Bitter Taste Remains as Corruption Scandals Fizzle Out in Chile

(Bloomberg) -- Chile’s political and business elites are breathing a sigh of relief after final rulings on major corruption cases. For some, though, the authorities have merely papered over the problem.

The cases range from illegal political financing and tax evasion that resulted in the downfall of one of Chile’s largest financial conglomerates, Grupo Penta, to accusations of influence peddling that ensnared the son of former President Michelle Bachelet. Another situation threatened to stall expansion of SQM, which sits on some of the world’s largest lithium reserves.

The government’s hoping it’ll regain some of its hard-won clean reputation -- in a region overflowing with corruption and bribery scandals -- after judges ruled on two of the three cases this week. Chile is moving on more quickly than its peers, where major infrastructure projects are stalled due to the multiple investigations. The limited nature of the graft, resulting in fines and suspended sentences, and changes to the law governing political financing have also limited the fallout.

"Chile would have been better off without the scandal, but the fact that there was an institutional reaction to the scandal, in my view, also speaks well of the way democracy works,” said Patricio Navia, a Chilean political analyst professor at New York University, said by email.

Regional Star

Investors seem to have put the scandals behind them already. Local pension funds have plowed $533 million into shares of Sociedad Quimica y Minera de Chile SA this year after selling all of their positions in 2015 when the scandal broke.

And South America’s wealthiest nation per capita is finally beginning to feel like its former self. Growth has rebounded faster than any other major neighbor, investment is rising after four years of decline and the popularity of President Sebastian Pinera is above 50 percent, the highest in the region.

Chile also remains in a better position than other Latin American countries -- aside from Uruguay -- in Transparency International’s Corruption Perception Index.

The risk for Chile now is becoming complacent and waiting for another scandal to emerge, said Maria Jaraquemada, a director at the research center Espacio Publico, which monitors corruption cases in the region.

"Reforms have been made and that helps investor confidence, but what we are worried about is that when things calm down, the reform agenda also calms down," Jaraquemada said. "I wouldn’t be surprised if other scandals appear in the future."

Too Easy

Legislators from the Frente Amplio, an eclectic coalition of left-wing parties, presented a petition to the Supreme Court on Wednesday to fire the country’s National Prosecutor, Jorge Abbott, for fostering impunity in the SQM and Penta cases.

A court ruled this week that the founders of Penta, Carlos Eugenio Lavin and Carlos Alberto Delano, were guilty of tax evasion and not bribery, even though they paid off a government official. Their punishment is a four-year suspended sentence and fines of about $2.6 million -- a drop in the bucket considering Penta recently sold pension fund manager Cuprum for $1.1 billion and health services and insurer Banmedica for $2.8 billion to UnitedHealthGroup.

"First, the scandals showed that the existing penalties and regulations for corrupt practices are insufficient to effectively punish offenders," Navia said. "The leadership of Penta and SQM will get off the hook with hefty fines, but no effective jail time."

In the SQM case, prosecutors have accused 16 people, including former CEO Patricio Contesse and Pablo Longueira, a former senator and minister during Pinera’s first government. That case has yet to be decided.

On Wednesday, Bachelet’s daughter-in-law Natalia Compagnon was found guilty of tax fraud related to the purchase and sale of land. Compagnon’s sentencing is still pending.

"The cases served as evidence of the strength of Chile’s institutions and political elite’s ability to pass institutional reforms to fix problems, specifically political financing rules, which should lead to better investor confidence," Navia said.

--With assistance from John Quigley.

To contact the reporters on this story: Eduardo Thomson in Santiago at ethomson1@bloomberg.net;Daniela Guzman in New York at dguzman26@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Philip Sanders, Christiana Sciaudone

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