1

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.

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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.

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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.

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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. According to Art. 104 Portuguese Commercial Code (which regulates commercial acts), a company needs to fulfil certain conditions to be considered commercial:

Art. 104: “Essential requirements for a company to be considered commercial are:

[…] 2. That the company is constituted in harmony with the provisions of this

Code.”19 The Portuguese Commercial Code stipulates certain registration requirements:

Art. 18: “Traders are particularly obliged to: […]

3. register all acts related to the commercial register […]”20

Art. 47: “The trader’s registration of individual sole traders is optional; the registration of the companies and of the ships is mandatory.”21 Art. 49: “The following are subjected to registration:

[…] 5. The instruments of incorporation, the renewal of the company, the

modification of the firm, object, head office or registered office, modification of status, reform, decrease or reintegration in the capital, dissolution or merger, cession of one managing partner on behalf of others and generally, every kind of change of the social contract, […].”22

15 Kisch, supra fn 1, p. 149. 16 Kisch, supra fn 1, p. 150. 17 Kisch, supra fn 1, p. 150. 18 House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 496. 19 The original Portuguese text reads: “São condições essenciaes para que uma sociedade se considere commercial: […] 2º Que se constitua em harmonia com os preceitos d’este codigo.” 20 The original Portuguese text reads: “Os commerciantes são especialmente obrigados: […] 3º A fazer inscrever no registo commercial os actos a elle sujeitos; […].” 21 The original Portuguese text reads: “A matricula dos commerciantes em nome individual é facultativa; a das sociedades e a dos navios é obrigatoria.” 22 The original Portuguese text reads: “Ficam sujeitos ao registo commercial: [..] 5º Os instrumentos de constituição e prorogação de sociedade, mudança de firma, objecto, séde ou domicilio social, modificação nos estatutos, reforma, reducção ou reintegração de capital, dissolução e fusão, cedencia da parte de um socio em nome collectivo n’outrem, e, em geral, toda e qualquer alteração no pacto social; […].”

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Registration is necessary to preserve the firm’s rights under the Portuguese Commercial Code (Art. 26) and for acts to take effect vis-à-vis third parties (Art. 57):

Art. 26: “Every trader should register his firm at the commercial register of the community where his head office and subsidiaries are based, to preserve all the right for his firm this code recognises.”23

Art. 57: “Acts subjected to the commercial register only take effect for third parties upon the date of registration and in the order in which the registration occurred. […].”24

However, despite the requirement of Articles 18(3), 47 and 49(5) Portuguese Commercial Code, Banco de Portugal was registered in the commercial register only in 1926.25

Organs and Officers of Banco de Portugal

Banco de Portugal’s Governor was nominated by the Government for renewable terms of three years each.26 He had certain veto powers that allowed him to suspend the enforcement of a decision of the bank’s board if he deemed it “to be contrary to the law, the Statutes of the Bank, or the interests of the State.”27

In the High Court proceedings, the following questions 3294-98 were asked:28

“MR. NORMAN BIRKETT: You said that you were a Government official?

SR. CAMACHO RODRIGUES: Yes, I am a Professor of the University; I am a public functionary.

Q: Yes, but is the description you gave, of a Government official, accurate?

A: Yes, I am a Government official. I am appointed by the Ministry of Finances as a confidential functionary of the Government.

Q: And in all matters pertaining to the Bank, it is your duty to preserve the Government's interest?

A: Of the Government and of the Bank. The regulation states that I must attend to both one and the other matter.

Q: Do you from time to time in the ordinary business of the Bank receive advice or instructions from the Government?

23 The original Portuguese text reads: “Todo o commerciante deverá, para gosar dos direitos que como tal este codigo lhe reconhece e da protecção que á firma dispensa, fazer lançar esta no registo commercial das circumscripções em que tiver o seu principal estabelecimento e quaesquer succursaes.” 24 The original Portuguese text reads: “Os actos sujeitos ao registo commercial só produzirão effeito para com terceiros desde a data do registo e na ordem por que este se ache feito. [...].” 25 Bloom, supra fn 1, p. 228. 26 Kisch, supra fn 1, p. 150. See also House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 459. 27 Kisch, supra fn 1, p. 150. 28 Quoted from the High Court’s record by Kisch, supra fn 1, p. 153 (indicators for questions by counsel (“Q”) and answers by the witness (“A”) added).

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A: Yes. I call pretty well every day at the Ministry and there we discuss matters and I get instructions, and so on.

Q: That is the general procedure, daily contact with the Ministry of Finances?

A: Yes, practically daily contact.”

Another officer nominated by the Government was the Secretary General (a post abolished during the reform in 1931). Art. 66 of the Statutes as approved by the Laws of 13 April 1892 and 16 July 1906 (“Statutes of 1892”) provided:

“It is incumbent on the Secretary-General, nominated by the Government, to satisfy himself of the strict observation of the Bank’s Statutes and regulations and attentively to follow the whole of the Bank's business, without intervening into the same, in order to be able to appreciate the situation of the Bank as regards the safeguard of the public interest and of the fiduciary circulation. It is furthermore incumbent on the Secretary-General to be present at all meetings of the Council of Administration and of the General Council, he being entitled to intervene in the discussions and empowered to make proposals regarding any matter interesting the Bank and the State, but without taking part in the final decision.”29

The Board consisted of the bank’s Governor as well as ten Directors of Portuguese nationality that owned bank shares of at least 5,000 Escudos worth and that were elected by the General Assembly of the shareholders.30 In accordance with Art. 77 of the Statutes of 1892, the voting rights were as follows: from 50 to 99 shares, 1 vote; from 100 to 149, two votes; from 150 to 199, three votes; from 200 to 249, four votes; 250 and plus, five votes.31 In 1925, the Bank had 97,000 outstanding shares, representing 1734 votes.32

Functions of Banco de Portugal

The function of Banco de Portugal was described in Art. 30 of the Statutes of 1892:

“The Bank shall be the Government’s banker and the general Treasury of the metropolis. Given this responsibility, the bank is obliged to maintain branches or agencies in every capital of the administrative districts of the mainland and of the islands. These agencies or subsidiaries will replace for all

29 Quoted from the High Court’s record by Kisch, supra fn 1, p. 151. The original Portuguese text reads: “Compete ao secretario geral noemado pelo Governo, certificar-se do exacto cumprimento dos estatutos e dos regulmentos do Banco, e sequir attentamente o conjuncto do expediente, sem n’elle intervir, para poder apreciar a situação do Banco em relação á segurança dos interesses publicos e da circulação fiduciaria. Compete mais ao secretario geral assistir a todas as sessões do conselho de administração, e do Conselho Geral, podendo intervir nas discussões, e tendo a faculdade de fazer propostas sobre qualquer assumpto de interesse para o Banco e para o Estado, mas com voto apenas consultivo.” 30 Kisch, supra fn 1, p. 152; Bloom, supra fn 1, p. 155 regarding the stockholding requirement. See also House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 465. 31 Bloom, supra fn 1, p. 155. Article 77 reads: “Os accionistgas que compuzerem as assembléas geraes ordinarias ou extraordinarias, terão um numero de votos, proporcional ao numero de acções que possuirem ; mas nenhum poderá ter mais de 5 votos a saber : o accionista possuidor de 50 a 99 acções, terá 1 voto ; o de 100 a 149 acções; terá 2 votos ; o de 150 a 199 acções, terá 3 votos ; o de 200 a 249 acções, terá 4 votos ; o de 250 ou mais acções, terá 5 votos.” 32 Bloom, supra fn 1, p. 155.

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purposes the central safes of these districts; and the inputs and outputs of funds from the Treasury account in the same branches and agencies will be subject to all requirements of the general regulation of public accounting. The same regulation will apply to inputs and outputs of funds at the headquarters of the Bank, if they are made on behalf of the Treasury.”

In addition to the issuance of banknotes, the main functions of Banco de Portugal under Art. 19 of the Statutes of 1892 were as follows:33

“(1) The discounting of: (a) Bills of Exchange and commercial paper; (b) Promissory Notes guaranteed by collateral; (c) Obligations of the State and Colonies; (d) Interest and coupons of the national debt and certain special

Securities issued by the General Portuguese Mortgage Credit Company.

(2) The purchase and sale of: (a) Bills of Exchange; (b) Gold and silver in coin or bar; (c) Bonds of the public debt and certain securities of the Portuguese

General Mortgage Credit Company; (d) Foreign Government bonds of recognised credit (Contract of 4th

December 1891, Art. 15).

(3) Loans against collateral, viz: (a) Gold, silver or precious stones or bonds of the public debt; (b) Fully paid shares or obligations of Banks and Municipalities and

certain Companies of recognised credit whose shares are quoted on the Lisbon stock exchange;

(c) Shares of the Bank of Portugal; (d) Bonds of foreign governments and certain foreign securities

guaranteed by each Government providing them; (e) Warehouse Warrants.

(4) Receiving cash on current account and opening credits on current

account against securities of specified types and granting credits in national and foreign markets by circular letter, etc.

(5) Grant credits on national and foreign stock exchanges through charters

or special warrants.

(6) Endorsing drafts of first-class foreign banks for exchange operations.

(7) Make collections and payment, and transfers of funds and cash and execution for third parties of banking operations not prohibited by the Charter.

33 Quoted from Kisch, supra fn 1, p. 154 et seq. (translation slightly revised). Kisch also states that the law foresaw certain limitations as to the kind of collateral to be accepted. Also, for example, the Bank’s discounts and loans had to be effected for a period of three months or less. Id., p. 155.

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(8) Receiving cash on current account.

(9) Safe custody of deposits of precious metals, etc.

(10) The employment of foreign credits for the importation of gold or silver

or operations in foreign exchange for the maintenance and defence of the reserves of the Treasury.

(11) Collection of revenue and making payments on account of the State and

public bodies and execution of operations for the Treasury at home or abroad.

(12) Negotiation, etc., of loans, duly authorised, for Government or public

bodies.”

