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The blame game
Written by: John Letzing
When bad business and bad politics
wreak havoc, who's accountable?
Adding it up
No one has been held directly responsible for the
following losses. As a tally of mislaid funds at
taxpayer expense, it is of course far from complete.
· Lost TV Nova arbitration: CZK10 billion
· Bad loans absorbed from Czech banks since 1990:
CZK 365 billion
· Preventable damage to the Prague metro: CZK 4.6
billion (contested estimate)
· Settlement with Housing & Construction for
D47 contractcancellation: CZK 626 million
THE CZECH REPUBLIC'S business and political
worlds often seem to compose a single, slippery tableau. When problems
arise - say, billions of crowns go missing at a bank, or damage
to public property isn't properly prevented - individuals connected
to misdeeds tend to slide into the dusky background. And when compromised
individuals are identified, they frequently find refuge in a labyrinthine
legal system, expressing a gross disregard both for public opinion
and the basic concept of right and wrong. What's worse: they usually
get away with it.
Petr Drulák, deputy director of the Institute of International
Relations, says, "people have gotten used to the idea that
politicians and public figures are glued to their chairs." Drulák
continues: "I'm not sure the political elite consider it (accountability)
a problem, and even whether the media and voters consider it a
problem." His concern is shared by Adriana Krnáčová, executive
director of Transparency International, a non-profit corruption
watchdog. "Accountability is one of the most important ways
to cure not only public administration, but also businesses," says
But notions of accountability are subject to cultural and national
context. After all, is the idea that mismanagement (criminal or
otherwise) should call for individual blame even a native one?
Martin Muchka, chairman of the Czech Radio and TV Council until
his dismissal last April, seemed to think not. When Czech taxpayers
were slapped with a 10 billion-crown arbitration decision due partly
to the council's failure to restrain the hijacking of TV Nova from
foreign investors, Muchka and fellow council members could only
produce a collective shrug. While politicians and the media clamored
for his head, Muchka claimed that in this country, his acceptance
of blame and resignation under the circumstances would have been
Most local observers refute Muchka's claim of exceptionalism, and like to believe
that EU membership will stimulate better accountability here. But the EU won't
be a cure-all. Take EU member Italy, for example, where a high-profile target
of criminal investigations, Silvio Berlusconi, is also the prime minister. The
head of the Italian branch of Transparency International recently told The New
York Times that Mr. Berlusconi is only guilty of being a particularly adept player
at what has been "a normal way of doing things." In this country, too,
avoiding blame and skipping from one high post to another has been a normal way
of doing things. Former Justice Minister Jan Kalvoda proved an exception when
it was revealed in 1997 that he'd faked a doctorate degree in law (a not uncommon
peccadillo). When the news broke, Kalvoda stunned the public by promptly resigning.
Asked if public disinterest allows others to get away with worse than his mistake,
Kalvoda wearily tells The Prague Tribune, "I keep asking myself that question."
Some may ask what difference it makes if offenders are held to account or not.
In response, reform-minded individuals cite the need to build public faith in
government and business. Vladimír Jaroš, head of corporate finance at brokerage
firm Wood & Company, says, "I'm scared about the level of tolerance
toward wrong-doing generally in the public...they think this is in some cases
the way business is, and that this is the way the system works.
Photo: MAFA-David Neff
In the 1990s, many as-yet state-owned banks became black holes,
odd points in the Czech financial universe where money, usually
through bad loans, frequently vanished. In order to clean up
their balance sheets prior to selling the banks, the government
swallowed a mountain of bad loans and dumped them into Česká
konsolidační agentura (ČKA). ČKA spokesman Jiří Pekárek sets
the amount total assets transferred from banks to date at roughly
CZK 365 billion. While the public has bemoaned the CZK 10 billion
loss at the TV Nova arbitration, it certainly pales in comparison.
The burden these bad loans have created for the average citizen
is extraordinary. As one local observer points out, if bank management
had been handled more responsibly in the '90s, "each Czech
tax payer would have saved tens of thousands of crowns." So
it would seem to be in the interest of new owners of privatized
banks to make an effort at public reconciliation (or at least image
burnishing) by holding those responsible for past losses accountable.
