CEE Fraud and Corruption Newsletter - Issue 40

Fraud and Corruption Newsletter

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.

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Transparency International has recently released the 2016 update of its ever-popular “Corruption Perceptions Index”. The index ranks 176 countries across the globe on a 100-point scale, where 100 indicates the lowest perceived level of public sector corruption. It is compiled based on survey results in each individual country.


The rankings for countries in Central and Eastern Europe shown in the table
below offer no major surprises, with the Baltic and Central European countries generally ranking higher than those in East and South-East Europe. The biggest moves in index ranking, however, can be seen in relation to Belarus and the FYR of Macedonia. While Belarus moved 28 places up on the scale, the FYR of Macedonia's ranking headed in a different direction, moving down 24 places and indicating a serious struggle with corruption. According to Slagjana Taseva, Chair of Transparency International Macedonia, the country's score reveals a need to strengthen and protect civil society in the country. 

Transparency International - 

Corruption Perceptions Index 2016

Country Rank Score CPI 2015
Estonia 22 22 ↑ 23 (70)
Poland 29 62 ↑ 30 (62)
Slovenia 31 61 ↑ 35 (60)
Lithuania 38 59 ↓ 32 (61)
Latvia 44 57 ↓ 40 (55)
Czech Republic 47 55 ↓ 37 (56)
Slovakia 54 51 ↓ 50 (51)
Croatia 55 49 ↓ 50 (51)
Hungary 57 48 ↓ 50 (51)
Romania 57 48 ↑ 58 (46)
Montenegro 64 45 ↓ 61 (44)
Serbia 72 42 ↓ 71 (40)
Bulgaria 75 41 ↓ 69 (41)
Belarus 79 41 ↑ 107 (32)
Albania 83 39 ↑ 88 (36)
Bosnia and Herzegovina 83 39 ↓ 76 (38)
The FYR of Macedonia 90 37 ↓ 66 (42)
Kosovo 95 36 ↑ 103 (33)
Moldova 123 30 ↑ 103 (33)
Russia 131 29 ↓ 119 (29)
Ukraine 131
29
↓ 130 (27)

Belarus

Owner of bicycle manufacturer faces fraud charges

A trial has started against the owner of a Belarussian company producing bicycles who has been charged with fraud. According to prosecutors, the bicycle company concluded a fictitious contract for delivery of 4 million glass jars with another company also controlled by the accused businessman. The fraud scheme was related to another case, in which a glass producer, a company where the businessmen had a beneficial interest, had problems repaying its foreign currency loans. The company which received the payment for the non-existent glass jars converted the funds into the required foreign currency and forwarded it to the glass producer. It is alleged that the rest of the money from the fictitious sale was transferred to other companies owned by the businessman, while a portion of it was simply pocketed. 

Bulgaria

Survey reveals 46% of Bulgarian companies asked for bribes

According to a survey conducted by the Bulgarian Chamber of Commerce and Industry (BCCI) 46% of Bulgarian companies were asked for a bribe when dealing with public officials. According to the survey, corruption is most widespread in public procurement, where bribes were solicited from 46% of those surveyed. According to 21% of corporate respondents, corruption is most rampant in the judiciary.

According to BCCI, one way to prevent such corruption is to implement a
system of electronic management wherever possible, which would reduce direct contact with public officials and therefore opportunities for demanding bribes. BCCI has also dedicated a section to its website where corruption can be reported anonymously when encountered by businesspeople.

Police seize EUR 13 million in counterfeit notes stashed underwater

Bulgarian authorities have seized a record EUR 13 million worth of counterfeit notes, most of them recovered by scuba divers from an underwater reservoir located near a dam in the south of Bulgaria. The counterfeit EUR 500 notes were seized after police were alerted of their imminent entry into circulation. According to Bulgaria’s chief prosecutor, the fake notes were of an extremely high quality and they looked used but not damaged after having been taken out of the water. Three Bulgarian nationals were arrested in connection with the case, including the owner of a printing company, who has already been sentenced to 6 years’ imprisonment for money counterfeiting. Earlier this year, the European
Central Bank decided to stop issuing the EUR 500 notes by the end of 2018 as they are often used for criminal purposes such as money laundering and the financing of terrorism. 

