Skyrocketing prices have ruined Venezuela’s economy with many people unable to afford even basic necessities — unless you are part of tight circle of politically connected elites with access to a government-controlled currency exchange that one financial expert in Miami summed up as a “perpetual money machine for insider criminals.”
The exchange offers bolivar-for-dollar rates insulated from the country’s hyperinflation, a currency system that the socialist government of the late President Hugo Chávez first set up to stabilize the economy and lower the prices of essential goods like food and medicine for the poor.
In the 15 years since, financial experts and U.S. prosecutors say the government exchange has also turned into a tool to empower Venezuelan leaders and enrich already wealthy business insiders. They’ve siphoned billions out of national coffers by exploiting exchange rates rigged to make astronomical profits in currency transactions that are inaccessible to a population struggling with widespread food shortages and runaway prices.
A landmark $1.2 billion money-laundering case in Miami has pulled back the curtain on the murky government exchange, detailing how it operates and, at least in this scheme, who is accused of cashing in on it.
Nine defendants — along with other unnamed co-conspirators such as the stepsons of President Nicolás Maduro and confidant Raúl Gorrín — have capitalized on the ever-widening spread between the fixed official exchange rates and the shrinking street value of Venezuela’s currency, according to a federal indictment filed last month.
One other damaging impact not mentioned in the criminal charges: The profits on the government exchange, financial experts say, only get bigger with the soaring hyperinflation that continues to destroy the nation’s economy.
In the Miami federal case, prosecutors charge that a network of Venezuelan businessmen and executives with the national oil company PDVSA managed to quickly turn $42 million worth of bolivars into $600 million in U.S. dollars by simply making a “loan” to the state-owned firm. PDVSA tapped into the government exchange to pay off the loan in a few months and, according to federal court records, funneled the windfall back to the ring. Its members then hid the money in Europe and the U.S. and bought up mansions from Cocoplum to Wellington in South Florida.
Bribes were also paid to oil company executives to go along with the deal, which prosecutors say was illegal because some of the ring’s ill-gotten profits were then transferred to South Florida.
The Venezuelan government has not responded to questions from the Miami Herald, nor has Maduro reacted to prior Herald stories about the money-laundering case. Gorrín’s attorney in Miami denied his client was involved in any wrongdoing.
But Russell Dallen, a Miami businessman who manages a capital investment company and formerly owned a newspaper in Venezuela, dubbed the government currency scheme a “perpetual money machine.”
“That’s one of the reasons why Venezuela has not changed this [government exchange] system,” said Dallen, a financial investor who has closely followed the money-laundering case.
He said the exploitation of the currency spread between the official and open rates diverts vast sums of Venezuelan oil income, which accounts for almost all of the government’s revenue, to corrupt executives, politicians and businessmen.
“They are robbing the Venezuelan treasury through [sleight-of-hand maneuvers],” Dallen, who is also a lawyer, told the Herald. “What other industry can you make a million times your money in ten minutes?”
That’s an exaggeration, but the profit margins would dazzle Wall Street’s high-rollers. In December 2014, when prosecutors say the Venezuelan ring tapped into the government exchange rate, 12 bolivars could buy one U.S. dollar. But on the open-market exchange, to which the vast majority of Venezuelans only have access, the rate was was 172 bolivars per one dollar. That gave the ring the opportunity to multiply their currency investment by a ratio of 14 to 1.
With that spread, $1,000 worth of bolivars on the government exchange could be turned into $14,000 worth of bolivars on the open market.
Today, the spread between the two currency rates is unknown to most Venezuelans, whose monthly minimum wage could only purchase a carton of eggs a couple of months ago. In August, Maduro imposed a currency conversion by essentially eliminating five zeros from the bolivar note. Now, the monthly minimum wage is 1,800 bolivars compared with the equivalent of 50 before the increase. But that boost still doesn’t go very far when a bag of ice costs 165 bolivars today.
With the currency conversion, the free-market exchange rate has been hovering near 110 bolivars per dollar.
Since Chávez adopted currency controls to stem capital flight after an oil strike in 2003, Venezuelan companies and businessmen, along with certain plugged-in members of the public, have increasingly tried to tap into the government’s profitable exchange system. But even applying for access has become increasingly difficult.
And in the end, gaining approval has required close relationships with top politicians and officials in Venezuela’s government, including sharing currency exchange profits, according to federal prosecutors and financial experts. The result has produced a currency exchange rife with corruption.
In 2013, Reuters reported that Venezuela’s exchange system was riddled with fraud and as many as 40 percent of the buyers of dollars were shell companies, costing the country billions. The news agency quoted the country’s then-interior minister and intelligence chief, Miguel Rodriguez Torres, saying that companies doing business with the Venezuelan government would buy dollars with bolivars ostensibly to import goods but instead would sell greenbacks for a hefty profit on the black market.
At the time, Maduro blamed the problem on capitalist profiteers in cahoots with right-wing politicians and ideological enemies in Washington.
In 2016, an Austrian economics institute issued a white paper on “Venezuela’s Bizarre System of Exchange Rates,” spotlighting the corruption in a handful of government exchanges dealing in dollars.
“Officials within the government and those connected to it have taken advantage of their positions of power and influence to mismanage the money assigned for other, productive and necessary, institutions,” the Mises Institute said. “Thus, well-connected individuals obtain U.S. dollars through legal channels and then sell them on the black market at a higher price.”
