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PP RUEHWEB

DE RUEHBO #4134/01 3222103
ZNR UUUUU ZZH
P 172103Z NOV 08
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC PRIORITY 5596
INFO RUEHBR/AMEMBASSY BRASILIA 8502
RUEHCV/AMEMBASSY CARACAS 1328
RUEHPE/AMEMBASSY LIMA 6743
RUEHLP/AMEMBASSY LA PAZ NOV QUITO 7439
RUEHZP/AMEMBASSY PANAMA 2665
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS BOGOTA 004134 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN KCRM PGOV CO
SUBJECT: COLOMBIA: PYRAMID SCHEMES SWINDLE THOUSANDS, 
RATTLE GOC 
 
REF: BOGOTA 3588 
 
¶1. (SBU) SUMMARY. Colombian authorities believe as many as 
three million Colombians have been defrauded of at least USD 
300 million in a series of pyramid schemes that began 
collapsing November 12 after the government's seizure of the 
firm Proyecciones DFRE.  The fall of DFRE spurred the 
subsequent demise of several similar institutions and set off 
violent demonstrations by angry victims that have led to two 
deaths and police-imposed curfews in 13 cities.  President 
Uribe, who has expressed frustration with the failure of 
financial regulators and law enforcement to stem the growth 
of pyramid schemes in recent years, accepted the resignation 
of Colombia's Financial Superintendent November 14 and issued 
four "economic emergency" decrees November 17 to address the 
crisis.  The same day, GOC authorities closed DMG, reportedly 
Colombia's largest pyramid scheme with 300,000 investors. END 
SUMMARY. 
 
Financial House of Cards Falls 
------------------------------ 
 
¶2. (U) At least 240 different pyramid-type institutions are 
thought to exist in Colombia, offering returns of up to 150 
percent for short-term cash investments of as little as a one 
month.  While the growth of these institutions has been 
widely known since 2006, the GOC has done little to monitor 
or regulate the firms as they attracted thousands of 
individual Colombia investors--most of them low-income 
residents of central and southern Colombia.  The current 
crisis began November 12 with the collapse of Colombia's 
second largest pyramid scheme, Proyecciones DFRE (which 
stands for "Direct, Easy, and Fast Money" in Spanish), after 
the flight of the company's owner, Carlos Alfredo Saurez. 
 
¶3. (U) Following the GOC's seizure of the 68 branches of 
DFRE, arrest of 52 DFRE employees, and confiscation of USD 42 
million in DFRE cash holdings, smaller pyramid-style firms 
began to collapse.  Angry victims have demonstrated in front 
of many of the businesses in question, leading to 
altercations, riots, and at least two deaths.  Local 
authorities instituted curfews in 13 cities to stem the 
violence. 
 
Scope of Losses Unknown 
----------------------- 
 
¶4. (SBU) GOC officials acknowledge that many of the primary 
individuals responsible for the pyramid schemes have already 
fled the country and admit they do not know the full extent 
of investor losses.  However, the Prosecutor General's Office 
(Fiscalia) says it has received almost 20,000 formal 
complaints and estimates that as many as 3 million Colombians 
could have invested in the schemes.  While most of the 
investors are low-income Colombians, wealthy Colombians 
appear to have fallen victim as well and the GOC has 
uncovered cases of police officials, local authorities and 
even a HIV/AIDS clinic that put money into schemes that 
subsequently collapsed.  Anecdotal information from Narino 
Department indicates that the lure of pyramid schemes led 
many coca growers to sell their lands at a steep discount to 
invest in the schemes rather than cultivation.  So far the 
GOC says it has no proof of money laundering activities 
conducted by the pyramid institutions, only illicit 
enrichment, but is now analyzing if any proceeds from 
narcotics trafficking could have fueled the explosion of the 
schemes in recent years. 
 
¶5. (U) National Planning Director Carolina Renteria said 
November 15 that, based on preliminary assessments, the most 
affected will be Colombia's poorest, some of whom reportedly 
sold their possessions to invest money in the schemes. 
Renteria said that the GOC cannot cover citizens' losses due 
to legal and budget constraints, but noted that the GOC was 
conducting a census to establish how many people were 
affected and would explore whether such individuals could 
qualify for emergency credits from Colombia's national 
development bank, Bancoldex. 
 
