[Publishing date Dutch original: 8 January 2022]

Anshu Jain was wearing a sleek tailored suit with a frivolously knotted tie when he arrived in Amsterdam on 17 January 2011. He came to meet ABN Amro's CEO, Gerrit Zalm. Jain is the boss of Deutsche Bank’s investment bank and the personification of the aggressive Wall Street mentality that the German bank has successfully embraced since the early 1990s.

His London-based department created one of the world’s largest turnover machines for derivatives, the complex financial products that were the root cause of the financial crises. The toxic mortgage products that the bank sold to investors played a huge role in this. Deutsche Bank narrowly escaped needing to be rescued by the German government in 2008. ABN Amro, however, did not: it was nationalised.

More than a year and a half before the Dutch government had to save ABN Amro from collapse with 30 billion, the once so proud bank was attacked by a hedge fund that wanted to split up the bank and sell it in parts. The ensuing bidding war was won by three foreign competitors, after which the bank was indeed split up. The part of the bank that remained, when Jain stepped into the head office on Gustav Mahler Avenue, was five times smaller than Deutsche Bank.

In early 2011, the international financial markets were still in turmoil: nine months earlier, the Greek crisis hit. And only a few months before – in November 2010 – it came to light that the Greeks, with the help of complex financial structures provided by the American investment bank Goldman Sachs, had lied about their financial position. Distrust spread through the financial markets, making it difficult to borrow large sums of money.

ABN Amro, which had to find between 20 billion and 25 billion euros in financing every year to stay in business, struggled with that a little less. It is backed by the Dutch state, and its 2010 annual report showed that it has been successful in accessing capital markets.

The project that Jain and Zalm were talking about was codenamed ‘Simba’, after the main character in the Disney classic The Lion King

​The most senior boss of Deutsche Bank’s investment bank came to Amsterdam because of a unique financing structure. ABN Amro was looking for new ways to obtain funding, while keeping costs as low as possible. That is why the Structured Finance departments of both banks contacted each other. These departments set up complex structures for clients to take advantage of legislative and regulatory differences between countries. These structures are often aimed at gaining a tax advantage.

The financing project that Jain and Zalm were talking about was codenamed ‘Simba’, after the main character in the Disney classic The Lion King. Simba was not your average financing transaction: it was a highly complex structure with a flow-through entity in Luxembourg and through which ABN Amro is able to avoid all market risks by parking them elsewhere: in particular, with the Dutch government.

‘Dear Gerrit’

Three and a half weeks after Jain’s visit to Amsterdam, he sent Zalm an email in which he expressed his thanks and complimented the former Minister of Finance. ‘Dear Gerrit,’ Jain wrote, ‘it was a great pleasure meeting with you in Amsterdam’.

The investment banker was delighted that Deutsche Bank and ABN Amro had once again concluded an important transaction the week before. ‘Project Simba is a true partnership deal which marries the benefits of long term funding with material cost reduction.’

‘I also recognise and appreciate the trust and long term focus that it takes to enter into a principal transaction together’

‘It has been a long and complicated process,’ he continued, ‘and I have been impressed how you have aligned your Treasury/ALM and Structured Finance teams to the common goal. I also recognise and appreciate the trust and long term focus that it takes to enter into a principal transaction together.’

A principal transaction is Wall Street slang for a deal that a bank or broker makes for its own account instead of for a client. Since the collapse of the US merchant bank Lehman Brothers, this type of transaction has been considered one of the root causes of the financial crisis. Bankers made massive bets to earn money for themselves and the shareholders of financial institutions.

Jain looked forward to doing business (more frequently) with Zalm and ABN Amro. ‘Congratulations on this success and thank you for the continued partnership with Deutsche Bank. I look forward to speaking to you soon. Best regards, Anshu.’

When Follow the Money asked Gerrit Zalm earlier this week whether he had had any involvement in the Simba transaction, he replied: ‘Not to my knowledge, no, no...’

The former Finance Minister

Finance Minister Wouter Bos appointed Gerrit Zalm CEO of ABN Amro at the end of 2008. Ministry officials had tremendous confidence in Zalm, who had been their boss for over twelve years.

