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Argentina’s Culture of Fraud: No Easy Escape

By Eduardo Singerman

There is a place in hell for corrupt politicians. In Dante’s Divine Comedy, the dammed souls of barraters—corrupt government officials—reside in the fifth Bolgia (ditch) of the eighth circle of the inferno, where they lie submerged in a river of boiling tar for all eternity. Just as they hid their shady deals from the eyes of their fellow citizens, barraters are out of sight, immersed in this dark river, with the hot tar sticking to their bodies just as money once stuck to their fingers. 

Dante’s canto dedicated to barratry reflects his concern with the breakdown in governance and trust in Italian city-states. In Dante’s view, barratry results in the corruption of social order. The poet elegantly explains through his verses that for a fraudster to be successful, he must conceal his intentions and actions by weaving lies together with true statements. The bigger the truth attached to the lie, the more persuasive and successful his deceit will be.

Over 38 percent of Dante’s Inferno is devoted to discussing different types of frauds and the torments their perpetrators suffer. For Dante, sins of fraud are malicious; they are premeditated and committed with the intention to cause harm. Accordingly, fraudulent souls are placed in one of the worst parts of hell, the eighth circle. The ninth and last circle of the inferno is where Satan and all other betrayers are encased. They are all guilty of the ultimate fraud: fraud against those with whom there was a special bond of trust. In other words, they are condemned to reside in the lowest part of hell because they betrayed their family, country, friends, or benefactors.     

Unveiling Argentina’s Corrupt Health-Care System

From Dante’s exposure of corruption in Italian city-states of the 13th century to Dr. René Favaloro’s disclosure of the corruption in Argentina’s health-care system 700 years later, corruption has occupied the minds of philosophers, poets, economists, sociologists, criminologists, and scientists.

There are certain dates in a country’s history that are marked with shame. July 29, 2000, is one of these dates for Argentina: Dr. René Favaloro, the father of coronary bypass surgery and perhaps the most distinguished doctor and scientist in Argentine history, shot a bullet through his own heart. It took the judge who investigated Favaloro’s death almost nine years to release his suicide note, which contains a painful testament to Argentina’s corrupt health-care system.      

In his letter of resignation from the Cleveland Clinic in 1971, Favaloro explained that his return to Argentina, after achieving notable success in cardiovascular surgery, was guided by his love for his country and his desire to establish an outstanding medical center in Buenos Aires that combined medical care, research, and education.

With that objective in mind, in 1975 he created the Favaloro Foundation, a cardiology and cardiovascular surgery institute, and compiled a set of principles for its professionals to follow, including honesty, non-departure from ethics, and the pursuit of truth.

In his suicide note, Favaloro stated that the quality of their outputs, driven by technology and the doctors’ and researchers’ expertise, made it so that the institute never lacked work. But they had to fight constantly against the prevailing corruption in the health-care system, which represented “part of the tremendous corruption that has contaminated Argentina at all levels without limits of any kind.”          

The Argentine health-care system is funded through a combination of health and welfare funds managed exclusively by unions, private health insurance, public hospitals managed by the national and provincial governments, and a federal fund for retirees and pensioners managed by the state, also known as PAMI INSSJP.

Favaloro’s suicide note indicated that his foundation systematically refused to break its ethical standards and, consequently, never paid a single peso in kickbacks. Because of this, the most important health and welfare funds managed by unions stopped sending their members to the foundation. Favaloro stated: “If I had to tell about the countless meetings with unionists on duty! Bunch of crooks that live off workers and use the money of the health and welfare funds that belong to medical care to obtain kickbacks.”

Favaloro suggested that the same thing happened with PAMI, which had refused to pay amounts owed to the foundation unless a kickback was given in return. Likewise, doctors who send patients, including those covered by private health insurance, to a surgeon expect a share of the surgeon’s fees. When one patient asked to be operated on by Favaloro, his clinical cardiologist instead referred him to another “high quality surgeon.” According to Favaloro’s suicide note, this surgeon would pay 50 percent of his fees to the referring doctor.

Many of these cardiologists have national and international prestige. They attend conferences held by the American College of Cardiologists and the American Heart Association, where they congratulated and embraced Favaloro every time he lectured.

