Economic crime - tunnelling


In this week's Talking Point, Dita Asiedu speaks to a PWC representative in Prague about economic crime in the country and ask ordinary Czechs how they think the situation has changed since the fall of Communism in 1989:

The Czech police have recently announced that they have charged two men with fraud. Viktor Kozeny who has been nicknamed "pirate of Prague" and his business partner Boris Vostry, are accused of having left the state with billions of Czech crowns acquired from small shareholders through deception during the privatisation process in the 1990's. Both men reject the accusations. They now live in Central America, and attempts by the police and state prosecution to bring them to trial have failed so far. The recent decision to charge them with fraud and prosecute them as fugitives has brought fresh hope to Czechs that the state is taking an active stance against fraud, and other economic crimes.

In the 1990's when the government of Vaclav Klaus began the privatisation process, Czechs were introduced to two new terms; the coupon privatisation and tunnelling, through which ordinary Czechs but mainly the state have lost substantial amounts of money. Mr Roger Stanley from PWC in Prague explains what these two terms mean:

"There were various forms of privatisation following the fall of Communism. The two major types were the individual sales to major companies as happened in the case of Skoda, for example. The other type was the coupon privatisation where individual members of the public were given a coupon which they could then exchange for shares in a particular company or groups of companies. It was a method of transferring ownership in previously state companies to members of the public. Tunnelling is a term unique to the Czech Republic. It's not something I had come across before I came here and it's now not only entered the Czech language but I think the international language when it comes to major investment fraud. I think the term tunnelling arose because literally when companies were privatised, it came about that a big hole was dug, the assets were stolen from the company through this big tunnel and out from the company and the country. So, hence, the term tunnelling. In effect, it was like any other major fraud of asset misappropriation when the assets of the company were stolen by deception."

In the 1990's many Czechs took the opportunity given to them by the state to become entrepreneurs. They founded companies, employed staff, and were glad to be their own bosses for a year or two - a year or two because the lack of a business education forced many to close their businesses down, leaving numerous Czechs unemployed. Others, however, learned to tunnel money out of their companies, before declaring their business bankrupt, and establishing a new one.

"I do think that our state has had to suffer from a lot of tunnelling and it's not just because there are holes in the law but also because we Czechs will not miss the opportunity to make good use of them. I'm quite sure we've lost a lot of money but I'm also convinced that things will change for the better with the growing economy."

"A lot of people steal from the state. I think that many companies use a lot of laws and we cannot stop them because they are not doing anything bad because it's the Czech law."

"We're talking about such large sums of money that it will still be a while before we'll really know how much was lost and how much people gained through tunnelling."

"I think what's happened in this and other cases around the world is that at the time there was a need to privatise quickly, various different systems were used, and also at the same time when there was a period of great change, the laws, the regulatory environment, weren't necessarily as well adapted and strong enough to cope with the other changes that were going on in the country and in the economy. And therefore, what it provided was an opportunity for certain individuals to take certain actions. Whether that is strictly against the law or not, only time will tell. It's always easy to say with hindsight what should have been done and what could have been done. With hindsight you can also say it could have been avoided. Given the circumstances at the time, that's very hard to tell."

The term tunnelling, in the Czech Republic, has become a frequently used word, and although officially linked only to the privatisation process, it is now being commonly used in place of terms such as fraud, dubious business transactions, deception, and the like.

"Tunnelling to me represents massive fraud that cannot be uncovered. I see it as a very disappointing part of our lives, our policies and everything that goes with it. It's very difficult to bring the criminals before trial by I think with a bit of will power, it should work. I have to stress I'm really disappointed because after a while we just let it happen and don't say anything against it because the number of cases are so high."

"I'm not convinced that our state is doing everything in its power to have these people punished. The lack of appropriate laws makes it possible for those guilty to escape punishments. That is why the state is not doing much and people lack the motivation to act."

"I think we can do much more, the state can do much more. We can change the law. Those responsible for tunnelling can get higher punishments and other things. So, I think it depends on our government."

"I think what's happened over the years is the legal and regulatory systems have got more robust, new measures have been taken to prevent against this type of thing and as the economy and legal systems develop it provides a less and less chance for this type of thing to happen. Of course, one has to remember that this was a one-off event following privatisation. You are always going to have fraud and economic crime and as our recently public survey shows, it's not just a problem of the Czech Republic. It's a global problem of huge significance for all countries and companies across the world. So, what both must do is keep up their guard in the fight against economic crime and take a pro-active stance rather than waiting for something to happen and be reactive to it.It's definitely getting better. I've been here for three years now and I see a general shift in both attitudes and actions and I think that necessarily will increase as we come towards EU membership."

So what can governments and businesses do to keep fraud at a minimum? Mr Roger Stanley:

"The steps that companies can take can be broken down into four main areas. First, to investigate the real fraud risk faced by their organisation. Secondly, to implement and encourage ethical codes of conduct and communicate those to all stake holders. Thirdly, begin to introduce Whistle Blower policies - a safeguard system to protect and encourage employees within an organisation who suspect fraud or have a knowledge of fraud to report that either to an independent body within the organisation or to an external body that would protect their rights but then investigate those allegations of fraud. And lastly, not to wait till it happens but prepare a robust defence plan before disaster strikes. Whistle blowing is a technique used widely in Western Europe and across the globe and about 27% of companies have a whistle-blowing policy. In the Czech Republic, only one percent of companies have such a policy and that's probably because of cultural reasons whether people don't like informing on each other because of the old state system."

And it appears that Mr Stanley is right. Most those Czechs we asked, all said they would not blow the whistle on someone they know is guilty of fraud:

"This is not an easy question. If it were someone I know I would not be able to do it. If it's someone I don't know that well, someone who isn't a close friend or relative, it would also be difficult because I would be scared that I would not get the necessary support or that we do not have the laws that enable us to talk about and point at someone with the assurance that it will not backfire."

"I most probably would not blow the whistle on anyone. If it were someone I know well, then definitely not. When it's someone I don't know well, I would think about it more seriously but probably would not tell on him anyway."