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TWO ARRESTED AS SPP FRAUD INVESTIGATION CONTINUES

Oh, those bills!

The arrest last week of two key figures in a 1998 plan to defraud the Slovak state gas utility SPP of millions of dollars has given fresh impetus to police efforts to solve one of the country's most infamous financial crimes. However, police say that despite recent progress in the case, the gas utility may yet face untold millions in claims from holders of blank bills of exchange signed by former SPP Director Ján Ducký in 1998.
Ivan M., a former SPP financial director, was arrested at a Slovak border crossing with Austria late on March 29 and charged with two counts of fraud. The ex-SPP employee, who under Slovak law cannot be named in the media until he has been found guilty of a crime, is charged with masterminding the payment of 350 million Czech crowns ($9.2 million) in bills of exchange signed by Ducký to a Czech firm named Sezooz Group, in return for 'technical equipment' that was never delivered. Ivan M. was released from custody March 30, and will be investigated while at liberty.


Former SPP Director Ján Ducký, murdered in 1999, allegedly issued dozens of blank bills of exchange.
photo: Vladimír Hák

The arrest last week of two key figures in a 1998 plan to defraud the Slovak state gas utility SPP of millions of dollars has given fresh impetus to police efforts to solve one of the country's most infamous financial crimes. However, police say that despite recent progress in the case, the gas utility may yet face untold millions in claims from holders of blank bills of exchange signed by former SPP Director Ján Ducký in 1998.

Ivan M., a former SPP financial director, was arrested at a Slovak border crossing with Austria late on March 29 and charged with two counts of fraud. The ex-SPP employee, who under Slovak law cannot be named in the media until he has been found guilty of a crime, is charged with masterminding the payment of 350 million Czech crowns ($9.2 million) in bills of exchange signed by Ducký to a Czech firm named Sezooz Group, in return for 'technical equipment' that was never delivered. Ivan M. was released from custody March 30, and will be investigated while at liberty.

The second charge concerned $10 million that had been transferred from SPP to Sezooz in December 1998 on the basis of an allegedly fictitious 'financial settlement'; the deal caused SPP 110 million Slovak crowns ($2.2 million) in damages.

The man who allegedly benefitted from the second fraud, Sezooz Group head Roman Z., was arrested on April 2 by Czech police.

The arrests, according to Interior Ministry investigator Ľubica Králiková, show that police are making headway with establishing criminal liability in what has until now been largely a business dispute between SPP and the holders of its fraudulently issued bills of exchange.


Former Czechoslovak Constitutional Court head Ernest Valko, acting for SPP against Union Banka, wants more evidence of the bills' existence she said.
photo: TASR

"It's important that people really understand these bills were issued on the basis of fictitious business contracts,"

However, for the Slovak government, which is trying to sell off a 49% stake in SPP by the end of this year, the latest arrests will neither reassure potential investors nor boost the eventual price the state gets for SPP, the economy's crown jewel. The police estimate that at least 36 other SPP bills of exchange may be circulating abroad, while damages may be far higher than the five to seven billion crowns ($100 to $140 million) estimated by people close to the case.

"It's going to become a real problem," said one energy sector source who asked not to be identified. "There's so much uncertainty, so many contradictory statements being issued, that the government is going to have to issue a disclaimer that the Slovak side will take care of these bills if it wants the SPP sale to be successful."

Big bucks

According to police investigator Králiková, stripping assets from companies by issuing fraudulent bills of exchange has become "a modern crime" in Slovakia since news of the bills issued by Ján Ducký first surfaced in late 1998.

Ducký, who was murdered in January 1999, is suspected of having issued dozens of bills of exchange on SPP's bank account for unknown reasons and to unknown parties. For the police, the most troubling aspect of the bills is that most of them reportedly do not specify a sum owed, leaving the holder to fill in the amount of the bill at will.

Marek Staroň, an associate at the Bratislava branch of the White & Case law firm, described bills of exchange as "basically promises to pay a certain amount of money, with no explanation required". They are commonly used in the business world as efficient forms of payment, and can also be transferred from one holder to another without the approval of the issuer.

When bills of exchange are issued by the statutory representatives of companies for fraudulent reasons, however, it is very difficult for the company to protect itself against having to pay the bills.

"Bills of exchange are quite difficult to defend against," said Staroň. "There is a special expedited court process for getting money from bills of exchange, where you can only attack the validity of the bill of exchange (i.e. whether the authorised person issued it), not the legal grounds for issuing it."

SPP has already discovered how tough it is to fight bills of exchange once issued - the firm lost a decision on April 17, 2000 in Bratislava District I court over the 350 million Czech crowns in bills traded by Ivan M. to Roman Z. of Sezooz. The bills were later bought by the Czech bank Union Banka, which took SPP to court to have the sum paid.

Lawyer Ernest Valko, who represents SPP in the case against Union Banka, appealed the court decision to the Slovak Supreme Court, and is now waiting for that court's ruling, scheduled to be handed down April 19.

