April
26th 2001
From The Economist print edition
http://www.economist.com
After
next month’s election, Silvio Berlusconi, Italy’s richest businessman,
is expected to become prime minister again. Yet he is still locked in a string
of legal battles. His companies have used money from untraceable sources—and
he even faces allegations of links to the Mafia
ON APRIL 20th,
in a drab courtroom in Milan, three judges met to hear evidence in a big trial.
The case involved the alleged bribery of judges. Taped to the door was a handwritten
list of the accused. At the top was Silvio Berlusconi’s name.
This
case illustrates vividly that Mr Berlusconi has not put his legal problems behind
him. Shortly before he first became Italy’s prime minister, in May 1994,
his business empire, Fininvest, became a subject of the mani pulite (clean hands)
investigations. This operation, launched by magistrates in Milan in 1992, had
exposed deep-rooted corruption in Italian politics, the bureaucracy and business.
When Mr Berlusconi
founded his political party, Forza Italia, in 1993, little was known about his
business methods. He portrayed himself to Italians as a self-made man who had
built up a powerful television empire by breaking the monopoly of Italy’s
state-owned broadcaster, RAI. He told them that he represented a clean break with
Italy’s corrupt past.
Since
1994, however, magistrates have investigated many allegations against Mr Berlusconi,
including money-laundering, association with the Mafia, tax evasion, complicity
in murder and bribery of politicians, judges and the finance ministry’s police,
the Guardia di Finanza. Mr Berlusconi, who strongly denies all the allegations,
maintains that left-wing magistrates dominate the judiciary, and that the mani
pulite investigations were politically motivated. Not surprisingly, his closest
associates echo these assertions. “Mr Berlusconi has been persecuted since
1993. There is something rotten in the judicial system,” says Fedele Confalonieri,
an old friend and chairman of Mediaset, Fininvest’s television group.
A
senior British judge, Lord Justice Simon Brown, took a rather different view in
1996. The case involved an unsuccessful attempt by Mr Berlusconi to stop Italian
magistrates getting their hands on some documents seized by the Serious Fraud
Office in Britain. The magistrates needed these documents as evidence in a case
of illegal party financing, whereas Mr Berlusconi claimed the alleged offence
was political. It was a misuse of language, Lord Justice Brown said, to describe
the magistrates’ campaign as being for “political ends”, or their
approach to Mr Berlusconi as one of political persecution...the magistracy are
demonstrating...an even-handedness in dealing equally with the politicians of
all political parties. It is, indeed, somewhat ironical that the applicants here
are seeking to be regarded as political offenders in respect of offences committed
in part whilst Mr Berlusconi himself was actually in office...I just cannot see
corrupt political contributors...as “political prisoners”.
But
Mr Berlusconi has a second line of defence. “Italy is not a normal country.
Even an anomaly like Mr Berlusconi must be understood in the context of the country.
He has done nothing worse than any businessman in Italy,” pleads Mr Confalonieri.
Indeed, many
Italians, by no means all of them on the right, echo this defence. Mr Berlusconi,
they say, did only what all businessmen had to do to get ahead: pay off anybody,
politicians and judges included, who was in a position to help. Mr Berlusconi’s
fault, they say, is simply that he was cleverer, and became richer, than his rivals.
Besides, they add, what were the magistrates themselves up to, before the mani
pulite campaign, when they were notably inactive in pursuing bigwigs?
Others
disagree. “He went beyond the acceptable way of doing business in Italy,”
comments a top Italian banker.
Wheels
of justice
Three
things are important if the full background to Mr Berlusconi’s legal entanglements
is to be understood. First, once an allegation of a crime is made in Italy, magistrates
have a legal duty to investigate. They can investigate the allegation for a maximum
of two years without bringing charges. Second, once charges are brought, the justice
system moves slowly: a trial can last for years, as can the appeal process. Third,
in Italy, the accused are not considered guilty before definitive conviction in
the final appeals court.
