Disguising The Debt

With the help of former Parmalat executives, magistrates and forensic accountants have mapped out the system of double billing they say was at the heart of the firm’s alleged fraud. They claim Parmalat secretly controlled 33 of the 104 distributors it employed in Italy through shell companies in the Netherlands Antilles. The company issued duplicate invoices and used the fictitious revenues as collateral for bank credits. It then shunted the debts into offshore, off-the-books companies. As a result, investigators say Parmalat was able to both inflate its revenues and give the appearance of reducing its debt. Here’s how they say it worked:

Step 1 Parmalat sends goods to supermarkets and other retailers via its network of distributors.

Step 2 It bills the distributors, but at the same time sends a separate invoice to the supermark- et chains for the same goods.

Step 3 Banks and other financing firms advance loans to Parmalat on the basis of these double accounts.

Step 4 Parmalat transfers the amount of these loans to its distributors, so that they can pay Parmalat’s phony invoices. The distributors then pay the money back to Parmalat, which accounts for the transfers as credits owed.

Step 5 Parmalat transfers these false credits to an offshore subsidiary in the form of an invoice for a nonexistent sale, recording the amount as an asset.

Step 6 Parmalat uses these fictitious assets to secure another round of loans.

Step 7 At repayment time, Parmalat again transfers the fresh loan infusion to the offshore subsidiary, which again records the money as revenue rather than a loan.

Step 8 Parmalat assigns the credits and the liabilities of this offshore firm to another offshore entity that isn’t consolidated in its accounts, thus making it appear that the loans are assets and the debt has been repaid.

Step 9 As the amounts transferred offshore and off the books grow ever larger, Parmalat executives invent fictitious milk powder sales to justify them.