Valko's defence in front of Bratislava I court had been the only possible defence under Slovakia's 1950 Bills of Exchange Law - that the third party (Union Banka) had known from the outset that the 350 million Czech crowns in bills involved a fraud. He based his argument on the testimony of both Ivan M. and Roman Z.; the latter, according to Valko, "testified, and I quote, 'The SPP representative [i.e. Ducký] signed the bills of exchange in Bratislava in the presence of a Union Banka representative - Mr. Vitala'. Roman Z. added that the whole bills of exchange deal was drawn up by a group including Union Banka vice-president Dejčík, Vitala, Roman Z. and Ivan M.

"The court, however, was of the opinion that it didn't happen this way, and that Union Banka had not known of the fraud perpetrated by Ivan M. and Roman Z.," Valko added.

The legal community, the government and SPP itself are now waiting to see how the Supreme Court rules, fearing that if the ruling goes against SPP, other holders of bills of exchange might be emboldened to come forward and collect on their debts.

"They will for sure [be emboldened] if the Supreme Court rules in favour of Union Banka," said Valko. "It won't set a precedent, as we don't know under what conditions these blank bills were issued, but yes, certainly, it will have such an effect."

Any takers for SPP?

Opinion is divided among business and legal analysts on whether the bills of exchange represent a barrier to SPP's privatisation, but most agree on one thing - that the government will have to issue a guarantee that it will cover any bills that arise if it hopes to sell SPP for anything like what it's worth.

"The government must issue a guarantee," said Valko. "It's their only chance. Otherwise, it [the unclaimed bills of exchange] will have an impact on SPP's sale price."

The main problem with the bills seems to be that no one knows what damages could eventually result. Králiková reported that phone calls had been received from people demanding to be paid off for returning the blank bills of exchange; as time has passed since 1998, she said, these demands have risen from as little as 300 million crowns ($6 million) to many billion crowns.

"These are sums that could really damage a country as small as Slovakia, never mind what it would do to SPP, which has property worth about 50 billion crowns," she said.

They are also sums large enough to worry potential investors, not least for the utter confusion over how many bills of exchange exist. Valko reported that his office had received letters in the past year from two Swiss law firms claiming to represent clients holding blank bills of exchange. After he responded to the letters, he said, he had heard nothing more from the firms.

Then, on February 15 2001, Vladimir Vološčuk, the representative of a Czech firm named IMC Burzovní, visited SPP headquarters in Bratislava and announced that his firm held 24 blank SPP bills of exchange and one for 400 million Czech crowns. He also claimed to represent a wider group holding further 'Ducký bills'. Vološčuk told the daily paper Pravda on March 1 that the blank bills had been filled in, with the total coming to "between five and seven billion crowns", although Vološčuk was ready to settle for two to three billion. Since then, no progress has been made in dealings between SPP and Vološčuk.

Valko, who took part in the parley with Vološčuk, said that "the whole thing makes me laugh - everyone claims 'I've got the bills', but when I pursue the matter, they never call again. Neither I nor anyone else has ever seen any of these blank bills."

Police, on the other hand, by painstakingly making the rounds of public notary offices in Bratislava, have uncovered 36 notarized Ján Ducký signatures they believe are connected with bills of exchange.

The government has not yet said what it intends to do about potential outstanding bills of exchange during the privatisation process. Economy Ministry spokesman Peter Benčúrik said that an official government statement in the 'Ducký bills' case had been issued in March, in which the government had declared the bills fraudulent, and empowered the Economy Ministry and SPP to solve the problem through the courts.

Would the bills affect the price which SPP could fetch? "No comment" responded Benčúrik. What would be the government's strategy to reassure investors during privatisation? Would it offer a guarantee for the remaining bills? "That's speculation. No decision has been taken on these matters."

But legal analysts say the government can do little but offer a guarantee if it wants to have the SPP sale come off smoothly.

"It's natural in this sort of deal that an investor requires a representation or warranty from the government to the effect that if any of these bills do pop up, the government is going to take care of them," said Staroň. "If I were the government, this would be a natural thing to do. It would create a level playing field so everyone could concentrate on the real value of the company without speculating on whether or not someone will bring up bills of exchange in the future."

Were the government not to issue such a guarantee, said Staroň, the state might receive far less than the $2 to $4 billion expected for SPP.

"The element of uncertainty may really influence the amount of the bids. While the real risk may be that the bills will cause damages of three billion crowns, one investor might see this risk at 10 billion, another at 20, and factor it into the bidding accordingly."

"It's like selling a car," Staroň continued. "You can either say 'here it stands, check it out all you want and give me a price, but I'm not guaranteeing anything', or you can say that 'anything that happens to it within six months I will look after'. You can sell it either way, but with the second way you get more money.

"It depends on what you think is likely to happen to that car."

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