Merrill Banker Indicted With 18 in Brazil Says He’s Scapegoat
Just before dawn on a cool June morning, six submachine-gun-wielding federal agents charged into Alexandre Caiado’s Sao Paulo apartment. After arresting him, they hustled Caiado into a pickup truck for a 30-block drive to Merrill Lynch & Co. (BAC)’s office, where he had been working as a private banker for two years.
As the agents scoured Caiado’s desktop computer, Mary Livingston, a lawyer for Merrill, sat down alone with Caiado. “She gave me very specific instructions,” says Caiado, recalling the scene in 2006. “I wasn’t supposed to say what I really did.”
Prosecutors charged Caiado with arranging illegal fund transfers for Merrill clients -- part of what has become a four-year investigation into bankers helping clients secretly move undeclared money abroad to evade Brazilian income taxes, Bloomberg Markets magazine reports in its December issue.
Federal agents put Caiado in the back of the pickup truck for a five-hour journey to Curitiba, his hometown, where two of his Merrill clients lived. There, police handcuffed the banker in front of press photographers and then jailed him along with nine others charged in tax-evasion schemes.
Caiado, 39, who was raised attending country clubs and private schools in Curitiba, was held for five days in a basement cell with men accused of robbery, drug dealing and murder.
‘They Were Emphatic’
“I kept trying to figure out what I did wrong,” says Caiado, in his first interview ever with journalists. “It was Merrill Lynch, one of the most respected places to work on the planet. They were emphatic about the fact that it was OK to transfer money abroad.”
Caiado, who wears jeans and a sports shirt with the sleeves rolled up, says he’s a scapegoat. He says New York-based Merrill, which Bank of America Corp. acquired in 2009, hired him so he could use his family contacts to gain new clients in Curitiba, a city of 1.8 million people 400 kilometers (250 miles) south of Sao Paulo.
His job at Merrill was to open new accounts, manage assets and arrange fund transfers out of Brazil, all of which his bosses told him was legal, he says. Brazilian law prohibits such private bankers from offering those services, federal Judge Fausto De Sanctis says.
Caiado’s work at Merrill was part of a pattern in which bankers helped clients move undeclared money in and out of Brazil in ways that couldn’t be tracked by tax authorities, says Deltan Dallagnol, a prosecutor handling Caiado’s case.
The biggest banks in the world are streaming into Brazil as an economic boom creates a new class of wealthy investors in Latin America’s most populous country. By 2017, 675,000 Brazilians -- more than 150 a day -- will become millionaires, compared with a negligible number in 2007, when Barclays Plc (BARC) researched the data.
Now, prosecutors are cracking down on income-tax dodging in Brazil by targeting bankers who help clients hide their money abroad.
The Brazilian investigators have focused on the role of foreign banks -- including Credit Suisse Group AG (CSGN), UBS AG (UBSN) and Merrill -- that were licensed by the central bank as so-called representative offices. Such firms are permitted to refer clients to bankers outside the country and provide marketing information, De Sanctis says.
The law prohibits bankers working in these offices from opening new accounts, making trades or transferring money abroad, the judge says. Those were exactly the activities that Caiado says Merrill asked him to do every day.
Merrill, Credit Suisse and UBS say they follow all laws and regulations and cooperate with any investigations.
In May of this year, Brazilian police, a prosecutor and a judge -- having collected internal documents and e-mails from Merrill -- concluded that Caiado was following orders from bank executives.
“Diverse documents indicate the practice, in theory, of crimes against the national financial system by Merrill Lynch’s legal representatives in Brazil,” Ricardo Cubas Cesar, a federal police supervisor in Curitiba, wrote in a May 27 report filed in court. Caiado is cooperating with prosecutors.
Three months before Caiado was arrested, armed federal agents raided the homes and offices of executives who worked at Credit Suisse in the same Sao Paulo building as Merrill’s private bank. By mid-2008, prosecutors had indicted 18 bankers at Credit Suisse and UBS, Switzerland’s two largest banks, on the same charges as Caiado.
After the indictments, Credit Suisse, Merrill and UBS moved their private bankers out of Brazil to Miami, New York, Zurich and Montevideo, Uruguay.
Brazilian investigators have documented a widespread method in which banks move funds outside the formal financial system. Bankers, including Caiado, and their clients have used doleiros, or dollar changers, to funnel money out of the country to accounts in Zurich, Monaco or Miami to avoid paying taxes.
