critical perspectives on international business

Emerald Article: Of legitimate and illegitimate corruption: Bankruptcies

in Nicaragua
Jose Luis Rocha, Ed Brown, Jonathan Cloke
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Jose Luis Rocha, Ed Brown, Jonathan Cloke, (2011),"Of legitimate and illegitimate corruption: Bankruptcies in Nicaragua",
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Of legitimate and illegitimate
corruption
Bankruptcies in Nicaragua
Jose Luis Rocha
Universidad Centroamericana, Managua, Nicaragua, and
Ed Brown and Jonathan Cloke
Department of Geography, Loughborough University, Loughborough, UK
Abstract
Purpose The concept of corruption is frequently represented as relating to social practices that
violate established rules and norms. This paper, however, seeks to demonstrate that corrupt practices
are often only possible because they in fact draw on existing institutional mechanisms and cultural
dispositions that grant them a certain social approval and legitimacy. The paper aims to explore these
issues through a detailed exploration of corruption in Nicaragua, which outlines how competing elite
groups have been able to use different discourses to appropriate resources from the state in quite
different ways, reecting the use of contrasting mechanisms for justifying and legitimizing corruption.
Design/methodology/approach The paper focuses on two key periods of recent Nicaraguan
political history: that which occurred during the administration of ex-President Arnoldo Aleman and
the events that unfurled in the aftermath of a chain of bank bankruptcies that occurred in Nicaragua
during 2001. These events are explored in the context of David Harveys ideas of accumulation by
dispossession.
Findings In contrast with more classic practices of corruption in Nicaragua that have openly
violated existing formal rules and norms but appealed to an ethos of redistribution and a
historically-specic concept of the public in order to imbue their actions with legitimacy, the corrupt
practices related to recent banking bankruptcies engaged in an extensive instrumentalization of
formal state institutions in order to protect elite parochial interests and to achieve accumulation by
dispossession through appealing to the legitimating support granted by multilateral nancial
institutions.
Originality/value The paper illustrates sharply the inadvisability of perspectives that narrowly
dene corruption in legalistic terms. Such perspectives focus exclusively on the state as the location of
corruption, whereas clearly, in Nicaragua as elsewhere, corruption is a far more complicated
phenomenon which crosses the articial boundaries between private and public sectors. It also evolves
and takes a myriad different forms which are intimately connected with the ongoing struggles for
control of accumulation processes, suggesting a much more integral role for corruption within
accumulation strategies than often allowed for in both orthodox economic and Marxist literatures on
capital accumulation.
Keywords Corruption, Bankruptcy, Nicaragua
Paper type Research paper
1. Introduction: mainstream approaches towards corruption
Corruption is frequently presented as a conjoining of acts that infringe certain norms.
Most mainstream writings on corruption treat the phenomenon as a form of deviant or
aberrant conduct, a departure from the normalized social order (frequently formalized
by laws). This approach suggests that corruption is an avoidable deviation that can be
mediated by adequate mechanisms of accountability and the effective application of
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bankruptcies in
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critical perspectives on international
business
Vol. 7 No. 2, 2011
pp. 159-176
qEmerald Group Publishing Limited
1742-2043
DOI 10.1108/17422041111128230
applicable laws. In reality, however, corruption is a much more complex and
differentiated phenomenon than this. Many corrupt practices are only possible because
they, in fact, draw on existing institutional mechanisms and cultural dispositions that
grant them a certain social approval and legitimacy, inside or outside the law. In other
words, they nd support in environments and organisms that guarantee impunity and
mitigate the character of the infraction according to the politico-economic group that
arrogates to itself the right to dene corruption.
This suggests that a much more complex set of issues underlie the denition,
causation and impacts of corruption than might be surmised from perspectives which
treat corruption as reecting the individual transgression of commonly-accepted
norms and standards. As a result of the over-simplied and one dimensional way in
which the topic is frequently conceptualized, the majority of ofcial international
reports and studies on the theme have tended to propose eminently technical solutions
to combating corruption (see Brown and Cloke, 2011), without paying attention to the
complexity of diverse politico-cultural contexts. This has tended also to produce a
universalization of norms and the promotion of western values as being the cure for
corruption, as well as a lack of critical analysis of the signicance of the differing
origins, dynamics and impacts of corruption in different latitudes (Brown and Cloke,
2004, pp. 282-9).
In a previous paper (Brown et al., 2007) we traced how some of the limitations of
mainstream approaches to corruption have been played out within anti-corruption
activities in Nicaragua. In the conclusions to that paper (which had explored the
notorious corruption scandals that took place during the administration of Arnoldo
Aleman), we stressed several ways in which the Nicaraguan experience challenged
mainstream approaches towards corruption and anti-corruption. First, was the
importance of questions of political and cultural context in designing mechanisms to
improve transparency and governance. Second, was the need to balance these
nationally-specic considerations through an effective engagement with questions of
conditionality, external intervention and transnational accountability (including that of
the international institutions promoting anti-corruption and governance reforms
themselves). Third, (and perhaps most importantly for our purposes here) the need to
recognize the complex clientelistic hybrid comprised by the state and private sectors in
Nicaragua (for more detail on the critique of the dualistic conceptualizations of private
and public sectors central to the dominant mainstream perspectives on corruption see
Brown and Cloke, this issue). As we argued in that paper:
[T]he state and private sector are not distinct and separate in Nicaragua, as IMF policy would
dictate, but are a complex and intermingled mesh in which it is virtually impossible to
distinguish boundaries. In short, the clientelistic networks which control government are
inseparable from those which run the private sector (Brown et al., 2007, p. 195).
In this article we seek to extend our analysis of corruption in Nicaragua by exploring
one particular episode of Nicaraguan corruption that associated with the chain of
bank failures that occurred in 2001 and what it reveals about the complexities of the
causation and impacts of corruption in Nicaragua. The perspective that we adopt here
grounds our understanding of this event within a detailed political analysis which
locates corruption at the intersection between private and public sectors in Nicaragua.
