Cablegate: Colombia: Pyramid Schemes Swindle Thousands,

Published: Mon 17 Nov 2008 09:03 PM
DE RUEHBO #4134/01 3222103
P 172103Z NOV 08
E.O. 12958: N/A
1. (SBU) SUMMARY. Colombian authorities believe as many as
three million Colombians have been defrauded of at least USD
300 million in a series of pyramid schemes that began
collapsing November 12 after the government's seizure of the
firm Proyecciones DFRE. The fall of DFRE spurred the
subsequent demise of several similar institutions and set off
violent demonstrations by angry victims that have led to two
deaths and police-imposed curfews in 13 cities. President
Uribe, who has expressed frustration with the failure of
financial regulators and law enforcement to stem the growth
of pyramid schemes in recent years, accepted the resignation
of Colombia's Financial Superintendent November 14 and issued
four "economic emergency" decrees November 17 to address the
crisis. The same day, GOC authorities closed DMG, reportedly
Colombia's largest pyramid scheme with 300,000 investors. END
Financial House of Cards Falls
2. (U) At least 240 different pyramid-type institutions are
thought to exist in Colombia, offering returns of up to 150
percent for short-term cash investments of as little as a one
month. While the growth of these institutions has been
widely known since 2006, the GOC has done little to monitor
or regulate the firms as they attracted thousands of
individual Colombia investors--most of them low-income
residents of central and southern Colombia. The current
crisis began November 12 with the collapse of Colombia's
second largest pyramid scheme, Proyecciones DFRE (which
stands for "Direct, Easy, and Fast Money" in Spanish), after
the flight of the company's owner, Carlos Alfredo Saurez.
3. (U) Following the GOC's seizure of the 68 branches of
DFRE, arrest of 52 DFRE employees, and confiscation of USD 42
million in DFRE cash holdings, smaller pyramid-style firms
began to collapse. Angry victims have demonstrated in front
of many of the businesses in question, leading to
altercations, riots, and at least two deaths. Local
authorities instituted curfews in 13 cities to stem the
Scope of Losses Unknown
4. (SBU) GOC officials acknowledge that many of the primary
individuals responsible for the pyramid schemes have already
fled the country and admit they do not know the full extent
of investor losses. However, the Prosecutor General's Office
(Fiscalia) says it has received almost 20,000 formal
complaints and estimates that as many as 3 million Colombians
could have invested in the schemes. While most of the
investors are low-income Colombians, wealthy Colombians
appear to have fallen victim as well and the GOC has
uncovered cases of police officials, local authorities and
even a HIV/AIDS clinic that put money into schemes that
subsequently collapsed. Anecdotal information from Narino
Department indicates that the lure of pyramid schemes led
many coca growers to sell their lands at a steep discount to
invest in the schemes rather than cultivation. So far the
GOC says it has no proof of money laundering activities
conducted by the pyramid institutions, only illicit
enrichment, but is now analyzing if any proceeds from
narcotics trafficking could have fueled the explosion of the
schemes in recent years.
5. (U) National Planning Director Carolina Renteria said
November 15 that, based on preliminary assessments, the most
affected will be Colombia's poorest, some of whom reportedly
sold their possessions to invest money in the schemes.
Renteria said that the GOC cannot cover citizens' losses due
to legal and budget constraints, but noted that the GOC was
conducting a census to establish how many people were
affected and would explore whether such individuals could
qualify for emergency credits from Colombia's national
development bank, Bancoldex.
The Blame Game Begins
6. (SBU) GOC officials insist they warned citizens against
participating in such schemes, but now find themselves facing
heated public criticism for allowing the businesses to
operate without sufficient regulation. President Uribe
expressed regret that GOC authorities did not react sooner
and publicly questioned why the Financial Superintendent, the
Prosecutor General's Office, and National Police did not
monitor and close the schemes before collapses began. On
November 14, President Uribe accepted the resignation of
Financial Superintendent Cesar Prado. However, Prosecutor
General Mario Iguaran has pushed back against criticism of
his office, saying that blame lies with financial regulators
for allowing the schemes to continue for more than a year
without investigating possible money laundering or illicit
enrichment. (COMMENT: Contacts in Colombia's Financial
Intelligence Unit (UIAF) tell Emboffs they closely monitored
the evolution of various pyramid schemes and produced several
reports to the Attorney General's office since late 2006
concerning the issue and the potential for money laundering
activities. END COMMENT)
7. (SBU) National Association of Financial Institutions Vice
President Carlos Rojas told us that much of the blame rested
with the Financial Superintendent, who has lead
responsibility for regulating and monitoring any firm that is
engaged in lending or financial transactions. Rojas echoed
government authorities' assessment that Colombia's formal
financial sector would remain unaffected by the scams, but
suggested that significant losses in the informal sector
could impact consumer consumption and economic growth in
local economies.