“Corruption has reached a level I never thought I would witness,” Favaloro stated in his suicide note. Well-respected institutions such as the Cardiovascular Institute of Buenos Aires send well-trained employees to the clinical cardiologists’ offices, where they explain in detail the kickbacks and the fee percentages that the cardiologists will receive not only for surgery, but also for other non-invasive procedures. Once the patient has been operated on, the same personnel will meet again with the cardiologist, presenting an envelope with money. 

Because it was not a part of the corruption scheme, Favaloro’s foundation was struggling financially. He had sent desperate letters to the president of Argentina, banks, businesspeople, and others seeking help, but he was ignored. His closest colleagues had advised him that to save his foundation he had to participate in the corrupt system.  

But his letter shows clearly Favaloro’s decision:

“Without a doubt being honest in this corrupt society has its price. One way or another you will have to pay for this … At this moment and at my age to put an end to my ethical principles which I received from my parents, teachers and professors, it is extremely difficult for me. I can’t change … This corrupt society that controls everything has defeated me … It hasn’t been an easy decision but one that was well thought … The surgeon lives with death. It is his inseparable companion, I leave hand-in-hand with her.”

Argentina’s Corruption Indices

Favaloro’s denunciation of the extent of corruption in Argentina’s health-care system is certainly worrisome, but the country’s corruption is not confined to this sector alone. It extends to Argentina’s public sector, with corruption scandals involving high-ranking government officials, and individuals and businesses in the private sector paying bribes and engaging in money laundering and tax evasion.

The World Bank’s Control of Corruption Estimate (CCE)—an index intended to capture perceptions of the exercise of public power for private gain on a scale of -2.5 (weakest governance performance) to 2.5 (strongest governance performance)—has given Argentina a negative score throughout the period from 1996 to 2015. It reached its lowest level (-0.59) in 2015, during the government of Cristina Fernández de Kirchner. Furthermore, when compared to other countries, Argentina scored in the 32.69th percentile, behind Brazil (41.35th percentile), Chile (87.50th percentile), and Uruguay (88.94th percentile). The low scores between 1996 and 2015 are correlated with high-profile corruption cases involving high-ranking government officials in the Justicialist Party (PJ) governments. A spike in the number and brazenness of cases coming to light toward the end of Fernández de Kirchner’s second term can account for the low point in 2015.     

Regarding Argentina’s private sector, a 2010 study published by the Economic Committee for Latin America and the Caribbean shows that in 2005, Argentina’s income tax evasion rate was 49.7 percent of its potential income tax collections, while the gap between the theoretical amount and the actual income tax collected was 5.6 percent of Argentina’s gross domestic product. The same study shows that in 2005, Argentina’s value-added tax evasion comprised 23.3 percent of its theoretical collections. Likewise, 44 percent of Argentina’s economically active population evaded payroll taxes that year. It is estimated that Argentina’s shadow economy from 1999 to 2007 averaged 25.5 percent of its gross domestic product.

Fraud at the Highest Levels

Many high-level government officials and prominent businessmen have participated in corruption schemes in Argentina over the last 25 years, often facing little or no punishment. 

In 2015, Carlos Menem, who served as president from 1989 to 1999, was sentenced to four and a half years in prison for embezzlement, while his economic minister Domingo Cavallo was sentenced to three years and six months. The embezzlement they are accused of involved distributing funds reserved for security and intelligence expenses to salary overpayments for government officials. The illegal payments during Menem’s administration amounted to almost $4.2 billion.

Neither man is serving jail time during the appeal process, which can take years. Furthermore, if the appellate court confirms Menem’s sentence, he will still not serve time because he enjoys parliamentary immunity as a senator for his province. In the event that the senate unseats him, stripping this immunity, he can only face house arrest due to his old age.

In a separate judicial process that lasted 18 years, Menem was sentenced in 2013 to seven years in prison for ordering the smuggling of weapons for profit to Croatia and Ecuador between 1991 and 1995, violating an international arms embargo. The smuggling defrauded the state of $60 million. Due to the terms related to his parliamentary immunity and age, however, Menem is expected not to serve any jail time.

