EN: Spare a Moment for the Financial Analytical Office (FAU)


Spare a Moment for the Financial Analytical Office (FAU)

AKRO investiční společnost, a.s. welcomes the news that the Czech Republic is taking the European Commission to the European Court of Justice. We believe this decision will back-fire on the Czech State by highlighting the manner supposedly independent institutions have been compromised by politically linked-oligarchs: What economists refer to as State or Regulatory "capture". We also welcome the investigation by members of the European Parliaments's Budgetary Control (CONT) committee. We believe these two events will indirectly highlight the challenges investors in the former CS Funds face in their own fight for justice against the Czech State at the European Court of Human Rights.

The European Commission halted subsidies to AGROFERT, a.s. following concerns about the possible conflict of interest of Czech Prime Minister Andrej Babiš, who founded AGROFERT, a.s.. While AGROFERT, a.s. was placed in trust funds, European Commission audits said that he still had control over it. Meanwhile, civic group the Milion Chvilek Pro Demokracii "One Million Moments for Democracy" have focused on the perceived machinations at the Ministry of Justice, which they allege could have been an attempt by the Prime Minister, Andrej Babiš, to influence the outcome of an EU Subsidy fraud investigation. The European Parliament's Budgetary Control committee, currently investigating the Prime Minister's alleged conflict of interests, might also like to take note of the shenanigans at another small, but key, organization that may have been overlooked: The Financial Analytical Office.

The Financial Analytical Office (Finanční analytický úřad), or FAU, is the organization charged with investigating ''money laundering'', or as the Czechs like to call it, the ''Legalisation of Proceeds from Crime''. In the Czech Republic, it is widely acknowledged that the main proceeds generating offenses include: tax crimes, corruption, public procurement machinations, and subsidies fraud (subvention). However, questions remain: How truly independent this organization is? Why has it been starved of adequate funding? Why was Andrej Babiš, while Minister of Finance, and under investigation for EU subsidy fraud, able to have this Department under his ministerial remit? 

A History of Regulatory Capture?

As many readers will know, the FAU has a controversial history. At times, officials at the FAU have gotten too close to those whom they are meant to be investigating; what economists term 'regulatory capture'. In 1997, officials at the FAU were implicated in the most spectacular financial fraud of the 1990's when thanks to the maladministration of officials at the FAU more than CZK 1.2bn was stolen from the CS funds [for which 60,000 investors still haven't received neither government compensation nor an apology].

More recently, the independence of the FAU has again come under scrutiny. While Andrej Babiš was Minister of Finance (MoF), from January 2014 to May 2017, the FAU was a department within the MoF. For a person who was under criminal investigation for EU subsidies fraud, to have had the organization responsible for investigating the laundering of such money reporting to him, was clearly embarrassing. But it's not just the work of the FAU that was possibly compromised: Directly and indirectly, the FAU also has access to information from numerous sources, including domestic and foreign law enforcement authorities, e.g. Interpol, Europol, CARIN, ARO, EPAC, StAR, relevant EU institutions as well as foreign security forces.

Not only is the FAU responsible for investigating money laundering, from subsidy fraud and other offenses, the FAU is also considered the main actor in anti-money laundering policy making. In other words, an individual who's been accused of subsidy fraud, and hiding his continuing control over AGROFERT, a.s., was quite literally in the position to set the agenda for tackling money laundered as a result of subsidy fraud.

In a further twist, European Commission audits claim Mr Babiš remains the beneficial owner of AGROFERT, a.s., while at the same time AGROFERT, a.s., the company Andrej Babiš founded, was been one of the country's largest recipients of EU subsidies. Indeed, the European CONT Committee points out: ''The AGROFERT Group have received significant sums from the European Structural and Investment Funds during the 2014-2020 period, ranging from EUR 42 million in 2013 to EUR 82 million in 2017''. These are staggering sums of money, implicitly in excess of EUR 330m over this time period. Mr Babiš is Chair of the Czech Council for the European Structural and Investment Funds.

Given these potential conflict of interest, the obvious question then arises: Why weren't the alarm bells ringing within the FAU earlier? The FAU is, after all, the organization tasked with investigating subsidy fraud (subvention). Were staff scared to speak out against their Minister?

Coincidentally, in September 2015, mid-way through Mr. Babis's tenure as Finance Minister, the Czech Republic was placed under MONEYVAL Compliance Enhancing Procedures (CEPS), most notably due to a ''continuous lack of progress on remedying gaps in money-laundering and terrorist financing offences''. It would appear investigating money laundering offences wasn't a priority during Andrej Babis's tenure as Finance Minister. The CEPS was subsequently suspended pending an onsite visit to the Czech Republic scheduled for the first half of 2018.

