By Sergio Goncalves
LISBON, March 5 Thu Mar 5, 2015 1:31pm EST
LISBON, March 5 (Reuters) - Banco Espirito Santo (BES) breached the Bank of Portugal's orders by increasing exposure to its founding family's collapsing businesses in the months before the state rescued the bank last August, a forensic audit report showed.
The central bank, worried about the financial state of the family empire's holding ESI, had told BES in late 2013 not to increase exposure to the Espirito Santo Group and not to pass any of the group's debt on to BES' retail clients.
In a report seen by Reuters and prepared by Deloitte, the auditor said it saw "potential practice of illegal acts of ruinous management" at the bank then headed by CEO Ricardo Salgado, the patriarch of the bank's founding Espirito Santo family. He denies any wrongdoing.
"In the period between Dec. 31, 2013 and June 30, 2014 there was an increase in the BES Group's exposure to ES Bank Panama and Espirito Santo Financiere worth 579.2 million euros," the report, dated March 3, said.
Both institutions, owned by the family-controlled Espirito Santo Financial Group, at the same time lent 699 million euros to ESI and another family holding, the report showed.
The audit was requested by the Bank of Portugal shortly before the rescue. In early August the authorities injected 4.9 billion euros, mostly in state funds, to save the country's second-largest lender after the business empire of the Espirito Santos collapsed under a mountain of debt.
The Bank of Portugal carved out a working bank - Novo Banco, and left the toxic exposure with the old BES, which is to be wound down. The state hopes to sell Novo Banco this year.
There were other "potentially wrongful" activities including financing of non-financial sector entities after June 4, 2014 in breach of a central bank ban, and other financing through money market operations.
The Prosecutor General's office said it had received the document and forwarded it to the Investigation and Legal Action Department, but would not comment further.
Former CEO Salgado said in a statement sent to Reuters that he hoped he "would one day be given the right to defend himself on minimally equal ground".
Deloitte also questioned the origin of some 440 million euros in a BES escrow account set up to repay retail clients who bought Espirito Santo Group's debt via BES, and warned that some 740 million euros from that account were used to reimburse debt holders who were not BES retail clients.
Loans from two Portuguese banks worth nearly 200 million euros were also repaid from the escrow account. (Writing by Andrei Khalip; Editing by Elaine Hardcastle)
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