Unfortunately, it's not that simple. Komerční banka, for example,
accumulated CZK 92 billion in bad loans before dumping them on
the public's shoulders. Certain former KB management came under
suspicion regarding these loans in 1998. But when transition management
was put in place under Radovan Vávra to get the bank ready to sell
in 2000, no concerted effort was made to hold them accountable.
Vávra, for his part, chalks up the errors to inexperience. "What
these guys were doing was not right, but it also wasn't criminal," he
says. In fact, police are still determining whether some of the
loans were made illegally or not.
Asked why Société Générale, the French bank that purchased Komerční
banka, hasn't more aggressively pursued the prosecution of former
management, the bank's CEO, Alexis Juan, responds: "It's not
a matter for Komerční banka to decide about the character of former
mismanagement." Vladimír Jaroš, of Wood & Co., adds a
different take on why Komerční would avoid pushing for prosecution. "How
much could you collect back?" asks Jaroš. "Very little,
compared to money that would be lost by the bank through legal
costs." The bank must also consider, says Jaroš, whether it
would want to give its dirty linen another public airing.
Of course not only Komerční was the scene of suspect dealings in
the '90s. In fact the bank's past seems benign compared to IPB,
which dumped a hefty CZK 96.5 billion in bad loans on the state
before collapsing. The difference is that the Komerční banka brand
still exists. Komerční's new owner won't tolerate the mismanagement
that marred its past, but errors from the past will not simply
disappear - and no one has yet been held directly responsible for
them. Former Komerční banka CEO Richard Salzmann, for example,
went straight from Komerční to the senate, where he enjoyed political
Photo: Tomáš Kubeš
Keeping it underground
When Prague's metro was transformed into a muddy warren of caves
during last year's floods, rumors started flying. Most people
knew only that the system was meant to withstand nuclear attack
- and wondered how water succeeded where ten-megaton bombs could
not. Prague's City Hall, meanwhile, has found next-to-no-one
responsible for how poorly the metro withstood the waters. Last
May, when the city council interpreted a commission's investigation
into the flooding to have found water, and only water, to be
the culprit, there was a mild uproar. Though two officials -
the head of the Prague metro and its security chief - resigned,
Marián Hošek, a member of KDU-ČSL and a City Hall representative,
sat in on most of the metro flooding investigative commission's
sessions. (The commission was made up of politicians and technical
experts.) Hošek has no doubts about who should be held accountable
for most of the damage - he says that firms contracted to build
and maintain the metro simply did a shoddy job of implementing
cable bushings and concrete barriers. "If everything was built
according to plan, the metro could have (mostly) resisted the floods," says
Hošek. He estimates that two thirds of the CZK 7 billion in damages
could have been prevented. A technical expert who was a member
of the investigative commission, and preferred to remain anonymous,
concurs with Hošek. The specialist has it boiled down to exact
figures: 76% of total flood damage was "linked to metro construction,
from its project preparation to its final approval inspection." This,
while a mere 24% was due to floodwater penetrating metro entrances.
As for why the city council has avoided holding companies involved
in metro construction and maintenance accountable, Hošek points
to the close relations between City Hall and the boards of these
companies as one explanation. He sums up the situation as such: "the
metro and the construction of transport accounts for the major
part of spending, and there is a huge amount of companies involved.
There are connections between them and City Hall, and sometimes
these connections are not healthy."
The relationship between City Hall and companies contracted to
provide city services has long been a hotly contested issue. The
head of the anti-monopoly office (ÚOHS), Josef Bednář, states that
his office is now investigating 33 contracts for being illegally
awarded by Prague to a single bidder without tender. When we contacted
his office for this story, Prague Mayor Pavel Bém was unable to
The troublesome highway
Last summer, former Transport Minister Jaromír Schling awarded
a contract for the proposed D47 highway (in north Moravia) to
a construction consortium called Housing & Construction.
It subsequently became clear that Housing & Construction
had never entered a public tender. The peculiarities of the situation
were many, most prominently the fact that potential future costs
had not been accounted for. By some estimates, the final price
tag could have reached upwards of CZK 200 billion. Quite a sum
for a stretch of road, when one considers that the Temelín power
plant, potentially the source of 30% of our energy, cost roughly
half that to complete. The new government has extricated itself
from the deal - but only after having to settle with Housing & Construction
for EUR 20 million (CZK 626 million). The case has since been
handed over to the police for investigation of possible corruption.
