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.
KPMG has recently released its 2016 Global Profile of the Fraudster Report, detailing thefraudsters who were investigated between March 2013 and August 2015 by KPMG Forensic teams across the globe. The investigations frequently involved interviewing the fraudster, helping KPMG to form a detailed picture of the perpetrator and the fraud committed. This report
is based on an analysis
I wish you pleasant reading.
A plan to set up a new anti-corruption bureau modelled on the FBI has caused disagreement in the Albanian Parliament between the government and opposition MPs. The proposed new agency would be considered a part of the police while closely cooperating with the general prosecutor's office as well. The bureau should comprise one or more representatives of the prosecutor’s office, and the head of the agency should be appointed by the interior minister. Moreover, an independent supervisory committee comprising experts from international missions is planned to become part of the new anti-corruption body.
The opposition criticised the model on the grounds that it does not leave the institution under the full control of the general prosecutor. In his address in the parliament, the Albanian prime minister accused the opposition parties that they had first agreed to support the initiative and that they suddenly changed their minds. The government draft can be passed in the parliament even without the opposition MPs’ votes; however, a broad political consensus is seen by the international community as a guarantee of the bureau’s viability.
An implementation audit of the Innovative Development Programme in Belarus which was conducted at one of Belarus’s major state-owned engine manufacturers, has revealed a potential procurement fraud. Three members of the company’s top management are alleged to have taken actions to favour certain companies in the awarding of contracts for provision of technology and equipment for the company’s iron casting production. It is estimated that the fraud resulted in a EUR 5.4 million loss to the company.
Investigators in the case allege that the managers coordinated the whole course of the fraud: from the designing of the procurement procedure in a way that allowed for awarding the contract to favoured vendors to the supply and reception of the equipment. The loss to the company was caused by the fact that the supplied equipment did not meet the terms and conditions of the contract. Prosecution of the three officials has now been launched by the Investigation Committee of the Republic of Belarus.
Fourteen individuals, employees of Bulgaria’s Road Transport Administration, have been detained in a police raid at the agency’s building. All arrests, including an earlier detainment of the agency’s head in Sofia, relate to alleged corrupt practices at the agency and its territorial directorates. Media reports link the arrests, inter alia, to bribery and corruption to the issuing of driving licences and certificates to road transport companies.
A former judge of the district court in Veliko Tarnovo, a city in the north of Bulgaria, has been sentenced to 4 years’ imprisonment on bribery charges. The ex-judge has also been banned from holding a position in the judiciary or practicing law in next 7 years. This is the first case in Bulgaria’s recent history of a judge’s prosecution and conviction.
The court found that the former judge accepted a bribe worth more than EUR 8,000 for which he promised a defendant charged in a petroleum theft case a favourable ruling, i.e. the shortest possible prison sentence. The bribery was exposed by the defendant himself, who reported that the judge had tried to blackmail him, demanding a higher amount (almost EUR 13,000) from him.
Eight managers of the Fund of Treatment of Children Abroad, an organisation which allocates money to cover foreign treatment of children with serious medical conditions, have been arrested over charges of corruption and abuse of office. The organisation’s former director is also among those arrested, and he faces allegations that, when accommodating children and their parents in France, he overstated the real accommodation costs and pocketed the difference.
The arrest took place just before a meeting at which funds for treatment of almost 50 children were to be approved. The fund’s director’s home and office were searched by police, and a large amount of cash of unknown origin was found.
The Anti-Corruption, Conflict of Interests and Parliamentary Ethics Committee of the Bulgarian parliament has rejected a new draft of an anti-corruption bill; an earlier draft was turned down last year by a majority of Bulgarian MPs.
There are three main criticisms regarding the bill. The first line of criticism concerns the question of who is to supervise the work of the new anti-corruption bureau which is to be established by the bill. Critics say that the bill provides no clear vision or concept of how such supervision should be performed. Secondly, some allege that the bill is designed in a way that would allow certain individuals, commonly deemed to be the most corrupted, to escape prosecution. Finally, the bill was criticised also by representatives of the Supreme Court for introducing a procedure for anonymous reporting of corrupt practices on the part of public officials. The Supreme Court representatives fear that such a mechanism might unleash a “witch hunt”.
The deputy prime minister (DPM) of Croatia is currently under investigation by the State Commission for the Resolution of Conflicts of Interest. The investigation relates to an alleged connection between his wife and a lobbyist working for a leading Hungarian oil and gas consortium. The lobbyist and the DPM’s wife are alleged to have closed a contract under which the wife was engaged to provide advertising services worth EUR 60,000 to the lobbyist.
The alleged conflict of interest relates to the fact that the Hungarian consortium is a majority shareholder in Croatia’s largest oil and gas company, with the second largest shareholder being the Croatian government. The consortium and the state of Croatia are currently the disputing parties in two international arbitration cases. Representatives of Croatia's social democratic opposition have stated they would file a no-confidence motion against the DPM if he refuses to resign over the scandal.
