Banking on Bankia?

Beatriz Cabezali

October 2017

The purpose of this article is to discuss the financial and regulatory implications of the Bankia scandal, and what can be done to prevent the same thing recurring in the future.

Bankia case takes place in Spain, a few years after the financial crisis of 2008, which hit financial markets internationally. Bankia is a company that arises in the middle of a financial restructuration from the merger of Caja Madrid, a large bank, with other six saving banks in 2010. Few months after its flotation, in 2011, it is disclosed that what was shown as 304.7 million euros net profit was in fact a 2,979 million losses. In addition, some high executives are using money from the bank to pay their own expenses through what is called “black cards”. The total amount of the misappropriation equals 15.5 million euros. Due to a change in accounting criteria, the equity value in 2012 decreases in an 87.42%, from 8554 to 1076 million euros (Climent and Pavía, 2015). Rodrigo Rato, the president of the bank, is removed from his position and the Spanish Government places another president. The bank starts a restructuration process but the consequences will be catastrophic.

As explained before, the final outcome was caused by the sum of different aspects where is important to highlight socio-moral consequences of the case and how both atomic and organic doctrines of corporate criminal liability can be applied within the case.

On the one hand, socio-moral consequences include negative impact in Spanish economy and lack of trust in Spain´s financial entities after the scandal. From my point of view, this is not the worst part of the case. Millions of people invested their money in what institutional organisms catalogued as a safe investment. Most of them, however, invested their life´s savings or a big portion of their heritage and ended with an unstoppable bankruptcy and no solution. In addition, the European Union and Spain enhanced a process called bail-out, rescuing the “too big to fail” bank. This system is basically based in saving the bank with the taxpayer´s money. Because this kind of organisms backed up Bankia´s financial reports, lot of investors trusted the operation. This type of scandals creates an unsafe environment and quite mistrust in official organisms, having big impact in society. People get suspicious and law courts collapse because such us deception and uncontrolled events.

On the other hand, I find a regulatory gap when talking about the accounting environment. Because there is not a standardized system, same aspects can be interpreted in different ways, which creates confusion and in this concrete case, leads to the failure to condemn illegal activities. Although it can be seen as unfair, it is usual to happen when there is a legal loophole and judges can do nothing about it. International organisms, such us, the United Nations or the European Union could work in order to develop an international accounting system suitable for all the companies no matter which country they belong to.

Secondly, regarding the regulatory system, we find a lack of mechanisms to punish financial organisms. In this case, we will talk about both the Bank of Spain and Deloitte, the audit firm.
The first one was in charge of analysing Bankia financial statements before its floating and their consent lead to a catastrophic choice for the investors. If the organism in charge is not able to take care of the matter properly, it is important to favour Government to take action due to their duty of protecting the public.

The second one, Deloitte, is a good example of the play between both Organic and Atomic Views. While Atomic doctrine conceives organisations as a sum of individuals actions, the Organic View makes us think of organisations as a whole, as a subject of rights and obligations (Wolf, 1985). When the case was first judged, the audit partner in charge of the audit was summoned to appear in court. The firm was finally acquitted because his defence plead that they audit partner was totally independent from the firm when signing the audit (what demonstrates the importance of the Atomic View). However, in September 2017 the firm was called to declare because the Spanish National Audience considered that Deloitte should have had pre-emptive mechanisms of control to avoid this kind of events (Organic View of the company as a whole). Because control mechanisms seem to be not effective, it is essential for most of the countries to create a legal structure surrounding companies. Here is where both atomic and organic doctrines of corporate criminal liability play an important role.

The Bankia case is a perfect example of how important the atomic model is within the law. Because of the black cards scandal (within Bankia case), it was possible to judge each executive director for their wrongdoing. However, the penalties are really low compared to the money they illegally took. For example, two of the bank directors, Miguel Blesa and Rodrigo Rato, took 436,688 and 99,055 euros respectively and their penalties were 7,200 and 6,000 each (El País, 2017). In my opinion, it is fundamental to respect the proportionality principle when talking about the law. Even if it was proportional to the quantity taken illegally, it has had other consequences related to depositors, investors and society and it should be reflected in both their penalties and condemns. It is fundamental when applying newly created offences (like the ones regarding companies), to highlight what is called exemplary punishment. Companies´ offences have been regulated in Spain since 2010 when it was first introduced the concept of legal entities responsibility. Since then, some crimes have been added to the legal environment. However, their effectiveness is yet to be faced.

To sum up, I find essential to stress how much is needed to be done in order to achieve a better legal environment within companies and to avoid this kind of scandals from happening again. Congress, Government, International Organisations and Regulators have to work all at once with effective policies, coordinating both resources and legal structures. There are lot of points that need to be covered in order to achieve social welfare but it is essential when dealing with this subject to act with transparency and to learn from past events.