So Czech taxpayers have a new headache: the payoff to Housing & Construction,
and still no highway to show for it. When asked about the D47 affair, Schling,
now a parliamentary deputy, says the decision was taken to give D47 exclusively
to Housing & Construction due primarily to time constraints. Addressing accusations
of corruption, he says, "all of the exceptions taken to what happened are
insubstantial or are clearly malicious, and I am ready to prove it, any time." Lawyers
involved in the D47 affair confirm that Schling's approval of the contract was
legal. Legal, says Jaroslav Havel, but not very responsible. Havel, an attorney
with Deloitte & Touche involved in getting the D47 contract cancelled, points
out that for the government to enter into such a contract with a single supplier
was extraordinarily bad policy. "The Czech state is not in a position to
take such a big risk," he says.
Assigning accountability for the D47 debacle is a murky business. Schling did
sign off on the deal, but he was being advised by others. As for the peculiar
way a single bidder got in the door, Mr. Schling was quoted in Mladá fronta Dnes
as saying he couldn't "put his hand in the fire" for subordinates at
his ministry who may have been involved in inappropriate dealings. So if he as
the minister can't take responsibility, who can? "Of course the minister
himself is responsible not only for his own actions but for the overall results
from his ministry," responds Schling. "I wouldn't hesitate to act in
an adequate way if any serious mistakes made by the ministry during my tenure
would show up," he adds. The police should report their findings on the
D47 affair in autumn of this year.
The law, or lack thereof
So the D47 highway case, as with those of suspect bank loans, is
now in the hands of the police. For many, this is far from reassuring.
When Radovan Vávra was charged with preparing Komerční banka
to be sold, he entrusted the police to investigate mistakes from
the bank's past. "You have no idea how incompetent these
guys were," says Vávra. "It would exceed your wildest
dreams." We got a glimpse of the inner workings of the Czech
police financial crimes unit (UFKOS) earlier this year when one
of its top detectives, Václav Láska, resigned. Láska, who was
in charge of the IPB bank investigation, says that the unit (founded
in 2000 under the aegis of the Ministry of the Interior) toiled
under a bureaucracy so opaque it seemed pulled directly from
a Kafka novel.
He adds that there was a definite turning point in terms of support
from superiors: "from the time the unit started investigating
cases connected to various politicians, we started to feel a certain
pressure." Asked if it was possible that his superiors would
perhaps have preferred the IPB case not be solved, Láska says: "It's
difficult to answer that. Sometimes I felt real pressure...but
it wasn't clear if it was coming from the business side or the
political side." He adds that to disrupt his investigation,
merely allowing bureaucracy to suffocate it would have been sufficient.
Now that he's resigned, Láska sounds bitter. "What the management
of IPB did in those days was what management of almost every Czech
bank did," he says. "We didn't necessarily want for people
to be arrested, all we wanted was just to make clear to the public
that yes, they did something wrong."
Pursuing accountability through the police or courts may be problematic
for the average citizen, but there is one potential way to get
a clearer idea of how money circulates among government and business:
a taxpayer's association.
To date, no significant taxpayer association exists in the Czech
Republic. Nataliya Biletska, a consultant with the World Bank,
recalls starting a program to identify and promote potential associations
in this region two years ago. "We were unable to locate any
Czech taxpayer associations," she says, though she points
out that both Poland and Slovakia (our fellow EU aspirants) have
since managed to develop taxpayer associations that do "concrete
work in monitoring and controlling government spending."
Meanwhile, educators are focusing on the problem in classrooms
- at Czech business schools, ethics is slowly taking hold as a
normal part of the curriculum. Marie Bohatá, former head of the
Czech Statist-ical Office (ČSÚ), finds herself in a unique position.
After resigning due to flubbed statistical numbers earlier this
year, she now teaches students about the rights and wrongs of accountability
at CMC, a private business school in Čelákovice. Bohatá claims
she wanted to "set an example" for students by resigning
for what were errors committed by subordinates. "Accountability
is perhaps a concept too sophisticated for a country in transition," says
Bohatá, though she feels most students have a grasp of the issue
that bodes well for the future.