Mr
Berlusconi has had no definitive convictions so far, but only three of nine criminal
proceedings against him have reached the final appeals court (click to see the
charge sheet). In the one case where the result is known, concerning illegal political
donations, this court did not find him innocent. It upheld the verdict of the
first appeals court which, because of the lapse of time since the offence, had
applied the statute of limitations. Under the Italian penal code, this extinguishes
the crime.
Mr
Berlusconi’s legal problems all stem from his business career, which started
in the 1960s. When he entered politics, he gave up the directorships of all his
Fininvest companies, except AC Milan, a football club. However, he remains the
controlling shareholder, and one or both of his grown-up children sit on the board
of each of the main companies in the empire.
The
structure of that empire is not straightforward even now, and has been far more
convoluted in the past. Twenty-two holding companies, each of them beneficially
owned by the Berlusconi family, control around 96% of the main private holding
company, Fininvest.
Fininvest’s
biggest asset by far is a controlling stake, worth 13.1 trillion lire ($6.0 billion),
in Mediaset. Terrestrial television in Italy is dominated by two groups: Mediaset,
and the state-owned RAI. Between them, Mr Berlusconi’s three TV networks
(Canale 5, Italia 1 and Retequattro) have a 43% share of the national audience
and over 60% of total TV advertising sales.
Television
is only one part of Mr Berlusconi’s media empire. He has a controlling stake
in another quoted company, Mondadori, which is Italy’s largest publishing
group. Mondadori’s books division has almost 30% of the domestic market;
its magazine division, with around 50 titles, 38%. The Berlusconi family also
owns one of Italy’s leading national newspapers, il Giornale.
Fininvest
also has a 36% stake in Mediolanum, a fast-growing financial-services group that
Ennio Doris founded in 1982 with Mr Berlusconi’s financial backing. Mediolanum
was floated on the stockmarket in 1996. And Fininvest has a clutch of loss-making
businesses (see table below), such as its Internet portal, Jumpy, launched just
as the dotcom party was finishing, and Pagine Utili, a struggling telephone-directories
firm.
The
money trail
Mr
Berlusconi cut his business teeth on property development in and around Milan.
In the late 1960s, he had the idea of developing Milano 2, a garden city of around
3,500 flats. It was built on the eastern outskirts of Milan beneath the flight
path of aircraft taking off from nearby Linate airport. The appeal of the development
was enhanced after the aircraft were mysteriously diverted over other residential
areas.
This was
not the only mystery. Companies in Switzerland, where beneficial ownership is
impenetrable, injected 4.1 billion lire (33.5 billion lire in today’s money)
in equity into the Italian companies responsible for Milano 2. So, on paper, this
project belonged not to Mr Berlusconi, but to anonymous third parties.
Officials
at the Bank of Italy suspected that Mr Berlusconi was behind the Swiss companies.
At the time, holding capital abroad without telling the authorities was a criminal
offence. A team from the Guardia di Finanza, led by Massimo Berruti, investigated
in 1979, but concluded, despite evidence that Mr Berlusconi had personally guaranteed
bank loans to the Italian companies, that he was not the beneficial owner of the
Swiss companies. Mr Berruti’s boss signed the official report. Like Mr Berlusconi,
he belonged to the infamous P2 masonic lodge. Immediately after his investigation,
Mr Berruti left the Guardia di Finanza and worked as a lawyer for Mr Berlusconi.
He is now a Forza Italia member of parliament.
Milano
2 gave birth to Mr Berlusconi’s television empire. In 1978, he launched a
local cable-television station for Milano 2, called Telemilano. This scheme became
far grander. Mr Berlusconi’s ambition was to challenge RAI’s monopoly
on national television advertising, for which there was huge pent-up demand. Telemilano
became Canale 5 in 1980.
