Latinnews Archive
Brazil and Southern Cone - 21 March 1996
How the secret was kept for so long; PARALLEL ACCOUNTING MAY HAVE BEEN THE KEY
The Banco Nacional, founded in 1944 by veteran Minas Gerais politician Jose de Magalhaes Pinto, remained in the family's hands right up to last November. But central bank investigations revealed that, since 1986, it had only been able to keep going by means of an elaborate deception that may or may not have been orchestrated by Marcos and Eduardo Magalhaes Pinto, sons of the bank's founder, who were the two senior board members.
Falsified balance sheets. The balance sheets for the past decade were all falsified, according to the inquiries, to give an entirely misleading impression of financial solidity. 'This may have been the biggest and longest-running farce in the financial history of the country,' in the words of Veja magazine.
Former Nacional executives have said that a combination of poor management, a politically-motivated loans policy and imprudent acquisitions had wrecked the bank by 1986. Jose Magalhaes Pinto was a politician rather than a banker -- he was governor of Minas, foreign minister and one of the most prominent civilian backers oi the 1964 military coup -- and he seems to have regarded the Nacional as an instrument to further his political career rather than as a business.
By 1986, when the old man had two severe strokes, the bank's assets of about US$ 250m covered less than half of its obligations. Veja says a Nacional official then came up with ways of hiding this reality from the rest of the world -- enter Clarimundo Sant'Anna, plucked by the Magalhaes Pinto brothers from the obscurity of managing a branch in backwoods Minas.
Parallel accounting. According to his evidence to the central bank inquiry, Clarimundo set up a parallel accounting system within the bank, crediting massive imaginary loans to the current accounts of 642 small debtors, without their knowledge. These fictitious amounts, which appeared on the balance sheets as part of the bank's assets, increased from US$ 600m in 1986to R$ 4.6bn in 1995.
Another senior Nacional executive, Arnoldo de Oliveira, claims he only discovered the dimensions of the fraud a year ago, and was dissuaded from resigning by Marcos Magalhaes Pinto, who told him that his departure would destroy the Nacional's reputation and bring it crashing down.
The best defence that the Magalhaes Pinto brothers could muster, according to some observers, would be to say that they did not fully understand what was going on around them, having neither the technical knowledge nor intellectual capacity to grasp the implications of the cover-up engineered by the likes of Clarimundo Sant'Anna. A source close to the brothers told Veja: 'On banking matters the two of them are complete idiots.'
Similarly, Ana Lucia Magalhaes Pinto, President Cardoso's daughter-in-law, was apparently unaware of what was going on, despite her seat on the Nacional board, because she confined herself to the bank's well-known sponsorship of the arts.
Auditor's role. It is less easy to explain the role of the Nacional's auditors, the international accountancy firm KPMG, which passed the bank's balance sheets for 20 years, until just before the bank went under, without drawing attention to any serious problems.
By the beginning of 1995, rumours were beginning to spread that the Nacional was in difficulties, and it became more difficult for it to raise short-term inter-bank loans. As big companies began to withdraw their accounts, the Nacional was forced to rely increasingly on the central bank for emergency credit lines.
In the end it was only possible to sell the Nacional as a going concern with central bank underpinning. Even then, Unibanco only took on the sound parts of the Nacional, such as its branch network and current accounts, leaving the liabilities for the central bank to sort out.
These included outstanding inter-bank loans totalling R3.5bn from the state-owned Caixa Economica Federal and Banco do Brasil. Settlement of these led central bank officials to admit in the last week of February that total Proer assistance to the Nacional could eventually approach R$ 12bn.
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