VZCZCXYZ0013
PP RUEHWEB

DE RUEHDG #0992/01 1152032
ZNR UUUUU ZZH
P 252032Z APR 07
FM AMEMBASSY SANTO DOMINGO
TO RUEHC/SECSTATE WASHDC PRIORITY 8084
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SANTO DOMINGO 000992 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR WHA/CAR, EB/IFD/OMA;TREASURY FOR M. SCHWARZMAN, J 
LEVINE 
 
E.O. 12958: N/A 
TAGS: EFIN DR
SUBJECT: DOMINICAN CAPITAL MARKET FAILS TO DEVELOP 
 
 
¶1. (SBU) Summary:  Business finance in the Dominican Republic 
remains opaque, dominated by a small number of banks and 
trading groups characterized by virtually incestuous 
relationships.  The country's long history of crony 
capitalism, corruption and tax evasion has retarded the 
establishment of modern practices of bookkeeping and of 
public trading of stocks, bonds and commercial paper. 
Despite extensive USG investment in technical assistance for 
a Dominican securities exchange, virtually all secondary 
trades are done outside that institution by bank offices on 
own account, exploiting lack of information to rack up large 
profits.  It is virtually certain that much of the business 
is tied to money laundering of some sort or other.  End 
summary. 
 
¶2.   (SBU) The Dominican private sector has evolved only very 
minimally away from oligarchic business structures that 
originated in the 30-year Trujillo dictatorship and were 
reinforced by the influence-peddling and corruption 
characteristic under the autocratic Balaguer (1966-1976  and 
1984-1996).  Banking regulation was slack enough to open the 
way for the catastrophic bank collapses of 2003, due mostly 
to fraud and to unsupervised lending to associated industrial 
groups.  The IMF standby, signed in 2003 but effective only 
from early 2005, provided the suasion for notable 
strengthening of bank regulation; it did not, for example, 
prevent the executive president of Banco de Progreso from 
issuing more than $200 million in unbacked commercial paper 
and pocketing the proceeds, an operation discovered by 
shareholders in late 2005. 
 
¶3.   (SBU) Business finance in the Dominican Republic remains 
opaque, dominated by a small number of banks and trading 
groups characterized by virtually incestuous relationships. 
The country's long history of crony capitalism, corruption 
and tax evasion has retarded the establishment of modern 
practices of bookkeeping and of public trading of stocks, 
bonds and commercial paper.  During the first Fernandez 
administration (1996-2000) USAID identified the need for a 
public market in securities.  Associated with the notion of 
financial "deepening," the proposal was to help create 
conditions for trading an array of private- and public-sector 
financial instruments.  This market would disclose prices of 
trades, providing market discipline for companies and 
obliging them to provide ample information about their 
operations. Between 1997 and 2004 USAID invested almost USD 2 
million in the undertaking.   Efforts included technical 
assistance to develop the Santo Domingo Securities Exchange 
(Bolsa de Valores) and assistance in drafting new legislation 
on capital markets, passed in 2000, as well as supporting 
regulations.   USAID financed the purchase of software for 
trades and for tracking the market. 
 
 ¶4. (SBU) Despite these efforts, today the Bolsa de Valores 
sits almost idle. President of the Bolsa Marino Ginebra, also 
a successful entrepreneur, recently told reporters that the 
country "lacks the culture necessary to support a properly 
functioning capital market."  Perhaps; but this is 
demonstrated also by the fact that the market,s regulatory 
body, the Securities Commission (Superintendencia de Valores 
or SIV), has never sanctioned the failure to respect 
provisions of Law 19-00 and Reglamento 729-04 that require 
trades to be registered and carried out through the Bolsa. 
The Commission accommodates the cronyism of Dominican 
finances.  Sovereign bonds, Central Bank certificates of 
deposit and commercial paper are not issued through the Bolsa 
or traded there, with few exceptions.  Original issues are 
generally sold directly to the public by the issuing 
companies and institutions. 
 
¶5.  (SBU) The secondary market in these instruments 
completely bypasses the Bolsa.  These trades are typically 
accommodated by offices of commercial banks labeled "exchange 
trading seats" ("puestos de bolsa") but acting with no regard 
for the Bolsa.  Trades are not registered with the Bolsa and 
 
the trading prices are not published.  The bank offices do 
not register the identity of the buyer or seller.  Further, 
the trades carried out by the "exchange trading seats" are 
non-transparent and inefficient, in effect obliging sellers 
to accept whatever rate the office is willing to pay.  This 
often means a substantial discount.  Banks comfortably rack 
up profits from their advantage in information about the 
market and the issuers of commercial paper. 
 
¶6. (U) Twelve such trading offices are registered with the 
Securities Commission (SIV).  Some but not all are located on 
the affiliated bank,s property and closely integrated with 
the bank's treasury operations.  Not surprisingly, several 
more firms or entrepreneurs have applied to the SIV to 
operate such offices. 
 
¶7. (SBU) The lack of transparency and the flouting of the 
requirement to register trades creates an opportunity for 
money laundering.  This is one explanation why some 
bondholders, for instance, are willing to trade through the 
"puestos," receiving as little as 50 percent of the face 
value of the bond.  It is also explains why banks, despite 
their declarations of support for enforcing use of the Bolsa, 
are perfectly happy for business to continue as usual through 
their" puestos de bolsa."  There are plenty of anonymous 
traders out there keeping the funds flowing through the 
banks.  If the government were to begin forcing all trades to 
be registered and to pass through the Bolsa, some of the 
current business would disappear - - but we do not know how 
much. 
 
¶8.  (U) Companies in the Dominican Republic historically have 
not published  financial statements; this is because almost 
without exception they are not publicly traded. Bolsa 
President Ginebra accepts this as a given: "They don't want 
competitors to know details of their business."  Another 
reason is that typically companies are operating accounting 
systems that misrepresent financial results in order to 
minimize tax obligations. 
 
¶9.  (SBU) Dominican customs authorities and income tax 
authorities have made considerable progress in detecting 
frauds and raising government revenues.  But deception and 
poor practice in business finance and trading are so 
ingrained and widespread that most businesses consider it 
more financially prudent to hide and to cheat than to comply. 
 The permissive atmosphere of the current Fernandez 
administration, especially toward large firms, does nothing 
to change this view.  Prospects for financial modernization 
of Dominican business remain poor and will not change 
appreciably unless regulators and tax authorities start to 
take on some of the bigger firms.  But all of them have 
contributed to Fernandez and his party - -  as well as to any 
other political party with electoral prospects. 
HERTELL