Banco Espirito Santo secretly lent funds to controlling shareholder

Banco Espirito Santo secretly lent money to its controlling shareholder for two years, documents have revealed - raising fresh questions over the Bank of Portugal's supervision of a lender that went on to suffer one of Europe's largest financial collapses.

BES, then Portugal's largest listed bank, routed undeclared loans to Espirito Santo International (ESI) - then indirectly its 25 per cent shareholder - through Panama, the documents show. BES did not declare the loans to ESI in its accounts at the time.

This exposure to the bad debt of the Espirito Santo family-owned ESI resulted in BES being rescued in August. But while Bank of Portugal said then that it had detected "fraudulent funding" involving non-financial Espirito Santo Group companies, it had not been known until now that a scheme routing loans through Panama had been in place for several years.

Fallout from the BES scandal has already prompted changes at the Bank of Portugal, which this week replaced the official in charge of prudential supervision of banks.

"The Bank of Portugal has failed to learn the lessons of previous bank failures," a Lisbon banker said on Thursday. "Supervision has been too soft. The rules that exist on paper have not been effectively put into practice."

Earlier this month, KPMG, the external auditor for BES, and the Bank of Portugal exchanged recriminations over when KPMG first alerted the central bank to the full extent of the losses that precipitated BES's collapse.

The Bank of Portugal declined to comment, while representatives for ESI, which filed for bankruptcy protection in July, were unavailable for comment. BES's suspect Panama operations are now under investigation as part of a forensic audit commissioned by the central bank from PwC, people familiar with the probe said.

Although the Bank of Portugal said in May that it had detected accounting issues at ESI, up until BES's collapse it repeatedly assured investors that the lender was insulated from the problems of the Espirito Santo family's holding companies. In June, the bank sold €1bn of new shares. Investors who subscribed to the sale were wiped out within two months.

Documents seen by the Financial Times show that between 2012 to 2014 BES extended credit lines to a small bank in Panama owned by its holding company, Espirito Santo Financial Group, which then used the money to buy the debt issued by ESI.

While BES in its previous annual reports noted it had credit exposure to ES Bank Panama, it did not detail that any of these loans were being used to lend to ESI or other companies linked to the Espirito Santo family.

This led to the bank increasing its hidden exposures to the troubled companies that would eventually cause it to report a €3.6bn loss at the end of July.

The Espirito Santo-linked bank in Panama existed almost exclusively to buy up debt issued by ESI, and its subsidiaries Rioforte and Espirito Santo Irmaos, according to a report written by the administrators of ES Bank.

© The Financial Times Limited 2014. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation