Hurricane Ramoncito: how Ramon Baez and his cronies broke the Dominican Republic's largest bank--and almost brought down the country.

From his 18th story penthouse at The Libertador Tower on Santo Domingo's Anacaona Avenue, banking scion Ramon Baez had sweeping views of this seaside capital. For years, his name was synonymous with booming business, open-handed charity and splashy living.

Baez still lives two blocks from the ocean. He still keeps distinguished company; until recently, a neighbor was a former ambassador to France. But the view is distinctly less lofty from the fourth story of downtown's Palacio de Justicia, where Baez is jailed. One street over stands the bottle-green offices of the government lawyers prosecuting him for his role in the Dominican Republics worst-ever banking scandal.

The Central Rank on April 7 took over Baez's family-owned Banco Intercontinental, known as Baninter, once the country's second-largest private bank. Authorities charge Baez and his cronies ran a shadow bank for more than a decade, doling out sweetheart loans and making secret business deals that drained the official bank dry. Baninter's collapse will cost the country at least US$2 billion to mop up, although the government said in June that the weak global economy means that it has only $300 million in the current account.

Bailing out. Baninter depositors will push the public deficit to 4% of gross domestic product from the previously projected 12% gap. "We are facing an unprecedented fraud, executed by a small group of persons acting in concert," Central Bank Governor Jose Lois Malkun told the nation on May 13, a few weeks after the scandal exploded.

The scandal puts into question President Hipolito Mejia's re-election bid, and it has tarnished the reputation of former President Leonel Fernandez, the country's strongest political leader. "There has been much complicity at every level of society: the government, the media, the church, the military," says TV commentator Rafael Acevedo, president of the opinion polling firm Gallup Republica Dominicana.

There's plenty of blame to go around: The alleged fraud went undetected for 14 years by the country's supposed financial gatekeepers--the Central Bank, the Superintendent of Banks and U.S. accounting company PricewaterhouseCoopers. How Baez and his cronies are accused of pulling it off provides a glimpse into the gift-giving and favor-swapping common between private business and top government officials in the Dominican Republic.

"Ramoncito" Baez had taken over the small bank started in 1986 by his father, businessman and former Industry Minister Ramon Baez Roman. Baninter grew quickly into a typical family-run Latin American conglomerate, buying up companies or controlling interests in firms that touched on nearly every aspect of Dominican life.

He also amassed a media empire: four newspapers, including the oldest and most respected, Listin Diario, 70 of the country's 300 radio stations and eight of 15 TV stations. Baez's influence was such that at his wedding, former Presidents Joaquin Balaguer and Leonel Fernandez signed the marriage document as witnesses. A national economic program he proposed in late 2000 earned him lavish praise from President Mejia. "Risk, and I'm talking about calculated risk, is proper of all business and of any human activity.

Whoever doesn't understand this can't triumph;" Baez said in a 2001 interview in Dominican business magazine Mercado. Although Baez came from wealth--his father co-founded the country's oldest shipping company, Baez & Rannick--Baninter's octopus-like acquisitiveness raised some eyebrows. Speculation about the source of Baez's mountains of cash ran wild. Nobody seems to have considered the more mundane explanation being given today by the Dominican monetary authority: He robbed his own bank.

Armored SUVs. According to Central Bank President Malkun, starting in 1989, Baez and "a very few executives" started running two sets of books. One was for the Baninter seen by the gatekeepers and the public; the second set was for a parallel, shadow bank that Baez would use primarily to fuel his empire building.

Depositors' money sponsored high-level government officials, including three presidents and nearly 70 armed-forces generals, paying monthly salaries and doling out costly gifts that included armored Lexus SUVs and Rolex President watches, the Central Bank charges. But the lion's share of the missing funds went to purchase money-losing enterprises and to issue highly irregular loans to friends and associates of Baez. An examination soon revealed that the shadow hank was triple the size of the audited bank.

The global recession had begun to put pressure on Baninter. In early 2002, deposits started to slip. By September, Baninter was feeling the pinch and started to get cash infusions from the Central Bank.

But spectacular conflagrations are often started by a tiny spark. Just as the Central Bank began shoring up Baninter for what it thought was a short-term lack of liquidity, another drama was starting to unfold, one that would set in motion Baninter's undoing.

Baez, as president and 90% owner of Baninter, took full-page ads in several newspapers denouncing what he called a $2.4 million credit-card fraud on the part of President Mejia's security chief, army Colonel Pedro Julio "Pepe" Goico. Although the credit card was issued in Goico's name, it was meant solely to finance presidential travel. Instead, Baez charged, Goico and his cronies used the card for personal purchases, including planes and helicopters, luxury housing and jewelry.

Baez went public after meetings with President. Mejia--who visited Baez twice at home and once at the bank to discuss the debt--failed to resolve the issue.

