U.S. Investigates Venezuelan Oil Giant

BY JOSÉ DE CÓRDOBA & JUAN FORERO

Former PDVSA officials suspected of looting billions of dollars through kickbacks and other schemes

WASHINGTON—The directors of one of Spain’s leading construction companies were delighted to land an appointment with Rafael Ramírez, the president of Petróleos de Venezuela, to talk about their plans to bid on a $1.5 billion electric-power project for the Venezuelan state oil giant.

But when they showed up at the JW Marriott Hotel in Caracas, it was Mr. Ramírez’s cousin, Diego Salazar, who received them in the presidential suite, say two people who attended the 2006 meeting. Mr. Salazar got right to the point, they say: The Spaniards would have to pay at least $150 million in kickbacks to be in the running.

“If not,” Mr. Salazar told the businessmen, according to one person, “you should return to the airport.”

The executives didn’t bite. But plenty of other vendors were willing to play along on PdVSA projects, say people who worked with the company before Mr. Ramírez’s departure last year.

Now, U.S. authorities have launched a series of wide-ranging investigations into whether Venezuela’s leaders used PdVSA to loot billions of dollars from the country through kickbacks and other schemes, say people familiar with the matter. The probes, carried out by federal law enforcement in multiple jurisdictions around the U.S., are also attempting to determine whether PdVSA and its foreign bank accounts were used for other illegal purposes, including black-market currency schemes and laundering drug money, these people say.

Mr. Ramírez, who is now Venezuela’s ambassador to the United Nations, didn’t respond to four detailed letters seeking comment or to phone calls. PdVSA, the Ministry of Communications, the Venezuelan attorney general’s office and the office of President Nicolás Maduro didn’t respond to phone calls and emails.

Mr. Salazar, who splits his time between New York, Miami, Caracas, Paris and Madrid, didn’t answer numerous emails, telephone calls and text messages asking for comment.

In the past, Venezuelan officials have routinely dismissed allegations of official corruption as attempts to destabilize and overthrow the government by opposition figures allied with the U.S. and other “foreign enemies.”

No charges have been made public in the PdVSA matter and it is possible none will be filed. Earlier this month federal prosecutors from New York, Washington, Missouri and Texas met in person or by teleconference in Washington to coordinate actions and share evidence and witnesses in the various PdVSA-related probes, say three people familiar with the matter. The meeting also included agents from the Department of Homeland Security, the Drug Enforcement Administration, the Federal Bureau of Investigation and other agencies, these people say.

Troubled economy

The investigations are taking place as Venezuela’s economy is on pace to contract by 10% this year and inflation to hit 160%, according to International Monetary Fund estimates. The country is crippled by a collapsing currency, moribund industry and an inability to pay for imports of medicine and food.

Under Mr. Ramírez, the soft-spoken son of a Marxist guerrilla, PdVSA completed a transformation from one of the world’s most-efficient oil companies to an arm of the late President Hugo Chávez’s socialist revolution. Petrodollars went to pay for housing, appliances and food for the poor, efforts that won voters at election time but starved the oil industry of funds needed for investment and maintenance. The company’s aircraft have been used to transport the families of ministers and allies, from Bolivia’s president to Colombian guerrilla commanders.

Mr. Ramírez’s signature moment was a 2006 speech to oil workers in which he said that PdVSA was “red, very red”—the color of Mr. Chávez’s movement. Mr. Ramírez thundered that if the then-president were to lose a coming election, he would head for Venezuela’s mountains, rifle in hand and “liquidate the enemies of the revolution.”

Some who know him say that the 52-year-old Mr. Ramírez has also amassed great wealth.

“His heart is on his left, but he keeps his wallet securely on his far right,” says a former close acquaintance, who notes Mr. Ramírez’s love of the best Château Pétrus wines, which sell for thousands of dollars per bottle. “He has very exquisite tastes.”

Mr. Ramírez was also suspicious of outsiders, say people who worked closely with him, so he placed relatives in senior positions. His mother-in-law, Hildegard Rondón, a former Supreme Court judge, was a top lawyer for the energy ministry. Mr. Ramírez’s brother-in-law Baldo Sansó was an aide who handled much of the oil company’s international bidding processes. And Mr. Ramírez’s wife, Beatrice Sansó, managed PdVSA’s cultural branch.

“He ran the company like a family business,” says one person close to the current PdVSA president’s office.

