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Anatomy of corruption: distributing and laundering proceeds

A significant reduction in the level of corruption, currently estimated at over Kč 80 billion a year per year, is at stake

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Both the government and the opposition have their own anti-corruption strategy; at least they claim they have. The regions and municipalities have one as well, while the police have their own special anti-corruption unit and there are also prosecutors specializing in the subject. One would almost think corruption's final hour has struck – to paraphrase a line from the popular Czech film “Cozy Dens” (Pelíšky): “I'll give corruption a year, two years at the most.”

But reality is different. Corruption seems as unbeatable as prostitution. It has accompanied us since time immemorial and is likely to accompany us to the grave of humanity. It may be a bigger problem in some countries than in others, but it causes harm everywhere. Although mankind may never be able to completely beat corruption it is nevertheless necessary to constantly fight it as to prevent it from entirely devouring us. The problem here in the Czech Republic is that corruption has exceeded all bounds. It is of the utmost importance to at least bring it down to the world average.

Czech Position wants to focus — and not just once — on ways of fighting corruption when its proceeds reach the point of being laundered and distributed. We would like to direct your attention to approaches that basically do not cost anything and can be applied very quickly without the need of changing existing laws.

Much like any other measures, these steps will not lead to corruption being prevented entirely but will at least make life difficult for its beneficiaries and could perhaps prompt them to make a mistake. Such changes would not affect petty corruption involving tens of thousands of crowns but are much rather aimed at tackling corruption in the order of magnitude of hundreds of millions or billions of crowns. And clamping down on this, let’s call it mega-corruption, is what we are most after.

Methods of laundering, distribution

Here follows a description of the most common methods used for distributing and laundering proceeds from corruption:

Let’s start with smaller corruption involving up to several hundreds of thousands of crowns. Here usually a businessman, who was given an order or some other lucrative transaction, collects after completing it their taxed remuneration and subsequently hand over the agreed sum of money to the politician or civil servant with whom the deal was struck. Another way to do it would be to buy shares or something else from that politician or civil servant at an inflated price.

Another method would be to pay an invoice to a company for a service of some kind — as a rule not one involving the delivery of tangibles — whose owner happens to be an acquaintance of that politician or civil servant. The owner of the company takes care of collecting the money in cash and then hands it to the final recipient.

A third possibility is to solicit someone specializing in this kind of operation who offers his services on a professional level to both parties — to the person who is doing the bribing as well as to the person being bribed.

All-embracing corruption services

Services of this kind have significantly gained in sophistication in recent years. Long gone are the days when the middlemen were mere carriers of money-filled envelopes. They now offer comprehensive services including tax and legal advice, the setting up and running of foreign companies etc. and rely on top lawyers and money laundering experts for advice. They do not address potential clients in a whisper somewhere in a quiet corner — they give professional presentations.

It has been long since they were limited to merely arranging such transactions. They are now actively seeking them out and assisting in their implementation — especially at the stage when the terms and conditions for public tenders are set (according to our information 90 percent of corruption cases involve tenders) but also when it comes to assessing the outcome of tenders, the signing of contracts or the increasing of costs as compared to the prices originally set down in the offer.

This is a whole new sector that has sprung up with a turnover running in the billions of crowns. It has been a long time that operators of this sort were working for politicians from just one political party — they now have contacts across the entire political spectrum and do not worry too much about the outcome of elections.

They do not address potential clients in a whisper somewhere in a quiet corner — they give professional presentations that press home to the audience their advantages as opposed to the competition. Close ties with the police, prosecutors and the courts are an important prerequisite for their success.

The anti-money laundering law and international cooperation in its enforcement present the biggest obstacles to such shady experts. It is, however, a big question to what extent declarations of assets could be helpful or, on the contrary, harmful in this regard. We are of the opinion that citizens cannot be all proclaimed criminals and be forced to prove the opposite.

According to this logic it would be possible if something gets stolen in your street for the police to go through all the houses in the neighborhood to find the stolen goods or, similarly, if a corpse is found in your city you would be automatically regarded the murderer for as long as you fail to prove the opposite. We think there are all manner of cheap and simple methods to reveal corruption there where it is actually happening without the need of harassing the rest of us.

It is the public sector, stupid!

We propose measures in the following three areas that should make the laundering and distribution of proceeds from corruption more difficult:

  • Trade register and Collection of Documents
  • Financial reporting by entrepreneurs and companies
  • Obligatory sections in contracts between the public sector and suppliers

The following measures are envisaged to exclusively pertain to those who have trade relations with the public sector, amounting to, let’s say, Kč 1 million a year or more. For the others all remains the same.

The trade register and its Collection of Documents is an invaluable source of information for citizens and journalists who want to check on corruption. Our proposals regarding this field are:

  • The entire content of the Collection of Documents regarding a company should be made accessible to anyone who wants to see it.
  • Self-employed contractors should likewise be obliged to submit their balance sheet, income statement and supplements to the Collection of Documents.
  • The sanctions for failing to include obligatory documents into the Collection of Documents could for example be punishable with a fine of Kč 10,000 per day without the possibility of abatement.
  • Documents regarding general meetings should contain a list of shareholders and shareholders are not permitted to remain anonymous although it would still be allowed for them to be represented by someone else.

Financial reporting by companies or self-employed entrepreneurs who have a business relationship with the public sector should include the following information signed by the company’s statutory body or by the entrepreneur:

  • A list of all commission agreements closed in connection with obtaining commissions for the public sector as well as the amount of the discharge fulfillment. If the entity offering to act as an intermediary is not an individual person, then the shareholding structure of such entity should be clearly displayed and unraveled.
  • Sums of money withdrawn by the companies and a list of all withdrawals above Kč 10,000 including the dates of withdrawals from all bank accounts.
  • A list of all contracts closed with the companies on the supply of intangible assets like commission agreements, marketing studies or other studies or individually created software, etc.
  • All acquisitions of stakes in other companies where it proves impossible to ascertain through the trade register who the share owner is.

The final area would involve mandatory sections that the public sector would have to include in its agreements with suppliers. Such provisions should already be part of the standard documentation submitted as part of a selection procedure:

  • A list of all shareholders of the company if stakes in the company are not being traded on public stock exchanges. If the shareholders are not private individuals there should be list of all shareholders “up to the level where it possible to distinguish private individuals or companies traded at stock exchanges.
  • Main suppliers are pledged to compel subsuppliers responsible for more than 5 percent of the contract to likewise fulfill all the above-mentioned obligations and, if subsuppliers fail to do so, the main supplier is certain to be subjected to strict sanctions. The same would, naturally, also apply to foreign suppliers.
  • The supplier is obliged to make all accounting accessible up to the level of primary documentation (contracts and invoices) to the auditor of the given state entity from the moment the agreement is closed until three years after the completion of the last subdelivery.

Tough but free of corruption

That this would amount to a very tough disclosure of suppliers to the public sector is clear. On the other hand everyone would have the possibility to avoid such a procedure by simply not supplying to the public sector. The described measures would of course be administratively demanding but would most probably reduce or significantly hamper the distribution or “laundry” of proceeds from corruption in the public sector.

What is at stake here is a significant reduction of corruption in the public sector, which is currently estimated at more than Kč 80 billion a year — a goal which is worth the struggle.

Everyone who is fighting for votes making public statements regarding all manner of anti-corruption strategies should clearly state whether they are prepared to enforce such measures or not.