Jan-Michael Simon

Versión en español aquí.

In Part I of this series, the author discussed two criminal cases pending before U.S. courts: the Housing case and the Food for Venezuela case. Both deal with business transactions involving the proceeds of public corruption tied to the Venezuelan State’s investment in the welfare of its people. This part, in turn, examines how Mexico’s justice system has handled the ramifications of the Food for Venezuela case in its territory. The author finds that there is a marked disparity in how the Mexican and U.S. justice systems approach these types of cases. It is concluded that the response of Mexico ignores the most basic rules of crime prevention and international standards on the fight against money laundering, which is hardly compatible with the inter-American standards on corruption and human rights developed by the IACHR. Part III of this series will evaluate Mexico’s response in terms of the probable business scheme.

Introduction

Grand juries in the Southern District of Florida have returned indictments in two criminal cases in which players close to Nicolás Maduro’s administration are charged with laundering hundreds of millions of U.S. dollars on U.S. soil. These are only a fraction of the criminal cases before the U.S. courts involving the Maduro administration.

The first case (called the Housing for Venezuela case) deals with proceeds of public sector corruption in the construction of low-income housing. The second (the Food for Venezuela case) concerns the proceeds of corruption schemes related to public food subsidies for the country’s population, mainly between 2016 and 2018. Together, they involve approximately US$2 billion in corrupt proceeds.

In the first case, one of the two defendants—Álvaro Pulido—is a fugitive from justice. The hearing to schedule the trial of the other defendant—Alex Saab, extradited from Cape Verde to the U.S. in October 2021— was continued to February 16, 2022. Although Saab is listed as an unindicted co-conspirator in the second case, the prosecution has announced that it may include facts from the Food for Venezuela case in the evidentiary record of the first case, which could increase Saab’s sentence if he is convicted. In any case, it is reasonable to assume at this stage that the custodial sentence would be high—at least around 235 months of imprisonment—in addition to the forfeiture of some US$363 million.

Transnational ramifications

The Food for Venezuela case arises in the context of widespread public corruption in Venezuela, according to U.S. Treasury Department advisories from 2017 and 2019. This state of affairs is underscored by the fact, reported by the Venezuela Chapter of Transparency International (TI Venezuela), that in 2019, authorities in 20 countries were investigating over 70 cases related corruption of the Venezuelan State. According to TI Venezuela, the amount of funds at issue in these cases totaled approximately US$30 billion at the time.

This is the context for the operation in Venezuela of a social program called “Local Supply and Production Committees” (CLAP in Spanish), created in May 2016 through an emergency decree issued by Nicolás Maduro’s administration. The CLAP program is part of the public food distribution system that delivers food in a bag or box, popularly known as a CLAP bag or box.

Intended by the Maduro administration to be “the most powerful weapon against the economic war,” the CLAP program suffers —according to academic research with a human rights-based approach— not only from a bias against an “internal enemy” of the administration, but —according to TI Venezuela— also from a lack of transparency and accountability. Its operations provide the context for the prosecution of the Food for Venezuela case in the Southern District Court of Florida.

In 2019, the U.S. Treasury Department had warned that corrupt Venezuelan senior political figures and business associates “collud[e] with front persons who use their shell companies to skim money from the commercial [supply] contracts … facilitated through the program [CLAP] … rely[ing] on … entities [registered] in Mexico, Turkey, Panama, or Hong Kong, among other [countries] … [and] subcontract[ing] with other companies to fulfill [their] obligations … such as purchasing food and assembling food boxes.”

The procedure reportedly consisted of “directing overvalued, no-bid contracts to front or shell companies … incorporated in Hong Kong… [These companies] obtain the required authorization from the Venezuelan Corporation of Foreign Trade (CORPOVEX) to import food into Venezuela, [receiving]… a prepayment for the contract from CORPOVEX … [Their] beneficial owners [later] act as intermediaries for kickbacks to the corrupt Venezuelan senior political figures, [diverting them]… into nested corporate accounts … typically held at financial institutions in the Caribbean, Panama, and Hong Kong … [and] sometimes … into personal bank accounts that are often [also] located in Switzerland.”

