Billions in U.S. : Private Cash Drains From Latin World

CALEXICO, Calif. —  Latin Americans employ all manner of schemes to convert their savings into dollars and spirit them away to havens abroad. They fake export invoices, smuggle gems, create phony Caribbean corporations and take kickbacks on foreign business deals.

Jose Silva, a 34-year-old pharmacist’s assistant in Mexicali, Mexico, on the California-Mexico border, simply hops in his beat-up Datsun and drives two miles across the border to the Calexico branch of First Interstate Bank, where he puts $50 a month in a passbook savings account. He keeps no money in Mexico.

“It’s because of the safety of the dollar,” Silva explained recently.

When bankers and economists speak of capital flight from the Third World, most people think of corrupt government officials and crooked businessmen stashing millions of looted dollars in numbered accounts in Zurich and private banking departments in Miami and New York. They envision presidents-in-exile living in splendor in Hawaii or the south of France, of luxury condominium complexes in Florida and Texas and California filled with wealthy Latins.

But throughout Latin America, the urge to hoard dollars extends to the shop worker, farmhand and domestic servant, who, if they cannot get their $10 bills into a U.S. bank, will keep them in shoe boxes at home. And while politicians decry capital flight as unpatriotic, it is utterly rational in light of steady devaluations and rampant inflation that quickly dissipate the value of savings held in local currencies.

The equivalent of $1,000 in Mexican pesos deposited in a Mexican bank in 1980 is worth about $125 now. The same sum in Argentine pesos banked domestically six years ago is virtually worthless today.

Savings Disappear

But $1,000 placed in a U.S. money market fund at the same time would have nearly doubled in value.

“It’s very simple. When you face inflation, you buy dollars,” said Adalbert Krieger Vasena, former Argentine finance minister and World Bank executive vice president for Latin America. “You can’t blame people who have seen their savings disappear. On the contrary, you can blame a man, the head of a family, for not protecting his money.

“In Argentina, it goes to the lowest level. A fellow who works for me on the estancia (ranch) asked me, ‘Senor, can you sell me dollars?’ A maid in the house said, ‘Please, sir, invest for me in some dollars.’

“That money will not come back. You can’t fool them with speeches or appeals to patriotism,” Krieger Vasena said.

Capital flight is both a cause and a result of Latin America’s debt crisis. Frightened and cynical citizens drain needed capital from floundering economies, exacerbating the region’s difficulties in repaying its collective debt of $370 billion to foreign banks and governments. The effect is to deepen a region-wide recession and discourage foreign lenders from committing new money.

New Policies Sought

U.S. Treasury Secretary James A. Baker III has said that the crisis will persist until Latin governments adopt policies to staunch the cash outflow.

“As a practical matter, it is unrealistic to call upon the support of voluntary lending from abroad when domestic funds are moving in the other direction,” the Treasury secretary said last fall in announcing a series of steps aimed at resolving the debt problem. “Capital flight must be reversed if there is to be any real prospect of additional funding.”

It is impossible to gauge precisely the extent of capital flight, because it is often illegal and usually practiced clandestinely. But by all available evidence, the exodus of cash from major Latin debtor nations and a number of other developing countries over the past decade has been massive.

According to a recent study by New York’s Morgan Guaranty Trust, $123 billion left 10 Latin countries between 1976 and 1985 as flight capital. During the same period, those nations’ foreign debt increased by $270 billion.

Billions Were Lost

In other words, an amount equal to nearly half of all the money that flowed into the region slipped right back out, like water through a leaky bucket. Morgan suggested, in its usual understated way, that the lost billions might have helped to repay debt and rebuild troubled economies.

The phenomenon is not limited to Latin America. The bank study also identified India, South Korea, Malaysia, Nigeria, the Philippines and South Africa as having capital flight problems.

But in Argentina, Mexico and Venezuela, the practice has been elevated to art. According to Morgan, without the unchecked cash migration from these countries, there would be no debt crisis.

