Does the Czech Republic’s Financial Intelligence Unit (FIU) Risk Suspension from the Egmont Group?

Tarnished Image

The Czech Republic's ongoing membership of the Egmont Group, a global financial watchdog, looks increasingly untenable. Recent explosive 'conflicts of interest' revelations related to both Andrej Babiš, and the 'tunneled' former CS Funds, have highlighted fundamental governance and operational flaws at the Czech Financial Analytical Office.

The Egmont Group, an international network of more than a 160 financial intelligence units (FIUs), provides members with a secure system to share information to fight financial crime. Typically, information shared relates to suspected money laundering, terrorist financing, tax fraud and subsidy fraud. The information, and the sources of that information, is therefore of a highly sensitive nature. In the event that this information is compromised, not only it can undermine public confidence in the system of reporting suspicious financial transactions but leaves individuals and organisations vulnerable to retribution.

In February last year, we wrote about the 'conflicts of interest' at the Czech Financial Analytical Office (Finanční analytický úřad), or FAU, the organization charged with investigating ''money laundering'' and other financial crimes in the Czech Republic. Since writing, there have been a number of significant developments related to:

Andrej Babiš and the FAU

Background

While Andrej Babiš was under criminal investigation for EU subsidies fraud, as Minister of Finance, the FAU, the organization responsible for investigating money laundering, was reporting to him. During this period, it has now emerged that Agrofert, the company founded by Mr Babis, was one of the largest recipients of EU subsidies.

Furthermore:

  • In a direct rebuke, a European Parliament Resolution, dated 15th June, 2020, called on the the Czech FIU to be more proactive and '' to ensure effective checks of beneficial owners by the entities responsible under the anti-money laundering rules''. It appears checking on their boss wasn't a priority.
  • Press reports have emerged suggesting public officials have felt or been intimidated when trying to raise concerns about potential conflicts of interest. Most notably, in February, members of the European Parliament's CONT Committee, investigating potential conflicts of interest, were subject to abuse and even death threats.
Traitors and Informers? Czech MEPs on the European Committee on a Budgetary Control fact-finding mission to the Czech Republic found themselves subject to a ‘’Hate speech’’ and an ‘’attempt of intimidation’’.
Traitors and Informers? Czech MEPs on the European Committee on a Budgetary Control fact-finding mission to the Czech Republic found themselves subject to a ‘’Hate speech’’ and an ‘’attempt of intimidation’’.

The 'Tunneled' CS Funds and the FAU

Background

The 60,000 defrauded investors in the former CS Funds, continue their legal fight for compensation in relation to repeated acts of maladministration by the Czech Financial Analytical Unit (FAU). Specifically, in 1997, staff at the FAU failed to block the transfer of stolen funds abroad despite being warned that the transaction was suspicious. The FAU then delayed filing a criminal complaint making it extremely hard for the police to either retrieve the stolen money or apprehend the main culprits. Tellingly, more than 20 years after the event, investors have received neither an apology from the FAU nor compensation from the government.

  • In a strange and surprising legal twist in the CS Funds case, in 2018, a Czech court revisited the issue of the Statute of Limitations (for the 3rd time) and, after admitting only evidence from the State, ruled that investors had to return previously received compensation, with 8% pa penalty interest added during the time the compensation had been held. As a result, the Czech State, through the actions of its court system, rewarded itself for the FAU's maladministration! Unbelievable, but true.
  • Even more bizarrely, it has come to the author's attention, that in a Czech Television (CT) investigative documentary (broadcast in 2019) frustrated Swiss officials claimed that when a gold transfer (many years after the original CS Fund fraud) triggered a Suspicious Transaction Report (STR), which was sent to the Czech authorities, it wasn't acted on. The Swiss authorities believed that the transaction may have been linked to the original CS Fund fraud and found the inaction by the Czech authorities incomprehensible. The author has been unable to verify these allegations. The author understands this is not the first time the Swiss authorities have complained about the Czech handling of STR's.

It therefore looks as though the FAU may have 'looked the other way' to both: 1) The conflicts of interest related to Andrej Babiš, and 2) The FAU's own conflict of interest in following up on leads related to a fraud which it itself had facilitated in 1997 by repeated acts of maladministration.

The FAU's annual reports continue to neatly 'skip-over' these and other contentious issues. So compromised is the FAU, subsidy fraud, or for that matter the CS Funds, gets little or no mention in the 2019 Annual Report.

To most Czechs, this will come as no surprise. Recently, the Czech Republic came last in a global corruption ranking by GRECO, the Anti-corruption body of the Council of Europe. The Czech Republic ranked last with regard to the Implementation of Council of Europe recommendations on preventing corruption among MPs, prosecutors and judges. The GRECO report alluded to the mass demonstrations and widespread public perception that State institutions have been compromised.

