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Always interested in offers/projects/new ideas. Eclectic experience in fields like: numerical computing; Python web; Java enterprise; functional languages; GPGPU; SQL databases; etc. Based in Santiago, Chile; telecommute worldwide. CV; email.

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The Penta Affair For Idiots

From: andrew cooke <andrew@...>

Date: Sun, 5 Apr 2015 17:13:13 -0300

This is a loose translation of
  https://politicasparatodos.wordpress.com/2015/03/05/el-caso-penta-explicado-con-manzanitas/
  by Matias Godoy Mercado.  I cannot guarantee the truth of what is written
  below for two reasons.  First, my Spanish imperfect.  I am particularly
  unsure of technical details like the translation of "impuesto de primera
  categoria" (capital gains tax?).  Second, I don't have the general knowledge
  of Chilean politics necessary to check the details given (I am translating
  partly to learn about these things myself).  So please use the original
  (linked above) as reference.

  I have added the occasional comment / context in parentheses.

  Finally, thanks to Matias.  I hope he does not object...

  Andrew



The Penta Affair is one of the most important scandals of the last 20 years.
I (Matias Godoy Mercado) cannot remember a case that better illustrates the
delicate relationship between the political and the commercial.  Even when
Sebastian Pinera, a well known businessman, accepted the presidency, we didn't
see this level of interest in the dark connections between private and public
sectors.  A relationship that can be imagined as a crystal: at first glance
transparent, but, when studied in detail, containing innumerable imperfections
that, finally, cloud the vision.

The aim of this column is to explain the Penta Affair in clear, simple terms.
The first part will cover the tragicomic origins.  The second tries to explain
the crimes that, allegedly, were committed.  The third and final part reflects
on the serious socio-economic implications for Chile.


Ivan Alvarez and the Perfect Fraud

The Penta Affair is a tragicomedy.  An entertaining screenplay that, with the
right direction and photography, could win an Oscar.  Cinephiles will
recognise similarities between the story I will tell here and the films of
Alejandro Gonzalez Inarritu (Amores Perros, 21 Gramos, Babel, and Birdman).
Or maybe Guy Ritchie (Snatch, RocknRolla, Sherlock Holmes).  Anyway, the story
begins like this.

Once upon a time there was a public servant called Ivan Alvarez.  Ivan worked
in the Tax Office (SII - Servicio de Impuestos Internos).  One day, by chance,
Alvarez found an error in the computer systems there.  Ivan realised that he
could change the tax returns of Chilean companies (those that pay capital
gains tax).  With little ethics and much entrepreneurial spirit, an
interesting hack soon grew into something darker: "I could make money with
this."

So Ivan opened a business.  The business of changing tax returns, so that
client companies received refunds larger than those due.  Of course, nothing
in life is free, so the service came with a charge: a percentage of the extra
refund.  For example, if you had a company, you completed your tax return, and
found that the state would refund you $100, then, with the help of Ivan, that
refund would exceed $100.  For the extra refund Ivan charged a commission.
Everyone wins.  Except, of course, the State.

Time to get busy.  Ivan needed successful salesmen and discrete clients.  A
drug baron doesn't work the street, he needs dealers.  So how could Ivan offer
his services to interested companies?  The answer was simple: he would use
accountants.  Accountants work with many companies, doing things even the
business owners don't understand.  In this way Ivan promoted his services.
Barbecues, cosy chats, business lunches - Ivan slowly assembled his network.
Many accountants were happy to work with Ivan.  They found clients and took a
commission.  The business boomed.  Soon there were new cars, dream vacations,
all the accoutrements of a good life.

At the peak of his business, Ivan made a grave mistake.  He met an auctioneer,
called Jorge "Guaton" (The Belly) Valdivia, at a barbecue.  Associates
describe "Guaton" as friendly, talkative, entertaining - the perfect guest for
a barbecue.  They recall how "Guaton" often joked about his name, claiming to
be father of the famous footballer, Jorge Valdivia.  Those same associates
also say that, despite what he claimed, Valdivia was not an auctioneer, but a
dealer in scrap cars, amongst other things.  What other things?  "Guaton", in
addition to buying and selling cars, worked, from time to time, for Hugo
Bravo, managing director of the Penta Group.  "Guaton" did it all - paid
fines, made trips to the bank, fetched and carried, whatever.  "Guaton" was
useful.

