The Value of Money1 What is the robbing of a bank compared to the founding of a bank? – Berthold Brecht asked this question in 1928, in his version of the Beggars’ Opera, The Threepenny Opera.2 However, what if one founded a bank, to rob a bank? The story of the Moot is based on the repercussions of the heist perpetrated by Alves Reis from 1924 to 1926. A national and international scandal, the biggest fraud in Portuguese history, a nightmare for every central banker, a crime that had the potential to destroy not only Banco de Portugal, but indeed the Portuguese monetary system. Justice Wright of the English High Court called it “a most elaborate fraud… unparalleled in the history of commercial fraud”.3 – Though maybe not quite unparalleled: shortly after Alves Reis, Stalin’s secret service, NKVD, embarked on a plot using a similar modus operandi with the slight difference that in this case the bank was bought with real money.4 Whether Brecht was inspired by the Portuguese Bank Note Case is not known. It is also not known whether Stalin’s secret service was inspired by Alves Reis. Unlikely as the story may sound, it is entirely based on facts. Apart from the investment dispute itself, the only point where we have deviated from reality is the outcome of the deliberations of the House of Lords. While in reality, Banco de Portugal won the case by a three to two majority (the Lord Chancellor, Lord Atkin and Lord MacMillan voting in favour of the Bank), participants in the Moot will assume that the case went the other way, a three to two majority in favour of Waterlow and Sons, Ltd. To arrive at this result, we “modified” the opinion of Lord Atkin. This document – as rendered for the purposes of the Moot – is published on the Moot’s website. 1 In putting together this Case-Study, I have relied heavily on the excellent book of Sir Cecil Kisch, The Portuguese Bank Note Case, The Story and Solution of a Financial Perplexity, Macmillan, 1932, and to some extent also on the book by Murray Teigh Bloom, The Man Who Stole Portugal, Secker & Warburg, 1967. We provide the references for those interested in the background of this fantastic story (students that would like to educate themselves further on the topic but who have difficulties accessing a copy of Sir Cecil Kisch’s book, may contact the Moot’s organizing team.) However, for the purposes of participating in the Moot, no such further reading is required: all the facts of the case are included in this Case-Study with its Annexes and the documents published on www.investmentmoot.org. In case of any discrepancy between the case-study and the historic documents published on the Moot’s website, the Case-Study prevails. I am indebted to my team in Frankfurt, London and Washington for their help with this case-study. All errors are my own. 2 "Was ist ein Dietrich gegen eine Aktie? Was ist ein Einbruch in eine Bank gegen die Gründung einer Bank? Was ist die Ermordung eines Mannes gegen die Anstellung eines Mannes?" – Bertolt Brecht, Die Dreigroschenoper, Suhrkamp, 1994, p. 91. 3 Justice Wright quoted in Bloom, supra fn 1, p. 271. 4 Bloom, supra fn 1 at p. 207; Walter G. Krivitsky, When Stalin Counterfeited Dollars, The Saturday Evening Post, 30 September 1939; Gary Kern, A Death in Washington: Walter G. Krivitsky and the Stalin Terror, New York Enigma Books, 2004, p. 27 et seq.; see also Karl Rhodes, The Counterfeiting Weapon, available at http://www.richmondfed.org/publications/research/region_focus/2012/q1/pdf/economic_history.pdf. 1 The Treaty of Commerce and Navigation between Great Britain and Portugal of 3 July 1842 (“Treaty of Commerce”/ “1842 Treaty”) as well as the Convention between Great Britain and Portugal of 22 May 1882, which supplemented the Treaty of Commerce are real.5 Real are also - the Agreement between the United Kingdom and Portugal providing for the Settlement by Arbitration of Certain Classes of Questions which may arise between the Two Governments of 16 November 1914;6 - the Exchange of Notes between Great Britain and Portugal Extending until 16 November 1926 the Operation of the Agreement providing for the Settlement by Arbitration of certain classes of questions which may arise between the two Governments of 29 August 1925;7 - the Notes exchanged between the United Kingdom and Portugal renewing the Arbitration Convention between the two countries of 16 November 1914, of 4 January 1927;8 as well as – of course – Portugal’s and the United Kingdom’s ratification of the Optional Clause to the Protocol Establishing the Permanent Court of International Justice.9 However, the 1919 Agreement between the United Kingdom and China for the Promotion and Protection of Investments (“1919 UK-China BIT”) as well as the 1919 Treaty between the United Kingdom and Brazil (“1919 UK-Brazil BIT”) as well as the arbitration are, of course, our invention.10 Although the facts of the case and the proceedings take place in the early 20th century, treaties, customary public international law and case law are those of the 21st century. In particular, participants in the Moot will assume that the ICSID Convention has entered into force on 14 October 1866. Both Portugal and Great Britain are contracting States. Neither the EU, nor any of its institutions, nor the Euro exist. 