Just a Change of Name?

Partly as a response to the aforementioned issues, in January 2017, the Czech FAU changed its status from a 'Department' within the MoF to an 'Independent Administrative Office', but still under the MoF. The question therefore arises: Just how independent is the FAU? A request by the author for clarification from the MoF as to who chooses the head of the FAU and who sets the organisation's budget remains unanswered. Meanwhile, it looks like business as usual, with the same people, in the same building doing the same job.

Of course, Alena Schillerova now heads up the Finance Ministry, but as one of the Prime Minister's closest political allies, the potential conflict of interest remains. In a telling news release, she praised the work of her colleagues at the FAU.

"Thanks to the hard work and huge commitment last year, our colleagues from the Financial Analytical Office secured an unbelievable 1.5 billion Czech crowns from crime, more than the previous two years together, which is great news and I am grateful for it. This money is definitely not just a number. Amounts secured by tax fraud are returned to the state budget, while money from other crimes goes back to the victims, " said Finance Minister Alena Schillerová.

"Díky tvrdé práci a obrovskému nasazení loni naši kolegové z Finančního analytického úřadu zajistili z trestné činnosti o neuvěřitelných 1,5 miliardy korun více než za předešlé dva roky dohromady, což je výborná zpráva a já jsem za ni vděčná. Tyto peníze rozhodně nejsou pouhým číslem. Částky zajištěné z daňových podvodů se vracejí do státního rozpočtu, zatímco peníze pocházející z jiné trestné činnosti jdou zpátky k poškozeným," uvedla ministryně financí Alena Schillerová.

So which is it? Are the personnel working in the FAU independent or colleagues? It seems the FAU is part of the MoF when it suits and 'independent' of the MoF when that suits better. A typical Czech fudge.

This skepticism about the real independence of the FAU would appear to be shared by others. A former member of the AML, Department of Criminal Police, recently reached out to comment that: "No institution like the FAU is ever really independent''. If the police have only qualified confidence in the independence of the FAU, why should anybody else?

It seems the only thing that has really changed at the FAU is its description as ''independent''.

Limited Resources & Unnecessary Duplication

In the 2018 MONEYVAL evaluation, the limited resources provided to the FAU and the duplication of some of its activities with those of the Czech National Bank (CNB) was noted. It remains odd, that an organization whose activities are more than self-funding should be starved of adequate resources. Furthermore, in an environment of inadequate resources and questionable independence, it is difficult to envisage that investigating one's political masters was a high priority.   

What's the Solution?

Implicit in the MONEYVAL evaluation is the suggestion that greater resources should be allocated to the fight against financial crime and that the activities of the FAU should be folded into those of the CNB. The CNB's independence is written into its founding Statute, the MoF by contrast is guided by its politically appointed Minister. Of course, the FAU's activities also logically fit within the scope of the Interior Ministry and police. Indeed, in many countries, that's where the domestic Financial Intelligence Units (as these organisations are generically termed) usually operate. Why the FAU therefore remains under the remit of the MoF remains a mystery. 

Concluding Remarks

While attention has focused on the Prime Ministers alleged beneficial ownership of the AGROFERT, a.s., and his role in relation to EU funds, it is hoped that the European Commission will also look at the potential conflict of interest with regard to the FAU, the body charged with investigating subsidy fraud.

In a not wholly unrelated case, representatives of the 60,000 defrauded investors in the former CS Funds have recently announced that they are taking the Czech State to the European Court of Human Rights for being denied the right of a fair trial. The case centres on maladministration by the FAU, which facilitated the theft of CZK 1.2bn from the CS funds in 1997, and the actions of State institutions which have denied investors their right to compensation for more than 20 years.

[i] The former CS fonds are now in the process of being liquidated by the MoF. AKRO investiční společnost, a.s., which represents the damaged investors, is taking the Czech State to the European Court of Human Rights on the grounds that the Czech Courts acted unfairly and perversely when it ordered the return of previously awarded compensation, along with statutory interest, to the Czech State. The case centres on maladministration by the FAU which allowed CZK 1.2bn to be stolen from the CS Funds in 1997. https://www.akro-blog.cz/l/en-do-investors-in-the-former-cs-funds-hold-a-european-trump-card/

Jeremy Monk

Investment Director

AKRO investiční společnost, a.s.

28th February, 2020