The blame game

When bad business and bad politics wreak havoc, who’s accountable?

Adding it upNo 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 Krnáčová.
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 inappropriate.
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

Banking woes
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 immunity.

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, questions remain.
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 comment.

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.”

Taking action
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: V&V

The legal aspect

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: V&V

Bad hangover

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: Mafra
Dan Materna

Don’t 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.

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