Fisheries agency official detained over EU funds misuse allegations

Bulgarian prosecutors have detained several officials in a probe into the misuse of EU funding at the Executive Agency of Fisheries and Aquaculture (EAFA) of Bulgaria. Those arrested in the case include the agency’s officials (one of them the agency’s CEO) and a representative of a company which had received funding from EAFA. The individuals were arrested after a police raid at three of the agency’s offices over allegations that EU funds were granted to companies which had provided false information about their activities in order to make themselves eligible. The investigation is ongoing and continues at Bulgaria’s state agriculture fund to establish whether "higher-level" officials were
implicated.

Czech Republic

Former Czech prime minister to be tried over bribery allegations

A former Prime Minister (PM) of the Czech Republic and his wife are to face trial over alleged bribery. Prosecutors claim that the former PM bribed three former members of parliament (MPs) in order to make them resign their posts, which was supposed to allow for the passing of a government tax reform. In exchange for the MPs’ resignation, the PM allegedly promised them positions in management of state-owned companies operating in the railway, oil and gas, and aviation industries. The three MPs had already been arrested in 2013, but the court ruled that they could not be prosecuted due to the indemnity they enjoyed as parliament members. Alongside the former PM, his former mistress (now his wife) is also awaiting trial over her involvement in the alleged bribery and over tax evasion charges. 

Possible indictment in Czech Post bribery allegations

Police in the Czech Republic are pushing for an indictment of two individuals and a company over the attempted bribing of employees of Czech Post, a state-owned provider of postal services in the Czech Republic. The bribery allegedly relates to a process of selecting the supplier of security services to Czech Post’s local branches. The contract with Czech Post was worth about EUR 9 million. The previous provider of these services also tendered for the contract, and the company’s CEO is accused of having offered a EUR 37,000 bribe to the then manager of Czech Post for securing the contract for his company. The CEO was joined by an entrepreneur in the attempted bribery, who offered bribes to Czech Post employees in the form of exotic holidays. 

Though the company remained the only bidder for the contract, it was not awarded to the company as the whole selection process was cancelled and the bribery attempt reported to police. 

Investigation into EU grant funds' misuse at science and technology park

Police have launched an investigation into a case of alleged misuse of EU grant funds at a science and technology park in the central part of the Czech Republic. The owners of the park are accused of inflating the construction and equipment costs of the park to get the costs reimbursed by the Ministry of Industry and Trade, which managed the allocation of the EU funds. 

According to prosecutors, one of the park owners and the CEO colluded with another company, owned by a lawyer, which bid for and won the contract for construction works at the park’s premises. The value of the contract was vastly overstated, yet the bid of the lawyer’s company was several million Czech crowns below that value. When applying for the EU grant, the CEO claimed that the saving allowed him to purchase more expensive technological equipment. However, this equipment had already been purchased from the lawyer’s company, and the equipment was then purchased from this company again, fictitiously and at an inflated price. The damage caused by the fraudulent activities is estimated at EUR 8 million, and the suspects face up to 10 years’ imprisonment if convicted. 

Hungary

Phishing scam targets clients of the Hungary's largest retail bank

Clients of the largest retail bank in Hungary have reportedly been receiving e-mails stating that the bank implemented certain changes in its online banking system due to an increasing number of fraud cases. In the e-mail, which has turned out to be a part of a phishing scheme, the bank’s clients were requested to confirm their user details on a scam website accessible via a link in the text. The e-mails prompted the clients to do so by adding that failure to enter the details within 48 hours would result in their accounts being frozen.

Phony sponsorship scheme busted

Following a 3-day raid involving 270 officers of Hungary’s Tax and Customs Administration (NAV) at 227 different locations, seven individuals were taken into custody, and assets worth billions of Hungarian forints were frozen. The individuals are alleged to have run a massive sponsorship fraud scheme. According to NAV representatives, an advertising agency was at the heart of the scheme: this agency concluded sponsorship agreements with hundreds of companies, offering advertising slots on cars competing in rally championships. To make the sponsorship appear legitimate, it was evidenced by photos of racing cars with the sponsors’ logos and invoiced to the sponsors as sponsorship fees. However, 95% of the sponsorship fees were withdrawn by the perpetrators from the accounts of the agency and paid back to the sponsors in cash. This allowed the sponsors, implicated in the scheme, to lower the income tax payable to the state budget, causing a loss to the state amounting to EUR 10 million.

