Government Corruption Makes Investments Risky in Peru

The New York Times -- 17 May 1997

by Calvin Sims

Bruce Heafitz made and lost a $50 million dollar fortune in the oil business in the United States in the 1980's and then regained much of it, only to sink millions into an ill-fated venture to look for sunken ships, ancient Egyptian tombs and other lost treasures.

For those setbacks, he had only himself and the uncertainties of the marketplace to blame. Now, though, he said he was discovering a daunting new challenge to his entrepreneurial ambitions: bureaucracy and high-level cronyism in countries that are emerging markets.

Two years ago, Mr. Heafitz said, he settled on Peru as the ideal target to export one of America's hottest businesses of the 1990's -- gambling. The Government had recently relaxed restrictions on gambling, and private casinos, bingo parlors and slot-machine houses were springing up throughout the country. With a group of investors, he opened an entertainment complex in the affluent Miraflores district of Lima in 1995, and it became an immediate hit.

But what initially appeared to be a royal flush has turned out to be one of the worst wagers of Mr. Heafitz's career. Soon after the complex -- a bingo parlor and nightclub -- opened, he became embroiled in legal disputes because of what he regarded as corruption and intimidation.

The upshot? Mr. Heafitz has closed the bingo parlor and may have to shut down the disco, too. He said he stood to lose $5 million in start-up costs and was accused of what he said were a variety of trumped-up charges.

When Mr. Heafitz started going about setting up his gambling emporium in Peru -- with a group of investors who ran a fleet of casino ships off Florida -- it seemed that the venture would go smoothly. He quickly cut a deal with Augusto Miyagusuku, head of the Government insurance company and a close friend of President Alberto K. Fujimori, to find space for his business in a prime location.

Mr. Miyagusuku showed Mr. Heafitz five properties owned by the insurance company, known as Popular y Porvenir, and Mr. Heafitz agreed to lease a building for $50,000 a month. After spending his "last pennies" to refurbish it, he said, he opened the American Bingo parlor and the adjoining disco in 1995. The entertainment complex quickly started to pull in 30,000 people a month and to make a hefty profit, he said.

But even as the venture seemed headed for business success, legal problems cropped up. First, Inca Tursa, the insurance company's real estate affiliate and Mr. Heafitz's partner in the leasing contract, informed him that he was in violation of their joint operating agreement and instructed him to vacate the building.

A letter from the state insurance company followed, saying he had no rights to be in the building because the company had canceled its contract with Inca Tursa. Then, a Peruvian court ordered him to vacate. A legal battle followed, with both sides suing for breach of contract.

Though Mr. Heafitz is appealing the court's ruling, he has already discharged 100 employees after shutting down the bingo parlor. He plans to close his disco, one of the most popular nightspots in Lima, if the case is not resolved soon.

Meantime, he said, he is being harassed by the Peruvian military and the police, who follow him, linger near his apartment and sometimes cut the electric power to the disco during prime hours. And he has been indicted on charges of fraud and violating city building codes by a prosecutor who he says is friendly with Mr. Miyagusuku.

What went wrong? By Mr. Heafitz's account, which is supported by officials of the United States Embassy here, the Peruvian government simply saw how much money he was making and decided to take over his business. And, he added, he has had little recourse because the leasing agreement the Government drew up is convoluted and, more to the point, because no one in Peru, not even the courts, is willing to cross a friend of the President.

"We've crapped out because the odds were stacked so heavily against us," Mr. Heafitz said. "This should serve as a warning to investors seeking to do business in Peru. You are very, very vulnerable because there is no justice."

The state insurance company declined to respond to repeated requests for its reaction to Mr. Heafitz's accusations. Mr. Fujimori's office and the Peruvian military likewise refused to comment.

But senior officials at the United States Embassy, speaking on condition of anonymity, confirmed the main outlines of his story. They said his case underscored the risk American companies, especially small and midsize concerns, face when doing business in countries with weak judicial systems.

And the Peruvian justice system is notoriously corrupt, with many judges quick to accept or demand bribes and most judges vulnerable to pressure from the Government, the embassy officials said.

"We appealed to Government officials and trade associations on Mr. Heafitz's behalf, but it was too hot a potato for anyone in Peru to pursue," one official said. "The response to our appeals was always the same: `Miyagusuku is the godfather of Fujimori's kids, and the President's mother lives in one of his apartments. What do you expect me to do?"

The embassy's commercial section said that it spent about 25 percent of its time helping American companies resolve legal disputes, mainly involving accusations, by Peruvians, of fraud or late payments.

The embassy said Peru remained a place to make medium- and long-term investments, but it recommended that American businesses get an agreement to resolve any legal disputes in another country.

And such situations are not unique to Peru or Latin America. Variations of the Heafitz case are known in emerging markets in Asia, Eastern Europe and Africa.

Mr. Heafitz partly blamed his own naivete for his troubles. Because he was introduced to Mr. Miyagusuku by a former Governor of Florida, Bob Martinez, he said, he looked on the Peruvian official's involvement as a guarantee of smooth sailing.

And he signed a complicated leasing contract he did not fully understand because Mr. Miyagusuku assured him it was standard procedure in Peru, he said. Embassy officials agreed that Mr. Heafitz should have exercised more caution about the agreement.

For his part, the 56-year-old American entrepreneur said he was not about to give up. "If eventually we have to close up shop here," he said, "I'm taking all these fancy disco lights and slot machines and opening up across town."