Out of Luck: The fall of Banco Espírito Santo

TOM SIMPSON

According to local legend, it was the nuns who gave the abandoned baby on the steps of a Lisbon church his auspicious name: Espírito Santo, or “Holy Ghost.” Nineteen years later, in 1869, José Maria Espírito Santo opened a small stand that sold lottery tickets and changed monies. Two decades later, he transformed his lottery business into another, more lucrative kind of gambling: banking and investing. He grew a corporate dynasty that would last generations and sprawl across an empire. But eventually, through hubris, corruption, and secrecy, it would collapse, nearly bringing down the Portuguese economy in 2014.

After a century and half at the center of Portugal’s economy, Banco Espírito Santo was tanked by offshore, off-balance-sheet transactions. Court documents, corporate data, and information from the Panama Papers leak show how the bank’s use of tax havens in places like the British Virgin Islands shielded the company’s fraudulent financial conduct, making it impossible to know if this mainstay of the Portuguese economy was solvent. Until international regulatory bodies such as the European Commission change key financial rules, it will remain impossible to verify the integrity of banks operating at a transnational level, and institutions like Banco Espírito Santo will continue to conceal their financial health.

The Espíritos were the Rockefellers of Portugal—an ultra-wealthy family with influence over the government. By World War II, Espírito family interests had seeped into nearly every pore of Portugal’s business and political communities. Because Portugal remained neutral during the war, the country was considered a safe haven for wealth from continental Europe, and plenty of money—much of it from Nazi Germany—found its way there. Banco Espírito Santo became the country’s second largest bank by market value and had the support of Portugal’s authoritarian prime minister, António de Oliveira Salazar.

Within Portugal, the Espírito Santo family and its eponymous bank were power players, but they made most of their money outside the country, via Portuguese colonialism. Until the 1960s, only 10 percent of the bank’s investments were in industrial firms. It sunk the bulk of its money into chartered companies—corporations given special rights, usually a local monopoly, by a colonial government. Banco Espírito Santo, for instance, helped finance Companhia do Açucar de Angola, a sugar enterprise that profited from forced labor in the Portuguese colony of Angola.

As Angola and other colonized nations began to declare independence in the 1970s, Banco Espírito Santo maintained its interests in the Lusophone world. After a left-wing government seized power in Portugal in 1974, many Espírito Santo assets were nationalized—but the family had already learned how to keep making money abroad from Portuguese strongholds like Brazil and international cities such as Miami. The Espírito Santos regained control of the bank when the government started privatizing companies again in 1989.

Much of the bank’s focus remained overseas throughout the 1990s and 2000s. Banco Espírito Santo annual reports show that about half of its total revenue “on a recurrent basis” was derived from its non-Portuguese commercial banking units. As recent as the 2010 annual report, for example, the bank noted Angola’s “very high profitability and efficiency levels.”

Over the years, the larger parent company—Grupo Espírito Santo, or GES—had become such a tangle of investments and loans that the Espírito Santo family could no longer keep tabs on all the companies. This was a problem once the global economy slowed in 2008. Banco Espírito Santo was GES’s crown jewel, but the conglomerate also invested in everything from an Angolan diamond mine to Miami condos to a soybean farm in Paraguay.

“The family eventually lost track of all these different businesses,” Ricardo Cabral, an economics professor at the University of Madeira told Bloomberg News in 2014. “The group amassed too much debt. It kept on postponing the problems by rolling over debt with short maturities and at high interest...