Oil Wars

Last week appeared the first installment of “The Good Old Days”, or what Venezuela was like back when the opposition was running things. Today comes the second installment showing what it was like when the Venezuelan business class had its own little multi-billion dollar piggy bank called Recadi.

Wanted In Caracas
Many Executives Fee Venezuela in Scandal Over Dollar Reserves
Even Multinational Officials Who Aren’t Implicated Fear Jail and Slow Justice
Illegal High Jinks at Recadi

By Jose De Cordoba
Staff Reporter of The Wall Street Journal

Caracas, Venezuela – When the head of new products for Ford Motor Co.’s unit here wants to talk strategy with his boss, he hops on the company plane for a 55-minute flight to Curacao. That is where the unit’s president is holed up to avoid a warrant for his arrest in Venezuela.

When the personnel chief of a Fortune 500 pharmaceutical company’s Venezuelan operation needs to discuss budgets, he jets to Miami, where his unit’s president is avoiding the possibility of arrest in Caracas. “What used to take half a day to do now takes three days,” laments the personnel manager.

This is a tedious way to do business, but for many international companies here, it has become the only way. About 100 top executives from blue-chip multinationals have decamped Venezuela in the wake of a huge foreign-exchange scandal. The exodus isn’t an admission of guilt, the businessman, insist; it’s there only choice.

For in Venezuela, if a company is charged with doing wrong with the nations money, that company’s top executives can sit in prison – denied bail – while the case lumbers through an unwieldy legal system. And in the sometimes-bizarre inquiry triggered by this scandal, scores of multinational companies, along with domestic businesses and former top government officials, are being investigated.

Few Arrests

Authorities have issued 47 arrest warrants so far and imposed travel restrictions on more than 60 other individuals, according to the principal judge in the affair. About 15 arrests have been made, he said. The only executive of a multinational unit to be arrested so far is Livio Pernetz, the Venezuelan –born director of Caleb Brett Venezuela, an import-verification unit of Britian’s Inchcape PCL.

The rest of those being sought apparently have left the country. The mad rush to get out of Venezuela also includes many executives whom authorities haven’t singled out but who aren’t taking any chances. Prominent among those who have fled are executives of car-assembly, flour-milling and pharmaceuticals companies, which have been among the first targets of investigators. The investigation generally focuses on a few top executives from each company.

Investigators believe that out of $40 billion authorized for payment by a now-defunct government agency over the past six years, as much as $8 billion may have been illegally skimmed. The agency, known by the acronym Recadi, was in charge of administering Venezuela’s complex foreign-exchange control system. It was supposed to conserve the country’s dollar reserves by limiting their distribution to key importers, and to subsidize these importers by allocating the dollars at bargain rates. The subsidies were meant to ensure that a continued flow of vital imports would keep Venezuelan industry rolling, prevent product shortages and keep inflation at bay.

Instead, with the price of dollars on the free market as much as three times the subsidized rate, corruption was rampant at Recadi, investigators say. In some cases, Recadi officials allegedly demanded commissions for authorizing dollar distributions. In others, importers are suspected of having bribed Recadi officials to approve inflated import invoices so they could collect extra dollars.

Soap-Opera Overtones

By 1987, the system was open to all 26,000 Venezuelan importers. It was discontinued earlier this year as part of an economic-reform package. About half of those importers are suspect, investigators say. In hindsight, no one is surprised.

“It was a piñata,” declares Judge Luis Guillermo La Riva, the jurist leading the charge against the multinationals. John Werver, President of H.J. Heinz Co,’s Venezuelan unit, one of many food companies being investigated, says: “You could have set up that system in Iowa and I guarantee there would have been a lot of corruption.” Mr. Werner, who hasn’t been personally implicated or had his travel restricted, denies any wrongdoing by Heinz.