But he was hardly a banker. The only experience Zalm could boast in that area, he acquired at Dirk Scheringa’s tiny DSB Bank in the preceding years. The expensive loans that DSB sold to consumers, often in combination with insurances, had been criticised for years. Moreover, by the end of 2008, the financial situation of the ‘usurious bank’ was precarious, to say the least. Wouter Bos nevertheless saw his predecessor and teacher as the man who could restore the severely damaged image of ABN Amro and who, at the same time, understood better than anyone what was required of him politically.

​Zalm’s job was to turn ABN Amro into a decent, albeit boring, bank

 The liberal party (VVD) described Zalm’s appointment as a ‘masterstroke’. However, parties at the other end of the political spectrum were more critical: ‘After all, he represents the market fundamentalism that led to the crisis,’ MP Ewout Irrgang (SP) said. MP Kees Vendrik (GroenLinks) regarded Zalm as someone who performed excellently as a minister for twelve years, but he expected him to bid a radical farewell to the ‘American banking culture’ at ABN Amro, with its short-term visions, high risks and its incentive culture.

​Zalm’s job was to turn ABN Amro into a decent, albeit boring, bank. As the son of a simple coal trader, he seemed perfectly suited to this task. Zalm’s manner of going about things made him the complete opposite of his controversial predecessor at ABN Amro, Rijkman Groenink. When the media wanted to photograph him, he preferred to be standing in front of a pinball machine rather than sitting behind his desk.

In March 2009, when Zalm had had a few months to get used to being the CEO of the state bank, his autobiography, De romantische boekhouder (The romantic bookkeeper), was published. The back cover described him as a ‘phenomenon’. In a review, newspaper NRC Handelsblad described him as a ‘talented economist, mathematical prodigy, Sunday’s child in politics’. The reviewer praised Zalm for his memoir on his political career and offered him a piece of advice: ‘He should start keeping notes for part two: The Cool Banker.’

A conservative course

Journalistic interest in Zalm’s career spiked when DSB Bank went bankrupt in September 2009, and the supervisory authorities, De Nederlandsche Bank (DNB) and the Netherlands Authority for the Financial Markets (AFM), were forced to examine the performance of its (former) directors. One of the issues raised was whether Zalm is fit to lead ABN Amro. If not, he can be dismissed, Minister Bos said.

DNB thought he was perfectly capable of continuing his work, but the AFM considered Zalm unfit

The verdict was announced in March 2010: DNB thought he was perfectly capable of continuing his work, but the AFM considered Zalm unfit. Even after much criticism, the AFM upheld its opinion. Follow the Money later published an article on the matter. The pattern: DSB was in big trouble and had to deal with a very headstrong owner, Dirk Scheringa. Zalm, whom DNB asked to straighten things out, never intervened.

However, the Scheltema Committee, which was investigating the collapse of DSB, considered Zalm to be sufficiently competent. The former Finance Minister survived the affair.

After things had calmed down, Zalm could focus on his job again. That included occasionally talking to a journalist. In October 2010, he was interviewed by Management Scope. In that interview, he emphasised the bank’s conservative course. ‘We will therefore no longer take positions under the pretext of knowing better than the rest of the world what will happen to the dollar exchange rate, the oil price, share prices, etcetera,’ Zalm said. ‘Of course, we serve our clients who want shares and options, but we no longer take a position ourselves. We only focus on moderate risk profiles.’

At that time, the Structured Finance departments of ABN Amro and Deutsche Bank were busily setting up Simba.

For its own account

Wouter Bos gave Zalm carte blanche to form a new Board of Directors. Amongst others, he chose former State Secretary of Finance Joop Wijn to lead what was left of the investment bank. Risk management fell under Wietze Reehoorn, previously active within ABN Amro as an investment banker. Jan van Rutte came from Fortis and became the new CFO. The Compliance and Legal departments fell under Caroline Princen. A remarkable choice, as Princen did not have any banking or legal experience before joining the bank’s Board of Directors. Furthermore, she was wet behind the ears in the field of compliance, yet she had to see to it that all proceedings within the bank were in accordance with legislation and regulations.