According to Art. 21 of the Statutes of 1892, Banco de Portugal was not allowed to engage in the following:

“(a) Purchase of its own shares for its own account; (b) Rediscounting of its own bills; (c) Carrying out operations on the Stock Exchange which cannot be

immediately liquidated, even for account of third parties; (d) The payment of interest on current accounts payable on demand; (e) The promotion or participation in the creation of commercial banking or

other undertakings; (f) The embarking in operations entailing risk or insurance; (g) The purchase or sale on its own account of any commercial goods; (h) The possession of goods or immovable property other than necessary for

its own business.”34 Kisch concludes from this that for “the greater part of the permissible operations”, the bank was “dependent on the initiative of the State or third parties who would go to it either for the discounting of Bills or for the arranging of loans.”35 Changes Introduced by the 1931 Reform

The reform in 193136 brought with it significant changes: From 1 July 1931 on, the Escudo became convertible into gold again; it was “stabilised in gold at a rate equivalent to E.110 per £1 gold and British sovereigns and half-sovereigns were to be legal tender in Portugal at 110 and 55 escudos respectively.”37 Banco de Portugal “was placed under an obligation to maintain the value of Portuguese money […]. For this purpose the Bank was to be exclusively responsible for the note circulation.”38 In order to maintain the value, Banco de Portugal had to pay “its notes on demand in specie or in foreign gold drafts at its option on

34 Quoted from Kisch, supra fn 1, p. 156. 35 Kisch, supra fn 1, p. 156. 36 See supra fn 12. 37 Kisch, supra fn 1, p. 272 38 Kisch, supra fn 1, p. 272 et seq. A similar move was made in England in 1997, see http://www.bankofengland.co.uk/about/Pages/default.aspx.

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the basis of the new parity. For this purpose the exchange on London was taken as a basis.”39 Furthermore, the maximum amount of notes allowed in circulation was set at 2.2 billion Escudos.40 However, the Government and the bank – by means of an agreement – could raise this limit to meet the demands of the Portuguese economy.41

Following the reform, Banco de Portugal “was obliged to maintain a reserve of at least 30 per cent, against its note issue, deposits and other sight obligations, in gold, gold bonds of the National Public Debt or easily realisable foreign securities payable in countries, the money of which is either gold or notes convertible into gold. The gold bonds of the National Public Debt were not to exceed 22 per cent of the Reserve and were to be converted into foreign assets within a maximum of 10 years.”42

Banco de Portugal also had to “to open, gratis, for the State a current account up to an amount not exceeding E.100 millions, the drawing of the State on the said account being made only against Budget receipts of the current period and subject to certain specified conditions regarding repayment.”43

Altogether, the then Minister of Finance, Dr. Salazar estimated that this reform would generate profits amounting to 400 million Escudos.44 After making two deductions – one which preserved the shareholder’s position and one to address the book liability Banco de Portugal’s book had incurred due to the Portuguese Bank Note Scandal – this profit was to be used to reduce the State’s debt to Banco de Portugal.45

However, Portugal’s period of convertibility did not last long: On 21 September 1931, the English pound – the currency which the Escudo had been pegged to in the reform – became inconvertible itself.46 On 29 December 1931, the gold standard was replaced by the sterling standard, i.e. tied to the (inconvertible) British Pound as reserve currency.47

The Monetary System of Portugal

The Portuguese Escudo had not been a gold standard currency since 1891,48 the same year in which Banco de Portugal became the sole bank of issue for metropolitan Portugal.

Banco de Portugal was entitled to issue notes in two cases: as government issue (at the request of the government) and as commercial issue on its own account.49 Commercial issue notes had to be balanced by a counterpart in assets, such as gold, loans and advances, whereas the counterpart for government issue notes was a claim against the State. 50

39 Kisch, supra fn 1, p. 273. 40 Id. 41 Id. 42 Kisch, supra fn 1, p. 274. 43 Kisch, supra fn 1, p. 273. 44 Kisch, supra fn 1, p. 273. 45 Kisch, supra fn 1, pp. 273, 276 et seq. 46 Kisch, supra fn 1, p. 280. 47 Kisch, supra fn 1, p. 280. 48 House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 497. 49 House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, pp. 465, 497. The banknotes issued in each case were of course identical. 50 Cf. House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 465.

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In December 1925, 1724 million Escudos were in circulation, of that 64 million Escudos were commercially issued.51

Printing Money

Printing money has always been a delicate business. Historically, central banks have either organised the printing themselves or through a small handful of specialised printing houses. Before World War I, Banco de Portugal had done its own printing. During the war, the machinery for printing the serial numbers onto the notes had broken down and could not be replaced.52 The reason for the bank’s inability to obtain a replacement, according to Bloom, was that only the leading commercial banknote printers had the know-how and held the patents for this machinery and were unwilling to share it with the banks; the customers of their printing services.53

Banco de Portugal used at least three printing houses: Joh. Enschedé en Zonen in the Netherlands, Bradbury, Wilkinson in London – and Waterlow.54

Waterlow and Sons, Ltd.

Waterlow and Sons, Ltd. was a very respected, London based specialty printer, working inter alia for the English court system. Indeed, it printed the transcripts of its own trial: Upon delivery of his judgment on 22 December 1930, Justice Wright reportedly “expressed his gratitude to Messrs Waterlow for transcribing and printing the daily proceedings of the trial. But he did note that ‘there were a good many misprints’.”55

The origins of Waterlow and Sons, Ltd. date back to the early nineteenth century.56 In 1877, the original firm had split into two companies – “Waterlow Brothers and Layton” and “Waterlow and Sons, Ltd.”.57 During World War I, Waterlow Brothers and Layton – which was led by William Waterlow – printed 100 million £1 notes for the British Treasury.58 The firm also assisted with clandestine operations for the British Secret Service – the counterfeiting of stamps and banknotes of the Central Powers.59 In 1919, William was knighted for his services to the Crown.60

In 1920, following the decision of (the now Sir) William Waterlow to pursue overseas printing opportunities, the two Waterlow firms merged.61 To maintain family peace, Sir Philip Waterlow was made head of the firm.62 Meanwhile the ambitious Sir William had set his eyes on a new goal: becoming Lord Mayor of London.63 In 1922, he became Alderman for the Cornhill Ward of the London Corporation, a “traditional stepping-stone” on the way

51 Kisch, supra fn 1, p. 228, see also p. 169. See also House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 465 (for the total number of notes in circulation). 52 Bloom, supra fn 1, p. 72. 53 Bloom, supra fn 1, p. 72. 54 See for example Bloom, supra fn 1, pp. 54, 71. 55 Bloom, supra fn 1, p. 273. 56 Bloom, supra fn 1, p. 58. 57 Bloom, supra fn 1, p. 58 et seq. 58 Bloom, supra fn 1, p. 60. 59 Bloom, supra fn 1, p. 62. 60 Bloom, supra fn 1, p. 60 et seq. 61 Bloom, supra fn 1, p. 62 et seq. 62 Bloom, supra fn 1, p. 63. 63 Bloom, supra fn 1, p. 64.

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to his desired position.64 His cousins discussed lowering his salary for the time given to this post, an issue that was eventually settled and never discussed again.65

The internal peace did not last long: Due to familial outrage after the discovery of an anti-competition agreement between Sir Philip Waterlow and one of the firm’s main competitors, Sir Philip was replaced by Sir William in 1923.66 Sir William drastically increased the firm’s profitability – in 1924, he won contracts for the printing of all British postage stamps and the printing of Latvia’s banknotes.67 However, Sir William was worried about the intentions of his second cousin Edgar to take leadership over the firm.68 In order to keep the support of the other family members, Sir William was resolved to keep the company profitable.69

The Portuguese System of Checking for Forged Notes

Banco de Portugal was only obliged to honour notes that the bank itself had issued and was entitled to reject and remove from circulation forged notes.70

Even before the Alves Reis incident, forged notes had surfaced, necessitating the withdrawal of issues from circulation.71 In those cases, the bank also replaced the withdrawn notes with new notes in order to protect the confidence of the Portuguese public in the currency.72 This confidence of the note-bearers was “essential”73 since (i) Portugal was basically a “cash country” and (ii) the currency was on a “purely paper basis”.74

Notes that were returned to Banco de Portugal were not registered by the number, taken out of circulation and replaced by new notes, but washed, pressed and returned to circulation in order to save costs.75 Thus it was possible that notes put in circulation by Alves Reis and his confederates had been returned to Banco de Portugal, washed, pressed and then reinserted into circulation by the bank itself, i.e. handed out to unsuspecting customers.76

Alves Reis (or a person writing under his name) argued in 1932 in an article in World Dominion that “the Issue Bank had no efficient department for the control of its note issue, and this deficiency afforded me certainty of success for the fraud which I had planned – duplication of Bank of Portugal notes. Recourse to a forced loan, by means of secretly issued notes, was to be the brilliant result of all my patient toil!”77

64 Id. 65 Id. 66 Bloom, supra fn 1, p. 63. 67 Bloom, supra fn 1, p. 64. 68 Id. 69 Id. 70 Kisch, supra fn 1, p. 225. 71 Kisch, supra fn 1, p. 227. 72 High Court, Banco de Portugal v. Waterlow and Sons, Limited, 22 December 1930, The Times Law Reports, Friday, January 30, 1931, p. 216: “According to the evidence it was the ordinary practice of the bank, so far as it had been called for, that, where a serious falsification of notes was brought to light, the bank withdrew the whole issue of notes because the circulation of false notes destroyed the issue of the credit.” 73 Kisch, supra fn 1, p. 228 quoting Banco de Portugal’s QC, Mr. Bevan, before the Court of Appeal. 74 Kisch, supra fn 1, p. 228. This necessity was also pointed out in the statements that Dr. Ulrich – one of the Directors of Banco de Portugal – made in court. See House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 469 et seq. 75 Kisch, supra fn 1, p. 226; see also Bloom, supra fn 1, p. 28 (noting that the Bank of England destroyed any notes returned to it after noting down their serial numbers and replaced them by new notes). 76 Kisch, supra fn 1, p. 227. 77 Cited by Kisch, supra fn 1, p. 226.

