THE PARMALAT FRAUD: the rise and fall of Italy’s milk colossal

Alessandra Kozlova 

The 5^th of May 2002 was a true miracle for the people of Parma, a little city in Northern Italy. The masterfully executed goal of Adrian Mutu, attacker of the local soccer team, brought them a second National Cup. Especially cheerful were the employees of the biggest milk-producing company in the country, Parmalat, whose CEO Callisto Tanzi also owned the soccer team. In 40 years, he transformed a small family business into a multinational company with over 150 factories across 30 different countries. “He was a man whose story all Italy looked up to. He was a true hero of his time.” – said Mauro Tiesto, one of the most authoritative Italian auditors of the early 2000s.

However, Parma’s soccer triumph was the last win in the history of Tanzi’s empire. In 2003 auditory checks revealed that Parmalat has been on the verge of bankruptcy for years, despite its financial statements predicting high production and dividend growth. The investigation, initiated by the Italian government, proved the existence of falsified accounting reports in which multi-million revenues were invented out of thin air, while actual collected cash was deposited on the accounts of numerous offshore companies. Parmalat was declared bankrupt and Tanzi was convicted to 18 years of prison, breaking the trust of millions of investors that believed the milk colossal to be an unshakeable pillar of Italy’s economy.

The key success factor of Parmalat was how revolutionary its innovations were inside the food industry. Tanzi was the first to introduce a system of ultra-pasteurization, which extended the expiration date of milk from a few days to a whole six months without fridge conservation. He got rid of the expensive glass jar packaging, opting for cheaply produced and easily transported paper cartons which also offered the possibility of branding. Parmalat’s logo appeared under the word ‘Milk’, becoming forever associated as a badge of quality in the collective imagination of generations of Italians. Its design by the world-renowned architect Silvio Coppola was so successful that it opened the exhibition of the New York Museum of Modern Art. “We were the first to sell milk not as a primary good, but as a service” – used to quote Tanzi.

In the 1960s he overcame the legally established commercial monopoly of Centrali del Latte in the city of Rome by selling fat-free and lactose-free milk, which did not fall under the law restrictions of the time and found a new consumer market in the sports industry. The doors of the homes of Italy’s political leaders Ciriaco de Mita and Silvio Berlusconi were always open for Tanzi, who was also the main sponsor of Democrazia Cristiana, Italy’s winning political party until the 1990s. Thanks to such high connections and highly efficient product diversification Tanzi made his company an absolute market leader, crushing its competitors and expanding internationally.

When Parmalat was introduced on the Milan Stock Exchange, investors purchased 49.7% of the offered shares marking a total market capitalization of $1 billion. In 1992 Tanzi acquired 18 companies abroad, specifically targeting countries with poor infrastructure and a lack of electricity coverage such as Brazil, Venezuela, Paraguay and Columbia. Powdered and UHT-milk were a true salvation for populations in remote villages of South America that did not yet have fridges in their houses. By the 2000s Parmalat owned 23 global brands, 162 factories with over 37 000 employees and entered the Forbes list of 100 most profitable family businesses with over $7 billion in revenues and 70% of them coming from international sales.

The brand’s reputation was perceived as immaculate and in 1974 it even became the official sponsor of Ferrari, with its name appearing across the uniform of legendary Formula-1 pilot Nikki Lauda. Parmalat donated over $1.5 million to the UN fund battling human hunger and financed the restoration of old roman mosaics in the Parma Duomo. Tanzi’s generosity was greatly appreciated, and he was awarded the Grand Cross of Merit of the Italian Republic for his exceptional career, 5 years before Silvio Berlusconi.

The two entrepreneurs’ paths often had interesting parallels. After Berlusconi acquired the soccer club ‘Milan’ in 1968, Tanzi became respectively the owner of ‘Parma’ in Italy and ‘Palmeiras’ in Brazil, whose teams both became national champions soon thereafter. In 1994 Tanzi acquired ‘Odion TV’ for $45 million, in an attempt to match Berlusconi’s leading media corporation ‘Mediaset’. After a few failed seasons, Odion TV was put on sale with declared losses of $30 million. The entrepreneur then invested $500 million in the affiliated travel company Parmatour, which was also forced to declare bankruptcy with over $300 million in debt.

Despite several failed projects, the company continued to report revenue growth and actively pursued investment. Between 1990 and 2003 the company issued €7.4 billion in debt securities, borrowed another €4.1 billion from banks and pulled out €1 billion in retained earnings, amounting to a total debt of €13.5 billion. By accident the Bank of America discovered that documents certifying the presence of €4.2 billion on Parmalat accounts were fake and it had no available liquidity to repay its debt. "Parmalat's top managers forged the bank's logo and letter: they scanned the logo, printed it out, and faxed it several times to make it look more authentic." Using a network of offshore funds, Parmalat concealed the loss of approximately 10 billion euros, equivalent to 1% of Italy’s GDP, inflating its profits by five times in financial reports.

The CEO of 25 companies where Parmalat’s revenues were allegedly directed was a random employee, while the funds themselves were funneled through ten different banks. The company was exempt from external audits thanks to the influence of thirty Italian politicians, whose names Tanzi revealed in court. Parmalat shares fell 20 times in value to €0.11 per share and S&P downgraded the company’s rating to default, causing losses to 200.000 Parmalat securities holders and deficits of 240 million to Italian banks. Alessandro Bassi, Head of financial operations, committed suicide after the final court verdict in 2012 in Bologna.

The new CEO appointed by shareholders Enrico Bondi obtained loans of €150 million to maintain production and promised to sell off assets and reduce staff as a collateral, having to get rid of all foreign investments and limiting itself to the Italian market. In 2011 the new owner of Parmalat became the French corporation Lactalis, acquiring it for €3.4 billion after a thorough contract discussion in the Italian Parliament. “The company gained back its capability to generate profit, but its Golden Age is long gone in the past.” – says Tiesto. What was once a symbol of Italian excellence is now forever gone from grocery aisles, just as gone are those times when Italy’s economy was flourishing and thriving and the future seemed so promising, and all was in bloom…