The scandal sometimes reads like a tropical soap opera. The inquiry picked up steam when Hector-Meneses, a former development minister and Recadi director, tried to kill himself but failed. Mr. Meneses reportedly left a suicide note, later published in the local press, implicating other top government officials. Disgusted by tales of corruption emerging from the congress and courts, Arturo Uslar Pietri, the country’s leading intellectual, has sarcastically proposed a new medal, “The Order of the Fool”, to be bestowed on honest citizens. Thousands of people marched in a “Parade of Fools” to protest government corruption.

Economically and politically, this affair couldn’t come at a worse time for Venezuela. Making life difficult for multinational companies can’t help government efforts to open Venezuela’s long protected economy to foreign investment and competition. A deep economic slump already had prompted many multinationals to rethink their plans for additional investment. Evidence of widespread government corruption, meanwhile, adds fuel to public discontent that erupted in February anti-austerity riots that left about 300 dead and 1,900 injured.

For foreign businessmen, the Recadi investigation has been a crash course on the Venezuelan legal system. Judges wield enormous power, combining the roles of prosecuting attorney, grand jury and criminal court judge. Defendants accused of crimes against the “national patrimony,” such as alleged in the Recadi case, can’t post bail.

Thus, Judge Le Riva, outgoing and folksy, has become the scourge of Venezuela’s corporate elite.

Businessmen accuse him of “judicial terrorism” and hint at legal extortion. The judge denies the allegations, labeling them part of a smear campaign by “the Caracas oligarchy.” He maintains he has nothing against businessmen – many, he says, are honest. But it was businessmen who took the most advantage of Recadi, he says.

“The sacked Venezuela,” he declares. “For every dollar that a public official was bribed, the businessman received $10,000.”

Businessmen also complain of a lack of professionalism. The investigation does seem haphazard and ill-equipped to deal with the mountains of records companies are being asked to provide. Aside from a dozen or so young law students and lawyers who help take depositions, the judge has only five economists and accountants provided by Congress and the police to help with technical details.

“In most cases I know about, travel restrictions were ordered before there was an investigation,” complains Alberto Mestre, the president of Kraft Inc.’s Venezuela unit, one of the companies being investigated by the judge. Mr. Mestre himself hasn’t been implicated and his travel hasn’t been restricted. He says Kraft’s accounts are in order.

Judge Isn’t Flustered

Judge La Riva provoked an embarrassing incident by issuing an arrest warrant for Nestor Rapenelli, an Argentine who had been an executive at a flour-milling company here. The warrant went unnoticed until Mr. Rapanelli was named Argentina’s Economics Minister in July. “If Rapanelli goes through Venezuela and is arrested, that would be a problem for Argentina,” shrugs an Argentine Economics Ministry spokesman. “The thing to do is not to go through Venezuela.”

In May, Judge La Riva blundered as he began investigating Venezuela’s car-assembly companies, the biggest private-sector users of Recadi dollars. He issued orders prohibiting executives from five auto-assembly companies from leaving the country. But the judge took names from out-of-date incorporation papers, which meant that some of the executives of the General Motors Cor., Ford and Fiat, S.p.A units that he prohibited from leaving Venezuela had been gone for years.

The judge remains unconcerned. He has charged Ford’s Venezuelan unit with “fraudulent use of public funds” and issued arrest warrants for four present and former Ford officials. (Judge La Riva says he is prohibited from elaborating on any case under investigation.) Ford insists its accounts are in order and is appealing the judge’s decision to levy charges.

“I was going to get” General Motors de Venezuela, Judge La Riva says unabashedly, running his index finger across his throat in a head-cutting motion. “But they took the case away from me.” Another judge is handling the investigation of the GM unit, which hasn’t been charged with any wrongdoing. (A spokesman for General Motors de Venezuela, 51% locally owned, says “all our accounts are clear and we don’t fear an investigation.”) The judge dismissed charges against Fiat’s Venezuelan unit.

Odd Arrangements

Some executives who remain in Venezuela despite investigations of their companies acknowledge that they may be taking a calculated chance. But in some cases an impending arrest warrant is signaled by the imposition of travel restrictions, and executives have found ways to evade that barrier.

