Italy - The Silent Outbreak

Why investors should worry about the mafia during the pandemic

A funeral procession is usually a common sight in Sicily. It is a rite of passage, bringing entire communities together. In March 2020, Italian authorities broke this tradition, banning funerals as part of efforts to contain the Covid-19 pandemic. Yet, the following month mourners in the city of Messina ignored the ban, leading a lavish procession honouring the brother of mafia boss Luigi Sparacio. While 18 people were later fined for breaking lockdown rules, the public display of defiance underscored the continued power of organised crime in Italy.

Criminal cartels in Italy have been quick to seize the economic opportunity offered by the Covid-19 crisis, applying three strategies: infiltrating and exploiting businesses in financial difficulty; investing in critical sectors; and providing essential services to local populations, thus increasing their popularity in low-income neighbourhoods.

Each cartel has its own procedure to infiltrate and take control of companies, from acquiring businesses in cash to subtler forms of control. For example, the Calabria-based criminal organisation ’Ndrangheta provides business owners with loans in exchange for equity in their firms. It then requires companies to hire one of the group’s members. This person quickly becomes the main decision-maker in the business, often through threats and extortion.

Once ’Ndrangheta has informally taken control of the company, the owner becomes a front for the organisation. The cartel can exploit the company’s former reputation and relationships to thrive, while business partners and local authorities remain unaware of the change in leadership. Between 2015 and 2019, for example, a number of international investors acquired bonds linked to assets later revealed to be created by front companies for the ’Ndrangheta, according to a Financial Times investigation. These bonds did not stand out as unusual and were sold through a wide range of transactions, worth EUR 1 billion in total. The companies that purchased the bonds, including Italian private bank Banca Generali, declared they were unaware of the problem.

Long-established in gambling, construction and hospitality, since the Covid-19 outbreak cartels have invested in healthcare in Italy: in May 2020, anti-mafia prosecutors in Milan reported that cartels had infiltrated locals supply chains for serological test kits and face masks. Cartels also used the crisis to bolster their popularity in their strongholds in southern Italy, distributing food and other essentials to low-income households in the regions of Campania, Calabria, Sicily, and Puglia. In Naples, the Camorra started issuing loans at low interest rates – even lower than those offered by banks.

So long as Italy’s economy remains in crisis, these cartels will continue to expand, exposing investors and foreign companies to compliance risks. When conducting due diligence in Italy on new commercial partners or acquisition targets, it is more important than ever to screen board members and shareholders for links to cartels – in particular minority shareholders. Companies with supply chains in Italy should similarly conduct robust due diligence to ensure they are free from organised crime links.