Versión en español aquí.
Part I of this series analyzed two ongoing criminal cases in the U.S. involving the laundering of proceeds of Venezuelan State corruption. One of them involves kickbacks in Venezuelan government purchases of food products exported from Mexico for a Venezuelan government social program (Food for Venezuela case).
Part II examined how Mexico’s justice system has handled the Food for Venezuela case in its own jurisdiction. Compared to the U.S., where severe penalties and the forfeiture of the full amount of money proceeding from the Venezuelan State corruption can be expected, the Mexican response of seeking to close the case by signing “reparatory agreements” (acuerdos reparatorios) is inconsequential and ignores basic rules of crime prevention and international standards on the fight against money laundering; it is also hardly compatible with inter-American standards on corruption and human rights.
The third part of this series examines the business scheme in the Food for Venezuela case, as another circumstantial evidence pointing to the payment of kickbacks, and the quality of the Mexican authorities’ response to the illicit nature of this scheme. The author concludes, based on the available evidence, that the business scheme would aim at disguising the financial source of the kickbacks through a clandestine form of compensation calculation. The calculation would absorb the amounts reduced by overpriced business transactions, in amounts increased by transactions at very low prices with substandard products of the same and/or similar category.
It is concluded that the Mexican authorities did not specify the illicit nature of the case. This begs the question about the factual and legal reasoning that would make the case eligible for reparatory agreements. This includes questions as to who would be entitled to reparation and authorized to enter into reparation agreements.
At a more conceptual level, the case demonstrates how close are the techniques of trade-related predicate offences and money laundering. It illustrates how difficult it is to identify the line between trade-related movement of goods as part of the predicate offence, and the movement of money which the trade transactions facilitate, as part of the money laundering.
In the fourth part of this series, we will discuss the overall dimension of the weight of the case on the food insecurity, hunger, and malnutrition among the Venezuelan population.
The Food for Venezuela case alleges that Venezuelan officials received kickbacks on Venezuelan government purchases of food products exported from Mexico.
This is based mainly on events that took place between 2016 and 2018. In 2016, according to a study by the Venezuela Chapter of Transparency International (TI Venezuela), the South American country had become the main export destination for several types of basic foodstuffs from Mexico. This period coincides with the beginning of the Venezuelan government program called “CLAP.”
Created by the administration of Nicolás Maduro, as a component of a series of programs the Venezuelan government calls “social missions,” the CLAP program distributes state-subsidized food to the Venezuelan people, delivered in a “CLAP bag” or “CLAP box.” The food products for the program were supplied and shipped under public procurement contracts between the Venezuelan government and third-party suppliers.
Exports from Mexico
One part of the Food for Venezuela case involves financial transactions in the United States and the other part involves financial movements in Mexico. Both parts concern business transactions related to the export of food products from Mexico to Venezuela for distribution to the Venezuelan population through the CLAP program.
Since Mexico is the departure territory for the Venezuelan-bound products, the Mexican side is particularly important for understanding the business scheme in the case. In Mexico, the authorities concluded that it was a “fraudulent scheme” with “unusual transactions.” They signed reparatory agreements totaling US$ 3 million, resulting in the termination of the criminal action, and expressed assurances of the “firm commitment [of the Government of Mexico] to the Venezuelan people.”
The Mexican authorities reported that “in connection with the program (referring to CLAP), as of 2016, … a network of companies and individuals, both national and foreign, ha[d] obtained Venezuelan public resources … 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. …”
Periods of overpricing
Overpricing refers to a surcharge on the price per volume of a given food item exported from Mexico to Venezuela, compared to what customers from other countries would have paid the Mexican companies for the same volume of this export item.
TI Venezuela studied the export of food products from Mexico to Venezuela between 2016 and 2018. The study identifies as export consignees public companies in the Venezuelan agri-food sector that purchase products intended for the CLAP program. Out of a total of US$ 1.734 billion of food products exported to Venezuela, the study concludes that approximately 25 percent of the US$ 590 million invested by the Venezuelan government in five food products (pasta, wheat, milk and dairy products, beans, corn flour) could represent overpricing (US$ 140 million).
Assuming that the reference price used by the study is correct—including the price to analyze periods in which Venezuela would have been practically the only destination for certain Mexican food exports—the overpricing may be indicative of corruption in public procurement for the supply of the CLAP program. This is the position of the U.S. Treasury Department and the prosecution in the U.S. criminal case.
The Treasury alleges that prices were deliberately inflated, and that the difference in value between their contract price and the market-rate value of the goods and services—minus the commissions of the contracted supplier and other intermediaries—represents the value of kickbacks to Venezuelan officials. In addition, the U.S. criminal indictment alleges that a Venezuelan state (State of Táchira) used “a company that was owned and controlled by the Venezuelan State of Táchira … to purchase the [CLAP] boxes at an inflated price so that the [providers/intermediaries] could use the additional funds to pay bribes” to certain Venezuelan officials who controlled the awarding of public procurement contracts and to other Venezuelan officials.
