The crazy story of Hernan Arbizu

July 1, 2009

The NYT yesterday finally got around to covering what it called “the curious case of Mr Arbizu” — I appreciate the reference to a series of blog entries I wrote in June and July last year (1, 2, 3, 4).

It’s unclear why the NYT is publishing the story now, when they started talking to Arbizu almost a year ago. But after all that time one would have hoped for something much more explosive, because there’s loads of really juicy stuff in the Arbizu story, including mind-boggling incompetence on the part of UBS and gun-toting thugs in Paraguay.

I’ve spoken to Arbizu at some length, and I think he’s reliable. Everything here comes from him — and he is, by his own admission, a criminal who stole money from his clients. That said, everything he’s said both to me and to the Argentine authorities has panned out so far; he’s always been upfront and honest about what he did wrong, and his story is both internally consistent and consistent with everything I know from reading court filings and talking to JPMorgan.

The story starts with Arbizu working for UBS as a private banker, being pressured to sign up $150 million in new money every year. One of Arbizu’s clients, Alberto Lopez, had about $2 million with the bank, and said he was leaving for greener pastures. At this point a panicked Arbizu did something very, very, very stupid: he promised Lopez interest payments of 21 percent per year, in dollars.

The problem was that Lopez’s money wasn’t earning anything close to 21 percent in interest. And so Arbizu started raiding Lopez’s own principal to make the interest payments: the $2 million was going down fast, as it kept on getting paid out in “interest” payments to Lopez. Eventually, there was so little money left that Arbizu had to find the money somewhere else. He turned to another one of his accounts at UBS — that of the Acevedo Quevedo family, which was based in Paraguay and had about $3 million in it. Arbizu started sending Lopez his “interest” payments, on now-nonexistent principal, from the Acevedo account. A simple, obvious, unambiguous fraud — he was stealing from Acevedo to pay Lopez. And UBS had no idea this was going on.

All the while, of course, Arbizu was helping some of his Latin American clients evade taxes, both by sneaking funds offshore illegally and by using little-known legal loopholes. These skills, it seems, were in high demand, and in October 2006, when he was still very much in UBS’s good books, Arbizu was poached from UBS by JPMorgan.

At this point the story gets seriously crazy: UBS never seems to have informed Arbizu’s clients that he had left the firm, and so both Lopez and the Acevedos continued to deal with him, via his cellphone, in the belief that he was their account representative. What’s more — and this boggles the imagination — Arbizu was somehow able to continue to make those “interest” payments from the Acevedo account to the Lopez account, even after he had left the firm — all the way through April 2008.

And UBS is arguably the foremost private-banking operation in the world.

What Arbizu was doing was, of course, extremely fraudulent and illegal. At one point, he got a message at his new job, at JPMorgan, from the head of compliance at UBS. He thought the game was up, but with that sense of relief that at least it’s all over now, he called back. It was just an enquiry about getting a job reference from Arbizu if the officer ever wanted to change jobs.

Things finally came to a head in April 2008. Arbizu was in Argentina, and got a phone call from the Acevedos, in Paraguay. They were furious, having just been told by UBS that far from having $3 million in their account, they only had $200,000. What, they asked, reasonably enough, was going on?

Arbizu flew to Asuncion — a dodgy enough city to begin with — and then on to Pedro Juan Caballero, a real Wild West town on the Brazilian border. When he got there, he was greeted by beefy men with machine guns.

The Acevedos weren’t happy: they were in the midst of a major land deal, and needed the money immediately. Arbizu decided he didn’t have any choice. He told the Acevedos that he’d get their money back immediately.

The problem is that he couldn’t get the money from Lopez, who had no money in his account either. And of course Arbizu didn’t personally have that kind of scratch. So he raided a third account, this one at JPMorgan, and belonging to a media executive named Natalio Garber. He transfered $1.1 million of Garber’s money straight to the UBS account in Paraguay, and another $1.7 million, in three different transactions, to the people selling the Acevedos their land. The Acevedos were thereby made whole, but only at the cost of Garber losing $2.8 million.

It turns out that JPMorgan’s controls over such things were rather more effective than UBS’s: the bank found out very quickly that something was amiss, and fired Arbizu on the spot. But Arbizu was in Argentina, and JPMorgan wanted him in the United States.