However, it seemed unlikely that Princen would encounter exotic adventures. After all, politics demanded – and Zalm promised – that the bank would not do anything outlandish. The agreements with the state, the sole shareholder, were laid down in a Memorandum of Understanding. The fact that ABN Amro would no longer take risks to maximise results made sense: little more was left of ABN Amro than a regional savings and mortgage bank with two remaining international divisions. At the end of 2010, the consumer bank generated three-quarters of ABN Amro’s profits, mainly from mortgage income.

The bank’s costs were still high. Almost 70 per cent of every euro earned was spent on costs. The bank was performing well below its competitor ING, and if ABN Amro did not want to become a takeover target again, it would have to reduce its costs. Zalm was aiming for a reduction by 10 per cent. One of the ways to do that was to reduce procurement costs, in other words: save money on funding.

Normally, the Treasury and Asset & Liability Management (ALM) departments within ABN Amro would be responsible for raising money to maintain the bank’s lending capacity. This is usually done by issuing and placing bonds or other types of bank debt securities on the market. For a bank, these are run-of-the-mill transactions.

The department devised transactions in which the bank itself acted as the counterparty. This violated the promises that Zalm made publicly

But now, according to documents obtained by Follow the Money, it is the Structured Finance department that wants to raise an amount of 500 million euros, in cooperation with Deutsche Bank. After merging Fortis Bank Nederland and the part of ABN Amro that was absorbed by Belgian Fortis in 2007, Structured Finance was attached to Commercial & Merchant Banking (C&MB). This department fell under the direct responsibility of former State Secretary of Finance Joop Wijn.

If ever there was a department where the blood types of the two banks were being intermixed after their nationalisation, then it was the humble Structured Finance department. The department’s team consisted of fewer than fifteen people, which included several key employees from both ABN Amro and Fortis. Some people in the department had long-standing relationships with employees of the eponymous department at Deutsche Bank. According to confidential documents inspected by Follow the Money, the department also devised transactions in which the bank itself acted as the counterparty, i.e. for its own account. This violated the promises that Zalm made publicly.

Wind-down entity Simba

In Luxembourg, a venture was set up especially for the deal with Deutsche Bank: Simba Finance. It was a so-called special purpose vehicle (SPV). This type of venture is often used in structured transactions and is legal but regularly abused to keep debts hidden from investors. The most famous example of this going wrong: Enron. Andy Fastow was the financial genius behind the structures of the American energy company and subsequently served a six-year prison sentence.

Simba’s special purpose: it was a bankruptcy remote entity. In plain English, this means that Simba Finance could go bankrupt without ABN Amro’s head office suffering any consequences. A kind of wind-down entity, in case the returns on the structure were disappointing. And that was exactly what ABN Amro was counting on.

No need to submit it to the Tax Office

 Hans van Horzen was director of the Tax department at ABN Amro, and assessed whether the Simba transaction was lawful. He used to be a tax inspector himself and joined ABN Amro in 1998, after spending years at KPMG. In a 2008 interview, he talked about his experiences with the Ministry of Finance when he worked as a tax consultant at KPMG.

‘They would reluctantly allow me to enter and looked at me as if I was some kind of con man,’ Van Horzen said. ‘Now, as tax director at ABN Amro, the doors at the Ministry swing open, and I get a cup of coffee. Relations with the tax authorities have always been positive.’

In his opinion, the deal he approved in January 2011 did not have to be discussed with the tax authorities. There was no need to submit Simba to the tax authorities’ scrutiny. His reasoning, according to documents read by Follow the Money: it was a normal business activity. Funding for the bank is acquired, and if it concerns a ‘normal business activity’, the taxman’s pre-approval is not required. If this condition is met and it also complies with ‘the bank’s approved risk policy’, the sole shareholder – the Dutch government – does not have to be informed either. Wietze Reehoorn’s risk management department and the compliance department headed by the inexperienced Caroline Princen agreed.

