PEPwatch Venezuela: Beware of
government-controlled private corporations PART II
By Ken Rijock We continue our
series on how compliance officers can ascertain whether a private company
seeking to become a bank client is indeed a government-controlled corporation
that is a politically-exposed organisation requiring enhanced due diligence and
heightened Source of Funds analysis. Our previous article detailed how a
government-controlled company may have special access to financing, or even
grants, how its officers and directors may be fronting for its real ownership ,
and how its ability to obtain public funds without accountability may make it a
high-risk, or even unacceptable, client. Today we examine a more dangerous variety
of government-controlled company: where its ownership is but a portion of the
total shares of stock. While identifying nominee owners of 100% of a company as
fronts for government beneficial owners, record holders of minority interests
are often overlooked, or disregarded entirely in due diligence investigations.
Recognise that the laundrymen know your policies.
As a compliance officer, I
was instructed by bank counsel to ignore owners of less than 20% of a company.
I later ascertained that potential clients were routinely advised to set
company ownership at exactly 19%. Their agents obviously knew where our enquiry
threshold was , so we quickly abolished the arbitrary benchmark , and checked
out anyone whose holdings were just under the formerly used figure. Why is it
difficult to recognise companies where government ownership is less than a
controlling interest ? Let’s examine the general corporate landscape where a
quiet transfer of partial ownership has occurred:
– Officers and directors
generally are unchanged; however, there may be direction from behind the
scenes, reducing the officers to figurehead status.
– The company, previously
known as private and closely-held, has no legal obligation to disclose its new
situation. Indeed, corporate records are usually only available to
– Certain benefits may
inure to the company by virtue of the new owner that it does not want the
commercial world to know about. ( e.g. contracts, new business, new raw
materials and/or facilities made available.)
Why be concerned ?
Over and above the
obvious, there are clear and important potential dangers when a financial
institution handles a government-controlled company where the private and
public sector share ownership. Some important things to be aware of:
– Covert governmental aims
and goals, whether diplomatic or economic, may cause serious reputational
damage to your bank when publicly disclosed in the media.
– The company may be
immune from civil, or even criminal action, by virtue of its hidden
governmental control. Can you be the banker for organised misconduct, or
criminal elements ? Obviously, no.
– Intelligence or
espionage activities may be conducted, either domestically or abroad, by agents
using the company for these operations. The linkage of such ‘dirty tricks’ as
the Watergate break-in, or the Nugan Hand scandal, can be fatal to the
existence of a financial institution.
money laundering may be part of the company’s operations.
A frightening case study.
An illustrative company
should help explain the nature of the beast, and why it could be compliance
suicide to knowingly allow a government-controlled corporation to bank with
you. Last week the world’s largest corn flour and tortilla manufacturer,
Mexican agrarian giant, Grupo Maseca, also called GRUMA, announced that it was
selling a 40% share of one of its Venezuelan subsidiaries, known as Molinos Nacionales, CA,
to Ricardo Fernandez Barrueco, for $65.6m. But do the Mexicans really know who
they are doing business with ? Readers who absorbed the first installment of
this series will recall that Sr. Fernandez Barrueco emerged from penury and
obscurity to become a major owner of Venezuelan companies closely aligned with
the immediate family of Venezuelan President Hugo Chavez Frias. Fernandez has
such power that his “friends” in government and the military succeeded in
quashing a major law enforcement investigation into his suspected smuggling
More suspect comrades.
We have already covered
Fernandez’ “colourful” background, and his shady associates, but perhaps it is
best to mention two additional individuals who are his frequent traveling
partners on his Bell 206 Ranger helicopters. They are the radical Lebanese
brothers Khaled Khalil Majzoub, born 26 August 1965, Cedula 6290182, and Majed
Khalil Majzoub, born 23 April, 1970, Cedula 13526338.
Believed to have
improperly transferred prohibited advanced technology from the US to Venezuelan government agencies using a Miami company called Hardwell Computer, Inc., their US visas were
revoked in 2004. The Khalils appear to be the preferred contractors of the
Venezuelan armed forces, and are allegedly linked to Venezuelans involved in
laundering money siphoned off from public contracts and from other illicit activities.
Like Fernandez, their companies appear to be involved in tax evasion and
customs schemes. Fernandez and the Khalils are linked to the same customs
agency, TMB Aduanas.
Financial pirates looting funds at public expense.
Fernandez is also considered
to be a member of the New Bolivarian Elite, the Venezuelan inner circle, all of
whom, by the way, clearly rate PEP status due to their ready access to billions
of dollars of Venezuelan oil revenues diverted by Chavez from the public
treasury, and used to promote his radical political agenda in Latin
America. Rotch Energy Holdings, the Fernandez company that
controls the other half of DAMASECA, GRUMA’s other subsidiary, is a registered
PDVSA broker. Energy brokers purchasing petroleum products from Venezuela are
regularly forced by PDVSA to send a large portion of their commissions to
powerful Venezuelan PEPs, often in tax haven countries. Would you like to see a
client of your bank named as a funding source of criminal organisations ? The
bank would surely run afoul of US anti-terrorism financing laws, or worse, in
today’s strict regulatory enforcement climate.
Is Fernandez the worldwide laundryman for Chavez?
The is an additional, more
dangerous, red flag: Fernandez’ businesses, which are strictly agrarian, and
are domestic in focus, cannot be reconciled with his dozens of personal
overseas bank accounts, many of which are in the unreformed active tax havens
of the Caribbean and Europe. A partial list impresses even this old veteran of
the “ banking republics. “
note well how he has accounts at both the London
offices as well as the tax haven branches of some of the world’s largest
international banks, including Barclay’s . Such inter-branch transfers rarely
incur enhanced due diligence, as the receiving compliance staff assume the
client’s transaction has already been vetted. Such multiple accounts at many
branches of the same bank allows virtually foolproof layering enroute to a
final destination, as investigators rarely would be allowed access to internal
transfer information between branches that have bank secrecy laws in effect.
Do you really want to be
moving suspect funds for a company with a hidden, governmental agenda, run by
the right-hand man of the family of the president of Venezuela , and whom may be a
master laundryman ? That’s just one risk one takes when banking
government-controlled companies. As the foregoing aptly demonstrates. Getting
involved with clients who may be a government-controlled company is not just a
PEP problem, it may indeed result in a financial infection from which your bank
may not recover, They should only be allowed under strictly controlled and
monitored circumstances, and if a link to hidden government ownership is shown
regarding a present client, steps should be taken to terminate the relationship.