Welcome to this issue of the KPMG in Central & Eastern Europe (CEE) Fraud and Corruption Newsletter. The Newsletter is an electronic bulletin providing its readers with an overview of mass media articles relating to the fight against bribery, corruption, and fraud in CEE.
At the National Judicial Conference in Tirana held in December 2015, representatives of the European Union and the United States urged Albania’s judges to support a large-scale reform of the judiciary, i.e. they encouraged judges suspected of engaging in corrupt activities such as bribe taking to step down voluntarily.
The reform, which is a precondition for the launch of Albania’s accession talks with the EU, is to introduce, among other things, background checks on judges comprising assessment of sources of their wealth, possible ties to organised crime and evaluation of their professional performance. Negative results of such background checks should lead to the judges’ dismissal. The background checks should be performed by an independent commission, whose work will be monitored by the International Monitoring Mission (a cooperative effort between the European Commission, US and other international organisations). The reform, however, has its opponents, who fear that dismissal of a large number of judges in a country that currently has the lowest number of judges per capita in Europe would only aggravate current chronic delays in the workings of the judiciary.
Belarus participated in the 23rd Plenary Session of the Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG), at which it was preliminarily agreed that relevant Belarusian public institutions will be subject to anti-money laundering (AML) risk assessment in 2016, performed by the World Bank and the International Monetary Fund. According to this agreement, Belarus is also expected to implement AML legislation, the progress of which is to be reported at the next EAG plenary meeting.
At the same time, the National Bank of Belarus, together with the Department of Financial Monitoring of State Control Committee, is launching a risk-based programme to combat money laundering. The programme assigns different levels of estimated risk (low, moderate and high) to potential clients based on their profile, country of origin and banking products. In addition, Belarusian banks have had a right to terminate relationships with suspicious clients and suspend banking transactions with them since 2014.
Belarusian investigators have uncovered a fraudulent scheme, in which almost EUR 650,000 were stolen from persons interested in buying Namibian diamonds from 2011 to 2014.
Police suspect a group of Belarusians of orchestrating the scheme. Allegedly, they claimed to have close business relationships with people engaged in diamond mining and trade in Africa, from whom they could buy diamonds at a price which would allow selling them at a profit. For those customers who doubted the existence of such business links, they organised trips to Namibia and Uganda, where they showed them the alleged diamonds. Once they had received the payment, they accused the buyers of “violating the agreement” and kept the money.
According to a recent Eurobarometer survey, more than half of Bulgarian companies think corruption is a problem they have to deal with when doing business. The survey called “Businesses’ Attitudes towards Corruption in the EU” has been carried out in all European Union member states. Bulgaria’s figure of 61% was only outranked by Romania and Greece, where 74% of the surveyed companies said that they found corruption to be a problem for their business. Bulgaria’s result represents a 7% increase in comparison with the previous survey conducted in February and March of 2013.
The Bulgarian respondents to the survey also expressed a strong link between corruption and politics: 60% of the respondents stated that corruption prevented them from winning a public procurement contract.
The Supreme Court of Cassation of Bulgaria has sentenced a former director of the district heating company in Sofia to 3 years' imprisonment. The court confirmed a previous ruling of a lower instance court that had found the ex-director guilty of asset misappropriation. Some of the company’s funds were spent on expensive alcohol and items such as a whirlpool bathtub – all this at a time when the company was facing debts worth hundreds of millions of euros.
The convicted individual was the executive director of the heating company between 2002 and 2006, when he was dismissed after an audit initiated by the then Sofia mayor. He is also facing charges on three other counts, including embezzlement and money laundering.
A group of 22 customs officials at the main checkpoint on the border with Turkey has been accused of receiving bribes and with abuse of power. While arresting the customs officials, police found more than EUR 76,000 — allegedly solicited and taken as bribes — in the cars and homes of the suspects. The suspects accepted the bribes in exchange for not performing thorough searches of selected cars, trucks and buses, at amounts varying between EUR 5 and EUR 300.
Fourteen customs officers have been arrested so far, and eight have been released on bail. The group had been operating since March of last year and has been under police surveillance since August.
An ex-mayor of a Bulgarian city has been accused of causing a loss to the municipal budget amounting to more than EUR 64,000. Between November 2010 and August 2011, he signed public contracts for supply of goods and services, for which there was no competitive tendering process. The contracted prices exceeded both prices for similar services and goods delivered in previous years and comparable market prices. The overpriced contracts were awarded at a time when the city faced debt of more than EUR 1.5 million. If convicted, the ex-mayor may face up to 5 years’ imprisonment.