We focus our analysis on the complex nature of the Nicaraguan state and its
relationship with Nicaraguas various elite groups and the wider civil society, as well
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as the broader context of Nicaraguas interactions with the global economy and
international institutions. In particular in this paper we explore how competing elite
groups in Nicaragua have been able to use different discourses to appropriate
resources from the state in quite different ways reecting the use of different
mechanisms for justifying and legitimizing corruption. Here we focus on two of those
mechanisms. The rst of these relates to Nicaraguan politicians with strong links into
emerging elite groups[1], who openly violate formal existing norms but simultaneously
procure for themselves a certain degree of social legitimation that appeals to cultural
dispositions. This links into the ethos of redistribution within a clientelistic culture
whose mechanisms defer to the archetypal Big Man, the caudillo, imparting to him
the faculty to distribute public funds discretionally. This type of looting of the state
coffers has created new fortunes over recent years (for example those connected to the
administration of President Arnoldo Aleman) and has justied itself socially through
the medium of a partial redistribution amongst a political clientele.
Second, politicians from the aristocratic cradle that is those belonging to
Nicaraguas traditional elites instrumentalize existing formal norms according to a
strategy whose end is to exploit to the maximum their hereditary advantages, towards
multiplying capital within legitimate channels. This type of corruption has frequently
counted on the complicity of the US government and of the international nancial
institutions. As a consequence, this type of corruption is able to make use of inherent
characteristics that give it the potential to become more solid, lasting and engrained:
formal legitimation in law, elite reproduction and an integral support system with
international support.
This article will explore the mechanisms and consequences of this last form of
corruption in the particular case of the chain of bank failures that occurred in
Nicaragua in 2001. By way of demonstrating a contrast (which is important in
demonstrating the co-existence of different discourses and practices within the same
political space) in terms at least of the type of political implications and cultural
mechanisms the rst section will describe in a succinct form corruption in its crudest
form, put in place by ex-President Aleman and his allies in the period of his
administration (1997-2001)[2]. The article then moves on to describe in detail the events
surrounding the failures of two Nicaraguan banks in 2001, Interbank and the Banco del
Cafe, the auctioning of their shares and the emission of state bonds towards facilitating
a process of salvation of the national nancial system, a process of which the surviving
banks were the main beneciaries and the taxpayer the principal loser. Finally, the
article explores the macroeconomic and political impact of these measures, which in
their design and execution counted on the blessings of the multilateral nancial
organisms. In particular, we seek to relate these events to Harveys (2004) ideas of
accumulation by dispossession where the crises of neoliberalization are seen as
contributing to a restoration of class power and the monopolization and centralization
of nancial power (Harvey, 2004, p. 157)[3].
2. Public funds and the ethics of redistribution: the era of the checazos
The corrupt practices of ex-President Arnoldo Aleman and his clique have been amply
documented. They were investigated and proven by the Comptroller General of the
Republic, denounced in the communications media, censured by the international
community and nally sanctioned by judicial condemnation (Equipo Nitlapan-Env o,
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1999; Bodan, 2000; Brown et al., 2007). They exemplify the crudest type of corruption,
ostensible and easily identiable. The Cuban ethnologist Fernando Ortiz developed
and applied the term cacoracia (Le Riverend, 1991, p. XVI) to the Machado regime to
refer to a power group that amasses its fortune by extracting money from the public
coffers, a qualication that applies fully in the case of Aleman. Deploying a luxury of
technology, US experts reconstructed the recently formatted hard disk of the personal
computer of Byron Jerez, of the states General Income Department (DGI), to trace the
illegal emission of cheques derived from taxpayer funds, and their triangulation until
they came to earth in the pockets of Arnoldo Aleman, his family and his closest friends.
It has been calculated that the total extracted and triangulated the famous huaca
(hole) exceeded no less than $124 million, although Aleman was only prosecuted for
$35 million (Gutierrez, 2002).
However, the judicial sentence was not followed by social ostracism. Aleman traded
certain political concessions with the Sandinista opposition in return for limiting his
punishment to house arrest, which was later broadened to connement to the
department of Managua (Potoy, 2005). Over the following years the ex-president and
convict was present at political campaigns, restaurants and ofcial festivities without
being exposed to any ofcial repudiation and nally he was cleared from all charges in
January 2009. His social impunity does not come from any denial of his guilt, but from
the assumption that he is a politician who Roba, pero hace that is he steals, but
gets things done (Equipo Nitlapan-Env o, 2002). He also redistributed resources:
Aleman provided medical help, gave generous tips, nanced trips and assigned
positions with a liberal generosity. The impunity of Aleman is not an anecdotal
peculiarity; he and his adventures are symptomatic of Nicaraguan political culture
(Bolt, 2001, p. 23). It has been recognized that clientelism is built upon social, political
and cultural elements and is being reinforced by the ourishing of neo-populism in
Latin America (Taylor, 2004) discretionary power over public money appears to be
permissible for the caudillo who gets things done.
When the mayor of Blueelds on the Atlantic coast of Nicaragua called a meeting of
the employees under his administration and of the young students of two universities
and made a brief survey of their vision of public administration, he found that 90
percent of those present were openly of the view that in a public post it was necessary
to accomplish things, but also necessary to steal (hay que hacer, pero tambien hay que
robar) (Arana, 2003, p. 22). For his part, the writer and political analyst Leon Nunez
made the distinction between legal honour and real honour when after hearing
the sympathetic declaration of a detainee accused of theft concluded that it was not
possible legally to be a thief if one had never been imprisoned or charged with robbery
(Nunez, 2001, p. 344). The evil in this view does not lie in stealing, but in being labeled
as a thief by the secondary processes of criminalization.
Making the distinction between the beliefs of the dominant classes (which nd
acceptance in formal norms) and more general dominant beliefs (which occasionally
are shared by the dominant class or by a segment of this same, and which are more
predisposed to be converted into informal norms) is useful for explaining another of the
elements underlying public attitudes towards this type of open corruption that is the
confrontation between the laws which protect private property and the ethos of
redistribution, which was converted into a dominant belief and norm during the
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revolutionary years of the 1980s in Nicaragua and which persists and dominates in
diverse informal environments even today, although it has no juridical expression.