"Guaton" joined the business.  Amazed by the results, he started to look for
new clients and more commissions.  And he hit the big time.  He recruited his
employer, Hugo Bravo, managing director of the Penta Group.  And business was
very good.


The Domino Effect

One day Ivan Alvarez sat down at his desk in the Tax Office.  Something was
not the same.  After a few minutes he realised that the bug had been fixed.
The business had come to an end.  Unsurprisingly, he kept quiet.  Little by
little the other participants realised that Ivan was no longer offering his
usual, efficient service.  On the other side, within the SII, given the
gravity of the error, an investigation was started.  Many decided not to fan
the flames.  That happens in Chile.  In other countries too.  In the local
vernacular: "hacerse el huevon" (to act dumb).  But, even so, a minority
dissented.

The investigation started to grow.  Ivan, the accountants, little by little
the connections were made.  Citations, orders of forfeiture, etc.  The seeds
of panic were sown.  Everyone pointed to Ivan.  Ivan blamed his sales force.
The investigation arrived at Jorge "Guaton" Valdivia.  Penta Group realised,
and immediately severed all contact.  The second grave error.  Valdivia was
seriously ill.  Fired, he broke silence.  He fingered Hugo Bravo, managing
director of the Penta Group, as part of the ring.


Hugo Bravo: "Hugolin"

Before this point, the investigators knew only of Alvarez, the accountants,
and Valdivia (roughly; at least, by this point, there was only a small group
of suspects).  But here was the revelation, the climax.  A new name.  Hugo
Bravo.

Hugo Bravo is a Commercial Engineer (in Chile, something similar to MBA) from
the Catholic University of Chile (Pontifica Universidad Catolica de Chile -
the big, rich-people's university here).  Intelligent, apathetic, sickly, and,
thanks to his university contacts, serving on the boards of various insurance
companies that, to this day, are traded on the market.  For more than 30 years
he has done his job, cultivating numerous successes.  A curriculum that earned
him the position of managing director of the Penta Group.

The investigation continued.  With Hugo Bravo on the radar of the
investigating magistrate, the seizure of information from Bravo's offices, in
the Penta Group, was ordered.  And executed.  I can't imagine the faces of the
investigating officials when they reviewed that information - information from
Hugo Bravo is not just any information.  At the least, at that level, everyone
knew the case was taking a dramatic turn.  The magistrate's office
communicated with Hugo Bravo.  "Hugolin", burdened by his connections with
"Guaton" and the accountants, needed support.  Bravo turned to his bosses, and
friends for decades, the principal shareholders of the Penta Group: Carlos
Eugenio Lavin and Carlos "Choclo" (Corn Cob) Alberto Delano.  The "Carlos"
categorically refused, firing Hugo Bravo for the unfortunate seizure of
documents.  Bravo was alone.  And alone, Bravo had one card to play.  He
played it.  Of course he fucking played it.


The Secrets of The Penta Group

The Penta Group ("Empresas Penta") is a Chilean holding company, with
investments in the areas of social welfare, insurance, finance, health, real
estate, and education.  The main shareholders are Carlos Eugenio Lavin and
Carlos "Choclo" Alberto Delano.  This group controls shares worth over 30
billion US$, through the companies Penta Vida, Penta Security, Banco Penta,
Empresas Banmedica and, until recently, the Universidad del Desarollo.  Their
owners are businessmen known to be linked to the right wing of national
politics, repeatedly participating in presidential campaigns for Alianza por
Chile (the right wing coalition here).  Lavin and Delano were important
directors of organisations, both non- and for-profit - "Choclo" Delano was
president of the directors of Fundacion Teleton (an annual, televised,
incredibly popular, fund-raising campaign for charity).

Lavin and Delano were friends of Hugo Bravo and trusted him with the
management of their companies.  After being disowned by his employers and
friends for decades, Hugo Bravo tried to make a deal with the magistrate's
office.  To some extent, a deal was made.  Both Bravo and the magistrate knew
that Bravo had invaluable information.  And that was all he had that could buy
immunity.  Hugo Bravo, under the pressure of legal action, spilled the secrets
he had accumulated during his time as managing director of the Penta Group.
Bravo sang, in detail, of the secrets of the Penta Group.