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The Sting

Alves Reis was born on 8 September 1896.78 In 1916, he created a diploma for himself from the (non-existent) “Polytechnic School of Engineering” of Oxford University which he had notarised by an accommodating notary in Portugal. Reis then relocated to Angola to pursue a career there.79 During his initial stay in Angola, Reis met José Bandeira (brother of António Bandeira, the Portuguese Minister to the Netherlands) who introduced him to the German trader Adolph Hennies and the Dutch trader Karal Marang van Ysselveere in The Hague.80

After his return to Portugal and after a brief stay in the Oporto jail (on charges of embezzlement and fraud in connection with a failed investment), Reis worked on his public rehabilitation and got back in touch with José Bandeira.81 Bandeira took him to Hennies in Berlin where they talked about a “promising” business opportunity Reis had mentioned.82 Reis told Hennies about a clandestine financial operation he was carrying out for Banco de Portugal that would require the secret printing of currency; Hennies put him into contact with his German lawyer.83 The lawyer explained to Reis which terms would have to be specified in a printing contract in order for a German company to handle the printing job.84 However, for a number of reasons (including the circumstance that Germany had just been through an unprecedented inflation), the group later decided not to use a German printing house.85

In November 1924, Reis forged a contract between a group of international financiers and the Portuguese colony Angola which stipulated that the international financiers would lend the Portuguese colony £1 million in exchange for the right to issue banknotes for the colony in the same amount.86 Whether the story was particularly plausible, is open to question. As Bloom put it:

“Portugal […] joked bitterly that Angola was its own poor farm. Clearly no banker who ever took a good look at the colony’s balance sheet would lend it £1,000,000. For that kind of money it might be worth buying […]. Not only was an Angola loan as risky as roulette, but the whole idea that a sovereign government should permit an outside group to duplicate its currency for private use was unthinkable. The last time anyone mentioned it was in 1914 […]. He [Alfred Loewenstein] was turned down as fiercely as if he had proposed renting the royal family to stud.” 87

78 Bloom, supra fn 1, p. 18. 79 Bloom, supra fn 1, p. 18 et seq. See also Sam Burton, Break the Bank, Cabinet Magazine, Issue 21 Electricity Spring 2006 (available at: http://cabinetmagazine.org/issues/21/burton.php): “As the only Oxford graduate in Angola, Alves Reis soon found himself running the country’s rail system, an occupation he discharged with considerable alacrity, diagnosing mechanical failures in engines he had never seen before. Such success must have encouraged him: told by real engineers that some new equipment was too heavy for the trestles, he tested it himself, bringing his infant son along in flamboyant demonstration of his self-confidence. In short, Alves Reis did his invented alma mater proud.” 80 Bloom, supra fn 1, p. 24. 81 Bloom, supra fn 1, p. 29. 82 Bloom, supra fn 1, p. 29 et seq. 83 Bloom, supra fn 1, p. 30. 84 Id. 85 Bloom, supra fn 1, p. 51. 86 Bloom, supra fn 1, p. 30. 87 Bloom, supra fn 1, p. 31. See also High Court, Banco de Portugal v. Waterlow and Sons, Limited, 22 December 1930, The Times Law Reports, Friday, January 30, 1931, p. 215.

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In order to make his contract appear more real, Reis decided to print it on the official Portuguese seal paper, papel selado (although he failed to get the required stamps on it).88 He planned to have the contract notarized by Dr. Avelino de Faria who was a notary friend of his.89 In return for a high fee, Portuguese notaries (who may not assess a fee against contracts involving a Government agency) are supposed to read the contract diligently.90 Reis’ notary of choice was absent but his assistant – without reviewing the contract – put the stamp and signature of Dr. Avelino de Faria on the contract.91 That same day, the clerk of the British Consulate – again without reviewing the contract – added the British consular stamp to verify that the document bore the signature of notary Dr. Avelino de Faria.92 Reis also had the authenticity of the notary’s signature confirmed by the French and German Consulate.93

Reis’ unsuspecting office manager, who had better typing and French skills than his boss, then retyped the contract on papel selado in both Portuguese and French.94 After his employees left, Reis forged the signatures of Daniel Rodrigues (then-Minister of Finance), the High Commissioner of Angola and a representative of the Government of Angola.95 Reis attached the two pages with the notarisations from the “original” contract to the new one.96 He then presented the contract to Marang and José Bandeira and managed to win them over for the official secret mission.97

When Marang first met Sir William in his office at Waterlow and Sons, Ltd. on 4 December 1924,98 he presented an (authentic) introductory letter from the well-respected Dutch printing firm Messrs. Enschede en Zonen.99 Marang had initially approached this firm with his printing request but was referred to the original manufacturer of the Portuguese banknotes which the Dutch printer thought was Waterlow and Sons, Ltd.100 He also handed Sir William a visiting card, identifying Marang as “Consul General de Perse” and a diplomatic document signed by Antonio Bandeira, certifying that Marang holds a general power of attorney for Reis.101 Marang may have shown Sir William one or possibly two of the contracts he presented to Sir William during a subsequent visit on 17 December 1924. 102 Marang explained that he belonged to a Dutch syndicate that was assisting the Province of Angola which was in dire financial distress.103 At that time, Angola used normal Portuguese currency stamped on which Banco de Portugal had stamped the word “Angola” (to devalue the notes).104 Marang explained that in exchange for advancing £1 million, Banco de

88 Bloom, supra fn 1, p. 32. 89 Bloom, supra fn 1, p. 33. 90 Id. 91 Id. 92 Bloom, supra fn 1, p. 33 et seq. 93 Bloom, supra fn 1, p. 34. 94 Id. 95 Id. 96 Id. 97 Id. 98 Bloom, supra fn 1, p. 65. 99 Bloom, supra fn 1, p. 54 et seq., Kisch, supra fn 1, p. 8. 100 Bloom, supra fn 1, p. 54. 101 Bloom, supra fn 1, pp. 55 et seq., 65; Kisch, supra fn 1, p. 8 et seq. 102 Kisch, supra fn 1, p. 11. For a more detailed description of the contracts, see p. 14 et seq. 103 Bloom, supra fn 1, p. 65, Kisch, supra fn 1, p. 9. 104 Sam Burton, Break the Bank, Cabinet Magazine, Issue 21 Electricity Spring 2006 (available at: http://cabinetmagazine.org/issues/21/burton.php).

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Portugal would let the syndicate issue the special printing of banknotes, to be super-printed “Angola” once they reach the colonies.105

The entire business was presented as strictly confidential, known only to the Governor and Deputy Governor of Banco de Portugal.106 Marang explained that such secrecy was necessary because Banco Ultramarino, the only bank that would normally issue banknotes for the Portuguese colonies, would not be happy to hear of the competition.107

Marang showed Sir William the banknotes which his firm was supposed to supply.108 Waterlow and Sons, Ltd. had previously printed banknotes for Banco de Portugal (under a contract of 27 November 1922, and a repeat order of 20 February 20 1924).109 These banknotes depicted Vasco da Gama, the great Portuguese explorer.110 However, the banknotes presented by Marang were of the so-called “poet” series (bearing portraits of the sixteenth-century poet Luis de Camões and the nineteenth-century poet João de Deus Ramos).111 The printer for those notes was Bradbury – the great rival of Waterlow and Sons, Ltd.112 Sir William saw a chance to replace Bradbury. Therefore, he did not redirect Marang to the office of Bradbury but explained to his visitor that the banknotes had been manufactured by “an American banknote firm”.113 Sir William’s tactic had the desired effect, Marang agreed to using the “Vasco da Gama” note, for which Waterlow and Sons, Ltd. had been retained as printer by Banco de Portugal.114

Sir William explained that the notes could not be supplied without the authority of the Banco de Portugal.115 Since a representative of Waterlow and Sons, Ltd., Mr. Romer, was in Lisbon at that time, Marang offered that his secretary José Bandeira, who was the brother of the Portuguese Minister at The Hague, would go to Lisbon to discuss details with him.116 Bandeira did not show up in Lisbon.117 Romer became suspicious of the whole business but his concerns fell on deaf ears.118

On 17 December 1924, Marang visited Sir William again and handed over two contracts and a Power of Attorney from Reis.119 The first contract, a notarised copy of what purported to be a contract dated 6 November 1924 between the Government of Angola and Reis, authorising Reis – under specified conditions – to supply the new banknotes for Angola.120 The second contract which bore the same date appeared to be between Banco de Portugal and

105 Bloom, supra fn 1, p. 66; Kisch, supra fn 1, p. 9. 106 Bloom, supra fn 1, p. 67, Kisch, supra fn 1, p. 9. 107 Id. 108 Bloom, supra fn 1, p. 66. 109 House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 460. 110 Id. 111 Bloom, supra fn 1, p. 66. 112 Bloom, supra fn 1, p. 66. 113 Id. Bradbury was a subsidiary of the American Bank Note Company. 114 Bloom, supra fn 1, p. 66 et seq. 115 Bloom, supra fn 1, p. 67. 116 Id. 117 Kisch, supra fn 1, p. 11. 118 Kisch, supra fn 1, p. 11. Mr. Romer’s concerns were addressed by Judge Wright in his judgment (High Court, Banco de Portugal v. Waterlow and Sons, Limited, 22 December 1930, The Times Law Reports, Friday, January 30, 1931, p. 214): “[Judge Wright] did not wish to overstress the importance of the warning given to the defendants by Mr. Romer (one of the defendants’ representatives at Lisbon). Mr. Romer, however, pointed out that there were odd things going on, and that in itself, even if it were misleading, required some inquiry.” 119 Id. 120 Kisch, supra fn 1, p. 11 et seq.

