The family denies any wrongdoing. And, in truth, no one knows how much the Riadys have to do with either scandal. What is clear, a NEWSWEEK investigation shows, is that moving cash around the globe in tangled webs of transactions has always been the Riady way. The arrangements involving Hubbell and Huang appear to fit a pattern of questionable Riady financial practices, such as lending their bank depositors’ money to their own deals, or quietly draining out bank capital. Since the mid-’80s these practices have provoked official reprimands from Asia to Arkansas– two regions not especially noted for regulatory stringency. And today they are provoking the curiosity of U.S. officials. NEWSWEEK has learned that congressional investigators are looking at evidence that a Riady shell company in Los Angeles, Hip Hing Holdings, was used as a conduit to move money from Indonesia to various American recipients, including Huang and possibly the Democrats; the company also bought Hubbell a United States-to-Jakarta plane ticket. Even so, no Whitewater or Donorgate investigator has been able to pin anything illegal on the family. Nor has any banking and securities regulator. ““The Riadys have always run very close to the law in various areas,’’ says a Hong Kong securities analyst who has tracked some of the family’s deals.
That’s a complaint heard around the globe - especially in the United States. Mochtar Riady, the patriarch of the Lippo Group, set the tone when he joined with Stephens Inc. of Little Rock, an investment bank, in the 1980s to buy controlling stakes in the Worthen Bank, then Little Rock’s largest. After Mochtar’s son James became copresident, and Huang a top executive, the Riadys were warmly welcomed in the impoverished state - especially by its eager, investment-seeking governor, Bill Clin- ton. Bu t they quickly ran into trouble. Stephens backed out of the partnership when its officials suspected the Riadys of lending too much of Worthen’s money to themselves. (Stephens may have been repelled, but Clinton wasn’t; James Riady was reportedly the onl y foreign businessman invited to attend the president-elect’s 1992 ““Economic Summit.’')
Information obtained by NEWSWEEK supports those suspicions. A February 1985 report by the Comptroller of the Currency sharply criticized James’s stewardship for, among other things, ““only vague familiarity with regulatory guidelines and laws.’’ A month later, U.S. bank examiners criticized both Mochtar and James for mak- ing millions in questionable Worthen loans to a company controlled by the patriarch.
At about the same time, the Riadys set up a U.S. company, Lippo Finance and Investment - an entity not unlike the one now at the center of the Whitewater probe - purportedly to lend venture capital to disadvantaged businessmen by getting Small Busi ness Administration loan guarantees. But documents obtained by NEWSWEEK indicate that Lippo Finance was a shareholder in a company to which it was trying to give a government-backed small-business loan, a California firm called Unipacific. The company th en intended to use the money to pay off debts it owed to a Hong Kong finance company that owned half of Lippo Finance. It is not clear whether the loan went through.
Trouble followed James Riady and his associate, Huang, out to the West Coast, where they took control of Lippo Bank California. Since 1990 the bank has been publicly reprimanded three times by the Federal Deposit Insurance Corporation. One confidential report on the bank’s compliance with anti-money-laundering rules found that Lippo had consistently failed to prepare proper paperwork, creating what examiners considered to be an ““invitation for abuse by [a] criminal element.’’ Just last March, a scathing cease-and-desist order noted that the bank had operated with inadequate management, equity capital and allowance for loan and lease losses.
Back in Jakarta, similar worries about Riady cash balances and self-dealing prompted a run on Lippo Bank two years ago. The run began when Lippo Land, the company through which James had invested billions in American-style malls and housing developments outside Jakarta, revealed in its 1995 annual report that it was heavily in debt. Lippo Bank depositors feared that much of the debt was owed to the bank. This time the Riadys’ Chinese partner came to the rescue: China Resources, an investment company controlled by the Chinese Trade Ministry. China Resources, which has injected tens of millions of dollars in Lippo since 1993, plunked down $15 million to buy a 5 percent stake in Lippo Land– an endorsement that attracted other major investors.
Another Riady brother, Stephen, has raised the ire of regulators in Hong Kong, home to the flagship Lippo Group. Two major Hong Kong government investigations in the early ’90s explicitly challenged Stephen’s credibility and business practices, alt hough they produced no allegations of illegality or regulatory violations. Stuart Crosby, an inspector appointed by the Hong Kong Financial Secretary, questioned whether Riady had joined with Hong Kong magnate Lee Ming Tee to improperly control a company called Asia Securities International. In a published report, Crosby noted ““inconsistencies in Mr. Riady’s evidence’’ and said he did ““not feel able to rely on those denials and claims.''
If regulators are unhappy, Lippo investors certainly aren’t. In March the stock price of seven of nine Lippo-affiliated companies hit all-time highs on the Jakarta Stock Exchange, and overall shares in the Riadys’ empire have nearly quadrupled in v alue in the last five years. The most recent stock run-up came after a complex restructuring last year, involving a dominolike series of share sales among various Riady companies. ““The Riadys are experts at jacking up their companies’ share prices,’’ sa ys one former Lippo employee.