Hugo Bravo indicated that the Penta Group had falsified tax receipts to reduce
their liabilities.  Hugo Bravo indicated that this was done repeatedly, and
that it was political.  Hugo Bravo indicated that the Penta Group made
irregular contributions to noted Chilean politicians.  Hugo Bravo indicated
that the Penta Group financed, directly and irregularly, the political
campaigns of Laurence Golborne, Pablo Zalaquett, Ena Von Baer, Ernesto Silva
Mendez, and Ivan Moreira, and, in general, supported the majority of the
politicians from the Union Democratica Independiente (UDI - the largest
political party in Chile, on the right), through contributions to Jovino Novoa
(co-founder of the UDI and recent head of Senate).  As proof, Bravo had a
detailed register of tax receipts, emails, dates, signatures, and audio
recordings.  This documentation would help the magistrate, in exchange for
immunity.  The magistrate must have paled.


Companies and Political Parties: Scraping the Pan

In Chile there's a way of working called "boleta de honorarios" (what I have
translated as "tax receipts" above).  This was conceived as a way for
independent professionals, or companies, to offer services to other companies,
without the need for a signed, written contract.  It is common for companies,
in the public and private sectors, to employ people in this way, because it is
flexible and reduces costs for the employer (for example, the employer does
not manage tax or health insurance for the employee when working "con
honorarios").

In Chile companies pay a tax on their profits.  The profits are called "renta
imponible" (qualifying income).  The boletas de honorarios reduce the "renta
imponible" of the companies.  As an example, we will use Charlie Brown and
Snoopy.  Imagine that Charlie Brown and Snoopy own a company called "Penta
Peanuts".  "Penta Peanuts" has various businesses, and obtains income through
sales.  There are costs associated with these sales: materials, rent,
salaries, etc.  Let's assume that "Penta Peanuts" only pays salaries.  Now
imagine that "Penta Peanuts" obtains an income of $100.  The salaries that it
pays are associated with boletas de honorarios that come to $50.  If you do
the maths, income of $100 and wages of $50 leaves a net income of $50.  And
the tax that "Penta Peanuts" should pay is 20% of this "renta imponible".  In
other words, 20% of the $50 left after paying wages.  So the tax is $10.  Now
this tax is soon to increase, because of the coming Tax Reforms, but that's
another story (see
https://politicasparatodos.wordpress.com/2014/03/31/la-reforma-tributaria-explicada-con-manzanitas/)

In the example given, "Penta Peanuts" has committed no crime.  But what would
happen if "Penta Peanuts" reduced its tax due by issuing fraudulent tax
receipts?  Fraudulent?  Receipts for work that was never done.  This is exactly
what Hugo Bravo denounced.  The Penta Group wrote a series of "boletas de
honorarios" for work that was never done.  Receipts for the wives of Delano
and Lavin, receipts for the chauffeur, help, friend or relation of some
politician, etc.  Thanks to these tax receipts, Penta Group reduced its "renta
imponible" and so paid less tax.  Serious business.

Now, the obvious question is: what happened to the missing tax?  This is the
most serious part.  Part of that money financed political campaigns.  The most
serious part of the business: politics was financed with money due to the SII;
that is, money that belongs to all Chileans.


The Cherry on the Cake: Pablo Wagner

The case had taken a huge turn.  What started as fraud by an ex-employee of
the SII ended with irregular financing of political campaigns.  The
entrepreneur Ivan Alvarez, the accountants, and "Guaton" Valdivia, faded into
the background.  Hugo Bravo, Carlos Eugenio Lavin, Carlos "Choclo" Alberto
Delano, and the Penta Group took the stage.  The investigation continued,
while the public enjoyed juicy details of a future bestseller.  But works of
art always contain surprises.  A good cake deserves a good cherry: Pablo
Wagner.

