Commentary: Parmalat: A Corporate Version Of "Clean Hands"?

Plenty of heads may roll, but now Italy must get serious about good governance

Every day, Italian investigators unearth fresh, worrisome details about the $17.8 billion Parmalat bankruptcy, Europe's worst-ever financial fraud. Over the past six weeks, former Parmalat executives have helped authorities piece together a forensic trail revealing an intricate network of secret bank accounts and shell entities from Lugano, Switzerland, to São Paulo, Brazil, that was used to siphon off corporate funds. Former Parmalat executives now in jail say they paid off as many as 30 politicians -- and that some financial institutions were aware of Parmalat's problems. They also say its bankers made things worse by forcing Parmalat into unhealthy deals.

Not all of those claims may prove to be true: Much of the testimony by former Parmalat executives must still be substantiated. Nonetheless, Italy seems to be headed for another round of shocking revelations. That has many wondering whether the Parmalat probe will grow into a corporate version of Clean Hands, the 1992 corruption scandal that wiped out an entire caste of politicians and two political parties.

True, Italy has come a long way since 1992, when a small clique of bankers, politicians, and industrial bosses controlled Italy Inc. with utter disregard for competition, shareholders' rights, transparency, or corporate governance. The state-dominated economy has been largely privatized, the capital market has opened to competition, and a generation of internationally minded bankers and managers has come to power.

But the Parmalat dragnet may well ensnare more than a handful of executives. At last count, the number of individuals under investigation was 36. Magistrates in Parma, Milan, and Rome want to know what role, if any, Italian and international banks played in the fraud. Italian magistrates and the U.S. Securities & Exchange Commission suspect that the banks knew about Parmalat's difficulties and knowingly passed off false information to investors. Italy's largest banks have already agreed to repay investors to whom they marketed Parmalat and Cirio bonds. (Cirio is the food giant that collapsed under $1.4 billion in debt in 2002 and whose chairman, Sergio Cragnotti, was arrested this week on suspicion of fraud.)

While executives at the country's top four banks -- together with Citigroup, Deutsche Bank, UBS, and Morgan Stanley -- are being interrogated, the spotlight is on Capitalia (formerly Banca di Roma), which had close ties to Parmalat and Cirio. Capitalia, Italy's fourth-largest bank, lent heavily to both Parmalat and Cirio and issued their bonds. Magistrates suspect Capitalia reduced its exposure to Cirio by issuing the bonds and used them to repay loans -- thereby transferring its credit risk to investors. Parmalat's former chief executive, Calisto Tanzi, says he was pressed by Capitalia to buy two companies from Cirio for inflated prices in 1999, when Cirio was having financial difficulty. Capitalia Chairman Cesare Geronzi, who is under investigation for market-rigging and fraud, denies wrongdoing.

If Italian courts convict bankers of resorting to illegal and market-distorting maneuvers in their dealings with Cirio and Parmalat, it will confirm what Italians already suspect: that old habits die hard. Many Italian executives, consultants, and lawyers believe that at least a handful of other Parmalats may be waiting to happen. This week, stock market regulator Consob put 54 companies under close observation.

An outraged public is demanding to know why regulators didn't monitor Parmalat more closely in the past. Did Consob and the Bank of Italy truly fail to detect the fraud, or did they stand mute because powerful individuals were involved? "We need individuals and a culture that exercise controls," says a Milan magistrate close to the investigation.

Therein lies the parallel with the Clean Hands affair. Italy's judicial attack on financial crime may well cause a few heads to roll in high places -- sending a long-overdue message to Italy Inc. But to achieve lasting change, Italians must pay more than lip service to good corporate governance, transparency, and shareholders' rights. If the Parmalat investigation hastens this shift in attitude, it will have gone a long way toward modernizing Italy.

By Gail Edmondson

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