Over recent years, the Dominican Republic has been one of the regions' surprising success stories. Growth hummed along at around 8% per year, thanks to a strong performance from the country's free-trade zones, heavy tourism business and a steady stream of remittances from Dominicans working abroad, principally in the US. Sections of the capital (Santo Domingo) and Santiago (the island nation's second-largest city) began to resemble American suburbs - with US-style shopping malls, US fast-food chains, supermarkets and other retailers all taking advantage of the consumerism that rose with the local economy. And the country's infrastructure was improving as well: there were new highways between the island's major cities, as well as the long awaited opening of a new international airport in Santiago.
The growth spawned a number of Dominican firms: banks, insurance companies, retirement funds, more media outlets, and even a home-grown Dominican telecoms firm. This was Tricom, which started in the early 1990s to compete with the foreign owned giant Codetel, for local, international and cellular phone services. All these new service companies were the product of the fast growth and Dominicans took them as proof that the country was indeed moving forward.
BanInter. One of these new firms was Banco Intercontinental, one of the country's largest banks, and a major part of an emerging Dominican conglomerate owned by Ramon Báez. He was a fixture in the local élite who happened to be the great-grandson of Buenaventura Báez (one of the country's first presidents). BanInter itself was started by Báez's father, Ramon Báez Sr in 1986 as a spin-off of his insurance firm Intercontinental de Seguros S.A. Just a few years after the bank's founding, Ramon Báez (the son) became president of the bank.
As the 1990s progressed, President Leonel Fernández introduced a number of reforms to the country's economy, which ratcheted up the country's growth rate.
The deadly deal. At the height of this period (1996) Báez, with the approval of the Fernández government and the Banco Central (the national treasury), merged his bank with the languishing Banco de Comercio. Under the terms of that deal, the Banco Central absorbed Banco de Comercio's major liabilities, while BanInter walked away with the profitable portfolios that belonged to Banco de Comercio. The deal transformed BanInter into the country's third-largest bank.
That infusion of financing helped Báez start up what became the country's biggest conglomerate - buying a variety of companies. His better-known acquisitions are in the media realm - Báez managed to buy 70 radio stations and three TV stations. He founded his own newspaper in 1997, set up the country's first 24-hour TV news station, as well as buying the country's leading newspaper in 2000 - Listín Diario (the Dominican equivalent of the New York Times).
Marketing. BanInter used the media and more favourable interest rates to attract a steady stream of new deposits, with more branches popping up throughout the island, and Dominican baseball great Sammy Sosa being used in local TV spots to promote the bank. The Sosa ad campaign was just a portion of the advertising BanInter conducted. Apparently, BanInter spent around US$100,000 a day on advertising alone (ranking it the largest advertiser in the country).
Báez became known throughout the country for his extravagance - buying himself luxury homes at locales as diverse as Vail (Colorado), Miami, and the rich & famous resort enclave Casa de Campo. He also owned a fleet of executive jets, helicopters, and yachts.
Fraud and Goico. Despite Báez's personal taste for luxury, it is really his use of BanInter's funds to allegedly pay off various sectors of the Dominican government that have caused the most outrage. What triggered the May 2003 collapse of BanInter was last September's revelation of US$2m in fraudulent expenses being run on a credit card given by the bank to Colonel Pedro "Pete" Goico (a powerful member of President Hipolito Mejía's staff) and two other military officers. After being arrested for the use of that credit card, BanInter dropped the charges and Goico received another major post.
The Goico case was just the tip of the iceberg. According to Báez himself, he supplied armoured SUVs (Sports and Utility Vehicles) to both President Mejía and former President Fernández, as well as providing monthly stipends to 70 out of 100 of the country's army generals (in addition to stipends to an unknown number of supreme court judges), 10 gold Rolex watches to a colonel connected with Mejía, and another US$100,000 to Fernández for an economic think-tank that he founded. The alleged distribution of funds to government officials and others over the years totalled about US$75m.