‘A structured finance transaction must still offer a benefit in a world without taxes.’ – ABN Amro’s Tax Policy Paper

The question was how seriously Van Horzen and team Zalm actually took their own internal ‘tax policy’. ABN Amro’s confidential Tax Policy Paper described the guidelines that bankers must adhere to. Naturally, a chapter was dedicated to structured finance transactions. These must meet the ‘highest standards’ of responsible and prudent banking, and they must be able to withstand the scrutiny of both the tax authorities and the public.

​​That means that these transactions should only be concluded if there is a genuinely valid business rationale and not merely an attractive tax benefit. In other words: ‘A structured finance transaction must still offer a benefit in a world without taxes.’ And: every transaction must be screened beforehand to determine to what extent it meets the so-called substance over form requirement. If a structure does not meet this requirement, there is a risk that the Tax Authorities will later decide to reject the created tax deductions.

‘Fiscal manoeuvering’

Follow the Money asked tax law professor Jan van de Streek to assess this design. He called it a structure ‘that exudes aggressive tax planning’.

‘ABN Amro is exposed to the risk of a high increase in interest rates and thus potentially a large tax deduction,’ Van de Streek said. ‘Of course, the costs you incur are generally deductible, including high costs. But in this case, the high-interest rate costs have an artificial character because they lead to a loss that is not actually economically incurred in the end. If the index loan turns out badly for Simba, the loss can be deducted at ABN Amro via the fiscal unit.’

‘The chances of a judge seeing through this aggressive form of tax planning and ruling the whole thing as fraus legis is at least 70 per cent’

‘However, embedded in the structure is the fact that Simba does not have to repay the debt to Deutsche Bank, who finances the loss, at the end of the process. Fiscal manoeuvering prevents the previously deducted losses from falling back on either Simba or ABN Amro. Deutsche Bank also seems to be doing well, as it has been compensated with a high-interest rate. The chances of a judge seeing through this aggressive form of tax planning and ruling the whole thing as fraus legis is at least 70 per cent.’

​The Leiden professor’s opinion is entirely at odds with that of tax consultants Loyens & Loeff, the firm that ABN Amro hired in 2011 to render a legal opinion regarding Simba. The firm submitted a 21-page document in early 2011. According to Loyens & Loeff, it was ‘highly unlikely’ that the tax authorities would classify the structure, or parts of it, as fraus legis.

There was a chance that the stock index-linked loan would show a positive result. In its legal opinion, Loyens & Loeff estimated this probability to be greater than 50 per cent. That means that there was at least a 50 per cent chance that, in a world without taxes, there would then be a raison d’être for the transaction and that the bank could substantiate the structure with a business rationale. That is why Hans van Horzen claims that he did not have to submit Simba to the tax authorities.

Goldman Sachs and Pumbaa

The body that approved the transactions was the Investment Committee. No one from the Board of Directors was a member, but the committee was mandated to judge the complex and potentially risky structured finance transactions. The Board of Directors received the minutes of this committee’s meeting two weeks before Zalm met with Anshu Jain.

It was purely informational. The risk processes did not seem to be in order: the transaction did not have to be submitted to the Board of Directors and the Supervisory Board for approval. This was only required from a threshold value: when an investment of 50 million or more own money was involved. A loan of 2 billion euros through an aggressive tax structure via Luxembourg did not qualify. Team Zalm also did not consider it necessary to ask questions during the meeting about the nature and risks of this transaction. Simba was ‘seen as an information notice’.

The ‘threshold value’ was also why NL Finance Investments (NLFI), the foundation that manages the interest in ABN Amro on behalf of the Dutch state, was not informed. That a 500 million bond was being issued was submitted to the appropriate committee of the bank’s Supervisory Board – the Risk & Capital Committee – but they were not told that this issue would be part of a complex tax structure.

Wietze Reehoorn, the then chief risk officer at ABN Amro – who should be aware of the bank’s risks better than anyone – told Follow the Money that he ‘became involved in the case after the fact’. He thought only ‘from 2013/2014’.

However, documents show that Reehoorn personally explained the second Lion King transaction: Pumbaa, named after the warthog in the Disney film, to the Board of Directors on 6 December 2011. This time, it concerned a deal with Goldman Sachs, the American investment bank. The transaction had almost the same structure, a through-flow in Luxembourg to Amsterdam, but the difference was that ABN Amro now purchased its own loans for 1 billion euros. Goldman Sachs provided a total of 2.17 billion in loans, and these, too, were linked to a fictitious stock market index.

