ECB-CARIGE: another important case lost at the European Court of Justice

Annuls European Central Bank (ECB) Decision LS/LdG/19/185 of 12 June 2019 refusing access to several documents relating to Decision ECB-SSM-2019-ITCAR-11 of the Governing Council of the ECB of 1 January 2019 placing Banca Carige SpA under temporary administration;

Source: http://curia.europa.eu/juris/document/document.jsf?text=&docid=227741&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=7321946

Provisional text

JUDGMENT OF THE GENERAL COURT (Fourth Chamber)

25 June 2020 (*)

(Access to documents — Decision of the ECB to place Banca Carige SpA under temporary administration — Refusal to grant access — Default procedure)

In Case T‑552/19,

Malacalza Investimenti Srl, established in Genoa (Italy), represented by P. Ghiglione, E. De Giorgi and L. Amicarelli, lawyers,

applicant,

v

European Central Bank (ECB), represented by F. von Lindeiner and M. Van Hoecke, acting as Agents, assisted by D. Sarmiento Ramírez-Escudero, lawyer,

defendant,

APPLICATION under Article 263 TFEU for annulment of ECB Decision LS/LdG/19/185 of 12 June 2019 refusing access to several documents relating to Decision ECB-SSM-2019-ITCAR-11 of the Governing Council of the ECB of 1 January 2019 placing Banca Carige SpA under temporary administration,

THE GENERAL COURT (Fourth Chamber),

composed of S. Gervasoni, President, P. Nihoul (Rapporteur) and J. Martín y Pérez de Nanclares, Judges,

Registrar: E. Coulon,

gives the following

Judgment

 Background to the dispute

1        The applicant, Malacalza Investimenti Srl, is a company incorporated under Italian law. It is the main shareholder of Banca Carige SpA, of which it directly holds 27.555% of the share capital.

2        On 20 September 2018, Banca Carige’s board of directors was renewed by the general meeting of the shareholders. On the basis of its shareholding in that company, the applicant appointed the majority of the members of the board of directors.

3        On 22 December 2018, following a new general meeting of Banca Carige’s shareholders at which the proposal to increase the share capital to EUR 400 million was rejected, a number of members of the board of directors resigned.

4        By decision of 1 January 2019 (‘the decision of 1 January 2019’), the European Central Bank (ECB) placed Banca Carige under temporary administration in accordance with the Italian law implementing Article 29 of Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012 of the European Parliament and of the Council (OJ 2014 L 173, p. 190). It thus ordered the dissolution of the administrative and supervisory bodies of that company and appointed three temporary administrators and a three-member supervisory committee.

5        The decision of 1 January 2019 was not published and the reasons underlying it are not known to the applicant. The only form of publicity adopted by the ECB is a press release of 2 January 2019 announcing the names of Banca Carige’s temporary administrators and the members of its supervisory committee and describing in general terms the concept of temporary administration and the duties of the temporary administrators.

6        On 15 January 2019, the applicant submitted to the ECB a request for access under Article 6 of Decision 2004/258/EC of the ECB of 4 March 2004 on public access to ECB documents (OJ 2004 L 80, p. 42), concerning:

–        the decision of 1 January 2019 and its annexes;

–        the documents, relating to the period from 30 November 2018 to 2 January 2019, containing other decisions taken by the ECB in relation to Banca Carige, including the draft decision on the capital conversion plan with its tables and annexes, communications between the ECB and the board of directors of that company or one or more of its members, and the minutes of meetings between the ECB and the board of directors of that company or one or more of its members.

7        On 14 February 2019, the ECB informed the applicant that the period for replying to the request for access to documents had been extended by 20 working days, in accordance with Article 7(3) of Decision 2004/258, because of an increased workload.

8        On 17 February 2019, the applicant replied to the ECB, disputing the compatibility of the extension of the period for processing its application with Article 7(3) of Decision 2004/258.

9        On 19 February 2019, the ECB replied to the applicant, stating that Article 7(3) of Decision 2004/258 had been invoked to extend the period for processing the applicant’s request for access to documents in view of the receipt of numerous requests concerning Banca Carige and consultations with the Bank of Italy on the same issue.

10      By decision of 13 March 2019, the ECB rejected the request for access in its entirety.

11      On 8 April 2019, the applicant submitted a confirmatory application to the Executive Board of the ECB pursuant to Article 7(2) of Decision 2004/258, requesting a review of the ECB’s decision of 13 March 2019. In that confirmatory application, however, it excluded from its request for access the capital conversion plan with its tables and annexes, which it had received in the meantime from the temporary administrators of Banca Carige.

12      The applicant pointed out that extracts from a document presented as the decision of 1 January 2019 had been published, in the form of photographs, on the website of an Italian daily newspaper. It submitted that, if those photographs did indeed reproduce that decision, the extracts contained in them could no longer be regarded as confidential since, having been published, they were now in the public domain. The applicant argued that, in any event, those extracts did not contain any confidential information, since all the data contained therein appeared on the information documents that Banca Carige publishes in accordance with the legislation applicable to credit institutions listed on regulated markets.

13      The applicant also reiterated its request for access to the full version of the documents requested or, in the alternative, to a non-confidential version taking into account the extracts of the decision of 1 January 2019 already published on the Internet and the time that had elapsed since that request, by reason of which the confidentiality of certain information was no longer required. With regard to the written communications between the ECB and Banca Carige’s board of directors and the minutes of the meetings between those parties, the applicant requested a list of the communications and meetings, the names of the participants and a general description of the content of those communications and meetings.

14      On 3 May 2019, the ECB informed the applicant that, in accordance with Article 8(2) of Decision 2004/258, it had decided to extend the period for replying to the confirmatory application by 20 working days due to an exceptional workload.

15      By letter dated 29 May 2019, the ECB announced that the new due date set for 4 June 2019 would not be met.

16      On 12 June 2019, the ECB decided to reject the confirmatory application in its entirety (‘the contested decision’). That decision reproduces, essentially, the reasons given in the ECB’s decision of 13 March 2019.

