Spain’s ruling party scrambles to limit damage after Rodrigo Rato tax arrest

Case against former head of IMF and finance minister, arrested on tax evasion charges, is damaging to People’s party, Spanish PM acknowledges

Spain’s ruling party is scrambling to limit the damage after one of Europe’s most high-profile politicians was arrested on charges of tax evasion and money-laundering.

The prime minister, Mariano Rajoy, acknowledged at the weekend that the case against Rodrigo Rato, a former finance minister and head of the IMF, was damaging to his People’s party. The case is the latest in a series of corruption scandals involving senior PP members.

Rato was briefly arrested on Thursday and his home and offices searched on Friday in connection with mismanagement at Bankia, the large Spanish bank he headed after he stood down from the IMF leadership in 2007.

In a judicial order calling for all Rato’s bank accounts to be frozen, judge Enrique de la Hoz attached a list of the 78 accounts that the former IMF boss holds in 13 banks. The tax inspectors have also listed 27 companies listed in his or a family member’s name, among them his ex-wife, three children, his brother and sister and two nephews. Five of the companies are listed at Rato’s home address.

One of them, whose activities are registered as “scientific and technical”, has no employees and in 2013 had a turnover of €38,373 and €1.8m in assets. Rato himself is listed as the sole administrator of another firm that in 2013 allegedly turned a profit of €177,000 while headquartered at his home address.

The tax inspectors claim that Rato used internal billing within these companies to avoid paying income tax and VAT estimated at €5.3m.

It has been revealed that Rato, who was finance minister from 1996-2004 and as such was titular head of the tax-collecting agency, was one of 31,000 tax evaders who were offered amnesty in 2012.

Under the controversial amnesty, condemned as illegal by the tax inspectors’ union, evaders were given the chance to “regularise” their undeclared assets with a one-off payment of 10% of their value, even though it is a criminal offence to hold more than €120,000 in undeclared assets.

This was later amended to 10% of the profits, so, instead of paying €100,000 on an asset valued at €1m, if it produced profits of, say, €30,000 a year, the evader only had to pay 10% of that profit, or €3,000.

Last year, the tax office announced it was investigating 705 of the 31,000 amnestied evaders on suspicion of money-laundering, one of whom is Rato. Shortly after the amnesty a law was passed obliging all Spanish residents to declare assets held abroad. It was the discrepancy between this declaration and the assets he had declared under the amnesty that alerted tax officials to Rato’s alleged fraud.

After he left the IMF in 2007 “for personal reasons”, Rato went on to run the Caja Madrid savings bank. As the financial crisis hit he merged it with other banks to form Bankia, which he ran until it went bankrupt in 2012. In 2011, it posted profits of €309m, a figure that was adjusted to a loss of €3bn a few months later. Bloomberg Businessweek voted Rato the worst CEO of 2012.

Last year, Rato was once more in the news when the scandal of the “black credit cards” broke. These were company credit cards issued to 86 executives of Caja Madrid and later Bankia and were called “black” because their owners were never billed nor did they declare the credit as income. Between them the executives ran up €15.5m in purchases. Rato himself ran up close to €100,000 on his card in a single year, including €3,000 on alcohol and €1,000 on shoes. Of the 86 card-holders, 27 were members of the PP.

Last October, a judge declared that, as CEO, he had civil responsibility for the credit card abuse. Rato denies any wrongdoing and says he has “faith in the judicial system”.