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the Government of Angola, allowing the latter to initiate the printing of 200,000 notes of 500 Escudos and 100,000 notes of 1000 Escudos of the Bank’s issue.121 Furthermore, the Government of Angola provided Reis with “all the powers granted by this contract in the part relating to the manufacture of notes”.122 However, Marang did not produce a document in which Banco de Portugal specifically authorised the contract with Waterlow and Sons, Ltd.123 Sir William sent the documents to a London based notary who certified that the signatures were properly authenticated by a Portuguese notary whose signature was in turn properly authenticated by the Consuls of England, France and Germany.124

A London based solicitor advised Sir William to ensure that the printers had express authority of the Governor of Banco de Portugal.125 Sir William therefore wrote a letter to the Governor of Banco de Portugal on 17 December 1924, asking for such authorisation.126 In his letter, Sir William also mentioned the visit of Marang as well as the contracts.127 The letter was to be delivered through Marang’s secretary.128 On 6 January 1925, Marang returned to London with the alleged reply letter from the Governor of Banco de Portugal, dated 23 December 1924, giving Waterlow and Sons, Ltd. permission to print the notes and explaining that due to the confidentiality of the operation, all communication should take place via Marang’s firm, Messrs. Marang and Collignon.129

This reassured Sir William. That same day, Waterlow and Sons, Ltd. and Marang’s firm entered into a Memorandum of Agreement: Waterlow and Sons, Ltd. agreed to supply 200,000 notes of 500 Escudos to Marang and Collignon in February for delivery to Banco de Portugal for a price of £1500.130 On 7 January 1925, Sir William dispatched a brief letter to the Governor of Banco de Portugal, in which he acknowledged “receipt of your confidential letter of the 23rd December, the contents of which I have noted and for which I am obliged.”131 It is unclear why Sir William chose to disregard of the rule that all communication go through Marang’s firm. It is also unclear, what happened to this letter – it appeared in the post book of Waterlow and Sons, Ltd. but there is no trace of its receipt by Banco de Portugal.132

Waterlow and Sons, Ltd. printed the ordered notes which were delivered to Marang on 10 February, 25 February and 12 March 1925 in London.133 Bloom describes the last delivery of notes as follows: “This time [Marang] had ordered three trunks, each to bear 250 pounds of notes. After the Waterlow porters had loaded the heavy trunks into two cabs [the aide of the director of Waterlow] and Marang drove the short distance to Liverpool Street Station Main Line Departure Cloakroom where the cases were unloaded and Marang received the 2d cloakroom tickets for each of the three heavy trunks with £800,000 worth of

121 Kisch, supra fn 1, p. 12. 122 Kisch, supra fn 1, p. 13. 123 Kisch, supra fn 1, p. 14. 124 Id. 125 Kisch, supra fn 1, p. 15. 126 Id. 127 Id. 128 Kisch, supra fn 1, p. 16. 129 Kisch, supra fn 1, p. 17 et seq. 130 Kisch, supra fn 1, p. 19. 131 Kisch, supra fn 1, p. 19 et seq. 132 Kisch, supra fn 1, p. 20. 133 Kisch, supra fn 1, p. 22. See also House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 462.

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Portuguese banknotes in them.”134This deviated from the normal practice at that time. According to Chris Waterlow, “a standard contract dealing with the printing and shipping of banknotes would usually contain a clause similar to the following: ‘The notes are to be sent by the Company to the Bank, ready for use, in packets of 1000 good notes each, tied with ribbon and sealed, each packet comprising ten bundles of one hundred notes each, also tied with ribbon. These notes shall come grouped in alphabetical order of the Series and in each series in numerical order from 1 to 20,000.’ Banknotes destined for abroard were sent by English Royal Mail steams because they had special strongrooms. For extra security, the wooden boxes containing the notes were lined with zinc and the outside hooped with wire and sealed at the joints.”135

Marang, who carried diplomatic passports of Persia and Liberia and José Bandeira who was equipped with a diplomatic card, transported the first and second batches of notes to Portugal without problems.136 When Hennies – who held a diplomatic passport of Liberia – transported another set of notes to Lisbon, he was held up by a custom officer who intended to open his trunk.137 Reis needed to intervene to resolve the situation.138

Due to the group’s incomplete knowledge of Banco de Portugal’s lettering and numbering of the banknotes, they had given partially inaccurate instructions to the printers (although they received some unwitting guidance from – Sir William).139 As a result 90,000 of the 200,000 ordered notes did not correspond to genuine banknotes and were therefore not useable for the group.140 The remaining 110,000 notes, however, were gradually put into circulation.141 Soon afterwards, rumours about the circulation of false notes and suggestions of forgeries started to spread in Portugal but on 6 May of that year, the Administration of Banco de Portugal published the following statement in three newspapers (two published in Lisbon and one published in Oporto), among them the Diario de Noticias:142

“Notes of 500 Escudos. – The Administration of the Bank of Portugal inform [sic] us that there is no foundation for the rumour current in some localities of the country that there are in circulation false 500 Escudo notes.”143

Reis’s Bank

Forging banknotes is less than half of the battle – the real challenge is getting the notes into circulation.144 Reis quickly noticed that inserting them through the piecemeal purchase of foreign currency on the black market or through the legal banking system (by depositing them in accounts)145 was slow and would inevitably create suspicion.146

134 Bloom, p. 123. 135 Chris Waterlow, The House of Waterlow – A Printer’s Tale, Troubador Publishing Ltd., 2013, p. 122 footnote 40. 136 Bloom, supra fn 1, pp. 102, 105. 137 Bloom, supra fn 1, p. 109 et seq. 138 Id. 139 Kisch, supra fn 1, p. 21. 140 Kisch, supra fn 1, p. 21 et seq. 141 Kisch, supra fn 1, p. 25. 142 Kisch, supra fn 1, pp. 22, 24. 143 Cited by Kisch, supra fn 1, p. 24, referring to the Diario de Noticias. See also Bloom, supra fn 1, p. 119. 144 For other examples see http://en.wikipedia.org/wiki/Operation Bernhard. 145 Bloom, supra fn 1, p. 102 et seq. 146 Bloom, supra fn 1, p. 110 et seq.; Kisch, supra fn 1, p. 25.

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In April 1925, Reis decided that a much more effective way would be to found his own bank147 (and also to attempt a take-over of Banco de Portugal).148

A first application for the formation of a new bank was signed on 2 May 1925 by “a number of individuals” including Reis as well as José Bandeira and Adriano Silva.149 However, following a negative report by the Banking Council, the Portuguese Ministry of Finance rejected the application in mid-May.150

A second application of 23 May 1925 had more luck.151 Bandeira and Silva had been dropped from the list of applicants and other names had been added.152 In early June, the Banking Council (under the presidency of the Governor of Banco de Portugal, Camacho Rodriguez) still had concerns about the necessity of having an additional bank in the market and also explained that several modifications would have to be made. As a consequence, the Ministry of Finance referred the application back to the Banking Council demanding a clear answer. On 15 June 1925, the Banking Council reported to the ministry that “the Bank [sic!] could in certain circumstances be of advantage to the national economy, in which case its capital should equal that of other leading banks.”153 The Minister of Finance authorized the formation of the bank and fixed the minimum capital of the new bank at 20 million Escudos154 (twice the sum proposed by Reis and his co-applicants).155 In early July 1925, the newly established “Banco Angola e Metrópole” (Bank of Angola and Metropole) was in business, a business described by Banco de Portugal’s QC in the British Court of Appeal as “any commercial, industrial or financial operations connected with or which may relate to banking business.”156

With Banco Angola e Metrópole in operation, more money could be put in circulation. Marang visited Sir William on 29 July 1925, carrying a letter purporting to be from the Governor of Banco de Portugal that authorised the printing of another 380,000 notes of the

147 Though it appears that Reis did not honour the Spanish proverb that one who lives in a glass house should never begin throwing stones (see Thomas Paine, The Writings of Thomas Paine, Vol. I. Collected and edited by Moncure Daniel Conway 1774 – 1779, The Crisis VI. (To The Earl Of Carlisle and General Clinton), available at: http://www.gutenberg.org/files/3741/3741-h/3741-h.htm. In May 1925, he sent information about alleged irregularities concerning the Oporto Commercial Bank to the Inspector of the Banking Trade, as a consequence of which the bank was shut down and two of its directors convicted. Bloom, supra fn 1, p. 128. 148 Bloom, supra fn 1, p. 116 et seq. – The latter was important as only Banco de Portugal “could initiate action against counterfeiters of its banknotes“. Id. After the fraud had been discovered, the Directors of Banco de Portugal stated in a circular to their shareholders on 24 December 1925: “Is it not known to all that the culprits made a heavy purchase of the shares of the Bank of Portugal with the evident intention of conquering its administrative posts and thus assuring that at the feared moment when the notes were cancelled, which was the crucial moment for the discovery of the fraud, a complacent Board of Directors would not allow the compromising proof to appear?” Cited by Kisch, supra fn 1, p. 28. See also House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 462. 149 Kisch, supra fn 1, p. 25. 150 Kisch stated that “The ground for the unfavourable view taken by the Banking Council was apparently that no sufficient grounds for founding a new Bank [sic!] had been given. It was considered in certain quarters that the applicants for the foundation of the bank were not of adequate standing for the responsibility”. Kisch, supra fn 1, p. 25 et seq. 151 Kisch, supra fn 1, p. 26. 152 Id. 153 Id. 154 See also House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 462. 155 Kisch, supra fn 1, p. 26. 156 Kisch, supra fn 1, pp. 26 - 27 (quoting from the court transcripts).