 Contested decision

17      In the contested decision, the ECB identified eight documents in relation to the applicant’s request for access and classified them into four categories:

–        the decision of 1 January 2019;

–        the capital conversion plan and any other written decision concerning Banca Carige adopted during the period from 30 November 2018 to 2 January 2019;

–        written communications between the ECB and Banca Carige’s board of directors or one or more of its members during that same period;

–        the minutes of the meetings between the ECB and Banca Carige’s board of directors or one or more of its members during that same period.

18      The refusal to grant access to the document coming within the first category, namely the decision of 1 January 2019, is based on the exception under Article 4(1)(c) of Decision 2004/258, which provides that ‘the ECB shall refuse access to a document where disclosure would undermine the protection of … the confidentiality of information that is protected as such under Union law’.

19      The ECB took the view that Article 4(1)(c) of Decision 2004/258 contained a general presumption of confidentiality covering all cases coming within the scope of the prudential supervision task entrusted to it.

20      The ECB inferred the existence of that general presumption of confidentiality from the fact that the EU legislature had laid down rules which, first, impose professional secrecy on all persons working or having worked for the prudential supervisory authorities and, secondly, require that confidential information which those persons receive in the exercise of their functions may be disclosed only in summary or aggregated form, in such a way that credit institutions cannot be identified. In that context, it referred to Article 27 of Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (OJ 2013 L 287, p. 63), to Article 53 et seq. of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ 2013 L 176, p. 338), and to Article 84 of Directive 2014/59.

21      Invoking the judgment of 19 June 2018, Baumeister (C‑15/16, EU:C:2018:464, paragraphs 35 to 43), the ECB stated that, in the field of prudential supervision, the obligation to protect confidential information should not be conceived as an exception to the general principle of transparency, but rather as a general rule in itself. In its view, those rules and the resultant general presumption of confidentiality ensured the effective conduct of supervisory activities, since both the bodies being supervised and the competent authorities could rely on the fact that, in principle, confidential information which had been provided would not be disclosed. According to the ECB, that confidence is essential for an effective exchange of information, which in turn is crucial for the proper conduct of prudential supervision.

22      Lastly, the ECB observed that the rules referred to in paragraph 20 above allowed the disclosure of confidential information only in certain cases expressly provided for, which did not feature in the present context.

23      For the other three categories of documents requested, the refusal to grant access is based on the exception under Article 4(1)(c) of Decision 2004/258, in conjunction with that under the first indent of Article 4(2) of that decision, which states that ‘the ECB shall refuse access to a document where disclosure would undermine the protection of … the commercial interests of a natural or legal person, including intellectual property’.

24      So far as the first indent of Article 4(2) of Decision 2004/258 is concerned, the ECB stated that disclosure to the applicant of the documents obtained or prepared in the context of the ongoing supervision of Banca Carige could harm the commercial interests of that company, since the information contained therein was not publicly known and reflected an essential element of that company’s current commercial position.

25      Having identified no overriding public interest justifying disclosure of the documents in question, the ECB also took the view that the request for access to those documents should be rejected without carrying out a concrete and individual examination of each of them.

 Procedure

26      By application lodged at the Court Registry on 7 August 2019, the applicant brought the present action.

27      By separate document lodged at the Court Registry on the same day, the applicant requested that the present action be dealt with under an expedited procedure in accordance with Article 152 of the Rules of Procedure of the General Court. The application and the request for an expedited procedure were served on the ECB on 20 August 2019. On 3 September 2019, the ECB lodged its observations on that request.

28      By decision of 18 September 2019, the General Court (First Chamber) rejected the application for an expedited procedure. The ECB was informed that, in accordance with Article 154(2) of the Rules of Procedure, the period for lodging the defence, to which the 10-day extension on account of distance is added, had been extended by a further month.

29      Following a change in the composition of the Chambers of the Court, the Judge‑Rapporteur was assigned to the Fourth Chamber and the present case was re-assigned to that Chamber.

30      The ECB lodged its defence on 6 November 2019.

31      By letter of 8 November 2019, in view of the late lodging of the defence, the Registrar of the Court requested the applicant to submit its observations on the further course of the proceedings.

32      On 20 November 2019, the applicant lodged its observations on the further course of the proceedings and, pursuant to Article 123(1) of the Rules of Procedure, applied to the Court for judgment by default.

 Form of order sought by the applicant

33      The applicant claims that the Court should:

–        annul the contested decision;

–        order the ECB to pay the costs.

34      The applicant also requests the Court to take, pursuant to Article 88 of the Rules of Procedure, a measure of inquiry concerning the production of the documents to which access was refused in the contested decision.

 Law

35      Under Article 123(1) of the Rules of Procedure, where the Court finds that a defendant on whom an application initiating proceedings has been duly served has failed to respond to the application within the time limit, the applicant may apply to the Court for judgment by default.

36      In the present case, the ECB lodged the defence on 6 November 2019, that is to say, seven days after the expiry of the period provided for in Article 154(2) of the Rules of Procedure.

37      The period for lodging the defence, which, if the Court had granted the application for an expedited procedure, would have expired on 30 September 2019, expired on 30 October 2019, since a single extension on account of distance is applied for the purposes of calculating the period for lodging the defence when an application for an expedited procedure is rejected (see, to that effect, order of 7 June 2017, De Masi v Commission, T‑11/16, not published, EU:T:2017:385, paragraphs 17 to 20 and paragraph 22).

38      Thus, the ECB did not reply to the application within the prescribed period.

39      Since, as stated in paragraph 32 above, the applicant has applied to the Court for judgment by default, Article 123(3) of the Rules of Procedure must be applied.

40      In accordance with Article 123(3) of the Rules of Procedure, the Court is to give judgment in favour of the applicant in the judgment by default, unless it is clear that the Court has no jurisdiction to hear and determine the action or that the action is manifestly inadmissible or manifestly lacking any foundation in law.

41      In the first place, it should be noted that, as is apparent from the application, the applicant is requesting the Court to annul a decision of the ECB’s Executive Board addressed to it, confirming the refusal to grant access to the documents requested by the applicant.