The massive formal support that the ethos of redistribution received in the 1980s
does not explain the increase in robberies from the state coffers in Nicaragua during
the 1990s (it represented a relatively brief respite to the more concentrated form of
accumulation by dispossession that took place during the dictatorship pre-1979, for
instance), but rather it moves in the same cultural melting-pot of relative tolerance
towards these behaviors. This is the same type of cultural background that excuses
exactions on the public purse by generous caudillos: it is not stealing, it is
redistributing. One demonstration of the persistence of the ethos of redistribution lies
in the culture of non-payment that many banks and micronance organizations are
now confronting in Nicaragua. The Belgian investigator Johan Bastiaensen reminds us
that, in a politics orientated towards redistribution, the Sandinista government made
credit: virtually synonymous with subsidy: the rates of interest were negative and the
repayment rates very low. With time, this transformed into a custom of condoning the
debts of producers on every anniversary of the revolution (Bastiaensen, 1998, p. 46).
Change in the property laws from 1979 to 2001, with their vertiginous succession of
expropriations, agrarian reform, devolutions, indemnities, refusals to recognize the
titles of the agrarian reform, etc. are the backdrop to the base of social imaginings
about property. To this we can add, casting a glance backwards, the arbitrariness of
the Somoza family in the management of state and private lands during the years that
they dominated Nicaragua (1936-1979). This ethos of redistribution had a moment of
consecration: the Sandinista revolution. At that point the expression recuperar (to get
back) was popularized, which designated whatever seizure of property outside
personal control that which was conscated had not been snatched or stolen but
recuperated, which is to say put back into the hands of its legitimate owners.
This redistributive ethos also has profound cultural roots in institutions such as La
Pur sima, the esta of the immaculate conception of Mary which takes place on
December 8, and which, in Nicaragua, is celebrated in many households with nine days
of prayer, at the end of which there is a generous sharing of fruit, pumpkin in honey,
sweets, natural refreshments and a variety of toys. Many commercial moneylenders
attempt to redeem or clean their image in the community by sharing out, during
these prayers to the Virgin Mary, a part of the wealth that they have accumulated
throughout the year. The social tolerance of Alemans corruption was nourished by
cultural dispositions that prevail in a society with a proclivity towards abrupt
redistributions such as this mechanism of social compensation and clientelism. Only
international intervention, in conjunction with local political interests, made possible a
censure and prosecution of Aleman that was in fact more centered on the protagonists
than the mechanisms. There was a political and media-driven effort to construct a
perception of corruption, an effort which received support from the legal system but
which received no strong popular echo that would have legitimized it outside of the
juridical sphere.
3. Bankruptcies and the effects of the sell-off on public nances
This section moves on to consider a sharply contrasting instance of Nicaraguan
corruption which occurred towards the end of the Aleman administration and during
that of his successor Enrique Bolanos. This concerns the collapse of Nicaraguan banks
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that occurred between 2000 and 2001, a process that transferred considerable amounts
of public funds into the pockets of some of the largest nancial institutions in
Nicaragua, institutions which were rmly rooted within some of the oldest and most
powerful sectors of Nicaraguas elite. Owing to the type of beneciary (that is those
from the aristocratic cradle), the mechanisms of legitimation, the level of international
support, and the impact, this form of corruption can be contrasted sharply with that
described in the previous section. The consecutive bankruptcies of Interbank, Banco
del Cafe, BAMER (Banco Mercantil) and BANIC (Banco Nicaraguense de Industria y
Comercio), which were all declared bankrupt by the Suprintendency of Banks(SIB)
during this period, an organism created and nanced by the InterAmerican
Development Bank (IADB) and other nancial organizations, could have unleashed a
nancial panic. Under the argument that a collapse in the national nancial system had
to be avoided at all costs[4], the government authorized the Central Bank of Nicaragua
(BCN) to issue bonds Negotiable Investment Certicates (CENIs) to cover the gap
between the assets acquired by the remaining banks and the liabilities that they
assumed. By the end of 2001, government debt crystallized in CENIs, had risen to US$
514.1 million. The CENIs have been seen as investments without risk, inasmuch as
their possession does not oblige the creation of any reserve. They have been, therefore,
a very attractive investment, even more so given the initial rates of interest (between
2003 and 2007 the servicing of the internal debt generated by the bankruptcies
surpassed US$ 981.1 million in payments to the creditor banks, thanks to rates of
interest of in some cases more than 21 percent annually (BCN, 2008).
As we can appreciate from Table I, the debt service for CENIs converted in 2005
into banking bonds and bills of exchange has exceeded by many times that relating
to the indemnity bonds which were given as compensation to those who had their land
conscated in the 1980s. The signicance of this for the Nicaraguan economy is that
the internal debt service (swollen by the obligations contracted during the operation to
salvage the nancial system) over the ve years from 2003 to 2007 devoured the
equivalent of more than a quarter of all tax revenues, 6-8 percent of gross domestic
product (GDP) and around 20 percent of the value of exports over this period. The
impacts of CENI payments have also signicantly affected the real possibilities for
social investment over this same period. Following cancellation of the external debt
(particularly under the Highly Indebted Poor Countries (HIPC) initiative), net external
co-operation (gross co-operation minus repayments) had been increasing. In 1994-1998
it had averaged US$ 271.3 million but by 2003 it had arrived at US$ 451.3 million
(Acevedo, 2004). Owing to the increasing burden of the internal debt, however, even
though HIPC debt cancellation has oscillated between US$ 190 and 248 million
Instrument 2003 2004 2005 2006 2007
Internal debt servicing 2,340.0 354.2 252.8 308.2 346.3
Indemnity bonds 31.2 51.2 70.6 92.4 124.5
CENIs 149.0 142.8 0.0 0.0 0.0
Banking bonds 0.0 79.2 55.1 52.3 43.0
Bills of exchange 0.0 64.6 112.3 135.4 147.4
Source: BCN (2008)
Table I.
