The disclosure of a
long-running fraud in a mid-size Brazil-based bank raised alarms
about governance and regulation in the country’s banking industry.
But, as Rodrigo Amaral reports, the authorities claim the case
demonstrates the regulatory framework works well and prevented the
scandal affecting the whole sector.
Go deeper with GlobalData
In November, the Brazilian
Central Bank revealed that large discrepancies had been found in
the reporting of operations involving the sale of loan portfolios
at Banco Panamericano, the country’s 20th largest bank by
assets.
The case attracted much
attention in the Brazilian media because Panamericano’s majority
shareholder is a media magnate and one of the most loved public
figures in the country.
It also caused concern
because Panamericano received a capital injection last year from
Caixa Econômica Federal, (CEF) the state-owned retail bank, after
doubts were raised about its financial health.
But CEF, which acquired a 49%
stake in the bank, failed to detect the problems in Panamericano’s
balance sheet, even though a due diligence procedure was performed
before the operation was sealed.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataAccording to the
investigators, Banco Panamericano sold hundreds ofms of reais in
loan portfolios to other banks in the past four years, but kept
recording the loans as assets in its own balance sheet. Thus the
bank’s capital positions were inflated, artificially boosting
profits and generating higher bonus to executives.
Anomalies
noticed
The Central Bank took notice
of anomalies in the market earlier this year, and pinpointed them
to Panamericano. In September, the managers of the bank were
summoned by the regulators to provide explanations.
Two months later, the bank
received an injection of BRL2.5bn ($1.47bn) from FGC, Brazil’s
deposit insurance fund. Several managers were fired, CEF is
strengthening its presence in the board, and the majority owner of
Panamericano, media entrepreneur Silvio Santos, had to put some of
his companies and even properties on the line as guarantees to the
loan.
The authorities celebrated
the case as a sign that Brazil’s regulatory framework is doing its
job.
“The important thing here was
that the Central Bank was able to identify the problem before it
caused harm to the system,” said Henrique Meirelles, outgoing
chairman of the Brazilian Central Bank.
“The only person to have been
affected by the fraud was the controlling shareholder, which is the
right thing to happen.”
But the crisis has raised
concerns that governance in Brazilian small and medium banks may
not be up to scratch.
In an interview with economic
daily Valor Econômico, Renato Martins Oliva, the chairman of
Associação Brasileira de Bancos an industry association, conceded
that investors were spooked by the idea that Panamericano might not
be an isolated case, and that more time bombs involving the sales
of loan portfolios could be hidden in banks’ balance
sheets.
Proof of that is the fact
shareholders have, in recent weeks, hired external auditors to go
through, again, the data on sales of loans portfolios by banks they
own, he said.
“I don’t see another
Panamericano in the system,” said Oliva.
But there is no doubt that,
in Panamericano’s case at least, governance left much to be
desired.
“Shareholders were not paying
enough attention to the reports. Auditors didn’t do their work
properly. It was string of failures,” said Norma Parente, a former
chairman of Comissão de Valores Mobiliários (CVM), Brazil’s
securities commission.
Meirelles rejected any hint
that regulators were to blame for the Panamericano mess, pointing
to corporate governance structures of banks as the main culprits
for having missed irregularities that took place for a number of
years.
In this context, the episode
has highlighted the role of auditing companies in guaranteeing the
reliability of bank reports, which are the documents that the
Central Bank examines in order to check the systemic health of the
banking industry.
Two of the most respected
names in the industry have been caught up by the bad publicity of
the case. Deloitte was the external auditor of Banco Panamericano,
and allegedly they did not spot the discrepancies.
KPMG, for its part, was the
auditor chosen by CEF in the due diligence process prior to the
capital injection and apparently, they did not report anything
wrong either.
“Auditing processes need to
change in Brazil,” said Marcos Assi, a São-Paulo compliance and
accounting expert. “To reduce their costs, auditing companies send
junior staff to perform delicate audits when clients are not big
enough.”
As a result, many of the
people responsible for keeping managers on their toes are
ill-prepared for the task, especially when complex operations are
the matter.
“During the financial crisis,
the Central Bank urged small banks to sell their credit portfolios.
Auditors should therefore be aware that they needed to check these
operations thoroughly,” added Assi.
Parente, for her part, noted
that proposals have been advanced by CVM, when she was the
chairman, to impose a rotation of auditing companies, which would
reduce the risk that irregularities went ahead unnoticed. But,
according to her, the Central Bank has rejected the move, and
auditors are only required to rotate the staffers who check the
accounts of their clients.
Harsher
punishments
Assi argued that harsher
punishments for auditors who do not do their jobs properly should
also be considered to spruce up the quality of auditing in the
market as a whole. But Brazil’s record in this particular area is
not bright. The Central Bank has announced, meanwhile, that it is
overhauling the way it oversees the sales of loan portfolios. A new
specialised team has been formed within the institution to compare
data provided by banks that sell and buy the loans, in order to
identify discrepancies more quickly.
The Central Bank has also
been reported to have drafted a list of 14 former executives of
Panamericano suspects of being the main authors of the
fraud.
Engaging into a bit of
punishing would be an important by Brazilian authorities towards
avoiding damage to the reputation of the Brazilian banking
system.
After all, Brazil’s long history of white collar crimes
impunity is seen by experts as a major reason why scandals like
Banco Panamericano take place.