The magistrate began to study, in detail, the financial movements of the Penta
Group.  Tax receipts for Tom, Dick and Harry were revealed.  All were
interesting, but some more so than others.  The magistrate's eye fell on Pablo
Wagner, ex Sub-secretary of Mines for Sebastian Pinera.  The magistrate noted
that Pablo Wagner, through receipts written to a sister-in-law, received
financial support while exercising his public duty as Sub-secretary of Mining.
It was found that Wagner worked for the Penta Group before he took on that
role, and he maintained a close relationship with the "Carlos".  The Penta
Group, amongst its many businesses, has an interest in Minera Dominga, a
project that at this very minute is in the process of approval and
certification to begin operations.  Given these details a new crime can be
added to the list: bribery.  Bribery is a crime that consists of an authority,
or public functionary, that accepts, or solicits, a gift in exchange for
making, or avoiding, some action under their control.  Serious stuff.


Conclusions

The story I've just explained is not fiction; it is reality.  This is
occurring in Chile, today.  In my short life I've tried to identify which
variables lead to a developed society, recognising that the engine of a
developed society is the economy.  Evidence shows that a healthy economy rests
on 3 pillars: competition, private property, and equality.  The details here
damage these 3 pillars.

First, there is harm to competition.  Large companies irregularly financing
politicians, encouraging them to run large campaigns at the expense of other,
independent candidates.  These large companies employ, in good positions,
people with questionable connections: Mr Hugo Bravo.  The political parties
don't restrict the sources for campaign contributions because they want big,
expensive campaigns that, at the end of the day, the State is funding - in
other words, all Chileans.  For them, it is irrelevant if these resources are
fraudulent, if receipts were written for services that were never provided,
etc.  Here it is the UDI.  But my suspicion is that politics as a whole is
financed from these, and worse, resources.

Second, private property.  There are laws that are not being followed.  You
wonder whether sanctions are really punitive, or whether those in charge of
applying the law are effective.  We have alleged robbery; alleged fraud;
alleged bribery.  There is harm to the rule of law.  Ivan, accountants,
"Guaton", Hugo Bravo, the "Carlos", Penta Group, members of the UDI, Wagner
etc.  Falsification of tax declarations.  Clear as day.

Third, the final point: equality.  Equality is considered good, but not
always.  At school I had a classmate who was caught littering.  A teacher
rebuked him, and he, scared, stammering, replied: "all of us did it".  And
truly, all of us had done so.  So?  Punishment for all.  How else can you
prevent these things from happening?  Meritocracy.  The managing director of
such a large company cannot be involved in crimes of this magnitude.  It pains
me to think of the thousands and thousands of professionals that would not do
so, yet, today, work for low wages, paid by "honorarios" - the same
arrangement that allowed this crime - thanks to the lack of meritocracy and
equality of opportunity in this country.  The same people could also be much
more transparent politicians.

  I - acooke - find the above confused.  I'm not sure if it's my translation,
  or the original.  Chile is plagued by an "old boys" network.  Here, more
  than anywhere else I know, it is who you know that counts.  No-one cares how
  good you are; they want to know who you know, who you went to school with,
  and which (private) school that was.  Once aware of this culture you can see
  it in the article above: the networking to extend the initial crime; the
  closing of ranks when it was investigated; the links between the rich
  families in business, and the rich families in politics.  The same surnames
  crop up again and again.  It's an incestuous, oligarchical, cesspool.

Today (the original article was published on 2015-03-05), 10 people were
charged with money laundering, bribery, and fraud.  Tomorrow we'll hear from
the defence.  Preventative custody will be requested for Delano, Lavin and
Bravo.  Alvares is already in custody for presumed fraud.  Valdivia died.  We
are the ones that process bank transactions for these companies.  We are the
ones that sell their products.  We are the one that buy their products.
Enough.  An economy for all, not for the few.

https://politicasparatodos.wordpress.com/2015/03/05/el-caso-penta-explicado-con-manzanitas/

Email Para Matias Godoy Mercado

From: andrew cooke <andrew@...>

Date: Mon, 6 Apr 2015 10:20:11 -0300

Matias,

No podia encontrar tu email para informarte de esta traduccion.  Asi que
escribi un comentario en tu blog, pero un dia despues aun no ha aparecido (tal
vez estaba filtrado como spam?).

Bueno, queria agradacerte por escribir el articulo.  Aprendi mucho a traves de
traducirlo.  Ojala que la traduccion no te moleste.

Andrew

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