Doleiros run money-exchange companies that routinely hold hundreds of thousands of dollars in accounts outside Brazil. In a typical transaction, a banker gives a doleiro a client’s cash. The doleiro then transfers funds from one of his accounts outside Brazil to the customer’s offshore holdings.
That allows the client to evade taxes because he didn’t make a wire transfer that’s reported to the government. If a client wants to move offshore money back to Brazil, he transfers money to a doleiro’s account abroad, and the doleiro gives him cash in Brazil.
“Financial institutions are intimately tied to a huge currency black market in Brazil,” says Sergio Fernando Moro, the federal judge in the case against Caiado. He’s sitting in a swivel chair in the Curitiba courthouse, peering over stacks of blue folders with files from tax-evasion cases.
Caiado says that when he worked for Merrill, his bosses encouraged him to transfer as much money as possible out of Brazil to generate more fees. Federal prosecutors say they recorded phone calls in which Caiado arranged money transfers with doleiros.
“We all worked with undeclared money,” he says. “More transfers meant more money coming in for Merrill.”
The case against Caiado has been inactive for two years because of technical appeals, a legal limbo that’s common in Brazil’s justice system. Janice Ascari, a regional federal prosecutor in Sao Paulo, says the 19 bankers who have been indicted will almost certainly never be imprisoned.
That’s because Brazilian courts allow anyone with enough money to avoid prosecution for any crime, she says. Defendants can, and often do, appeal every step in a criminal case -- even before a court finds facts or reaches a verdict.
In Brazil, criminal defendants aren’t asked to enter guilty or not guilty pleas unless they go to trial. Prosecutors can indict only people, not companies, for financial crimes.
There are often 20 lawyers filing as many as 40 appeals for a case being built by one prosecutor, Ascari says.
“They use numerous types of appeals, making technical arguments, to postpone the final decision,” she says.
In the Credit Suisse and UBS cases, the 64 bankers, doleiros and their clients who have been indicted have used appeals to stay out of jail and delay the court process.
In successful appeals, they have argued, for example, that not all of the lawyers were present when a judge took testimony and that prosecutors didn’t travel to Switzerland to depose one defendant who had left Brazil.
Doing it For Decades
Finding ways to avoid taxes is hard-wired into Brazilian culture. And it’s not because levies are sky-high, Ascari says. A millionaire in Brazil is taxed at a federal rate of 27.5 percent, a smaller levy than in the U.S. and most European countries.
Brazilian millionaires avoid taxes routinely because that’s what their families have been doing for decades and they know they can get away with it, Ascari says. And even if they’re caught, they would use the weak court system to prevent convictions or having assets seized.
Banks are fighting to win over Brazil’s new class of millionaires, who love splurging on luxury. In Rio de Janeiro, condominiums overlooking famed Ipanema beach sell for $12 million. Lamborghini, Maserati and Porsche dealerships line the streets of the Jardins neighborhood in Sao Paulo.
This year, carmaker Aston Martin Lagonda Ltd. built its first dealership in Brazil and handbag maker LVMH Moet Hennessy Louis Vuitton SA (MC) opened a sixth store in the country.
$150 Billion Hidden
Brazilians have as much as $150 billion parked in foreign accounts, according to studies by federal legislators.
“The money got there through banks or doleiros,” says Jose Mentor, a congressman for the ruling Workers’ Party, who is sponsoring a bill giving amnesty to people who report hidden income and pay taxes.
Caiado is the only Merrill employee in Brazil who has been indicted. Nine months after his arrest, Merrill fired him.
“We’re writing to inform you that we have terminated your work contract without just cause,” Merrill wrote to Caiado in a letter dated March 20, 2007. The language in the letter allows Caiado to collect severance pay.
Caiado says Merrill told him he wasn’t cut because he’d been indicted; rather, the bank said it no longer needed his services. He sued Merrill in Brazil on March 18, 2009, for wrongfully firing him, seeking 30 million reais ($18 million) in damages. The case is pending.
Livingston, the lawyer who was with Caiado on the day he was arrested, says Merrill sent her and two or three other lawyers to the office to help Caiado. She says she talked to him as police were searching for records. She declined to confirm or deny that she told Caiado to not tell police what he really did.