Czech anti-corruption police have seized archived documentation of six
construction companies which won or bid for public contracts with the Railway Infrastructure Administration, a state-owned company responsible for maintenance of the country’s railway network. Police have also searched the companies’ employees’ laptops and raided their server rooms.
It is alleged that the six companies colluded while bidding for the public
contracts: they made a deal as to which of them would get the contract and which would be “compensated” as a subcontractor. Moreover, there are allegations that representatives of the railway administration have also been involved in the fraudulent practices.
One of the public contracts was worth more than EUR 28 million and was
co-financed by the EU. Police also suspect that documentation submitted with the bids was possibly fraudulent, designed to secure the pre-selected bidder’s victory. So far, charges have been raised against six individuals and three companies. The misconduct can be qualified as harming the financial interests of the EU, for which the accused may face up to 10 years’ imprisonment.
Two individuals have been charged with tax evasion in fuel trading by representatives of a specialised police unit whose mission is to combat tax fraud. The alleged loss caused by the two accused is estimated at almost EUR 12.6 million. The company where they were employed and where one of the accused was a statutory representative purchased fuel from another EU member-state and then sold it to end customers. However, the police claim that VAT was not properly paid on the transactions. The police unit’s attention was brought to the case by fiscal authorities.
The director of a prison in a city in the north of the Czech Republic was arrested last year over allegations that he had attempted to bribe and extort the general director of the Prison Service of the Czech Republic. Now an indictment has been issued by the prosecutor.
The general director of the Prison Service stated that the defendant, who formerly worked as an economic deputy of the prison service, wanted him to reinstate some of the institution’s former managers. In exchange for doing that, he allegedly promised to stop the negative media campaign against the Prison Service director and offered him a bribe worth several million Czech crowns. The general director also added that the bribery and extortion attempts may be related to his intention to review some of the past public contracts awarded by the Prison Service.
The State Revenue Service of Latvia (SRS), the government body responsible for tax collection, has been under scrutiny after an investigative news report broadcasted on national television exposed that certain SRS employees and their relatives had accumulated wealth (including real estate, luxury cars etc.) which does not correspond to their reported net monthly salary of around EUR 800. Journalists allege that the SRS employees might have gained the wealth through bribes received in exchange for helping cover up VAT fraud schemes.
Although the initial journalists’ investigation unveiled only the wealth of a senior investigator’s (who was the alleged leader of the criminal group within SRS) family, the head of the SRS has admitted that there are more employees whose integrity is being questioned. As a temporary solution, the SRS management has decided to assign the employees facing the allegations to different positions within the agency. The prime minister has however indicated that the employees are about to be dismissed.
An owner of a flower shop in the proximity of a cemetery in Riga, Latvia’s capital, refused to pay a EUR 13,000 bribe to the head of the Riga cemeteries administration. The bribe was solicited in exchange for extension of a lease contract for the florist, who decided to report the bribery attempt to Latvia’s anti-corruption bureau. After an investigation conducted by the bureau, the court banned the municipality official from holding a public office in the next 5 years.
It is alleged that the arrest of the municipality official is connected with the decision not to extend the florist’s lease contract and to find new tenants through a request for tenders. It has also been alleged that the municipality tried to drive the florist out by cutting water and electricity supplies to the shop. According to the florist, the municipality has retaliated against him for his report to the bureau and he expects his lease contract to be extended, as it has been over the past 11 years.
Investigators from Poland’s central anti-corruption bureau have raised allegations that a procurement manager of a conglomerate uniting Polish state-owned defence industry companies, demanded a bribe worth 2% of a contract to lease SUVs to the group. The manager of the conglomerate is also facing a related allegation that in exchange for helping the SUV vendor win the contract, he was promised that the repair of his own private vehicle would be covered. If convicted, the manager can face up to 10 years’ imprisonment.
A teacher from a small Polish town has been sentenced on VAT evasion and money laundering charges. Before their exposure, the fraudulent practices, which included the issuing of fictitious invoices, had been taking place for almost 3 years. The VAT fraudster purchased animal feed from suppliers and claimed the feed was meant for his farm, which allowed him to apply a lower VAT rate: 7% instead of 22% or 23%. However, there was no such farm, and instead of using the feed, he re-sold it to pre-selected customers, presumably accomplices in the scheme.
It is estimated that over 2,200 invoices were issued under the scheme, totalling EUR 30 million. In an attempt to hide the illegal source of the money, the fraudster set up bank accounts in Slovakia, UK and Cyprus, to which he transferred the stolen VAT amounting to EUR 800 000.
Polish anti-corruption police have arrested a former vice-chairman of the Industrial Development Agency, a state-owned company specialising in innovation and restructuring. The agency’s vice chairman allegedly received bribes from local businessmen in exchange for influencing the decision-making processes at the agency in the businessmen’s favour. The bribes were received not only in cash, but also in the form of a luxury SUV, a trip to Dubai, and a free-of-charge installation of an air-conditioning unit in the vice chairman’s private house. The CEO of a leading ICT developer of solutions for the army and the public sector is also among those accused of bribery in the case.