A recently published “Corruption Perception Index” by Transparency International has shown a major improvement for the Czech Republic in perceived corruption levels: the country rose from 53rd place to 37th, which puts it on a par with South Korea and Malta. Still, the Czech Republic’s result was outranked by other CEE countries, namely Estonia, Poland, Lithuania and Slovenia.
Journalists have shed light on a corruption case involving managers of the Czech prison service, specifically its head of finance. It seems that corrupt activities within the prison service had been more extensive than it was previously thought. The official was charged last summer on the basis of wiretaps of his meetings with the prison service’s general manager. He advised the manager how to manipulate the procurement process, giving examples of how this had been done in the past. For instance, he mentioned a contract for light fixture repairs, where the works performed were worth CZK 4,000 (about EUR 150), but the amount invoiced to the prison service was 10 times higher, i.e. EUR 1,500. To cover-up the fraudulent activities, he also suggested organising three proper, transparent procurement processes for each that was manipulated. The general managers decided to report the meetings to police, an action which led to the head of finance’s detention.
Police are prosecuting a gang of four individuals (one of whom is a lawyer), who caused the loss of CZK 280 million (EUR 10.3 million) to the state budget. It is alleged that the suspects reported fictitious sales of tools and engineering services to the US, for which they reclaimed VAT, setting up several shell companies just for this purpose. Once the VAT was returned, they withdrew it in cash from the companies’ bank accounts. If convicted, the four suspects face up to 10 years’ imprisonment.
A controversial Czech businessman, now a fugitive in South Africa, and two of his accomplices have been convicted of misappropriation of a state-owned petroleum company’s assets. The sales director of the petroleum company acted as one of the businessman’s accomplices: together, they produced fictitious claims worth CZK 3 billion (EUR 110 million), settlement of which they demanded in court. The court then ruled in their favour.
The sentence given to the businessman, which is not yet valid, also includes punishment for earlier crimes he committed and was convicted of, such as a tax evasion offence worth CZK 500 million (equivalent to more than EUR 18.5 million). Earlier this year, the businessman was taken into custody in South Africa, where he is being tried, inter alia, for attempted murder, kidnapping and drug possession.
A trial has commenced with the former director of a Prague hospital charged with corruption. Prosecutors allege that six other individuals acted as the director’s accomplices in manipulating public tendering processes and receiving bribes at the hospital.
Two cases, where vastly overpriced public contracts were awarded to pre-selected suppliers, stand out: a project to digitalise patients’ records and the procurement of a Gamma Knife for advanced radiation treatment. The loss caused to the hospital in the first case amounts to almost EUR 2.1 million, out of which EUR 2 million was an undue personal gain of the suspects. In the second, 2009 case, the hospital director is alleged to have taken a bribe worth more than EUR 200,000.
Besides the corruption charges, the former director has also been accused by the media, who base these accusations on his personal journal, of drug and alcohol abuse. Some reports suggest that he even performed surgery while being under the influence of illegal substances.
In December of last year, a member of the European Parliament and the Czech Communist Party was placed under arrest trying to take out funds worth EUR 350 million from a Swiss bank on behalf of a Czech individual. Three other individuals who accompanied him were also detained by Swiss police. The MEP, who was released from detention the next day, claimed that the money had been an inheritance and the individual’s claim to it legitimate. However, according to media reports, the individual had been convicted of fraud on several occasions. It is assumed by many that the politician, perhaps unintentionally, got involved in a financial fraud attempt.
As a result of the latest development of the corruption saga of a major, partly state-owned Nordic telecommunications corporation, one of the managers of the Hungarian subsidiary of the company has been suspended amid allegations of bribery. The executive in question was formerly involved in a Russian telecoms group, in which the Nordic corporation has a large stake. The Russian entity is alleged to have acquired licenses in a Central Asian jurisdiction by bribing local officials.
The Agricultural and Rural Development Agency of Hungary has announced that it would get rid of 40-45% of its managers in order to, inter alia, forego future occurrence of corruption. "A great deal of people work with a great deal of money within the organisation, and we know that wherever a lot of people and a lot of money meet, corruption rears its head," said the spokesperson of the agency. The organisation has also introduced additional controls that have already helped to uncover instances of fraud related to certain tenders organised by the agency.