42      Under the first paragraph of Article 263 TFEU, the Court of Justice of the European Union is to review the legality of acts of the ECB intended to produce legal effects vis-à-vis third parties. Pursuant to the fourth paragraph of that article, any legal person may institute proceedings before the Court of Justice against an act addressed to it.

43      Furthermore, Article 8(1) of Decision 2004/258 confirms that, in the event of a total or partial refusal to grant access, the applicant has a legal remedy laid down under Article 263 TFEU.

44      In addition, under the first subparagraph of Article 256(1) TFEU, the General Court has jurisdiction, in particular, to hear and determine at first instance actions or proceedings referred to in Article 263 TFEU, with the exception of those reserved to the Court of Justice by the Statute of the Court of Justice of the European Union. Article 51 of that statute lists the categories of actions which, by way of derogation from the rule laid down in Article 256(1) TFEU, are reserved to the Court of Justice. It should be noted that the present action does not belong to any of those categories.

45      In those circumstances, it must be held that the Court does not manifestly lack jurisdiction to rule on the present action.

46      In the second place, it should be noted that the applicant is the addressee of the contested decision, which rejects a confirmatory application submitted by it in accordance with Article 7(2) of Decision 2004/258.

47      Under the fourth paragraph of Article 263 TFEU, any person may appeal against acts addressed to him or her. The applicant therefore has standing and, in addition, can assert an interest in bringing proceedings against the contested decision (see, to that effect, order of 30 April 2001, British American Tobacco International (Holdings) v Commission, T‑41/00, EU:T:2001:125, paragraph 20).

48      In those circumstances, the action, which was brought, moreover, within the period laid down in the sixth paragraph of Article 263 TFEU, cannot be regarded as manifestly inadmissible.

49      In the third place, it must be noted that, in support of the action, the applicant puts forward two pleas in law, each of which has several parts, the examination of which does not enable the Court to take the view that the action is manifestly unfounded.

50      The applicant challenges, inter alia, in the context of the first part of the first plea in law, the existence of a general presumption arising from Article 4(1)(c) of Decision 2004/258 allowing the ECB to keep confidential the decisions by which it places a credit institution under temporary administration.

51      In that regard, the applicant rightly submits that the existence of such a general presumption of confidentiality, derived from Article 4(1)(c) of Decision 2004/258, has not hitherto been recognised or established by the case-law.

52      The applicant also challenges, in the context of the second part of the second plea, the consequences which the ECB drew, in the contested decision, from the provisions on professional secrecy and confidentiality referred to in paragraph 20 above.

53      Invoking the judgment of 19 June 2018, Baumeister (C‑15/16, EU:C:2018:464, paragraph 46), the applicant submits that the provisions referred to in paragraph 20 above cannot be interpreted as imposing an absolute obligation of confidentiality on the ECB. On the contrary, according to those provisions, in certain situations the provision of information could be justified.

54      Finally, the applicant submits, in the context of the second part of the first plea in law, that the decision of 1 January 2019, which, according to the ECB, could not be communicated to it due to its sensitive nature, was the subject of publication, no doubt unauthorised, in the form of extracts, reproduced on the website of an Italian daily newspaper.

55      The applicant submits that an examination of the extracts of the decision of 1 January 2019 which were published makes it possible to establish that the content of that decision is not confidential, since it concerns information which Banca Carige, as a company listed on the regulated markets, was required to publish.

56      According to the applicant, that fact has an impact on the assessment of the risks presented by disclosure, pursuant to the case-law (judgment of 3 July 2014, Council v In ’t Veld, C‑350/12 P, EU:C:2014:2039, paragraph 60).

57      In the light of those factors, it appears that several of the objections submitted by the applicant cannot be considered to be manifestly lacking any foundation in law.

58      Thus, the Court finds, in view of the evidence on the file and in the light of the foregoing considerations, first, that it does not manifestly lack jurisdiction to hear the action and, second, that the action is neither manifestly inadmissible nor manifestly lacking any foundation in law.

59      Accordingly, it is appropriate to grant to the applicant the form of order which it seeks without it being necessary to adopt the measure of inquiry requested.

 Costs

60      Under Article 134(1) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party’s pleadings. Since the ECB has been unsuccessful, it must be ordered to pay the costs, in accordance with the form of order sought by the applicant.

On those grounds,

THE GENERAL COURT (Fourth Chamber)

hereby:

1.      Annuls European Central Bank (ECB) Decision LS/LdG/19/185 of 12 June 2019 refusing access to several documents relating to Decision ECB-SSM-2019-ITCAR-11 of the Governing Council of the ECB of 1 January 2019 placing Banca Carige SpA under temporary administration;

2.      Orders the ECB to pay the costs.

Gervasoni

Nihoul

Martín y Pérez de Nanclares

Delivered in open court in Luxembourg on 25 June 2020.

[Signatures]

---

Wirecard AG

EY prepares for backlash over Wirecard scandal

Senior partners advised to tell clients objective of fraud was to ‘deceive investors and EY’

EY auditors failed for at least three years to request crucial account information from a Singapore bank about Wirecard © Hayoung Jeon/EPA

Tabby Kinder in London and Olaf Storbeck in Frankfurt

Source: https://www.ft.com/content/ae73160b-fd9a-4313-89f9-8fd70183158e

 

EY has told its partners how to prepare for difficult conversations with clients about its audits of Wirecard, the German payments company that has filed for insolvency after admitting that €1.9bn of cash probably never existed.
In an internal note to senior partners on Friday, EY advised them to tell clients that the “objective” of the large international fraud at Wirecard was to “deceive investors and EY”.

It also provided partners with “summary talking points” about the scandal — the largest accounting fraud in German postwar history — and said they should contact Sajid Hussein, EY general counsel for Europe, or Jonathan Blackmore, head of risk management for the region, “to assist with client discussions”.
The Financial Times revealed last week that Wirecard’s auditors in EY’s German office failed for at least three years to request crucial account information from a Singapore bank where Wirecard claimed it had up to €1bn in cash, a routine audit procedure that could have uncovered the fraud.
James Freis, Wirecard’s new chief executive, has in recent days told supervisory board members that basic checks should have been enough to spot the scandal, according to people briefed on the discussions. Mr Freis, Deutsche Börse’s former head of compliance, joined Wirecard only this month,
The company said on Saturday that its business activities would continue despite the insolvency and that Wirecard Bank, which holds most of the group’s licences to process credit card payments, is not part of the insolvency proceedings.