The bank said that if the billions had been invested domestically and not in foreign banks and real estate, Argentina’s foreign debt today would be $1 billion, not $50 billion; Mexico’s debt would be $12 billion, not $97 billion, and Venezuela would actually have a capital surplus of $12 billion instead of a debt of $31 billion.

Foreign Banks Reap Profits

Latin treasury officials and some U.S. economists dispute Morgan’s numbers and the study’s conclusions but offer no credible alternatives. A 1985 study by the World Bank yielded similar results.

The foreign banks to which so much money is owed have not been the innocent victims of capital flight, however. Much of that money is sitting in their own vaults earning them nice profits, lured there by the urbane envoys of their private banking departments who travel first-class through the Third World selling their discreet services to monied elites.

While it is technically illegal for foreign bankers to solicit deposits in most Third World countries, the line between “establishing a presence” and soliciting funds is razor-thin and widely ignored.

“We do quite a bit of traveling, but we’re simply there to say hello and look after our customers,” said Jack West, head of international private banking for Southeast Bank in Miami.

Huge Deposits

Southeast’s private banking department has $1.5 billion in deposits, mostly from Central and South Americans, West said. He said the private banking offices in Miami of half a dozen big New York and California banks each have more than $1 billion in deposits from Latin Americans.

West estimated that Latins have between $12 billion and $14 billion on deposit in U.S. banks in Miami alone.

“Banks solicit deposits, figuring if you don’t take it, someone else will,” the Caracas representative of a major U.S. bank said. “People come to visit you in New York, you don’t send them away.”

The policy sometimes backfires, however. The American banker in Caracas said his bank had several Venezuelan customers whose untouchable personal deposits exceed their unpaid business debts.

‘We Force Them Out’

To deal with the problem, he said, “we force them out of our private banking department,” requiring them to withdraw their deposits. “You don’t want a client with that kind of an attitude.”

But mobile money will always find an open door and a foreign home, often through ingenious methods.

One South American cotton exporter--he insisted that neither his name nor his nationality be identified--explained how he employs a scheme known as under-invoicing of exports.

Raw cotton is sold by grade or quality level, with A-grade cotton being the most expensive and E-grade the cheapest. The exporter said he will sell 10,000 pounds of B-grade cotton at 65 cents a pound but will identify it on the export invoice as E-grade cotton, which sells for 25 cents a pound.

Swiss Bank Account

He then has a receipt showing that he was paid $2,500 for the shipment, when in fact he received $6,500. The money--always in dollars--changes hands abroad, so he has no problem getting the cash out of his own country.

“And I deposit the 40-cent-a-pound difference in my Swiss bank account,” he explained.

The scheme works in reverse, as well. An importer tells his government that he paid $10,000 for a shipment of Taiwanese shirts, when in fact the manufacturer charged him only $5,000 and deposited the difference in the importer’s U.S. bank account.

The U.S. Embassy in Buenos Aires estimated that, at the height of capital flight from Argentina a couple of years ago, 15% of the country’s foreign trade was falsely invoiced.

Trading for Dollars

Another popular method is to take valuable and portable goods, such as Brazilian semi-precious stones, to the United States or Europe and sell them for dollars or deutsche marks or Swiss francs. This is a favorite of airline pilots and diplomats, whose luggage is seldom checked thoroughly at customs.

One Mexico City bank officer who travels frequently to the United States buys an extra airline ticket or two with pesos and turns them in for dollars in the United States. The money is invested in a U.S. money market fund through a major American brokerage house.

Then there’s the “air bridge” between Buenos Aires and Montevideo, Uruguay, which has liberal foreign exchange laws and is home to the highest concentration of foreign banking offices in Latin America.

During the heyday of the Argentine plata dulce (“sweet money”) in the late 1970s and early 1980s, when a controlled exchange rate made dollars irresistibly cheap, professional couriers would make the Buenos Aires-Montevideo trip several times a day. They left Buenos Aires carrying briefcases bulging with dollars and returned with deposit receipts from foreign banks.

