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.
Organised, large-scale embezzlement has been revealed to have been taking place at a leading Belarusian mining dump trucks manufacturer. It is alleged that both former and current employees of the company, including inventory clerks, formed an organised group who misappropriated spare parts for the trucks. The roles of the alleged perpetrators in the group were clearly separated: some of them were responsible for preparation of the spare parts, while others for their loading on vehicles, transportation, securing access to the premises where the parts were stored, etc. Allegedly, the organised group had nine members and operated on weekend nights. The stolen items were brought to temporary storage facilities in a nearby village and then sold in Russia as genuine, which was achieved through forged documentation.
The company’s latest recorded inventory shrinkage amounted to EUR 64,000. However, representatives of the Ministry of Interior estimate that turnover of the sales of stolen spare parts totalled more than EUR 900,000 annually.
The Head of Customs at the main checkpoint on the Bulgarian border with Turkey and four other customs officers have been arrested for bribery and smuggling of refugees. A border policeman working at the same crossing has also been accused of receiving bribes. The illegal dealings were exposed when one of the customs officials was caught receiving a EUR 5,000 bribe in exchange for helping “smuggle” 30 refugees. When searched by police, an additional sum of USD 4,500 (EUR 4,100) was also found with him.
Allegedly, the customs officers and policemen at the border crossing were paid money by certain traffickers for letting refugees into the country and for arresting the traffickers’ “competitors”.
Nine tax officials from Bulgaria’s National Revenue Agency have been arrested for allegedly blackmailing companies and businessmen: threats were made that information about tax irregularities at such companies would be revealed, unless they were willing to pay large amounts of money to the officials. Allegedly, the officials facing the extortion accusations demanded as much as 10% of the companies’ turnover. The head of the Collection Department of the National Revenue Agency in Veliko Tarnovo, a north Bulgarian city, was among those arrested. Police reportedly escorted him out of the agency’s building in handcuffs.
The European Anti-Fraud Office (OLAF) has confirmed that an investigation has been launched into fraud allegations involving one of the companies of a huge conglomerate (called “Agrofert”) owned by the current Czech finance minister and billionaire Andrej Babiš. There are allegations that the company received a EUR 1.8 million grant for the construction of a luxurious resort (including a farm), which it was not, as a member of the conglomerate, entitled to.
Allegedly, the company’s ownership structure and legal form were intentionally changed just for the purpose of receiving the grant, as the grant programme was intended for small and medium-sized enterprises. To become eligible, the company changed its form from an Agrofert subsidiary to a joint-stock company with bearer shares, and it also changed its name.
The finance minister had previously denied the allegations, and had stated that the grant was awarded in accordance with all the relevant rules.
The head of the Energy Regulatory Office (ERU) of the Czech Republic has been convicted of fraud and given an eight-and-a-half year prison sentence. The court decision is not final and can be appealed.
The conviction relates to licenses granted to two power plants, which were found not to be in a state which would allow for their operation. Also, the licenses were granted just a few hours before new legislation came into force which significantly reduced government subsidies for solar energy. The licenses were granted for a period of 20 years, and the estimated loss to the state budget amounts to more than EUR 74 million.
The granting of the licenses was not approved by the ERU head, as she only joined ERU 6 months after the licenses had already been granted. The judge however justified the decision by finding that she had allowed both power plants’ operations to continue despite being aware of the whole issue surrounding the granting of the licenses.
According to a survey of corruption levels in Latvia, which has been conducted every year since 1999, the country has reached its best result so far. Only 7.1 % of the respondents to the survey stated that they had made a bribe worth more than EUR 7, as compared to 8.9% (2014) and 11.5% (2012).
On the other hand, the proportion of respondents who stated that they would give a bribe to ensure a favourable court ruling has increased, from 10.9% in 2014 to 11.9% in 2015.
The survey reveals that respondents would give a bribe to a public official under the following circumstances:
The survey conducted by a private research company queried 1,009 Latvian citizens aged between 15 and 74.
The former vice president of Latvia's state-owned energy provider Latvenergo, Aigars Meļko, has been sentenced by a court to pay a fine of EUR 48,100 related to charges of bribery by a multinational provider of energy solutions, Alstom Power. It is reported that during the period 2007 to 2010, bribes amounting to more than EUR 627,000 were paid to representatives of the state-owned company to ensure favourable outcomes in procurement with Latvenergo worth multiple millions of euro.
The court did not impose a jail sentence on the former VP as, according to the presiding judge, he was not a public official under the prevailing anti-corruption legislation at the time that the corrupt activities took place. This ruling has stirred speculation as to the integrity of the judge who, according to commentators, applied the law literally and ignored the spirit of the law.
The process is still ongoing, and the Corruption Prevention and Combating Bureau has asked for the prosecution of 17 persons involved in the bribery, including the former CEO of the Latvian energy company.
Polish anti-corruption police have arrested four members of a suspected organised criminal group that is alleged to have caused an almost EUR 7 million loss to the state budget resulting from VAT evasion.
