10 Kasım 2012 Cumartesi

The Most Famous Fraud Cases: Parmalat

The company Parmalat was opened in 1961 by Calisto Tanzi. Initially it was a small pasteurization plant in Parma. Nevertheless, the company has gone through the developments shown in the following and four decades later the company had emerged into a global giant, becoming listed on the Milan stock exchange in 1990.[1]

In 1963, when a Swedish company developed the Ultra Heat Treatment (UHT), Mr. Tanzi noted this revolutionary development and adopted this new technology to give Parmalat milk longer shelf life milk that exceeded six months without refrigeration. Parmalat began with the development of a seemingly ordinary but nonetheless revolutionary product: the world’s first shelf stable milk. Parmalat's 'Milk Box' became an instant success and soon achieved a prominent place on store shelves around the world. From this radical beginning, three decades later, the Parmalat trade mark - the innovative splashing milk drop - identifies one of the leading Italian food companies and the world leader in milk processing.[2]

Sales of the company grew rapidly from EUR 100,000 in 1962 to EUR 50 million in 1970. Mr. Tanzi enlarged his horizons by sponsoring sports (skiing) and buying a TV station, to compete with Berlusconi. He became involved with politicians and started mixing business with politics. His venture with Odeon TV was a flop and so were all his other diversifications. But he kept buying. In 1990, when Parmalat Finanziaria, the holding company, was listed on the Milan Stock Exchange, it had sales of EUR 569 million. Five years later it reached to 2.2 billion. In 2000, Parmalat celebrated EUR 7.3 billion.[3]

Parmalat and its subsidiaries had consolidated total assets of approximately 19,680 billion Italian Liras (USD 17.6 billion) and sales of 14,200 billion Italian Liras (USD 12.7 billion). They were employing over 40,000 people in 162 plants in 27 different countries as of 31st December 2000.[4]

As seen from the history of Parmalat, it is one of the most respected organizations in the world. However, as the time passes, the investments have gone to unprofitable places as shown in the following time line since 1990:[5]
·        Parmalat increased its total debt by EUR 13.2 billion,
·        It generated EUR 1.0 billion cash flow,
·        It spent EUR 5.4 billion in mostly unproductive acquisitions,
·        It paid EUR 5.3 billion in commissions and interests,
·        EUR 2.3 billion was siphoned off for various purposes.

The fraudulent transactions have taken place with the following sequence:[6]
·        In 1999, Parmalat set up a subsidiary in the Cayman Islands called Bonlat.
·        The first indication of financial problems came in early 2003 as the company tried to sell EUR 500 million in bonds although they claimed that they have a cash amount of EUR 4.2 Billion.[7]
·        After this CFO Fausto Tonna resigned in March replaced by Alberto Ferraris.
·        The crisis became public in November 2003 when questions were raised about transactions with mutual fund Epicurum, another Cayman-based company linked to Parmalat causing its stock to plummet.
·        As a result of this action Ferraris resigned, less than a week later replaced by Luciano Del Soldato, who resigned in December, unable to get cash from Epicurum fund, needed to pay debts and make bond payments.
·        On 15 December Tanzi himself resigned as CEO and then, Enrico Bondi took on as the company’s president. Parmalat's bank, Bank of America, claimed a document showing EUR 3.95 billion in Bonlat's bank account was a forgery. After that this is admitted by Parmalat. If we open the issue a little more, Parmalat’s auditor had sent a request for confirmation of that account to the bank. In return, the auditor received a letter purportedly from Bank of America that claimed to confirm the account’s details.  But according to people familiar with the matter, initial checks revealed that Bank of America never received the auditor’s request and the letter sent in return was a forgery.[8]
·        Shortly after the first revelations, Parmalat went into bankruptcy protection according to the laws in Italy.
·        An audit during the early days of the probe put the company's debt at USD 18 billion, eight times higher than the company claimed in its accounts.

The Wall Street Journal called Parmalat the “biggest corporate fraud in Europe”. In relative terms the estimated ‘hole’ of EUR 10 billion is slightly less than 1 % of Italian GNP, which makes Enron obsolete in comparison.[9]

Other than the above developments, the debt of the company to only two Italian Banks which are Medioblanca and Lazard was EUR 14.3 Billion although they have stated in the financial statements that the debt was only EUR 1.18 Billion.[10] Therefore, the accountants supposing that this hole would get bigger in the future.

