ANALYSIS:The high prices gained by AIB in 2008 sale of the Kallakis portfolio to Green Properties belie a market then in crisis, writes GRETCHEN FRIEMANN
AS AIB knows to its cost, there is never a good time to discover a fraud. When the John Rusnak trading scandal was revealed in the early years of the century, Ireland’s largest bank suffered a €760 million loss. However, it was the blow to AIB’s credibility that brought the bank to the brink of destruction.
News of the fraud triggered a wave of takeover rumours, temporarily undermined the share price and focused the limelight on Ireland’s banking system just as investors were reeling from the collapse of Enron, which then ranked as the world’s largest bankruptcy.
Six years later, AIB found itself back in the same boat, but this time the fraud – a massive property scam – was set against the calamitous events of the credit crunch.
Unlike the Rusnak affair, however, which was the subject of a public inquiry, the exact details of this latest scandal remain shrouded in mystery. According to the bank’s version of events an “internal review”, conducted in 2008, revealed that hundreds of millions of pounds in British mortgages had been paid out on the basis of bogus guarantees from a blue-chip property company.
AIB says it then informed Britain’s serious fraud office and, in March last year, newspaper reports identified the millionaire Greek tycoon, Achilleas Kallakis, as the key figure in one of Britain’s largest property fraud investigations.
The allegation is that Kallakis, and other unnamed individuals, duped AIB into lending vast amounts of money by inflating the lease values on buildings. Faked documents guaranteed higher rents and longer lease periods than tenants were actually paying, enabling Kallakis to demand higher mortgages than the properties warranted.
It has since emerged that Kallakis, who was born under the surname Kollakis, has a track record in forgery. In 1995 he was convicted of flogging bogus British feudal titles to unsuspecting Australians, Americans and Canadians.
By 2008, his name and his fortunes had changed. In that year his wealth propelled him to number 325 on the Sunday Times Rich List. Kallakis was now a formidable presence on the British property scene. A four-year spending spree, funded largely by AIB, had amassed him a €1 billion portfolio that included some of London’s swankiest real estate.
By the end of 2007, his collection of trophy assets included the headquarters of the Daily Telegraph – a building that also houses an arm of the Metropolitan Police – luxury apartments and office blocks in Mayfair, two home office tower blocks in Croydon and the department of health’s offices in central London.
It is not clear precisely how much Kallakis, who is dubbed “The Don” for his renowned poker skills, borrowed from AIB. The bank has never disclosed what it lent him, but a source who worked closely with the Greek firebrand claims it was £707 million. Newspaper reports put his total bank lendings at £850 million.
Yet despite sinking hundreds of millions of pounds into building up Kallakis’s property portfolio, AIB was left with a relatively small loss – just £56 million. Statements from the serious fraud office reveal this was because AIB took control of the properties and sold them on to Green Property. The subsequent write-down was included in the bank’s 2008 annual report but was not brought to the public’s attention until the serious fraud office unveiled its investigation in March 2009.
According to well-placed sources, the bank discovered the scam back in September 2008 when the Irish banking system was on its knees and required a blanket Government guarantee to continue functioning.
It must be asked why such price-sensitive information was not shared with the Irish Stock Exchange. Why also did AIB leave it to the serious fraud office to reveal the fraud – six months after the bank apparently unearthed the problem?
Moreover, AIB has made no public statements about the nature of the property deal with Green, other than confirming that it resulted in the bank booking a write-down of £56 million. An AIB spokesman told The Irish Times it could not comment on the deal due to commercial confidentiality. However, an extensive investigation by this newspaper shows the transaction with Green, which is headed by Pat Gunne and real estate veteran Stephen Vernon, is far from straightforward.
The new owners of Kallakis’s former property empire are a series of Isle of Man-listed companies titled Kish One through to Kish Sixteen. In the first 14 of these special purpose vehicles, there are registered mortgage charges to AIB and the files document the addresses of the 14 sites to which the loans apply.
It has never been made clear how much Green stumped up for the Kallakis portfolio. However documents filed at the British land registry show the Kish entities paid £652,949,000 for the AIB-mortgaged properties. That gives an outstanding figure of £54 million on AIB’s £707 million Kallakis loan book.
The 12 sites, owned by Kish One through to Kish 12, include the Greek tycoon’s the Telegraph building, the home office tower blocks and a large residential development block in St James’s Square, one of London’s most exclusive districts. All were sold to Kish on November 21st, 2008. Two luxury apartments, in Belgravia and Knightsbridge and held by Kish 13 and 14, were not acquired until April 2009. How then did the bank book a £56 million loss in its 2008 accounts when two properties worth £7.2 million were not sold until the second quarter of 2009?
MORE PUZZLING STILL are the bloated sales prices of the Kallakis portfolio. In November 2008, the British property market was in crisis. Properties were flogged at fire-sale prices. A report issued by agents CB Richard Ellis in January 2009 shows that British commercial property values had slumped by 35.5 per cent from their summer 2007 peak.
However, the land registry documents show a number of Kallakis’s assets were sold on for roughly the same price “The Don” himself had paid at the height of the boom. In some cases, the Kish companies forked out even more than Kallakis for the same properties.
Kallakis’s property firm, Pacific Group, bought the Telegraph building at Buckingham Palace Road for £205 million in August 2007. Kish One paid £200 million. In 2006, Kallakis stumped up about £100 million for Apollo and Lunar House in Croydon, two office blocks where the British government rents 46,450sq m (almost 500,000sq ft) of space for key departments such as the border agency and the immigration and nationality directorate. Kish Five paid £95 million for the site.
Later that same year, Kallakis acquired a block at Nine Elms in Vauxhall for £75 million. The 23-storey Market Towers was mainly let to the department of health. Kish Six bought it for £77.5 million.
