Transcription
Hello, dear friends. My name is Clive Thompson, and this is my little boy. He's eight years old, and he's here to learn about finance. And tonight, we've got a story, a true story. And it doesn't start with "once upon a time." This man committed one of the most gigantic frauds in international finance.
What's finance? >> Uh, finance is to do with money and investments and banking. I'm about to tell you what happened. I'll talk about the massive impact it had on an entire nation. And I'll also tell you why I think the same kind of fraud is happening today, but on an even grander scale.
We're going back to a cold December morning in London in 1924. It was December the 4th, 1924, when the respected businessman and banker from the Hague, Carol Merang, arrived at 26 Great Winchester Street. This housed the austere offices of the London premises of Waterlo and Sons Limited, the venerable company which dedicated itself to the impressive and often delicate business of printing banknotes for governments around the world. Carol Morang presented his credentials as the special emissary for the Portuguese government. Merang held diplomatic status with a rather vague title of honorary consul of Persia in the Hague.
>> What's Hague? >> Uh, that's in the Netherlands. It's a place, uh, it's a, it's a town in the Netherlands.
He was immediately received by none other than Sir William Waterlo in person. The distinguished Dutchman explained to Sir William that the Bank of Portugal, Bank of Portugal, immediately needed 200,000 banknotes of 500 escudos each.
>> What's an escudo? >> That was the currency of Portugal before we had the euro. So, in Europe, every country had its own currency. Like the French had the French Franc, the Germans had the German Mark, the Italians had the Italian Lira, the Spanish had the Spanish Peseta, and the Portuguese had the Portuguese Escudo. So, he wanted a lot of escudos to be printed. Now, in today's money, that would be the equivalent of about $142 million.
Morang, the Dutchman, went on to explain to Sir William that the currency issue had to be kept secret for political reasons. This was why Portugal's bank governor had entrusted the negotiations to Merang instead of using the regular diplomatic channels. Sir William probably gave a knowing nod to the need for secrecy. The request, while unusual in its secrecy, was not entirely unprecedented in the volatile political climate of post-World War Europe. But Sir William Waterlo was also cautious in his business dealings. He was not going to let the need for secrecy crowd out the need for sensible precautions. He wasn't going to act without the necessary authorities. He pointed out to Carol Morang that he would need written authorization from the governor of the Bank of Portugal, as well as the usual contractual agreement.
Thus began one of the most gigantic frauds in all of history. An unusual part of the request from Merang was that the banknotes should use the same plates and the same serial numbers as the previous issues of notes. This seemed most irregular to Sir William Waterlo. He challenged the motivation for duplicating the previous serial numbers. Merang explained that the notes were destined for Portugal's colony, Angola. He said that each banknote would be overstamped in Lisbon with the word "Angola" to avoid any confusion. He explained that the Banco de Portugal, the Bank of Portugal, had an established banknote numbering protocol for its issues. So, it was essential to adhere to these for the Angolan issue. Any suspicion of irregularity that Sir William might have harbored was dispelled with the arrival of contracts and supporting documents and agreements signed by the high commissioner in Angola and some of the most important bankers in Portugal, including the governor of the Bank of Portugal. One of the documents was a letter bearing the seal and signature of the governor of the Bank of Portugal. The letter stressed that this information was to be kept top secret and was for the eyes of Sir William only.
>> Why? >> Because it was a secret. And if Sir William showed or told anybody, everybody would know who's got the banknotes, and they might steal them.
But what Sir William Waterlo did not know was that all the letters and all the contracts had been falsified. They were fakes. He did not know that the banknotes would never be overstamped with the word "Angola."
>> What? What's Angola? >> Angola is a country in Africa, and it was a colony of Portugal. In other words, Portugal ruled over Angola, and they had to do as they were told. He did not know that none of the banknotes would ever circulate in Angola. The course of Portugal's history was about to be changed.
But let's come to the mastermind of this fraud. It was a young man called Archuro dos Reis. Reis dos Reis. He was an intelligent young man from Lisbon in Portugal. Archuro was born in Lisbon in 1896. He came from a humble background.
>> What's humble background? >> Humble means you're not very rich. You're not, um, wearing expensive clothes or anything like that.
His father was an "agente finário," an undertaker. Do you know what an undertaker is?
>> No. >> Undertakers look after dead people. When they, when they die, they put them in the coffin and they bury them and do the funeral.