Internal debt servicing by
instrument (US$ millions)
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annually, this has not translated into the availability of funds that could be devoted
towards the reduction of poverty or social investment (Acevedo, 2004). The servicing of
the internal debt is becoming an increasingly unsustainable burden. During the period
1994-1998 Nicaragua had only paid US$ 284.5 million in servicing the external debt
and the internal debt did not exist. By 2005, after the onset of the HIPC programme,
servicing the external (US$ 87.2 million) and internal (US$ 252.8 million) debt
amounted to more than US$ 340 million, and over the four years from 2004 to 2007 the
relief from the external debt (US$ 920.9 million) was easily exceeded by the US$ 1,261.5
million of internal debt servicing (gures from Table I and BCN (2008)).
Saving the nancial system has had an enormously high cost for the public purse
in Nicaragua: it increased the internal debt by approximately 20 percent of GDP (this
being the cost to all taxpayers and not only the privileged beneciaries of the
nancial system) and basically usurped all the social investment that might have been
expected from the HIPC relief. The cost of the bankruptcies exceeded by more than a
factor of ten the value of the Alemanista corruption and, as we shall see in the following
section, the whole process of nancial salvage systematically drained the countrys
coffers to the benet of some of the main groupings of Nicaraguas traditional elite via
the use of legitimate juridical, rather than illegal, mechanisms.
4. Accumulation by dispossession
Revisiting a thesis of Hannah Arendt, David Harvey proposed that the original
massive acts of theft or dispossession, which centuries before made possible the
original capital accumulation processes (and all subsequent accumulations), are often
repeated when the motor of accumulation dies suddenly (Harvey, 2004, p. 142). The
same process that Marx, following Adam Smith, refers to as primitive or original (for
Arendt and Harvey) accumulation, therefore in this view constitutes an important and
continuous force for the accumulation of capital this is accumulation by
dispossession. In this way, Harvey proposes abandoning previously-held suppositions
that have relegated accumulation based upon predation, fraud, and violence to an
original stage that is considered no longer relevant (Harvey, 2004, p. 144). Instead,
for Harvey, this type of accumulation by dispossession includes a broad range of
contemporary processes, including: the commodication and privatization of land and
the forceful expulsion of peasant populations; the conversion of various forms of
property rights (common, collective, state, etc.) into exclusive private property rights
[. . .], and usury, the national debt, and ultimately the credit system as radical means of
primitive accumulation. The state, with its monopoly of violence and denitions of
legality, plays a crucial role in both backing and promoting these processes (Harvey,
2004, p. 145).
The national debt or rather the possibility of increasing it and the state with its
denition of coercive legality and coercive capacity played a signicant role in the
concentration of capital which resulted from the series of banking bankruptcies which
occurred in Nicaragua between 2000 and 2001. In reality, what occurred in the banking
sector was the second stage of a process that had been initiated in Nicaragua with the
privatizations at the beginnings of the 1990s. The neo-liberal project of unchecked
privatization makes sense as a strategy for solving the problem of over-accumulation
of capitalism (Harvey, 2004, p.149). The opportunities afforded by the threatened
collapse of the Nicaraguan banking system provided a rapaciously-grasped second
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opportunity for accelerated accumulation and elite realignment when privatizations,
arriving at their exhaustion-point, ceased being the fuel for accumulation. The
existential threat constituted by the collapse of the banking system in Nicaragua,
moreover, assumes a peculiar poignancy when it is realized that only 12 percent of
Nicaraguans have access to any kind of formal nancial services (IFAD, 2010). Using
the extremely regressive tax system of Nicaragua to prop up the banking system
therefore in a country where the elites pay little or no direct tax by itself constitutes a
direct payment from the very poorest to the very richest, for a system to which those
poor have no access.
The situation in Nicaragua emphasizes a more general global tendency over recent
years as the nancial system and bankruptcies have been converted into predominant
paths for accumulation, as recognized even by some neo-classical economists
(Kindleberger, 1991). Harvey (2004, p. 147) asserts that some mechanisms of primitive
accumulation that Marx emphasized have been ne-tuned to play an even stronger role
now than in the past. The credit system and nance capital became, as Lenin,
Hilferding, and Luxemburg all remarked at the beginning of the twentieth century,
major levers of predation, fraud, and thievery. In the example with which we are
dealing, the manipulation of the nancial system towards provoking a redistribution of
banking assets that dispossessed certain groups to the accumulatory benet of others
included three stages:
(1) The declaration of insolvency of four banks through a reclassication of their
investment portfolio by the SIB.
(2) The auctioning of their assets.
(3) The emission of CENIs under the authority of the BCN to compensate
purchasing banks for assuming a presumably risky portfolio.
The reclassication of the lending portfolios of the banks was the rst element that we
can connect to the idea of accumulation by dispossession. An indiscriminate
application of nancial legislation (for example on loans granted to relatives and
related interest groups) would have found major irregularities in all of the banks.
Nevertheless, at this time, the SIB only submitted four banks to a process of revision
concerning the levels of risk in their portfolios and the results were surprising. Banks
that had until that point been very protable and solid were suddenly declared
insolvent, the most outstanding case being that of Interbank. In the SIB report of
September 2000, just one month before its collapse, Interbank appeared to have 96.1
percent of its portfolio in the no risk category, a characteristic that, combined with its
volume of deposits, put it in a stronger position than any other Nicaraguan bank,
including the Banco de America Central (BAC) which had 90.8 percent of its portfolio in
the no risk category (Superintendencia de Bancos y de Otras Instituciones
Financieras, 2000, Table 23). One month later, quite bizarrely, the liquidating board
were to classify the 4,819 credits held by Interbank in the following way. Only 36 were
classied as type A (the lowest risk), ten as type B, 73 as type C, 67 as type D and 4,631
as type E (the highest risk), in which was now re-located some 99.35 percent of the
entire portfolio of Interbank. Clients such as Roberto Teran, head of one of the most
powerful corporations in the country, moved from category type A to C. The
Comptroller General, Luis A

ngel Montenegro, moved from being a type A client to

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being type D. Both paid their loans back and had presented ample guarantees to
support them (Ibarra, 2006c).
