Why CentAm Social Security Agencies Generate Corruption, Crime

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A series of corruption scandals implicating high-level government officials have rocked Honduras and Guatemala in recent months. In both countries, the governments’ social security agences are at the forefront of the crisis, a product of fundamental traits of these agencies making them vulnerable to malfeasance, corruption, and crime.

Guatemala’s current series of corruption scandals began in April, when authorities arrested officials from the country’s trade authority (SAT) on charges of participation in a customs fraud ring known as “La Linea.” The alleged leader of this network is the former private secretary of ex-Vice President Roxana Baldetti. Baldetti resigned in May as a result of the scandal, but she has consistently denied any wrongdoing.

Soon after Baldetti’s resignation, Guatemalan authorities arrested the head of the country’s Social Security Institute (IGSS), Juan de Dios Rodriguez, along with at least 15 other suspects, for fraud. The allegations resulted from irregularities in a $15 million contract IGSS awarded in October 2014 to the pharmaceutical company Pisa. The participants in the scam are believed to have pocketed 15 to 16 percent of the contract’s value — around $2.27 million.

The two scandals have put Guatemalan President Otto Perez Molina under increasing pressure. On June 30, Guatemala’s Constitutional Court rejected an injunction submitted by Perez to halt a congressional corruption probe into his activities.

In neighboring Honduras, a corruption scandal in that country’s Social Security Institute (IHSS) first broke in 2014. Mario Zelaya Rojas, the former director of the IHSS, stands accused of embezzling as much as $330 million from the institution; other IHSS officials are suspected of accepting bribes from medical providers and making false purchases.

The IHSS debacle gained new momentum in early June after President Juan Orlando Hernandez admitted his 2013 election campaign received money from businesses implicated in the scandal. On June 30, the Honduran Supreme Court ordered the arrest for 16 people suspected of colluding with the IHSS’ corrupt activities. This included Lena Gutierrez, the Vice President of the Honduran Congress.

On the whole, Guatemala and Honduras are notoriously corrupt. Nonetheless, that the countries’ social security agencies are at the center of investigations and public scrutiny is in part due to at least five key attributes of these institutions. Together, these attributes have resulted in susceptibility to corruption and exploitation by government officials, who have repeatedly used these agencies as vehicles for personal enrichment.

1. They are Huge.

The budget for Guatemala’s IGSS in 2015 is slightly over $2 billion: a significant chunk of the Guatemalan government’s total estimated 2015 budget of $9.2 billion. The approved 2015 budget for Honduras’ IHSS is around $300 million; Honduras’ total government budget for 2015 is nearly $8.5 billion. Both are amongst the largest businesses in their respective countries. 

A large operating budget in itself does not mean an agency is destined to become corrupt. Nonetheless, rampant corruption and a culture of impunity in both Honduras and Guatemala provide ample opportunities for officials in both agencies to skim money off the top without creating much (if any) suspicion.

This is especially true in Guatemala. The IGSS’ substantial resources have allowed the agency — and its top officials — to become an important political actor. The IGSS has even been referred to as the “petty cash” department, in that its money is used to buy favors from government officials and politicians.

Political and personal favors bought by the IGSS, however, frequently take the form of investments, medicine purchases, and the issuing of contracts for services. This leads to the second attribute of these agencies that makes them susceptible to corruption…

2. So Many Contracts.

In order to complete their basic functions providing for the wellbeing of Hondurans and Guatemalans, the IHSS and IGSS issue contracts to various private companies and providers of goods and services. Contracts, however, create opportunities for graft and fraud in the form of kickbacks and bribes.

For instance, Mario Zelaya Rojas — in addition to embezzling large sums of money from the IHSS when he led the agency — allegedly received over $2 million in bribes to facilitate payments to a company contracted to digitalize the IHSS’ registry system. At least 320 people formed the network facilitating IHSS’ corrupt transactions, including IHSS employees and relatives of top officials. The wives of Jose Alberto Zelaya — the former head of IHSS acquisitions and supply — and Jose Ramon Betetty — the former IHSS financial chief — helped launder the money their husbands stole by making false purchases from phony companies.

SEE ALSO: Coverage of Money Laundering

In Guatemala, the majority of the IGSS’ money is spent via no-bid contracts. (In the first months of 2015, the IGSS awarded no less than 1,000 no-bid contracts). For example, in September 2014, the IGSS awarded a contract worth over $22 million for the digitization of forms to the company Nextec, S.A., even though few details about the company were known, and it had never before serviced a government contract. Additionally, Nextec was the only company to participate in the bidding process (which lasted one week), easily winning the exorbitantly over-priced contract.

This, however, is just one of a series of IGSS contract irregularities in recent years. In March, the IGSS gave a $1.66 million contract to the company Grupo MC2 S.A. for furniture, office paper, and the rental of printers, a photocopier, a fax machine, and a scanner. The company, however, submitted the second lowest bid, which the IGSS could select due to a legal exception allowing them to do so when renting materials. IGSS purchases under this exception rose from $12.2 million in 2012 to $68 million in 2013 — the same year Juan de Dios Rodriguez became IGSS director.

3. Conflicts of Interest.

A reason the IGSS and IHSS have been able to unscrupulously award shady contracts with minimal repercussions is that many politicians and government officials have personal business interests at stake.

SEE ALSO: Coverage of Elites and Organized Crime

For example, Lena Gutierrez — the Vice President of the Honduran Congress whose arrest was ordered on June 30 — and members of her family are accused of defrauding the IHSS by selling it poor quality medicine at inflated prices, potentially embezzling as much as $120 million from the IHSS. The medicine sales were made through AstroPharma, a pharmaceutical company to which her family has been linked and may have even created with the express purpose of defrauding Honduras’ health system.

4. The Medicine Lobby.

Completing this nefarious circle of corruption and underhanded contracting is the power of the medicine lobby, which is one of the largest political campaign financers in Guatemala.

In Honduras, part of the money AstroPharma made from its IHSS contracts allegedly helped fund President Hernandez’s 2013 presidential campaign, which Hernandez himself acknowledged received at least $145,000 in contributions from businesses linked to the IHSS corruption scandal.

In return for providing political financing, medical companies receive lucrative government contracts for medicine purchases and other related services. Honduran and Guatemalan politicians are also in a position to impede investigations or court proceedings challenging the validity and legality of questionable contracts.  

5. Corruption and Impunity.

Finally, the IHSS and IGSS exist and operate within a broader context of rampant institutional corruption and impunity in Honduras and Guatemala. As a result, entrenched political and economic elites have been able to manipulate the two agencies for personal financial and political benefit free of scrutiny and legal prosecution. With so much money at stake, it is not suprising that the result is a government body that often acts more like a mafia than a public service institution. 

SEE ALSO: The War for Guatemala’s Courts

Change may be on the horizon. The scandals have provoked widespread protests in both countries that are unprecedented in recent memory. Ordinary Hondurans and Guatemalans appear to be fed up with corruption among the political class and are demanding change — leading some to wonder if we are witnessing a “Central American Spring.”

The factors giving rise to corruption in the Honduran and Guatemalan social security agencies will not be reversed overnight. But the recent arrest of Honduran Congressional Vice President Gutierrez, and the denial of Guatemalan President Perez Molina’s injunction to halt corruption investigations by Congress, suggests lawmakers and politicians in both countries are feeling pressure from public outcry over the scandals, and that they may begin more significant steps towards serious reform.

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