HomeNewsAnalysisHow Criminal Opportunists Exploit Venezuela’s Currency Controls
ANALYSIS

How Criminal Opportunists Exploit Venezuela's Currency Controls

MONEY LAUNDERING / 16 JUN 2015 BY VENEZUELA INVESTIGATIVE UNIT EN

US prosecutors say a businessman laundered up to $100 million for Colombian drug trafficking groups by financing Venezuelan companies in desperate need of dollars, in another illustration of how criminal opportunists profit from the socialist country's strict currency control system.  

In early April, US authorities arrested Martin Lustgarten Acherman -- who has dual Venezuelan and Austrian citizenship -- in South Florida for allegedly using bank accounts in the United States and elsewhere to launder as much as $100 million in drug proceeds.

During a detention hearing (pdf) in April, prosecutor Joseph Palazzo said Acherman "takes advantage of a unique situation in Venezuela" by providing US dollars to foreign currency starved Venezuelans. According to the indictment (pdf) against him, Acherman obtained dirty dollars from illegal sources and then sold them to legitimate companies in Venezuela at a higher exchange rate on the black market.

According to prosecutors, Acherman used his purchase order finance company, which provides capital loans to companies involved in international trade, to conceal the origins of the drug money. Based on wiretaps and other evidence collected by US authorities, Acherman's finance business was in fact a shell company used to launder between $40 million and $100 million on behalf of unspecified drug cartels and "revolutionary paramilitary organizations" in Colombia. 

SEE ALSO: Coverage of Money Laundering

According to the indictment, Acherman laundered drug trafficking proceeds through bank accounts in Florida from 2008 until March 2009. Following the seizure of these accounts, Acherman allegedly opened accounts in Hong Kong and Singapore, disguising the drug money he received by claiming it was compensation for the loans he had made through his purchase order financing company.

InSight Crime Analysis

If Acherman is found guilty, his case will be the latest example of how criminals and corrupt officials have manipulated and exploited Venezuela's strict currency controls to make huge profits.

In 2003, then-Venezuelan President Hugo Chavez fixed the country's official exchange rate at 1.6 Bolivars per US dollar in a measure designed to prevent capital flight. The controls have remained in place ever since, although more recently, the government has imposed a triple tiered exchange rate, with preferential rates of 6.3 and 12 to the dollar for essentials and priority goods and a market based rate for other transactions that currently stands at 199 to the dollar. However, runaway inflation means even these adjustments fall short of the reality, and the black market rate is estimated to have plunged to over 420 to the dollar in recent months. 

The artificially fixed exchange rate has created not only a black market currency exchange, but also a wealth of opportunities for illicit profits, and unscrupulous businesses and government officials have spent years depleting Venezuela's treasury by taking advantage of the short supply of dollars available in the country. 

Due to the weakness and instability of the Bolivar, foreign companies typically refuse to do business with Venezuelan importers in local currency. As a result, Venezuelan businesses must apply to the country's currency control agency to purchase dollars. If they are accepted, however, these companies are able to buy US currency at the extremely low, government-controlled exchange rates. 

SEE ALSO: Venezuela News and Profiles

This system has led to endemic fraud, as importers frequently inflate the price of shipments from abroad in order to snatch up as many dollars as they can while trading at the government's fixed exchange rate. A former head of Venezuela's central bank has claimed over one-third of the money -- roughly $20 billion -- assigned to product imports in 2012 was siphoned off via fraudulent transactions, reported the New York Times

Official corruption has been at the heart of the schemes. One importer involved in the fraud told the New York Times he doles out several hundreds of thousands of dollars in bribes to the government officials who control which Venezuelan companies are permitted to purchase the limited supply of US currency.

The currency control system means importers hoping to do business outside of Venezuela that do not have access to dollars at the government's low exchange rates are left with few options. In February, the government eased the demand for dollars somewhat by introducing a free market currency exchange for businesses and individuals who don't have permission to buy at the preferential rates. However, authorities have stated only five percent of US currency sold by the government will go through this exchange rate, meaning the black market will likely remain the best option for many of those out of the loop companies looking to obtain dollars.

The trading of currency on the black market is typically the stage in which unlicensed money brokers reap profits by supplying dollars to Venezuelans who don't have authorization to buy US currency from the government. In one recent case, a suspect told prosecutors he collected Bolivars from clients in Venezuela and later placed them into his US bank account. He then reportedly exchanged the Bolivars for dollars and placed the US currency in the US accounts of his clients, whom he charged $200 per transaction.    

Unlicensed brokers may provide one of the few avenues for many Venezuelans to obtain dollars, but this system can also leave those involved vulnerable to theft. Some shady brokers have reportedly refused to deposit dollars in bank accounts once they have received the Bolivars, robbing their clients in Venezuela of large sums of cash. Because these financial transactions are unlicensed, victims have little recourse for reclaiming their stolen money. 

This currency system, with its black markets, bureaucratic loop holes and corruption, has been seized on by money launderers, who have taken advantage of the short supply of dollars in Venezuela to legitimize illicit proceeds. More than 15 suspects were arrested just in South Florida in 2010 for reportedly laundering over $7 million in drug profits through schemes similar to the one allegedly carried out by Acherman. 

However, while using Venezuela's unique financial situation for money laundering may be ideal for drug traffickers in the country, cases such as Acherman's involving international criminal groups are unlikely to become common. The same weaknesses that create opportunities in Venezuela's system also create risk and instability, and the rapidly declining value of the Bolivar means trading with Venezuelan currency involves the possibility of seeing profits wiped out by inflation -- a gamble many criminals would be unwilling to take.

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