In 2015, Felicia Miceli, Argentina’s economic minister during two years of Néstor Kirchner’s 2003-2007 presidency, was sentenced to three years in prison for covering up an illegal financial transaction and for stealing and hiding a federal police affidavit. In 2007, federal police found in her office $31,670 in U.S. bills and 100,000 Argentine pesos ($33,000 based on the exchange rate at that time) heat-sealed and vacuum-packed. It was later proven that Argentina’s Central Bank sent 100,000 pesos to a financial institution, Caja de Crédito Cuenca Cooperativa Limitada, before the money appeared in her office. Miceli was not able to explain her possession of the cash. Since the court tribunal conditionally suspended her sentence, a practice not uncommon for prison terms of up to three years, Miceli will not serve any jail time.
          
Julio De Vido, who served as minister of planning and public works under Presidents Néstor Kirchner and Cristina Fernández de Kirchner (2007-2015), was indicted in May 2016 by a federal judge for criminal negligence in the derailment of a train that killed 51 people in 2012, as well as for fraudulent administration of state subsidies given to the company responsible for operating the train. The judge did not order De Vido’s detention while awaiting trial. Even if De Vido is eventually found guilty and sentenced, he currently serves in Argentina’s Chamber of Deputies—so he will not serve time while protected by parliamentary immunity.

In July 2016, another federal judge indicted De Vido for defrauding the public administration and receiving bribes in the 2005 purchase of useless, obsolete locomotive carriages and engines from Portugal and Spain for around $125 million. Once again, the judge did not order De Vido’s arrest while the judicial process continues.

De Vido has long been suspected of participating in various corrupt deals. As minister of planning, he managed an annual budget of around $10 billion for public works. In 2005, Roberto Lavagna, the economic minister during the early years of Néstor Kirchner’s administration, tacitly accused De Vido of awarding public work contracts to a cartel of friendly construction companies, which had agreed among themselves to set their bids at amounts significantly higher than market prices. The companies bid for the same tenders, offered comparable terms, and took turns winning public contracts in order to appear as if they were competing. For example, in the case of the public tender for work on Provincial Route No. 5 and National Highway No. 3, three companies linked to Néstor Kirchner bid very similar amounts: GOTTI S.A. bid 8,911,933 pesos, Kank y Costilla bid 8,984,207 pesos, and Esuco bid 9,112,399 pesos. The contract was awarded to GOTTI S.A.

U.S. diplomatic cables confirmed Lavagna’s accusation, reporting complaints from American and European firms that Argentine government officials responsible for public work bids had requested bribes averaging 15 percent of the total contract award. In 2008, a cable from Earl Wayne, the U.S. Ambassador to Argentina from 2006 to 2009, stated that the level of corruption under the Kirchners was at least as bad as it was under Menem. Furthermore, in early 2016, the newly appointed government officials of the Argentine Highway Authority (Vialidad Nacional) began an investigation of the overpricing of public works during the Kirchners’ presidencies and determined that certain highway projects cost seven times more than initial budgets before they were even completed.

In June 2016, José López, who served as secretary of public works during the 12 years of the Kirchners’ administrations and worked closely with De Vido, was indicted for illegal enrichment. Despite the immunity he was granted due to his position as a deputy in the parliament of regional bloc Mercosur, the judge ordered López’s arrest without bail because he was caught in the open—police arrived at the scene as he was trying to hide $9 million in cash in a convent. 

In 2014, Amado Boudou, Cristina Fernández de Kirchner’s economic minister during her first term and vice president during her second, was indicted by a federal judge for receiving bribes and for being involved in business deals that were incompatible with public office. In 2010, the national tax collection agency, AFIP, demanded the bankruptcy of Ciccone Calcográfica, a firm that printed banknotes for Argentina’s Central Bank, because of taxes due to the federal government. The judge determined that while economic minister, Boudou had purchased Ciccone through a shell company, acquiring 70 percent of its stock. In his official position, he then instructed the AFIP to grant Ciccone an exceptional moratorium, which included the abatement of interest and penalties, in order to refinance the company’s tax liability. Also, as part of the purchase transaction, Boudou agreed with the former owners of Ciccone (now minority stockholders) that the state would continue to grant future printing contracts to the company. The judge did not order Boudou’s detention while awaiting trial.  
   
In May 2016, Cristina Fernández de Kirchner and two officials—Axel Kicillof, economic minister, and Alejandro Vanoli, president of the Central Bank—were indicted by a federal judge for fraud against the public administration due to disloyal administration. Kirchner, Kicillof, and Vanoli were accused of selling the Central Bank’s futures dollars at a price significantly below market rates, resulting in a loss of 77.3 billion pesos (roughly $5.5 billion).