As a result, many suppliers only sell their limited goods for dollars, refusing to accept bolivars as payment. “These problems affect directly all citizens, but are especially pernicious to lower-income individuals,” the Mises report said.
A prominent U.S. academic, Steve H. Hanke, who has studied currency controls and advised governments from South America to Eastern Europe, says the exchange mechanism in Venezuela is one of the main factors behind the country’s hyperinflation. It has soared — by his measurement — to 62,000 percent over the past year. Opposition leaders in Venezuela’s parliament said this past week that the hyperinflation rate is three times higher than that. A country experiences hyperinflation when the prices for goods increase at a rate of 50 percent a month for 30 straight days.
In the past three years, hyperinflation has sunk the country into a desperate state of affairs, an economic spiral further aggravated by Maduro’s decison last month to devalue the bolivar and increase the minimum wage, said Hanke, a professor of Applied Economics at Johns Hopkins University.
He said Chavez’s regime, and later Maduro’s government, created a “lying price” that allowed political insiders to make instant fortunes by playing the spread between the low official exchanges and the high market rates — the core of the currency scheme behind the money-laundering case in Miami. Only a very small number of people close to Venezuela’s political hierarchy have access to the favorable official rates, he said.
“With hyperinflation, the profit is magnified beyond recognition,” Hanke told the Miami Herald.
He described access to official exchange rates as a “subsidy” for the rich to prop up the Venezuelan government’s power, just as food and medical subsidies for the poor are politically designed to curry favor with that constituency.
“The biggest subsidy of all is the amount of money going to the crony capitalists,” Hanke said. “The real big money is for the guys with bank accounts in Miami and Europe.”
Federal court records say that in late 2014 the Venezuelan leaders of the money-laundering conspiracy used a shell company called Rantor Capital to loan 7.2 billion bolivars, valued at $42 million on the free market exchange, and then had the country’s state-owned oil company, Petroleos de Venezuela, S.A., repay them in euros at the government’s much lower rate. That transaction instantly multiplied the loan repayment to the equivalent of $600 million.
According to a criminal affidavit filed in July, PDVSA wired those funds to an unnamed European financial institution that the Herald has learned is Swiss-owned Portmann Capital Management in Malta. The oil company’s loan repayment was eventually turned over to another shell company, Eaton Global Services Limited, set up in Hong Kong, which was controlled by the Venezuelan leaders of the money-laundering conspiracy.
The $600 million windfall was then divided up among a group of wealthy Venezuelan businessmen, PDVSA officials and the three stepsons of Maduro, according to an email obtained by agents with Homeland Security Investigations and sources familiar with the criminal case. The president and his stepsons — Yosser Gavídia Flores, Walter Gavídia Flores and Yoswal Gavídia Flores — are under investigation in the Miami case, sources said.
According to the affidavit, here is how the government funds were distributed in early 2015:
▪ $272.5 million went to Gorrín, the Venezuelan tycoon who owns a Caracas TV network, insurance company and other businesses. He has not been charged in the Miami case, but is considered a main suspect in the federal investigation. In turn, Gorrín kept about $72.5 million for himself — wiring some money to pay for aviation, yacht and brokerage services in Miami — and transferred the balance, $200 million, to a bank account for the benefit of Maduro’s three grown stepsons from his marriage to Cilia Flores.
▪ That account was set up for the stepsons in the name of a “straw” representative, Mario Enrique Bonilla Vallera, a Venezuelan businessman who owns a handful of Florida companies with addresses linked to four multimillion-dollar homes in the exclusive Cocoplum neighborhood of Coral Gables. Bonilla has been charged in the money-laundering indictment, but remains at large.
▪ $272.5 million also went to Francisco Convit Guruceaga, a wealthy Venezuelan businessman who is the lead defendant in the money-laundering indictment, and another person identified as “Conspirator 2.” Of that total, $94 million was distributed to a Venezuela businessman, who became a confidential source for Homeland Security Investigations in 2016 out of fear that he would get caught laundering funds to Miami.
▪ He redistributed about $20 million to: Carmelo Urdaneta Aqui, former legal counsel for the Venezuelan Ministry of Oil and Mining; Abraham Edgardo Ortega, a former director of finance at PDVSA; Jose Vicente Amparan Croquer, described as a professional money launderer; and three other unnamed Venezuelan co-conspirators with ties to the state-owned oil company.
The remaining funds were absorbed by the cost of the initial loan to the oil company and bank charges related to the transaction.
Late last week, the Ministry of Economy and the Venezuelan Central Bank issued new regulations aimed at easing the rigid exchange controls, allowing both public and private banks to buy and sell U.S. dollars. The policy change also eliminates weekly auctions where the government allocated dollars to favored businesses and individuals at preferential rates, said Diego Moya-Ocampos, a Latin American analyst with IHS Markit.
But there is no guarantee that the new rules will help curb widespread abuse of the currency system. It might be too little, too late for the Venezuelan economy as billions of dollars have already been drained from government coffers by corruption.
“The new regulation is unlikely to lead to a significant improvement in Venezuela’s economy,” Moya-Ocampos said. “It should make the foreign-exchange system slightly more flexible [but] the underlying supply of dollars to feed this market will remain minimal.”