The Czech Republic therefore hasn't just found itself breaching basic principles laid out by the European parliament, GRECO, Moneyval, FATF, Egmont Group, etc.; a whole civic movement has formed. Meanwhile, the Czech Republic continues its slide down Transparency International's Corruption Perceptions rankings. Public trust in the independence of state institutions couldn't be lower.

The Czech Financial Analytical Office (FAU) Drops the Charade of Independence

Since January 2017, the FAU changed from being a ''Department" of the Ministry of Finance to an ''Independent Administrative Office''. Following our earlier blog, questioning just how independent the Financial Analytical Office (Finanční analytický úřad) is from the Ministry of Finance (MoF), and therefore possible political interference, we received some belated answers to some basic questions. In the response, the FAU's Legal Department drops the charade of being 'Independent' pointing to just a ''higher degree of independence in decision making''.

When asked: Who sets the [now separate] budget of the FAU? The response was: ''the activities of the Financial Analytical Office are materially, administratively and financially ensured by the Ministry of Finance.''

The FAU's description as an 'Independent Administrative Office' is therefore a blatent misnomer. The FAU would appear as ''Independent'' as the Democratic People's Republic of Korea is ''Democratic''.

The current Minister of Finance, Alena Schillerova, remains a close political ally of Andrej Babis. In Press releases, FAU staff are described by the Minister as her "colleagues''. Put another way: Would you submit an Suspicious Transaction Report (STR), related to Andrey Babis, to ''colleagues'' of his closest political ally? I know, I wouldn't.

That the FAU remains linked to the MoF, rather than the police or a politically independent supervisory body, e.g. Czech National Bank, looks politically motivated; especially in light of the ongoing criminal investigation into possible subsidy fraud by the Prime Minister and accusations he is exercising continuing control over his business empire (which includes some major newspapers). The current organisation therefore leaves the Czech FAU vulnerable to both:

  • Political interference in the operations of the Czech FAU.
  • Breaches of security or confidentiality of information.

The way subvention fraud has now been downplayed by the FAU, and the circumstances that led frustrated Swiss officials to go public with their concerns about the CS Funds (and other) investigations, rather underlines these vulnerabilities.

What's the Damage?

Were politically sensitive STR's acted on or were they 'buried'? Were reporting entities and staff within the FAU reluctant to report concerns related to alleged subsidy fraud (linked to Mr Babis) or the tunneling of the CS Funds (linked to repeated maladministration by officials at the MoF/FAU)?

The Egmont Group

The Egmont group is committed to building trust and confidence in its network of Financial Intelligence Units (FIUs). Recent scandals at Interpol, with accusations of politically motivated arrest warrants, have demonstrated just how fragile that trust in international institutions can be. The Egmont Group declined to comment on the specific case of the Czech FIU. However, it is on record as saying potential ''political interference'' and ''breaches of security or confidentiality of information'' would be reasons to initiate a review. ''If these are compromised, the Egmont Group can take steps to support the FIU or take corrective measures including the suspension of an FIU as a member.'' This is no idle threat, in the past the Vatican, Syria, Nigeria, amongst others, have been subject to suspensions.

Concluding Remarks

The current organisation of the Czech FIU makes it vulnerable to both political interference and breaches of security [not least from 'whistleblowers']. This is not an issue that can be resolved by attendance at one of the Egmont Group's courses on Operational Independence and Autonomy or a Financial Action Task Force (FATF) seminar Identifying Beneficial Owners. Alas, it has gone far beyond that stage.

That the Czech Financial Analytical Unit remains within the broad remit of the Ministry of Finance looks a politically motivated decision to forstall efforts to investigate the Prime Minister and his business empire. It is the author's opinion that the Czech FIU should be part of the police or Czech National Bank (CNB); the latter being the financial market supervisory body, which has independence written into its founding statutes. Indeed, implicit in the last Moneyval review was the suggestion that the Czech FIU should be under the the Czech National Bank (to combine limited resources and avoid duplication). However, such a move is likely to be strenuously resisted by Mr Babis's allies and those in the FIU who have 'something to hide'.

Jeremy Monk
Investment Director,
AKRO investiční společnost, a.s.
Prague. 10th February, 2021

Afterword

Since 1997, AKRO investiční společnost, a.s. has managed the former CS Funds and has been seeking compensation from the Czech government for the repeated acts of maladmisnistration by the MoF/FAU which facilitated the tunelling of the former CS Funds. The MoF was at that time also the financial market Regulator/Supervisory body.

The damaged unit-holders in the former CS Funds have received neither an apology or compensation from the government. It is therefore with horror and disbelief that, years after the original fraud, Swiss officials should again accuse the the Czech authorities of 'looking the other way' to a Suspicious Transaction Report (STR) possibly linked to the CS Fund fraud.

The author would like to stress that he has not personally seen the Czech Television documentary; now subject to a court order which Czech Television is appealing against.

Disclaimer

This article does not constitute investment advice or a recommendation to buy or sell any security.