Pescanova paid front men with black money to hide shortfalls

The extensive report by auditor KPMG on the accounting practices of failed Spanish seafood processor Pescanova could pass for an expert’s manual on how to cook the books.

KPMG’s 350-page forensic audit highlights how Pescanova managed to paint a brighter picture of its monthly accounts than merited by reality by transferring invoices to subsidiaries, paying less taxes than really due by billing sales through other companies owned by front men, and by massaging the figures on the group’s financial debt and its operating profits.

All these practices were registered in the company’s emails and discovered by KPMG in the computers of Pescanova managers. The dismissed chairman of the group, Manual Fernández de Sousa, was not blind to these sharp practices, given that he was one of the recipients of several of these emails. He was aware of the system of front men used to create companies to hide stakes that the group held in subsidiaries and in order to swap invoices.

In one of the emails sent to Fernández de Sousa by Alfonso García, the manager of a number of external companies linked to Pescanova, he explains that he plans to pay a front man by the name of Jaime Rioja “1,500 euros a month in black market money” and asks for the go-ahead to do so. Fernández Sousa agrees.

In another message sent in January of this year, García notes that “Cuvimarket is the company where the shares \[held by Pescanova\] in Novanam are ‘parked’ on December 31 every year.” He goes on to say that the name of Cuvimarket had already been mentioned to tax inspectors in an audit and, therefore, it would be best to liquidate the company and “park” the shares elsewhere.

There are older emails dated 2001 in which García explains to Fernández de Sousa plans to buy a company in Madeira where taxes are lower. “This company will be officially owned by some partners named by our administrator through a trustee arrangement.” He goes on to say that the trustees will appoint the manager of the company in question but that García himself would have “power” over it and that the firm would have a bank account with signed blank checks so that his name would not appear as being linked to its affairs.

The flow of emails leaves it clear that Pescanova managers gave orders and counter-orders with the sole purpose of squaring the group’s books. KPMG’s report shows how Pescanova obtained loans guaranteed by merchandise it did not control, omitted companies that were controlled by it from its books, and left complicated paper trails through the issue and receipt of invoices from companies set up specifically for this sole purpose.

Joaquín Viña, the head of Pescanova’s audit division and the person responsible for consolidating its financial results over the course of several years, sent emails to the regional heads of all of the company indicating that: “Bank debt should appear as low as possible.” He also instructed them to draw up the accounts so that gross operating profit in the form of EBITDA should be as high as possible by offsetting financial costs with other lines in the profit and loss account that affect EBITDA.

The same message was sent on December 19, 2012 as part of preparations to present the annual accounts for the year, which eventually never saw the light of day. The company eventually revealed the financial problems it was facing toward the end of February and went into receivership. KPMG’s report reveals Pescanova is technically bankrupt with financial debt of 3.281 billion euros — four times the amount it had recognized — and a negative net worth of 927 million.