An alternative explanation for the payment of surcharges could be the State’s lack of expertise in managing imports to supply the CLAP program. This explanation, by itself—without other indications of corruption—seems plausible in light of the macroeconomic context, which is marked by a state-dominated agri-food sector with inefficient state-owned enterprises, according to a TI Venezuela analysis of the sector in 2018. In addition, Venezuelan import prices of basic food products have exceeded international price trends since before the creation of the CLAP program, according to estimates by the Venezuelan Agri-food Network (Red Agroalimentaria de Venezuela).
In any case, the value of the 25 percent markup for products exported from Mexico to Venezuela remains within the margin—even at the upper end, and estimated with due caution—that is generally thought to be the cost of corruption in public procurement.
Periods of “underpricing”
The TI Venezuela study also identified, for some food items exported to Venezuela, periods with prices considerably below the Mexican export market rate. Here, the study concludes that the total investment would amount to only about 44 percent of the market price.
The periods identified by TI Venezuela as “underpricing” periods may be explained in part by the low quality of the Mexican export products. The TI Venezuela study points to repeated complaints from Venezuelan consumers about the condition of certain CLAP products as an indication of quality deficiencies.
The hypothesis of deficiencies in the quality of Mexican products seems to be in line with the opinion of market experts. When asked during the period analyzed by TI Venezuela about the quality of the milk powder exported from Mexico to Venezuela, an insider told investigative journalists that “[t]he milk they are sending is really crap.”
This assessment is somewhat corroborated by a cross-sectional scientific study. Published in the official journal of the Latin American Society of Nutrition (Archivos Latinoamericanos de Nutrición – ALAN, published in Venezuela since 1992), a renowned Venezuelan academic nutritionist conducted the study as the corresponding author of the publication, which he coauthored with two journalists who had worked on the journalistic investigation of the case.
The scientific study analyzed a sample of powdered milk from Mexico distributed by the CLAP program. The sample was drawn from households in the Caracas metropolitan area at a time when, according to TI Venezuela’s survey data, export prices to Venezuela for this food item were predominantly well below the Mexican export market price. The scientific study found that the products were of poor quality and did not meet the nutritional standards set by Venezuelan regulations for powdered milk.
An economically reasonable explanation for this could be that the procurement process sought very low prices in order to maximize the sheer volume supplied to the CLAP program, sacrificing the level of quality needed to comply with Venezuelan regulations. Prioritizing a very low price point increases the risk of purchasing low-quality food as manufacturers and intermediaries seek to maintain or increase their profit margins. This risk seems to have materialized, particularly in the procurement of Mexican powdered milk.
Assuming this is correct, it would not be a question of “underpricing,” but rather of rates that correspond, in principle, to an ordinary commercial pricing model, characterized by the profit motive. Although this explanation seems obvious in terms of understanding the poor quality of the product, by itself, economically speaking, it does not explain the combination with the periods of overpricing.
Besides the probative value of the 25 percent surcharge, its combination with periods of exporting low-quality products at very low prices could—when added to the chain of associated and interrelated evidence in the business transactions analyzed by TI Venezuela—constitute circumstantial proof pointing to the payment of kickbacks.
The evidentiary reasoning would involve demonstrating the function of the link between the surcharge and the low-priced exports to obscure the financial source of the kickbacks. This is independent of evidence that would directly prove the payment of kickbacks (United States v. Saab Moran, S.D. Fla. Case 1:19-cr-20450-RNS, Document 26, p. 5).
Mexican products are exported to Venezuela in a context characterized, among other factors, by widespread public corruption in Venezuela and no-bid public procurement contracts awarded to suppliers of the CLAP program, with no transparency or accountability, according to the U.S. Treasury Department.
In addition, for the period covered by the TI Venezuela study, the criminal indictment in the U.S. points to the existence of commercial transactions and financial movements in multiple jurisdictions with front companies and nested correspondent payment accounts in the public procurement operations for the CLAP program, and Venezuelan officials involved in the awarding of supply contracts for the program allegedly received payments of several million U.S. dollars from the program’s suppliers.
Under these circumstances, unless there is another economically reasonable explanation for the unique pricing pattern in Mexican exports, the most reasonable inference is that the export business from Mexico to Venezuela contained a scheme to disguise the financial source of kickbacks generated through overpricing, while maximizing the volume exported and the profitability of the business. This concealment apparently consists of a clandestine form of compensation calculation aimed to absorb the amounts reduced by overpriced transactions into amounts increased by very low-priced transactions, with low-quality products on the same and/or similar category.
This is especially plausible for investments in the same food export sector, such as milk and dairy products. In this category, as suggested by the data collected by TI Venezuela, the investment would be based on a compensatory calculation between three types of milk powders, granules, or other solid forms. First, the calculation would involve a 25 percent overcharge (approx. US$ 53 million) on the total investment in this sector, of which the largest part (approx. US$ 45 million) would pertain to one type (identified by tariff code 0402.10.99). Meanwhile, the investment in the other two types (identified by tariff codes 0402.10.01 and 0402.21.01) would be “underpriced” by 33 percent.
