Portugal – a Country Struggling with Corruption Scandals

Portugal, 04 Mar - 31 Mar 2015
The Submarines Affair – ten suspects found not guilty ++ The fall of ‘Banking Empire’ BES – clients want their money back ++ Public support for arrested former PM Sócrates. by Joana Pinto Oliveira
The Submarine Affair – ten suspects found not guilty

One of the most important portuguese book publishers, Porto Editora, declared ‘corruption’ as “Word of the Year” in 2014, after it had received an overwhelming majority in an online voting. Due to the economic and financial crisis, which has resulted in negative economic growth, rising unemployment and social difficulties for the past five years, Portugal equalled financial debt, bail-out programs and austerity. Now, more than anything, Portugal in one word means `corruption´.

By the end of March, the Lisbon Court of Appeal confirmed the decision by the Portuguese Criminal Court in 2014 to declare ten suspects – three German administrators and seven Portuguese businessmen – not guilty in the so called Submarines Affair, a major bribery scandal.

In 2004, the Minister of Defence at the time and current Deputy Prime Minister Paulo Portas decided that the National Navy needed to buy two submarines. A contract was signed with the German Submarine Consortium (GSC), composed of three major companies in the industry. In 2006 the Portuguese Public Prosecutor’s Office started investigating the case, because conjectures had been raised that Portas’ conservative Christian Democratic Party (CDS – People’s Party) was receiving money illegally.

The offsets contract, an agreement between parties and the German companies, from which the parties benefited, ruled that 1.2 billion Euros should be invested in the Portuguese economy. According to experts, this arrangement cost Portuguese taxpayers 34 million Euros. In 2010, this contract became a major issue within the acknowledgment of the national budget crisis. Two German executives were prosecuted and found guilty of bribery in 2011 in their home country.

The fall of ‘Banking Empire’ BES – clients want their money back

Dozens of clients of former bank Banco Espirito Santo (BES) demonstrated in front of Portugal’s central bank (Bank of Portugal) at the end of March and demanded the repayment of money they had invested in commercial papers and deposits issued by BES. In 2014, BES went bankrupt. Despite promises that people owing retirement saving plans and other banking applications would not lose the money they had invested – sometimes whole life savings – the clients recently had to realise that they are not going to see any of it again.

The scandal surrounding the Portuguese ‘Bank Empire’, became public last June. The Governor of the Bank of Portugal tried to force the members of the board of BES to renounce their administrative powers, mostly because of the negative news that had been spread throughout the media. A few days later it was acknowledged that Portugal Telecom (PT) – the former state-owned telecommunications monopoly company, now a subsidiary of Oi (a leading Brazilian enterprise in the South American telecommunications market) – had bought 900 million Euro of short-term debt to Group Espirito Santo (GES), the bigger corporation BES was a part of. The Portuguese Securities Market Commission, responsible for analysing and keeping track of market irregularities, decided to look deeper at the situation since PT tried to benefit its main shareholder.

BES did a prospect of capital increase, and by July 2014 BES accounts concerning the first half of 2014 were made public. The numbers were a great surprise, even to the Bank of Portugal. The accounts ended up revealing non-compliance with its obligations of reimbursement of loans, among other things. The investors, interested in the raise of capital that had been predicted, retreat and the bank started facing a lack of investment.

Since there was no time for auditions and BES/GES was about to “sink” within just a few days. The Bank of Portugal, the government, the European Commission and the European Central Bank decided to gather in order to avoid the settlement of BES. Nationalisation and recapitalisation were traumatic options for the Portuguese banking history and so a ‘bail-in’ was the final choice. According to some experts, this decision, normally taking place before bankruptcy, was a tough option because shareholders would lose everything while, hypothetically, taxpayers would lose nothing.

A new bank was born in order to “clean” history, and was called ‘New Bank’ (Novo Banco). It was recapitalised by a ‘Resolution Fund’, which has had 367 million Euros at its disposal since its founding in 2013. However, not enough to help New Bank’s challenges. Eventually, the Resolution Fund had to apply for a loan by the Portuguese state and by the other private banks operating in the Portuguese banking system, unwilling to get caught up in a bad “wave”.

In November 2014 a parliamentary inquiry committee started to audit the former management of GES regarding the collapse. It was supposed to last four months but it continues until today. Deputies have to finish their final report until the end of April, was reported on Easter Sunday. The process of selling New Bank to a new investor must be concluded until this summer. Various investors from different nations are interested. The New Bank workers commission seems to prefer that it stays in Chinese hands. A final decision shall be reached by Bank of Portugal in the near future. Also the final conclusions taken by the members of the Portuguese parliament, auditing how BES became bankrupt, are still to be made public soon.

Public support for arrested former PM Sócrates

The civic movement “José Sócrates forever” assembled in front of the prison in the city of Evora, where José Sócrates, a member of the centre-left wing Socialist Party and Prime Minister between 2005 and 2011, is being held under precautionary arrest. The participants sang Socrates a supporting anthem. The movement accuses the authorities of having imprisoned the former Prime Minister for political reasons. Many members of the Socialist Party disapprove of the arrest as well.

Sócrates was arrested in November of 2014. Investigations surrounding a 600.000 Euro transfer from his mother's bank account began in 2012. The money came from the sale of an apartment in Lisbon Sócrates had owned. He is being accused of actions he committed before, during and after he was the head of the Portuguese Government. The Prosecutor’s Office is suspicious about financial transactions that occurred during a period of nearly ten years. He is indicted for corruption, qualified fiscal fraud and money laundering.

In February, the movement “White Revolution”, a civic association committed to fighting corruption, was admitted as accusation assistant in this trial. The association will have access to the main documents and will be able to collaborate with the Prosecutor’s Office.

Portugal has been facing turbulent times. It seems that the judicial system is undergoing change and bribery is starting to be addressed. More and more scandals are being brought up by the media, but it remains to be seen, if the fight against corruption will be a long-term and complete success.

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