Anti-money laundering keeping authorities busy in 2016

The Hungarian Financial Intelligence Unit (HFIU), a government body tasked with receiving and analysing reports on suspicious transactions and other kinds of illicit financial activity, has published statistics, according to which it received 4,500 reports on suspicion of money laundering from a range of financial services institutions during the first half of 2016. The number represents a 15% increase compared to the same period in 2015. The statistics further show that on average 25 transactions a month were suspended due to alleged money laundering attempts.

Latvia

Ex anti-corruption bureau official raises accusations against bureau’s head

The former deputy head of Latvia’s Corruption Prevention Bureau (KNAB) has accused the bureau’s head, whose term in the office is about to end, of acting in favour of certain individuals implicated in the so-called “oligarch case”. To support her allegations, the former deputy has stated that her access to the case was intentionally hampered by the head, and that that several other KNAB officials were prevented from investigating deeper into the case. 

The case was opened in 2011 and entails, inter alia, allegations of bribery, money laundering and abuse of power involving 11 suspects. During the investigation, KNAB representatives conducted searches in various locations across Latvia, including the property of some of Latvia’s high-profile politicians. 

Cartel suspected of bribing state-owned railway official

Representatives of seven Latvian companies are alleged to have colluded and paid bribes to an official of the real estate department at Latvia’s state-owned railway company. According to information published by the Corruption Prevention Bureau, the companies acted as a cartel, paying bribes to the official over a period of 1 year. In exchange, the official arranged for the companies' rotation in winning public contracts for renovation of the railway company’s property. 

Poland

Anti-corruption prosecutors suspect grant fraud worth EUR 3.6 million

Prosecutors of Poland’s Central Anti-Corruption Bureau (CBA) have alleged that a former deputy marshal of the Wielkopolska Voivodeship, a province in west-central Poland, was among the perpetrators of a grant fraud. According to CBA prosecutors, the former official was implicated in irregularities surrounding the establishment and operation of a group of food producers, which applied for grant support from Poland’s agricultural agency.

The former deputy marshal is alleged to have issued a decision that the producer’s group meets all the requirements for obtaining the grant. However, the group had been formed artificially just for the purpose of obtaining the state support, and contribution of some of the group’s members to the total production was only marginal (less than 1%).The decision issued by the former official helped the group to obtain EUR 3.6 million, which was then pocketed by the individual forming the group. Besides the former deputy marshal, charges have also been brought against six other civil servants including representatives of the agriculture agency. 

Thirteen arrested for fraud involving fictitious invoices

Representatives of the Central Anti-Corruption Bureau have detained 13 individuals in a special operation following allegations that these individuals were implicated in a scheme involving the issuing of fictitious invoices. One of the suspects, a businessman, was caught red-handed in a hotel in Warsaw while accepting EUR 110 in exchange for fictitious invoices worth EUR 400,000.

The arrested businessman issued the fake invoices for, inter alia, catering services, training and consultations. Anti-corruption prosecutors suspect that another company, an earthworks service provider, is also implicated in the scheme, which was covered up by the recording of the fictitious invoices in the accounts of the companies. These companies were accomplices in the scheme as the invoices, recorded as costs, helped them lower the amount of tax payable to the state.

Romania

Hospital manager arrested for bribery and embezzlement following journalists’ investigation

Investigative press reports have alleged that a former manager of a Bucharest hospital received bribes and embezzled hospital funds. Following the reports, anti-corruption prosecutors arrested the ex-manager, who had been dismissed once the first news articles about his misconduct appeared.It is alleged that he embezzled approx. EUR 430,000, most of which he took in cash. He then reportedly ordered his employees to cover-up the withdrawals by producing fictitious invoices for services never delivered to the hospital.

Prosecutors also suspect that the manager and several other individuals received bribes in the form of holidays abroad from one of the hospital’s suppliers, allegedly in exchange for a very favourable contract for this company. The articles that prompted the investigation alleged further irregularities including the contracting of several companies controlled by a former Bucharest mayor, with whom the ex-manager is reported to have had a close relationship. 

