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  • A cashier counts bolivars at money exchange in Caracas.

    A cashier counts bolivars at money exchange in Caracas. | Photo: Reuters

Published 3 October 2017
An examination of one of the Venezuelan opposition's methods of financial warfare.

It seems obvious that the Attorney General is committed to seeing that justice is done, to clearing up and making good the scandalous embezzlement in Venezuela caused by speculation and corruption revolving around exchange rate controls and the policies for assigning foreign currency, from 2003 until now.

Socialism Hasn’t Failed Venezuela. Economic War Has.

His news media conference last Sept. 27 confirms this. However, in an effort to contribute to discussions of the issue, I’ll offer some comments about the focus the matter is getting, not, to be clear, from the Attorney General, but from most of the news media and opinion-formers, who, every time they touch on this topic, rather than help to clarify things in fact distract attention from the main causes of what has happened.

In that regard, these media and “expert opinion” recall the old joke about the drunk who’s looking for his keys in the early morning on under street lights across the road from the pavement, without lighting, where he dropped his keys. He argues that he’s looking for his keys there because that’s where the lights are. I mention this because my concern about this issue of fraud has always been that people look for it in the wrong place.

Because, however true it may be that the so-called off-the-shelf companies, however much money they may have helped embezzle, and no matter how many get identified and are subject to measures taken against them, none of that can shift attention from where I have always thought it really belongs. namely not off-the-shelf companies but those really and truly multinational businesses using transfer pricing and inflated invoices.

I have insisted on this point since 2013, when the widespread robbery to which the population was being subjected came to light, exemplified by the notorious case of DAKA. In fact, this current article is a version of one I wrote back in January 2015. Likewise, Luis Gavazut has published work reaching similar conclusions to mine. The reasons to doubt the argument that off-the-shelf companies are the main cause of the embezzlement Venezuela has suffered are basically two, a technical accounting reason and a political one.

As a matter of technical accounting, given the data in question, and we’re talking about several billion U.S. dollars, it doesn’t seem feasible for this to have been done by phony companies, above all when the cases in question involve significantly smaller amounts even when they are added up together. As regards the political question, it always seemed very suspicious to me the way in which the political opposition, the news media and their experts swallowed the news about each case and publicized them straight away. Everyone knows the opposition aren’t going to give prominence to something inconvenient for them. In that case, why were they so ready to publicize the argument about off-the-shelf-companies?

The way I see it, they did so because it served to put the blame for what was happening on the government, especially in those cases where such companies belonged to public officials. But beyond that, the argument obscures and distracts attention away from the financial engineering, a whole institutional set-up of consultants, accountancy advisers, legal offices, banking operators and commercial amalgamations which, operating from the private sector, have established themselves to work like centrifuges spinning off public resources, channeling them overseas and evading taxes.

This, obviously, is not to say that government functionaries have no responsibility in the matter, in fact they do and in large measure. But it has to be said that this responsibility cannot be used to overlook the role of well established businesses and business people, from those in the food sector to those in the pharmaceutical sector, by way of vehicle, auto-parts and airline companies and so on.

The classic mechanism, but not the only one, invented for this is price transfer. Put briefly, price transfers are those used in the sale of products between companies linked economically but located in different legal and tax jurisdictions. So these prices are used for the purchase and sale of products or inputs within the same commercial group, which means in effect that the buyer and seller are one and the same, although the business entities are located in different countries, which allows the buyers and sellers to rig their transaction prices.

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Consider the case of any multinational, for example Proctor and Gamble. P&G sells a series of products in Venezuela, some made here and some imported, such that for goods made here it imports a good part of the inputs it needs for the end product. Given that, from whom does P&G Venezuela buy the inputs it imports? Clearly, P&G Brazil, P&G Panama or P&G Cincinnati or perhaps some other company not called P&G but linked to it (probably operating exclusively on its behalf).

Additionally, P&G has its own storage and distribution structure, so that whoever stores or ships the merchandise and probably its insurers too are linked one way or another to P&G. Clearly, just because they are linked they do not carry out these operations for free and that is the detail to pay attention to, because all those prices paid by P&G are both invoiced and paid for by P&G itself.

So if P&G, for basic economic reasons, without raising the issue of politically motivated conspiracy, wants to extract more profit from a country, what it needs to do is raise the price of its imports so as to increase the prices paid by consumers in the country affected. In Venezuela’s case, P&G argue to the authorities that given the increase in the costs of its imports, it needs more foreign currency, but we are talking about costs that P&G has itself inflated.

So then the Venezuelan State assigns P&G more U.S. dollars enabling P&G to extract more U.S. dollars disguised as imports. But the company extracts still more benefit when it repatriates to its head office the excessive profits obtained from the inflated prices for which it sells it products.

Plenty of commentators will argue that this analysis is a paranoid, unjustified attack on noble private enterprise initiative. In fact this apparently hypothetical example is based very much on two real life cases. One is the case brought by Argentina’s government in 2014 against Proctor and Gamble for capital flight and tax evasion. The other is the accusation in 2015 against Proctor and Gamble by journalist Víctor Hugo Majano.

Back then, Majano highlighted the fact that in 2014, Venezuela’s National Center for Foreign Commerce awarded P&G almost US$407 million, three times the annual average between 2004 and 2012. But, even so, through 2014 a significant scarcity arose of products and brands produced or marketed by P&G, like Pampers disposable diapers, sanitary towels, Gillete razors and powdered detergent like ACE or Ariel, among various others. Majano’s blog gives details of the case and the startling similarities with the procedure identified and penalized in Argentina.

Changes to the Venezuelan Economy: Primary Considerations

Over the last few days, this same journalist has published a list of the foreign currency assigned to businesses through 2015. In it he notes the same pattern, of large, well-established businesses, by no means off-the-shelf companies, that received large amounts of foreign currency without those resources improving the supply and availability of their products, to the contrary.

Given this, it is necessary to investigate whether they inflated invoices, whether they imported the products but diverted them for contraband or hoarding or, which seems the most likely, that they did both. Whatever the case may be, it is impossible to continue ignoring this phenomenon given its serious consequences for people in Venezuela.

It is also worth noting, by way of conclusion, the reports this week about a case in Spain involving Venezuela’s Polar company which has to do with exactly the issue we have been looking at. The case deals with how Spain’s Mercadona supermarket chain terminated a contract with Polar for the distribution in Spain of Polar’s PAN brand of maize flour.

The reason Mercadona gave up on the deal was that consumers complained about the flour’s high price. Mercadona discovered that Polar was using as intermediaries two subsidiary companies, one in the U.S. and one in Spain, so as to inflate its costs artificially. When the managers of Polar’s boss Lorenzo Mendoza refused to change that arrangement, Mercadona contacted an Italian milling company who produced a version of the same product 40 percent cheaper, but of the same quality, that Mercadona is now selling instead of Polar’s PAN brand.

Originally published in 15 y Ultimo on Sept. 28, 2017.

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