Puerto Rico corruption arrests rock local government

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The FBI arrested current and former officials of Puerto Rico Gov. Ricardo Rosselló's administration on corruption charges, potentially undermining his administration in the midst of the commonwealth's historic bankruptcy.

The FBI on Wednesday arrested and charged former Rosselló Secretary of Education Julia Keleher and former Executive Director of Health Insurance Administration Angela Avila Marrero over alleged corruption in the awarding of contracts. In addition the FBI arrested and charged Glenda Ponce Mendoza, an assistant to Keleher in the education department, Alberto Velazquez Piñol, president and owner of the private company Azur, Fernando Scherrer Caillet, managing partner at consultant BDO, and Mayra Ponce Mendoza, owner of the private firm Colón & Ponce and sister of Glenda.

In their charging documents released Wednesday, federal prosecutors listed three corruption schemes, five types of charges, and 32 counts of these charges. The charge types were: wire fraud conspiracy, conspiracy involving theft, wire fraud, money laundering conspiracy, and money laundering.

Keleher had served as Education Secretary from the start of the governor’s administration in January 2017 until April 1 of this year. She was arrested in Washington, D.C. The others were arrested in Puerto Rico.

Avila Marrero worked as head of the Health Insurance Administration until June 25.

Bond market observers and local politicians said the busts may weaken Rosselló relative to the Puerto Rico Oversight Board, with which he has been struggling over fiscal policy from the start of his administration.

The FBI action “lessens the weight the government will have to the commonwealth plan of adjustment,” said Puerto Rico attorney John Mudd. About $35 billion of commonwealth debt is subject to a plan of adjustment being worked out in a bankruptcy proceeding.

“Puerto Rico's current leadership has failed the island, its citizens and all stakeholders around the world," said Puerto Rico Senate Minority Leader Eduardo Bhatia Gautier. "The immediate effect of today's indictments will be more direct control from the Oversight Board on day-to-day operations of basic government functions. The governor has lost all credibility to deal with Congress, the U.S. Government and the financial community.”

Bhatia Gautier, who has declared his candidacy to replace Rosselló, continued, “The Puerto Rican people need new leadership for a way forward out of the Oversight Board's grip, grappling debt and [to] restore the confidence of the federal government."

Puerto Rico commentator Cate Long saw the episode as a step in the board’s rivalry with the board.

“Relations between the Oversight Board and Rosselló administration have been adversarial for a long time as detailed in the April, 2019 New York Magazine article by Andrew Rice, ‘The McKinsey Way to Save an Island.’ The board has used a technocratic, corporatist approach to try and force the government to operate more efficiently and transparently. This has been mostly ineffective.”

Long said that last week the board sued the governor for approving Law 29, exempting municipalities from paying for pension benefits thereby, in the board’s view, undermining the central government’s finances. The board is also trying to get a central government plan of adjustment passed that would include pension cuts, something Rosselló is opposing.

“In my opinion the board will try to use the indictments to argue to Congress that they need more authority, but I believe it’s unlikely Congress will agree,” Long said.

In the aftermath of the arrests, Evercore Director of Municipal Research Howard Cure said he had several questions: “Does this give the board more moral authority to commandeer the budgeting and auditing responsibilities from the elected officials? Will the current government continue to oppose proposed cuts to commonwealth operations in order to maintain government employment levels? Is the additional $12 billion from Congress for the government health plan now in jeopardy? Will debt restructuring also include a larger pension haircut to retirees and current employees?” he asked.

"I am incredibly saddened, but even more so frustrated to see the news coming out from Puerto Rico today," said Puerto Rico Resident Commissioner Jenniffer González Colón. Puerto Rico residents "will be the ones hurt, as things like these make the process of obtaining and disbursing funds, and of making decisions on programs, even harder at all levels."

She said she would work in Washington, D.C. to "avoid the political trap of having these events used to justify avoiding or delaying the resources the Island so desperately needs to rebuild."

The charging documents indicate that two of the alleged schemes involve contracts the Education Department awarded to Colón & Ponce or BDO. One of the alleged schemes involved contracts the Health Insurance Administration awarded to BDO with the assistance of Azur.

Keleher awarded contracts to Colón & Ponce “accomplished through a corrupted bidding process wherein Colón & Ponce was provided with a competitive advantage based in part on the close relationship between Julia Beatrice Keleher, Glenda Ponce Mendoza, and Mayra Ponce Mendoza,” the charging documents allege.

In exchange for diverting contracts to the firm, Colón & Ponce allegedly paid Glenda Ponce Mendoza $16,425.

Whereas the education Department’s contract with Colón & Ponce was ultimately around a half million dollars, the contract with BDO was ultimately nearly $2 million. Alberto Velazquez Piñol allegedly received illegal commissions of $113,000 for gaining the contract and its expansions for BDO.

The charge regarding the Health Insurance Administration connects to contracts around $2 million to BDO, which allegedly paid kickbacks to Alberto Velazquez Piñol of $711,000. Avila Marrero allegedly used her knowledge of confidential information to assure BDO would succeed in its bids.

In addition to Wednesday’s charges and arrests, news web sites including that of El Vocero reported that the FBI had seized the computer and iPad that Raul Maldonado Gautier had used as Secretary of the Treasury until the governor dismissed him in late June. The governor dismissed Maldonado Gautier after the secretary gave a media interview claiming there was a “mafia” of professionals within the Treasury and that these individuals were trying to sell their influence and confidential information.

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