Parmalat shareholders will on Tuesday elect a new board of directors, signalling the revival of the Italian maker of milk, yoghurts and fruit juices less than two years after its collapse in Europe’s biggest corporate fraud. The ripple effect, however, is likely to be felt for years as regulators, banks, auditors and politicians grapple with an uncomfortable question: has enough action been taken to prevent another Parmalat?

Parmalat shows all that is good and bad about Italy. What is particularly worrying is that the fraud went undetected for the 13 years that the company was publicly traded on the Milan stock exchange – 1990 to 2003 – even though the profit and loss statement was fictitious throughout that period and the balance sheet for 2003 understated debt by almost €12bn ($14bn).

The gatekeepers of capital markets – directors, regulators, auditors, credit-rating agencies, analysts, investment bankers and other financial intermediaries such as members of my own profession, lawyers – all failed to protect investors, despite an abundance of red flags. That points to a systemic failure.

As with other financial frauds, including Enron, the gatekeepers’ failure can be explained by significant conflicts of interest. It also reflects perverse incentives, poor internal controls, limited resources, lack of moral courage and sometimes just sheer corruption. They failed to protect Parmalat’s shareholders and creditors; they also failed to protect their own institutions and reputations.

The soul-searching in Italy has yielded some positive results, stinging regulators, large companies and prosecutors into action. Borsa Italiana, the stock exchange regulator, is reviewing its code of corporate governance. Several listed companies are rewriting governance rules, often inspired by the measures adopted by Parmalat – the most advanced in Italy. A number of banks have introduced better internal controls and compliance programmes. Consob, the securities regulator, has improved its ability to respond in a timely fashion. Criminal prosecutors and investigators have developed a better understanding of certain financial schemes and, as seen in recent events related to the takeover bid for Banca Antonveneta, they do not shy away from bold investigative measures.

Parmalat also led to an overdue overhaul of insolvency law. The rapid legislative response of the government and parliament following the collapse of Parmalat in December 2003 helped save thousands of jobs by giving the administrator greater flexibility and authority in how he operated the business and the recovery process for creditors. The result is that Parmalat is now a nimble, healthy enterprise with a bright future. The successful flotation a month ago means that creditors have benefited from a significantly better recovery than expected.

But the response to the scandal has not gone nearly deep enough. Italy has not significantly increased resources available to help supervise capital markets. Almost two years on, Italy has no legislative response equivalent to the US Sarbanes-Oxley Act, even though recent events surrounding the Bank of Italy have made reform more urgent.

Parliament has yet to enact a bill aimed at protecting minority shareholders and reducing the risk of financial frauds. The measures envisaged in the draft law include a lower threshold for bringing claims against directors, enhanced disclosure requirements, new rules on the prevention of conflicts of interest for financial intermediaries, criminal and civil liability for financial officers, transparent accounting for off-shore entities, and reform of the rules governing the Bank of Italy.

Regrettably, Italy has lost an
important opportunity to show that
it is able to tackle problems by
passing timely structural reforms.

But it is not just the Italian authorities that should have responded with greater urgency. Parmalat reflected a feature common to many recent financial frauds: their global dimension. Global markets are being overseen by fragmented supervisory regimes, usually organised on a national basis, allowing fraudsters in multinational companies to seek out regulatory weak points around the world, often thousands of miles away from where business is being conducted. Parmalat raised money on international capital markets from lenders based in some 100 countries. Many of the financial shenanigans by the former managers were in certain offshore centres, where financial regulation is, to put it politely, skimpy. International co-operation must be stepped up, with the European Union and the US taking the lead.

Bruno Cova is co-chairman of the Milan office of international law firm Paul Hastings. He was the chief legal adviser to Enrico Bondi, Parmalat’s administrator, from January 2004 to April 2005

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