Global Policy Forum

Sour Milk


By Ignacio Ramonet

Le Monde Diplomatique
February 2004

They talked of ethical company practices and business morality at the recent World Economic Forum in Davos. And piously hoped that capitalism was about to return on a healthier basis than before. That now looks like wishful thinking because, even as the speeches were being made, the full facts about the Parmalat affair were emerging. It is perhaps the biggest financial scandal in Europe since 1945, its shockwaves likely to be as disastrous as those provoked by the collapse of the energy giant Enron in the United States in December 2001 (The collapse of Enron as a result of dodgy accounting led to 5,600 job losses and $68bn of capital evaporated).

Parmalat seemed a success story that had been made possible by the dynamics of liberal global isation. It had started as a small family firm in the 1960s, distributing pasteurised milk around Parma. Then it began to grow, thanks to the business skills of its founder, Calisto Tanzi, and to generous funding from the European Community. By 1974 the company went international, first with operations in Brazil and then in Venezuela and Ecuador. It extended its network of subsidiaries and shell companies in countries, with easy tax regimes (the Isle of Man, the Netherlands, Luxembourg, Austria, Malta) and then in tax havens (Cayman Islands, the Virgin Islands, the Dutch East Indies).

In 1990 the company went public, becoming Italy's seventh largest private corporation and a world leader in long-life milk. Parmalat employed 37,000 workers in more than 30 countries and in 2002 its turnover stood at €7.6bn, higher than the GNP of countries such as Paraguay, Bolivia, Angola or Senegal. The success earned Calisto Tanzi a place in the Italian establishment and a position on the board of Italy's employers' feder ation, the Confindustria. Parmalat shares had a good reputation on the Milan stock exchange.

All that ended on 11 November 2003, when auditors raised doubts about a €500m investment in the Epicurum fund based in the Cayman Islands. Standard and Poors promptly downgraded Parmalat's stock rating. Share prices dropped. At the same time the Stock Exchange Commission asked for clarification about how Parmalat was planning to repay debts due at the end of 2003. Shareholders and creditors began to get jittery. In an attempt to reassure them Parmalat announced a €3.95bn nest egg deposited in a Bank of America account in the Cayman Islands, and presented a document, from the bank, attesting to the existence of the amount. Management was playing double or quits. Either everyone would calm down, shares would rise again and business would pick up, or suspicions would remain, with the threat of collapse.

At that critical moment the Bank of America claimed that the document shown by Parmalat to prove the existence of the €3.95bn was a forgery put together on a makeshift letterhead, created with the aid of a scanner. Parmalat shares plummeted. Within a few days their value had sunk to almost nothing. More than 115,000 investors and small savers lost; some faced ruin. Then we learned that Parmalat's debt had been revised upwards to €11bn. And that, as in the Enron, Tyco, Worldcom, Ahold scandals, there were accusations of deliberate concealment for years via a fraudulent system of accounting malpractices, cooked books, tampered documents, fictional profits and complicated pyramids of offshore companies interlocking with each other to make the tracing of money and the analysis of accounts impossible.

The long-term manipulations had been invisible; even on the eve of the scandal Deutsche Bank acquired 5.1% of Parmalat's capital, and analysts recommended Parmalat shares as a strong buy. Auditing firms such as Grant Thornton and Deloitte & Touche, as well as major banks such as Citigroup, have been accused of complicity. The pernicious effects of tax havens have again been highlighted (See Pierre Bauchet, Concentration des multinationales et mutation de l'Etat, CNRS, Paris, 2003).

The affair has global implications. After the Enron collapse supporters of globalisation had been arguing that the era of rogue capitalism, dodgy companies and economic nightmares was over. The scandal had been beneficial, they said, because it had enabled the system to correct itself. But as Parmalat proves, this is far from the case.

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