The Blame Game Begins 
--------------------- 
 
¶6. (SBU) GOC officials insist they warned citizens against 
participating in such schemes, but now find themselves facing 
 
heated public criticism for allowing the businesses to 
operate without sufficient regulation.  President Uribe 
expressed regret that GOC authorities did not react sooner 
and publicly questioned why the Financial Superintendent, the 
Prosecutor General's Office, and National Police did not 
monitor and close the schemes before collapses began.  On 
November 14, President Uribe accepted the resignation of 
Financial Superintendent Cesar Prado.  However, Prosecutor 
General Mario Iguaran has pushed back against criticism of 
his office, saying that blame lies with financial regulators 
for allowing the schemes to continue for more than a year 
without investigating possible money laundering or illicit 
enrichment.  (COMMENT: Contacts in Colombia's Financial 
Intelligence Unit (UIAF) tell Emboffs they closely monitored 
the evolution of various pyramid schemes and produced several 
reports to the Attorney General's office since late 2006 
concerning the issue and the potential for money laundering 
activities.  END COMMENT) 
 
¶7. (SBU) National Association of Financial Institutions Vice 
President Carlos Rojas told us that much of the blame rested 
with the Financial Superintendent, who has lead 
responsibility for regulating and monitoring any firm that is 
engaged in lending or financial transactions.  Rojas echoed 
government authorities' assessment that Colombia's formal 
financial sector would remain unaffected by the scams, but 
suggested that significant losses in the informal sector 
could impact consumer consumption and economic growth in 
local economies. 
 
Economic State of Emergency Decreed 
----------------------------------- 
 
¶8. (U) Following marathon cabinet discussions over the 
November 15-16 weekend, President Uribe issued a "State of 
Emergency" on November 17 allowing the GOC to issue decrees 
without Congressional approval to strengthen criminal 
penalties for collecting funds through a pyramid scheme, 
criminalize the failure to return investor funds from such 
schemes, expedite procedures for returning seized funds to 
swindled citizens, and provide Governors and Mayors 
precautionary authority to shut down suspected pyramid 
schemes operating in their communities.  The GOC also ordered 
72 firms suspected of still operating pyramid schemes to 
submit all of their transactions for review by UIAF. 
 
Worst Yet to Come 
----------------- 
 
¶9. (SBU) Also on November 17, the GOC intervened in 
Colombia's largest pyramid-style company, DMG, closing its 59 
offices and immediately impounding USD 5 million in company 
funds.  DMG was founded in 2003 in Putumayo and has 300,000 
investors in Colombia as well as operations in Panama, 
Mexico, Ecuador and Venezuela.  DMG investors buy pre-paid 
cards for six months during which they can use the card to 
purchase household items and then have the entire original 
cash balance returned at the end of the contract period.  In 
addition to the administrative closure, the GOC has assembled 
a task force of the National Tax Authority (DIAN), Prosecutor 
General's Office, National Police and UIAF to gather proof 
against DMG for possible criminal prosecution on fraud and 
money laundering charges.  Given the large number of DMG 
investors and the company's high profile, many local 
observers expect the GOC-imposed closure to cause further 
runs on similar, smaller pyramid schemes still operating and 
to sharpen the immediate economic impact of the crisis. 
(NOTE: While the Financial Superintendent issued a resolution 
in September 2007 that ordered the dismantlement of DMG for 
illegal collection of money from the public, DMG effectively 
challenged this administrative action and sidestepped the 
targeted regulatory action by changing its name.  Due to the 
initial failed regulatory attempt, contacts at the 
Superintendent's office tell us they were reluctant until now 
to challenge the legal precedent with another administrative 
action. END NOTE) 
 
¶10. (U) In the run-up to the November 17 closure, DMG owner 
David Murcia Guzman publicly rebuked President Uribe and GOC 
officials for their allegations and actions against the 
company, insisting the GOC is acting on behalf of Colombia's 
largest banks to destroy DMG and its "alternative" saving 
mechanism for low-income Colombians without bank accounts. 
Murcia Guzman stated November 14 that several high-level GOC 
 
officials are among his investors, including President 
Uribe's son Jeronimo, but has provided no other names or any 
evidence.  Jeronimo Uribe said November 15 that he considered 
a business deal with a subsidiary of DMG in early 2007, but 
dropped out of the deal when he found out the company was 
linked to DMG.  Murcia has publicly denied that his scheme is 
a pyramid, and has urged thousands of his supporters to 
publicly protest against the GOC,s actions. 
 
Political Ramifications for Uribe 
--------------------------------- 
 
¶11. (SBU) President Uribe has publicly acknowledged that the 
GOC should have stepped in sooner to head off the crisis, and 
is moving quickly to address public concerns.  Still, many 
local analysts and opposition politicians are blaming Uribe 
for the disaster.  Well-known economist Guillermo Perry wrote 
that the pyramids "catastrophe" shows the President,s 
inability to respond to economic or political disasters until 
it is too late.  Pro-Uribe columnist Mauricio Vargas called 
Pardo,s resignation an attempt to shift the blame away from 
Uribe and Finance Minister Oscar Ivan Zuluaga.  Many members 
of Congress took issue with Uribe,s claims on November 15 
that they had invested in the pyramid schemes. Opposition 
Liberal Senator Cecilia Lopez criticized Uribe's declaration 
and called on him to name politicians involved in the 
scandal. 
BROWNFIELD