Ms. Rondón in a brief interview said she was appointed because of her experience as a lawyer. Emails and calls to Mr. Sansó weren’t returned. Mr. Ramírez’s wife couldn’t be reached through a representative.

A key figure in Mr. Ramírez’s world was Mr. Salazar, 47 years old, people familiar with the matter say.

Like his cousin, Mr. Salazar was also the son of a Marxist guerrilla. When Mr. Salazar’s father landed in prison, Mr. Ramírez’s father took care of young Diego and his family. When it was Mr. Ramírez’s father who was jailed, Mr. Salazar’s father stepped in.

“That type of relationship made them closer than brothers,” says a former top Venezuelan government official who knows both Mr. Salazar and Mr. Ramírez.

Both men were brought up to believe that Venezuela needed a deep transformation from its pro-U.S. stance, says the official.

They would get their wish with the 1998 election of Mr. Chávez, a former paratroop commander-turned-fiery politician. Mr. Ramírez, an engineer, was tapped to run the energy ministry in 2002 and then, in 2004, PdVSA. Mr. Salazar soon found himself in the flow of PdVSA business, negotiating deals between the oil company and firms from China and elsewhere.

People close to Mr. Salazar say he enjoyed a life of private jets and sumptuous meals in the company of beauty pageant contestants. He was known to lead his own private orchestra, singing romantic ballads in concerts attended by friends and employees, these people say.

“He loves to flaunt his money in people’s faces,” says the former top Venezuelan government official who knows Messrs. Salazar and Ramírez.

In the car-clogged streets of Caracas where traffic often slows to a crawl, Mr. Salazar drives a Ferrari—followed by an SUV full of bodyguards. He is so obsessed with expensive watches, friends say, that he sometimes hands out new Rolexes to people who attend his parties after first ceremonially grinding their old watches into scrap in a mortar and pestle he keeps handy.

In transcripts of conversations taped by Spanish police, Mr. Salazar’s acquaintances refer to him as “el Señor de los Relojes,” or “Mr. Wrist Watch.”

In March, the U.S. Treasury’s Financial Crimes Enforcement Network, or FinCEN, opened a rare window into the movement of PdVSA money.

The agency issued a finding saying that a bank in tiny Andorra, which sits between Spain and France, was being used as a money-laundering hub, allegedly by corrupt Venezuelan officials, as well as Russian and Chinese mobsters.

FinCEN said executives at the Andorran bank, Banca Privada d’ Andorra, or BPA, helped to launder more than $4 billion of Venezuelan money, of which about $2 billion was “siphoned” from PdVSA. As a result of the FinCEN finding, Andorran and Spanish authorities seized control of BPA and its Spanish unit, Banco Madrid.

Spanish authorities are now investigating Mr. Ramírez, Mr. Salazar and others who did business with PdVSA for possible money laundering, say knowledgeable people.

BPA’s controlling shareholders, Ramon and Higini Cierco, earlier this month sued FinCEN in Washington federal court demanding it reverse its decision. A spokesman for the brothers said neither audits by top accounting firms nor reviews by Andorran and Spanish authorities had raised significant concerns. He added that the bank reported the alleged money-laundering incidents to authorities well before the FinCEN report. “There was no legal or evidentiary basis to justify closing the bank,” the spokesman said.

In May, Andorran judicial authorities prepared extensive documentation for the U.S. Justice Department and Venezuelan judicial authorities asking for help in the continuing probe. Andorran authorities declined to comment on the investigation.

One document reviewed by the Journal outlines suspicious transactions and asks American law enforcement for information about two dozen people and companies, including top Venezuelan bankers, former PdVSA officials and the joint ventures PdVSA had with foreign oil companies.

According to the Andorran documents, Mr. Salazar received hundreds of millions of dollars in his accounts in Andorra from firms, many of them shell companies in Panama, Belize and the British Virgin Islands.

“This money presumably has a criminal origin in political corruption,” says one of the Andorran documents. Both documents also list payments for millions of dollars, many of them allegedly made by Mr. Salazar, to PdVSA executives and other Venezuelan officials.

Once, Mr. Salazar allegedly gave Venezuelan police an $80,000 bribe to ignore suspicious transactions, transcripts of Spanish police wiretaps reviewed by the Journal show.

“This is a free-for-all,” an associate of Mr. Salazar said with a laugh, recounting the payoff while talking to an Andorran banker, according to the transcript.