>> Okay. >> Archuro's father managed to scrape together enough money to send him to the Polytechnic School of Lisbon. Archuro studied various subjects, specializing in engineering. Thanks to his father's undertaking business, Archuro was already familiar with legal documents, notorizations, certificates, official papers, seals, and stamps. He decided to forge himself a string of qualifications from a non-existent department of Oxford University in the UK. Reis forged himself a diploma and certificates from the Polytechnic School of Engineering of Oxford University, an institution that had never existed. Reis's grade, that's Arturo dos Reis's grade of bachelor, was awarded for his application in the disciplines of, and now here's a long list: engineering, science, geology, geometry, physics, metallurgy.
>> What's metallurgy? >> Dealing with metals, changing their shape and mixing them together and making different types of metals. Pure mathematics. Mathematics.
>> What's pure mathematics? >> Um, that's the kind of math you do when you're a bit better at mathematics, it comes later, it's more complicated math. Paleography. And don't even ask me what that is. No, I don't know what paleography is. Maybe we're supposed to say paleontology, but it says paleography. Um, electrical engineering. Mechanical.
>> What's engineering? >> What's electrical? >> Electrical engineers dealing with electricity and wires and, um, motors and things like that. Mechanical engineering. Applied mathematics.
>> What's that? >> Well, that's even harder math.
>> What? >> Chemistry, experimental physics, applied mechanics, applied physics.
>> Applied math. This is the harder stuff. When you get the, when you've done mechanics, you do applied mechanics. And when you've done physics, you do applied physics. General civil engineering, civil and mechanical engineering, general engineering, mechanical and civil design.
>> That's complicated. >> He's got all those qualifications, of which he's got none, but he pretended he got them by forging a certificate or certificates. In short, according to the bits of paper, he had studied everything and could do anything. Archuro now appeared to be qualified in engineering, economics, metallurgy, science, mathematics, and a host of other subjects. And this was his first act of forgery and deception. Many more were to follow.
So, in 1916, at the age of 20, and armed with this outstanding string of qualifications, Arturo landed himself a job in Angola as a senior railway engineer with the state railway. Arturo miraculously was promoted several times, and his rise was meteoric.
>> What's meteoric? >> Like a meteor. It goes very fast.
>> Okay. >> Goes faster and faster. Even within two to three years, he was director of the state railways in Angola.
>> What's the state railways? >> Those are the railways. He's in charge of the railways. The top man. And shortly afterwards, he was appointed inspector of public works. That's an even more important position where you oversee all kinds of infrastructure products like railways, ports, roads.
>> Well, why buildings? Good? >> Well, he was an intelligent man, and maybe he wasn't good enough at the previous job. And when you have someone who's incompetent, you to get them out of your way, you promote them to a better position sometimes. I know that sounds daft, but that's kind of what might have happened. But he was now in the highest official technical position in the colony.
>> Well, how rich is he? >> Very rich, 'cause he was had a very well-paid job. The top job in the country. I can't tell you how much he was paid, but it was a lot.
>> Like? >> More than me? >> Like how much? Like thousands? Millions? >> I bet it was thousands. I don't think it was millions, but I bet he was paid thousands at least.
Archuro felt that with the construction of railway lines across the country and with the development of its great rivers, he could make Angola into one of the most prosperous areas of the continent. In fact, he dreamed that he could be like Cecil Rhodes.
>> Who's that? >> Ah, Cecil Rhodes. Well, he was the founder of De Beers Consolidated Mines in about 1888 in South Africa, and then he became prime minister of South Africa of the Cape Colony, and he was a guy who played a great or an important role in the British Empire, particularly building out the infrastructure of South Africa, building the railways, the expansion of the railways, the telegraphs. And you know what he said? A funny thing he said, and maybe some people weren't like him saying this, but this is what he said: "To be born English is to win the first prize in the lottery of life." Do you think that being born English is to win the first prize?
>> No. >> No, not really. And perhaps, but perhaps Arturo, who was Portuguese, dreamed that one day he would say, "To be born Portuguese is to win first prize in the lottery of life." Do you think Arturo might have said that?
>> Yes. >> No, he would have said it in Portuguese. Let's see. But no, I guess he spoke English. I mean, a lot of people spoke English back then. Of course, Portugal had a lot of relations with the UK. And of course, England was, it was England was like the, as far as the currency is concerned, like the dollar of the world today. The most important currency in the world was the British Pound back then. So all countries had strong relationships with the UK, and probably he would have spoken good English.