This process of reclassication smoothed the road to the second stage in the process
the positioning of CENIs. Once declared bankrupt, the banks were sold but the
acquiring banks had to be compensated with CENIs for assuming such contaminated
portfolios. One of the main beneciary banks Banco de la Produccion (BANPRO), for
example, received more than US$ 339 million in CENIs at an interest rate adjusted to
19.45 percent for the Interbank portfolio, Banco de Finanzas (BDF) received US$ 102
million in CENIs for the Banco del Cafe portfolio and Banco de Credito
Centroamericano (BANCENTRO) received more than US$ 50 million in CENIs for
BAMER (Avendano, n.d.)[5]. The reclassication of portfolios made it possible to
acquire portfolios at lower cost and to receive more CENIs: for example, for every credit
of a million US dollars to a client of type A which was reclassied as type D, the
acquiring bank received the right to charge 100 percent of the loan plus interest but
would also receive US$ 700,000 in CENIs. In many cases, the loans were reclaimed in
their totality by the acquiring banks or were the subject of proceedings and
sequestrations which were frequently more protable than the reclamations. The
banks negotiated an annual effective rate of interest of 20.7 percent, a gure
substantially superior to the 11.5 percent established by the policies of the BCN. The
effective rate was so high because of the nominal interest rates and because CENIs are
exempt from tax on the income made; a report presented by the economist Nestor
Avendano to the Comptroller General of the Republic revealed that the emission of the
CENIs had involved in excess of US$ 120 million (Avendano, n.d.).
The auctions of the assets of the bankrupt banks were one more act in this drama.
The US corporation First Financial Network received US$ 4 million for executing the
sale of assets of the banks between May and August of 2003 (Avendano, n.d.). The
elites won bargain-basement prices by stacking the liquidating boards with their own
members. These liquidating board members were the rst immediate beneciaries
since they received 2 percent of the value of everything liquidated. The sale of the
assets of BAMER earned US$ 135,000 to each liquidator, whilst that of the Banco del
Cafe and BANIC remitted US$ 216,000 and US$ 292,000 respectively to each liquidator.
By virtue of these juicy salaries and other expenses claimed by the liquidating boards,
in some cases the liquidating board recovered only a fraction of the value of the assets.
In the case of Interbank, for example, the liquidating board recovered scarcely CS$
206.3 million at a cost of CS$ 88 million: of this more than CS$ 41 million went in
salaries and benets to the liquidating personnel (Ibarra, 2006b).
The buyers, also frequently from the same elite groups, helped themselves with a
big spoon. BANCENTRO, for example, bought a third of the total of the property
auctioned. One set of properties which had been valued at CS$ 241 million were
acquired for scarcely CS$ 18 million 7.5 percent of their value (Ibarra, 2006b). Two
auctions of ofce equipment and furniture only recovered US$ 95,000, and two auctions
of vehicles generated scarcely US$ 152,000. As a result of all of this, after assuming a
debt of hundreds of millions of dollars in CENIs, the BCN ultimately recovered scarcely
US$ 21.7 million of assets (Avendano, n.d.).
Harvey (2004, p. 150) asserts that:
[. . .] devaluated capital assets can be bought up at re-sale prices and protably recycled
back into the circulation of capital by over-accumulated capital. But this requires a prior wave
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of devaluation, which means a crisis of some kind. Crisis may be orchestrated, managed, and
controlled to rationalize the system. [. . .] The result is the periodic creation of a stock of
devalued, and in many instances undervalued, assets [. . .]
Access to cheap assets is in this way converted into a strategy as important as the
broadening of markets, in terms of the increased opportunities presented (Harvey,
2004, p. 139). The auctions in the Nicaraguan case were a form of reducing the cost of
many assets: lands, buildings, computer hardware and software, security systems,
furniture, etc. This process of accumulation by dispossession consisted of situating an
innumerable quantity of goods at a low (often at zero) cost, the emission of CENIs and
the auctions aiding this effect with the ultimate effect of reinforcing the nancial
dominance of the traditional elite sectors.
5. Concentration of capital
The economic massacre of liquidations, auctions and emission of CENIs, protagonized
by executioners of vari-colored political options, left the winning prizes to the strongest
traditional elite groups. The concentration of nancial capital in to fewer hands had
two mechanisms: the purchase of liquidated banks (the absorption of assets) and the
reduction of the demand for various nancial services (the absorption of clients).
BANPRO acquired Interbank and BANIC without licitation. It was foreseeable that
BANPRO would be successful in the acquisition of two banks, given its links with Noel
Ram rez, at that time president of the BCN with enormous inuence over the
liquidating boards of the banks. Rodolfo Delgado, named by Ram rez to preside over
the liquidating board of Interbank, wrote various letters to Ram rez asking for
indications over the future of the adjudicated goods and judicial charges. In addition,
the wife of Noel Ram rez is one of the principal share-holders of BANPRO and her
shares increased in value from US$ 300,000 to US$ 5 million, whilst in BANCENTRO
the shares owned by Eduardo Montealegre, at that time Minister for the Treasury,
increased in value from US$ 1.5 million to US$ 4 million between July 2000 and
December 2001 (Ibarra, 2006a).
The surviving banks increased their wealth and their protability in an
unprecedented manner. Between July of 2000 and December of 2001, the total assets
of BANPRO increased by a factor of 2.5, from US$ 211.9 million to US$ 530.6 millions.
Its permanent investments increased from US$ 8.7 million to US$ 182.8 million (an
increase by a factor of 21.1) and its deposits grew 2.5 times from US$ 162 million to US$
410.6 million (Avendano, n.d.). Table II demonstrates the overall growth of prots of
two of the acquiring banks until 2003, and their diminishment by 2006-2007 when they
were virtually nil in BANPRO and negative in BANCENTRO. The increase in the
prots of BAC a bank that didnt participate in the auctions also fell, but very far
from the levels of the other two banks.