A county police officer is about to face trial over allegations of corruption. He allegedly took bribes in exchange for leaking information acquired from the police's internal registries to lawyers and their clients. The police officer is further believed to have provided surveillance and screening services to his clients while, again, exploiting information from the police records which he had access to. He also allegedly acted as a paid advisor to those of his acquaintances who happened to be under police investigation.
Investigation by the Corruption Prevention and Combating Bureau of Latvia into allegations of potential conflict of interests involving the Latvian health minister has resulted in the Latvian parliament allowing his prosecution, i.e. voting for lifting the minister’s parliamentary immunity. According to the Bureau, the minister was in a conflict of interest when he appointed his son, who is an owner of a chain of pharmacies, to the supervisory board of an advisory group for the pharmaceutical industry, a government agency subordinated to the Ministry of Health.
According to Latvian prosecutors, several members of the city council of Riga received more than EUR 5 million in exchange for rigging public tenders. The allegedly manipulated tenders, which took place between 2002 and 2006, related to the procurement of 117 buses from a German bus manufacturer, a subsidiary of the Daimler concern. According to prosecutors, the buses were sold to the municipal public transportation company in Riga for highly inflated prices. The city council members are also suspected of laundering the money they received as bribes. It is further alleged that they used intermediaries to hide the fact that it was they who actually received the money. Now, the court is looking into the evidence submitted by prosecutors before it makes any further moves.
Nearing the end of 2015, two of the city of Riga’s municipal companies, namely the public transport provider and the city’s property management company, transferred EUR 1.49 million and EUR 0.53 million, respectively, to a coordination centre for both companies’ trade unions. Usually, the funds transferred to the centre are further allocated to the trade union organisations of both of the municipal companies.
There are allegations that some of the funds might have been misappropriated. Further, the trade unions’ funds were used to finance rallies and demonstrations in which both companies’ employees took part to support the current mayor of Riga,. The mayor is at the same time an owner of shares in both municipal companies. Representatives of the companies denied the allegations, pointing out that an audit performed by the State Audit Office did not identify any irregularities.
Latvia's Corruption Prevention Bureau has launched an investigation, following the Latvian finance minister’s request, in relation to a promissory note issued and signed by the mayor of Lielvarde, a Latvian city of less than 7,000 inhabitants. The promissory note for EUR 200 million was signed with a Hong-Kong based company. The mayor signed the promissory note without consulting or obtaining the consent of any other representative of the city, thus breaking the law in numerous ways.
Once he had submitted the promissory note for the State Treasury’s approval, suspicions that the loan was potentially fraudulent arose immediately, and an investigation by the Ministry of Finance was launched. In reaction to the case, the city council of Lielvarde banned the mayor from signing any documents on the city’s behalf and appointed a new acting mayor.
KNF, the Polish financial supervision authority, has recently filed for two bankruptcies of financial institutions. The first bankruptcy motion was filed in November and concerned a cooperative bank, while the second, involving a credit union, was filed in January of this year. The cooperative bank’s bankruptcy was the first case of a bank whose operation had to be terminated in the last 15 years.
It is alleged that the collapse of the bank was caused by the dubious decisions and activities of its managers, who created a model ensuring uncontrolled growth. The model, however, was supposedly based on distorted financial mechanisms and potential manipulation of financial statements. It is also alleged that the bank did not review loan collaterals adequately, and granted loans worth EUR 35 million to newly established companies with very limited capital and even to parties related to the bank’s employees. Eventually, the bank’s assets became insufficient to cover its liabilities due to the scale of necessary write-offs of high risk credits (which comprised 50% of its credit portfolio).
In the latter case of a credit union collapse, it is also alleged that there were irregularities in management, including misrepresentation of the credit’s union financial value. KNF regulators suspect that some of the credit union’s assets were vastly overvalued and that this overstatement was potentially intentional. The balance of deposits of both financial institutions, which amounts to hundreds of millions of euros, will have to be repaid by other Polish banks according to the Bank Guarantee Fund Act. The criminal investigation into both bankruptcies is ongoing.
Wroclaw prosecutors have charged 26 managers of large international retail chains with corruption. The retail stores entangled in the scandal include Kaufland Poland, Carrefour Poland Real and Makro C & C Poland. The accused are alleged to have accepted bribes in exchange for favourable treatment of certain suppliers. Such treatment included promotion of the suppliers’ products in stores or displaying them on attractive places on the shelves. According to the prosecutors, the bribes came from 49 beverage manufacturers and one confectionery producer. One retail store executive, arrested in 2010, is alleged to have accepted bribes worth almost EUR 1 million.
