The fall of BES: the origins of the problem – a culture of hiding losses and overspending
This year marks 10 years since the collapse of the Banco Espírito Santo banking empire. David Sampson reflects on what went wrong with Portugal’s once most respected banking group.
In 2006, Ricardo Martorell and Henrique Granadeiro, two senior directors of the Espírito Santo Group’s top holding company (GES) were asked to report urgently on the Group’s financial situation. They reported that in ES Resources, the holding company for non-financial assets, there was a “high level of accumulated losses and the level of debt had grown so high that the financial charges were becoming unbearable”. Despite the value of the assets being greater than the amount of the debt of any company, except for the airline Portugália in which it had a 99.8% stake, “GES would soon all disappear under the weight of systematically financing the losses”.
They had found that, within the group, costs were out of control. There were “too many staff and a culture of overspending, with no professional management and too many family members and associates in the company”. Financial control and management was awful with no clear lines of responsibility, no coordination between group companies, with a very complex company structure and 193 companies involved. The management was drowning in paper, bureaucracy and tax avoidance schemes.
The members of the Superior Board approved the report, but the president Antonio Ricciardi warned of the risk of forced sales of assets. He said that the reduction in staff should be done “with the greatest care in order not to tarnish the name of GES and to avoid any public awareness of the negative views about the group’s financial situation”.
It was estimated that ES Resources had debts of €2.3Bn and accumulated losses up to 2005 of €1Bn. The assets in Portugal alone, besides Portugália, included Tivoli hotels, Espírito Santo Travel, a number of real estate funds and development companies, the estates of Comporta and Reguengo, Espírito Santo Agropecuária, which included estates in South America, the spa of Monfortinho, the Vimeiro water company, Espírito Santo Saúde, and Escom, among others.
Well before the financial crisis of 2008, BES was warned in a report from PwC about the “enormous risk involved in the granting and extension of inappropriate credits” to companies in GES. By the end of 2000, the bank’s exposure was already more than €800 million.
Personal experience in the real estate sector
As an editor and commentator on real estate in Portugal in the years leading up to 2008, I witnessed the overspending, the lack of financial control and often the poor behaviour of family members and associates. Campera Outlet Centre in Carregado and Beloura Shopping in Cascais were both financed and eventually bought by a property fund of ESAF, the Group’s property fund arm. The building costs were so excessive that they became a common cause of comment, but they were all authorised by family members or associates, and the eventual costs were lost in the development costs of ESAF.
Unfortunately, the conduct of ESAF was not uncommon. No bank prior to 2008 wanted to show a loss on a property sale and it would transfer assets into a property fund it controlled at a value which avoided it showing any loss on the sale. The fund had by law to publish regular asset lists and valuations by ‘independent valuers’, but there was no control at that time of the valuers or their valuations.
Undeclared income
The scandals around BES and the behaviour of Ricardo Salgado personally, who was nicknamed ‘O Dono disto Tudo’ (the Owner of All This), increased over the years. The other family members were particularly shocked when it came out that Salgado had received a ‘present’ of €14 million from José Guilherme, a builder in Amadora. (He died in August this year)
Guilherme justified the gift on the grounds that he was grateful for Salgado’s investment advice and his suggestion that he build in Angola where he had made enormous profits. In a parliamentary inquiry, Guilherme referred to Salgado as “an old friend”.
The family and its associates were involved in bribes received in 2005 from a German consortium that won a tender from the Portuguese government to supply two submarines to the Portuguese navy. It was discovered that €30 million had passed through a Swiss bank account to Escom, a GES company, which then passed the money to various accounts in the Bahamas and the Cayman Islands. In 2013, Salgado confessed in a meeting of the GES board that €5 million out of the €30 million had been received by each of five Espírito Santo family clans, and another €15 million had gone to the directors of Escom. There was another person who received part of the money from Escom whose name has never been revealed.
It was known since 2013 that Salgado had had to amend his tax returns in the years 2005, 2010 and 2012, and that he had benefited substantially from the tax amnesties granted by the government of José Sócrates. It only came out in 2020 that the total amount hidden in Swiss bank accounts and legalised by Salgado amounted to €34.1 million and on this he paid tax of €2.4 million.