The group was engaged in cross-border fictitious transactions of steel among companies from other EU member states, especially from the Czech Republic. Based on these transactions, the alleged fraudsters reclaimed the VAT from the Polish government. To hide the illegal source of the money, the suspects allegedly tried to launder the reclaimed VAT.
Poland’s Central Anti-Corruption Bureau has alleged collusion between a contractor, the Institute of Meteorology and Water Management, and one of the bidders for a public contract worth PLN 20 million (EUR 4.6 million). The contract was for the supply of meteorological measurement devices to seven Polish airports. Available documentation and other evidence indicate that the institute's representatives designed the procurement process in a way that favoured one particular vendor.
Prosecutors have already charged two representatives of the Institute of Meteorology and Water Management with procurement fraud, including the chairman of the Institute’s scientific council.
It is alleged that the deputy of the Romanian social democratic party accepted a bribe worth EUR 300,000, by promising a businessman to help expedite restitution procedures over certain land. He is also suspected by the National Anticorruption Directorate (DNA) of trying to influence two witnesses at the case. He allegedly promised them that, provided they would not talk to prosecutors, they would receive a commercial space in a shopping centre in Bucharest.
The deputy has also been accused of money laundering: he is alleged to have concluded four false loan agreements in order to hide the illegal source of the money received in bribes.
An Amsterdam-based global telecommunications provider, VimpelCom, and its Uzbek subsidiary reached an agreement with the U.S. Department of Justice (DOJ), the U.S. Securities and Exchange Commission (SEC) and Dutch Public Prosecution Service to pay penalties totalling EUR 660 million. The penalties were imposed for having given out almost EUR 104 million in bribes to government officials in Uzbekistan between 2006 and 2012. According to DOJ, the Russian-owned telecom company and two other telecommunications providers paid a total of USD 800 million to shell companies tied to high-ranking Uzbek officials, allegedly including a daughter of the Uzbek president, to get licenses allowing them to operate in Uzbekistan. Some media sources, however, mention that the daughter alone solicited over USD 1 billion (EUR 912 million) in bribes, for which she purchased, inter alia, a castle in France.
The US penalties amount to USD 398 million (EUR 363 million), which makes the case the sixth biggest Foreign Corrupt Practices Act enforcement action in history.
Russian oligarch Mikhail Fridman (with a 56% shareholding through LetterOne Group) and Norway’s Telenor (with a 33% shareholding) control VimpelCom. Telenor has announced plans to sell its shareholding.
A deputy of the Altai Republic regional legislative body and an ex-owner of an agricultural company will be convicted in the case of an illegal VAT refund worth RUB 1 million (EUR 12,500). According to investigators, in 2009 the deputy, as a shareholder of the agricultural company, colluded with the company’s general director to orchestrate an illegal VAT refund, which was claimed on the basis of fictitious purchases of technical equipment from a shell company controlled by the deputy. Tax authorities then refunded the VAT upon provision of a tax return. The investigation was initiated after the agricultural company declared bankruptcy in February 2015, leaving a debt of RUB 3 billion (almost EUR 38 million).
The former general director of a regional travel agency has pleaded guilty to charges that she defrauded the travel agency’s customers of over RUB 5 million (EUR 62,500). In the fraud scheme, she signed and issued fake travel vouchers to the company’s clients. When they wanted to use the vouchers, they were unable to get the respective services, as the company had not paid for the hotels, transportation, etc. Over 30 individuals were scammed under the scheme, including several groups of students from local schools who bought group tours from the agency.
In addition to a 5-year prison sentence, the court has also ordered the former general director to pay a fine of RUB 120,000 (EUR 1,500).
Slovakia has ranked 50th in the Transparency International's 2015 “Corruption Perception Index”. The country's position has improved by three places compared to the last year's results. Although Slovakia shares 50th place with Hungary, it still however ranks below the Czech Republic (37th place) and by Poland (30th place). The lower the rank, the higher is the perceived level of corruption.
Two former ministers and top politicians of the (until recently ruling) “Smer” social democratic party face allegations of involvement in an international VAT fraud scheme. The scheme is alleged to have operated from 2007 to 2011 and is estimated to have caused at least EUR 75 million in losses to the state budget.
Forty individuals have been charged in the case so far, with others under suspicion of having participated in the scheme. It is alleged that more than 100 companies were involved in a complex VAT carousel fraud scheme. The companies were from several countries including Slovakia, the Czech Republic, Latvia, Hungary, Ireland and the US. Fictitious transactions, mainly with bricks, platinum, or gold, were used to claim VAT returns from the state.
A Slovak newspaper reported that it had a document in its possession "resembling an investigation file". The file, which the newspaper "cannot vouch to be 100% true", contains transcripts of interviews with the main orchestrator of the scheme, in which he mentions that a former interior minister and a finance minister helped cover up the fraud. Both ministers have denied the allegations.
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