​The Lion King transactions only became a prominent topic for the Board of Directors and the Supervisory Board in autumn 2015. But by then, a lot had already transpired at the bank.

’Zero tolerance’

In March 2015, business newspaper Het Financieele Dagblad revealed that ABN Amro had sent home virtually the entire senior management of its Dubai branch a few months earlier. The reason: large-scale fraud committed by the private banking desk, a department for which Board Member Chris Vogelzang was responsible. The newspaper’s publication marked the start of a very turbulent month, just as the state bank was about to go public.

Zalm immediately wrote a letter to Dijsselbloem stating that a ‘zero-tolerance policy will be implemented within the bank to ensure compliance with all applicable regulations’

Minister of Finance Jeroen Dijsselbloem (PvdA) was quick to say that the circumstances in Dubai would not lead to the postponement of ABN Amro’s re-listing on Damrak, the Amsterdam Stock Exchange. Zalm immediately wrote a letter to Dijsselbloem stating that a ‘zero-tolerance policy will be implemented within the bank to ensure compliance with all applicable (internal, local and international) regulations, including the high standards for client acceptance and client transactions’.

​The letter had just been sent when a new riot broke out: the bank’s annual report revealed that six of the seven members of the Board of Directors – Zalm being the exception – were to receive a substantial pay rise. The news led to heated discussions and political debates, which in late March forced Dijsselbloem to call off the IPO for the time being.

Yet another incident occurred the day after this announcement. Het Financieele Dagblad revealed that the state bank received a negative rating from supervisory body De Nederlandsche Bank for its handling of corruption risks; this according to a confidential letter that the newspaper managed to get hold of.

It was the umpteenth compliance issue the bank had to face. And Caroline Princen, responsible for compliance, had already – in consultation with Zalm – torpedoed a joint money-laundering investigation by the bank and the Justice Department a mere six months earlier. An investigation by Follow the Money later revealed that Zalm did so because he feared bad publicity.

After-taxes

Finance Minister Dijsselbloem emphasised that ‘calm and trust’ were crucial in enabling the IPO later that year. But then officials from his own ministry threatened to spoil the broth.

At the end of the summer of 2015, the Tax Authorities came knocking on ABN Amro’s door. The inspector carefully examined the Simba and Pumbaa transactions. The loans linked to the Deutsche Bank and Goldman Sachs indices resulted in heavy losses, and thus generated generous tax deductions. The Dutch Collection was no longer willing to accept these deductions. ABN Amro was to pay back the taxes that were short-paid as a result, and the bank could forget about the positive cash flows from future deductions. The damage for the bank could add up to hundreds of millions of euros in total.

The issue was raised at the Audit Committee meeting on 5 November – fifteen days before the planned IPO. Zalm, Reehoorn and CFO Kees van Dijkhuizen were present and heard a more than astonished Rik van Slingelandt, Chair of the Supervisory Board, inquire about the discussions with the tax authorities. How is it possible that hundreds of millions of euros of after-taxes will be levied? How come the Supervisory Board knew nothing about this? Zalm remained silent. Van Dijkhuizen answered that it concerned issues from the past, but it soon became apparent that this was not the case.

​When Reehoorn was asked whether these transactions were for customers, he answered affirmatively, but this was not the case either. Reehoorn then had to admit that ABN Amro itself was the client and that it concerned a transaction in which the bank had acted on its own behalf – as principal.

Van Slingelandt concluded that the transactions were deliberately cut up, and as a result, the Supervisory Board was unable to properly ascertain the risks involved. He felt misled and summoned the entire Supervisory Board to an emergency meeting the following morning at 7.30 am. A thorough investigation had to be conducted, and the Supervisory Board concluded that Commissioner Olga Zoutendijk would lead that investigation.​

‘Poor judgment’

All reports, minutes, and proposals regarding the Lion King transactions were collected. ABN Amro’s internal security department, Security Intelligence Management (SIM), was deployed to conduct forensic investigations.