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Vasco da Gama series.157 Again, Waterlow and Sons, Ltd. delivered.158 This time the delivery happened in August and September 1925.159 To avoid difficulties, Marang and José Bandeira asked Count Simón Planas Suárez – Venezuelan Minister to Portugal – to transport their large quantity of “confidential documents” to Lisbon as diplomatic baggage.160 Planas Suárez, whom António Bandeira had met when the Venezuelan gave a series of lectures at the Academy of International Law in The Hague in 1924,161 was happy to help out.162 Planas Suárez was a widely published author on international law and arbitration.163 Due to its large transaction volume, the new Banco Angola e Metrópole soon became the subject of attention. 164 Were foreign financial interests operating in Portugal? Rumours also flew about the purchase of Banco de Portugal shares by Banco Angola e Metrópole.165 In November, the front page of the Lisbon daily newspaper “O Século” opened with the headline: “WHAT’S GOING ON?” and explained that a group of individuals connected to a “certain banking house” had purchased 10,000 shares of Banco de Portugal.166 On 19 November 1925, the Portuguese Minister of Finance ordered an investigation into the proceedings of the bank.167 On 29 November – following further coverage by “O Século” about the sudden wealth of a formerly poor Portuguese diplomat – António Bandeira was recalled by the Ministry of Foreign Affairs for a report.168 On 4 December 1925, Banco de Portugal was informed that Banco Angola e Metrópole was buying large quantities of sterling and foreign currency in exchange for new 500 Escudo notes and that a conspicuous amount of new 500 Escudo notes circulated in Oporto.169 After calling in the Criminal Investigation Department, a commission of enquiry was dispatched

157 Kisch, supra fn 1, p. 28. See also House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 480. 158 House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 480. 159 Id. 160 Bloom, supra fn 1, p. 136-138. 161 See Simón Planas Suárez, L'extension de la doctrine de Monroe en Amérique du Sud, Recueil des cours/Collected Course, Tome/Volume 5 (1924), pp. 267-365. 162 Bloom, supra fn 1, p. 137 et seq. 163 His works include “El arbitraje, estudio de Derecho Internacional” (1900) as well as “Ideas, colección de artículos sobre política y administración” (described as forthcoming in 1916). 164 Mr. Bevan stated: “Whilst other banks were slow to make advances and careful in the conduct of their banking business it was found that the Bank of Angola and Metropole was making a bold attempt to get business and was doing business, and doing business very freely. It was making large advances of money against securities. It was buying moveables and immoveables, and it even went so far as to purchase as many shares as it could get in the Bank of Portugal. All these things became known, and the readiness with which advances were made and liabilities incurred by this Bank, and the readiness with which those liabilities were liquidated, became, as I have said, a matter of press and public comment. There was a press campaign as to where this money came from. Some said it was Germany, and some said Russia, and the position became so acute that the Government, by the Minister of Finance, or the Foreign Minister, ordered an enquiry. Such was the disquietude and uncertainty in the country and such had been the effect of the press campaign, that the police were called by the Government to take part in the enquiry.”Kisch, supra fn 1, pp. 27, 32; House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 462. 165 Kisch, supra fn 1, p. 32. 166 Bloom, supra fn 1, p. 174. 167 Bloom, supra fn 1, p. 175; House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 462. 168 Bloom, supra fn 1, p. 179. 169 Kisch, supra fn 1, p. 32 et seq. House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 462.

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immediately to Oporto where they arrived on 5 December 1925, a Saturday.170 Banco Angola e Metrópole was placed under arrest of the police who found some 4000 new 500 Escudo notes of the Vasco da Gama series.171 However, the commission’s banknote expert pronounced them to be genuine. He stated that it would be impossible to forge plates with such perfection.172 The Chief of Police, Pereira dos Santos suspected that the notes had been issued by Banco de Portugal itself and had Banco de Portugal’s members of the enquiry commission “guarded” by the police.173 It was only when the banknotes were sorted out by series and numbers that the first duplicates were discovered.174 The immediate reaction was shock. Not knowing the exact extent of the fraud, Banco de Portugal convened a crisis meeting to agree on what could be done in this situation – before the banks would open on Monday morning.175 The aim was to avoid a general bank run. A decision was made to withdraw all notes of the Vasco da Gama series and to publish notices in newspapers asking the public to exchange these notes for others at Banco de Portugal and its branches.176 The public rushed to get rid of the notes – between 7 and 16 December 1925, over 715,000 notes were exchanged.177 In total, the Banco de Portugal ended up with 799,190 Vasco da Gama notes.178 Seizures took place in Holland and in Portugal.179 Even “[t]he inviolability of an embassy was disregarded and on 10 December investigators entered the Venezuelan Ministry – actually the apartment of Count Planas-Suarez – where they found 85,000 of the 500 Escudos notes. On 11 December the Papal Count was allowed to leave the country. He went to Paris.”180 Reis and Hennies, who were on a ship with the name “S.S. Adolf Woerman”, were warned by friends about arrest warrants against them (and other members of the group).181 Whereas Hennies fled, Reis stayed on the ship and was arrested on 6 December 1925.182 The operations of Banco Angola e Metrópole were immediately suspended after the discovery of the fraud. A search revealed other forged notes there before they could be

170 Kisch, supra fn 1, p. 33 et seq. See also House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 462 et seq. 171 Kisch, supra fn 1, p. 34; House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 463. 172 Kisch, supra fn 1, p. 34. 173 Bloom, supra fn 1, p. 186. 174 Kisch, supra fn 1, p. 35. House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 463. 175 Kisch, supra fn 1, p. 35. 176 Kisch, supra fn 1, p. 36. House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 460. 177 Kisch, supra fn 1, p. 38. 178 House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 465. 179 Kisch, supra fn 1, p. 39, who, upon quoting Lord Justice Scrutton, remarks that it remains unexplained how the authorities got over the difficulty of diplomatic immunity. 180 Bloom, supra fn 1, p. 197. 181 Bloom, supra fn 1, p. 188. 182 Id.

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launched into circulation.183 First steps were taken towards the liquidation of the bank as early as 7 December 1925 (Monday).184 The Governor of Banco de Portugal contacted Sir William on 7 December 1925 and Portuguese officials subsequently learned about the contracts produced by Mr. Marang and of the printing of the notes by Waterlow and Sons, Ltd.185 Minuscule differences between authentic and forged notes were now observed.186 On 10 December 1925, “O Século” reported:

“The Portuguese Experts have already verified that there is on the bank notes of the Angola e Metropole Bank an additional comma in the name of the manufacturer, that the small letter printed in the corner over the fleur-de-lys does not correspond as on the genuine notes to that of the respective series, and that the numbers are printed in darker red.”187

When the scale of the forgery became apparent, it was decided that a time limit should be laid down for the exchange of notes; the period initially set by Senhor Garcia, the then Finance Minister, expired on 22 December 1925, but his successor in office, Marques Guedes, extended the period until 26 December 1925.188 Meanwhile, the distrust within Portugal had grown so strong that even the Governor and the Deputy-Governor of Banco de Portugal were arrested for a few hours on 12 December 1925.189 On 24 December 1925, the directors of Banco de Portugal, tired of the accusations of the investigating judge, decided to resign.190 On 30 December 1925, Marang was arrested in The Hague.191 Soon after the discovery of the fraud, the Portuguese Government changed, a circumstance that delayed the enactment of necessary measures which would enhance the bank’s power of issues.192 On 19 July 1926, this power was finally increased.193 According to the House of Lords decision, the government’s decree stipulated:

“(1.) an issue of a hundred million escudos, to be repaid out of the anticipated indemnities from Waterlows. It is not suggested that this loan from a third party can be used to reduce damages from Waterlows ; (2.) a further issue of a hundred million escudos to be used for commercial operations ; (3.) a

183 Kisch, supra fn 1, p. 39. 184 Kisch, supra fn 1, p. 39. 185 Kisch, supra fn 1, pp. 40-43. See also House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 464. 186 Kisch, supra fn 1, p. 46. 187 Kisch, supra fn 1, p. 47. 188 Kisch, supra fn 1, p. 38. See also House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 472. 189 Kisch, supra fn 1, p. 42. 190 Bloom, supra fn 1, p. 206. 191 Bloom, supra fn 1, p. 212. 192 Kisch, supra fn 1, p. 79. See also House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 465 et seq. 193 House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 465.

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further issue of 125 million escudo, to be used in colonial development, which does not affect this case.”194

A law of 31 May 1926 appointed a special commission for the liquidation of Banco Angola e Metrópole.195 According to Kisch, “[t]he Bank of Portugal put in a claim under five heads for a substantial award:

(1) E.99,965,500 ‘verified by the equivalent real effective value which had to be given in true notes, outside of or beyond the number and quantity of those issued of this type by the Bank of Portugal.’

(2) (2) E.5,163,233 being interest on the above amount ‘because the Bank was in this way deprived of employing this amount in lucrative and reimbursable operations from the exchange until the date of the contract of 21st June last’ between the Government and the Bank, which will be referred to subsequently;

(3) E.863,432 representing the cost of the issue of true notes withdrawn from circulation on account of the currency of the forged notes, the cost of the notes required for the exchange of the illegal notes and the cost of the investigations for the defence of the Bank;

(4) E.54,666 interest on the amount mentioned under (3); (5) Prejudices which the Bank might suffer ‘by reason of the facts resulting from the

criminal issue in question’.196 In its judgment of December 1926, the commission which “did not consider itself entitled by the terms of the law under which it was appointed to award compensation for loss of profits […] disallowed items (2) and (4), but admitted [Banco de Portugal]’s claim under (1) and (3) subject to a small deduction. The total award to the Bank was E.100,531,069. The Bank appealed against the judgment to the High Court and from the High Court to the Supreme Court. Both tribunals, however, confirmed the original award, the verdict of the Supreme Court being dated 24th January 1928.”197 Marang was sentenced to eleven months in prison on 10 December 1926 in The Hague but was immediately released (due to the time he had spent in jail while awaiting the Court’s judgment).198 In 1927, when Marang had already moved to Brussels, he was sentenced in absentia to two years of imprisonment by the Dutch Court of Appeal upon the Prosecutor’s appeal.199 A year later, Marang and his family relocated to Paris.200 On 6 May 1930, the trial against Reis and eight other defendants (one of them – Hennies – was missing) started.201 A special court had been constituted sitting in an improvised court

194 House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 466. 195 Kisch, supra fn 1, p. 77. 196 Kisch, supra fn 1, p. 77 et seq. 197 Kisch, supra fn 1, p. 78. 198 Bloom, supra fn 1, p. 228 et seq. 199 Bloom, supra fn 1, p. 229. 200 Id. 201 Bloom, supra fn 1, p. 248 et seq. The defendants included: Alves Reis and his wife, José and Antonio Bandeira, Francisco Ferreira, Adriano Silva, Moura Coutinho, Manuel Roquete and Adolf Hennies. Marang did not stand trial because he had already been convicted in The Hague.