Economic State of Emergency Decreed
8. (U) Following marathon cabinet discussions over the
November 15-16 weekend, President Uribe issued a "State of
Emergency" on November 17 allowing the GOC to issue decrees
without Congressional approval to strengthen criminal
penalties for collecting funds through a pyramid scheme,
criminalize the failure to return investor funds from such
schemes, expedite procedures for returning seized funds to
swindled citizens, and provide Governors and Mayors
precautionary authority to shut down suspected pyramid
schemes operating in their communities. The GOC also ordered
72 firms suspected of still operating pyramid schemes to
submit all of their transactions for review by UIAF.
Worst Yet to Come
9. (SBU) Also on November 17, the GOC intervened in
Colombia's largest pyramid-style company, DMG, closing its 59
offices and immediately impounding USD 5 million in company
funds. DMG was founded in 2003 in Putumayo and has 300,000
investors in Colombia as well as operations in Panama,
Mexico, Ecuador and Venezuela. DMG investors buy pre-paid
cards for six months during which they can use the card to
purchase household items and then have the entire original
cash balance returned at the end of the contract period. In
addition to the administrative closure, the GOC has assembled
a task force of the National Tax Authority (DIAN), Prosecutor
General's Office, National Police and UIAF to gather proof
against DMG for possible criminal prosecution on fraud and
money laundering charges. Given the large number of DMG
investors and the company's high profile, many local
observers expect the GOC-imposed closure to cause further
runs on similar, smaller pyramid schemes still operating and
to sharpen the immediate economic impact of the crisis.
(NOTE: While the Financial Superintendent issued a resolution
in September 2007 that ordered the dismantlement of DMG for
illegal collection of money from the public, DMG effectively
challenged this administrative action and sidestepped the
targeted regulatory action by changing its name. Due to the
initial failed regulatory attempt, contacts at the
Superintendent's office tell us they were reluctant until now
to challenge the legal precedent with another administrative
action. END NOTE)
10. (U) In the run-up to the November 17 closure, DMG owner
David Murcia Guzman publicly rebuked President Uribe and GOC
officials for their allegations and actions against the
company, insisting the GOC is acting on behalf of Colombia's
largest banks to destroy DMG and its "alternative" saving
mechanism for low-income Colombians without bank accounts.
Murcia Guzman stated November 14 that several high-level GOC
officials are among his investors, including President
Uribe's son Jeronimo, but has provided no other names or any
evidence. Jeronimo Uribe said November 15 that he considered
a business deal with a subsidiary of DMG in early 2007, but
dropped out of the deal when he found out the company was
linked to DMG. Murcia has publicly denied that his scheme is
a pyramid, and has urged thousands of his supporters to
publicly protest against the GOC,s actions.
Political Ramifications for Uribe
11. (SBU) President Uribe has publicly acknowledged that the
GOC should have stepped in sooner to head off the crisis, and
is moving quickly to address public concerns. Still, many
local analysts and opposition politicians are blaming Uribe
for the disaster. Well-known economist Guillermo Perry wrote
that the pyramids "catastrophe" shows the President,s
inability to respond to economic or political disasters until
it is too late. Pro-Uribe columnist Mauricio Vargas called
Pardo,s resignation an attempt to shift the blame away from
Uribe and Finance Minister Oscar Ivan Zuluaga. Many members
of Congress took issue with Uribe,s claims on November 15
that they had invested in the pyramid schemes. Opposition
Liberal Senator Cecilia Lopez criticized Uribe's declaration
and called on him to name politicians involved in the
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