Banks 2000-2001 2002-2003 2006-2007
BAC 21.29 19.98 6.81
BANPRO 57.79 25.89 0.91
BANCENTRO 12.76 32.19 220.87
Source: Authors calculations based on the statistics of the Nicaraguan Superintendent of Banks
Table II.
Percentage increase in
prots (annual average)
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168
The bankruptcies had signicant indirect effects on other sectors of the Nicaraguan
economy. The bankruptcies of the Banco del Cafe and that of Interbank, where the
mortgage guarantees of AGRESAMI (the most powerful coffee export business in
Nicaragua, whose acts of fraud accelerated the fall of Interbank) were located, reduced
the range of coffee exporters substantially. In its nal year of life before the crisis,
AGRESAMI (owned by the Centeno Roque brothers) exported 31 percent of
Nicaraguan coffee; its exit from the market left more than 500,000 quintales (22,676
metric tons) of coffee available for the other commercial houses. The following year, in
full crisis, according to statistics provided by the Nicaraguan Centre for Export
Licences (CETREX, n.d.) the volumes of coffee exported by Caley Dagnall grew 221
percent relative to the 1999/2000 and 2000/2001 harvests; those of VOLCAFENIC grew
by 89 percent and those of Exportadora Atlantic by 62 percent. Where there are losers,
there are also always winners.
This series of events, which we argue that we can term a form of accumulation by
dispossession ultimately had the effect of reducing the number of contenders in a tight
market. Wade and Veneroso (1998, p. 18) afrm that nancial crisis have always
caused transfers of ownership and power to those who keep their own assets intact and
who are in a position to create credit. The bankruptcies of the banks can in this way be
interpreted as a cannibalistic version of the process of Schumpeterian creative
destruction. As Harvey (2004, p. 148) argues Capitalism internalizes cannibalistic as
well as predatory and fraudulent practices. In Nicaragua, what seems to have
occurred is that the capitalists who have no historical pedigree seem to have been
out-maneuvered by the traditional centers of Nicaraguan capital and if not directly
attacked through the bank liquidations, certainly excluded from sharing in the benets
according to in the membership of the liquidating boards of the demolished banks and
the ownership of the surviving banks that gobbled them up. Reecting on this theme,
Harvey (2004, p.11) recalls the statement of Andrew Mellon:
[I]n a depression assets return to their rightful owner.
What the liquidated banks and AGRESAMI had in common was the fact that their
owners were not members of the traditional elite, excepting a handful of minor
shareholders. The liquidating boards of BANPRO and BANCENTRO were full of
surnames of long Nicaraguan lineage: Chamorro, Cardenal, Montealegre, Llanes, Ortiz,
Cuadra, Rapaccioli, McGregor, Arguello and Callejas Deshon, amongst others.
According to Wright Mills, there is a sort of mutual attraction within those who sit
down on the same terrace. However, frequently this sense of common bond is clear to
themselves (as to the others) only when they feel the necessity to draw the dividing line
(as in this instance), when, in mutual defense, they realize what they have in common
and close their ranks against strangers (Wright Mills, 1960, p. 19). This last was just
what the banking aristocrats did. There was a cautious selection of the targeted banks:
only those belonging to the inferior castes were affected in an operation which we
might term a form of economic cleansing. According to a leak to the El Nuevo Diario
newspaper by a high-ranking ofcial in the ofce of the Superintendent of Banks, it
appears that the prudential norms were only applied with extreme rigour to Interbank,
BANIC, BAMER and the Banco del Cafe and not to other banks with stronger
connections into the traditional elite structures (Ibarra, 2006a).
Corruption:
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Interestingly, very similar cleansing processes appear to have occurred during the
same period in Guatemala, Honduras and El Salvador. In Guatemala the Empresarial,
Metropolitano and Promotor banks were intervened during the Portillo
administration (2000-2004) and during the Berger administration (2004-2008)
interventions were undertaken against Bancafe and the Banco del Comercio. In the
case of Bancafe it was given no opportunity to recover and was interevened before it
was able to resolve its illiquidity problems (Banco de Guatemala, 2006; Gudiel and
A

lvarez, 2007; deGuate.com, 2006). Previously the Banco Industrial had been able to
induce a nancial panic by spreading rumours about the Banco Agromercantil and G
& T Continental. In Honduras, the Bancorp bank of the Bendeck family was submitted
to forced liquidation in 2000 and SOGERIN was sold in 2003 because of alleged
illiquidity. By 2003 bankruptcies and sales had reduced the number of banks in
Honduras from 22 to 16 (La Prensaweb, 2003). In El Salvador, the year 2000 brought an
earthquake for the administrators of new-born pension funds (AFPs): when three
AFPs, Prevision, Porvenir and Maxima, were forced to merge to avoid complete
destruction, whilst the AFP ProFuturo was dissolved and its funds were transferred to
the two AFPs which already dominated the market for pensions, Crecer and Conf a
(Business News Americas, 2003).
This regional pattern of bankruptcies is symptomatic of vulnerability in the face of
the speculative cataclysms in the north and of the cyclical crises of the agro-export
model which still dominates the relatively fragile economies of the region the
break-ups were linked to a strong decrease in the price of coffee and, overall, of the
concentration of capital and the nancial market amongst the traditional elites. It is
important to point out, however, that this process of accumulation by dispossession, at
least in the Nicaraguan case, was facilitated and legitimized through the multi-lateral
nancial organisms and orchestrated through legal rather than illegal channels.