Maybe so, but analysts have been left wondering exactly who owns what in the Riady empire - especially since the Chinese got involved - and what real value lies beneath the stocks. Later this year the Riadys will ask investors to pony up an additio nal $500 million or more to buy new shares the group is issuing largely to pay the Riadys for their stakes in Lippo Bank and Lippo Life, which they sold in last year’s restructuring. Mochtar and James plan a ““road show’’ to sell the issue. Says a PR man close to the group, ““They are masters of razzle-dazzle promotion.’’ Good as they are at boosting their own shares, it’s too bad the Riadys have the opposite effect on Bill Clinton’s stock.
title: “Money On The Move” ShowToc: true date: “2023-01-31” author: “Francis Mcelhaney”
One of Latin America’s biggest economies, Mexico also has one of the most crippled banking systems in a hemisphere filled with financial ruins. The peso crisis of 1994 drove Mexican banks into a retreat from which they never fully recovered. Even as Mexico’s economy became the region’s growth superstar, its banks lagged behind those of its neighbors. According to the World Bank, credit amounts to only 10 percent of GDP in Mexico, compared with 30 percent in Brazil, 20 percent in Argentina and 65 percent in Chile. It is now all but impossible for ordinary Mexicans to get bank credit to buy an appliance, car or house, or to expand a small business. By offering credit in limited forms, and only to a narrow elite, Mexico is failing to build a crucial source of growth for any modern economy. Azteca CEO Carlos Septien says that one way to measure a nation’s wealth is to count the ways people can borrow money–just look at the United States, where “everybody owes money.”
Hailed by President Vicente Fox as “good for Mexico,” Azteca became the first new Mexican bank to win an operating license since the peso crisis. Owned by Grupo Elektra, the new bank extends the credit service Elektra has been offering customers at the three big discount stores in its retail chain for 50 years. Since its November launch, the bank has opened more than 800 outlets by plunking down giant metal safes in Elektra stores. Opening 5,500 new savings accounts a day, with a minimum deposit of just $2, it began last month to offer personal loans for use outside the Elektra stores. This month, it will expand its offerings to include house and car loans and, eventually, microloans for small entrepreneurs.
Even before the peso crisis, Mexican banks shunned the poor. Of the 40 million working Mexicans, half are in the “informal sector,” meaning they don’t pay taxes or get pay stubs to prove they are employed. About 20 million earn less than $5 a day. They would appear to be bad credit risks. Enter the motorcycle loan officers: they play a role that is part debt collector, part social worker to recover loans. Grupo Elektra claims a 97 percent repayment rate on loans at its stores, and despite occasional glitches like the one Monroy ran into, expects the new bank to do at least as well. “They’re unafraid of dealing with the poor, which is what has held up traditional banks until now,” says Damien von Stauffenberg, director of MicroRate, a microloan rating agency in Arlington, Virginia. “They will make a killing. This is a vast, untapped market.”
The peso crisis was an offspring of the privatization of Mexican banks in 1991, which led to a boom in new credit. After the bust, Mexico was reluctant to encourage creditors, and now has (in the World Bank’s opinion) the second most-underdeveloped credit-protection system in Latin America after Colombia. It is still illegal, for example, to finalize credit-card transactions over the Internet in Mexico (unlike Brazil). After 1994, Mexico made one big change: opening to foreign banks, which now own 75 percent of bank assets in the country, up from 4 percent in 1994.
None of the foreign banks had targeted services to the poor until Azteca made its move. Citibank, the biggest foreign player in Mexico, recently purchased a company called The Associates, which has been criticized in the United States for alleged predatory lending practices to the poor. In Mexico, The Associates has made it clear it is moving into low- and middle-income markets, and analysts see that as a sign of Citibank’s widening strategy. “They’re trying to get away from their elitist image,” says Jan Smith, financial director of InfoAmericas, a market-intelligence consulting firm. “It is a turning point for financial services in Mexico. The expansion of banking services to low- to middle-income groups is the next big push.”
The authorities are watching closely, wary of the specter of 1994. “You have to be careful, because with a boom in credit you usually get a crisis in the banking sector,” says Alejandro Micco, an economist at the Inter-American Development Bank. Azteca is charging a 50 percent flat interest rate on its loans, which can nearly double the price of a $250 television set to almost $500 over the 12-month life of the loan. Social critics describe it as highway robbery; financial analysts say it’s fair, given the risks. Azteca says its motorcycle agents make sure payments don’t exceed 20 percent of a person’s disposable income, and visit customers’ homes to confirm their ability to pay. Moreover, bank officials says most of its new loans aren’t going to stereos and other frills, but for practical investments like cement for home improvements. Like Fox, they believe Azteca will be both good business, and good for Mexico.