Some businessmen have left the country by hiring commercial fisherman to take them to the nearby island of Trinidad. One man got out by bribing an immigration official $500 at a small regional airport. Another executive hid out in the hills around Caracas while his company bargained with a pilot, who wanted $100,000 to fly him out. After a week of jawboning, two pilots, one flying a decoy route, smuggled him out of the country from a remote airstrip. The price: $50,000.

Another executive received a telephone call from Judge La Riva asking if he was the president of his company, which was being investigated. The executive said yes. The judge then asked him how to spell his name. “I decided it was time to leave,” says the executive, who did so the next day. No warrant or travel restrictions have been issued for him. (Most executives decline to be quoted by name in hopes of avoiding the judges attention.)

Not all of Judge La Riva’s targets have been foreigners. One warrant went out for Nicomedes Zuluaga, a member of Venezuela’s aristocratic elite known as the Lords of the Valley. Mr. Zuluaga, chairman of a flour milling company, Grandes Molinos de Venezuela, was accused of paying too much for wheat. But to everyone’s surprise, Mr. Zuluaga didn’t flee. Protesting his innocence, he went to prison instead.

Gilded Cage

Well, sort of. At the prison, Mr. Zuluaga occupies the warden’s office and bedroom, turned over to him so that Mr. Zuluaga has an appropriate place to receive visitors. He has his own visitors guestbook, his chauffeur brings breakfast and with the help of a personal computer, Mr. Zuluaga traces his family tree to the 16th century. He uses a facsimile machine to send instructions to his companies and occasionally commiserates on his cellular phone with Venezuelan President Carlos Andres Perez.

In his gilded cage, Mr. Zuluaga has become a symbol to Venezuelan businessmen who feel Judge La Riva is trying to divert public attention from official corruption and plunging living standards worsened by stringent economic reforms. Prices rose 62% in the first seven months of this year, and one economist predicts domestic economic output will fall 10% this year. “If there is no bread, then circuses,” mutters Mr. Zuluaga, a commanding presence still even behind the warden’s big desk.

Multinational executives draw another message from Mr. Zuluaga’s fate: leave. “If Nicomedes Zuluaga with all his power has been in prison for months, who is going to cry for you?” asks Vincenzo D’Elia general manager of SmithKline Beckman Corp. Venezuela unit, who hasn’t been implicated.


Recently, to the general relief of businessmen, Judge La Riva has parceled out most of the cases he has launched to nine newly named jurists. Nevertheless, two weeks ago he announced 30 new investigations of food-processing companies, many subsidiaries of U.S. companies. He promises to decide them all by Christmas.

Inappropriate Garb

Meanwhile, many fugitive executives will continue working from vacation destinations in the Caribbean.

Ford Motor de Venezuela has three top executives on the lam in Curacao. In the resort hotel where they live, the Ford men strike a visually odd note. They – and visiting Ford brass – are the only people around in buttoned-up long-sleeved shirts and ties. One recent day, half a dozen executives sit under a stuffed marlin in the outdoor cafeteria, sweating through a marketing strategy meeting in full corporate dress. Just a stone’s-throw away, scantily clad tourists sunbathe and frolic in the ocean.

Ford chose Curacao because from there executives can watch Venezuelan television and buy Venezuelan newspapers. And a company plane hops back and forth daily. Still, in a telephone interview from an undisclosed location, Cornelius Koreman, president of Ford de Venezuela, says he doesn’t know how long this method of operation can go on. Despite facsimile machines, phones and constant meetings in Curacao, “Sooner or later you start loosing the sense of the environment in which one operates,” he says.

Both in Caracas and outside, executives are hoping the worst is over. Publicity surrounding the case has shifted toward the investigation of Blanca Ibanez, private secretary and mistress of former President Jaime Lusinchi. She has left the country and reportedly is in Miami with Mr. Lusinchi. In addition, the vocal criticism of Judge La Riva by the business community appears to have slowed his drive somewhat.

Some executives are even returning to Venezuela, quietly. But most keep up their guard. “I have two plane tickets with open dates,” says Mr. Werner, the Heinz executive, who never left.

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