Romania’s National Anticorruption Directorate (DNA) has completed an investigation of what is being described as one of the most important corruption cases in the history of the institution, with political repercussions and losses to the state budget worth millions of euros. A businessman, the owner of one of the largest and most influential agro-industrial and financial groups in Romania, and a politician, head of a county council and a president of a political party’s local organisation, have been accused, inter alia, of using bribes to secure a favourable government decision. The politician, the businessman, and their two accomplices also face tax evasion, money laundering, and influence peddling charges.
Anti-corruption prosecutors allege that, in the period between January and March 2009, the businessman offered bribes to certain politicians in exchange for promoting a government decision which would have granted tax incentives to purchase fertilisers. This policy, had it been adopted, would have created a profit for the agricultural company owned by the businessman totalling EUR 600 million.
It is further alleged that between August 2008 and March 2009, the businessman’s company concluded a contract for provision of advertising services with another agricultural company. Fictitious transactions worth RON 36 million (EUR 8 million) were then made under this contract with the purpose of evading tax. The businessman has also been accused of having used a money laundering scheme, under which the equity of one of the companies of the agricultural group was increased through a contribution of an offshore company controlled by him. The estimated losses caused by the tax evasion amount to RON 11 million (almost EUR 2.5 million).
Prosecution of a former energy minister for bribery and influence peddling has been launched by the DNA. It is alleged that the former minister and then-MP solicited a bribe worth 5% of the value of a RON 3.4 million (over EUR 756,000) service contract with a city in 2013. In exchange for the bribe, the politician promised to exercise his influence to make the city’s mayor sign the contract. The bribe was to be paid partially in cash and partially in the form of payments under a fictitious consulting contract concluded between the businessman and an accomplice of the politician. However, the businessman eventually decided to report the bribery attempt to authorities.
Police have launched an investigation into 20 cases of corruption related to the construction of the Vostochny Cosmodrome, a Russian space centre. It is estimated that contracts worth EUR 1.1 billion (half of the total value of all contracts) were awarded without a tendering procedure. There are allegations that part of the money paid under these contracts was misappropriated using inflated prices, fictitious invoices and extraordinarily high management bonuses.
While the majority of the investigations are ongoing, one case of the chairman of the board and the director of one of the companies engaged in the Vostochny Cosmodrome construction has already been completed - both pleaded guilty to charges of misappropriating federal funds and diverting them through shell companies established for that purpose. Both individuals have been sentenced to 3 year’s imprisonment, and their possessions worth almost EUR 2.2 million including land, apartments, cars and luxurious watches have been seized.
A court in Belgrade has ruled in a corruption case involving two heads of major Serbian companies, a holding and a road maintenance company, and the holding director’s son. The son of the director and owner of the holding company has been found guilty on tax evasion charges and has been sentenced to 3 years and 6 months in prison. Besides his prison sentence, he will have to pay a fine of about EUR 65,000. However, the director’s son has been cleared of embezzlement charges that had also been raised against him.
The second of those accused, director and owner of the road maintenance company, has been found guilty of embezzlement and sentenced to 7 years in prison and fined almost EUR 50,000. Eight others have also been found guilty in the case, with sentences ranging from house arrest to 5 years’ imprisonment. The sentenced individuals have been convicted of diverting funds from road construction companies, which then went bankrupt. The damage caused by the group has been estimated at EUR 13.8 million.
The verdict relating to the last of the accused, i.e. to the director of the holding company (which is Serbia’s largest private employer), has not been announced, as the trial with the director was postponed due to the health condition of the accused. It has been alleged that both directors were involved in dubious privatisations of road construction companies, and that they may have acted as accomplices in embezzling the road construction companies’ funds.
Employees of NDS, a major state-owned highway construction company, have sent a whistleblowing letter alleging corruption at NDS to the newly appointed Slovakian transport minister. The allegations concern the project of a highway tunnel built by a consortium of several construction companies.
According to the letter, the former NDS investment director accepted a house as a bribe in exchange for altering the project in a way which caused a major increase in the price of works delivered by certain vendors. Other NDS managers, the letter further alleges, also received cash and holidays as bribes. In addition, the latter claims that the Ministry of Transport officials were also involved in the corrupt practices, as they received bribes from companies conducting an archaeological survey at the construction site. Supposedly, the survey was conducted at vastly inflated prices.
In reaction to the scandal, the transport minister has dismissed the NDS director as well as the head of investment and promised to launch an investigation into the allegations raised by the letter.
A law enforcement unit specialising in combating tax fraud called “Cobra” has uncovered the second biggest VAT evasion case in Slovakia’s recent history. The loss to the state budget is estimated at EUR 76 million, and the case is believed to be connected with an earlier tax fraud case revealed by authorities in 2012.
The alleged VAT fraudsters formed an organised criminal group, which operated in Slovakia, the Czech Republic, Hungary and Serbia. The group reclaimed VAT and reduced the amount of tax payable by the group members by performing fictitious transactions and forging documentation. The president of Slovakia’s Financial Directorate has stated that, thanks to the police operation, the amount of EUR 8.3 million has been saved for the state budget, which would otherwise have been defrauded by the group.
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