A city mayor has been indicted for bribery after having allegedly been caught red-handed receiving a bribe in the amount of RON 5,000 (about EUR 1,100) from the representative of a company. The bribe represented 10% of the total value of a service contract between the city hall and the company to install festive lighting for the winter holidays, which the mayor promised to help the company obtain in return for the money.
A member of the Romanian parliament and a former deputy managing director of a major Romanian bank have been indicted by National Anti-corruption Directorate (DNA) prosecutors in a case related to dubious extension of a credit worth EUR 3.3 million. The bank deputy has been charged with abuse of office, with the MP allegedly acting as his accomplice.
According to prosecutors, the deputy director granted the MP a number of concessions in relation to the repayment of the EUR 3.3 million loan, which resulted in damages to the bank. These concessions included uncollected interests or not foreclosing on the loan collateral. Prosecutors also allege that the extension of the loan was not preceded by standard negotiations about the financing conditions – the loan was granted under a so-called “private banking” system. The loss to the bank is estimated at EUR 2.5 million.
A vice-chair of the Social Democratic Party of Romania and three other individuals have been detained by prosecutors on suspicion of tax evasion and money laundering. The total loss to the state budget caused by the illegal activities of the suspects is estimated at EUR 10 million.
Investigators allege that between 2007 and 2014, representatives of several construction companies made fictitious purchases from shell companies, through which they evaded tax worth over EUR 3 million. The detained politician acted as one of the construction companies’ administrators in the period between 2008 and 2014. The same structure of shell companies was used to launder proceeds from criminal activities amounting to EUR 7.5 million.
A massive money-laundering scheme using money-transfer orders issued by Russian courts has been reported by representatives of various banks to the Central Bank of Russia. In the scheme, shell companies were first established. Then, these companies opened bank accounts to which payments for fictitious “consulting services” were made. Finally, the banks received court orders to pay large amounts of money from these accounts to individuals involved in the scheme. It is yet to be established on which basis the court orders, which appear to be genuine, were issued.
As the directors of the shell companies did not dispute the court orders’ legitimacy and did not reply to the banks’ inquiries, the banks had to follow the law and hand the money over to the individuals, thus making the money “clean”. It is estimated that hundreds of millions of rubles might have been laundered under the scheme.
Farmers’ organisations from northern Serbia are campaigning for the withdrawal of draft legislation on agricultural land from parliamentary hearing, claiming it would give the authorities unchecked powers to lease unused state-owned farmland to favoured investors. Representatives of the Social Democrat party from the region joined the protests, with the party’s president having said that in case the law was passed, a significant area of the region’s farmland would go to “unknown people” under no “visible criteria”.
The draft law states that 30% of state-owned land in each municipality should be leased for a period of 30 years on the basis of an investment plan evaluated by a committee set up by the agriculture minister. The protestors also consider the draft legislation unfair to small farmers, as they are not even allowed to participate in auctions for the agricultural land. And even if some of the unused land was leased to small farmers, they would still be concerned about the quality of such land as most of it is not productive enough to be profitable. The agriculture minister responded by saying the ministry is ready to negotiate with small farmers to address their concerns.
A company advising the Serbian government over the privatisation of Telekom Srbija, a state-owned telecommunication provider, has denied conflict-of-interest accusations. It was alleged that the advisory firm had signed a strategic partnership with a US investment fund, a potential buyer of Telekom Srbija. The senior vice-president of the advisory firm added that they indeed had been considering the idea of forming a strategic partnership with the US fund in 2008, but it had never been implemented. According to a Serbian news portal that focuses on corruption, not only was the deal signed in 2008, but the advisory firm and the US fund allegedly had already cooperated on three occasions in 2015.
The proposed sale of Telekom Srbija has attracted major public attention as it is the most profitable state-owned company, generating profit of around EUR 140 million per year.
Eighty individuals have been arrested in a Serbian anti-corruption police operation. A former minister, two deputy ministers, heads of state-owned companies and businessmen are all among the suspects. The damage these individuals caused is believed to exceed EUR 100 million. According to the Serbian interior minister, the arrests are a result of an investigation launched in 2004. The charges on which the officials have been arrested include abuses of office, money laundering and other financial crimes.
The fraudulent activities concerned, inter alia, illegal transactions with agricultural land. It is suspected that from December 2004 to June 2008, the group illegally exchanged agricultural land owned by a marketing company for state-owned land in the construction zone of the city of Novi Sad. This resulted in a gain of over EUR 8 million for the private company, as the state-owned land was worth many times more than the agricultural land the state had received in exchange.
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