However, it has suspended the payment of June salaries to its employees in Germany, France, Luxembourg and some other countries, according to people with first-hand knowledge of the matter, while the bulk of the 5,400 staff employed by subsidiaries elsewhere have received this month’s pay.

Wirecard and the missing €1.9bn: my story

Mr Freis told the board he did not understand how the fraud could have remained undetected for so long. The comments by Mr Freis were first reported by Süddeutsche Zeitung. Wirecard and Mr Freis declined to comment.
In its memo to senior partners, EY claimed responsibility for discovering the fraud, despite signing off Wirecard’s accounts for more than a decade in the face of growing questions about its accounting practices from journalists and certain investors.

European Investors VEB, the Netherlands-based shareholder rights group, on Friday called for a “thorough investigation” of EY’s work at Wirecard to be led by Germany’s financial watchdog BaFin.
“EY’s performance is unacceptable,” said Paul Koster, chief executive of the group, adding that it would seek compensation “for the significant damages caused by EY”.

EY said it would not comment on internal communications or pending litigation. It said: “We’ve established that third parties, with a deliberate aim to deceive, provided EY with false documentation in connection with its 2019 Wirecard audit. The extent and sophistication of these suggest a large-scale international fraud at Wirecard.”

 

EY informed Wirecard’s board in June that €1.9bn of cash apparently held in bank accounts in the Philippines probably did not exist, after special auditors at KPMG — brought in by Wirecard’s supervisory board last year to investigate allegations reported by the FT — said they were unable to verify significant account balances.

 

The audit firm advised its partners to tell their clients: “There are indications that this was an elaborate and sophisticated fraud with the deliberate aim of deceiving our audit team in Germany.

“The CEO is accused of having inflated the balance sheet total and sales volume of Wirecard, likely in co-operation with other perpetrators, by feigning income . . . to make the company more financially powerful and more attractive for investors and customers.”

A number of people close to EY said the scandal had caused dismay among some partners around Europe, particularly in non-audit teams, who feared that a backlash would affect client relationships and undermine EY’s brand.
The fraud is just one of several international accounting scandals that have emerged this year where EY audits are under scrutiny, including at NMC Health and Luckin Coffee. EY has declined to comment on NMC Health and Luckin Coffee.

The firm is already facing a lawsuit in Germany brought on behalf of Wirecard investors by Wolfgang Schirp, a Berlin lawyer. About 1,500 investors have joined the case, which is seeking up to €1bn in compensation from EY, according to Mr Schirp.

One EY partner based in the UK said the matter could encourage non-audit partners to push harder for separation from the audit part of the firm.
The Big Four auditors have been under pressure from UK regulators and politicians to move towards this type of reorganisation.

The EY partner said: “Wirecard is unlikely to bring down the German firm in my view, but it has stoked many fires across the business and, depending on the nature of regulatory interventions, I wonder if this will accelerate calls for separation from within, not just from the outside. Some partners have already had enough.”

Bank accounting fraud banned from publication at JFAR

I THINK THAT THE AUDITING INDUSTRY HAS A VERY BIG BLIND-SPOT PROBLEM ABOUT BANKING, SO THE ACADEMIC FORENSIC ACCOUNTING...

MAY 1, 2020 - My first email to the Editor of the Journal of Forensic Accounting Research

Zabihollah Rezaee

Dear professor,

I write to you to know if you have some material about the fraud perpetrated by banking institutions while creating new money.

Here in Italy bank money is defined as 'legal money' by the central bank.

But when a bank create a new deposit there is not a corresponding inflow in the cash account matching the new deposit just created. The bank only record an OUTFLOW from the centralized account thus masking the money creation process by a negative cash flow as if the bank could overdraft on herself. This problem is very important because officially in Italy each year the commercial banks do create 1,000 billions euro not accounted for as cash inflow at the time of creation.

I have collected a short bibliography which I include below. Do you have some suggestion for an integration ?

Thank you for an appreciated answer,

Marco Saba

Forensic accountant

marco saba	ven 1 mag, 12:27

---------------------------------------------------
The same-day answer:

Dear Marco,

Thank you for sharing information about the possible bank fraud. As the editor of the Journal of Forensic Accounting Research (JFAR), I suggest you further develop this important research idea, reach out to Professor Cindy Durtschi (copied within), the Guest Editor of the Special Fraud Issue of the JFAR to prepare your manuscript for submission to the JFAR (please see attached call for paper). The deadline for submission is extended.

Good luck and stay safe and well,

Zabi

Zabihollah “Zabi” Rezaee, PhD,

CPA, CMA, CIA, CGFM, CFE, CSOXP, CGRCP, CGOVP, CGMA, CRMA

Thompson-Hill Chair of Excellence / Professor of Accountancy

Editor of the Journal of Forensic Accounting Research

Zabihollah Rezaee	ven 1 mag, 16:05
a Cindy, me

---------------------------------------------------
Below my paper proposal:

Hello Prof. Durtschi and Prof. Rezaee,

here below a short summary of my proposed paper.

TITLE: SCF: Money creation as a financing activity in banking

Proposal for a paper.

After the recent rediscovery by the public that banks do create new money when a loan is made, little literature do still exist about a puzzling problem in analyzing a bank balance by examining the official Statement of Cash Flows (SCF). While it appears obvious that all bank money in all the A/cs is created by the banks themselves, there is a lack in the accounting evidences of this money creation because the old accounting view is that money is an asset for every economic agent excluding the banks who had to cover for this money with a real asset, specifically gold on demand, and thus banks do record money created as a ‘liability’. This paper investigate how to reconcile the accounting view with empirical banking today by suggesting to record money creation as an inflow in the cash flows from financing activity and adjusting the balance to this reality to give the auditors and the public a more realistic approach to evaluate any bank business, and to adjust the profits evaluation in view of the money creation activity. As money creation happens in other bank activity outside the lending one, recommendations are made to establish a Digital Monetary Register (a Monetary Cadastre) to record all money creation by any central and commercial bank to help the stakeholders keeping track of the aggregate circulating medium. The proposal is evaluated in respect of US-GAAP and IAS-IFRS international accounting rules. 

