Slovak fraud allegations raise questions ahead of election

Slovak fraud allegations raise questions ahead of election
Was Transport Minister Jan Pociatek's code name "Shaggy"?
By Benjamin Cunningham in Bratislava February 2, 2016

Just weeks before elections, Slovak media have linked two cabinet ministers to a long-stalled carousel fraud investigation that cost the state at least €75mn between 2007 and 2011 and has seen more than 40 people criminally charged.

Alhough the investigation has lingered since at least 2009, no top officials have been directly implicated as yet. However, revelations published by Trend on January 27 allege that Interior Minister Robert Kalinak and Transport Minister Jan Pociatek helped cover up the scheme at the very least. The weekly calls the pair the “main actors” in the fraud.

Kalinak held the same post in an earlier government led by Prime Minister Robert Fico and Pociatek was formerly finance minister. The pair jointly founded a company in 2000 and they have seen their total wealth grow by €2.8mn and €4mn respectively during their time in office, according to the report.  

Milan Chovanec, a lawyer from the eastern Slovak city of Kosice, confessed to organising the fraud in November 2013, with the Tatra Trade Corporation (TTC) as the focus of the scheme. Trend purports to have documents that include transcripts of wire-tapped phone conversations stemming from the period that the fraud was being committed, as well as some from an interrogation involving Chovanec during the spring of 2015.

A standard carousel fraud sees a company import goods from abroad and then sell them on to a series of other companies where they are re-exported. Each company in the chain is responsible for paying VAT, which they recover by charging it on the resale before the state reimburses it on on the goods that are exported. Either the first or last link in the chain often disappears before the state authorities catch up with the series of transactions.

This version of the scam is alleged to involve more than 100 companies in the Czech Republic, Hungary, Ireland, Latvia and Poland, with masterminds based in eastern Slovakia. They are said to have been making fake transactions involving materials like gold, platinum, bricks and oak flooring.

While Trend alleges that Slovak officials did their best to shelve the investigation, authorities elsewhere have been less willing to push the case aside. Chovanec contends that a network of politicians, police, intelligence officials and prosecutors helped cover up the scheme.    

“The businesses I described never had a real commercial basis and the primary motivation from the beginning was to take in state funds through the unauthorised collection of VAT in Slovakia, the Czech Republic and Hungary,” he says in the interrogation transcript.

Kalinak denies the allegations and claims he plans to sue for libel. A statement from the interior ministry calls the allegations “fiction” and notes that the article’s main source, Chovanec, is a criminal. The same document seeks to highlight Smer’s fight against tax crime, noting that it has “gone for the jugular” when it comes to tax cheats and set up the "Tax Cobra" task force that binds police, customs officials and the finance ministry.   

However, Trend notes that some of Chovanec's claims during interrogation are corroborated in the transcripts from phone conversations taped by the Slovak Intelligence Service (SIS). Code names are used to refer to alleged players in the scheme, including “Robo”,“Strapaty” (Slovak for “Shaggy”), and “Stano”. Chovanec claims those are references to Kalinak, Pociatek - with his spiked hair - and Stanislav Kubanek, Smer’s party chief in the eastern Presov region.

Chovanec’s testimony also alleges tensions between various factions within the Smer party. He claims those tied to Kalinak are opposed by a group headed by Pavol Paska, a Kosice political boss and former parliamentary speaker forced out by corruption allegations in the health care sector in 2014.  

The revelations, just weeks before the March 5 election, strike at the heart of Smer’s attempt to secure another outright majority in parliament. Even those skeptical of Smer’s achievements during its current term acknowledge that they have made inroads against VAT fraud.

“The only systematic economic policy the government has had is raising revenues by increasing taxes and cracking down on tax avoidance,” Martin Vlachynsky, an economist with the Institute of Economic and Social Studies in Bratislava, asserts to bne IntelliNews.

Indeed, the Smer government has used improved tax collection to lower the country’s budget deficit, which is forecast at 1.93% of GDP this year. A series of policies to boost VAT revenues, including a lottery system designed to encourage customers to demand a retail receipt, which can then be exchanged for a lottery ticket, have been implemented.

Historically, Slovakia has been one of the EU’s worst performers when it comes to the "VAT gap," the difference between VAT that is actually collected and what theoretically should be due based on overall GDP. According to a European Commission analysis, Slovak VAT collection was about 35% down in 2013; however, that was an improvement on 39% the year before.

The report in Trend offers an extra level of intrigue, aside from the obvious connection to the upcoming election, which Smer is expected to win comfortably. The business weekly is owned by financial group Penta, which has long been careful to remain friendly with whomever governs the country.

Kalinak’s office contends that the story was planted to damage his and Smer’s electoral prospects. If true, it could signal a growing divide between the governing Smer party and some of the country’s most powerful business people.   

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