Legal Money “Laundering” With Herbalife in Venezuela

An interesting item in Herbalife’s ($HLF – no positions) 10-k filed this evening is their discussion of their cash positions in Venezuela.

Let’s let the company explain, emphasis mine:

Currency restrictions enacted by the Venezuelan government have become more restrictive and have impacted the ability of the Company’s subsidiary in Venezuela, Herbalife Venezuela, to timely obtain U.S. dollars in exchange for Venezuelan Bolivars, or Bolivars, at the official foreign exchange rates from the Venezuelan government and its foreign exchange commission, CADIVI. The application and approval process continue to be delayed and our ability to timely obtain U.S. dollars at the official exchange rates remains uncertain.

In June 2010, the Venezuelan government introduced additional regulations under a new regulated system, SITME, which is controlled by the Central Bank of Venezuela. SITME provides a mechanism to exchange Bolivars into U.S. dollars through the purchase and sale of U.S. dollar denominated bonds issued in Venezuela. However, SITME is only available in certain limited circumstances. Specifically, SITME can only be used for product purchases and is not available for other matters such as the payment of dividends. Also, SITME can only be used for amounts of up to $50,000 per day and $350,000 per month and is generally only available to the extent the applicant has not exchanged and received U.S. dollars via the CADIVI process within the previous 90 days. Effective January 1, 2012, additional laws were enacted that required companies to register with the Registry of Users of the System of Transactions with Securities in Foreign Currency, or RUSITME, prior to transacting with the SITME, the regulated system, which is controlled by the Central Bank of Venezuela. As an alternative exchange mechanism, we have also participated in certain bond offerings from the Venezuelan government and from Petróleos de Venezuela, S.A. or PDVSA, a Venezuelan state-owned petroleum company, where we effectively purchased bonds with our Bolivars and then sold the bonds for U.S. dollars. In other instances, we have also used other alternative legal exchange mechanisms for currency exchanges.”

Translation:  Herbalife has Bolivars that they want to exchange for dollars, but they are having trouble doing so.  So what do they do?  Well, they use “alternative legal exchange mechanisms” – those are the company’s words, not mine (emphasis mine):

During the year ended December 31, 2012, the Company continued accessing the SITME market in order to exchange its Bolivars to U.S. dollars and the daily and monthly restrictions continues. In other instances, the Company recognized an aggregate of $4.8 million of foreign exchange losses as a result of exchanging Bolivars for U.S. dollars using alternative legal exchange mechanisms that were approximately 43% less favorable than the 5.3 Bolivars per U.S. dollar published SITME rate. During the year ended December 31, 2012, we have exchanged 59.2 million Bolivars for $6.4 million U.S. dollars using these alternative legal exchange mechanisms. We continue to remeasure our Bolivars at the published SITME rate given the limited availability of alternative exchange mechanisms and the uncertainty in the effective exchange rate for alternative exchange mechanisms.

Did you catch that?  Herbalife paid a 43% vig to launder (legally launder, of course – at least according to the Company. I have exactly ZERO expertise in grey market and black market Venezuelan currency exchanges) 59.2MM Bolivars at a functional FX rate of 9.25 to 1, vs the official rate of 5.3 to 1.

I also found their prior solutions to this problem to be interesting (emphasis mine):

In February 2011, Herbalife Venezuela purchased U.S. dollar denominated bonds with a face value of $20 million U.S. dollars in a bond offering from PDVSA for 86 million Bolivars and then immediately sold the bonds for $15 million U.S. dollars, resulting in an average effective conversion rate of 5.7 Bolivars per U.S. dollar. This Bolivar to U.S. dollar conversion resulted in us recording a net pre-tax loss of $1.3 million U.S. dollars during the first quarter of 2011 which is included in its consolidated statement of income for the year ended December 31, 2011. We were unsuccessful in accessing any subsequent PDVSA bond offerings and the frequency of future bond offerings is unknown

So back in 2011, the vig they had to pay to exchange their Bolivars through the much more appealing PDVSA bond offering was lower than it is today. (They took 86MM Bolivars, which at a rate of 5.3 should have gotten them 16.23MM USD, and turned them into $15MM USD.  I’d call that a vig of about 7.5% (1.22MM on 16.23MM).

As for why all of this matters:

As of December 31, 2012 and December 31, 2011, Herbalife Venezuela’s net monetary assets and liabilities denominated in Bolivars was approximately $82.9 million and $26.8 million, respectively, and included approximately $99.2 million and $34.8 million, respectively, in Bolivar denominated cash and cash equivalents. Our Bolivar denominated cash and cash equivalents increased during 2012, primarily due to the current exchange restrictions in Venezuela which has limited our ability to timely exchange our Bolivars to U.S. dollars. These remeasured amounts, including cash and cash equivalents, being reported on our consolidated balance sheet using the published SITME rate of 5.3 Bolivars per U.S. dollar may not accurately represent the amount of U.S. dollars that we could ultimately realize. While we continue to monitor the exchange mechanisms and restrictions under SITME, and assess and monitor the current economic and political environment in Venezuela, there is no assurance that we will be able to exchange Bolivars into U.S. dollars on a timely basis.

Fascinating stuff.

EDIT:  I have added “quotations” around the word “laundering” in the post title because I do not mean to accuse Herbalife of illegal activity.  I associate paying huge vigs to exchange one currency into another with “laundering,” but I realize that “money laundering” is generally defined to be related to illegally obtained funds.  I am making no such accusation at all in this post.

Related:  HLF 10-k

my other posts about Herbalife

-KD

disclosure: NO POSITIONS in $HLF

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