A side-effect of the proposed accounting reconciliation is that bank crisis are avoided since treating bank activity as a minting activity don’t require any “capital ratio” and provide for a proper treatment of the banking reflux in the books. We propose that central banks adopt a similar accounting view by reintroducing the adjusted Statement of Cash Flow in their Annual Report and making evident their real seigniorage profits that can be returned to the host country Treasury.

Bibliography:

Prof. Massimo Costa, Sulla natura contabile delle "passività monetarie" nei bilanci bancari, ed. RIREA, June 2009 http://www.rirea.it/rirea/node/214
Proff. Charles W. Mulford, Eugene E. Comiskey, Cash Flow Reporting by Financial Companies: A Look at the Commercial Banks,   Georgia Tech College of Management, July 2009
https://smartech.gatech.edu/handle/1853/29098

Michael Schemmann CPA, Accounting Perversion in Bank Financial Statements: Root Cause of the Ongoing Global Financial Crisis, 2012
https://www.amazon.com/Accounting-Perversion-Bank-Financial-Statements/dp/1468171119
Prof. Asgeir B. Torfason, Cash flow accounting in banks – a study of practice, Università di Goteborg, April 2014    https://gupea.ub.gu.se/handle/2077/35272
Prof. Antonino Galloni, Il futuro della banca - Lineamenti di teoria bancaria e finanziaria, ed. Eurilink, August 2014 http://eurilink.it/prodotto/il-futuro-della-banca-lineamenti-di-teoria-bancaria-e-finanziaria-2/
Thomas Mayer, Roman Huber, Vollgeld: Das Geldsystem der Zukunft. Unser Weg aus der Finanzkrise Taschenbuch, Tectum Sachbuch, August 2014
https://www.amazon.de/Vollgeld-Geldsystem-Zukunft-Unser-Finanzkrise/dp/3828833500

EFRAG, Statement of Cash Flows: issues for Financial Institutions, 2015
https://www.efrag.org/Activities/335/Statement-of-Cash-Flows-issues-for-Financial-Institutions

Michael Schemmann CPA, Putting a Stop to Fictitious Bank Accounting, 2015
https://www.amazon.com/Putting-Stop-Fictitious-Bank-Accounting/dp/1511593598/

Prof. Richard A. Werner, A lost century in economics: Three theories of banking and the conclusive evidence, International Review of Financial Analysis Volume 46, July 2016, Pagies 361-379 https://www.sciencedirect.com/science/article/pii/S1057521915001477
Prof. Dirk J. BEZEMER  - Towards an ‘accounting view’ on money, banking and the macroeconomy: history, empirics, theory, Cambridge Journal of Economics, Volume 40, Issue 5, pp. 1275-1295, September 2016 https://academic.oup.com/cje/article-abstract/40/5/1275/1987682?redirectedFrom=fulltext
Avv. Marco Della Luna, MONETA SCRITTURALE: LE ORDINANZE DEL TRIBUNALE, 28 February 2017 http://marcodellaluna.info/sito/2017/02/28/moneta-scritturale-le-ordinanze-del-tribunale/
Avv. Silvio Orlandi, Un viaggio attraverso il non mutuo bancario. Analisi critica della questione monetaria,  Sindimedia Edizioni, May 2018 https://www.amazon.it/viaggio-attraverso-bancario-questione-monetaria/dp/883199400X
Proff. Biagio Bossone, Massimo Costa, The “accounting view” of money: money as equity, The World Bank, May 2018
http://blogs.worldbank.org/allaboutfinance/accounting-view-money-money-equity-part-i

Bossone, B.; Costa, M.; Cuccia, A.; Valenza, G. Accounting Meets Economics: Towards an 'Accounting View' of Money - 2018
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3270860

Zhan Gao , Weijia Li, John O’Hanlon, The informativeness of U.S. banks’ statements of cash flows, Journal of Accounting Literature, Volume 43, Dicembre 2019, pp. 1-18
https://www.sciencedirect.com/science/article/pii/S0737460718300624

Kind regards,

Marco Saba

Forensic Accountant

Organized Crime Observatory – Geneva

https://o-c-o.net

Phone in Rome: +39 370 353 8535

marco saba <marcosabait@gmail.com>	6 mag 2020, 11:00
a Zabihollah, Cindy

---------------------------------------------------------

Their rejection answer, 21 days later:
May 27 2010 19:49
 

Dear Marco,

Thank you for submitting your manuscript titled “Money creation as a financing activity in banking” for consideration for the Special Issue on Fraud at the Journal of Forensic Accounting Research.

We do not believe the paper has the potential for a positive publication outcome at JFAR. This special issue of JFAR focuses on Fraud Research in Forensic Accounting. Your proposal does not provide any information on how your paper aligns with the theme of the issue. We wish you the best as you develop your research idea further.

Best Regards,

Kip Holderness and, on behalf of, Meghann Cefaratti and Cindy Durtschi

Kip Holderness
To me, Meghann, Cindy  --------------------------------------------------- A further reply from me - citing current cases in Court - went unanswered... Here the JFAR GUEST EDITOR: Cindy Durtschi is EY Professor of Accountancy (EY = Ernst & Young) cdurtsch@depaul.edu EY Professor of Accountancy School of Accountancy & MIS Phone: (312) 362-8789 1 E. Jackson Blvd. DePaul Center 6038 Chicago, IL 60604 ​Academic Degrees PhD, Accounting, University of Arizona MAcc, Accounting, University of Arizona MA, Economics, University of Nevada BS, Economics, Utah State University BS, History, Utah State University Research and Teaching Interests Forensic Accounting Financial Accounting Biography Cindy Durtschi is an award-winning teacher and researcher in the fields of financial and forensic accounting. Durtschi received the 2006 American Accounting Association Innovation in Audit Education Award for her published case in forensic accounting, "The Tallahassee Bean Counters:  A Problem-Based Learning Case in Forensic​ Auditing." She continues to publish forensic accounting cases that are used in classrooms around the world. Durtschi has published in forensic accounting as well as capital markets. Her articles appear in the Journal of Accounting Research, Journal of Accounting, Auditing and Finance, Journal of Forensic Accounting, Issues in Accounting Education as well as other accounting and finance journals. She is currently on the editorial board for both the Journal of Forensic and Investigative Accounting and Issues in Accounting Education. She has given invited lectures in forensic accounting to professional and student groups throughout the U.S. and in Europe. She currently serves as chair of the American Accounting Association (AAA) and is past president of the Forensic and Investigative Accounting section of the American Accounting Association. I THINK THAT THE AUDITING INDUSTRY HAS A VERY BIG BLIND-SPOT PROBLEM ABOUT BANKING.