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room, conducting a hearing under a special procedure.202 No less than 15 attorneys and 85 witnesses were involved.203 According to Bloom, Reis “accepted full responsibility for the crime, with the complicity of Marang [who was not tried in Portugal because he had already been sentenced in the Netherlands] and Hennies [who was absent], and thus sought to exonerate fully all the others on trial.”204 Reis, José Bandeira and Hennies (the latter in absentia) were sentenced to eight years of imprisonment and an additional 12 years in exile or, alternatively, a total of 25 years in exile. 205 Antonio Bandeira was sentenced to six years in jail and ten years in exile or 20 years in exile.206 The English Dispute

On 5 April 1928, Banco de Portugal issued a writ against Waterlow and Sons, Ltd., claiming damages for breach of contract and/or negligence and/or conversion (on appeal, they only relied on the first claim).207 Para. 9 of their statement of claim – dealing with the breach of contract – stated:

“In breach of the express terms of the said contract and/or negligently and in breach of the implied terms as set out in paragraph 4 hereof and/or negligently and in breach of the duty set out in paragraph 5 hereof, the defendants between January, 1925, and September, 1925, without the authority of the plaintiffs printed from the said plates and/or from plates made from the said die or dies on paper made to the plaintiffs’ specification and bearing the watermark ‘Banco de Portugal’ and delivered in London to one Marang a Dutchman about 580,000 banknotes of the value of 500 escudos each of the said Vasco da Gama design purporting to be banknotes of the plaintiff Bank.”208

The claim amounted to £610,392 (the initial sum was £1,115,613, but the Bank deducted £488,430, the amount they had received when Banco Angola e Metrópole was liquidated).209

On 9 November 1929, Sir William Waterlow – who had left Waterlow and Sons, Ltd. a year earlier – was inaugurated as Lord Mayor of London.210 Waterlow and Sons, Ltd. attempted to postpone the upcoming trial until the end of Sir William’s one-year term as Lord Mayor of London.211 Banco de Portugal – who had initially resisted the diplomatic pressure it was put under – finally had its solicitors state the following:

“In spite of the inconvenience of the Bank and its witnesses, we have been instructed to consent to your request and we feel we must look upon this consent as an act of courtesy to the office held by Sir William and so that such office might not suffer embarrassment by its holder having to devote his

202 Bloom, supra fn 1, p. 248. 203 Bloom, supra fn 1, p. 248. 204 Bloom, supra fn 1, p. 250. 205 Bloom, supra fn 1, p. 253. 206 Bloom, supra fn 1, p. 253. 207 House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 466. 208 Id. 209 Id. 210 Bloom, supra fn 1, pp. 238 et seq. 211 Bloom, supra fn 1, p. 246.

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time and attention to the Defendant’s case. We are instructed to ask that the new date for trial be fixed for the earliest available day in November.”212

The trial eventually commenced on 24 November 1930.213 According to the House of Lords, the position of the respondent was as follows:

“By their amended defence, Messrs. Waterlow denied that the contract of November 27, 1922, was subject to the implied terms alleged; they denied that they were guilty of any breach of the express or implied terms of the contract; they denied that the Bank had suffered any loss, and alleged in the alternative that, if the Bank had suffered any loss, such loss was caused solely by the Bank’s own voluntary act in withdrawing from circulation the Vasco da Gama 500 Escudo notes and exchanging them for other notes, although the forged notes or some of them which were in circulation were distinguishable from the authorized ones and although the Bank were under no liability to pay the authorized notes; and in the further alternative they alleged that any damage was caused by or contributed to by the negligence of the Bank.”214

High Court, Banco de Portugal v. Waterlow and Sons, Ltd., Judgment of 22 December 1930, The Times Law Reports, 30 January 1931, p. 215 et seq.215

Judge Wright rejected the arguments brought forward by Waterlow and Sons, Ltd., both with regard to the amount and to the measure of damage.216 Specifically, the judgment stated:

“The argument that the bank had merely exchanged paper for paper was a fundamental point of the defence, and it called for the most careful consideration. Mr. Birkett [who appeared for Waterlow and Sons, Ltd.] had said that the only damage recoverable was the cost of printing the new notes which had been handed out and exchanged for the Vasco da Gama notes. The argument was based on the fact that under Portuguese law the notes were not convertible into gold, and that the question when that regime of inconvertibility would end was a matter too remote to take into account. No evidence had been given on the question why Portugal would return to a convertible note issue, but, putting that aside, [Judge Wright] did not feel able to accept Mr. Birkett’s contention. In Portugal the notes were the currency of the country. They would purchase commodities, including gold. They could buy foreign exchanging, including sterling or dollars, or any currency which was convertible. They could do that because they had behind them the liability of the Bank of Portugal.”217

The subsequent House of Lords judgment reveals that Judge Wright “was of the opinion that by 16 December 1925, [Banco de Portugal] knew (or ought to have known) the tests by which they could distinguish some of the forged notes from the authorized notes, and he held that from that date Messrs. Waterlow were not liable for damages in respect of the good notes

212 Id. 213 Bloom, supra fn 1, p. 254. 214 House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 466. 215 A copy of the decision is reproduced at www.investmentmoot.org. 216 House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 467. 217 High Court, Banco de Portugal v. Waterlow and Sons, Limited, 22 December 1930, The Times Law Reports, Friday, January 30, 1931, p. 217.

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which they gave in exchange for forged notes and upon this basis gave judgment for the amount above referred to, and not for the whole of the Bank’s claim.” 218 He therefore gave judgment for £569,421 with costs and rejected the remainder of Banco de Portugal’s claim.219

Waterlow and Sons, Ltd. appealed the judgment arguing that the damages awarded by the High Court were excessive. The Banco de Portugal cross-appealed the judgment with regard to that part of its claim that Judge Wright had rejected.220

Court of Appeal, Banco de Portugal v. Waterlow and Sons, Ltd., 26 March 1931, The Times Law Reports, 1 May 1931, p. 359 et seq.221

The Court of Appeal (by majority of Greer and Slesser L.J.) held “that the plaintiffs were entitled to damages based on the exchange value of the genuine notes which they had issued in the place of the spurious notes, but that that the damages should be limited to £300,000ˮ222 because Banco de Portugal knew or should have known how to distinguish between the real and the forged notes by 10 December 1925.223 Scrutton L.J. dissented. He stated that “[a]s the plaintiff’s notes were inconvertible the damages should be limited to the cost of printing they genuine notes which they had given in exchange for spurious notes.”224 According to him, the “really loss was the cost of replacing the genuine notes which they had parted with, and Mr. Justice Wright’s judgment should be set aside and judgment should be entered for the bank for £8992.”225

House of Lords, Banco de Portugal v. Waterlow and Sons, Ltd., Judgment of 28 April 1932226

The House of Lords agreed that Banco de Portugal’s loss “arose naturally from the breach of contract.”227 For the purposes of the Moot, a majority (Lord Warrington of Clyffe, Lord Atkin and Lord Russell of Killowen with Viscount Sankey L.C. and Lord Macmillian dissenting) held that, in alignment with the opinion of Scrutton L.J., Banco de Portugal was only entitled to £8992, i.e. the costs for the printing of new banknotes.228

Viscount Sankey L.C. and Lord Macmillian explained in their dissenting opinion, that Banco de Portugal should receive £610,392 in damages – the amount which it had claimed.229 They argued that Banco de Portugal’s total loss amounted to £1,098,822 from which the sum of 218 House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 467 (emphasis added). 219 High Court, Banco de Portugal v. Waterlow and Sons, Limited, 22 December 1930, The Times Law Reports, Friday, January 30, 1931, p. 217. 220 Court of Appeal, Banco de Portugal v. Waterlow and Sons, Limited, 26 March 1931, The Times Law Reports, Friday, May 1, 1931, p. 360. 221 A copy of the decision is reproduced at www.investmentmoot.org. 222 Court of Appeal, Banco de Portugal v. Waterlow and Sons, Limited, 26 March 1931, The Times Law Reports, Friday, May 1, 1931, p. 359 (emphasis added). 223 Court of Appeal, Banco de Portugal v. Waterlow and Sons, Limited, 26 March 1931, The Times Law Reports, Friday, May 1, 1931, p. 363 et seq. 224 Court of Appeal, Banco de Portugal v. Waterlow and Sons, Limited, 26 March 1931, The Times Law Reports, Friday, May 1, 1931, p. 360. 225 Id. 226 Copies of the relevant House of Lords materials are reproduced at www.investmentmoot.org. 227 House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 452. 228 House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, p. 452 (in the Moot Court-version available at www.investmentmoot.org). 229 House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, pp. 478, 512.

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£488,430 (which Banco de Portugal had already redeemed in the liquidation of Banco Angola e Metrópole) had to be subtracted.230

230 For a detailed explanation of that number, see House of Lords, Banco de Portugal v. Waterlow and Sons, Limited, 28 April 1932, [1932] AC 452, pp. 478, 511 et seq.

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The Arbitration

Professor Innocent Joaquim Camacho Rodrigues, the Governor of Banco de Portugal, was furious when he learnt of the Lords’ decision. When he sat down for lunch with his lawyer Antonio Horta Osorio, he was still fuming. Unable to stop his client’s tirade until the arrival of coffee, Horta Osorio waits until Camacho Rodrigues was stirring two lumps of sugar into his bica com cheirinho.

“Are you in the mood for more lawyering?”

“Certainly not!” says Camacho Rodrigues adding an epithet for English silks and their legal fees better not repeated in polite company.

“Most unfortunate,” replies Horta Osorio, “if you were there might be a way to get the bank’s money back – from England, not from the printers.”

Horta Osorio detects a certain lustre in his client’s eye and goes on to explain the concept of investment arbitration under the 1919 UK-China BIT and of the most-favoured nation clause in Article 1 of the Treaty of Commerce between Portugal and the United Kingdom (knowledge acquired only recently by him through the bank’s Dutch lawyer Jan Tobias Asser).

