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Latin American Economy & Business - March 2015 (ISSN 1741-7430)

Chile: Trouble comes in threes

Chile is considered one of the least corrupt countries in Latin America. Yet all of a sudden there are three major cases in the headlines, and an embarrassed government is promising new measures to strengthen ethical standards.

The first case, known as the Caval affair, was revealed by the magazine Qué Pasa on 5 February. The state-owned Banco de Chile had lent US$10m to a company called Exportadora y de Gestión Caval. The money was used to buy and then re-sell land in Machalí, generating an almost overnight profit of US$5m. On the face of it, nothing illegal took place. But Natalia Compagnon, the owner of the company, is married to Sebastián Dávalos, the son of President Michelle Bachelet (meaning that the scandal has also been dubbed ‘Nuera-gate’ [‘daughter-in-law-gate]’).

The loan was made on 16 December 2013, only one day after Bachelet won the election that was to return her to the presidency for a second term (her first was in 2006-2010). And Dávalos, later to be appointed socio-cultural director of the presidency (an unpaid position running a charity), appears to have played a key role in securing the deal. It looked suspiciously close to influence peddling. The government initially tried to shrug it off as a “private transaction”. But on 13 February, Dávalos resigned from his government role; on 23 February he and his wife Natalia also resigned from the Partido Socialista (PS), one of the five parties in the ruling centre-left coalition, Nueva Mayoría. President Bachelet, initially slow to respond to the scandal, has had to apologise and her approval rating has taken a sharp dip since.

If the first case is embarrassing for the government, the second and third ones paint the centre-right opposition in an unflattering light. The tax authorities and the courts have been investigating the large local firm Sociedad Química y Minera de Chile (SQM) and other companies for siphoning off illegal campaign contributions to the main right-wing party, Unión Democrática Independiente (UDI), historically closely linked to the 1973-1990 dictatorship led General August Pinochet. The SQM chairman is billionaire mining magnate Julio Ponce Lerou, the late Pinochet’s son-in-law. By mid-March, up to a quarter of the company’s US$6bn market capitalisation had been wiped out, as shares plummeted on news of the allegations. Three board representatives from Canada’s PotashCorp, which holds a third (32%) of SQM, resigned after the rest of the board did not agree to their demand for “an exhaustive, transparent and independent investigation”.

Linked to the SQM scandal and bigger in its ramifications is a third case, dubbed ‘Pentagate’. In early March, four executives from the financial holding company Penta Group, along with a former government official, were arrested. Penta is a major Chilean financial services group, with estimated assets of US$30bn. Along with other officials, including two in the country’s internal revenue service (Servicio de Impuestos Internos [SII]), they stand accused of tax fraud, bribery and money laundering. Those arrested include Penta’s owners, Carlos Alberto Delano and Carlos Eugenio Lavín, who also had ties to the UDI. Prosecutors said that the Penta Group had “a culture of tax evasion” and had become “a machine to defraud the state”. The UDI party president, Ernesto Silva, announced his resignation on 11 March due to his links to Penta, which came to light as part of the SII’s audit of the company last year.

Ironically perhaps, according to the latest (2014) Annual Corruption Perceptions Index (CPI) compiled by the Berlin-based NGO, Transparency International, Chile is considered the fourth least-corrupt country in the Americas (behind Canada, Barbados and the US in that order). It is seen as having much higher ethical and legal standards than some of its neighbours, such as Brazil (ranked 12th in the hemisphere), Mexico (21st), Argentina (22nd) and Venezuela (which comes bottom of the regional ranking at 31st, just behind Haiti).

So there are at least two readings of the latest revelations. The first, simply, is that all countries suffer corruption. Three high profile cases coming together do not necessarily alter Chile’s overall position in the rankings. Aldo Cassinelli, dean of the political science faculty at the Universidad Central de Chile, put forward a second interpretation. He told the (Argentine) website Infobae, “It is not that Chile is free from corruption and influence peddling. The difference is in how you react to specific cases. They can be hidden or confronted. In Chile’s case they get confronted. Society exerts pressure and the political class, whether in opposition or in government, takes decisions”.

According to this line of thinking, in Chile there is faster resolution of cases, with officials resigning or businessmen being investigated, than in many other neighbouring countries, where cases tend to drag on for much longer without resolution. For her part, President Bachelet has reacted by calling for a range of new anti-corruption measures. Henceforth, she wants officials and former presidents, including herself, to be obligated to make detailed declarations of their assets. The president has also set up a 16-strong commission (formally a ‘presidential advisory council’) under a respected local economist, Eduardo Engel, to report back with proposed anti-corruption measures within 45 days.

  • Anti-corruption measures

The new presidential advisory council comprises 16 of the country’s senior academics, economists and legal experts. It is tasked with drafting proposals to strengthen the country’s legal framework in a bid to eradicate influence-trafficking, the abuse of power and corruption. Proposals aim to tighten up existing controls, draw up a new code of practice and establish appropriate sanctions for offenders. Separately, a bill to better regulate political party financing is before congress and the executive hopes for approval by late May. President Bachelet also has suggested a constitutional reform to create new sanctions for politicians found to have broken the law in the course of securing their elected posts.

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