A Report on Banco Espirito Santo Scandal

Abstract

Banco Espirito Santo is a practical example of what the lack of proper audit oversight and the mismanagement from the owner can do. The company that has survived two world wars, political upheaval, economic transitions could not survive under the leadership of an autocratic business leader. Banco Espirito Santo went from being the second-biggest bank in Portugal to a victim of mismanagement and fraudulent activities. The report shows the complex company structure which made the overall fraud process feasible for the company and how they have been doing it for many years. Espirito Santo Family started business in the financial sector, but they branched out in real estate, tourism, agriculture and many other fields. The overall form and the company structure is so complicated that even in simple words it takes a lot of time to understand the overall company structure. On top of that, their listing in many countries made it difficult to keep them under observation as they fall under a different jurisdiction. Banco Espirito Santo has been under the leadership of Sagaldo who has been working as the CEO since 1991. The parent company was highly leveraged, money was taken out of the bank using complex financial tools and special purpose vehicles. They used their offshore banks and special purpose vehicles in order to bring out more money as debt. However, the revenues from other business tanked and they could not keep up paying the interest on the loans they have taken. The Espirito Santo family sold their parent company loans to the retail customers of the bank as commercial paper. However, the situation deteriorated and they no longer have the ability to pay back their loans and filed for bankruptcy. The case of BES showed how the lack of proper audit created the chance for fraud.