6. Financiers and libusters
The three key elements of the process of accumulation by dispossession which we have
described in this paper the reclassication of portfolios, the auction of the assets of
the banks and the emission of CENIs had the blessing of the multi-lateral nancial
organisms throughout. The SIB, for example, which administered the whole process, is
an entity that was created by the Interamerican Development Bank and throughout
this drama it counted on the support of the World Bank and the IMF. Its portfolio
reclassication, which was deeply questioned by civil society (see Acevedo, 2008), was
the starting-point in a chain of bankruptcies. The second step, the liquidation of the
assets of the banks, was a requirement of the World Bank and the IMF as a mechanism
to reduce the internal debt but they clearly saw no need to monitor the transparency or
efcacy of that process. First Financial Network (discussed above), for example,
included a member of the Teran family as a representative (Ibarra, 2006d); but the fact
that this family was implicated as a shareholder in the banks and also as debtors was
not seen as an obstacle for questioning the appropriateness of the appointment of First
Financial Network to oversee the process. Under their administration, the auctions
brought massive benets to a number of the major elite economic groups, who were
able to buy at re-sale prices. Alejandro Lacayo of FINANCO, one of the purchasing
entities, declared We do good business. We are always looking for opportunities and
we dont buy at market prices. And if we acquire something, its because we believe
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that we can sell it better (Ibarra, 2006d). In effect, FINANCO bought for US$ 5 million
a portfolio valued at US$ 50 million; it reached an extreme by buying loans valued at
US$ 35,000 for only US$ 1,544, and later it sequestrated the debtor in order to leave
itself with a loan collateral valued at US$ 245,000 (Ibarra, 2006d).
The IMF and the World Bank, which drove and monitored the auction and the
emission of CENIs, made no objection to the fact that the liquidating boards were
formed by members of the Gurdian, Alaniz, Pereira, Deshon, Lugo and Icaza families
(amongst others), who all had shares in the purchasing banks. In fact, the accusations
of civil society that these liquidating boards violated the elemental juridical principal
that you cannot be judge, jury and executioner were completely ignored (Coordinadora
Civil, 2006). In his annual management report, the Superintendent of Banks an
ex-ofcial of the World Bank and today newly re-contracted by this institution
praised his selection of members of these liquidating boards and justied it thus:
[. . .] in the selection of members for the liquidating boards, the Superintendency has tried
always in conscience to conform itself to the law, naming persons of known integrity and
professional capacity according to the requirements of the work of liquidation(Sacasa, 2002).
He admits that he named bankers belonging to the failed institutions but justies this
by claiming that these people were of recognized integrity and professional competence
(Sacasa, 2002). In essence, the two reports of the SIB (Sacasa, 2001, 2002) were technical
instruments that directly served the strategy of accumulation by dispossession.
The SIB provided a means for the limited number of elite members affected by the
banking crisis to save their own. Overriding legal constraints that specically
outlawed such practices, the SIB incorporated some of the principal shareholders of the
bankrupt banks onto the liquidating boards, but only those shareholders who were
members of these particular groups of the elite. If one characteristic denes the
Nicaraguan elites historically it has been their will to protect and to benet their own in
any set of circumstances. This characteristic was not diminished by the revolutionary
rupture of the 1980s, if anything it was reinforced when leading Sandinista gures
were able to place their family members in key posts; in the process facilitating a
transition from the nepotistic administration of private businesses to the management
of state businesses and ministries. The revolution thus contributed to the reproduction
of the oldest and most established expressions of social hierarchy in Nicaragua (Vilas,
1992, pp. 324-30).
Our conclusion from this discussion is that the SIB, the Nicaraguan institution that
received perhaps the most nancial, technical and moral support from the multi-lateral
nancial organisms over recent years, was captured by these social hierarchies and
thus made possible the salvation of members of the elite in peril. By being suborned in
this manner, the SIB facilitated the re-concentration of capital accumulation in
Nicaragua into the hands of the most powerful sectors of the traditional elite. The
emission of CENIs by the BCN was also made at the insistence of the multilaterals: all
of these processes were undertaken with a presumed adherence to the law. The state
apparatus (the SIB, the BCN and the Ministry of the Treasury) supported via its close
relationship with the international nancial institutions, orchestrated this process of
accumulation by dispossession, giving to it a legal varnish, and it did so in a form
which meant that the process could occur without sparking off a general collapse
(Harvey, 2004, p. 151).
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171
7. Of legitimate and illegitimate corruption: nal considerations
The nancial crisis in Nicaragua reduced by at least half the range of national banks, if
to the banks already mentioned we add the Banco del Sur, the Banco de Credito
Popular, PRIBANCO and Caley Dagnall, which also disappeared in this period (even
though in less lurid circumstances). The salvation of the nancial system, which in
Guatemala cost 0.6 percent of GDP, in Nicaragua cost 13 percent of GDP (Banco de
Guatemala, 2006). Payment on the CENIs and their interest will cost depending on
how the negotiations between the Nicaraguan government and the bankers advance
an amount between ve and ten times greater than the total cost of Alemanista
corruption. Civil society has repeatedly denounced the illegality of the emission of the
CENIs and the auctions, but there has been no echo in the Nicaraguan judicial system
and the multilaterals have supported the actions of the BCN and the SIB. The return to
power of the FSLN (Frente Sandinista de Liberacion Nacional) may imply a turnabout
in this situation; the Sandinista leadership was affected by the bankruptcy of
Interbank, which was recognized as the nancial axis of Sandinista capital. Motivated
by an interest in neutralizing its politico-economic rivals a motive especially directed
towards Eduardo Montealegre, erstwhile Minister for the Treasury and at the time of
writing leader of one of strongest anti-Sandinista political force (the Vamos con
Eduardo movement) the FSLN has nanced a media campaign towards the
construction of a public perception typifying and condemning the emission of CENIs as
a corrupt event. The return to power of the FSLN has returned the power to dene
corruption to a different politico-economic group, corruption thus appearing as a
social-media construction in the care of the thoughts and the media of the dominant
class. The CENIs case is used by the FSLN to keep some politicians on stand-by in the
shadows of the current political spectrum, and to prevent Eduardo Montealegre from
having a more prominent role in the next electoral campaign. And FSLN is being
successful: Montealegre quit his party Alianza Liberal Nacionalista (ALN) and is
not going to be the candidate of the anti-Sandinista coalition.