Using his influence with the Angolan government and with its Portuguese masters, Archuro was able to secure the exclusive rights to explore and exploit the mineral wealth of Angola. Then he suddenly spotted an opportunity to make some money and get started. He learned of an opportunity with one of the Angolan Railways. The share price on the stock exchange had collapsed due to a delayed payment to some foreign bondholders. But Archuro knew something that the other shareholders did not know. He had some inside information. He knew from his previous role as director of the state railways and as inspector of public works that the company had a large working cash balance. It was money that could have been used to pay off the bondholders. But Archuro had other ideas.
>> What are the bondholders? >> Bondholders are people who've lent the company money, and they want it back. So you lend money, they pay you interest, and then much later, they pay you the capital back. They lend you, they pay back what you lent. But if they don't, if the company doesn't pay back, the bondholders are going to get very cross.
So Archuro approached a widow who was a major shareholder in the railway, and no doubt he used his charm, his elegance, and his apparent wealth, and effectively he acquired a controlling stake in the railway. And he paid the lady for her shares with a check drawn on his New York bank account. It was an empty account, which didn't have any money. However, Archuro knew that it would take two weeks for the check to reach New York by boat. So, while the check was still making its way to New York, Archuro had himself appointed as president of the company. Then, taking advantage of his position and his authority as chairman and president of the company, he transferred those company funds to himself.
>> Because this, by anybody's standards, is a case of embezzlement. >> What's embezzlement? >> Good question. Embezzlement is when you use deception or fraud to steal money from a company which is your employer, where you're working.
The police were called, and at the behest of some powerful directors, Archuro was arrested and transferred to jail.
>> For how long? >> Well, it was a difficult crime for the police to understand. They were more used to dealing with murders and robberies, or the types of crimes which had easy to identify victims, who the victims were. And of course, all this time, Archuro was claiming, "I've done nothing wrong." So, as the police were trying to figure out what crime he'd committed, Archuro languished in jail for about two months. He used his time wisely, asking his friends to bring him all kinds of legal books and papers to prepare his defense. Whilst in jail, he came to read about banking law and about the money system and about the central bank, and crucially, about banknotes.
In August 1924, he was charged and found guilty of defrauding the railway bondholders. That's because he'd stolen the money from the company he just bought, the railway company. He appealed the verdict. And luckily for him, the guilty verdict was overturned by a superior court, and he was released. Upon his release, he wasted no time in planning what was to become his next fraud, which would be the greatest financial fraud ever. If only he could circumvent Waterlo's security measures through deception rather than counterfeiting, the resulting banknotes would be absolutely authentic in every respect, except for their authorization. And these crate loads of banknotes are arriving in Lisbon, Portugal. It's 1924, and he has successfully forged banknotes to trick Waterlo and Sons. And they're shipping hundreds of millions of newly printed and completely genuine escudos to Lisbon. And Archuro had a gang of associates, and they embarked on a mission to buy everything and anything that they could. They bought land, properties, businesses. He bought gold and foreign currencies, and of course, he bought his wife gifts and jewelry and all kinds of things, including a lovely huge mansion, which today I think is the British Consulate in Porto, in Lisbon.
But as time went on, it became more difficult. The huge influx of new money into Portugal meant that the prices of everything were rising, and businesses were becoming more successful. People were becoming more reluctant to sell things because of the rising prices. And Archuro couldn't get rid of the money fast enough. So he hit on his next step, and this was to create a bank. He created a bank called the Bank of Angola and the Metropolis, and the bank opened its doors in May 1925 with two branches, one in Oporto and the other one in Lisbon. His bank quickly acquired an excellent reputation for granting loans, especially small amounts, with unprecedented promptness and benevolence. Actually, what Archuro had developed was an ingenious system for laundering the Waterlo banknotes by exchanging them for legitimate collateral from their borrowers. And thanks to the easy money lending policy of the bank, Portugal's money supply was growing rapidly. Not only had Archuro nearly doubled the Portuguese money supply, but with the effect of fractional banking, fractional reserve banking, where a loan gets deposited and then the money is relent out a second time, he had, in fact, increased the money supply several times over. The once moribund Portuguese economy was now booming. Businesses were doing well, and the price of everything was rising. At the same time, the value of the escudo was falling sharply. At one point, it was trading at less than half the value of the year before he started to inject the cash into the economy. Trading at less than half what it was worth before. And there was growing dissatisfaction in the army. Soldiers and even their generals, who were all on fixed pay, were not happy because shop prices were rising rapidly. This huge influx of new banknotes was causing higher price inflation, but there was no corresponding pay rise for the military, and that will become important shortly.