“I’m not responding to that,” she says. Asked if she disputes Caiado’s account, she says, “I am not going to dignify his story with an explanation.” He has no credibility because he’s suing Merrill, she says.
Merrill spokesman Bill Halldin says the firm is fighting the lawsuit.
“We are vigorously defending ourselves in that matter,” Halldin says. No Merrill officer or director in Brazil has ever been charged with a crime, he says. Merrill isn’t responsible for the criminal charges against Caiado, he says. “This individual was arrested on matters that didn’t involve any activities related to Merrill Lynch,” Halldin says.
Federal prosecutor Dallagnol says the case against Caiado is based on what the banker did for Merrill.
“While a Merrill Lynch employee, Caiado was investigated for activities he did on behalf of some of the bank’s clients,” Dallagnol says.
Caiado says the only work he was doing when he was arrested was for Merrill.
“I was doing what I was hired to do: bring in new clients and handle their investments,” he says. “I had no reason to suspect we were doing anything illegal. We were told by our superiors that if the client was evading taxes or breaking the law, it was their problem, not ours.”
Caiado, a slim man with short black hair, drives his Suzuki SUV in August to the Graciosa Country Club in Curitiba, where his family has had a membership since he was a teenager. Caiado says he always wanted to work for an international bank, beginning in high school, when he studied for a year at the Brockwood Park boarding school in England.
After graduating in 1993 with a business degree from Universidade Positivo, a private college in Curitiba, he took postgraduate courses in finance and company law. He then started two small investment firms.
The son of a corporate tax consultant for Arthur Andersen LLP, Caiado says he made his first move toward being a Merrill banker by flying to Miami to meet with executives in late 2003. Caiado convinced Merrill to hire him by promising to recruit new clients from hundreds of wealthy family members and friends in Curitiba. Merrill signed him on in March 2004.
“When I got the job, I thought I was going to stay with Merrill forever,” Caiado says.
At the time, the bank had no customers in Curitiba, a car-manufacturing hub. The country club was one of his hunting grounds for Merrill, Caiado says.
“I’d do a lot of events here, like wine tasting, and then try to bring the guests to the bank,” he says.
Merrill assigned him to work with 15 other bankers in its Sao Paulo wealth management office in the Faria Lima financial district. Those Merrill bankers were prohibited by law from opening accounts, managing assets or transferring funds outside of Brazil, prosecutor Dallagnol says.
Internal Merrill e-mails show that Caiado was asked by his bosses to both open and manage accounts.
“Alex introduced $10MM in assets and has opened other accounts that are not funded yet,” Roberto Teofilo, a private banker at Merrill’s Miami office, wrote to bank managers in a June 21, 2005, e-mail.
Five months after that, Mary Kauachima, Merrill’s service manager in Sao Paulo, said in an e-mail that top private-banking executives in Miami and Sao Paulo decided that Caiado should manage six more accounts from Brazil. Kauachima and Teofilo declined to comment.
The young banker first drew the attention of federal police not because they were investigating Merrill, Dallagnol says, but because investigators were probing possible tax evasion by two of Caiado’s clients. In that investigation, police heard Caiado talking about fund transfers that weren’t legal, which led to the examination of the banker.
On March 21, 2006, as prosecutors in Curitiba zeroed in on Caiado, police in Sao Paulo raided Credit Suisse’s offices.
“There’s evidence that Merrill hastily moved client records out of Brazil in case of a police raid,” Moro wrote in a May 10, 2010, order authorizing police to investigate. Bank executives told Caiado and his colleagues not to save documents on computers, Moro wrote.
When Merrill moved private-banking operations out of Brazil, the bank lost track of some accounts. In a March 17, 2008, e-mail to five Merrill executives, Jay Marcus, a senior credit official in Merrill’s wealth management unit, said that records from Brazil were in such disarray that accounts weren’t showing up on the bank’s computer systems.
Marcus said he couldn’t quantify Merrill’s own risk and recommended halting trading in some types of stock options.
“I am greatly concerned by the exposures here,” Marcus wrote. “We have no way to monitor or avoid these situations.”
Marcus, who is no longer with Merrill, couldn’t be reached for comment.
Claudia Srour, who was a banker in Merrill’s Sao Paulo office from 2002 to 2007, says the firm was more interested in profiting than in monitoring risk.
