Another Probe, Another Poll

by John Marino

August 27, 2004
Copyright © 2004 THE PUERTO RICO HERALD. All Rights Reserved.

. O.K., let’s get this straight.

The Popular Democratic Party House majority is leading an investigation which allegedly shows officials from the administration of former Gov. Pedro Rosselló conspiring with the heads of multinational companies to launder money and shield millions in profits from federal and local taxes by funneling them through island subsidiaries and an economic development incentive fund and other investment vehicles.

The probe is focused on the mishandling of money poured into the Puerto Rico Industrial Incentives Fund, which Gov. Calderón’s hand-picked Blue Ribbon Committee reckons cost the Puerto Rican taxpayer a whopping $1.4 billion.

It does make for interesting reading, and news of the report, as well as public leaks about an FBI investigation of the PRIIF, has been making front-page headlines in San Juan all week. Yet all this is still conjecture, and the local Justice Department has already closed the book on the case.

The case is weird because it rests on Section 936 of the federal tax code, which apparently made all the alleged misdeeds possible. The tax break has been the backbone of the PDP economic program since it was founded in the mid-1970s until the present, when it has all but been phased out. Yet the legislative probe points to the former New Progressive Party administration as constructing a scheme for the companies to win preferential tax treatment in exchange for investments in the PRIIF, and perhaps, illegal payoffs.

It’s also weird because although investigators are privately complaining about political pressures to kill the probe, those pressures don’t date back to the previous administration, but to the current Calderón administration. That’s because the governor’s former Economic Development secretary, and current husband, Ramón Cantero Frau, is cited by the Blue Ribbon panel as approving a dubious $5 million deal that was a complete bust for the government. The mud from this probe apparently can stain those dressed in red as well as those dressed in blue.

There are two aspects of this probe. The one with the most meat, from initial appearances, anyway, revolves around how the money invested into the fund by multinational companies was used by local officials and companies.

Two former government officials are cited in the report as breaking the Government Ethics Law by profiting from the fund immediately after leaving government and reentering the private sector. The report also accuses them of charging outrageous fees for the subsequent PRIIF-related financial transactions they undertook.

Other allegations center on the disbursement of the funds from the investment fund, which were granted to local companies to spur new business and expansions. They occurred under former PRIDCO director Xavier Romeú as well as Cantero Frau, Calderón’s first appointment to run the Economic Development agency.

In some cases, including that of Cantero Frau, the deals cited in the report just seem like bad business decisions rather than crimes. But still unproved allegations point to illegal kickbacks and political donations in exchange for the economic development grants.

The second aspect of the probe is a little harder to swallow; it alleges that many 936 firms, through investments in PRIIF in exchange for favorable local tax treatment, also violated federal tax law through the accelerated repatriation of profits to mainland parent firms that the local tax incentives made possible.

If it were a scheme for the companies to avoid federal taxation, it was a very public one at the time. I covered seminars on the issue given by government officials to 936 company executives. So far, despite the screams of PDP lawmakers, there is scant evidence that aggressive accounting somehow stepped over the line to money laundering or tax fraud.

And remember, Puerto Rico has some of the most talented accountants in the world advising 936 companies; it’s no secret that the world’s largest accounting firms established island branches as the federal tax break took root here. Arguments between the federal Treasury and 936 companies over their attribution of profits to island subsidiaries have been raging as long as the federal tax break has been in existence. Given that fact, the Blue Ribbon report’s finding that mainland firms may have violated federal tax law through certain investments that might not have qualified for exemption appears downright naïve.

The fact that the federal authorities are investigating the issue means there is probably some fire to all that smoke flowing out of the Capital hearings. The San Juan STAR reported Thursday that the PRIIF probe is part of a much larger investigation that includes other federal agencies such as the U.S. Treasury Department's Financial Crimes Network, known as FiNCEN and the Internal Revenue Service. If that’s the case, it’s likely the local office is looking into illegal payoffs while the other agencies could well be the probing the aspect of the investigation touching on 936 firms and allegations of federal tax fraud.

But the investigative hearings at the Capitol are also one part politics, and can’t be divorced from the election battle being waged between the NPP and the PDP.

The latest poll puts Rosselló out in front of his PDP rival Aníbal Acevedo Vilá by 9e percentage points, with the undecideds winnowing to 9 percent of those polled.

Legislative hearings and leaks about federal probes are one way of pounding home the corruption theme, as the PDP hopes for a knockout punch against the NPP to improve poll numbers as the election nears.

But a big part of the message of Rosselló’s lead must be that the PDP has to deliver much more than trying to paint its opponents as corrupt in order to retain power. It must convey to the public why it would be a better administrator of the commonwealth government than the NPP.

NPP politicians, meanwhile, should note the big public negatives associated with their party on the corruption issue. Accusing federal officials of "political persecution" won’t help much. They are currently out in front not because the public believes the party is being persecuted. They are in front because more believe they will do a better job of governing than the PDP.

John Marino, Managing Editor of The San Juan Star, writes the weekly Puerto Rico Report column for the Puerto Rico Herald. He can be reached directly at: Marino@coqui.net

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