The Andorran documents also cite transactions involving Chinese companies. In one 10-month period ending in September 2012, investigators say that five Chinese oil and construction companies deposited $154 million in accounts belonging to a Panamanian shell company owned by Mr. Salazar.

According to the documents, the deposits came from commissions of up to 15% on contracts the Chinese companies signed with Mr. Salazar’s company. The payments are for “consulting contracts” don’t describe what services Mr. Salazar’s company provided, according to the documents.

The Chinese companies didn’t respond to requests for comment.

Gaming currency

PDVSA officials also made off-the-books profits and commissions by gaming Venezuela’s Byzantine currency exchange system, say people familiar with the matter. The opportunity has arisen due to the huge gap between the black-market rate for the Venezuelan bolivar, now close to 800 per dollar, and the official rate of 6.3 bolivars per dollar, these people say.

The Andorran documents state that Mr. Ramírez ordered PdVSA in March 2012 to obtain a bolivar-denominated credit line from a firm that had hired a close acquaintance of his as a consultant. The loan, for 17.9 billion bolivars, was to be repaid in dollars, the report says.

At the time, the official exchange rate was 4.3 bolivars per dollar, making the value of the loan about $4.16 billion. But bolivars were commonly available for 9.3 per dollar on the country’s parallel market, meaning that the lender could theoretically have obtained them for $1.92 billion, giving the firm a potential profit of more than $2 billion.

Andorran investigators allege in the documents that the loan wasn’t for any financing need. Instead, they say, the arrangement was a “covert” foreign exchange deal that allowed Mr. Ramírez’s acquaintance to pocket a commission of at least $70 million.

Inadequate financial controls made it difficult to detect fraudulent transactions, say current and former PdVSA officials. In 2005, Mr. Chávez created off-budget funds that spent billions in petrodollars generated by PdVSA on such things as subsidized housing and projects for Venezuela’s allies. The funds weren’t subject to central-bank controls. “There was no auditing in the management of the money,” says Ramon Espinasa, a PdVSA chief economist before the Chávez takeover, in an interview.

The result was that up to $3 billion of the $15 billion in services and equipment that PdVSA contracted for annually represented overcharges that flowed back to top company executives, government officials and businessmen as kickbacks, say people knowledgeable about the alleged crimes.

“I can tell you that there was a generalized system of corruption at the company,” said a former PdVSA executive. Investigators in New York “have everything—contracts and memos and emails,” he said, holding his hands apart to show how investigators have a 2-foot stack of company documents.

An oil industry executive recounted how in one episode, PdVSA executives interested in buying a ship with seismographic equipment were prepared to pay more than double the $125 million cost that a European seller wanted. The plan, the executive said, had been to share the spoils.

“You can’t charge the real price,” says a former top Venezuelan government official. “You have to pay commissions, because if you don’t pay commissions, you don’t get paid.”

A former official from an Asian oil services company says he routinely paid hundreds of dollars in cash in recent years or provided gifts like watches just to secure meetings with midlevel PdVSA officials.

Bids for PdVSA projects were usually rigged, the former Asian company official says. In a scam known as “la tapa,” or the lid, well-connected firms used shell companies to place bogus bids, thus giving the appearance of fairness while shutting out real competition, he says.

Those practices, as well as Venezuela’s hostility toward many Western multinationals, drove out most American and many European companies, which years ago left the field in favor of Iranian, Russian and Chinese companies, says the former top Venezuelan official.

The growing anarchy in Venezuela is helping U.S. prosecutors recruit former PdVSA executives, contractors and bankers as potential witnesses, say people familiar with the probes.

In New York, law-enforcement officials are speaking to about a half-dozen former top officials, according to people familiar with the investigation, and hope to enlist Mr. Ramírez’s cooperation. Mr. Ramírez has been on the outs with his old comrades in Venezuela, having been ousted as president of PdVSA and as energy minister last year.

His reassignment this year to the U.N. was seen as a major demotion for a man who had controlled Venezuela’s cash cow.

Upon arriving in New York, he dismissed the staff of the Venezuelan mission because he was convinced, he told another ambassador, that they were spying on him. Fellow U.N. diplomats say that Mr. Ramírez, who speaks in a low voice that belies his imposing height, keeps to himself, rarely attending or hosting diplomatic events.

“He is a solitary man who hardly speaks to anybody,” says one diplomat.

—Christopher Matthews, Lisa Schwartz and Eduardo Kaplan in New York and Kejal Vyas in Caracas contributed to this article.

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