Scandal Hit Bachelet Fights To Protect Chile’s Saintly Image

May 1, 2015

Santiago, May 1, 2015: President Michelle Bachelet has had to deal with more than her fair share of natural disasters since she returned to power just over a year ago, from powerful earthquakes, to fires ravaging major cities, and last month, the awe-inspiring eruption of the Calbuco volcano that blanketed the area for miles around in toxic ash.

But by far the most serious of the unexpected crises are the corruption scandals that exploded this year, shaking the foundations of Chile’s political establishment. After being criticised for failing to lead from the front, last week Bachelet seized the initiative by announcing a process of constitutional reform that would include measures to try to end the campaign finance scandals that have destroyed the public’s confidence in Chile’s political class.

Few could have imagined that what started out in August 2014 with a group of bank executives being accused of tax fraud could have snowballed into a problem of such magnitude that it has stalled Bachelet’s ambitious programme to introduce sweeping changes to Chile’s political and social order and reduce its stubbornly high levels of inequality. But a dizzying succession of corruption scandals has distracted attention from her legislative agenda and caused observers to wonder if Chile, Latin America’s poster child for how a free-market economy should be managed, is not as saintly as widely supposed.

Although at first only rightwing opposition politicians were implicated, more recently corruption allegations have come close to the president herself. Most damagingly of all, her son Sebastián Dávalos and daughter-in-law Natalia Compagnon were accused of abusing their influence to secure a lucrative property loan from the Banco de Chile. Last month, Bachelet found herself forced amid rumours to clarify publicly that she had no intention of resigning – and later that she was not planning on running for office after her term expires in 2018.

Many are questioning how deserving is the “Chilean miracle” label in which the country has revelled since its remarkable transformation from among the poorest in the hemisphere in the 1970s to what many consider to be one of the world’s most successful economies. Has South America’s only OECD member lost its way? Or perhaps Chile was just more successful at hiding an institutionalised corruption problem that is endemic across the region?

Certainly, Chile always scores well in surveys by the widely respected corruption monitor, Transparency International. Alongside Uruguay, it is ranked as the 21st “cleanest” country in the world, according to their Corruption Perceptions Index. Perhaps surprisingly, despite the massive scandal at Petrobras, the next country in South America on the list is Brazil, even if still some way down at 69th place. Neighbouring Argentina lags behind at 107th, and Venezuela limped in last at 161st, out of 175 countries.

These results are borne out by similar surveys from organisations like the World Heritage Foundation, which ranks Chile as the 7th freest economy in the world in its 2015 Economic Freedom Index, highlighting the rule of law as one of its stongest features. Likewise, the World Justice Project’s 2014 Rule of Law Index puts Chile in 2nd place in the region, after Uruguay, and 21st in the world.

Despite its glowing performance in international rankings, it is clear from the acute crisis of confidence in Chile’s entire political class, now at historic lows, that there is a problem. Indeed, a closer look at Transparency International’s numbers reveals that political parties are considered to be the most corrupt institutions in Chile.

And a more nuanced view of Chile’s financial transparency can be gleaned from the list made public by a former HSBC employee of the bank’s clients that had accounts in Switzerland – even if there was not necessarily anything illegal about having such accounts. Venezuelans had the most, by far, with accounts worth $14.8bn, nearly half of the $35bn total held by clients from Latin America and the Caribbean. Brazil came next with $7bn, then Argentina, with $3.5bn. But Chileans had only $467.5m: less than Panama and Uruguay ($2.8bn each), Mexico ($2.2bn) and even Surinam ($772.3m).

Even if Chileans are not immune from corruption, the amounts of money involved are of a different order of magnitude. Bachelet’s family probably made a profit of no more than a few million dollars in the Banco de Chile deal. The biggest scandal, “Pentagate”, erupted when an executive at Penta Group, one of Chile’s largest financial groups, accused the company of illegally financing the electoral campaigns of the right-wing Independent Democratic Union party, involving tax evasion of no more than $4m. That pales in comparison to the money siphoned out of Brazil’s Petrobras, which officials estimate runs into billions of dollars. And in Venezuela, where operations at the state-owned oil company PDVSA are notoriously opaque, they scoff at the schemes at Petrobras as child’s play.

But Chilean society has become more demanding. Rapid economic growth has created an expanding middle class. There is less tolerance for the incestuous relationship between business and politics, which has its roots in the military dictatorship of General Augusto Pinochet. (The other company at the heart of the campaign finance scandals is Soquimich, one of the world’s biggest potash and lithium miners whose largest shareholder and former president – until the scandal erupted – is Julio Ponce, Pinochet’s son-in-law.)

Chile’s great advantage, however, is the strength of its institutions. Justice has worked swiftly. Already the most senior executives in the Pentagate scandal have been detained as the trial gets underway – although it will be a test of the judiciary, which has often been accused of leniency towards white-collar crime. And even if Bachelet was slow to react, better late than never. And she has displayed a humbleness in stark contrast with the insouciance of, say, Mexico’s President Enrique Peña Nieto after the unusual nature of his own family finances were questioned.