Summary
Parmalat (once Italy’s largest dairy company) was "Europe’s Enron".
In my experience, fraud and corruption in an organisation can only be rooted out if my “five principles of good governance” are followed.
When something stinks, you open the window and throw it out.
Analysis
The Star reports that the lawyers for two Cayman Island entities are of the view that the Bank of America Corp. should he held responsible for the 2003 collapse of Italian dairy Parmalat Finanziaria.
Parmalat went bankrupt after revealing a 3.95 billion euro ($5.78 billion) account at Bank of America didn't exist.
Liquidators for two special purpose vehicles created by Bank of America – Food Holdings Ltd. and Dairy Holdings Ltd. – sued the bank, claiming it knew of the Parmalat fraud.
As the trial continues, it is worthwhile reacquainting ourselves with Parmalat.
I called the fraud at Parmalat (once Italy’s largest dairy company), at the time, "Europe’s Enron". It seems that payments were siphoned off from Parmalat to prop up a failing travel business, which was owned by the founding family.
The fraud was “hidden” from the gaze of the outside world by using two sets of books; and by falsifying the accounts of Bonlat, a Cayman Island subsidiary (I really do not trust companies that use offshore accounting with "abandon"; take a very long hard look at any company that employs this practice see "The Consequences of The UBS Tax Evasion Cases ").
Bonlat claimed to have £2.7BN deposited with the Bank of America; however, this turned out to be no more than false accounting.
One interesting aspect of this case is the order alleged to have been given by Luciano Del Soldato, a Finance Director in Parmalat, to Gianfranco Bocchi a Parmalat executive. By all accounts, Soldato ordered Bocchi to destroy the computer that housed the false accounts of Bonlat with a hammer.
At first sight this may seem “a tad extreme”; after all, those denizens of probity at Andersens and Enron only ordered that documents be shredded when the outside world started to investigate their nefarious activities. However, as an experienced fraud investigator I can tell you that this was in fact an eminently sensible order.
Computers have an annoying habit of recording all activity on their hard disc. Although they possess delete buttons which, when the innocent user presses them, “delete” the file from the visible area of the system; the reality is that the crafty computer still stores the information on its hard disc. Any self respecting IT hacker, or professional can resurrect this data in a matter of hours.
To counteract this problem, anyone who wishes to erase traces of data from their computer systems must destroy the hard disc with hammer and fire; ie crush the hard disc then burn it. Soldato’s orders were not extreme, he knew exactly what he was doing.
The fraud was “hidden” from the gaze of the outside world by using two sets of books; and by falsifying the accounts of Bonlat, a Cayman Island subsidiary (I really do not trust companies that use offshore accounting with "abandon"; take a very long hard look at any company that employs this practice see "The Consequences of The UBS Tax Evasion Cases ").
Bonlat claimed to have £2.7BN deposited with the Bank of America; however, this turned out to be no more than false accounting.
One interesting aspect of this case is the order alleged to have been given by Luciano Del Soldato, a Finance Director in Parmalat, to Gianfranco Bocchi a Parmalat executive. By all accounts, Soldato ordered Bocchi to destroy the computer that housed the false accounts of Bonlat with a hammer.
At first sight this may seem “a tad extreme”; after all, those denizens of probity at Andersens and Enron only ordered that documents be shredded when the outside world started to investigate their nefarious activities. However, as an experienced fraud investigator I can tell you that this was in fact an eminently sensible order.
Computers have an annoying habit of recording all activity on their hard disc. Although they possess delete buttons which, when the innocent user presses them, “delete” the file from the visible area of the system; the reality is that the crafty computer still stores the information on its hard disc. Any self respecting IT hacker, or professional can resurrect this data in a matter of hours.
To counteract this problem, anyone who wishes to erase traces of data from their computer systems must destroy the hard disc with hammer and fire; ie crush the hard disc then burn it. Soldato’s orders were not extreme, he knew exactly what he was doing.
I have run international audit departments, and headed the fraud investigation department of one of the world’s largest multinationals. See my articles Ten Types of Fraud , Ten Reasons Frauds Occur and Codes of Conduct, the Ethical Principles of Companies for further background.
In my experience, fraud and corruption in an organisation can only be rooted out if my “five principles of good governance” are followed:
1. Those responsible for fraud and corruption are fired, and prosecuted with the full force of the law. Note that this applies to all levels up to, and including, the CEO/President.
2. Senior management are seen to be “whiter than white”; corporate ethics are disseminated top down, not bottom up (see Codes of Conduct, the Ethical Principles of Companies ).
3. There is transparency with respect to the reporting of fraud and corruption.
4. Effective financial controls are in place.
5. There is an independent organisation that reviews and reports on controls, on a regular basis (see The Added Value of Internal Audit, a Brief Overview and Attributes of a World Class Internal Audit Department ).
When something stinks, you open the window and throw it out.
1. Those responsible for fraud and corruption are fired, and prosecuted with the full force of the law. Note that this applies to all levels up to, and including, the CEO/President.
2. Senior management are seen to be “whiter than white”; corporate ethics are disseminated top down, not bottom up (see Codes of Conduct, the Ethical Principles of Companies ).
3. There is transparency with respect to the reporting of fraud and corruption.
4. Effective financial controls are in place.
5. There is an independent organisation that reviews and reports on controls, on a regular basis (see The Added Value of Internal Audit, a Brief Overview and Attributes of a World Class Internal Audit Department ).
When something stinks, you open the window and throw it out.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