Michael Enthoven, the chair of state shareholder NLFI, was unpleasantly surprised when he heard about Simba and Pumbaa. His opinion was that the bank had violated the agreements in the Memorandum of Understanding. This type of structured finance transaction was not in line with the bank’s normal business operations and moderate risk policy.

Eleven years after the Simba transaction was concluded, Gerrit Zalm agrees. After Follow the Money posed him a series of questions recently, he stated that the bank may have used ‘poor judgment’. Did the transaction fit the bank’s risk profile? Zalm: ‘With the benefit of hindsight, I would say it didn’t.’ In 2011, when he shook hands with Anshu Jain, this apparently did not occur to him; this realization only came later. ‘After the facts were made clear. After the tax authorities had objected.’

According to the  Board of Directors, the governance rules were followed correctly and the transactions were in compliance with the internal regulations

However, in February 2016, when the results of the Simba and Pumbaa investigation were discussed with the Supervisory Board in a Risk & Capital Committee meeting, he drew a different conclusion. Zalm and the other members of the Board of Directors concluded that the fuss was unfounded, despite a lengthy report detailing all the facts about the aggressive tax planning surrounding the two funding transactions. According to them, the governance rules were followed correctly and the transactions were in compliance with the internal regulations in place at the time. Invoking the zero-tolerance policy was not relevant because there was nothing going on, according to team Zalm.

Now, Zalm considers his point of view at the time as logical: ‘Of course you defend the interests of the bank,’ he says. ‘But if you had the opportunity to do it all over again, you would not take the same risk.’

The former chair of the Board of Directors clarifies: ‘At the time, we were trying to defend the interests of the bank, also towards the tax authorities. So, it turned out to be a transaction involving risks. Suppose you had realised that in advance, then you would not have taken those risks. However, it does not mean that you must now stop defending the transaction. You do not want to cause the bank unnecessary financial damage, and your internal line must be consistent in its defence regarding taxation.’

At the end of November 2016, Het Financieele Dagblad managed to reveal the amount of after-tax related to Simba and Pumbaa: 142 million euros.

‘No specific information, no answers’

Former Commissioner Annemieke Roobeek looks back on the Lion King affair with mixed feelings: ‘In this case, the Supervisory Board operated on false pretences that it could not get a grip on. No detailed information was provided beforehand, and later on, specific questions were not answered. The risk of reputational damage was not taken into account; it was all about making money.’ Roobeek wonders in which direction the ‘moral compass’ of the Board of Directors was pointing. ‘It was shocking to witness that the Board of Directors, with Zalm at the helm, listened but deliberately did not act. They had access to all the information but deliberately withheld it from the Supervisory Board.’

Roobeek: ‘The problem was Gerrit Zalm’s leadership failure at the core of internal banking performance. By not involving the Supervisory Board in such complex structures, he undermined our supervisory function. As chair of the Board of Directors, he did not actively respond to our questions, and nobody on the Board of Directors opposed him.’

‘The problem was Gerrit Zalm’s leadership failure at the core of internal banking performance’

‘It was a very complex dossier on which the Supervisory Board and Olga Zoutendijk, in particular, spent an enormous amount of time trying to uncover the truth – insofar as this was possible with the limited information obtained,’ former Commissioner Frederieke Leeflang said. ‘Zalm and Reehoorn were not amused by her efforts, and it caused friction. Nevertheless, this was her and the Supervisory Board’s duty. Zoutendijk also reported the findings to the supervisory authorities. The Supervisory Board subsequently made it very clear that (similar) tax structures were absolutely not admissible and certainly not in the future.’

‘These aggressive tax constructions came to light at the end of 2015,’ former (President) Commissioner Olga Zoutendijk says. ‘At the time, I conducted a thorough investigation and found malpractices. I raised the alarm, also at the supervisory authority De Nederlandsche Bank, but no consequences were forthcoming. I was not the only one on the Supervisory Board who was concerned about risky and irresponsible practices under Gerrit Zalm’s leadership. I do not want to say anything more at the moment, but perhaps I will do so later.’