The Portuguese Bank Note Scandal of 1925

Throughout the annals of history there have been individuals who have sought to deceive others by producing counterfeit versions of precious goods, and one of the most damaging of these items is counterfeit money. Counterfeit currency erodes the very foundations of trust and stability that underpin a healthy economy, causing people to question the authenticity of the currency they hold, while also causing inflation and loss of purchasing power, as well as loss of credibility of a country's financial institution in the global economy.

One of the most notable counterfeiters of the 20th century was the Portuguese criminal Alves dos Reis, who nearly wrecked the Portuguese economy by exploiting loopholes and poor practices in his country’s financial system. Unlike other criminals, Alves dos Reis’ genius was that he did not counterfeit Portuguese currency himself. Instead, his network managed to deceive a British banknote-producing company, leading them to believe that they were working on behalf of the Portuguese government, thereby tricking them into printing money for them.

. One of the banknotes fraudulently issued by Alves dos Reis.

Reis cooked up his brilliant scheme while he was in prison serving time for embezzlement. At that time Germany was undergoing one of the worst inflation in history, and the deluge of government authorized notes led Reis to examine the workings of Portugal’s note issuing institution, the Bank of Portugal. Reis learned that since 1891, Portugal had been off the gold standard, allowing the bank to issue notes that far exceeded its share capital. Reis also learned that the Bank of Portugal sometimes printed notes in secret, neither recording such transactions in the books, nor informing the government of the increase in the number of circulating notes. Furthermore, Reis discovered that the Bank had no mechanism in place to prevent the issue of duplicate bank note numbers. Reis calculated that he could inject 300 million escudos (equivalent to one million British pounds in 1925 exchange rate) into the Portuguese economy without disrupting the central banking mechanism of the state.

After Reis was released from prison in August 1924, he swiftly moved to put the plan into action. At first, he took into confidence another petty crook, José Bandeira, whose elder brother happened to be the Portuguese Minister to the Hague. Through José's introduction, Reis was brought into contact with two more collaborators: Karel Marang, a Dutch trader, and Adolph Hennies, a German trader. Both Marang and Hennies had checkered pasts and had no objections to engaging in a shady enterprise, such as the one that Reis was poised to set in motion.

Alves dos Reis

Reis sent Karel Marang to London to meet Sir William Waterlow, the managing director of the Waterlow and Sons Limited, the British printer which printed Portuguese currency for the Bank of Portugal. Marang presented himself as the authorized agent of the Bank of Portugal with a mandate to negotiate a massive financing operation in the economically ailing Portuguese African colony Angola. He explained that for political reasons the contract required utmost discretion and he was to be the only intermediary between the printer and the Bank. Sir Waterlow, not unnaturally, insisted that he have a letter of authorization from the Governor of the Bank of Portugal. However, he made the mistake of not contacting the bank directly, but rather asked the conspirators to furnish documentation. Marang gleefully obliged and produced documents forged by Reis.

Though Marang stressed the secrecy of the whole deal, Sir Waterlow informed his representative in Lisbon, Henry Romer. When Romer got wind of the extraordinary deal, he sent repeated warnings to Sir Waterlow as to the irregularity of the affair, stressing that only the Banco Nacional de Ultramar had the right to issue notes in Angola. But Sir Waterlow turned a deaf ear to all alarm.

In early 1925, Waterlow and Sons Limited printed 200,000 banknotes of 500 Portuguese escudos with an image of Vasco da Gama, to a total face value of 100 million escudos, and delivered them to Reis. The next step was to introduce these notes into the market. Reis hired people to open bank deposits in country and suburban branches of major banks with the Vasco da Gama notes and subsequently make withdrawals in genuine notes from the head office of these banks.

With the laundered money, Reis and his crooks began investing heavily in real estate and businesses, creating a temporary boom in the Portuguese economy. Reis bought the Palace of the Golden Boy (Palácio do Menino de Ouro, nowadays the building of the British Council in Lisbon), three farms, a taxi fleet, and spent an enormous quantity of money on jewellery and expensive clothing for his wife. José Bandeira bought retail shops and invested in all manner of enterprise; he also sought, unsuccessfully, to purchase the newspaper Diário de Notícias. Reis also opened a new bank, named the Bank of Angola and Metropole, to aid in circulation of their bills and to invest in projects in both Portugal and Angola.

The final phase of Reis' scheme was to gain control of the Bank of Portugal, which would allow him sweep the entire affair under the rug. To ensure that, he began buying Bank of Portugal shares with the intention of acquiring a majority. By the end of 1925, Reis had acquired 10,000 of the 45,000 shares needed for controlling interest in the bank.

The unique success of his Reis’s new bank and his own rise to affluence attracted the attention of a Portuguese newspaper O Sêculo who raised questions about how this particular new bank was flourishing, and how it was possible that the bank gave loans with low interest rates without the need of receiving deposits. The paper raised questions as to the history and financial probity of the hitherto unknown directors and especially Alves Reis. It also implied that Germany, through the agency of Adolf Hennies, was attempting to infiltrate and take over Angola in compensation for the colonies it had lost in the recent World War.

On 4 December 1925, a teller for a money-changer in Porto, who himself had been involved in money laundering the Vasco da Gama bank notes for Reis, became suspicious and took one of the notes to the local manager of the Bank of Portugal under the suspicion that the notes could be counterfeit. Officials at the bank examined the notes but could find no difference from the real thing. After an exhaustive and frustrating investigation, they finally noticed that the banknotes had duplicate serial numbers, and Reis’s scheme fell apart.

Crowds rush to the Bank of Portugal building in Lisbon, to exchange the fraudulent banknotes. 8 December 1925. Photo credit: Wikimedia Commons

Alves Reis was arrested, convicted and sentenced to 20 years in prison. He got out after serving fifteen years, and died of a heart attack in 1955, ten years later.

Bandeira received a sentence of 15 years, served it, and upon release, briefly went into the nightclub business. He died in 1960 in Lisbon, a well-liked man of modest means.

Marang was tried in the Netherlands and sentenced to 11 months. But as he had already served that time in prison waiting for trial, he was immediately released. He later purchased a small electrical manufacturer in France, eventually becoming a respected manufacturer, family man, and French citizen.

Hennies fled to Germany where he lost much of his wealth to bad investments. He died in poverty in 1936.

The Bank of Portugal sued Waterlow & Sons' business for negligence and won. The House of Lords ordered Waterlow to pay the bank £610,392 in damages and an additional £95,000 to cover the cost of the hearing. The firm never recovered from the financial setback, and was eventually acquired in 1961 by another British bank note printer.

Reis's fraud had enormous repercussions on the economy and politics of Portugal. It caused the value of the Portuguese escudo to fall and the general public to lose what little trust they had in the financial institutions of their country. Some would even say that this crisis had a strong effect on the nationalist military coup d'état against the Portuguese First Republic government in 1926 that brought the Ditadura Nacional (National Dictatorship) to power.

Although the Bank of Portugal withdrew all 500 escudo banknotes from circulation, many notes are still held in private hands. They fetch some serious money in auctions, with one sold in 2016 for over $7,500.

References:
# Andrew Bull, “Alves Reis and the Portuguese Bank Note Scandal of 1925”, British Historical Society of Portugal