JUST A MONTH LATER........

"Arthur Andersen 2.0" - Ernst & Young Could Have Uncovered Wirecard Fraud Years Ago: FT

https://www.zerohedge.com/markets/arthur-anderson-20-ernst-young-could-have-uncovered-wirecard-fraud-years-ago-ft

EY $2 billion Wirecard Auditing Scandal

Wirecard's collapse reveals cracks at the heart of Germany, Inc

By Charles Riley, CNN Business

Updated 0732 GMT (1532 HKT) June 27, 2020 

Source: https://edition.cnn.com/2020/06/27/tech/wirecard-germany/index.html

Wirecard's former CEO arrested in Germany 02:27

London (CNN Business)It's been a spectacularly bad week for German business. 

One of the country's biggest public companies was brought down by an accounting scandal, another was forced to pay out billions in damages, and poor working conditions at a leading family-owned meat packing firm were dragged into public view by a huge Covid-19 outbreak.

 

The collapse of digital payments wunderkind Wirecard into insolvency is the biggest scandal of them all. It was triggered by a $2 billion accounting fraud that financial watchdogs, the company's supervisory board and its longtime auditor failed to detect.

 

Now the regulators and corporate bosses tasked with safeguarding Europe's biggest and most successful economy are coming under intense scrutiny.

Wirecard files for insolvency after ex-CEO arrested in $2 billion scandal

 

Journalists, whistleblowers and skeptical investors had all questioned Wirecard's accounting for years, but executives were able to brush aside their allegations. Wirecard (WCAGY) received cover from the country's banking regulator, which pushed back forcefully against critical hedge funds and investigative reporters, but failed to spot anything amiss at the company.

In the end, the collapse took only seven days. Wirecard admitted last week that roughly a quarter of its assets — €1.9 billion ($2.1 billion) in cash — probably never existed. CEO Markus Braun resigned and was quickly arrested on suspicion of artificially inflating the firm's balance sheet and sales through fake transactions. Wirecard filed for insolvency on Thursday. 

 

Braun, who has been released on bail, has consistently denied wrongdoing, suggesting instead that Wirecard was the victim of a highly sophisticated fraud. But a picture is emerging of a prized tech company that was cheered on by authorities instead of scrutinized, and of a supervisory board that failed to act as a check on a chief executive many regarded as a visionary. Accounting firm EY precipitated Wirecard's downfall by refusing to sign off on its final results for 2019, after more than a decade of auditing the company.

Wirecard's former CEO Markus Braun arrested after $2 billion scandal explodes

 

"You have a multitude of evidence of sinners, of overlookers, of all kinds of various guilty parties," said Christian Strenger, academic director of the Corporate Governance Center at HHL Leipzig Graduate School of Management.

Wirecard is the first member of Frankfurt's elite DAX stock index to file for insolvency. But its implosion follows a series of scandals over the past five years that have embarrassed Germany's government, regulators and business community, raising questions about the strength of corporate governance and financial regulation in the world's fourth-largest economy.

 

Volkswagen (VLKAF), the world's biggest carmaker and champion of German manufacturing, admitted in 2015 that millions of diesel vehicles had been equipped with software to cheat on emissions tests. Deutsche Bank (DB), the country's biggest lender, has paid tens of billions of dollars in penalties related to its sale of toxic mortgage assets, interest rate manipulation and a Russian money laundering scheme.

 

Two more German corporate snafus have generated global headlines this week: more than 1,500 workers tested positive for coronavirus at a plant owned by meat processing giant Tönnies Group, forcing local officials to reimpose a lockdown on more than half a million people in the surrounding region; and Bayer (BAYRY) agreed to pay over $10 billion to settle claims that Roundup, a product it owns thanks to its acquisition of Monsanto, causes cancer.

The outbreak at the Tönnies plant highlighted the poor working and living conditions faced by foreign workers in the industry, and the German government responded by promising to ban the use of subcontractors and to double fines for breaching rules on working hours. 

 

The Bayer settlement comes after investors voiced deep concerns about the acquisition of Monsanto, and questioned whether management had properly understood the legal risks. Shares in Bayer have lost roughly a third of their value since the purchase of Monsanto was announced in September 2016.

The giant meatpacking company at the heart of Germany's new coronavirus hotspot

 

The firms operate across different industries, but with the exception of the Tönnies Group, they are publicly listed and are run by a management board with responsibility for daily operations and overseen by a supervisory board that includes worker representatives. Critics say oversight breaks down when the boards become too cozy, which can happen when top executives move into supervisory positions. Investors complain that their interests are too often subjugated to other considerations, such as politics or internal corporate dynamics.

 

Strenger said that German corporate governance has improved significantly in recent decades, but that shortcomings by executives and directors are still too common. Additional safeguards would be relatively simple to install, he said, such as changing stock market rules to prevent companies from delaying their financial results, as Wirecard had done. 

 

"We've made good progress ... but there is still room for human error, or for trying to believe in people that are appearing in a convincing fashion. [Wirecard] was traded in the analyst and investor society as the next SAP (SAP), and who wouldn't want to be on that bandwagon?" he said, referring to the software giant that is also listed on the DAX.

Former Wirecard CEO Markus Braun was regarded by many as a tech visionary.

