Venezuela is in an ever-deepening crisis that has dragged the national currency, the bolivar, down with it. For years, the rate of inflation has skyrocketed and this year is expected to reach 10 million percent.
The dysfunction has its roots in the currency control system of 2003 introduced by the late Hugo Chavez. This system, common to many authoritarian regimes, provides that access to the ‘hard currencies’ of first world nations is tightly controlled by the government.
The ostensible logic of this type of system is that the government of a developing nation has a responsibility to ensure that the scarce resource of hard currency is always available to meet emergencies and to provide essentials (e.g. food, medicine, infrastructure) for ordinary citizens and not irresponsibly monopolized by the rich.
The harsh reality is that these systems often result in the fox living in the henhouse. The authoritarians running the government accumulate wealth with their power and take unlawful liberties, including monopolizing hard currency for selfish ends.
In times of stress, hard currency is dearer and jealously guarded. If stress leads to crisis, many will resort to stealing whatever hard currency can be had. Once they have it, they will resort to further criminal acts to move it offshore, safe from the chaos of Venezuela.
The problem with this last step is that the safe jurisdictions are such because they enjoy the rule of law. Nowadays, financial regulators in law-abiding nations are keen to trip up Venezuelan kleptocrats looking to park loot from their despoiled country.
Recent high-profile prosecutions in Miami have shed light on the international industry that is Venezuelan money laundering.
Last October, Martin Krull, a German national living in Panama and employed by Swiss bank Julius Bär, was sentenced to prison after pleading guilty to laundering Venezuelan money through several countries, including the USA. Krull had been indicted along with a group of seven other people, including former Venezuelan officials and members of the ruling elite.
The scheme was conceptually simple and centered around the access of Venezuelans officials and their cronies to PDVSA, the state oil company. The Venezuelan government accords PDVSA a preferential currency exchange rate, ostensibly because PDVSA is the nation’s primary participant in the world economy.
Corrupt officials used dollars to purchase bolivares on the local black market at rates much lower than the inflated PDVSA rate. The officials would then provide short-term ‘loans’ of the bolivares to PDVSA, who would repay the loan quickly in dollars at the inflated PDVSA rate, giving the corrupt officials instantaneous profits in dollars.
Once the dollars were secured, the fraudsters used international bankers to deploy the money in first world economies, routing the money through a daisy chain of shell corporations and banking jurisdictions in an attempt to hide the tracks.
Martin Krull admitted to charging a point (1%) for these services and receiving a $600,000 commission for laundering $60,000,000 of Venezuelan currency.
In a separate case, last month in Miami U.S. officials indicted Gustavo Hernandez Frieri
for similar acts of money laundering. Hernandez was a Miami investment manager with satellite offices in Manhattan and Latin America. He is accused of being a ringleader in a $1.2 billion money-laundering operation involving eight Venezuelan businessmen and government officials with ties to the embattled government of Nicolás Maduro.
Apparently, the operation began in December of 2014 and was meant to embezzle $600 million. However, by May 2015, the group had been able to double the amount to $1.2 billion. It is a cruel irony that the weaker the local currency became, the greater the profits the illegal arbitrage produced.
Similar cases have been brought by the US against other individuals in the federal court in Houston, Texas, the oil capital of the U.S. and a focal point of capital flow in the international oil industry.
More cases are anticipated as the days of the Maduro regime become more obviously numbered and those responsible for Venezuela’s demise look to escape the consequences of their disastrous rule.