There
was one major snag: only RAI was permitted by law to broadcast nationally. Although
private commercial television was unregulated in most respects, a court ruling
in 1980 allowed private television stations to broadcast only on a local basis.
But
Mr Berlusconi soon found a way round this ruling. He bought programmes, especially
American films and soaps, and offered them at very low prices to small, regional
television stations. Mr Berlusconi collected the revenue from pre-recorded advertising
slots that he inserted. Each station in the Canale 5 circuit agreed to broadcast
the same programmes at the same time. In this way, he secured his national audience.
How did Mr Berlusconi
finance his budding television empire? Part of the answer is with bank debt. He
had a large helping hand from public-sector banks, which provided bigger loans
than Fininvest’s creditworthiness seemed to merit. But the rest of the answer
is not clear at all. In 1978, at the birth of his television group, Mr Berlusconi
set up the 22 holding companies that control Fininvest. From 1978 to 1985, 93.9
billion lire (387 billion lire in today’s money) flowed into the 22 companies,
ostensibly from Mr Berlusconi.
In
1997, a financier with links to the Mafia alleged to magistrates in Sicily that
Mr Berlusconi had used 20 billion lire of Mafia money to build up his television
interests. The magistrates asked the Bank of Italy to help the anti-Mafia division
investigate. Two officials spent 18 months combing the shareholder, banking and
accounting records of the 22 companies. The Economist has a copy of their reports,
which run to over 700 pages. The two main findings are startling.
The
first is Mr Berlusconi’s lack of openness with the two trust companies that
he instructed to be the registered holder of his shares in the 22 companies. The
trust companies were subsidiaries of Banca Nazionale del Lavoro (BNL), a large
bank. Mr Berlusconi put money into the holding companies through two little-known
Italian banks, rather than through BNL itself. Thus, BNL’s trust companies
had no clear picture of the ultimate source of these funds. In 1994, BNL’s
managers were so concerned about this that they carried out two inspections of
BNL’s relations with the 22 companies.
These
inspections revealed other anomalies, such as share sales that were registered
solely on Mr Berlusconi’s word, and with no documentary evidence. For instance,
when he sold shares in one of the holding companies to a Fininvest subsidiary
for 165 billion lire, the funds bypassed the trust companies altogether. So they
had no idea how, or even whether, the buyer had paid for the shares.
The
second finding is that the ultimate source of the money put into the 22 companies
cannot be traced. There were three reasons for this. First, 29.7 billion lire
had been paid in cash, or cash equivalents. Second, the investigators had found
no extant supporting documents in the records of the trust companies, banks or
holding companies for 20.6 billion lire. Third, Mr Berlusconi had been adept at
sending funds round in circles.
Why
did Mr Berlusconi want to do this? The investigators were baffled. One company,
Palina, ostensibly a third party, had sent 27.7 billion lire to the trust companies,
which had then transferred this sum to the holding companies. From there, the
funds went to Fininvest, and then, through a Fininvest subsidiary, back to Palina.
All these transactions took place on the same day and at the same bank. The investigators
found that hidden behind Palina was Mr Berlusconi. He had used a 75-year-old stroke-victim
to front for him. Soon after the transactions took place, Palina was liquidated.
Its books had been kept blank.
So
the true source of the 93.9 billion lire that flowed into the 22 companies in
1978-85 remains a mystery that only Mr Berlusconi can solve. We have sent him
questions about this, in writing, but he has declined to answer. A close reading
of the reports suggests that the possibility of money-laundering in the 22 companies
cannot be ruled out. Banca Rasini, one of the little-known banks used by Mr Berlusconi
and once his father’s employer, cropped up in trials of several money-launderers
in the 1980s. But the anti-Mafia investigators found no evidence to support the
allegation that had triggered their work. They clearly hoped to produce a second
report, but the time limit for the investigation had by then expired.