The collapse of Wirecard is making waves far beyond Germany. A frantic search for the missing funds reached the Philippines, where the central bank denied the money had entered the country's financial system. US card issuers Mastercard (MA) and Visa (V) are reconsidering whether to allow Wirecard to continue processing payments on their networks, according to Bloomberg, and a UK regulator has moved to safeguard the funds of Wirecard clients.

Germany's government is now paying close attention. Finance minister Olaf Scholz described the Wirecard scandal as "extremely worrying," saying the country must act quickly to improve oversight. "Critical questions arise over the supervision of the company, especially with regards to accounting and balance sheet control. Auditors and supervisory bodies do not seem to have been effective here," Scholz said in a statement.

 

Germany's Federal Financial Supervisory Authority, or BaFin, is actively investigating whether Wirecard violated rules against market manipulation. But the regulator is now coming under heavy scrutiny, with critics arguing that it should have done a better job overseeing Wirecard's banking unit, even if it didn't have direct oversight of the larger firm.

Mastercard and Visa reportedly reconsidering their relationship with Wirecard following accounting scandal

 

Observers also want to know why BaFin issued a temporary ban in 2019 that prevented investors from borrowing Wirecard shares to sell them in anticipation of prices falling, and why it filed a criminal complaint against journalists at the Financial Times, which published a series of articles that exposed accounting and management irregularities at the company. BaFin chief Felix Hufeld described the scandal earlier this week as a "total disaster."

The European Commission has asked its top market supervisor to conduct a preliminary investigation of BaFin. Valdis Dombrovskis, the EU official in charge of financial services policy, told the Financial Times that the bloc should be prepared to launch a formal probe if necessary.

"We need to clarify what went wrong," he said.

 

EY, which already faces a criminal complaint from German shareholders' association SdK, said Friday that Wirecard's collapse was the result of an "elaborate and sophisticated fraud, involving multiple parties around the world in different institutions, with a deliberate aim of deception."

 

"Collusive frauds designed to deceive investors and the public often involve extensive efforts to create a false documentary trail," the auditor added in a statement. "Professional standards recognize that even the most robust and extended audit procedures may not uncover a collusive fraud."

 

— Chris Liakos, Eoin McSweeney and Stephanie Halasz contributed reporting.

Meet BlackRock, the New Great Vampire Squid

Meet BlackRock, the New Great Vampire Squid

Ellen Brown • June 21, 2020 

 Source: https://www.unz.com/article/meet-blackrock-the-new-great-vampire-squid/

 

BlackRock is a global financial giant with customers in 100 countries and its tentacles in major asset classes all over the world; and it now manages the spigots to trillions of bailout dollars from the Federal Reserve. The fate of a large portion of the country’s corporations has been put in the hands of a megalithic private entity with the private capitalist mandate to make as much money as possible for its owners and investors; and that is what it has proceeded to do.

   To most people, if they are familiar with it at all, BlackRock is an asset manager that helps pension funds and retirees manage their savings through “passive” investments that track the stock market. But working behind the scenes, it is much more than that. BlackRock has been called “the most powerful institution in the financial system,” “the most powerful company in the world” and the “secret power.” It is the world’s largest asset manager and “shadow bank,” larger than the world’s largest bank (which is in China), with over $7 trillion in assets under direct management and another $20 trillion managed through its Aladdin risk-monitoring software. BlackRock has also been called “the fourth branch of government” and “almost a shadow government”, but no part of it actually belongs to the government. Despite its size and global power, BlackRock is not even regulated as a “Systemically Important Financial Institution” under the Dodd-Frank Act, thanks to pressure from its CEO Larry Fink, who has long had “cozy” relationships with government officials.

   BlackRock’s strategic importance and political weight were evident when four BlackRock executives, led by former Swiss National Bank head Philipp Hildebrand, presented a proposal at the annual meeting of central bankers in Jackson Hole, Wyoming, in August 2019 for an economic reset that was actually put into effect in March 2020. Acknowledging that central bankers were running out of ammunition for controlling the money supply and the economy, the BlackRock group argued that it was time for the central bank to abandon its long-vaunted independence and join monetary policy (the usual province of the central bank) with fiscal policy (the usual province of the legislature). They proposed that the central bank maintain a “Standing Emergency Fiscal Facility” that would be activated when interest rate manipulation was no longer working to avoid deflation. The Facility would be deployed by an “independent expert” appointed by the central bank.

   The COVID-19 crisis presented the perfect opportunity to execute this proposal in the US, with BlackRock itself appointed to administer it. In March 2020, it was awarded a no-bid contract under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to deploy a $454 billion slush fund established by the Treasury in partnership with the Federal Reserve. This fund in turn could be leveraged to provide over $4 trillion in Federal Reserve credit. While the public was distracted with protests, riots and lockdowns, BlackRock suddenly emerged from the shadows to become the “fourth branch of government,” managing the controls to the central bank’s print-on-demand fiat money. How did that happen and what are the implications?

Rising from the Shadows

   BlackRock was founded in 1988 in partnership with the Blackstone Group, a multinational private equity management firm that would become notorious after the 2008-09 banking crisis for snatching up foreclosed homes at firesale prices and renting them at inflated prices. BlackRock first grew its balance sheet in the 1990s and 2000s by promoting the mortgage-backed securities (MBS) that brought down the economy in 2008. Knowing the MBS business from the inside, it was then put in charge of the Federal Reserve’s “Maiden Lane” facilities. Called “special purpose vehicles,” these were used to buy “toxic” assets (largely unmarketable MBS) from Bear Stearns and American Insurance Group (AIG), something the Fed was not legally allowed to do itself.

BlackRock really made its fortunes, however, in “exchange traded funds” (ETFs). It gained trillions in investable assets after it acquired the iShares series of ETFs in a takeover of Barclays Global Investors in 2009. By 2020, the wildly successful iShares series included over 800 funds and $1.9 trillion in assets under management.

