A Wave Of Scandals In Puerto Rico

Congress is becoming increasingly alarmed that federal money is fueling corruption

When 10-year-old Carlos Melendez-Dyer came tearing home from school one day in October, he ran through a courtyard that floods with sewage when it rains. He ran by a rusting electric box where high-voltage wiring lies bare. Then he tripped and fell on the crumbling staircase leading to his tiny apartment, where rain pulses through ill-fitting windows.

Home to Carlos is a public-housing project outside San Juan called Las Palmas, where the stench of rotting garbage hangs heavy, mixing with the odor of human waste that lingers after the floodwaters recede. "Look at this filth," cries Edward Marti-Ramirez, 31, a cousin of another tenant. "They should knock this down and start all over."

Las Palmas and the poor conditions found at many of the island's 332 public housing projects are the visible face of a growing number of corruption scandals racking Puerto Rico. They range from kickbacks to bribes to bogus companies and sham transactions.

The scandals have caught the attention of Congress, since much of the corruption involves federal funds, and they may have cost the New Progressives (the statehood party) the governorship on Nov. 7. "No question about it--corruption played a major role [in the election]," says Alfonso M. Christian, auxiliary comptroller of Puerto Rico. The scandals also have highlighted a nasty feud between U.S. Housing & Urban Development Dept. Secretary Andrew M. Cuomo and HUD Inspector General Susan Gaffney, who last summer attacked "HUD's failure to stop flagrant fraud, waste, and abuse" at Puerto Rico's public housing authority.

TRUST ISSUE. Concerned about pouring good money after bad, Congress in October voted to hold up a $130 million payout to the Puerto Rico public housing agency. In a deal cut by Cuomo, the money was to have settled a lengthy court battle over whether HUD's funding formula was shortchanging the island. "You hate to get that heavy-handed, but...we have an obligation to the taxpayers and the people down there," says Senator Wayne Allard (R-Colo.), who helped block the funds in his role as chairman of the Senate Banking, Housing & Urban Affairs Committee's housing subcommittee. Adds Senator Christopher S. Bond (R-Mo.), head of a Senate Appropriations subcommittee overseeing HUD: "According to what the investigators tell us, they keep opening up new areas of corruption every time they look into something." The next Congress may also want some assurances that none of the approximately $250 million a year that supports the public housing authority in Puerto Rico--a sum second only to that spent on New York City--is being siphoned off.

The scandals could get even worse. Even though island residents can't vote in U.S. elections, Democratic and Republican party officials and candidates from the mainland have stepped up fund-raising on this highly politicized island. The Democratic Congressional Campaign Committee (DCCC) has been especially active, with $229,000 in donations reported thus far for the 1999-2000 election cycle (table). Now there are concerns that some donations to mainland campaigns may have been tainted by corruption. At the DCCC, headed by Representative Patrick J. Kennedy (R.I.), spokesman Erik Smith says: "We're confident every contribution is above reproach."

For all the tropical glitz of San Juan's beachfront resorts or the shiny SUVs that clog narrow city streets, Puerto Rico remains poor. About one-half of the population of 3.9 million receives some kind of public assistance. And some 250,000 residents live in HUD's 57,000 public-housing units. HUD's Gaffney, for one, thinks the island's impoverished residents are suffering because of corruption in high places. In July, following a highly critical report she issued a few months earlier, Gaffney went nuclear, firing off an emergency letter to Cuomo and Congress. "I don't understand what is necessary to get HUD moving," she told BUSINESS WEEK. "The residents of public housing in Puerto Rico deserve to live in decent, safe, and sanitary housing." HUD officials contend that they are working diligently to address public housing deficiencies.

HUD has long been a troubled agency, and Cuomo, who has been chief since 1997, clearly inherited many problems on the island. His handling of them could be important to his future: It's widely believed that in 2002 Cuomo will run for governor of New York, which has a huge Puerto Rican population.

