Achilleas Kallakis and AIB deals

A long-running but little-covered business story took another step forward yesterday. Two men appeared before the London Magistrate’s Court charged with fraud against AIB and Bank of Scotland PLC. Today’s Irish Times has about 60 words on it in the In Short box in the corner of page 20.

For full details read this in-depth article by Gretchen Friemann from January 18. PropertyPin discussion also.

Achilleas Kallakis and Alexander Williams, formerly known as Stefanos Kollakis and Martin Lewis respectively, were arrested recently following a two-year investigation by the UK Serious Fraud Office.

In a press release issued today the Fraud Office says…

…each [of the men] have each been charged with two counts of conspiracy to defraud, 13 counts of forgery, five counts of fraud by false representation, two counts of money laundering and one count of obtaining a money transfer by deception.

The offences charged in relation to Allied Irish Banks PLC relate to property loans made between 2003 and 2007 resulting in losses of £56 million. The offences in relation to Bank of Scotland relate to a shipping loan made in 2008 resulting in losses of around £5 million.

The London Evening Standard described their alleged actions as one of the “most audacious frauds ever committed on the London property scene”. It was bankrolled largely by AIB, which, it’s widely mooted, the Irish taxpayer will soon own.

Kallakis, who was the main player, has a colourful past. Fifteen years ago he was convicted of a serious forgery in the UK. Despite this, by 2007 he had amassed what The Irish Times describes as “a €1bn property portfolio funded mainly by AIB”. Over the course of a few short years the bank reportedly loaned the convicted forgerer more than £700m.

In May 2008 AIB came across something fishy about Kallakis, they called in the Serious Fraud Office and seized control of his properties. They then quickly sold the same properties on to Green Property with a €56m (relatively small) write-down. Green Property are known as owners of the Blanchardstown Shopping Centre and Fonthill Retail Park, amongst other properties.

Strangely, the write-down was included in the bank’s annual report but not brought to the attention of the public, or – importantly – the stock exchange at the time. This was during the period when Irish banking was in crisis and Government guarantees were floating around. It wasn’t until six months later, when the Fraud Office announced it was investigating Kallakis that the apparent fraud came to light. One would have to wonder if the information would have hurt AIB’s share price had they notified the stock exchange, this would have at a point when the bank was teetering on the brink…

Even more strange is the prices Green Property paid for the buildings. The Irish Times investigation by Gretchen Freiman discovered the company had paid almost the same price for the properties in late 2008 as Kallakis himself had done so at the height of the boom. The market fell more than 35% in the interim. Bizarrely, for some properties Green even paid more than Kallakis.

It should be noted that Green Property is in no way involved in the alleged fraud by Kallakis.

The Green deal with AIB is extremely opaque, involving 16 companies named Kish One through Kish Sixteen, all registered in the Isle of Man. It’s not even clear who the beneficial owners of the portfolio are at this point since Green have employed such a non-transparent ownership structure.

AIB refuse to talk about the transaction. In the un-bylined Cantillon column two weeks ago the Times called for the bank to open up about the deal, saying;

Serious questions remain unanswered as to whether it was a bona fide arm’s length transaction or a cleverly structured deal that allowed AIB avoid taking a big fraud-related writedown at the worst possible time, early 2008, which might have been enough to tip it over the edge.

The sine qua non of the Nama process is that it draws a line – and a very expensive one at that for the taxpayer – under the bank’s property-related loans. Some greater clarity about AIB’s continued exposure to the Kallakis portfolio is needed before we can safely say that we have arrived at that point.

The Sunday Business Post believes the way in which the transaction with Green has been structured must leave the bank exposed. If further details don’t emerge suspicions may grow that AIB was dealing in a non-transparent manner to avoid declaring the full extent of the damage on its books.

In relative terms – talking tens of billions – any losses from this scenario are not likely to be huge. The story does however raise some questions about the nature of decision-making in AIB as it faced collapse pre-guarantee, and its possible exposure to hidden bad debts as many of its loans are set to be transferred to NAMA.

It probably won’t be the last time we see a story like this… in the meantime we await the unearthing of a few home-grown Kallakises by our own fraud squad.