Assuming all of the above is correct, it is difficult to find any logical explanation or conclusion other than that a commercial export scheme of this unique nature, that operates with a clandestine form of compensation calculation, would depend to some extent on the fraudulent participation of Mexican counterparties. This appears to be in line with the conclusion of the Mexican authorities who have described the case as a “fraudulent scheme” of “a network of companies and individuals, both domestic and foreign.”
This unique commercial export scheme would be part of the Food for Venezuela case, if the facts analyzed by the TI Venezuela study and the scientific study published in ALAN are consistent with the facts of the criminal cases in the U.S. and/or Mexico. This should be confirmed, especially since the individuals implicated in the criminal cases, according to investigative reporters, were not the only ones to supply the CLAP program with commercial exports of Mexican food between 2016 and 2018.
To confirm which of the facts examined by both studies may coincide with the facts of the Food for Venezuela case, the data from the TI Venezuela study would need to be verified in detail and, if necessary, further examined. Then, the findings of the TI Venezuela study should be compared with the origin of the milk powder analyzed in the scientific study published in ALAN, and with the companies, individuals, products, brands, shipping schedules, and Venezuelan consignees in the criminal cases in the U.S. and Mexico.
Assuming that the commercial export scheme of combining overpricing with low-quality products at very low prices was part of the commercial operations in the Food for Venezuela case, economically, it seems logical to conclude that this combination would be profitable; that is, it would be driven by “commercial speculation,” as noted by the Mexican authorities.
The speculative aim alone is likely not a criminal act, even if it is considered reprehensible or immoral to speculate with food for Venezuela, as the Mexican authorities suggest when they point out that the commercial export scheme they are investigating has “taken advantage” of the Venezuelan “food shortage.”
What the authorities failed to explain was why the “commercial speculation” would not have been lawful, and what specifically makes it a criminal act. It is not enough to simply mention the existence of a “fraudulent scheme” and the fact of a “diversion of resources from their humanitarian purposes.”
By failing to adequately disclose the facts or call them by their name, the Mexican authorities left the public unsure as to why they were convinced that a crime had been committed under Mexican criminal law.
This is not just one of the many details of the case. The facts and the respective specific criminal offense, as a legal provision describing the specific elements qualifying the conduct as a criminal act in the Mexican part of the Food for Venezuela case, are the condition without which the Mexican authorities could not have signed reparatory agreements resulting in the termination of the criminal case under Mexican law.
Because of this failure to specify the facts and identify the type of criminal wrongdoing perpetrated by conducting a “fraudulent scheme” and engaging in “commercial speculation,” it is difficult to understand why there would have been a legal basis to enter into the reparatory agreements, or who would be entitled to reparation and authorized to sign the agreements.
Based on the TI Venezuela studies, the scientific study published in the journal ALAN, and the criminal case in the U.S., the totality of the concurring and mutually reinforcing evidence indicates that the commercial dealings in the Food for Venezuela case operated through a business scheme that included concealing the financial source of kickbacks in the Venezuelan government’s purchases of products exported from Mexico and intended for the CLAP program. This is provided that the facts examined are in line with the facts of the criminal cases in the U.S. and/or Mexico.
The financial source of the kickbacks appears to be included in an average 25 percent markup on a given food item exported from Mexico to Venezuela, compared to what customers in other countries would have paid Mexican companies for the same volume of this export item. The concealment of the financial source would seem to involve a clandestine form of compensatory calculation to absorb overpriced business transactions into transactions at very low prices with low-quality products. In particular, this would be the case for the export of milk and dairy products.
In Mexico, the authorities have not transparently explained the business scheme and, therefore, did not specify the criminal nature of the Mexican side of the Food for Venezuela case. It is unclear why there would have been a factual and legal basis for the case to be eligible for reparatory agreements, and who would be entitled to reparation and authorized to sign such agreements.
At a more conceptual level, the case shows why trade-based money laundering is often considered the hardest type of money laundering activities to detect. It also shows that trade-based money laundering is not only highly adaptive and can exploit any sector or commodity. Rather, the case demonstrates how close are the techniques of trade-related predicate offences and money laundering. It illustrates how difficult it is to identify the line between trade-related movement of goods as part of the predicate offence, and the movement of money which the trade transactions facilitate, as part of the money laundering.
The fourth part of this series will demonstrate, in view of the overall dimension of the weight of the case in Venezuela on the food insecurity, hunger, and malnutrition among the Venezuelan population, that the reparatory settlement in Mexico is hardly compatible with the claim of the Mexican authorities that the agreement is “a reconfirmation of [the] firm commitment [of the Government of Mexico] to […] the Venezuelan people.”
To be continued in Part 4.
Cover photo: AP Photos/Ariana Cubillos