Prosecution authorities in different countries have reacted to the transnational ramifications noted by the U.S. Treasury. To date, the results of these actions have been modest, if not insufficient, to effectively contain this type of conduct amid Venezuela’s widespread, internationally notorious public corruption.

Ramifications in Mexico

Among the jurisdictions identified in the U.S. Treasury Notice, in particular the Mexican authorities’ approach to crimes in their territory related to the subject of the U.S. indictment is noteworthy. As of 2016, according to a study by TI Venezuela based on data from Mexico’s Ministry of Economy and other official sources, Venezuela had become the main export destination for several staple foods from Mexico. That year coincides with the creation of the CLAP program.

According to this study, exports from Mexico to supply the CLAP program included 17 types of food products. Between 2016 and 2018, the value of its exports to Venezuela reportedly totaled US$1.734 billion. The total value of powdered milk and other dairy products exported to Venezuela, for example, was said to be US$227 million, not only making it the leading food product exported to Venezuela in 2018, but also accounting for nearly all Mexican exports of this product for that year.

After Mexican media reported that a former Venezuelan Prosecutor General had publicly denounced criminal acts involving Alex Saab and Álvaro Pulido and their relationship with a Mexican company contracted by the Venezuelan government to distribute CLAP bags, investigative journalists delved deeper into the facts. They identified links between Mexican suppliers and offshore companies controlled directly or indirectly by Saab and Pulido, which are registered in Mexico and other countries (China, Panama, Turkey, and the United Arab Emirates, among others). One of the main companies registered in Mexico was subsequently classified by the Mexican Tax Administration Service as a shell company.

Accountability in Mexico

After the revelations of investigative journalists became widely known, an administrative unit of the Ministry of Finance and Public Credit (SHCP in Spanish), called the “Financial Intelligence Unit” (FIU), blocked several bank accounts involved in financial transactions in Mexican territory linked to the businesses mentioned in the journalistic reports. The FIU receives, analyzes, and disseminates information related to the prevention, detection, and fight against crimes involving transactions with the proceeds of unlawful activities, i.e., money laundering (Article 15 of the Internal Regulations of the SHCP).

The FIU also filed a criminal complaint with the Office of the Federal Public Prosecutor (MPF in Spanish). In Mexico, the MPF is the entity in charge of criminal investigation and public prosecution. At the time, the MPF was presided over by the head of the former Office of the Attorney General of the Republic (PGR in Spanish), a body answerable to the President of Mexico.

The FIU filed a complaint against 14 companies and individuals for their participation in financial transactions in Mexican territory. Just two weeks after having received the complaint, the PGR stated that the “MPF… entered into a…” —in fact, there were four— “reparatory agreement[s]” with the defendants. The case was described as a “fraudulent scheme” with “unusual transactions.” It was announced that, as reparation, “[t]he accused will hand over three million dollars to the United Nations High Commissioner for Refugees (UNHCR).” The total amount of the reported financial transactions was US$156 million, according to the then head of the FIU, meaning that the value of the reparation would be approximately two percent of the total financial transactions alleged.

Article 186 of the National Code of Criminal Procedure (CNPP in Spanish) and Article 33 of the National Law on Alternative Dispute Resolution Mechanisms in Criminal Matters (LMA in Spanish) were cited as the legal basis for the MPF’s reparatory agreement with the defendants. Under Mexican criminal procedure, the reparatory agreement is a measure to “settle disputes arising between members of society as a result of a complaint or lawsuit related to a criminal act,” according to Article 1(2) of the LMA. This is the Mexican version of a typical alternative to criminal prosecution in Latin America, which in several countries of the region has the legal consequence of terminating the criminal action. The termination of the criminal action is also the legal consequence of the reparatory agreement under Mexican criminal procedure, provided the necessary legal requirements are met.