Other banks were envious as they saw their business slip away to this new upstart bank. Competitor banks started to spread rumors and innuendos about Archuro's bank. Pretty soon, a newspaper called O Seculo started to take an interest and published stories. They raised questions concerning how the bank seemingly thrived by making enormous loans without requiring deposits. "How can a bank which is taking in hardly any deposits be lending so much money?" they inquired. "Maybe they're counterfeiting money," they hinted. The newspaper hinted at possible ties with Germany or the Netherlands. They suggested that Germany was maybe secretly funding the bank with its eyes on Angola.
The decline in the value of the escudo on the foreign exchange market and the increasing demand for gold, along with the rumors, prompted the central bank, Bank of Portugal, to start an investigation. Officials were dispatched to the bank to carry out an inspection. The officials found nothing wrong. They issued a statement to the skeptical public confirming that Portugal's money supply was sound. There was no counterfeiting, and there was nothing to worry about. Emboldened by the central bank's endorsement, Archuro ordered another $200 million escudos from Waterlo's, double the first order. It was an amount equivalent to $282 million in today's world money. He planned to use that money to expand his colonial ambitions in Angola. However, the Bank of Portugal's investigation had worried him. Suspicions were rising. He needed to take action. And the action he took was one of truly daredevil proportions. He and his associates decided to take control of the Bank of Portugal, the central bank. It was a private institution. So he and his associates started to secretly buy up the shares of the Bank of Portugal on the stock exchange or wherever they could get them. Archuro's plan was to buy 51% of the shares and vote himself as the governor, and then he would be in a perfect position to destroy any traces of wrongdoing and quash any investigations. He was convinced that his plan to take control of the Bank of Portugal would be successful. So he set sail for Angola to meet with the high commissioner, Colonel Rio Chavez. The high commissioner was genuinely fascinated by his former inspector of public works, who now seemed to have unlimited financial resources and the technical expertise to implement these amazing transformative projects. For a brief moment, it appeared that Archuro's imperial dreams were about to become reality.
However, back home, things were going awry. Another bank had found two 500 escudo notes with the same identical serial numbers. They notified the central bank. Unfortunately for Archuro, he had not yet succeeded in acquiring enough shares in the Bank of Portugal to take control. If he had been governor, he could have suppressed the investigation which was to follow, and he could have blamed the bank's predecessors for any illegal issues of currency. But it was too early for him. The central bank immediately launched an investigation. They ordered all the financial institutions in Portugal to line up their banknotes by serial number, looking for possible duplicates. Several more duplicates were found. Waterlo's in London were immediately contacted, and the fraud was unmasked.
Rumors of the banknote fraud were spreading fast. The newspaper O Seculo ran the story the very same day. Panic erupted among the population. Nobody knew which banknote was real and which one was not real. People rushed to the shops. They rushed to the banks, and they rushed to the Bank of Portugal itself. They were trying to buy things. They were trying to buy anything. They were trying to change their notes into coins, gold or silver, it didn't matter. Any coins would do. They just didn't want the banknotes in case their banknote was not the real one. But such was the uncertainty about what was real and what was not, there were very few takers of the banknotes at the time.
Archuro was on route by boat from Angola to Portugal. Immediately upon arriving in Lisbon, he was arrested. Finally, in 1930, five years after the fraud was discovered, Arturo dos Reis was brought to trial. The evidence against Archuro was overwhelming. The forged documents, the counterfeit banknotes in the vaults of his bank, the testimony of his accomplices, all of this left no doubt about his guilt. In the end, even Archuro admitted that he was guilty. Arturo dos Reis was declared guilty by his own confession and sentenced to 20 years in prison. It was a substantial sentence that reflected both the magnitude of his crimes and the damage he had inflicted on Portugal's financial system and its international reputation. Archuro served the full 20 years in prison and emerged a broken man at the age of 54. All traces of his former opulence and grand ambitions had completely disappeared.
Even his own wife, Maria Luisa Jacabeti Dias do Alves Reis, was jailed. She was charged with concealing criminal proceeds. Her defense lawyer portrayed her as a devoted wife and mother who trusted her husband completely.
>> He's somebody, a lawyer is somebody who, um, uh, tries to defend you. If you have to go to court, you, if you committed a crime, a lawyer will argue the case and say you didn't do it. But there'll be another lawyer on the other side who says, "Yes, you did it." Then each side has to present, present their evidence, and the lawyers for the prosecution have to prove you did it, and the lawyers for the defense have to prove that maybe you didn't.
>> But then, did you have to pay to get a lawyer? >> It costs money, but if you don't have any money, the government will pay for it for you.
>> Really? >> Yeah.
>> Why? >> Well, because people are entitled to be defended when they're charged with a crime.