A few weeks later, the Portuguese ambassador to the Court of St. James General Tomas de Garcia Rosado presents himself and his compliments at the office of the Sir John Simon, the Secretary of State handing over a letter by Banco de Portugal:

“The Right Honorable Ramsay MacDonald, The Prime Minister.

Dear Sir,

Banco de Portugal has the honour to present to you as His Majesty King George’s Prime Minister its acceptance of the offer to arbitrate any disputes between them concerning the bank’s investment in England under the Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States. It is hereby giving notice of its dispute arising out of and in connection with the failure of His Majesty’s Government and His Majesty’s courts to protect said investment in the printing arrangements for its legal tender in accordance with the Treaty of Commerce of 3 July 1842 and to treat them fairly and equitably.

Banco de Portugal invites His Majesty’s government to enter into amicable discussions for the resolution of said dispute, but will commence arbitration should the dispute not be resolved by the expiry of the period set out in Article 7 of the Agreement between the United Kingdom and the Republic of China for the Promotion and Protection of Investments of 22 February 1919 read in conjunction with Article 1 of the Treaty of Commerce.

Banco de Portugal avails itself of the opportunity to renew to His Majesty’s Prime Minister the assurances of its highest consideration.

Professor Innocent Joaquim Camacho Rodrigues”

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In a confidential cable, the ambassador reports back to Lisbon: “Delivered. Letter received coolly.” – “Somehow fitting for a cooling-off letter”, he is tempted to add but then does not.

Back in London, Sir John summons the newly made up Viscount Sankey of Moreton, the Lord Chancellor. “It is not over, eh – Jack.”

And it is not. Three months later, a Request for Arbitration is filed with ICSID in Washington, DC. and registered as ICSID ARB 14/1932. A Tribunal is constituted consisting of Benjamin N. Cardozo (appointed by the Claimant), Friedrich August von Hayek (appointed by the Respondent on a recommendation by the Chancellor of the Exchequer for his economic expertise) and Vi Kyuin Wellington Koo, appointed by the Administrative Council of ICSID. A proposal by the President to employ the services of Sophia de Jong as tribunal secretary was frowned upon by ICSID and ultimately shot down by both Parties.

A. Respondent Raises Objections under Rule 41 (1) of the ICSID Arbitration Rules

Following a first procedural meeting which is held in Paris, the United Kingdom files a memorial in which it objects to the jurisdiction of the Tribunal and the admissibility of the claims. The Tribunal decides to bifurcate the proceedings. Subsequently, Banco de Portugal submits a reply and the United Kingdom a rejoinder.

The Parties’ positions can be summarised as follows:

I. Position of the United Kingdom

1. Jurisdiction ratione personae

(a) At the time that the fraud was allegedly perpetrated, Banco de Portugal did not even exist validly as a joint stock corporation.

(b) In any event, Banco de Portugal is a part of the Portuguese State and therefore not entitled to avail itself of investor-State-arbitration. Banco de Portugal is therefore neither

(i) a “national of another Contracting State” within the meaning of Article 25 of the ICSID Convention, nor

(ii) a “subject” within the meaning of Article 1 of the Treaty of Commerce. Banco de Portugal cannot rely on the divergent definition for “company” in the 1919 UK-China BIT as Banco de Portugal would first have to be a “subject” under the 1842 Treaty before trying to get access to the 1919 UK-China BIT on the basis of the alleged most-favoured nation clause in Article 1 of the 1842 Treaty. You cannot put the cart in front of the horse. Banco de Portugal is and was always a branch of the State. If anything, the reform of 1931 even increased its public element by giving it more independence in the administration of this public function – which a State would only allow if it considered the entity as “part of itself”.

This is not a case suitable for investor-State arbitration, but a case that – if Portugal wishes to pursue it – should be solved under the applicable State-State mechanism, previously provided for in the Agreement between the United Kingdom and Portugal

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providing for the Settlement by Arbitration of Certain Classes of Questions which may arise between the Two Governments of 16 November 1914 and currently under the Optional Clause to the Protocol Establishing the Permanent Court of International Justice.

2. Jurisdiction ratione materiae

The contract with Waterlow and Sons, Ltd. is not an investment as it does not meet the criteria of the Treaty of Commerce and the ICSID Convention for investment, nor is it an investment in the United Kingdom. Of note, Banco de Portugal has no physical presence in the United Kingdom. Moreover, the allegation of Banco de Portugal that the United Kingdom is somehow responsible for commercial entities operating in England (and elsewhere) and their protection of their own intellectual property is ludicrous.

3. No jurisdiction ratione consensus

The Treaty of Commerce cannot be a basis for any investor-State claim before an international tribunal. There simply is no investor-State arbitration clause. Nor can Article 1 of the Treaty of Commerce be relied on to “import” Article 7 of the 1919 UK-China BIT. Most-favoured nation clauses cannot be used for such imports anyway. Second, access to investor-State arbitration is not a “privilege”, “immunity” or “protection” within the meaning of Article 1 of the Treaty of Commerce.

Even if all those obstacles could be overcome, the claim would not be admissible under the Oil Platforms Test:

4. No prima facie case for a denial of justice

The dispute simply arises from a tort by a Portuguese citizen acting on Portuguese soil in connection with a commercial transaction between a foreign State instrumentality (Banco de Portugal) and a private English company (Waterlow and Sons, Ltd.). The fact that English courts were asked to decide a commercial dispute between Banco de Portugal and Waterlow and Sons, Ltd. does not turn this into an investment dispute. It was Banco de Portugal’s choice to litigate in England under English law.

Banco de Portugal has failed to show that the English courts somehow denied it justice.

The case went through three instances in the English courts. As a result, Banco de Portugal was awarded damages in the amount of the printing costs by the House of Lords. The fact that the Law Lords denied a further reaching, extraordinary and also unfounded claim for the face value of the forced bills is nothing but a normal exercise of the judicial prerogative. ICSID tribunals are not courts of fourth instance. Respondent also points the Tribunal to the limitations of international scrutiny of court decisions and that the Treaty of Commerce limits protection to the international minimum standard. Claimant attempts to cobble together treaty protection from now at least three different treaties. This is precisely not what most-favoured nation treaty is supposed to achieve.

As to the other allegations, they are inventions from cloud-coo-coo-land and should not be taken into account under the Oil Platforms Test. Banco de Portugal admits that it has no evidence and wants to go fishing, which we will address below.

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In addition, they are not only ludicrous but disingenuous: how Banco de Portugal may have gotten hold of what they purport to be an earlier draft of Lord Atkin’s opinion, if it indeed is such a draft which nobody knows, is very suspicious. At best, we are talking about illicitly obtained (and hence inadmissible) “evidence”; at worst, this is yet another forged document.

5. Banco de Portugal’s claims fail on the basis of “tu quoque”

As is clear from the facts, the fraud would not have been possible except for the home State’s contributory negligence. It was the lack of diligence in choosing and lack of control of its own officials (notably its Minister to The Hague who was – at least – an unwitting contributor to the fraud), its failure to supervise its banking system properly (especially the creation of new banks and the persons in charge of banks) as well as its substandard system of public notaries that made the fraud possible. This contributory negligence of Portugal has to be held against Banco de Portugal as a Portuguese entity even if it were not (as it truly is) an instrumentality of the Portuguese State.

Tu quoque is a well-established principle and does apply also in the context of an investment treaty – such treaties do not exist in isolation from general international law.

This does not compromise any of Portugal’s rights under international law as no award or decision in this arbitration would be rendered against Portugal. Indeed, the United Kingdom’s rights to a fair trial would be violated if it were not able to raise this objection. Moreover, in investment treaty arbitration, the investor has only a derivative right, i.e. its position is derived from the rights of the home contracting party, which is evidenced by the structure and certain features of investment treaties, which are also present in this case.

6. No showing of damage (1)

Banco de Portugal did not show that it suffered any damage at all – apart from the printing costs which the English courts ordered to be paid to it. In the absence of damage, there is nothing to complain about.

(a) First, this is evident on the basis of the arguments advanced on appeal in the English court cases by Waterlow and Sons, Ltd. and embraced by the House of Lords which Respondent hereby adopts.

(b) Secondly, even if there had been any damage, such damage was compensated by the Portuguese Government’s increase of the bank’s power to issue notes for commercial purposes. Respondent notes that the Treaty of Commerce does not contain a so-called “non objection clause” (as do other investment treaties) that preserves the right of an alleged investor to claim under the treaty if compensation was paid by its home State.

7. No showing of damage (2)

(a) Banco de Portugal only claimed for the face value of the notes, not under other theories. Therefore, ex abundante cautela, if Banco de Portugal were to claim damages in relation to a loss in exchange value etc., (i) this would be impermissible as it did not present such a claim in the English courts on grounds of estoppel (and how could there be any denial of justice if such claim was never raised), and (ii) it would not be able to make a showing to damages either as the real damage (if any) would have occurred to the note holders, not Banco de Portugal. If Banco de Portugal was claiming on their behalf, it would just further support Respondent’s objection that it is acting on behalf of Portugal as nation state.

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(b) Ex abundante cautela, not even the note holders suffered any damages but indeed the expansion of liquidity and the loans handed out by Reis’s bank helped the Portuguese economy more efficiently than could be done for example by a quantitative easing programme of Banco de Portugal as in the case of a quantitative easing programme only the cash accounts of the commercial banks would have benefited but not the business world through an expansion of loans by such commercial banks. Instead of just trickle down effects, Reis’s fraud led to a direct injection of capital into the Portuguese economy.

Claimant’s reliance on the two Latin maxims (the existence and application of which it has not established) is misplaced. Their scope of application is totally different.

II. Position of Banco de Portugal

1. Jurisdiction ratione personae

(a) Banco de Portugal has always been a valid entity. Even if the late registration had any effect under Portuguese corporate law, this is irrelevant for the purposes of the ICSID arbitration as the relevant breach of treaty was perpetrated by the English courts when Banco de Portugal had already been registered.