Payments from the Saco Azul (the Blue Bag)
The other major scandal during the years prior to 2014 arose from the close links between BES and Portugal Telecom (PT). In 2006, the Sonae group made a takeover bid for PT, having got an assurance of neutrality from the incoming Prime Minister José Sócrates. PT was a money-making machine and a major source of financing for GES. Salgado did all he could to block the bid.
He was later accused of paying €25 million to the CEO of PT, Zeinal Bava, and €20 million to his successor Henrique Granadeiro. After the bribes were discovered, Bava paid back €18.5 million, alleging he had received it on trust for the employees of PT, and Granadeiro alleged a verbal agreement to sell half of his vineyard in Arraiolos to Salgado. Even worse was the allegation, never proved, that Sócrates was also bribed with an initial payment of €6 million.
The one case of corruption for which Salgado has been convicted is that of Manuel Pinho, who was Minister of the Economy in the government of Sócrates. All the time that Pinho was a minister he continued to receive monthly payments out of Salgado’s blue bag.
Trying to save the sinking ship
In 2013, the pressure began to rise when it became clear that the losses in Espírito Santo International (ESI), the company which held the non-financial assets of GES, could no longer be hidden and the company would soon have to file for bankruptcy. Soon after, the Bank of Portugal (BoP) as supervisory authority obliged BES to increase its capital. It did so after deciding that a guarantee given by the government of Angola for the debt owed by the Bank’s Angolan subsidiary was not effective for calculating the level of risk in BES, and secondly after discovering how substantial losses within the Group had been hidden over many years. The supervisor was concerned that the problems within the Group might affect the bank and wanted to increase the financial cushion.
The BoP said that “the loans made by BES to ESI were at risk”, and that although ESI was not the responsibility of BES, it would have an impact on the reputation of BES.
The BoP also wanted to ring fence BES so that it would still be able to survive even if GES and other family companies all collapsed. When the raising of new capital was completed there were a few brief weeks of hope. Even as late as 21 July 2014 President Cavaco Silva was assuring the press that BES had sufficient reserves to cover all its exposure to the problem of the non financial GES companies.
Even the resignation from the BES board of Ricardo Salgado and of all other family members was not enough. Ten years later thousands of those who were led unknowingly to lend their savings to GES companies rather than to BES are still waiting for full compensation and the hearings of the cases against Ricardo Salgado and other BES directors have hardly begun. Ricardo Salgado has been diagnosed with Alzheimers and is just a shadow of the man who once dominated the Portuguese financial world.
In 1993, I went to interview Ricardo Salgado in his office on the top floor of the Espirito Santo Bank building on Avenida de Liberdade in Lisbon. He had recently overseen the family taking back control of the bank after it was nationalised in 1975 and then privatised in 1992. I described then how the modern Espírito Santo Group was “much more than just a traditional Portuguese banking group”. Under ES International Holding Ltd, two holding companies had been formed: Espírito Santo Financial Holding in Luxembourg for the group’s banking, insurance and fund management activities, and Espírito Santo Resources in Nassau, Bahamas, for its interests in agriculture, hotels and catering, real estate, and other non-financial concerns. These holding companies were further divided into branches and sub-branches that made the structure of GES even more complex than the family tree. The effective leaders of the group were the six members of the group’s superior board who were “all tied together by blood relationships and long friendships”.
At the time of the privatisation, the government of Prime Minister Cavaco Silva was only too happy to clear the way for the family’s return to Portugal and to make them pay for the privilege. In their years of absence from after 1975, the family built up a string of valuable connections. An example was the French bank Crédit Agricole. One of their directors, Bernard Brousse, told me the basis for their Relationship. “Crédit Agricole found the proposition of investing in Espírito Santo Bank interesting for two reasons: the fact that it came from Espírito Santo – a magical name with a great capacity for mobilising capital – and because it was limited risk for us. We could tell they were personally engaged as bankers, not just investors. In a very 19th-century manner, they place the accent on the personal angle of things.”