Shell Corporations

More sophisticated businessmen set up shell corporations in Caribbean nations--the Bahamas, Panama and the Netherlands Antilles are current favorites, because of their rigid corporate and bank secrecy laws--and shuffle assets through them. This has become a common ploy of drug and arms smugglers who need to move and conceal the origin of large sums of cash. The islands are also popular way stations for Latin flight capital.

A simpler scheme is to inflate the cost of a project with a foreign partner and have him credit the difference to a U.S. or Swiss bank account. There are periodic scandals of this sort involving Mexican and Argentine government officials, but they usually blow over.

Even easier is to buy dollars in a foreign exchange house or on the black market and carry them to a foreign bank. That’s how Jose Silva and thousands of other Mexicans who live along the U.S. border convert their pesos into American bank deposits.

At the First Interstate branch in Calexico where Silva does his banking, for example, 70% of the account-holders are Mexican residents.

Couriers Used

“People usually come in with $20 or $30 or $40 and try to get it into a bank, if they can get it across,” said Sergio Lopez, owner of La Moneda exchange house in Nuevo Laredo, Mexico, across the Rio Grande from Laredo, Tex. He said that Mexicans who do not have permits to cross into the United States will entrust their cash and bankbooks to couriers who will make the trip for them.

Lopez noted that Mexico allows its citizens to hold dollar accounts in Mexican banks, but very few people have them. In 1982, when then-President Jose Lopez Portillo nationalized most banks in Mexico, dollar accounts were frozen and the money could be withdrawn only in pesos and at an unfavorable, government-decreed rate.

“People were very angry,” Lopez said. “It’s legal again to have dollar accounts, but nobody wants to do it. People know it’s going to happen again. They (the government) will cancel the accounts and give them pesos.”

Billions of dollars are held abroad in the form of real estate, a favored investment of big-time Mexican and Venezuelan sacadolares (“dollar-looters”) in the early 1980s, when U.S. real estate values were skyrocketing and local currencies were heavily overvalued.

Condo Investments

There are large Mexican enclaves in exclusive condominium projects in Coronado and La Jolla, Calif.; Beaver Creek, Colo., and Padre Island, Tex. Venezuelans and other South Americans are partial to waterfront property in Miami.

Charles Kimball, a real estate economist specializing in South Florida, said that as many as 80% of all condominiums selling for more than $100,000 in Miami in the 1979-83 period were bought by Latins.

In 1979 and 1980, Latins invested nearly $2 billion in commercial real estate in Dade County (which includes Miami), about 45% of all large commercial real estate purchases in the area, according to Kimball.

Latin American real estate investment in Florida has fallen off drastically in the last three years, leaving the area with a glut of luxury condominiums and unsold commercial property. Latin investment “distorted the market on both the up and down cycles,” Kimball noted.

Repatriating Capital

Much of the capital flight occurred as a result of unrealistic exchange rates, a lack of attractive domestic investment opportunities, and favorable interest rates and real estate markets abroad. This sort of money comes and goes, as sophisticated investors “play the money” much the way that multinational banks and currency traders do.

There is some evidence of capital returning, albeit gingerly, to Mexico and Argentina to take advantage of current high rates of interest on short-term bank deposits. Venezuelans appear to be repatriating some capital to keep their businesses going, because of a shortage of domestic bank credit.

But throughout Latin America and the rest of the world, there will always be a flow of private capital away from political instability toward whatever represents safety in a changeable world. At different times, it has migrated toward gold and dollars and property and artwork.

Bankers call it capital flight. Those who have it call it “if-it-all-blows-up money.” And the only way those funds will ever return to Third World nations is if those countries enjoy an extended period of political and financial stability.

These governments, however, face a deeply ingrained skepticism about their economic experiments and their efforts to re-attract flight capital.

“Many people are pessimistic because every economic plan here over the last 40 years has failed,” Argentine economist Javier Gonzalez Fraga said. “In the past, it has paid more to be a pessimist than an optimist.”