Merang, the one who visited Waterlo's office, pleaded innocence due to his gullibility. He claimed he'd been tricked, but he was still sentenced to 11 months in jail.
When Archuro dos Reis came out of jail 30 years later, and he attempted another fraud, this time he promised investors high returns from shipping coffee from Angola to Portugal. But it was a scam. There was no coffee, the coffee didn't exist, and Archuro was arrested again. And on 5th March 1954, he was sentenced to another four years in prison for that fraud. Unfortunately for him, he passed away in jail a year later at the age of 59. The dreamer who had once commanded hundreds of millions of escudos, who had founded banks and planned colonial empires, the man who had nearly seized control of an entire nation's monetary system, died forgotten and impoverished.
>> What's impoverished? >> When you have no more money. You had money, but now it's all gone. You're impoverished.
>> I didn't listen. >> Made poor. You're made poor.
>> How'd he lose his money? >> How, how'd he lose his money? Well, because he'd stolen it all, or well, when he went to prison, the government took all his money, uh, as a punishment.
Waterlo and Sons, who had been tricked into this scam, did not come out of the affair unscathed. The Bank of Portugal sued Waterlo and Sons in the High Court of London. It was a complex legal case which dragged on for many years, hampered by the many forged documents which looked so genuine. Ultimately, the case reached the House of Lords, that's the highest court in the land, and it culminated in 1932 with Waterlo's being guilty, found guilty of negligence. They were ordered to pay massive compensation to the Banco de Portugal, the Bank of Portugal. It almost destroyed the company, and Waterlo's business never fully recovered, and ultimately it was acquired by the English company Daru.
As for Sir William Waterlo, you may be wondering what happened to him. Well, he was dismissed shortly after the scandal broke. He was accused of incompetence. However, that was maybe too much of an epic accusation. Contrary to the conspirators' rule against direct communications, he had written a letter directly to the governor of the Bank of Portugal. And I'll read this letter. It's a short one. This is the letter he was not allowed to write. "Dear Sir, I have pleasure in acknowledging receipt of your confidential letter of 23rd December, the contents of which I have noted and for which I am obliged. Yours faithfully, W.A. Waterlo." So, one has to wonder why he wrote that letter against the instructions of for secrecy. Did he harbor a latent fear that the transaction was not legitimate? And after the event, he must have wondered what actually happened to that letter. Was it ever received by the governor of Portugal, of the Bank of Portugal? And if it was, why didn't it set off any alarm bells?
Despite the fact that Sir William had been so easily duped, he didn't do too badly afterwards. Three years after his dismissal, he was elected Lord Mayor of London. Waterlo was very well connected. His previous position as banknote printer to the world placed him at the nexus of finance and government, and governments, connecting him with influential figures all around the world who shaped the city's destiny. So it was perhaps not so surprising that he was appointed Lord Mayor of London. As for the trial between the Bank of Portugal and William Waterlo and Sons Limited, it was still ongoing by the time Sir William Waterlo died in 1931.
>> Daddy, I'm tired. >> All right, it's nearly at the end. We've got a few words to go, and then we can stop.
>> Okay. >> Ultimately, this banknote fraud changed the history of Portugal. The scandal induced a permanent loss of confidence in the first Republican regime of Portugal. The military, already unhappy with the fixed pay and rising prices, hatched their plan for a military takeover less than a month after the scandal was revealed. The banknote scandal was revealed in December 1925, and the overthrow plot was hatched in January 1926, and the army forced the resignation of the president in May, who was exiled to France. What followed was a series of repressive dictatorships that was to last for another 36 years.
I mentioned at the beginning that I believe the same kind of fraud is happening to us again, but on an even grander scale. When central banks around the world can create money out of thin air with a few keystrokes. When governments can spend trillions they don't have. And when the line between legitimate monetary policy and legalized counterfeiting becomes increasingly blurred, we might ask ourselves, who are the real Arturo dos Reis of our time? And unlike Archuro's fraud, which was eventually discovered and punished, today's money manipulation is not only legal, it's celebrated as economic policy. Perhaps the greatest fraud in history is still being written.
I'm Clive Thompson. If you enjoyed this story of financial deception and historical intrigue, please subscribe, like, subscribe. And if you have any comments, I'll try to answer them if I can. Uh, I'll certainly be looking at the comments for the next seven days or so. Goodbye, everybody.
>> Goodbye. >> And thank you for watching. And also, I'd like to say thank you to everybody who made some very nice comments on my last video. That was really nice, and it touched my heart. Thank you.