BOV’s Deiulemar Trust fiasco

Guest commentary from financial services practitioner Paul Bonello

Now that the BOV Deiulemar Trust Chapter is coming to an end, it is dawning on many investors, among others, that this was really a cause for concern.  So far, many had believed – perhaps against their better judgement – the insistence of BOV’s board and top management in belittling the Deiulemar episode and that, in the end, this would fizzle into nothing.

This has been BOV’s battle cry during the last seven years in which the litigation was ongoing. While disclosing the existence of this litigation, BOV speakers, including the three chairmen since the litigation started, also spoke at the annual general meeting and press conferences as if this was nothing to worry about because BOV had a solid case.

This almost nonchalant make-believe behaviour was also the mantra of the Bank at the time of the last Rights Issue, as indeed all stockbrokers can testify to the oral representations of the BOV speakers, namely that with the capital increase the Bank can take advantage of many business opportunities and profits would double.

The share price of the Bank since then has had only one southerly direction, and dividends have practically ceased, only restricting itself to the distribution of bonus shares in further taking its shareholders for a ride.

Luckily, I had already completely lost faith in BOV management and believed nothing of what they said.  Finco Treasury management advised clients not only not to take up their rights, but indeed to sell a number of their existing shares equivalent to their rights entitlement, and in this way they reduced their exposure, selling at the pre-rights inflated price.

Now, after the announcement this week that the Bank came to a final settlement of €182.5 million, the current chairman of the Bank, Gordon Cordina, is admitting that this case was crucial, indeed “existential” and could have brought about the liquidation of the Bank.

The Bank remained economical with the truth even when issuing its statement earlier this week. Yet it avoided mentioning that this settlement meant that the Bank would have a direct hit on its profit & loss account of a further €102.5 million, having only provided €80 million so far.

Indeed, it gave the impression that this settlement would be a cause for the release of profits of almost €190 million due to the release of the deposito cautelatorio for the full €370 million of the Deiulemar claim that BOV had made some two years ago, which of course is not the case as this did not constitute an accounting provision.

Readers ought to be reminded that this Deiulemar Trust was conceived around 2009.  It was the result of a Swiss Bank referring one of its clients to BOV – a shipping group from Torre Annunziata, in the heart of the Camorra, of the same calibre as Corleone is in relation to the Sicilian Mafia.

The Swiss Bank was Banco Svizzero d’Italia Trust Corporation Ltd Malta, whose parent company is the Italian Swiss bank BSI of Lugano.  Indeed, the Swiss private bank in Malta’s registered office was the same as the BOV head office in Zachary Street, Valletta, at the time.  Swiss bankers, or rather Italian Swiss bankers, are of course no fools and know what business to keep to themselves and what other business to charitably refer to others.

It would be interesting to have confirmation from BOV of the level of fees earned on the Deiulemar Trust or whether it is true that this case was treated as if it were a small family Trust holding a few shares in a top holding company of a group,  earning BOV a few thousands.

Investors, and others like Arnold Cassola, are now asking who is to shoulder responsibility for this debacle, for this mammoth loss of €182.5 million, plus a few other million in litigation costs in Malta and Italy, and the priceless loss of reputation of the Bank.  The Bank would have become a perfect candidate for a take-over acquisition had it not been for Malta’s greylisting and Malta becoming a no-go area for international finance.

BOV, in response to pressure from the press, came out earlier this week with the result of an investigation already made by the Bank, and held to its chests so far, which found that no employees of the Bank were responsible.  And I, for once, must agree with this conclusion of this internal investigation, although the Bank tried to infer and give the impression that the Bank had no fault.

If it had no fault why would it agree to pay €183 million of its shareholders’ funds so capriciously?  Why come with such a puerile stand, reminiscent of when in childhood we would solemnly declare it was not us who caused the vase to break to pieces?  If it is not the Bank’s fault, whose fault is it then?  Perhaps the work of the Holy Spirit?