Open or crude corruption like that associated with the administration of Arnoldo
Aleman considered in earlier sections of this paper is usually eventually denounced
because it puts at risk the accumulation of the most powerful elites with the greatest
international linkages, as has been demonstrated in other studies (Williams and Beare,
2000). Thus the nanciers of the IMF and the World Bank condemned Alemanista
corruption and the traditional elites generally supported the actions taken against
Aleman during the administration of President Enrique Bolanos, a well-known
member of one of most powerful families of the Nicaraguan oligarchy. The second
genre of corruption, which has formed the focus of our attention in this article, is much
more difcult to identify as it has largely been administered through legal channels
and has also received the ideological and technical support of the multilateral nancial
organisms.
Since the events described above, a drastic change of the economic group in state
power (the return of the FSLN to government in 2007) has had the effect of changing
the popular discourse on corruption and anti-corruption. In the current Nicaraguan
reality, Alemanista corruption is scarcely mentioned (perhaps because of the ongoing
alliance between Daniel Ortega and Arnoldo Aleman), and all the propaganda focuses
on the corruption of the bankers and their allies: however, all of the FSLN propaganda
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related to this is directed strictly towards engaging public opinion rather than directly
addressing the issues.
With the multilaterals and bankers another discourse is maintained, that they will
honour the obligations contracted with the emission of CENIs in order not to
destabilize the country. The Sandinista state, for example, has negotiated extensions
for the redemption of the CENIs, but it has not put in question their legality. The
accumulation by dispossession that resorts to strategies with legal substance obtains
greater sustainability over time and is vaccinated against all lethal viruses; it speaks to
a form of institutionalized corruption in diverse environments: juridical, international
and within the lineage of the oligarchs.
Returning to our broader discussion of international attitudes towards corruption
and the limitations of mainstream approaches, the Nicaragua examples we have
explored within this paper have illustrated sharply the inadvisability of perspectives
that narrowly dene corruption in legalistic terms. Such perspectives focus exclusively
on the state as the location of corruption whereas clearly, in Nicaragua as elsewhere,
corruption is a far more complicated phenomenon which crosses the articial
boundaries between private and public sectors. It also evolves and takes myriad
different forms which are intimately connected with the ongoing struggles for control
of accumulation processes, suggesting a much more integral role for corruption within
accumulation strategies than often allowed for in both orthodox economic and Marxist
literatures on capital accumulation.
Notes
1. We refer here to emerging elite and traditional elite fractions in Nicaragua. Clearly, this is
something of an over-generalization. We recognize that the nature of Nicaraguas ruling
classes is more complex than this (indeed, later, for example, we talk about another elite
group associated with the current Sandinista administration) and that there are
inter-connections between these groups but we stand by our use of the distinction here.
For more detailed historical characterizations of the ruling sectors in Nicaragua and the
complexities of class relations in Nicaragua see Stone (1990), Spalding (1994), Vilas (1992);
Robinson (1997) and Segovia (2007).
2. For more detail on this period see Brown et al. (2007).
3. Interestingly, one of the referees of the original version of this paper questioned our
engagement with Harveys ideas in relation to the issues discussed in this paper since they
relate as much to an increasing concentration of nancial capital as they do to any
appropriation of communal or state resources (which in fact represent only a few amongst
many possible modalities of resource appropriation and accumulation by dispossession).
We would argue that in fact the events described within this paper are an excellent example
of the processes Harvey describes in that they illustrate both appropriation of state resources
and the utilisation of state power to concentrate nancial power within fewer hands. This
point also relates back to our earlier discussions about the malleability of the borders
between private and public sectors. Harveys concept of accumulation by dispossession is
inspired in Rosa Luxemburgs work on the capitalist accumulation. Luxemburg sought to
explain the mechanism through which the contradictions of capitalism, contrary to the
prognostications of Marxist theory, would not cause a systemic collapse. Luxemburg
observed and documented that the mechanism of accumulation which Marx classied as
the origin of capitalism was a continuous mechanism, always in action, on the condition
that there were non-capitalist productive, commercial or nancial areas that might be
appropriated and exploited by fully capitalist actors. What we describe in this article is the
Corruption:
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appropriation of public and private patrimony on behalf of transnational elites described by
Segovia (2007); which is to say, the segment of the elites most inserted into the dynamics of
globalizing capitalism. Those dispossessed by such a mechanism are the taxpayers, the state
and the non-transnational bankers.
4. Not the only time in which the mythic language of the current global economic crisis nds
echo in the justications of Nicaraguan banking collapses.
5. The report by Nestor Avendano which is referenced several times in this and subsequent
sections was produced for Nicaraguas Comptroller General and provides an extremely
detailed analysis of the events considered in this paper. It is interesting to note that
Avendanos report, which provides an extremely damning evaluation of several of the
aspects of the case, has not been made available ofcially to the public in Nicaragua and has
been the subject of some political controversy itself.
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About the authors
Jose Luis Rocha is Senior Researcher at the Central American University (UCA) in Managua,
Nicaragua and Associate Researcher with the Brooks World Poverty Institute at the University
of Manchester. His work focuses on issues relating to youth gangs, local government, disaster
prevention and management, the coffee industry, and migration. He is a member of the editorial
committees of the academic journals Env o and Encuentro, and is also the Research Coordinator
of the Central American Jesuit Service for Migrants. Jose Luis Rocha is the corresponding author
and can be contacted at: jlrocha@yahoo.com
Ed Brown is Associate Director of Loughborough Universitys Sustainability Research
School and Senior Lecturer in Human Geography at the same institution. His research interests
span the political economy of Neoliberal economic reforms in Central America, debates over
water and energy poverty in the Global South and critical geographies of corruption and illicit
nance.
Jonathan Cloke is a Lecturer in Human Geography at Loughborough University and a
Research Associate with the Globalization and World Cities (GaWC) Research Network. His
research and consultancy covers a range of themes including nancial services for the urban
poor, corruption, energy poverty and cities and gender.
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