5 Both were denounced by Portugal on 22 June 1891 (with effect as of 22 June 1892). For the purposes of the Moot, the denunciation never happened and the two treaties remain in force. Both are available at www.investmentmoot.org. 6 http://treaties.fco.gov.uk/docs/pdf/1914/TS0015.pdf, also available at www.investmentmoot.org. 7 http://treaties.fco.gov.uk/docs/pdf/1925/TS0041.pdf, also available at www.investmentmoot.org. 8 http://treaties.fco.gov.uk/docs/pdf/1927/TS0005.pdf, also available at www.investmentmoot.org. 9 See The Permanent Court of International Justice: its Constitution and Work. Trilingual book (English, Spanish, French), first published in 1939, republished in 2012, p. 220, available at http://www.icj- cij.org/pcij/other-documents.php?p1=9&p2=8. 10 Available at www.investmentmoot.org. 2 The Status and Constitution of Banco de Portugal The following description of Banco de Portugal’s history is found on the bank’s website: “The Banco de Portugal was established by a royal charter of November 19th, 1846, to act as a commercial bank and issuing bank. It came about as the result of a merger of the Banco de Lisboa and the Companhia de Confiança Nacional, an investment company specialised in the financing of the public debt. By 1887, the Banco de Portugal shared the right to issue banknotes with other institutions. With the publication of the Decree-Law of July 9th, 1891, the Banco de Portugal became the sole issuer of banknotes for the mainland, the Azores and Madeira. From the beginning, it was a public limited company,11 […] was for the most part privately owned. The first decade of the Banco de Portugal's existence was marked by considerable hardship, after which it grew steadily as the major Portuguese commercial bank, until the First World War. This growth may be explained by the fact that most of the persistent public debt could be monetised with the help of public loans, to the detriment of the money supply. Until 1891, when the gold standard was in force, one of the main concerns of the Banco de Portugal was ensuring the convertibility of the paper currency it issued into metallic currency. Although it was not part of its official functions, the Banco de Portugal also acted as a ‘lender of last resort’ in the banking system, preventing several crises and easing many more. Following the 1891 financial and monetary crisis and the establishment of non-convertibility of Banco de Portugal banknotes, this active monetary policy halted and the discount rate was fixed at a level which would last until 1914. Conversely, its function as the ‘bank of the banks’ was retained and developed, together with a certain degree of informal supervision over the sector. In June 1931, a major change in the functions and statutes of Banco de Portugal took place. New rules were set into place in order to limit the increase of its liabilities, linking these to the amount of foreign currency reserves. These rules, together with other stringent measures, intended to restrain its role in financing the Government, enabled effective monetary control. The administrative dependence of the Government increased and the Bank took on a commitment to pursue a policy of fixed interest and exchange rates.”12 Banco de Portugal before the Reform in 1931 Banco de Portugal’s capital had been fixed at 13.5 million Escudos since 1887 and was only raised in 1931 to 100 million.13 Its profits were divided as follows: a minimum of 10% had to be devoted to the building up of two reserve funds (the Permanent Reserve Fund and the Variable Reserve Fund); 7% were payable to the shareholders as dividend; a further 2.5% was payable to the management.14 The remainder was then divided equally between the 11 Also referred to as a joint stock corporation in other documents. 12 http://www.bportugal.pt/en-US/OBancoeoEurosistema/Historia/Pages/default.aspx. 13 Kisch, supra fn 1, p. 149. 14 Kisch, supra fn 1, p. 149. 3 State and the bank.15 In addition, the bank was paying taxes and other levies to the State, resulting in “very substantial” revenue for the State.16 Banco de Portugal’s administration, according to Kisch, “show[s] that its original creators aimed at securing the advantages of an independent organisation subject to safeguards which would ensure the careful observance of national interests.”17 Banco de Portugal as Joint Stock Corporation Banco de Portugal was created as a Joint Stock Corporation18 which it remained until 1974.