A
friend in need
After he bought his two largest private competitors, Italia
1, in 1983, and Retequattro, in 1984, Mr Berlusconi had secured a virtual monopoly
in private television. To skirt round the law and broadcast nationwide, he needed
help from political friends. None helped more than Bettino Craxi, who became leader
of the Socialist Party in 1976 and prime minister in 1983. Mr Berlusconi, through
his two main networks, had a powerful political weapon to offer.
In
October 1984, officials in several Italian cities shut down his television stations
for broadcasting illegally. This spelled potential disaster for the heavily indebted
Fininvest group. Within days, Craxi, who died in Tunisia last year after being
sentenced in absentia to prison for corruption, signed a decree that allowed Mr
Berlusconi’s stations to stay on air. After some parliamentary tussles, this
decree became law.
Craxi’s
decree did nothing to prevent concentration of ownership. But neither did the
Mammi law (named after Oscar Mammi, the telecoms minister), passed in 1990. Tailor-made
to suit Mr Berlusconi with his three national networks, it said that no single
group could own more than three out of the 12 networks that would be licensed.
The coalition government of the day, which depended heavily on Craxi’s Socialist
Party, pushed through this controversial measure despite the resignation of five
ministers in protest. In effect, this law entrenched the duopoly between Mediaset
and RAI. In 1991 and 1992, Mr Berlusconi paid a total of 23 billion lire into
Craxi’s offshore bank accounts from a clandestine part of his Fininvest empire,
known as All Iberian.
Following
leads from their investigation of Craxi’s bank accounts, prosecutors discovered
a secret and substantial network of Fininvest companies, incorporated in such
jurisdictions as the British Virgin Islands and the Channel Islands. These companies
were not disclosed as subsidiaries in Fininvest’s accounts. According to
prosecutors, in 1993 Mr Berlusconi signed a letter to his auditors falsely stating
that these companies were not part of the Fininvest group.
The
prosecutors claim to have found a wide-ranging international fraud, perpetrated
under the direction of Mr Berlusconi, to siphon off huge amounts from Fininvest
into the secret offshore companies. According to them, Fininvest used various
fraudulent financial techniques. The offshore companies, the prosecutors claim,
used these funds for all sorts of illegal activities, such as the offshore companies
purchasing:
through
a third party, quoted shares in companies in the Fininvest group, the apparent
intention being to inflate the price of the shares. That this operation was a
sham was clear from the fact that the shares, which were bearer shares, remained
at all times in the possession of the same fiduciary.
A
genuine buyer of bearer shares in a quoted company would hardly have left them
in the safe keeping of the same person used by the seller.
Offshore
interests
Another
leg of the prosecutors’ case is that the offshore companies were used to
warehouse secret stakes in television companies in Italy and Spain. The prosecutors
say they have strong documentary evidence of this. The Mammi law required Mr Berlusconi
to sell 90% of his interest in Telepiu, a pay-TV network that he set up in 1990.
However, according to the prosecutors, Mr Berlusconi kept control of this stake
until 1994 through his offshore companies. He arranged contracts with associates
who agreed to act as fronts for him. Under these contracts, while legal ownership
of the shares passed to the investors, beneficial ownership remained with Mr Berlusconi’s
offshore companies.
The
magistrates also uncovered a similar alleged warehousing operation for a 52% stake
in Telecinco, a Spanish television station. At the time, Spanish antitrust legislation
did not allow anyone to own more than 25% of such companies. Baltasar Garzon,
an anti-corruption magistrate in Spain, wants Mr Berlusconi’s immunity as
a member of the European Parliament lifted. He is likely to have to wait. For
eight months, Spain’s foreign and justice ministries have been locked in
a strange wrangle about which is the competent authority to submit a request to
the European Parliament.
Mr
Berlusconi is currently on trial for falsifying the accounts of the Fininvest
holding company. The effect of the alleged falsification of the accounts was to
hide all the alleged illegalities. False accounting is a serious offence in Italy,
punishable by up to five years in jail. Magistrates have recently applied for
a case to be brought on equally serious charges of false accounting relating to
the group accounts of Fininvest.