Israeli pharmaceutical giant allegedly bribes health care professionals

An anonymous tipster has alleged that an Israeli-based pharmaceutical multinational paid bribes to Romanian health care professionals to get them to prescribe the company’s drugs to patients. In response to the tip-off, made through a series of e-mails sent to the company’s chief executive and audit and compliance officers, an internal investigation has been launched. The allegations concern prescriptions of a multiple sclerosis drug: Romanian doctors were supposedly paid consulting fees and otherwise disguised bribes in exchange for recommending the medication to as many patients as possible. Besides launching the investigation, the drug manufacturer set aside a substantial amount to settle potential fines and terminated certain relationships with third parties which it deemed “problematic”.

High-profile surgeon arrested for bribery and unauthorized experiments

Romanian prosecutors have launched an investigation into allegations that a well-known Romanian orthopaedic surgeon was involved in bribery and used unauthorised and dangerous treatment methods and prosthetics on child patients. It is suspected that these experiments may have led to disability or even the death of some of the patients. As for the bribery allegations, the doctor reportedly kept the children waiting for operations and would only perform the surgery after having been paid by the parents. 

Serbia

Three Serbian courts' independence thrown into question

Three contracts between Serbian courts and a commercial bank have been published, revealing that the courts’ employees were granted favourable terms for obtaining loans from Greek Piraeus Bank. In Serbia, such contractual relationships are considered a breach of the courts’ independence. In addition, one of the courts, namely the Supreme Court of Cassation, agreed to provide the bank with certain information about the court’s employees and also agreed to keep the contract confidential, which is prohibited under Serbian law on free access to information. Besides independence concerns, the case has prompted allegations of conflicts of interests as the Supreme Court of Cassation is to rule in a dispute between 20,000 Serbian families and certain banks, one which is Piraeus, over loans in Swiss francs. 

Slovakia

Slovakia tied for 2nd most corrupt European country, survey shows

According to the 2016-2017 Global Competitiveness Report, a survey conducted by the World Economic Forum, Slovakia shared the position of the second most corrupt country in Europe with Ukraine, only falling behind Moldova, which sits at the top of the list. The survey, aimed at capturing perceived corruption levels, was conducted among 15,000 upper level managers in Europe. The corruption index is based on answers to questions regarding trust in politicians, the soliciting and receiving of bribes and other kinds of irregular payments, and embezzlement of public funds. The country report for Slovakia shows that, besides corruption, inadequate tax rates and excessive bureaucracy are still perceived as the main impediments to doing business in Slovakia. 

Slovak parliament adopts anti-shell law

Slovak parliament has passed an anti-shell bill aimed at increasing the transparency of public contracts. The law requires companies tendering for public contracts to be registered on a list of so called “partners of the public sector” and to publish their ownership structure, including beneficial ownership. The law also stipulates that, unless a company is registered on that list and publishes its beneficial owners, it is not entitled to collect any outstanding receivables from the state exceeding EUR 1 million.

Parliament has also passed several
amendments to a bill requiring persons such as holders of mining licenses,
entities operating in the energy sector and in toll collection, and contractors
of geological works to be registered. If a company does not register itself on
the list despite being required to do so by the new law, or states incomplete
or incorrect information, it may face sanctions of up to EUR 1 million and maybe banned from bidding for public contracts.   

Ex-ministry official alleges public contraction manipulation during Slovak EU presidency

A former foreign ministry official has made allegations of suspicious practices during Slovakia’s EU presidency related to the awarding and execution of public contracts. The official has alleged that, inter alia, the project budget for two opening concerts relating to the Slovak presidency increased by several hundred thousand euros. The second allegation concerns the selection of a supplier who was to prepare an event at which the logo of the Slovak presidency was to be presented. According to the former ministry employee, the contract might have been split in order to apply an exception under which the details of the selection process do not have to be published in the public procurement bulletin and the contract can be awarded directly. 

The ministry has denied all the allegations; however, it has not published any documents providing evidence to refute them. The Slovak prime minister supported the foreign ministry calling the allegations an “intentional attack on the Slovak presidency”, dismissing them as based on merely subjective impressions and incomplete information taken out of context.  

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