Regarding the findings of its investigation, the MPF noted having found that “under said program [referring to CLAP], as of 2016 … a network of companies and individuals, both national and foreign, have obtained Venezuelan public resources from a government program, the purpose of which is to procure food supplies in various countries for subsequent export to Venezuela and distribution to the population… [to] mitigate the severe food crisis the people of Venezuela are facing. According to the investigation, this group of companies and individuals [Mexican and foreign] have obtained funds by diverting them from their humanitarian purposes, in order to acquire food and engage in commercial speculation, taking advantage of the food shortage in Venezuela by (1) acquiring low-quality products, [and] 2) exporting them to Venezuela at a premium price. …”

The MPF emphasized, “[U]ltimately, the outcome of these investigations and the subsequent actions are proof of the unwavering determination of the Government of Mexico in the fight against corruption and money laundering, and confirmation of its firm commitment to the wellbeing of the Venezuelan people.”

Conclusion

Although Nicolás Maduro’s administration has accused the Government of Mexico of “abusing Mexican businesspeople [in] one of the many attempts to hinder the Bolivarian Government’s bold efforts to defeat the economic war against our people,” there is a marked disparity between the Mexican and U.S. justice systems in how they deal with criminal acts detected in their territories. This applies both to procedure and to its legal consequences.

In the U.S., these are criminal cases brought to trial, with a considerable likelihood of imprisonment and forfeiture of all the property involved in the offenses, and any property traceable to such property, in the event of a conviction. In contrast, with only two weeks having passed since the receipt of the criminal complaint, Mexico’s MPF agrees to allow the defendants to pay —without going to trial— “reparation” amounting to two percent of the financial transactions reported, which would result in the termination of the criminal action, provided the necessary legal requirements were met.

This arrangement by the Mexican MPF is clearly inadequate given the value of the financial transactions detected in Mexican territory. With it, the State ignores the most basic rule in crime prevention: that the cost of criminal conduct must always exceed its benefit, i.e., that crime does not pay. Thus, in terms of money laundering prevention, Mexico is at odds with the international anti-money laundering standards of the Financial Action Task Force (FATF), particularly in terms of Immediate Outcome 8 (IO8), used to evaluate the effectiveness of the implementation of FATF recommendations, mainly the effectiveness of recommendation 4 (R.4) on confiscation. Therefore, the agreement in Mexico contradicts the MPF’s claim that it is “proof of the unwavering determination of the Government of Mexico in the fight against corruption and money laundering.” On the contrary, it is a concrete example that validates Mexico’s poor performance in the mutual evaluation of FATF indicator IO8 (low level of effectiveness), published in 2018 (paragraph 218).

Besides ignoring the most basic rules of crime prevention and international standards on anti-money laundering, Mexico’s approach is hardly compatible with the inter-American standards developed by the Inter-American Commission on Human Rights (IACHR) in late 2019 on corruption and human rights. This is particularly so with regard to the obligation to combat impunity for acts of corruption, which have a serious impact on the enjoyment and exercise of human rights and reparations to victims. Although the alleged corrupt agreements that involved using the proceeds of crime in Mexican territory were allegedly made in Venezuela, Mexican territory was used to carry them out. Therefore, in this case, Mexico is subject to the standards developed by the IACHR. Because these standards were developed based on State obligations in the inter-American system in force in 2019, considering how the State’s compliance with these international obligations is updated, with a view to preventing impunity in cases of corruption that directly and indirectly affect the enjoyment and exercise of human rights, the inter-American standards on corruption and human rights also apply to events that occurred prior to their adoption by the IACHR.

The third part of this series will demonstrate that, in terms of the probable business scheme in the Food case, the Mexican authorities failed to clarify the facts and statutory base which would make the case eligible for a reparation agreement, including who would have the right of redress and be entitled to sign agreements.

To be continued in Part 3.

Picture of Alex Saab via United States Department of the Treasury.

Updated on June 4, 2022 at 06:19 PM (EST).