The credit-card scandal brought to light another item: Goico had been free on bail since 1997, after $87 million went missing at the Dominican National Lottery while he was serving as security chief at that government agency. Goico was charged with fraud in the case and briefly jailed. But the five-year-old lottery case had been engavetado, a Dominican term that means putting the issue away in a drawer to be forgotten about. After the Baninter scandal imploded, the lottery case--in which charges are still pending--came back to life.

Goico was jailed again while military intelligence investigated Baninter's credit-card claim and other charges. An Armed Forces report on the investigation concluded in late November 2002 but was never publicly released, despite Mejia's promises. In a shocking twist, the case was tossed out in February 2003 after Baninter failed to file formal charges.

Baez's lawyers have a different explanation for why Baninter declined to press charges. "The problems started in September 2002 because Baninter saw itself pitted against the authorities," says attorney Juarez Castillo Selma, a son and partner of Baez's lead defense attorney, Mario Vinicio "Vincho" Castillo. "It's not just any bank that can deal with that kind of pressure, you know. The bank presented its claim, but this tremendous pressure fell upon it, so tire bank prefers to withdraw the charges and absorb the losses rather than deal with this."

In March, despite the lottery and credit-card scandals, Goico was given a plum job--subcommander of the army's Sixth Infantry Battalion in La Romana, an international playground of the rich and famous on the Caribbean island's southern coast. The following month, Goico landed yet another prestigious post. He returned to tire capital as chief of the army's First Brigade.

"Pepe-Gate" may have been the spark, but a mountain of kindling had been piling up for years around Baninter.

In the first three months of 2003, authorities say, Baninter's top 100 debtors were given funds or had debts erased from the books totaling $1.08 billion. What was coming in the front door from the Central Bank was being slipped out the back.

At the same time, Baez sought salvation from the financial time bomb in a proposed merger with No. 7-ranked Banco del Progreso. Monetary authorities approved the deal March 24. Within two weeks, without explanation, Progreso withdrew.

Then the Central Bank switched a floodlight on Baninter's books.

Baez saw the writing on the wall and availed himself of the country's top criminal defense team--the Castillo law firm. "In the first few days in May we met with President Mejia at the home of a mutual friend," says attorney Castillo, who says several economic groups were interested in buying Baninter, including tobacco giant Grupo Leon Jimenes.

The 90-minute meeting ended at 9:30 p.m., by which time, Castillo says, Mejia was agreeable to seeking "an administrative solution within the framework of the business community," a euphemism for getting the good-old-boy network and the government to quietly soak up the financial mess. "But, the monetary authorities revolted," says Castillo.

Nearly three weeks earlier, the Central Bank had hired the Dominican office of Miami law firm Steel Hector & Davis. Steel Hector's job is forensic, to map out Baninter and its maze of affiliated companies, then find and recover depositors' money.

"So far, we've located 140 companies, including 30 in fiscal paradises, like Cayman Islands and BVI [British Virgin Islands]," says Steel Hector's lead attorney in the Baninter case, Pedro Gamundi. Baninter Bank and Trust, a subsidiary of Baninter in Grand Cayman, had deposits "between $150 and $200 million dollars," Gamundi says. Only on paper, though. The vaults were bare.

Country club. The day after the Central Bank governor's speech detailed the Baninter debacle, police arrested Baez at his high-rise home. Also arrested were two Baninter vice presidents, Vivian Lubrano de Castillo (no relation to the lawyer) and Baez's cousin, Marco Baez Cocco. Weeks later, authorities also jailed former Dominican Ambassador to France, Luis Alvarez Renta, recalled after less than a month in Paris due to his alleged involvement. All three denied the charges to prosecutors.

The monetary authority's decision to make good on Baninter deposits prevented a run on the banks, although the domino effect already has provoked the sale of Bancredito, reportedly for $68 million. On July 21, the Central Bank announced that Banco Professional and the Leon Asensio family would buy Bancredito, with the proviso that the Central Bank will assume a $193 million loan portfolio guaranteed by commercial paper issued by the loan holders.

The Central Bank later announced that Canada's Scotiabank would buy some Baninter assets, as well as its 35 branches, although it will not assume the bank's billions in liabilities.

The national recovery plan, hatched by the Central Bank and tire International Monetary Fund (IMF) and announced June 25, unsigned at press time, will take two years and rely in part on $1 billion in financial assistance from the IMF and other lenders of last resort. The proposal calls for limits on public spending; a freeze on public sector salaries; $46 million in budget cuts in 2003; an additional 2% tariff on imports paid directly to the Central Bank; a $10 increase on tire exit tax charged foreign visitors; even a 0.15% charge on pensioner's checks.

"This case has battered the whole of Dominican society," says Elena Viyella de Paliza, president of the Consejo Nacional de la Empresa Privada, the country's largest private enterprise group. "The private enterprise community demands that [the prosecution] is carried out with transparency and strict adherence to the letter of the law."

Baez has not spoken to the press. A police officer posted at the bottom of the stairs leading to Baez's cell said he could not take a reporter's business card to Baez, but that somebody from the banker's entourage could deliver it. Give it to "one of his chauffeurs or his bodyguards or the maids," the officer said.