ENDEMIC. The corruption that HUD and other U.S. government agencies must contend with is endemic: embezzlement of federal funds for a social agency helping children, homeless, and the elderly; alleged payoffs at the agency that collects taxes for island municipalities; a mayor soliciting a bribe for hurricane cleanup work; the diversion of federal funds meant to help AIDS victims. "In the past, we had corruption, but never at this level, never with this amount of money, and never at the federal level," says Anibal Acevedo Vila of the Popular Democratic Party, who was elected on Nov. 7 as "resident commissioner," the nonvoting delegate to the U.S. Congress.

Why such a climate of corruption? Greed, of course. Another factor is nepotism, which is not only common but legal in the island's 78 municipal governments. But the biggest reason may be bound up in passions over Puerto Rico's hottest political issue: statehood.

In 1998, Puerto Ricans turned down statehood for the second time in five years. Governor Pedro J. Rosello, now stepping down after two terms, is a statehood supporter. So is the current resident commissioner, Carlos Romero-Barcelo, whom Acevedo Vila defeated. The opposition Popular Democrats (commonwealth party), whose candidate, San Juan Mayor Sila M. Calderon, was just elected governor, want to maintain the island's current status. "It's so partisan--worse than any U.S. politics," says former Representative Robert Garcia (D-N.Y.), now a statehood lobbyist in Washington.

So heated has the issue become that some believe the line between party and government has been erased and that the statehood party in recent years effectively became the government. That has contributed to corruption, suggests A.W. Maldonado, a longtime political commentator. "You give the corrupt an escape from the moral consequences of what they're doing," he says. "They're not `stealing.' They're `helping their ideology.' What you see in all these cases is that they say, `I did it because I was helping the party."'

DISTANT DONORS. Mainland politicians, eager to feed their constant need for money, have waded into this highly charged atmosphere. According to Federal Election Commission data available as of Nov. 1, George W. Bush and GOP interests collected $550,768 this election cycle. Democrats have done better, raising $783,900. Kennedy of the DCCC has made fund-raising visits to the island, while also netting $51,000 for his own campaign coffers. The most obvious motive for such donations: influencing decision-makers in Washington, where the statehood issue could someday be decided.

In at least one instance, some questionable funds may have found their way to a mainland candidate. Jorge Colberg Toro, who just lost election to the Puerto Rico Senate, has provided BUSINESS WEEK with documents indicating that $20,000 was diverted from federal highway funds for political contributions, of which more than $10,000 went to the statehood party and $1,000 went to the just-concluded campaign of Senator Edward M. Kennedy (D-Mass.), father of the DCCC's chief, in 1995. That could be the first incident coming to light of tainted money landing in mainland campaign coffers. In Washington, a Kennedy aide said he knew nothing of such a donation but any questionable contribution would be reevaluated. Representative John L. Mica (R-Fla.), who heads a House subcommittee that oversees HUD, says he has heard reports of such recycling and may investigate.

Congress may have no choice but to step in. For one thing, the public rift between Cuomo and Gaffney has escalated to the point of absurdity. Last month, Gaffney filed a sexual discrimination and harassment complaint against Cuomo and other officials, alleging retaliation for her investigative work at HUD. Cuomo aides declined to make the Secretary available for comment. But according to Cuomo spokeswoman Lisa MacSpadden, Representative Tom Lantos (D-Calif.) demanded that HUD investigate the downloading and circulation of pornography by "senior officials" in the HUD inspector general's office. "This is nothing more than a diversion from [Gaffney's] misconduct regarding the downloading of pornography in her office and retaliation for our efforts to get to the bottom of it," MacSpadden says.

Puerto Rico Comptroller Manuel Diaz-Saldana, a soft-spoken former member of Governor Rossello's Cabinet and a watchdog for the island government, is cooperating with federal corruption probes. But Puerto Rico's legal infrastructure is so weak that Saldana is seeking nontraditional solutions, too: He wants to set up a special court to expedite corruption cases. He's worked with colleges and universities to develop and promote government ethics courses. And he's aired anticorruption spots on radio and TV. "We are emphasizing prevention," he says. But for now, few believe the parade of corruption cases is over.

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