Latin America's lack of bank credit spurs scammers like David Murcia Guzman and his DMG Ponzi scheme.
BY ANDRES OTERO
While the world is still shocked by the Madoff affair – the high profile Ponzi scheme that continues to affect international banks, private funds, and high-net worth individuals across the globe – smaller scale pyramid schemes keep multiplying in many Latin American countries and elsewhere, affecting millions of individual investors.
As lawyers in the United States are preparing to sue banks and feeder funds, victims are growing in number by the day. Scams are equal opportunity affairs. They do not distinguish by nationality, race, social standing, wealth, education, profession, or background. Whether a high profile hedge fund in an office on New York’s Fifth Avenue or a dodgy operation run from a warehouse with two chairs in a South American shantytown, the impact is the same: victims have been fleeced by the thousand and the credibility of the global financial system has been compromised.
In Colombia, for example, David Murcia Guzman – known as DMG – was able to perpetuate his pyramid scheme for more than seven years. The government had to issue a special legal decree to intervene in his operation. Yet people across the nation still consider him some kind of Messiah or Robin Hood, demanding his acquittal and release from prison. Even The New York Times ran an article portraying him as a folk hero brought down by Colombia’s elite.
Murcia’s scheme shows how easy it is for someone with a little ingenuity to build a multi-million dollar scam that can bring down investors across the globe. DMG, as Murcia’s company was called, sold credit cards that guaranteed returns on prepaid amounts of between 50 and 300 percent in any given period, most of the time in less than six months. This attracted not only gullible consumers in the small towns of the coca-growing region of Colombia, but brand name manufacturers and service providers of all kinds and sizes – car manufacturers, electronics firms, telecommunication companies, plastic surgeons, beauty shops, and many others – also played along with the scheme to boost sales of their goods and services at special, discounted prices.
Although the authorities have not been able yet to ascertain the total loss that resulted from this criminal behavior, the media puts the figure close to US$2 billion in Colombia alone. Murcia’s cross-border scheme also attracted investors in Panama, Venezuela, Ecuador, the Dominican Republic, Mexico, Spain, Costa Rica, and other countries. His victims were largely common citizens enticed by the massive promised returns as they tried to save for their kids’ university tuition or earn some quick cash to buy gifts for Christmas. They also included, however, sophisticated institutional investors, such as retirement funds and local governments.
Whether it is Madoff or Murcia, the questions are the same. Why can’t banks pay me the dividends that these companies are offering? Who will pay me back what I invested? Where did the money go? Looking at the host of scams being uncovered, many have voiced criticism about the effectiveness of government regulators in detecting and preventing these schemes in the first place. There is concern that a criminal modus operandi used for decades is still the preferred method among unscrupulous people around the world, and that governments still have difficulty stopping it.
The challenge facing governments today is whether more regulation is the correct response to prevent this from happening again. After the corporate frauds of 2002, the U.S. government replied with complex and robust compliance regulations – many called them excessive – thereby creating a burden on the business community.
The Sarbanes-Oxley Act became the latest prominent entry in a long list of programs and certifications that have been created through the years to prevent frauds. Despite these regulations, fraudsters continue to prove they can penetrate and defraud companies in any industry, in any country around the world.
Meanwhile, technological advancements, 24-hour media coverage, and indecipherable formulae for the valuation of assets facilitate fraudsters’ endeavors. Many take advantage of the gaps created by the fast-paced technological developments in companies to infiltrate and exploit internal systems while going undetected for years. Others overvalue assets – tangible and intangible – using unproven methods to make people believe in their magic. They use the Internet to reach out to potential victims across the globe, as well as to move their ill-gotten gains to jurisdictions where they know that law enforcement will never touch them.
In the end, though, what nurtures this criminal behavior are older problems: lack of internal controls, ethics and good sense; a personal race for wealth and early retirement; and the readiness of people to hear what they want to and nothing else. No matter how much regulation governments enact or how much companies spend on fraud prevention, the problem will exist so long as corporate values do not change, governments’ ability to prosecute and sanction remains inhibited, and people’s hunger for easy money rages on.
Whatever the fundamental causes, the recent crisis has proven that investors and ordinary people have lost faith in institutions, in the financial industry, in government’s ability to regulate and control, and in the security of their retirement funds and their children’s education money. The challenge ahead will be to regain this confidence and get the global economy back on its feet in a time of uncertainty. Transparency, a clearer understanding of the risks and returns, and the ability of the banking system, particularly in Latin America, to enfranchise millions of poor citizens with no access to credit or even bank accounts, will be essential in restoring integrity to the system.
Andrés Otero is a managing director in the business intelligence and investigations division and head of the Miami office of Kroll. Previously he ran the office in Bogotá, Colombia. This article originally appeared in Kroll’s Global Fraud Report. Republished with permission.