However,
Mr Berlusconi may be planning an escape. On March 17th he told a meeting of Italian
businessmen that, if elected, his government would decriminalise most cases of
false accounting. So the magistrates’ work may have been in vain. Yet although
they have been unable to trace the ultimate destination of the tens of billions
of lire paid out by various parts of Mr Berlusconi’s secret offshore empire,
they have discovered where some payments went.
Mr
Berlusconi gained control of Mondadori, the publishing group, in 1991 after a
bitter battle with Carlo De Benedetti, a wealthy Italian businessman who was himself
briefly imprisoned in the mani pulite period. Mr Berlusconi is alleged to have
bribed an appeal-court judge, Vittorio Metta, with 400m lire to rule in his favour
in a case that decided the battle with Mr De Benedetti.
When
magistrates started investigating the case, they discovered that Mr Metta had
paid 400m lire in cash in 1992 towards the cost of a flat. In February 1991, the
month after Mr Metta’s ruling, one of Fininvest’s secret offshore companies
paid 3 billion lire into a Swiss bank account of Mr Berlusconi’s close associate
and lawyer, Cesare Previti, who was defence minister in his government in 1994.
From Mr Previti’s account, magistrates traced a payment of 425m lire to a
Swiss bank account of another lawyer, Attilio Pacifico, who withdrew this amount
in cash in October 1991. Mr Pacifico allegedly handed over the bribe to Mr Metta.
Although
the magistrates found no direct proof of the payment in cash to Mr Metta, they
believed they had a strong case based on indirect proof. Scrutiny of Mr Metta’s
bank accounts revealed no cash withdrawals amounting to 400m lire in the relevant
period. Neither did investigation of the Italian and Swiss bank accounts of a
retired Italian judge who, according to Mr Metta, had given him the 400m lire
in wodges of cash—though the accounts did contain several million dollars.
So
the magistrates believed they had established that Mr Metta had received 400m
lire in cash from the money that Mr Berlusconi paid to Mr Previti in February
1991. Last June, a judge at a preliminary hearing took a different view. He believed
Mr Metta and ruled, therefore, that Mr Berlusconi and the other defendants, who
included Mr Previti and Mr Metta, had no case to answer. The magistrates have
appealed.
Dealings
with judges
Mr
Berlusconi is also on trial for alleged bribery of judges. His co-defendants,
who all deny the charges, include Mr Previti and Mr Pacifico, and, again, the
case involves Mr De Benedetti as the offended party. In 1985, Mr De Benedetti
signed a contract to buy SME, a food and catering conglomerate, from IRI, a large
state-owned group. Mr Berlusconi and another businessman formed a company to mount
a higher bid for SME. After a court ruling in 1986 that his contract was not valid,
Mr De Benedetti’s deal with IRI fell through. He then took the case to the
highest appeals court, where he also lost.
One
charge against Mr Berlusconi, which he denies, is that he induced judges to find
in his favour by promising them money. Whether this is true or not, there is a
clear trail of money from Mr Berlusconi to Renato Squillante, a judge, via Mr
Previti. The Economist has documents that show a transfer, on March 6th 1991,
of $434,404 from one of Mr Berlusconi’s Swiss bank accounts to one of Mr
Previti’s, and on March 7th, a transfer of the same amount from Mr Previti’s
account to the Swiss bank account of Rowena Finance, a Panamanian company. Court
evidence shows that Rowena Finance’s account is Mr Squillante’s. Mr
Berlusconi had wanted to appoint his chum, Mr Previti, as justice minister in
1994, but the president of Italy refused to approve this.
Mr
Berlusconi has been absent from the 26 hearings scheduled to date in this trial—some
recently postponed, as his lawyers are standing in the election. He has applied
for the judges to be replaced, as he claims they are prejudiced.