“They were so commission- and fee-oriented at the private bank,” Srour, 44, says. “They had no interest in risk controls or investing in systems that would have prevented this from happening.”
Merrill fired Srour on May 6, 2008, saying she didn’t cooperate with an internal investigation of the losses Marcus wrote about. She sought arbitration for wrongful dismissal through the Washington-based Financial Industry Regulatory Authority and was awarded $25,000 in compensatory damages.
She also sued Merrill in Brazilian labor court and lost. She appealed that decision.
“We are pleased with the results so far,” Merrill’s Halldin says of Srour’s complaints.
Bankers continued using doleiros to help clients hide money from authorities even after prosecutors began their crackdown.
Claudine Spiero, a mother of two who says she left a job in fashion to be a doleiro, took a phone call from Reto Buzzi, a banker at Credit Suisse unit Clariden Leu Ltd. on July 25, 2007. Buzzi said a money transfer from an offshore account hadn’t gone through, a summary of police wiretaps says.
Buzzi and Spiero spoke in code words such as ‘lasagna’ and ‘tortellini’ to describe accounts in an attempt to avoid getting caught. They were indicted in 2007 for illegally transferring funds out of Brazil. Spiero, 55, is cooperating with investigators.
“I did bad things,” Spiero says outside one of the jails in the Sao Paulo district of Carandiru where she spent 45 days locked up in late 2007. “But the banks knew what was going on.”
Buzzi declined to comment. Clariden Leu spokesman Urs Fehr declined to comment.
‘True Criminal Organization’
De Sanctis, who has dedicated his career to trying cases involving white-collar crime and writing books about it, reviewed the indictment of Credit Suisse and UBS bankers and doleiros and found there was enough merit to hold a trial.
“The accusation shows the existence of a true criminal organization,” De Sanctis, 46, wrote in the Dec. 17, 2007, decision.
After that, Credit Suisse kept its bank for wealthy Brazilians alive. In April 2008, almost two years after the raid on Credit Suisse, federal police arrested Credit Suisse banker Christian Peter Weiss as he managed client accounts from rooms in the Caesar Park Hotel in Rio and the Sao Paulo Grand Hyatt.
Police found Weiss had a piece of paper with details of investigations of Credit Suisse and phrases that prosecutors say were to be used if caught by police, scribbled in English: “I am traveling on business,’ the document says. “I am an employee of Credit Suisse. My business purpose is marketing.”
‘Disrespect for Authorities’
De Sanctis wrote that the notes showed Weiss was prepared to cover up his illegal activities. “They show true disrespect for Brazilian authorities,” he wrote.
Weiss, who lives in Zurich and now works there for Credit Suisse, declined to comment. Credit Suisse spokesman David Walker says his firm has strict ethics standards and follows all regulations and laws. So far, there are just charges and no court verdicts, he says.
“We believe the allegations against Credit Suisse and its employees are completely without merit and we will continue to defend ourselves vigorously,” he says.
UBS spokesman Dominique Gerster says the bank doesn’t comment on active investigations.
“After an official inquiry was launched in 2007, UBS reviewed and optimized its internal control mechanisms,” he says. “Personnel-related measures were also taken. UBS is fully committed to complying with laws and regulations.”
Seeking New Clients
Even as Credit Suisse, Merrill and UBS track the investigations and indictments of bankers, those same firms are competing to lure the country’s new millionaires as banking clients -- legally. Still, federal police suspect that some banks may be using more-sophisticated schemes to move undeclared money to and from Brazil, Sao Paulo prosecutor Karen Kahn says.
Caiado says that Merrill humiliated him and that he’s been consumed by anger and resentment toward the bank he once so trusted.
He says he still has nightmares about sitting in a jail cell for five days with his knees bent tight, without enough room to lie down. The air was rancid; a hole in the floor served as a toilet. Caiado says he was so afraid of being attacked by cellmates that he couldn’t sleep.
“I was emotionally and physically destroyed,” he says. Caiado says he feels betrayed by Merrill. “I want them to pay for what they did,” he says.
With Brazil’s weak system of justice, that’s not likely to happen. However tough the prosecutors’ crackdowns may be, the cost to bankers of successfully fighting criminal charges will be dwarfed by the profit banks stand to reap by catering to the Brazilian millionaires being created every day.
Editor: Jonathan Neumann, David Ellis
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