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Transparency: just like old times. (Special Report).

Democracy, free market economies, privatizations and international commerce promised to reduce corruption. Then came the BBVA scandal.

The case of Spain's Banco Bilbao Vizcaya Argentaria--embroiled in Latin American charges of questionable cash transfers, money-laundering and secret political campaign contributions--illustrates how the highway to democracy and global commerce is still pocked with holes, some of them deep.

BBVA, with US$276 billion in assets, is under investigation for allegations linked to multibillion-dollar bank privatizations in Mexico, Venezuela, Colombia and Peru. It denies wrongdoing but admits one mistake. "We acted without transparency," BBVA President Francisco Gonzalez declared in late June, a week before the bank announced sweeping reforms.

Democracy, free market economies, privatizations and global trade promised reduced corruption in corporate and government landscapes--or transparency, in the jargon of policymakers. However, the troubles at Spain's No. 2 bank underscore how businesses in the region remain tightlipped and public paper trails stay convoluted. For many, silence is still golden.

Under caudillo rule and dictatorships, openness was irrelevant in Latin America. The shift to democracy, however, assured that governments not only would become accountable to the public, they would curb corruption and back-room dealings.

Clearly, breakthroughs have occurred. Vicente Fox's clean election as president of Mexico broke the PRI political party's 71-year stranglehold on the government. Adherence to democratic processes thwarted the coup attempt against Venezuela's controversial--but elected--President Hugo Chavez. When the Argentine economy hit the skids and President Fernando de la Rua resigned, it may have taken four replacements to find someone to stay in the job but the military did not take over.

That said, democracy comes with its own doors to influence peddling. In Venezuela, BBVA acknowledges that it contributed a total of $1.5 million in 1998 and 1999 to Chavez's re-election campaign. The Spanish bank, which owns Venezuela's biggest financial institution, Banco Provincial, says the secret contributions broke no laws. Other banks, including rival Banco Santander, also have been identified as having helped fill the campaign war chest.

Peter Hakim, director of the Inter-American Dialogue, a policy analysis center focusing on the Americas, doubts there's more honest disclosure in Latin America than there was in the past. Still, he believes the public has increased expectations that there should be. As evidence, he points to the outcry in Peru when it was revealed that anthropologist Eliane Karp, the wife of President Alejandro Toledo, received $10,000 a month as an adviser to Banco Wiese Sudameris, whose president, Eugene Bertini, is under investigation for alleged ties to former Peruvian spy chief Viadimiro Montesinos. Although she admitted no wrongdoing, Karp resigned from the post.

"There is less tolerance," Hakim says. "There used to be a time when people would say "Yes, he's corrupt or she's corrupt, but they get things done. This is the way business gets done.' Not anymore." The plums of privatization. Public auctions of government-held companies and concessions defined how transparency was expected to work. Bidding would be open to all, reducing longstanding corruption. Even better, foreign investors competing in the process would bring with them global accounting standards and, in the case of U.S. companies, legal prohibitions against bribes and kickbacks--safeguards on the region's road to reform. But did privatization really pull bureaucrats' hands from the public till, or did it simply redesign the backroom rules?

The alleged missteps of Banco Bilbao Vizcaya--most predating its 1999 merger with Argentaria--sound just like old times in Latin America: secret bank accounts, slush funds, money laundering. However, a single thing sits at the core of charges in Peru, Colombia and Mexico. Privatizations.

The BBVA probe started when a former employee in the bank's Puerto Rico office claimed his bosses silently approved money laundering and bribery U.S. law enforcement agencies, including the FBI, failed to find evidence to back the accusations locally. Eventually, the finger-pointing employee was convicted of embezzling $49,000. The probe revealed, however, that BBVA had $227 million in a secret account in the British isle of Jersey A trail from that account led to Latin America.

In 1996 and 1997, during its acquisition of privatized Banco Continental de Peru, then-Banco Bilbao Vizcaya is alleged to have shelled out millions of dollars in loans and other payments to former Peruvian President Alberto Fujimori and his videophile security chief Montesinos. The accusations, which BBVA says are baseless, range from claims that $112 million in bribes were paid to Fujimori to questions over the sale of Fujimori's $670,000 house.

In Colombia, BBVA is fending off money-laundering charges in connection with its successful bid to control Banco Ganadero. BBVA-Ganadero executives vehemently deny the charges. Officials in Mexico, meanwhile, are looking into whether money laundering played a role in BBVAs takeover of financial group Mercantil Probursa and if offshore funds were inappropriately used to buy shares in Bancomer, Mexico's biggest bank BBVA, which denies any wrongdoing, continues to solidify its hold on Bancomer, paying $230 million in June for an additional 3% of stock, bringing its control to 53%.

Last year, Bancomer was BBVA's biggest moneymaker outside of Spain, reaping profits of $670 million. Bancomer generates 89% of BBVA's Latin American income.

Governments acknowledge that privatizations offer illicit temptation. In Mexico, a watchdog entity was set up to oversee the bidding process of the doomed $2 billion international airport at Texcoco. And Peru created an independent agency to stand vigil on its transfer of state-owned utilities and mines. That wasn't enough to sway the public, however Violent street demonstrations in Arequipa forced Peru to cancel the sale of a power company.

"Although transparency has very much been an issue on the agenda of governments, the Latin America-based private sector still has a long way to go in achieving true transparency," says Lucinda Low, a board member of the U.S. branch of watchdog agency Transparency International and a partner with the Washington, D.C., law firm Miller & Chevalier, which does substantial work in Latin America.