Article 18 of the Central Bank charter allows the institution to buy and sell futures dollars, but only to do so at market prices. The judge determined that Kirchner and her officials colluded to make the Central Bank sell up to $17 billion in futures contracts at a price of 10.6 pesos per dollar when global futures markets were pricing the Argentine currency at an exchange rate between 14 and 15 pesos per dollar in anticipation of a government devaluation. Since these futures contracts were settled in pesos at their expiration date, the Central Bank, under current President Mauricio Macri, had to pay the 77.3 billion pesos loss by increasing the money supply. This has raised the inflation rate, causing a further deterioration of economic activity in 2016. There were no arrest warrants issued.

In April 2016, businessman Lázaro Baez, believed to be a standing in for the Kirchners during business dealings, was indicted by a federal judge for money laundering. He moved $5.1 million derived from the tax evasion of a construction company he owns, Austral Construcciones, through a financial institution. In June 2016, the same judge further indicted Baez, accusing him of laundering an additional $32.8 million. He allegedly used a shell company to purchase Argentine bonds in Switzerland and later sold them in Rosario’s securities exchange. The proceeds were deposited into an Argentine bank account of Austral Construcciones. Baez was arrested while awaiting trial.

Also in April 2016, a federal prosecutor requested that Cristina Fernández de Kirchner be investigated for money laundering. In what is known as the “Route of the K-Money,” Kirchnerist government officials awarded public work contracts worth millions of dollars to Baez’s construction companies even though their bids were significantly above market prices. Baez’s companies then leased offices and rented rooms in buildings and hotels owned by the Kirchners.

On Dec. 27, 2016, Fernández de Kirchner, De Vido, López, and Baez, among others, were indicted by a federal judge for being part of an illegal association, operated between 2003 and 2015, that was created to illicitly and deliberately appropriate state funds that were assigned to public road works. The judge accused these individuals and other former high-ranking officials of the Argentine Highway Authority of conspiring to adjudicate 52 public projects (out of 83) worth about $3 billion in the province of Santa Cruz to construction companies related to Baez. In making a preliminary estimate of the monetary damages caused to the public treasury, the judge determined that the state incurred on average a 15 percent surcharge over the original costs of the contracts.    

Argentina’s Corruption Trap

Corruption in Argentina is massive and pervasive. Numerous high-ranking government officials and businessmen have been involved in fraudulent schemes over the past 25 years, and indices suggest that systemic corruption is only getting worse. In Transparency International’s Corruption Perceptions Index, adjusted for a change in scale in 2012, Argentina’s average score between 1995 and 1999 (from the year the CPI was first published to the end of President Menem’s second term) was 34.92 on a scale from zero to 100, with zero indicating the highest level of corruption. Between 2003 and 2015 (during the Kirchners’ presidencies), the average had declined to 29.85. This deterioration of the average CPI correlates with revelations about the extent of corrupt dealings during the Kirchners’ administrations.  

Because returns from corruption are high and Argentina’s feeble judicial and legislative institutions reduce the likelihood that this behavior will be detected and punished, government officials and businesses have been more disposed to engage in illicit activities. As the proportion of corrupt government officials and businesses increased, collusion and covering up corruption became easier—further decreasing the chances of detecting and punishing such activities. Thus, as the “cost” of corruption has fallen, Argentina has descended into a trap where high corruption levels beget higher corruption levels. As Dr. Favaloro found in the pressure placed on him to save his foundation by breaking his ethics code, incentives are strong for both companies and government officials to comply with, rather than to oppose, the corrupt system.

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Eduardo Singerman is a litigation director in the global forensics practice at one of the largest accounting firms in the United States. He is a certified fraud examiner and a certified public accountant with more than 25 years of experience investigating fraud.

[Photo courtesy of futureatlas.com]

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Anonymous's picture
Corruption Trap


Very interesting article. It is startling and upsetting to read the laundry lists of names committing these acts. It indeed is a corruption trap, as you state “massive and pervasive”, where “high corruption levels beget higher corruption levels.” The article was a very good read; very interesting, entertaining and enlightening.
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