Greensill misled German regulator on insurance deal, IAG claims

A large insurer of Greensill Capital has alleged the failed lender deceived German regulators in an attempt to reduce the capital requirements of its Bremen-based unit.

Insurance Australia Group, which is being sued by Greensill investors nursing billions of dollars of losses, has accused the defunct supply-chain finance group of concealing the fact it had agreed to fund its own insurance claims when it presented a credit insurance guarantee to the regulator.

The move was “intended to deceive the regulator and was fraudulent”, IAG said in a court filing last week.

Greensill insurers are fighting claims for credit insurance payouts covering loans extended by the failed lender and then packaged up for investors.

The administrator for Greensill Bank, the group’s German banking unit, which held some of the insured notes, is among entities suing insurers as part of key proceedings in Australia. Sydney-based IAG, which denies liability, argues that insurance offered on its behalf was invalid.

In the filing, IAG said that Lex Greensill, the Australian financier who ran the group, approached its key underwriter, Greg Brereton, in 2018 to propose an arrangement that would allow its German banking entity to use credit insurance as a risk mitigant under local regulations.

Brereton was an executive at underwriting agency Bond & Credit Co, which was then 50 per cent owned by IAG and issued insurance policies on its behalf.

If Greensill Bank needed to claim on its credit insurance, Greensill Capital would allegedly advance funds to BCC which would then pay that amount to Greensill Bank within five days. This was then formalised through an extension to the policy that IAG says was “silent as to the proposed funding arrangement” and, it adds, was agreed without seeking its consent.

In late April 2019, just days after Japanese insurance group Tokio Marine announced it had acquired BCC, Lex Greensill requested that Brereton confirm the arrangement in a letter to be shared with BaFin, the German financial watchdog, according to the filing. Brereton provided it, according to IAG.

People with knowledge of the matter confirmed such a letter was shared with the regulator but said that no agreement between BCC and Greensill Capital was disclosed.

IAG argues Greensill’s conduct was “likely to mislead Greensill Bank’s regulator that [IAG] had agreed to pay claims within 5 days when it had not and involved the deliberate hiding from BaFin that GCUK was in fact funding any claims payment”. 

“The proper inference in the circumstances is that the conduct was intended to deceive the regulator and was fraudulent,” it wrote.

BaFin’s decision to approve credit insurance as a risk mitigant allowed Greensill Bank to class its loan book as safer. In 2019, two years before Greensill’s collapse, German rating agency Scope gave the group’s German bank unit an investment-grade rating, citing a “large credit insurance contract” authorised by BaFin as a reason for its improved capital ratio.

BaFin revoked the capital relief in 2021 in the wake of an audit into Greensill Bank, according to people familiar with the details.

Joachim Kühne, a lawyer working for Greensill Bank’s German administrator, told the Financial Times that the administrator was assessing IAG’s allegations. 

BaFin, Tokio Marine, IAG and a spokesperson for Lex Greensill declined to comment. Legal representatives for Brereton did not immediately respond to an FT request for comment. Brereton has also denied liability in the Australian proceedings and said he was misled by both Greensill and IAG.

Bremen prosecutors, who are running the German criminal investigation into Greensill Bank’s 2021 demise, told the FT that they have been scrutinising the group’s insurance arrangements. They said they previously did not know about details outlined in IAG’s filing. 

Greensill Bank had €3.5bn of deposits when it collapsed, with savers lured in by its relatively high interest rates. While most of these depositors were covered by an insurance scheme, €500mn held by municipalities was not covered. These cities and small towns are still yet to reclaim their funds two and a half years later.

Some have opted to sell on their claims for a fraction of their face value, with the municipality of Botzingen disclosing earlier this year that it had sold its own for 25 cents on the euro.