Arbizu’s wife was in the United States, and agreed to meet Arbizu’s boss in a Starbucks in Fairfield, Connecticut. He talked to her for three hours, trying to persuade her that Hernan should return to the United States. The two sides talked on the phone quite a lot, but Arbizu wanted to be near his family and his lawyer in Argentina, and eventually JPMorgan gave up negotiating and said they were going to throw the book at him.

At that point, Arbizu essentially turned himself in to the Argentine authorities. Yes, he said, I broke the law in the US, while I was working on behalf of Argentine clients. Many of those clients were evading taxes. There’s a massive tax-evasion scheme going on in both countries, and if I’m going to come clean about my own misdeeds, I’m also going to come clean about the bigger-picture scandal. He alleged Argentines have $150 billion offshore, but report to the authorities only $30 billion. Private banks like UBS and JP Morgan help them to avoid reporting those assets to the Argentine authorities, and — he said — I know exactly how they do it.

The Argentine authorities raided the JPMorgan offices in Buenos Aires, and the list of account holders got leaked to the Argentine press. (I believe Arbizu when he says it was the Argentine justice department, not himself, who leaked the list.)

Arbizu then started going through all manner of legal proceedings in Argentina. At one point he told an Argentine judge about a very commonplace — but technically legal — way in which Argentines managed to avoid paying taxes on the $30 billion of assets which they do declare every year.

It worked like this: in the 1970s, during the junta, the Argentine government was buying a lot of arms from the Austrian government. And somewhere along the way, the military government passed a rule saying that Argentine citizens didn’t need to pay taxes on Austrian bonds. Amazingly, that was pretty much the only law from the days of the military government which survived the transition to democracy. Every year, in December, Argentines would sell everything they had, and put all their money into Austrian bonds for year-end. They paid no taxes. And then, in January, they went back and bought whatever they were invested in in the first place.

JPMorgan, says Arbizu, was even working on something called “the Austrian structure” — a special bond designed to solve the problems of illiquidity in December when lots of Argentines all wanted to buy Austrian bonds at the same time. It would be issued by the Austrian government at JPMorgan’s request, and would have a yield linked to a balanced portfolio, so that the yield on the bond was the yield on the portfolio and the Austrian government itself would pay no interest at all.

Thanks to Arbizu’s testimony, however, the Austrian loophole was wiped from the Argentine books.

Arbizu has lots of information on other structures, too: trusts, shelter companies, back-to-back loans, Standard Bank Letters of Credit — a whole panoply of instruments designed to help private-banking clients evade taxes and which he’s happy to explain to the authorities in Argentina and the United States.

But there’s still a criminal case against Arbizu, and a request for extradition, making its way slowly through the Argentine legal system. Arbizu is happy to admit that he’s guilty, but he’s trying to essentially do a deal with both the Argentines and the Americans, where he will cooperate on tax-evasion investigations in return for lenient treatment when it comes to the criminal cases.

The UBS clients are content. Lopez thought he had $2 million in the bank but doesn’t; on the other hand, he got paid some $2.4 million in “interest” payments he never should have got, so he’s not complaining too much. He hasn’t lost money. The Acevedos were made whole. So it’s really only Natalio Garber who lost money — he was paid back by JPMorgan, but that means JP Morgan is hungry for restitution and justice.

My guess is they won’t get it: Arbizu is useful enough to the leftist Argentine government that he’s unlikely to be extradited any time soon. But at the same time, Arbizu is going to have a lot of uncertainty over his head for the foreseeable future: no one is going to guarantee that he won’t eventually get extradited, and he’s still not able to leave Argentina.

The real scandal here surrounds UBS, whose controls were unbelievably lax. Here’s the NYT:

Panicked about covering the shortfall, Mr. Arbizu said he ‘pretended’ he was still the family’s banker at UBS, and secretly raided a JPMorgan Chase account held by Natalio Garber, a prominent media executive in Buenos Aires, for the funds.

He did so, he said, by faxing transfer requests with forged client signatures to UBS’s New York offices, and then visiting the offices to ensure … that the transaction had gone through. ‘Everybody there liked me and trusted me …,’ Arbizu recalled. ‘I think that my presence there saying that it was OK made people not follow the controls’.

Do ex-employees regularly turn up in person when transferring money? Is that really a sign to be reassured rather than alarmed? There are some tough questions here for UBS; I hope that someone forces the bank to answer them.

(Spokesmen for UBS and JP Morgan declined to comment to me.)


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