Of course, the Bank’s employees – which includes the line and branch managerial staff – are not to blame for this umpteenth fiasco of BOV, to be added to the La Valette Property Fund, the Falcon Funds, the €2.5 million fine inflicted by the FIAU for the systemic failure of anti-money laundering procedures in opening corporate accounts.

The employees were executing the policies established by successive Bank boards.  They were promoting the products that the board and executive committee designed for them for indiscriminate selling to all, starting from Trusts, to VFM funds, including the professional investor fund of La Valette Property Fund, to giving quotations and estimates for MSV Life Policies which quotations and estimates –  policyholders now realise – on maturity yield only 45% to 55% of the estimates given at pre-sale stage, to the more recent Electrogas power station loan of €360 million.

But – as in so many other things in Malta – nobody is blamed for the fracas, while the cost is borne by the small shareholders and the public, the most important shareholder.

It was the chairman and board of directors appointed in the third and final legislature of the Nationalist government that decided to go for the Trust business, and this without first understanding the business and its full implications and liabilities for Trust banks in the second millennium.  It was the Bank’s chairman, board of directors and executive committee that required branch employees to start selling Trusts to every Tom, Dick and Harry in our towns and villages as if it were some new wonder financial product.

I recall some of my clients, hairdressers, grocers and mechanics, feeling so important that BOV had set up an unsolicited family Trust for them, perhaps believing that this would also help them save on taxes or protect the family from business creditors or avoid mandatory requirements in our succession law.

This was the same board that had promoted the La Valette Property Fund which – as confirmed by the MFSA in 2012 and by the Arbiter for Financial Services in 2016 –  had committed multiple breaches of the Fund’s Investment Restrictions, and where the Bank, as custodian, closed both eyes to what happened and issued clean Custodian Reports.

Then the Bank, knowing no shame, insisted at the Court of Appeal stage that the investors had accepted the Bank’s offer of €0.75 per share in full and final settlement, and therefore there could be no further judicial review of the case.  But it has to be emphasised: the Bank was completely at fault on merit; in the end, the Bank managed to reverse the Arbiter’s decision only on matters of form, avoiding paying the full price of compensation to its loyal clients in the Fund only because of its arrogance and sense of entitlement.

And this is where the Nationalist government of 2008 to 2013 is at fault, also for this Deiulemar debacle and others.  I remember former prime minister Lawrence Gonzi, former finance minister Tonio Fenech and former consumer affairs minister Jason Azzopardi extolling the qualities of their selected and infallible Chairman Roderick Chalmers, appointed straight from retiring from PricewaterhouseCoopers (PWC) Asia.  This political class is responsible for its miserable choices, what in legal circles would be called culpa in eligendo (fault in selecting).

The subsequent Labour government is also responsible, in part.  Joseph Muscat quickly forgot the pre-election criticism of the Bank’s top management.  Indeed, the previous top management – the same top management in the Executive Committee that was responsible for both the Deiulemar Trust and the La Valette Property Fund – were either given top golden handshakes on retirement or else one further promotion after another.

Members of the new Labour government lent their unlearned support to the BOV cause; the then Parliamentary Secretary for Competitiveness José Herrera weighed in soon after this Deiulemar case became public knowledge, saying that BOV shareholders had no cause for alarm: “The bank has engaged top lawyers in Malta and Italy… the case is a long shot and the odds are very much in favour of BOV”.  What do you say now, Dr Herrera?

Naturally, the above notwithstanding, there will be no shocks in the board and management strata of the Bank.  It is business as usual. The absence of a sense of shame in Malta is such that repeated fiascos and debacles will not make any of the culprits question their own performance and the consideration of possibly taking a step back and being part of a mass resignation of the Bank’s managerial class.

Rather, this same management, believing so much in themselves, created their right to install a board of directors and top management profit-sharing remuneration scheme, a proposal passed with “unanimity” at an annual general meeting conducted remotely on Zoom in the thick of COVID.

This is Malta’s political and managerial class.