Parmalat black hole:
Scandal on a global scale
with consequences for Australia

Bob Briton

The spin doctors of capitalism would love to pass the Parmalat 
scandal off as a crisis that could only happen in Italy. After 
all, Italy gave the world Machiavelli, the mafia and institutions 
like the P2 Lodge — names now synonymous with scheming, 
secretiveness and shady dealing. The Parmalat debacle would 
conveniently fit this heritage.

Parmalat Finanziaria SpA, however, is only one of the most recent 
collapses of corporate giants previously fjted as success stories 
of the globalised economy. It follows a pattern laid down by the 
likes of US heavyweights Enron and World.Com and, closer to home, 
HIH. Furthermore, it appears that other big outfits are set to 
join it at the brink of oblivion.

Swiss-based Adecco, the largest player in the world labour hire 
industry this month delayed the publication of its annual results 
for 2003 due to "material weaknesses in internal controls in the 
company's North American operations". Adecco has worldwide sales 
of about A$25 billion. Its failure would be the equivalent of an 
IBM or Microsoft going under.

In this climate the OECD published proposals to tighten up the 
way companies are run. If adhered to, the OECD's non- binding 
proposals would improve the quality of market information 
provided by companies, protect whistleblowers and increase the 
power of shareholders over boards.

Parmalat's difficulties became world famous when the company 
filed with Italian authorities for bankruptcy protection on 
December 24 last year. The company had defaulted on a US$185 
million bond payment in mid-November, prompting auditors to look 
more closely at company accounts.

It turns out that some 38 percent of Parmalat's assets were 
supposedly held in the name of a subsidiary in an account with 
the Bank of America on the Cayman Islands. However, a note on 
Bank of America letterhead claiming the existence of a US$4.9 
billion nest-egg proved to be a forgery. The whole truth behind 
Parmalat's fall is still to be unearthed from the company's 
labyrinthine records.

Information gathered from raids on company and bank offices and 
during interviews with company heavyweights has helped 
authorities to piece together at least part of the lurid story. 
It seems that there is a US$10 billion hole in the company's 
accounts and it will be up to government-appointed administrator 
Enrico Bondi to find it and, if possible, recommend a way out of 
the current predicament.

Company founder Calisto Tanzi has fallen from grace. He is one of 
10 company representatives being held by authorities. Once 
praised for his generosity to projects like the restoration of 
Parma's 11th century basilica, various Christian charities in 
Central and South America and his hometown's soccer team and 
respected for his connections among government and Vatican 
elites, he is now a pariah.

Tanzi faces charges of fraud, false accounting and conspiracy. 
His application to be released from Milan's San Vittore prison 
and kept under house arrest was turned down. Administrator Enrico 
Bondi saw to it that his son Stefano was removed from the boards 
of Parmalat and AC Parma.

According to the prosecutors, Tanzi has admitted to diverting up 
to US$640 million from Parmalat to his family's tourism business 
to cover losses. His wife, Donatella Alinovi, has been arrested 
and two money orders worth about a million Euros in her 
possession were confiscated.

Parmalat's former finance director and author of a textbook on 
business finance, Fausto Tonna, claims that he only ever followed 
Tanzi's orders. "Stainless Fausto" told a gathering of curious 
journalists, "I wish you and your families a slow and painful 
death" when asked about his role in Parmalat's demise.

Tanzi claims he is the victim of bad advice. He told prosecutors 
that the head of Capitalia (formerly Banca di Roma) had pressured 
him into buying the dairy company Eurolat from the Cirio group 
five years ago and a Sicilian mineral water and soft drink 
company two years ago — investments that later went bad.

Signor Tanzi conveniently leaves out the masses of "creative" 
accounting done for him by the agencies of finance capital. For 
years the Bank of Italy, the stock market's watchdog Consob, co-
operating banks like the Bank of America, Citicorp and the 
Deutsche Bank, other corporations and auditing firms like Grant 
Thornton and Deloitte Touche Tohmasu apparently sat quietly by 
while Parmalat carried on its doubtful business.

Banks turn blind eye

Parmalat used derivatives (a form of gambling in which it is 
possible to lose more than you bet) and other complex financial 
transactions to disguise its financial situation. It did this 
through investment banks like Citicorp and Merrill Lynch. In 1999 
Citicorp made an "investment" of US$146 million in the Italian 
food giant through a subsidiary called Buconero LLC ["Buconero" 
is Italian for "black hole"].

This perfectly legal transaction helped hide the company's 
indebtedness by showing loans as investments. Company managers 
have revealed that Parmalat used a web of "shell" or empty 
companies in tax havens and forged documents to cover up losses 
and support bond issues.

The shockwaves from the collapse of Parmalat have been felt all 
over the world. Brazil's largest flour milling concern, Moinho 
Pacifico, has not seen any payment for its supplies to Parmalat 
since December 15.

In Australia, Parmalat had bought the Pauls concern for $A460 
million. Its products account for 19 per cent of the milk sold in 
the country and 37 per cent of sales in Victoria. If the 
Australian subsidiary were sold to market rival National Foods, 
the buyer would control over 80 per cent of Victorian milk sales.

Should the Australian Competition and Consumer Commission prevent 
the takeover, Coca Cola Amatil, Wesfarmers, Frontera and Murray 
Goulburn Cooperative are reported to be interested.

Meanwhile, corporate big-wigs all over the world are bracing 
themselves for the embarrassment that will flow from the Parmalat 
investigations. Sacrificial lambs will be prepared according to 
the time-honoured tradition. One senior aide has already 
apparently committed suicide.

Calisto Tanzi, himself, might live to fight another day. His 
billionaire Prime Minister Silvio Berlusconi last year succeeded 
in having false accounting reduced from a felony to a 
misdemeanour.