If
he is eventually found guilty of the crime in the final appeals court, he could
receive a prison sentence; the statute of limitations will not kick in until 2008.
Unlike the crime of false accounting, it will be very difficult for his government,
if he wins the election, to decriminalise the offence of bribing judges. This
trial could also be unique in Italian judicial history. No serving prime minister
of Italy since the war has yet been a defendant in a criminal trial.
Cosy
with Cosa Nostra?
Mr
Berlusconi’s problems with the magistracy have not been confined to Milan.
In Sicily, Mafia pentiti (supergrasses who have “repented”), especially
Salvatore Cancemi, whose evidence has helped prosecutors secure several convictions
against Mafia bosses, have made very grave allegations against Mr Berlusconi and
his close friend, Marcello Dell’Utri. Mr Cancemi alleged in 1996 that both
were in direct contact with the Mafia boss who ordered the bombing which killed
an anti-Mafia magistrate, Paolo Borsellino, in 1992.
After
a two-year investigation, magistrates applied last year for the inquiry to be
closed without charges. They did not find evidence to corroborate Mr Cancemi’s
allegations. Similarly, a two-year investigation, also launched on evidence from
Mr Cancemi, into Mr Berlusconi’s alleged association with the Mafia was closed
in 1996.
A parallel
investigation resulted in charges against Mr Dell’Utri of aiding and abetting
the Mafia, which he denies. With the exception of Mr Berlusconi, nearly all the
prosecution witnesses in the trial, which started in 1997, have been heard. According
to Ennio Tinaglia, the lawyer for the province of Palermo, a civil party in the
case, the prosecution has “presented strong evidence of Mr Dell’Utri’s
very close links with the Mafia.” Mere mention of the Mafia makes Fininvest’s
managers twitch. “Mafia is second only to paedophilia as a crime. It is a
terrible, shameful thing,” says Mr Confalonieri, one of Mr Dell’Utri’s
former colleagues.
So
who is Mr Dell’Utri? Apart from a short spell in the late 1970s, Mr Dell’Utri,
a Sicilian, worked with Mr Berlusconi in Fininvest from 1974 to 1994. As chief
executive of Publitalia, Mediaset’s advertising wing, he was responsible
for the cash generator of the Fininvest group. Mr Dell’Utri, a member of
the Italian parliament, was a co-founder of Forza Italia, and acted as Mr Berlusconi’s
campaign manager in the 1994 election.
Magistrates
have also applied for Mr Dell’Utri to be brought to trial on charges of conspiracy
to slander their colleagues. And he is currently under investigation for allegedly
attempting to bribe a prosecution witness at his trial. A court case in 1996 revealed
that Mr Dell’Utri received donazioni (gifts), often in cash, of 4 billion
lire from Mr Berlusconi between 1989 and 1993.
While
Mr Berlusconi is not obliged to testify in his own trials, even as prime minister,
he cannot escape giving evidence in Mr Dell’Utri’s. Prosecutors will
probe him about his long-standing friendship with Mr Dell’Utri. And he will
have to answer other questions that he has hitherto avoided. These include how
and why he employed Vittorio Mangano, a convicted mafioso from a powerful clan
in Palermo, on his country estate near Milan for two years in the 1970s.
High
on the prosecutors’ list will be questions on the anti-Mafia investigators’
reports about the 22 holding companies. Not least, they will ask him where the
22 companies got their funds. There will also be questions about a Sicilian television
company that he owned with a Mafia-related figure.
Despite
his claims that he is the shining archetype of a self-made man, Mr Berlusconi
has needed a lot of help from insalubrious quarters. Though he says he wants to
replace the old corrupt system, his own business empire is largely a product of
it. His election as prime minister would similarly perpetuate, not change, Italy’s
bad old ways.
Copyright © 2001 The Economist Newspaper and The Economist Group. All
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