Another Latin American State, Chile, Hit by Brazil-Like Scandal

March 23, 2016

  • Lithium Giant Owned by Pinochet Son-in-Law Is Charged

  • Dozens under investigation, accused of taking SQM Money

Chile, widely viewed as a model of stability and democracy in a region plagued by impropriety and upheaval, is facing a campaign funding scandal that has cast a shadow over politicians of all major parties.

More than a year of revelations has helped drive to record lows the approval ratings of the government, President Michelle Bachelet, the Chamber of Deputies, the Senate and the opposition. With new allegations appearing almost weekly, the parties are struggling to find candidates with unblemished reputations for the 2017 election.

As in Brazil’s mounting scandal, one company sits at the center. In Brazil it is state-owned Petroleo Brasileiro SA funneling money to politicians; in Chile it is Soc. Quimica & Minera de Chile SA, or SQM, the fertilizer producer that supplies more than a fifth of the world’s lithium and is controlled by Julio Ponce, the former son-in-law of Augusto Pinochet, the country’s one-time dictator. And while the funds involved in Chile are a pittance compared with those in Brazil, the reach is helping to discredit the entire political class.

Those charged with accepting money illegally from SQM include fundraisers or assistants to Bachelet and a former president, Eduardo Frei, as well as Carlos Ominami, the adoptive father of a presidential candidate in the 2013 election. People linked to former President Sebastian Pinera and his Economy Minister Pablo Longueira are also under investigation by the tax authorities, though they have not been charged by the public prosecutor.

Through an external press relations office, SQM didn’t respond to an e-mail and phone calls seeking comment for this article. The company has said it is cooperating with the authorities.

No one has accused Bachelet herself of involvement but the scandal is so widespread that eight of Chile’s largest political parties have been linked to it. A comic recently suggested that all the country’s parties join together and form one party — called SQM.

Tarnished Model

“Chile has been considered a worldwide example in how to transition from dictatorship to democracy,” said Kenneth Bunker, a Chilean political researcher at the London School of Economics and Universidad de Diego Portales. “For many, the recent scandals set democracy back 20 years, and can only be fixed with a constitutional reform.”

Chile has held six presidential elections since 1990, with little or no violence and the results uncontested. The country regularly ranks second in Latin America after Uruguay in Transparency International’s index of perceptions of corruption. Those perceptions are now changing.

According to the tax authorities, SQM’s modus operandi was this: Politicians, their relatives or their assistants were urged to bill the company for work they never did. Since the first accusations appeared in January of last year, the public prosecutor has charged 21 people, with dozens more under investigation. Trials are expected within a year.

The probe suggests that SQM was an equal-opportunity briber without concern for ideology. Marcos Enriquez-Ominami, a presidential candidate in 2013, is among those investigated. He is the son of a former left-wing revolutionary shot dead by the security forces of the dictatorship in 1974. If charged and convicted, it would be no small irony that he took money from a company controlled by the son-in-law of that same dictator. Enriquez-Ominami has said he acted lawfully.

Other politicians have also denied taking funds or said they were unaware of the actions of their assistants or fundraisers. Longueira has said that he didn’t grant SQM undue influence over the writing of a tax law on the mining industry after an e-mail appeared in which SQM’s CEO seemed to dictate part of the bill to him. Chileans remain skeptical.

Political Cost

“The widespread belief in Chile is that all politicians are involved in the irregular campaign financing scheme,” said Patricio Navia, a Chilean political scientist at New York University. In the 2017 election, he added, “people will have to decide between tarnished left-wing and tarnished right-wing candidates.”

The ruling coalition’s approval rating fell to 22 percent in February from 54 percent when it took office two years ago, according to surveys by GfK Adimark. The opposition is doing no better. Its approval rating is at 20 percent, while only 11 percent of people approve of the work of the Chamber of Deputies, down from 38 percent two years earlier.

“Nobody comes out of this clean,” Navia said.

Ponce, who gained control of SQM during the dictatorship of his former father-in-law, has invited bids for his stake in one of the holding companies. SQM shares, down more than peers since the regulatory and legal strife began, have rallied in the past several months amid speculation Ponce will lose control of SQM.

Bizarre Law

One source of the problem, Navia says, is that Chilean funding regulations in political campaigns were a mess. Candidates could only raise money in the 90 days before an election, leaving them with nothing to finance a campaign that often starts a year earlier.The law has been changed.

The scale of the alleged corruption pales in comparison with Brazil’s Carwash case where state-owned oil company Petrobras is accused of paying $1.7 billion in kickbacks, much of it to politicians. SQM said a year ago that it had identified irregular payments of $11 million. It has fired the CEO who signed off on the invoices. He is suing the company for wrongful dismissal.

And whereas Brazil’s economy has been devastated, in Chile markets have not been affected.

The blame for loss of voter confidence can’t all be heaped at SQM’s door. Other Chilean companies — Grupo Penta and Corpesca SA — have also been accused of illegal funding. And there has been controversy surrounding alleged influence peddling by Bachelet’s daughter-in-law. Furthermore, two years of sluggish growth have added to a crisis of confidence in Chile, Latin America’s wealthiest nation, making the scandal all the more significant.

“It has been a cathartic experience,” Bunker said. Twenty-six years after the departure of Pinochet, the “evidence that important political figures of the dominant coalitions were involved in illegal campaign financing schemes cast a shadow on the cost of this transition.”