Yet, despite the efforts of people like Bohatá, there is no absolute
imperative here for reform. Above all, accountability is really
a matter of preference - if people are comfortable with the way
things have been done, they will continue as such. Petr Drulák
points out that the issue remains volatile within our future political
home, the EU: "This is what divides (the EU) into two halves
- the north and the south. From that point of view, we are in the
south." Ralf Dreyer, first counselor of the EU delegation
in Prague, acknowledges that EU has given this country no concrete
guidelines as far as accountability goes. "The Czech Republic
has its own way to follow," says Dreyer.
Unlike last month's EU referendum, the vote in progress on the
accountability of Czech political and business leaders isn't nearly
as concrete as dropping a ballot into a box - though it's certainly
no less important. What's clear is that if there is to be improvement,
the elite must realize they'll be held to higher standards. "When
people let politicians get away with things and then vote for them
again and there is no pressure," says KDU-ČSL member Marián
Hošek, "nothing is going to change."
The public will, however, is uncertain. Drulák says that "(accountability)
is not something which stirs people up... but once the state is
forced to start a more restrictive fiscal course, people will become
angry, and start to look for culprits. Maybe there is a sort of
hidden dissatisfaction, and people are just waiting for an incentive." Judging
by the thousands who have taken to the streets in recent months
to protest being squeezed by public finance reform - from factory
workers to doctors, teachers and airline pilots - that incentive
may be at hand.
Arthur Braun Photo:
For plaintiffs seeking redress in matters of business
crime, going to court is daunting - especially once
bankruptcy proceedings have started. Arthur Braun,
a partner with Haarmann Hemmelrath in Prague, says, "usually
creditors give up fighting as soon as bankruptcy
is opened, because their experience is there's nothing
to be gained." In theory, adds Braun, a paper
trail should exist that links any gross mismanagement
to those responsible, "but usually people say,
'I won't waste money chasing this, I'll just have
to write it off.'"
One window of hope, says Braun, may be a future emergence
of civil, rather than criminal cases - in civil cases,
the burden of proof is born not by the plaintiff,
but by the managing director liable for damages.
So far no cases based on civil law have emerged,
but Braun is confident that they will: "(creditors)
have been chasing these people and no, they're not
satisfied with seeing them get away."
Adriana Krnáčová Photo:
When grasping for explanations for the Czech Republic's
problems, many reference the pre-'89 era almost reflexively. "If
you admitted making a mistake (under communism), you were
stamped out," says Adriana Krnáčová, head of Transparency
International; her logic being that avoiding blame is in
part a legacy of the past. One local banker adds that under
the old regime, a real mistake wasn't even required: "If
you were purged, it was not for wrongdoing, but was random...
so people (now) just don't expect our business leaders to
be accountable." However, others point out that many
countries with no communist past are also grappling with
the troublesome issue of accountability - and that a lack
of accountability here goes back even to the First Republic.
Still, there is a certain amount of comfort in thinking the
problem can be more easily addressed the further communism
recedes into the past.
Václa Láska Photo:
call the cops
IT WAS UP TO Václav Láska, a former
detective with the financial crimes unit of the Czech Police,
to unravel the Gordian knot of bad loans that undid IPB bank
in 2000. The bank had been run into the ground by management
with strong political ties, saddling taxpayers with nearly
100 billion crowns in debt.
Láska resigned from his post early this year, having obtained
no convictions. He claims a mere three investigators were
working on the IPB case for the under-funded police, though
12 had been officially appointed. "I had promises from
several people that there would be more people put on investigations," says
Láska, adding, "but in reality, nothing was happening." Since
resigning, Láska has taken a job working at a firm called
Focus Five under Jiří Teryngel, who had defended IPB management
as an attorney. Láska is tight-lipped about Focus Five, declining
to discuss what they do, but he states that because as a
cop sniffing around IPB he had no direct contact with Teryngel,
there is no conflict of interest. Critics say Láska has sold
his soul to make good on the inside of the power structure.
But others speculate that Focus Five may be one of a new
breed of forensic investigation firms with private funding,
and could succeed where the cash-strapped police have failed.