The same day Low made the comment, officials in Venezuela and Paraguay were accused of improperly awarding airport concessions. Venezuelan officials on the island of Margarita were charged with improprieties in a $5 million concession at the Santiago Marino International Airport. In Paraguay labor unions alleged that the National Civil Aeronautics Commission failed to follow proper procedures in contracts to modernize the control tower and improve the telecommunications system at the international airport in Asuncion. Companies under scrutiny by the unions include Thales, Consorcio Calmaquip, Samsung Corp. and Data Lab.

Global village. "It's clear that the issues surrounding transparency have been getting far greater attention in the past five years," says Haldm. "That's because of globalization in part."

Foreign investors want to know that when they read earnings statements, they're getting the truth. They want to know who owns companies, the true scope of their operations and the source of their financing. Already there is more information on Latin American companies listed on U.S. stock exchanges and, as a result, required to meet reporting standards of the U.S. Securities and Exchange Commission. And there undoubtedly has been some trickle-down effect from U.S. companies trading and investing in Latin America.

But, as recent corporate scandals show, requiring businesses to report on their affairs doesn't guarantee they will do so accurately "Look at Enron. Wouldn't transparency in its economic affairs have created a different picture of the financial health of that company and, perhaps, prevented some of the losses that have occurred?" says Low "Look at the Asian crisis. A lot of the evidence shows that it was a lack of transparency in relationships within the corporate sector, among the financial institutions and between the financial institutions and businesses, that led to that massive financial meltdown."

Even if international commerce raises the anti-corruption bar for corporations, it does so principally for multinationals. Smaller companies--the bulk of business in Latin America--have fewer incentives for reform. "Nobody wants to be transparent," says Hakim at the Inter-American Dialogue. "It takes time and energy. You have to reveal to the outside world what you're doing."

Still, BBVA voluntarily launched sweeping reform after the scandal broke. In its scramble to become a poster child for transparency, the Spanish bank moved the once-secret offshore accounts onto its books as extraordinary gains, replaced more than 20 executives and directors and barred new board members from also sitting on the boards of companies in which BBVA holds interests. It also took the dramatic step of revealing its executives' salaries, rare in Europe.

Why the rush to cooperate? Globalization. BBVA, with minority shares of Banca Nazionale del Lavoro in Italy and Credit Lyonnais in France, has made no secret of its desire to acquire more outside its home country. It has even announced it will put foreigners on its board of directors as part of its global vision. It can do neither, however, if a scandal lingers.

BBVA also belongs to the sector increasingly moving to the vanguard of anti-corruption reforms: the financial system.

Money talks. "Access to international sources for finance, for banks, requires that they have much more transparent accounting practices. classification of loans practices, reserve practices, capitalization and collaterization practices," says Boris Kozolchyk, director of the U.S. based National Law Center for Inter-American Free Trade.

The law center last year completed a study titled Transparency and Truth in Latin American Banking. Using international accounting standards as a base, it published a laundry list of recommendations that were quickly adopted in great part by Mexico, Brazil, Venezuela, Chile and Argentina. Ecuador is revising some of its banking rules to comply, as well.

"If Banco Itau in Brazil wants to sell ADRs in the United States, then the standards of disclosure Itau must comply with are very high compared to those in Brazil. There is a natural market adjustment," says Kozolchyk. "The problem in Latin America, of course, is that there are very few institutions that place their ADRs in the United States. But there still is an incentive to be more transparent: central bank regulations that require transparency if financial institutions want access to discounting and rediscounting."

Such adjustments call for new laws-- and getting laws to conform from country to country is a thorny issue. Furthermore, they must be enforced. Impunity and tax evasion, for example, go hand-in-hand in most parts of Latin America.

"Making laws just isn't enough. There are lots of laws on the books against bribery in Latin America. But there's still bribery." says Hakim.

Still, in the United States, corporate accountability was forced by legislation. And Latin American countries increasingly are moving in that direction. Mexico and Brazil have revised tax laws. Mexico also passed a press freedom law that, among other things, opened court documents and other once-secret files. Peru's Truth Commission is reactivating closed investigations into military atrocities during the crackdown on terrorist activity in the 1980s and 1990s. Classified documents linked to desaparecidos are, in other countries, being opened.

Progress has been made. How else would the public know how much Mexico's president paid for his towels, that Argentina's Carlos Menem may be barred from politics over allegations of a secret Swiss bank account and what business executives were videotaped handing bribes to Peru's spy chief. But in the bigger measure, increased international business in Latin American economies does not necessarily mean decreased corruption.

"We shouldn't believe that establishing corporate governance standards and controlling their compliance are a panacea, says BBVA's Gonzalez. "After all, companies, in the end, are run by people."

 17 Chile
 32 Uruguay
 40 Costa Rica
 45 Brazil
 48 Peru
 57 Colombia
 58 Mexico
 60 Dominican Republic
 63 El Salvador
 67 Panama
 70 Argentina
 72 Honduras
 82 Guatemala
 83 Nicaragua
 84 Venezuela
 89 Bolivia
 91 Ecuador
 100 Paraguay


Chile again emerges as the only Latin American representative in the top tier of Transparency International's list of least-corrupt countries. Chile sits at No. 17 in the Corruptions Perceptions Index 2002, right after the United States and just ahead of Germany and Israel.

Chile's insider-trading rules are more rigorous than those in the United States, its corporate reporting regulations are stringent and it was the first Latin American country to regulate loans to corporate directors and their families. Chile's Superintendency of Banking--with an independent, well paid and professional staff--is held up as a model in the Americas.

Argentina, where corruption is perceived to have soared in the past year, joins most other Latin America countries in the bottom half of the 102-nation ranking.
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Title Annotation:Banco Bilbao Vizcaya Argentaria investigation outlined
Author:Dempsey, Mary A.
Publication:Latin Trade
Geographic Code:4EUSP
Date:Oct 1, 2002
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