Tom Nicholson in Bratislava -

A key Slovak witness in a multi-million-euro international VAT fraud case has told police that top members of the Slovak ruling Smer party, the Tax Office, police and the secret service knew of the scandal and profited from it financially, bne can reveal. The revelation is sure to cause further consternation in the EU, which in its latest Anti-Corruption Report released in February found Slovakia to be generally perceived as the most corrupt country in the EU.

According to sworn testimony that remains part of a confidential police investigation but obtained by bne, Milan Chovanec, 36, a lawyer from the eastern Slovakia city of Presov, has implicated MP Stanislav Kubanek, Deputy Interior Minister Jozef Bucek and the former head of the elite anti-organized crime unit, Michal Kopcik, in a cross-border fraud spanning five years from 2006 to 2011. The officials have denied his claims.

Chovanec made the allegations over the course of dozens of police interviews in January and February 2014, transcripts of which have been seen by bne. Police regard the Presov lawyer as one of the main architects of the fraud, and took him into pre-trial custody in November 2011. To date, 45 people have been charged in the case with tax and racketeering offences, with another 40 regarded as suspects. Damages are pegged at €20m, but according to unofficial estimates could exceed €50m.

Carousels

According to the police indictment in the case, filed in 2012, the tax fraud revolved around the Slovak company Tatra Trade Corporation (TTC) and involved over 100 Slovak, Czech, Polish, Latvian, Hungarian, US and Irish companies. These companies, investigators claim, dealt in gold bars, bricks, oak flooring, platinum, oil and other goods in a classic "carousel" scheme.

Such VAT scams typically involve the re-export of goods across international borders. As the goods cross each frontier, the exporter can demand the return of VAT paid. In fraudulent "carousel" transactions, either no goods are actually shipped, or the consignments are traded among shell companies until they wind up back with the original exporter, completing their "carousel ride".

Since coming to power in 2012, the Smer party-led government of Prime Minister Robert Fico has targeted VAT crime for special police attention, claiming that widespread fraud is costing austerity-straitened state coffers hundreds of millions of euros annually. A new electronic VAT audit system, introduced earlier this year, revealed the size of the problem: of over 14m VAT transactions reported in January, 1.7m were identified as “risky” by the Tax Office. Officials identified 108 previously unknown “carousel” schemes involving over 800 companies.

“For the first time, we have an accurate picture of VAT anomalies and of networks where the entire VAT sum disappears,” said Tax Office head Frantisek Imrecze April 15. “Our response to this information will be swift.”

However, senior police and prosecution sources tell bne that aggressive investigations, like that of Chovanec’s TTC, could unearth more embarrassing links between suspected VAT scammers and highly-placed Fico administration officials in the months to come.

Police protection

According to information from sources connected to the TTC investigation, Chovanec decided to talk after two years in custody in the hope of being released to provide financially for his young child and common-law wife, Katerina Simcikova of Prague, who has also been charged in the case. According to transcripts of Chovanec’ testimony, he told police that he hoped that if his evidence proves authentic, he will receive a reduced sentence. He remains behind bars. bne attempted to contact Simcikova, but her number has been disconnected.

In his testimony, Chovanec alleges that his TTC company came early to the attention of the police, but that far from prosecuting him and his associates, Michal Kopcik as head of the UBOK elite racketeering unit during the first Fico government of 2006-2010 agreed to protect the gang in exchange for a share of the proceeds. "In return for providing me with 'police supervision', he [Kopcik] received quarterly payments of at least €10,000 each," Chovanec told police. "Our cooperation began in 2007, mainly with regard to TTC's dealings in gold bars. Kopcik helped to thwart the work of the police anti-fraud unit."

Kopcik rejected Chovanec's claims. "These accusations are pure lies. I intend to file a libel complaint," he said in a statement when approached for comment by bne.

Chovanec told police in jailhouse interviews that his activities also attracted the attention of ostensible "fixers", such as a man he described to police as "Miroslav", and who promised to help him have accomplices selected as heads of local tax offices to facilitate further tax crimes. "Miroslav had contacts to people who worked in Banska Bystrica (the seat of the national Tax Office) and who comprised a group of top Tax Office bureaucrats, police and secret service officers, people who could influence decisions taken by these institutions," Chovanec claimed in his testimony.

"The Banska Bystrica group had detailed information on TTC and its business activities and partners, meaning that at any point they could have launched Tax Office audits and police arrests against me and my business partners. They also had detailed information about my personal life and the lives of my associates." Chovanec claims to have paid hundreds of thousands of euros in bribes and extortion money to Miroslav and his group.

