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We Got a Code Blue. I Repeat, Code Blue.

Healthcare
Reading time: 8 minutes

In July, the Financial Times published quite a shocking investigation: ‘Ndrangheta, the powerful Italian mafia based in Calabria, infiltrated the national public healthcare systems and laundered the proceeds through the issuance of debt securities. Millions of looted money that ended up in financial portfolios of several investors around the globe, with the (unintentional?) help of financial institutions. How does it work?

A contribution by Claudia Gazzola

Covid-19 against the Italian National Healthcare System

The Covid-19 pandemic has put a lot of pressure on healthcare systems worldwide. The Italian one, in particular, has shown some signs of lack of preparation, although quite rightfully so, considering that Italy has been the first and most affected European country during the first wave of the Coronavirus pandemic and that this virus was completely unpredictable and unknown. Moreover, in the last years Italy has witnessed a wave of privatisation and a decrease in public funding towards the healthcare industry, giving birth to general dissatisfaction, lower service quality, but especially longer waiting time schedules. Despite the current situation, we Italians are quite proud of our healthcare system, and rightly so: according to the Bloomberg 2018 Health Care Efficiency ranking, the Italian public healthcare system is the fourth best one in the world, after Hong Kong, Singapore and Spain. This ranking is based on data provided by World Bank, IMF, WHO and UN, for countries where the average lifetime is above 70 years old, with a pro-capita GDP greater than 5,000 dollars and more than 5 million inhabitants. It computes the most efficient health systems, considering their costs and life expectations. Surprisingly, Germany takes the 45th position, while the USA, not surprisingly, is at the bottom of the list, ranking 54th out of 56 countries examined. Furthermore, the Italian population is considered the healthiest and the longest-lived one in the world, according to another Bloomberg ranking (Global Health Index 2017), then updated to the second place in 2019.

We can identify two main factors that contribute to the Italian success in this field: the dieta mediterannea, UNESCO heritage since 2010, and the structure itself of the system, which is publicly financed and managed at around 75%, freely accessible by everyone, without the need of any kind of health insurance. This of course translates into high costs for the public treasury. Every year, the Italian government sets aside between 13 and 14% of public expenditure for the healthcare system. In 2018, this expenditure was equal to 8.8% of national GDP, but the percentage goes down to 6.5 when we consider the spending entirely funded by public funds. The figure is in line with OECD average (6.6%) and lower than the healthcare spending in the other big European countries, like Germany (9.5% of GDP), France (9.3%) and the UK (7.5%).

The main principles that govern the Italian healthcare system are universality, equality, fairness. In Italy, health is a fundamental right for everybody, without any discrimination of personal conditions, economic or social background, safeguarded even by the Constitution and perceived not only as an individual prerogative, but also as a resource for the entire community. What makes it extraordinary, in my opinion, is that it is almost completely free. This is a characteristic that citizens should keep in mind and not take for granted, although it gets easier to realise its importance once having experienced the healthcare system of other countries.

The Financial Times Investigation

However, healthcare is a business and its public structure, which means contracts and projects are assigned following competitive bidding processes, makes it attractive to those groups which have a tendency to resort to violence and bribery and are particularly looking for opportunities to launder illicit proceeds. Yes, we are talking about mafia clans. Last summer, the Financial Times published two quite shocking articles (this one and this other one) that show how the Mafia infiltrated the national health system, investing their criminal proceeds into bonds, then sold to global investors. The articles specifically refer to ‘Ndrangheta, the Italian criminal organisation based in Calabria, that made strong family ties its key to success. Yet ‘Ndrangheta is still not so commonly known outside Italy, despite their ascendance that makes it one of the most dangerous and internationally spread out criminal organisations in the world. For sure, the most powerful one today in the national territory.

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The numbers prove it: based on some studies, the annual turnover of ‘Ndrangheta clans combined is estimated to sum up to €44 billion, more than all the Mexican cartels together. According to Federico Cafiero De Raho, the Italian National Anti-Mafia Prosecutor (Procuratore Nazionale Antimafia), the Calabrian clans are able to earn €30 billion annually only from drug trafficking, part of which is reinvested in cash flows and financial investments, infecting the legal economy. The FT confirms that hospitals are not only a new lucrative source of income for the Calabrian criminal families, but also an easy and smart way to launder illicit proceeds: directly, thanks to their own front companies that get the contracts and create monopolies on healthcare services, but also through some financial tricks. As a matter of fact, an investigation by the Financial Times revealed that, between 2015 and 2019, the profits obtained from the healthcare business have been packaged into debt securities with the help of investment banks and hedge funds. These instruments were sold to different clients, ranging from Italy to South Korea. But how did ‘Ndrangheta manage to invest its money into universally traded bonds?

Securitisation, Securitisation!

The mechanism behind it is not so difficult and it is called securitisation, a practice that became popular after the 2008 crisis. First of all, keep in mind that debt securities are usually issued and underwritten by investment banks, or the like, and they are backed by some assets, known as underlying assets. Moreover, it is common practice to take accounting items like receivables and other illiquid assets out from company balance sheets, in order to convert them into tradable and more liquid securities. This maturity and liquidity transformation takes the name of securitisation.