   Exchange traded funds are bought and sold like shares but operate as index-tracking funds, passively following specific indices such as the S&P 500, the benchmark index of America’s largest corporations and the index in which most people invest. Today the fast-growing ETF sector controls nearly half of all investments in US stocks, and it is highly concentrated. The sector is dominated by just three giant American asset managers – BlackRock, Vanguard and State Street, the “Big Three” – with BlackRock the clear global leader. By 2017, the Big Three together had become the largest shareholder in almost 90% of S&P 500 firms, including Apple, Microsoft, ExxonMobil, General Electric and Coca-Cola. BlackRock also owns major interests in nearly every mega-bank and in major media.

   In March 2020, based on its expertise with the Maiden Lane facilities and its sophisticated Aladdin risk-monitoring software, BlackRock got the job of dispensing Federal Reserve funds through eleven “special purpose vehicles” authorized under the CARES Act. Like the Maiden Lane facilities, these vehicles were designed to allow the Fed, which is legally limited to purchasing safe federally-guaranteed assets, to finance the purchase of riskier assets in the market.

Blackrock Bails Itself Out

   The national lockdown left states, cities and local businesses in desperate need of federal government aid. But according to David Dayen in The American Prospect, as of May 30 (the Fed’s last monthly report), the only purchases made under the Fed’s new BlackRock-administered SPVs were ETFs, mainly owned by BlackRock itself. Between May 14 and May 20, about $1.58 billion in ETFs were bought through the Secondary Market Corporate Credit Facility (SMCCF), of which $746 million or about 47% came from BlackRock ETFs. The Fed continued to buy more ETFs after May 20, and investors piled in behind, resulting in huge inflows into BlackRock’s corporate bond ETFs.

In fact, these ETFs needed a bailout; and BlackRock used its very favorable position with the government to get one. The complicated mechanisms and risks underlying ETFs are explained in an April 3 article by business law professor Ryan Clements, who begins his post:

Exchange-Traded Funds (ETFs) are at the heart of the COVID-19 financial crisis . Over forty percent of the trading volume during the mid-March selloff was in ETFs ….

   The ETFs were trading well below the value of their underlying bonds, which were dropping like a rock. Some ETFs were failing altogether. The problem was something critics had long warned of: while ETFs are very liquid, trading on demand like stocks, the assets that make up their portfolios are not. When the market drops and investors flee, the ETFs can have trouble coming up with the funds to settle up without trading at a deep discount; and that is what was happening in March.

   According to a May 3 article in The National, “The sector was ultimately saved by the US Federal Reserve’s pledge on March 23 to buy investment-grade credit and certain ETFs. This provided the liquidity needed to rescue bonds that had been floundering in a market with no buyers.”

Prof. Clements states that if the Fed had not stepped in, “a ‘doom loop’ could have materialized where continued selling pressure in the ETF market exacerbated a fire-sale in the underlying [bonds], and again vice-versa, in a procyclical pile-on with devastating consequences.” He observes:

There’s an unsettling form of market alchemy that takes place when illiquid, over-the-counter bonds are transformed into instantly liquid ETFs. ETF “liquidity transformation” is now being supported by the government, just like liquidity transformation in mortgage backed securities and shadow banking was supported in 2008.

Working for Whom?

BlackRock got a bailout with no debate in Congress, no “penalty” interest rate of the sort imposed on states and cities borrowing in the Fed’s Municipal Liquidity Facility, no complicated paperwork or waiting in line for scarce Small Business Administration loans, no strings attached. It just quietly bailed itself out.

It might be argued that this bailout was good and necessary, since the market was saved from a disastrous “doom loop,” and so were the pension funds and the savings of millions of investors. Although BlackRock has a controlling interest in all the major corporations in the S&P 500, it professes not to “own” the funds. It just acts as a kind of “custodian” for its investors — or so it claims. But BlackRock and the other Big 3 ETFs vote the corporations’ shares; so from the point of view of management, they are the owners. And as observed in a 2017 article from the University of Amsterdam titled “These Three Firms Own Corporate America,” they vote 90% of the time in favor of management. That means they tend to vote against shareholder initiatives, against labor, and against the public interest. BlackRock is not actually working for us, although we the American people have now become its largest client base.

In a 2018 review titled “Blackrock – The Company That Owns the World”, a multinational research group called Investigate Europe concluded that BlackRock “undermines competition through owning shares in competing companies, blurs boundaries between private capital and government affairs by working closely with regulators, and advocates for privatization of pension schemes in order to channel savings capital into its own funds.”

Daniela Gabor, Professor of Macroeconomics at the University of Western England in Bristol, concluded after following a number of regulatory debates in Brussels that it was no longer the banks that wielded the financial power; it was the asset managers. She said:

We are often told that a manager is there to invest our money for our old age. But it’s much more than that. In my opinion, BlackRock reflects the renunciation of the welfare state. Its rise in power goes hand-in-hand with ongoing structural changes; in finance, but also in the nature of the social contract that unites the citizen and the state.

   That these structural changes are planned and deliberate is evident in BlackRock’s August 2019 white paper laying out an economic reset that has now been implemented with BlackRock at the helm.

   Public policy is made today in ways that favor the stock market, which is considered the barometer of the economy, although it has little to do with the strength of the real, productive economy. Giant pension and other investment funds largely control the stock market, and the asset managers control the funds. That effectively puts BlackRock, the largest and most influential asset manager, in the driver’s seat in controlling the economy.

   As Peter Ewart notes in a May 14 article on BlackRock titled “Foxes in the Henhouse,” today the economic system “is not classical capitalism but rather state monopoly capitalism, where giant enterprises are regularly backstopped with public funds and the boundaries between the state and the financial oligarchy are virtually non-existent.”

If the corporate oligarchs are too big and strategically important to be broken up under the antitrust laws, rather than bailing them out they should be nationalized and put directly into the service of the public. At the very least, BlackRock should be regulated as a too-big-to-fail Systemically Important Financial Institution. Better yet would be to regulate it as a public utility. No private, unelected entity should have the power over the economy that BlackRock has, without a legally enforceable fiduciary duty to wield it in the public interest.

Ellen Brown is an attorney, chair of the Public Banking Institute, and author of thirteen books including Web of Debt, The Public Bank Solution, and Banking on the People: Democratizing Money in the Digital Age. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.