In November 2007, Pacific paid £120 million for the block at St James’s Square that Kallakis intended to develop into a luxury apartments. Kish 12 also paid £120 million.
In January 2006, Kallakis bought the Astral Towers building in Crawley, West Sussex, for £21.6 million. Kish Eight paid £23 million for the same site. In 2004, Pacific acquired Liverpool’s India Buildings for £45 million, Kish 11 paid £47.1 million.
By any measure, the Kallakis portfolio is impressive, but is it feasible that Green agreed such frothy prices in a distressed market where values had nose-dived and credit had virtually evaporated? The company has a strong reputation in the British and Irish property industry, thanks largely to its expert management of the Blanchardstown shopping centre, which ranked as Green’s chief asset before it clinched the AIB deal and, more recently, a €1 billion portfolio of property from the nationalised Anglo Irish bank.
These transactions have thrust Green into the limelight just as some of the most famous developers from the Celtic Tiger era flee the property stage with their fortunes and reputations in tatters.
So how is Green succeeding where others have spectacularly failed? According to a senior source within the firm, the company has hit upon a strategy that is “beneficial to the banks” as they work through distressed property portfolios.
Officially the company will say little about the transaction other than it is “pleased with the progress of the portfolio”. A key milestone for the business has been a rental deal on Kallakis’s former Mayfair headquarters at Carlos Place. Kish Four bought the property for £6.7 million and, according to documents filed at the land registry, has installed Simon Fuller’s firm, 19 Entertainment, as the new tenant.
The Kish vehicles act as landlords to some high-calibre tenants, but who is the actual owner of Kish? A source within Green claims the beneficial owners are a “group of Green directors”. Yet there is no clear paper trail back to the company.
Each of the Kish entities list seven directors: three are from Green – Pat Gunne, Stephen Vernon and Mark Munro – three are from Dixcart Management, an Isle of Man financial services firm that acts as the registered agent for Kish 1-16, and one is from Chesterfield Management, also an Isle of Man financial services firm. The ultimate owner of Kish, as listed in the companies’ memorandum of association, is Pencaster Ltd.
THIS IS A FUND administration company controlled by directors of Dixcart Management, whose Isle of Man address is shared by Kish.
Why is it not possible to prove that Green is the sole beneficial owner of Kish? And who is instructing Pencaster?
Such lack of transparency is compounded by the discovery that AIB and Kish share the same lawyers. Documents obtained by The Irish Times show that the English law firm, Cameron McKenna, is acting for both AIB and Kish One, the special-purpose vehicle that owns the Daily Telegraph building.
A source within Green dismisses the suggestion that this is an irregular practice and points out that both AIB and Green employed separate lawyers to handle the sale of the Kallakis portfolio. He maintains that since Cameron McKenna is familiar with the properties, it “makes sense” for Green to use it for various “management issues”.
He says that when AIB and Green agreed the Kallakis deal, the bank informed them it was “under no obligation to make an announcement”. He adds: “We were fine with that as we didn’t want to publicise the transaction either.”
In November 2008, the Irish banks were hurtling towards insolvency. The global financial system looked shaky. What would have been AIB’s fate had it unveiled the Kallakis fraud in those febrile conditions?
The bank’s reported loss from the property scam is £56 million but if the portfolio had been valued in late 2008, the write-down would have been far greater. On the basis of the CB Richard Ellis report, a 35.5 per cent fall in market values represents a £250 million drop on AIB’s loan of £707 million. In a fire sale scenario, the price declines may have been even more dramatic. Caught in the teeth of the worst financial crisis since the Great Depression, it is a moot point whether AIB could have sustained a write-down on that scale.
Yet questions remain over AIB’s exposure to the Kallakis portfolio, even as the State’s largest bank prepares to hand over €24 billion in impaired loans to Nama and further capital injections from the taxpayer look inevitable.
According to a leading property specialist, the inflated prices of the Green transaction only “make sense” if the loans are non- recourse, meaning that if the assets fall below the value of the mortgage, AIB takes the hit.
“In effect,” the expert explains, “it is a risk with no downside for Green. They can hand back the properties if the loans become impaired . . . It would be interesting to know what percentage they are earning in management fees. For AIB, the upside is the avoidance of a large write-down and the continued income generated by the interest on the mortgages . . .
“Banks are not in the market to asset- manage property so it makes sense to transfer the portfolio to a company like Green.”
In that scenario, the industry source claims, “everyone is a winner. The problem is the lack of transparency. It’s not clear what the risk is to AIB. Also, the interest earned from the loans and the percentage management fee are both based on a lot size that may be worth “30 to 40 per cent less”. In other words, a smaller price tag on the Kallakis portfolio would have translated into reduced revenue streams for Green and AIB.
The London Evening Standard described the Kallakis scandal as one the “most audacious frauds ever committed on the London property scene”. AIB was the Greek fraudster’s chief banker.
In a statement to The Irish Times, AIB said it "is working with the serious fraud office concerning the £56 million fraud perpetrated on the bank. Given that the matter is the subject of an ongoing investigation by the SFO, it is not appropriate for AIB to comment".
In a letter to The Irish Timesin October last year, a former director at the bank, Padraic Fallon, penned a staunch defence of Doherty's recent appointment as managing director. He argued that "AIB would not have lost $691 million in 2002 at its [Allfirst] Baltimore unit" if Rusnak had been under Doherty's chain of command.
From 2003 on, Kallakis allegedly pulled off one of the biggest property scams ever seen in Britain or Ireland. AIB’s capital markets controls corporate banking so this scandal is one that happened on Doherty’s watch.