The same happened here. In this case, the underlying assets were made of invoices still to be paid, issued by health service providers and signed off by officials of the Calabria public healthcare system, for an overall value of hundreds of millions of Euros. Financial intermediaries are usually more than available to buy assets like these unpaid invoices because they are very cheap, since they are guaranteed by the Italian government. In turn, these invoices are mixed with other similar categories of assets and sold to other financial agents (normally special purpose vehicles or SPVs). Finally, SPVs issue debt securities available for trading, backed by the cash flows expected from the invoices themselves, which work as a sort of insurance: investors are willing to buy the bonds sponsored by the SPV because they are quite sure to receive periodic payments, guaranteed by the fact that the invoices will be finalised sooner or later.

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Once the securities are tradable on different capital markets, they can be purchased and sold by different categories of intermediaries and investors, eventually ending up in the financial portfolios of the clients of private banks, hedge funds, mutual funds and so on, depending on their  level of risk and on the correspondent risk appetite of investors.

An important note: there is absolutely nothing illegal in this procedure, on the contrary securitisation is a normal practice in capital markets. Issues arise when we consider the weak and corruptible nature of the industry involved and of roles like public officers. The problem is that, as the FT reports, some of the authorities who signed off the invoices were then placed under emergency administration due to links with organised crime groups. Moreover, the invoices were issued by ambulance, funeral, and other health services companies, or even by religious charities. However, some of them were investigated by the public prosecutor office of Catanzaro and later revealed to be under the control of ‘Ndrangheta clans, which successfully avoided anti-money laundering controls.

In this way, front companies for ‘Ndrangheta had the chance to shift the unpaid invoices, owed by regional health agencies, and sell them at a discount to financial intermediaries, getting cash in exchange and freeing their balance sheets from receivables, which were then transformed into perfectly tradable securities. In this way, every criminal connection could potentially be disguised (in jargon, all this process is called securitisation based on factoring). There are other two elements that hid the transactions from controls: these “mafia bonds” were neither rated by credit rating agencies, like Moody’s or Standard & Poor’s, nor traded on regulated financial markets, but instead privately placed by smaller and more specialised investment banks.

Business as Usual?

As it often happens, ‘Ndrangheta needed the help of one or more financial institutions to structure, underwrite and trade the bonds. The protagonist of the story is the Luxembourgian branch of the private bank of the Italian insurance company Generali, which was the ultimate buyer of the bonds. Generali got the bonds by Chiron, a special purpose vehicle owned by CFE, an investment banking boutique with offices in Luxembourg, London, Geneva, and Monaco. The Italian office of a big consultancy firm, EY, was also involved in the deal as external consultant. So far, neither Generali nor EY have made public announcements on the case. The Bank of Italy itself has not published any specific press release on potential breaches, or sanctions.

Once again, this is an example of how financial service providers and professionals may play a crucial role in increasing the power and the wealth of mafias, although both Generali and CFE told the FT not to have willingly executed transactions linked to organised crime and to have accomplished all the proper checks and controls on the assets. Nevertheless, strong action has been taken by the Italian government after the inquiries of the Italian anti-mafia investigative forces: in September 2019, the healthcare authorities of Catanzaro and Reggio Calabria were dissolved, due to suspicious mafia infiltration. They had been put under extraordinary administration for eighteen months.

If we think about it, the entrepreneurial spirit, the diversification, and the vertical integration of ‘Ndrangheta businesses have something incredible, in a perverse sense though. Not only organised criminals make great profits from contracts they win through intimidation and bribes, but also having access to medical records allows the clans to promptly get to know which patients are more likely to pass away. Before the patient exhales his or her last breath, ‘Ndrangheta will leverage on its powerful and coordinated mechanism, other than on its violent reputation, so that the family of the dead will choose the funeral company they want and that, it goes without saying, they control. In this way, ‘Ndrangheta is able to do business in several diversified fields and in every stage of human life. It seems we cannot really be free from mafia, not even when we are dead.

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Calabria is known to be the poorest region in Italy, its GDP per capita is half the European average. It is a clear outlier in the Italian health statistics, being the region with the lowest average number of years of good health and the highest rate of infant mortality. For sure, ‘Ndrangheta infiltration is responsible for the high amount of debt, corruption, mismanagement and bad infrastructure conditions that affect hospitals in Calabria. Gaetano Saffioti, an entrepreneur in the cement industry who had been courageous enough to testify against a ‘Ndrangheta clan and who had been living under police protection ever since, told the FT: “We are always getting poorer, but this is what they want. The weaker we are, the less likely we are to resist. The ’Ndrangheta has got inside of us, inside our minds. The majority simply adapt to the system.”


References

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Bocconi Students against Organized Crime è la prima associazione di studenti bocconiani a trattare il tema della criminalità organizzata dal punto di vista economico, sociale e organizzativo.

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