The Goico scandal alerted the Banco Central. Once it noted BanInter's liquidity problems, the Banco Central put the equivalent of US$300m in pesos into the troubled institution, in hopes of finding a buyer for that bank (those funds were later converted to dollars by Báez & his associates and transferred out of the country). In March 2003, another major Dominican bank, Banco del Progreso, was considering a merger, but balked at the idea upon closer examination of BanInter.
Too late. Having, become seriously worried by what was going on at BanInter, the Banco Central found that the bank was keeping two sets of books - one for Dominican bank regulators and international auditors (PriceWaterhouse Coopers) and another set for the higher-ups at BanInter, including Báez, to keep track of the bank's actual fraudulent activities.
The significance of the double books was that they hid a clandestine banking operation which transferred the inflow of legitimate deposits into various secret accounts. A good US$70m of such funds, for example, went into a petty cash fund for Báez's personal use. An arm of the bank in the Cayman Islands, which was supposed to have kept US$152 million in deposits for wealthy Dominicans, spirited away those funds into another of BanInter's clandestine accounts. Given that much of the funds were left unclaimed since the outbreak of the scandal, questions have been raised by both US and Dominican authorities on the legitimacy of those funds.
In addition, a Báez associate who was the country's former Dominican ambassador to France, earlier this year allegedly transferred another US$176m in embezzled funds overseas through a firm under his control.
Collateral damage. The collapse in the peso, which has halved so far this year, was due to BanInter erasing from its books, from January to March 2003, nearly US$680m in bad loans taken out by Báez's enterprises and friends. When these loans became apparent, the Banco Central had to stump up and continue to fund the media operations owned by Báez pending the country's court system's approval of their sale.
In the meantime, the temporary takeover of BanInter's formidable media holdings (including the now closed Listín Diario), poses a legitimate question regarding the government guaranteeing the country's well-established press freedoms.
Staggering. All in all, the sum of BanInter's fraud is US$2.2bn. This is a sum equal to two-thirds' of the country's annual national budget and 15% of its annual gross domestic product. The cost of the fraud has not only reversed the country's steady economic growth (the country's economic growth rate in 2002 was 4%, and is expected to be flat this year), but has halted the importation of food and other goods from overseas.
The collapse of BanInter has also has sent the peso on a roller coaster: exchange rates for the peso have lurched from 28 pesos to 35 pesos to the dollar in a two-week period. In some sectors, there is serious talk of dollarising the economy to restore economic stability.
IMF. The government's reaction has been to resort to the IMF. It has signed a letter of intent for US$1bn. Although the government has yet to get the money, it is implementing the economic policies it has agreed with the Fund. These include cuts in public spending, wage freezes in the state sector, and the introduction of new taxes (including an increased departure tax for tourists - from US$10 to $20 - a measure which the tourist sector fears will hurt future repeat visits from foreign travellers).
Political fallout. The fallout from the BanInter scandal will almost certainly end any lingering hopes Mejía may have nursed for re-election. The immediate question is whether he will be able to maintain social peace in the coming months, as the most stringent IMF measures the country has seen since 1984 take effect.
Then the food price riots triggered by the imposition of a similar IMF austerity programme caused civil disturbances in Santo Domingo and other parts of the country -resulting in over 100 deaths.
Electricity: As if BanInter was not enough of a blow to the economy, the perennial electricity supply crisis has returned to haunt the government. The electricity supply companies are threatening to cut off supplies to the government unless it clears the US$20m in arrears it has accumulated with them. The electricity distributors say that the system is once again running up against capacity constraints.
George Reynoso, the electricity superintendent, said that the deficit could only be eliminated with 300MW from the Cogentrix project. The distribution companies said that 233,000 customers had suffered power cuts. The latest data show that the country's output is around 250MW below demand. Cogentrix provides 100MW.
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