Smer MP denies taking payments

But the gravest implications arising from Chovanec's testimony concern the alleged knowledge and participation in the fraud of two Smer party officials who remain in top posts today.

The name that comes up most often in Chovanec's extensive testimony – over 50 times – is that of Stanislav Kubánek, who serves as deputy chairman of the Smer party caucus in parliament and as the party's regional boss in Presov. When contacted by bne, Kubanek denied any knowledge of the scam or of the individuals involved. "I don't know who these people are, and I have no knowledge of the matters you refer to," he said April 1.

According to Chovanec, Kubanek allegedly facilitated cooperation between the VAT gang and the head of the local tax office in Presov. From 2007 to 2009, this office allegedly returned about €3.5m in fraudulent VAT rebates to the Renoir company of Presov, owned by Chovanec's brother Ivan. "This cooperation [between Renoir and the local tax office] was overseen by the Smer party boss in Presov Stanislav Kubanek, who took a cut of 8% in cash of all VAT returned to Renoir," Milan Chovanec claimed.

bne attempted on several occasions to contact Ivan Chovanec, but without success.

Milan Chovanec alleged to police that the pay-offs and all communication with Kubanek were arranged through Vladimir Palonder of Presov. Although Chovanec was not present at any meetings or transactions with the Smer official, "I was present during telephone conversations between Kubanek and Palonder… I had no need to independently verify Palonder's claims to have reached a deal with Kubanek, because we regularly received proof from all sides that it was so."

Palonder, 61, admitted during an interview with bne that he knows the Chovanec brothers, but said he had not taken part in any tax fraud. "They kept asking me to contact people who could influence tax office decisions, but I never did," he claimed on April 3.

Palonder said the Chovanec brothers had paid him €830 a month – a handsome salary in Slovakia's impoverished east – and had given him an SUV to use. He claimed his duties were limited to picking up the Renoir company's mail and driving Chovanec family members around Presov. "The money was like a life-line to me," he said. "I enjoyed having a lot of free time, and everyone envied me for being so rich with a big car."

Palonder failed to explain, however, how he had managed to hoodwink his employers – the organizers of a sophisticated criminal conspiracy – for over a year into believing he was arranging crucial political and police protection, when in fact he was doing nothing of the kind. "I just wanted to keep them happy, that's the kind of guy I am," he told bne. "I told them it was all arranged, and they never pressured me."

Interior Ministry: Payback for police successes

Deputy Interior Minister Bucek, according to Chovanec, helped to take police heat of the main company involved in the fraud, Milan Chovanec's TTC. "Bucek and Kubanek communicated with senior Tax Office officials... in order to have them drop their investigations of TTC during this period, especially regarding our trades in precious metals," Chovanec claimed.

Bucek denied the allegations to bne. "I have never met the individual in question [Chovanec], and I have no idea who he is. I will be filing a criminal complaint for libel and false accusation," Bucek said.

Bucek, according to Chovanec, also allegedly helped to have an accomplice appointed as head of the border police on the frontier between Slovakia and Ukraine in order to facilitate the gang's cross-border smuggling operation. "Following the appointment of this individual, Kubanek, Bucek and Kopcik received €100,000 a month," Chovanec testified to police in jailhouse interviews earlier this year.

Arms trader Ladislav Pipta, a co-accused in the VAT fraud and a name police have associated with organized crime since the 1990s, allegedly promised in return to provide police with the names of rival cross-border smugglers, "thereby helping the police to improve their record of solving cases and at the same time giving himself a monopoly over the black-market trade with Ukraine," Chovanec testified.

The Slovak Interior Ministry also issued a statement to bne rejecting Chovanec's testimony. "The Slovak police have been investigating this criminal organization, which claimed fraudulent VAT rebates, since 2008. Milan Chovanec is regarded as the main organizer of this group. Everyone has the right to protect himself as he sees fit, but we regard his testimony as a complete invention and falsehood. It is clearly motivated by the success of the police over the last two years in investigating VAT fraud, which has saved the state budget tens of millions of euros."

The whiff of official corruption ties in with perceptions in the EU of how this member state, which was one of the first ex-communist countries to join the bloc in 2004, has singularly failed to get a grip with burgeoning corruption.

In its latest "EU Anti-Corruption Report", Brussels found that corruption in a broader sense is perceived as most widespread in Slovakia. "Corruption in a broader sense is perceived as widespread in these countries (82% in Poland, 89% in Hungary and 90% in Slovakia)," the report said.