Global Economics

Spain's Corruption Crisis Reaches the Palace


(An earlier version of this story incorrectly included an image of Santander Chairman Emilio Botin. He is not mentioned in the story.)

Spain, already suffering a painful fiscal hangover from years of economic excess, now faces another unpleasant morning-after symptom: a wave of corruption cases engulfing city halls, regional governments, and even the royal family.

Transparency International estimates that 1,000 corruption investigations are now under way across the country, most involving charges that public officials took advantage of the economic boom to enrich themselves. In the highest-profile case yet, Inaki Urdangarin, the son-in-law of King Juan Carlos, was stripped of his official duties in December pending an investigation into charges that he skimmed millions of dollars from padded government contracts. Urdangarin, summoned to appear before prosecutors on Feb. 25, has denied wrongdoing.

Fresh allegations seem to be cropping up almost daily. The ex-president of the Balearic Islands went on trial in January on charges including embezzlement and fraud, while police in Andalucia accused that region’s former employment chief with spending $1.2 million in public money on cocaine and other personal purchases. And José Blanco, the longtime Socialist Party No. 2, is under investigation for influence-peddling in the northwestern region of Galicia. Lawyers for all of the accused say the charges are false.

Such reports come at an awkward time for Prime Minister Mariano Rajoy’s new government, which is asking citizens to swallow more than $19 billion in tax increases and spending cuts, while promising a crackdown on tax evasion. Rallies against the planned austerity measures drew tens of thousands of protesters in several cities on Jan. 26.

With an absolute majority in parliament, Rajoy will have no trouble getting those measures enacted, says Alejandro Quiroga, a Spanish political scientist at Newcastle University in Britain. But, Quiroga says, “there will be a price to pay,” with the schedule of planned corruption trials now stretching into 2014. “The contradiction between politicians taking advantage of public money, while asking the public to deal with huge austerity measures, is going to get worse with time.”

A Rapid Slide Into Corruption

As recently as a decade ago, Spain was considered one of the world’s least-corrupt countries. But over the past 7 years, its ranking has slid from 22nd to 31st place on Transparency International’s annual survey of perceptions of corruption worldwide.

Spain became a breeding ground for graft during its 15-year real estate boom, says Manuel Villoria, a political scientist at the Rey Juan Carlos University in Madrid who serves on the executive committee of Transparency’s Spanish affiliate. Antiquated laws gave local officials almost unlimited discretion over land-use planning, he says, and developers willingly forked over bribes to get approvals for construction. In the southern resort city of Marbella, prosecutors have accused a former city planning adviser with amassing a $3.4 fortune, including a palace in Madrid and a stud farm guarded by a tiger. Already convicted of bribery and embezzlement, Roca is now being tried on additional charges, along with more than 80 co-defendants. A person answering the phone at the office of Roca’s lawyer hung up on a reporter seeking comment.

Many of the cases now coming to light involve alleged looting of public agencies that were flush with tax receipts and European Union aid during the boom. Investigators have said that a nonprofit foundation run by Urdangarin, the royal son-in-law, negotiated inflated contracts to organize tourism and sporting events for regional governments in Valencia and on the island of Mallorca. Millions were then funneled from the foundation into private companies owned by Urdangarin and a business partner.

It’s the first time that the country’s popular monarchy has been hit by scandal, and the royal family has moved swiftly to contain the damage. In early December, Queen Sofia flew to Washington, where Urdangarin lives with Princess Cristina and their 4 children; soon after, the palace announced Urdangarin would step aside from official duties, and that the royal household would make its financial accounts available for public inspection.

In still other cases, money skimmed from public coffers was used to finance political party activities, says Ken Dubin, a political scientist at IE Business School and Carlos III University. Even the most humdrum government activities became sources of illicit cash. An audit of a wastewater-treatment agency in Valencia found more than $22 million had disappeared from its accounts; agency executives charged Armani suits and luxury watches to their expense accounts and jetted around the globe, staying in five-star hotels at which they sometimes were accompanied by women described as “Romanian translators.”

Marta Andreasen, a Spanish-trained accountant who previously served as the European Union’s chief financial controller and now is a member of the European Parliament, says neither the EU nor the Spanish government showed much interest in controlling such abuses. “A culture was created, we had all this economic growth, and people sort of thought, ‘Who cares?’ Even honest people tolerated it.”

With Sharon Smyth
Matlack is a Paris correspondent for Bloomberg Businessweek.

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