As a result, the Italian justice system has concluded that the following individuals were accused of preparation of fraudulent financial statements and forgery bankruptcy:[11]
·         Calisto Tanzi : Former CEO (He is also accused of stealing money from the company)
·         Fausto Tonna and Luciano Del Soldato : Previous finance managers
·         Gianfranco Bocchi and Claudio Pessina: Parmalat managers
·         Lorenzo Penca, Maurizio Bianchi and Giampaolo Zini: Grand Thorton

Under the management of Mr.Enrico Bondi, two major accounting firms have been sued for USD 10 billion by Parmalat for the fraudulent USD 5 billion bank confirmation that sent the Parmalat Company into bankruptcy and lost investors and lenders billions of dollars in the U.S. and abroad. The following investment banks and underwriters have also just been sued by Parmalat:[12]
·        Citigroup – USD 10 billion
·        Morgan Stanley & Banka Intesa – USD 1.96 billion
·        Deutsche Bank – USD 21 million
·        UBS – USD 355 million
·        Bank of America - amount not yet disclosed


Until 1999, Grant Thornton was Parmalat's auditor. Italy's rules on rotation of auditors meant that the group then switched to Deloitte & Touche. However, those rules did not make much difference to the end result. Standard practice is for auditors to write independently to banks for confirmation of cash balances. Grant Thornton did this, but seemingly relied on Parmalat's internal mail to deliver its letters seeking confirmation. This, as it transpired, meant that the letters were fraudulently intercepted and altered, allowing the deception to continue.[13]

The Parmalat fraud was, at its centre, a very simple one, although there were lots of complex deceptions, including playing on the reputations of some big names in the financial system. The audited accounts from Bonlat showed cash balances that were consolidated by the parent and used to allay concerns about the high levels of debt the parent had on its balance sheet. No one asked why a group that had so much cash on deposit needed to borrow so much. There was much other false paperwork that was aimed at showing how the cash balance was built up, but this simple forgery was at the core. It has been suggested that the one line in an audited balance sheet that no one questions is: cash and other short-term assets and that is where the Parmalat fraud laid hiding.

The auditor company which was Grant Thornton, had audited Parmalat's accounts between 1990 and 1999, has previously denied its staff's criminal involvement, saying they were victims not authors of the fraud. A spokeswoman for Grant Thornton International told that the company was "trying to ascertain the facts."[14] As seen from these statements, the former auditor tries to defend itself. However, even though this is true, it is certain that they should have checked the accounts in the banks and they had the opportunity to understand the facts in a clear and correct manner.

An independent auditor later found that Parmalat had been falsifying its accounts for more than a decade and that the company had EUR 14.3 billion in debt, eight times more than it claimed to owe. Tanzai later said Parmalat began falsifying its accounts in the 1980s.[15] If we think that the auditor company is the one which is stated before, they shouldn’t say that they are not aware of these events. Since 1980, the accounts have been changed and the forgery has taken place. However, this was very well hided in the audit period of Grant Thornton.

If this accounting firm had reported these suspicious transactions to higher councils the magnitude of the burden would have never been like this.


[1] University of Warshova, “Parmalat”, http://www3.wz.uw.edu.pl/sknf/publikacje/papers/Parmalat.pdf
[2] Parmalat, “History of Parmalat”, http://svc058.bne110v.server-web.com/content/history.asp
[3] Gianfranco Tabasso, “A Modern Replica of Ponzi Finance”, TMI, Vol. 126, p. 22.
[4] Parmalat, “History of Parmalat”, http://svc058.bne110v.server-web.com/content/history1.asp
[5] University of Warshova, Ibid.
[6] University of Warshova, Ibid.
[7] Radikal, “Parmalat’taki Yolsuzluk 7 Milyar Euro’yu gecti”, http://www.radikal.com.tr/haber.php?haberno=99858
[8] Entwistle & Cappucci LLP, Parmalat SpA Securities Litigation Summary, US, 2004, p.6.
[9] Tabasso, Ibid, p. 22.
[10] Aksam, “Parmalat yolsuzluğu bilinenden 8 kat büyük”, http://www.aksam.com.tr/arsiv/aksam/2004/01/27/ekonomi/ekonomi10.html
[11] Radikal, “Parmalat skandalında 9 tutuklama”, http://www.radikal.com.tr/haber.php?haberno=100791
[12] Capital Confirmation, “Industry White Paper: The Issues Surrounding the Confirmation Process”, http://www.capitalconfirmation.com/WhitePapers_Brochures/Issues_Surrounding_the_Confirmation_Process.pdf
[13] Cooper, Ibid, p. 5.
[14] Sophie Arie, “More arrests as Parmalat fraud scandal deepens”, http://www.guardian.co.uk/parmalat/story/0,,1114524,00.html#article_continue
[15] Eric Sylvers, “4 banks to stand trial in Parmalat fraud”, http://www.iht.com/articles/2007/06/13/business/parmalat.php

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