(b) Banco de Portugal is a proper claimant in this arbitration:

(i) It is a “national of another Contracting State” within the meaning of Article 25 of the ICSID Convention. It always was independent enough not to be equated with Portugal under the principles established in international law but also comparatively looking for example at the case-law of the English and French courts on which this Tribunal should rely for guidance. Moreover, it is even more independent now, which is the decisive moment for the ICSID Convention.

(ii) Banco de Portugal is also a “subject” within the meaning of Article 1 of the Treaty of Commerce. This is reinforced by the fact that also the 1919 UK-China BIT (on which Banco de Portugal relies for the consent to arbitration) provides for the protection also of state entities as investors (assuming arguendo that the Claimant was in that category, which it is not).

To argue that this case is a matter for State-State dispute resolution is ludicrous.

2. Jurisdiction ratione materiae

The contract with Waterlow and Sons, Ltd. is an investment and it does meet the criteria of the Treaty of Commerce and the ICSID Convention (which does not even contain criteria and which have simply been dreamed up by creative lawyers!) for investment in the United Kingdom.

All of Banco de Portugal’s money printing is carried out abroad exposing it to significant risks (not only of the sort that was realised in this case but also others). This is not even by choice but a “forced investment” as the Respondent is allowing money printers operating in its territory to deprive a foreign government of the right to print their own money and subjecting it to risks because of extortionary intellectual property rights.

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3. Jurisdiction ratione consensus

Article 1 of the Treaty of Commerce can be relied on as most-favoured nation clause. The right to investor-State arbitration is a “protection” within the meaning of Article 1 of the Treaty of Commerce. Indeed, it is not only a substantive right but perhaps the most important protection enjoyed by foreign investors. Such MFN clauses mean that Portuguese entities can rely on the consent to arbitrate investor-State claims in Article 7 of the UK-China BIT (1919).

The case is also admissible under the Oil Platforms Test:

4. There is a prima facie case for a denial of justice

First, it is not true – as Respondent suggests – that Article 2 (2) of the 1919 UK-China BIT only refers to the international minimum standard. Its wording militates for a self-standing standard. Moreover, the most-favoured nation clause in Article 3 of 1919 UK-China BIT allows for the (allegedly) higher standard of Article 2 (2) of the 1919 UK-Brazil BIT.

Banco de Portugal was forced to go through three instances of costly litigation in England to lose in what must be a politically motivated decision to protect Waterlow and Sons, Ltd. which is closely connected to the British Government. Indeed, Sir William Waterlow has been Lord Mayor of the City of London!

Moreover, it has come to our attention that Lord Atkin changed his opinion shortly before the delivery of the judgment in the House of Lords (his original opinion is exhibited with this submission as Exhibit C-114).231 Even though we have no further evidence at this stage, we are certain to obtain such evidence in the course of the document production.

5. Banco de Portugal’s claims do not fail on the basis of “tu quoque”

Respondent has not established that “tu quoque” exists (either as customary law or general rule of law), or that it applies in this case. In any event, tu quoque would not be able to override the treaty protections.

Even if it existed, it would not apply as it is an inter-state concept. However, Portugal is not a party to this arbitration. Indeed, it an application of “tu quoque” would violate Portugal’s sovereignty as well as its right to be heard: not being a party and not having submitted to the jurisdiction of this Tribunal, its legal position would be made a subject of these proceedings.

Lastly, even if Portugal’s Minister to The Hague had been (wittingly or unwittingly) a part of the fraud he would have been acting ultra vires in any event. Such conduct would not be attributable to the sending State in any event.

6. Damage (1)

A showing of damages is not necessary. Damage is not a precondition to a denial of justice claim. This is different for other causes of action under investment treaties, for example when assessing the impact of a regulatory measure in order to determine if it is fair or unfair. However, the breach of treaty was not by virtue of regulation but through court action.

231 Exhibit C-114 is available at www.investmentmoot.org.

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(a) The fact that Banco de Portugal’s case for damages is warranted is clear from the arguments accepted by Lords Viscount Sankey L.C. and Lord Macmillan as well as by Lord Atkin in his original opinion. Those arguments are adopted by Claimant for this arbitration.

(b) The actions of the Portuguese Government are irrelevant for the present arbitration. They were not undertaken to relieve the United Kingdom, now Waterlow, nor the fraudsters from liability. Whether or not the 1919 UK-China BIT contains a non-objection clause is irrelevant for a number of reasons. One further being that the legal principle underlying such clauses (which are contained in many investment treaties of the United Kingdom and many treaties throughout the world) is a general principle of law and also of the national laws of many nations.

7. Damages (2)

(a) Banco de Portugal acted under advice from its English counsel for the formulation of his case under English law. While it is true that it only claimed for the face value of the notes, not under other theories, this is irrelevant for the present arbitration. The arbitrator will have to assess the damage as a matter of international law.

The contractual relationship from which the investment arises was between Banco de Portugal (and not the holders of Portuguese notes) and Waterlow and Sons, Ltd. Hence, only Banco de Portugal has ius standi in the English courts and in this arbitration. Even assuming that the damage occurred to the note holders, this would have resulted from an unintended and accidental shifting of the damage which should not benefit the party that caused the damage (Waterlow and Sons, Ltd. under English law and the United Kingdom as responsible party for its courts under international law). Any such shifting would have to be disregarded for the purposes of assessing damages.

(b) The argument that the note-holders allegedly profited from the dilution of the currency fails not only on the merits (as will be shown in the merits/quantum phase of this arbitration) but also on legal grounds because of turpitudinem suam allegans and ex turpi causa non oritur actio. Both are legal principles in international law that apply in the present case. Banco de Portugal did not voluntarily expand the amount of Escudos in circulation which happened as a consequence of a crime.

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lacks any specificity. Respondent’s sweeping request fail to identify any specific document. Respondent is seeking to impose U.S. style discovery that goes beyond the limits of the IBA Rules.

In any event, Respondent’s request includes documents covered by commercial and technical confidentiality and documents which are of particular political and institutional sensitivity and must therefore be rejected.

(2) Any and all communications between Banco de Portugal and the Portuguese Government relating to the approval of and supervision over Banco Angola e Metropole.

The documents and information sought in Request No. 2 are necessary to establish that Banco de Portugal is and always was an instrumentality of Portugal and therefore cannot avail itself of investor-State arbitration for lack of jurisdiction ratione personae.

The documents and information sought in Request No. 2 are also necessary to establish that, in any event, the fraud would not have been possible except for the contributory negligence of

Claimant objects to this request on the basis that it calls for documents which contain privileged legal advice.

The requested documents are also subject to commercial and technical confidentiality of Banco Angola e Metropole and are of particular political and institutional sensitivity.

Claimant’s objections are inadequate and fail to meet the requirements of the IBA Rules.

The communications requested in Request No. 2 are only between Banco de Portugal and the Portuguese Government, not outside counsel. For greater certainty it bears noting that any advice from in-house counsel, should such advice be contained in the documents (which Claimant failed to identify), is not covered by privilege. In any event, documents containing privileged legal advice are only subject to

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Portugal with regard to the approval and supervision of Banco de Portugal.

redaction and may not be withheld altogether.

As regards Claimants assertion of “commercial and technical confidentiality of Banco Angola e Metropole”, it bears noting that Banco Angola e Metropole is not only a third party, but the criminal organization whose fraud is at the heart of this dispute. Their “secrets” are certainly not subject to protection under the IBA Rules.

Finally, as is the case with Claimant’s objection to Request No. 1, Claimant failed to provide any indication why the requested documents come within the confines of political and institutional sensitivity.

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which Claimant itself is invoking in this arbitration).

(2) Any and all communications from 26 March 1931 through 28 April 1932 between:

(i) Lord Atkin and the Respondent;

(ii) Lord Atkin and Sir John Simon, Norman Birkett, James Wylie, H. Bensley Wells, Theodore Turner, Gavin Simons and

(iii) Lord Atkin and Waterlow and Sons, Ltd.

Respondent has demonstrated that shortly before the delivery of the judgment in the House of Lords, Lord Atkin drastically changed his opinion, depriving Claimant of fair compensation for the damage done to its investment. The documents and information sought in Request 2 are relevant and material to establish that this change is a result of nepotism, bribery, fraud or corruption thus depriving Claimant of its right to a fair trial and constituting a denial of justice.

Respondent refers to its objections to Claimant’s Request No. 1.

In addition, Respondent objects because the requested documents are not in the possession, custody and control of the Respondent. Respondent is under no obligation to obtain documents from third parties for the Claimant.

Claimant refers to its response to Claimant’s Request No. 1.

As regards Respondent’s objection with regard to possession, custody and control, it bears recalling that what is decisive is the definition of State under public international law.

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Procedural Order

Whereas the Parties have submitted their arguments on jurisdiction and admissibility, the Tribunal decides to hold a hearing on jurisdiction and admissibility from

10 to 13 March [2015].

The Tribunal asks the Parties to submit skeleton arguments by 15 February [2015].

The Tribunal further requests the parties to reserve 14 March [2015] for an evidentiary hearing, should the need arise.232

The Tribunal intends to focus the oral hearing on the nine issues, set out in A. I. 1.-7. (pp. 26-29), A. II. 1.-7. (pp. 29-31) and B. 8. and 9. (pp. 32-36). It expects the Parties to address these in their skeleton arguments in preparation for the hearing.

Given the enormous amounts of documents which were attached to the Parties’ memorials, the Tribunal also asks the Parties to compile a core bundle of relevant documents. The Tribunal insists that all documents (other than legal authorities) which the Parties intend to refer to during the hearing must be included in the core bundle.233

Signed:

Vi Kyuin Wellington Koo, on behalf of the members of the Tribunal

232 A cross-examination course will be held for the semi-finalist teams and the best regional teams on 14 March 2015. 233 The core-bundle consists of the documents available at www.investmentmoot.org. The participants of the Moot should not produce core-bundles for the Moot hearings and should not attempt to hand out bundles either to the other side or the arbitrators.