[Note: Since the date of this post, there has been no indication that investment bank CFE has been charged with or convicted of any criminal or regulatory offense relating to the sale of bonds created from unpaid invoices. A 2020 fundtruffle article reported that “financial institutions are often unwittingly involved with the black economy and in CFE’s case, a complex securitisation worth over €2 billion unfortunately had some assets that were tainted by their association with the Ndrangheta, or Calabrian organised crime. The firm may be considered to have quite a high risk appetite but this doesn’t extend to dealing with organised crime, in this case it seems to have been the victim rather than the perpetrator.”]
On July 7, the Financial Times reported that between 2015 and 2019, investors bought approximately €1 billion in private bonds that were “backed by the crime proceeds of Italy’s most powerful mafia,” the Calabrian ‘Ndrangheta. The bonds were reportedly “backed in part by front companies charged with working for” the ‘Ndrangheta.
Although Italian law did not designate the ‘Ndrangheta as a mafia organization until 2010, one criminologist has stated that it has existed for as long as the Sicilian Cosa Nostra. According to the Financial Times, the ‘Ndrangheta, which consists of hundreds of autonomous clans, “has risen over the past two decades to become one of the wealthiest and most feared criminal groups in the western world,” with a collective annual turnover of €44 billion.
The Financial Times stated that the bonds in question
were created out of unpaid invoices to Italian public health authorities from companies providing them with medical services.
Under EU law, overdue invoices owed by state-connected entities incur a guaranteed penalty interest rate. This makes them attractive for special purpose vehicles, which place them into a large pool of assets and issue bonds backed by the expected cash flows from the future settlement of the invoices.
A Geneva-based investment bank, CFE, allegedly constructed the vehicle that sold the bonds to investors, who included pension funds, hedge funds, family offices, and “one of Europe’s largest private banks, Banca Generali.” Almost all of the deals “were private deals not rated by any credit rating agency or traded in financial markets.”
CFE stated that it “had never knowingly purchased any assets linked to criminal activity,” adding “that it conducted significant due diligence on all the healthcare assets that it handled as a financial intermediary, and that it also relied on the checks of other regulated professionals who handled the invoices after their creation in Calabria.” It also noted “that the total amount of invoices later revealed to be linked to organised crime made up a very small proportion of the total amount of assets it had handled connected to the Italian health systems.”
Note: This report – on which the Financial Times indicated it will expand in a forthcoming Financial Times Weekend Magazine investigation – indicates the care with which financial institutions need to conduct due diligence on prospective and current investments. Explanations that a firm did not knowingly purchase assets linked to criminal activities is likely to carry little if any weight with financial regulators — not least because knowing purchases of criminally derived assets would constitute money laundering in multiple countries’ anti-money laundering (AML) laws. In addition, the report indicates that financial institutions may need to expand their AML risk assessment processes to include systematic intelligence-gathering on significant criminal organizations active in those institutions’ key markets and the principal types of investments those organizations are seeking to exploit.
Dipping Through Geometries 