Does the continuing fallout from the Parmalat scandal say something about the Italian way of doing business? asks Paddy Agnew
Throughout much of last December, there was a lot of unusual activity at the 460 Park Avenue, New York office of Italian-American law firm, Zini & Associates. So many boxes of documents were being removed from the office that the building doorman one day stopped a Zini executive and asked him if there was a problem.
Zini & Associates was founded by Italian Mr Gian Paolo Zini, the principal lawyer in the US for collapsed Italian dairy giant, Parmalat. Mr Zini, currently under arrest in Italy, is suspected of having played a key role in overseeing the complex and fraudulent web of back-to-back companies, off balance sheet financial transactions, fake intercompany credits and escrow accounts that led to the pre-Christmas collapse of Parmalat, leaving behind a €12.5 billion "hole".
The activity at Zini & Associates was prompted by the imminent arrival of the Manhattan District Attorney's office. According to a report this week in the Financial Times, former employees at the law firm believe that by the time the DA's investigators arrived on New Year's Eve, much documentary and computer file evidence had already been removed.
In particular, say the ex-employees (most of them were fired two weeks ago), it became impossible to access computer files relevant to Bonlat, the Parmalat subsidiary which allegedly held some 38 per cent of Parmalat's assets in a Bank of America account in the Cayman Islands.
It was a December 19th statement from Bank of America pointing out that no such account existed which effectively pulled the plug on Parmalat, prompting the Italian government to enact a protective bankruptcy decree which both suspended the company's old debt and sent in a state-appointed administrator. The last-mentioned, Mr Enrico Bondi, by the way, has 180 days in which to come up with a new financial and industrial plan.
Revelations that vital documents may have been withheld from US investigators came on the same day this week that the Swiss Federal Prosecutor's Office confirmed it had initiated a money-laundering investigation linked to the Parmalat scandal. There are ongoing "Parmalat-related" official investigations in Brazil, Luxembourg, the Netherlands, Sweden, Switzerland, the US and Venezuela, and that list may not be complete.
The fallout from the Parmalat crash would appear to be truly global. Parmalat was not just an Italian flagship company, it was also Italy's eighth-largest industrial group, employing 36,400 people at 139 plants in more than 30 countries worldwide and with estimated annual revenues of €7.6 billion.
Eighty thousand Parmalat bondholders and 40,000 Parmalat shareholders as well as corporate investors have all taken a hit in the wake of a collapse which has left them with bonds and stock that are currently worthless. Not only investors but also suppliers and employees have suffered.
This week, 200 dairy farmers in Chile claimed that Parmalat has paid them only one third of more than $2 million owed. In Brazil, Parmalat Brasil Industria de Alimentos, which employs 6,000 people, announced this week that it had suspended 60 per cent of its production lines because suppliers were no longer delivering raw materials.
The Brazilian government estimates that Parmalat Brasil, which filed for bankruptcy protection last week, may owe up to $15 million to suppliers.
Parmalat Brasil is Brazil's second biggest milk-buyer, prompting the government to set up a special Parmalat crisis unit, headed by a minister and intended to limit the damages on the local dairy sector. Even faraway in freezing Alaska, the Parmalat effect has been felt. The Southern Alaskan Carpenters' Pension Fund are amongst a group of private investors currently suing Parmalat and "outside financial and auditing firms" for $1 billion .
Similarly, the US Securities and Exchange Commission (SEC) is suing Parmalat for "brazen fraud" in misleading investors.
The Parmalat crash is an immensely complex affair. For the last six weeks, investigative magistrates in Milan and Parma, the District Attorney's Office in Manhattan, the Price Waterhouse Cooper accountancy firm and investment banks Mediobanca and Lazard have all been struggling to untangle the complex, Chinese box web of back-to-back companies that is fundamental to the Parmalat scam.
Calisto Tanzi, the "padre padrone" of Parmalat, is currently under arrest, charged with fraud, embezzlement, false accounting and with having misled investors. Also in detention since late December or early in the New Year are not only senior Parmalat executives but also senior figures in Grant Thornton International, the accounting firm which audited Parmalat's books from 1990 to 1999 and which subsequently continued to audit its offshore entities, including Bonlat in the Cayman Islands.
Given that the scandal implies a level of collusion between banks, auditors and Parmalat, it is hardly surprising to find that banks such as Bank of America, Morgan Stanley, Deutsche Bank, Citigroup, Capitalia as well as rating agency Standard & Poor's are all co-operating with Italian investors.
There is no doubt but that the Parmalat scandal represents a case of fraud on a truly massive scale. As Italian economist Marco Vitale ironically put it to the Rome-based foreign press corps recently: "When Italians do things, they do them in style, with a lot of imagination."
Desperately serious questions, however, remain unanswered. Above all, how come neither Consob, the Milan stock market regulatory authority, nor the Bank of Italy failed to pick up on a fraud that is as big as 1.3 per cent of Italy's GDP and which may have gone on for more than a decade?
More importantly, are commentators such as EU Affairs Minister Rocco Buttiglione and Confindustria President Antonio D'Amato correct when they declare emphatically to the foreign press corps that the problem is not an Italian one but rather an international one? Given that the Italian economy has been hit in the last 18 months by similar, if smaller, collapses involving food products company Cirio and software developer Finmatica, is it not possible that there are other "Parmalats" out there just waiting to happen?
"There is no way that Parmalat and Finmatica are isolated incidents," Massimiliano Romano of Opus Consulting in Milan told the International Herald Tribune last week, adding: "There are definitely others out there, no doubt about it. Company financial statements are often falsified for one reason or another. It used to be to dodge taxes, now it is to cover losses."
Is it possible that the sort of murky corporate governance that underpins the Parmalat scandal is typical of the classic Italian, family-run company (Calisto Tanzi owned a 51 per cent shareholding)?
Is it also possible that the current government of media tycoon, Silvio Berlusconi, has inadvertently sent the wrong signals to the Italian business community? After all, one of the earliest pieces of legislation introduced by this government saw the one-time crime of "false accounting" reduced from a felony to a misdemeanour. During his recent briefing with the foreign press corps, Minister Buttiglione pinpointed offshore companies as one of the great problems faced by international finance, describing them as examples of "worldwide piracy".
Ironically, Mr Berlusconi's Fininivest group controlled a number of such companies whilst he himself in July 1998 received a suspended two years and four months jail sentence (subsequently dropped in 2000 when Italy's High Court ruled that the statute of limitations had kicked in) for his involvement with one of them, namely All Iberian, alleged to be a channel for slush funds to political parties.
The bottom line of the Parmalat scandal, as in all business transactions, will concern creditworthiness. Will planned reforms to Italy's regulatory authorities restore confidence or will foreign investors now begin to think that the old joke about Italian firms having two sets of accountancy books, one for real and one for public consumption, is in fact the case. As of now, the jury is out.