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Corruption Watch: February 11, 2002

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February 11, 2002

11 February 2002, Volume 2, Number 5

SPECIAL ISSUE: The Two-Headed Falkon -- One Scenario

By Roman Kupchinsky

When the Soviet Union ceased to exist in 1991, its largest component, the Russian Federation, agreed to inherit the debts of the nonexistent USSR as well as the payables owed to it. The Russians also insisted on inheriting all the property owned abroad; all the embassies and consulates throughout the world.

The Soviet debt to Czechoslovakia was in the vicinity of $5 billion. When the Czechoslovak Federation dissolved in 1993, the Russian debt was divided between the new entities; the Czechs would get $3.6 billion and the Slovaks $1.1 billion. About $400 million was intercompany debt and was not included in the overall state debt.

In the following years, efforts were made by the Czech side to get the Russians to repay this debt. The Russians were offering goods in lieu of cash, and while this satisfied the Slovak side in its own negotiations with the Russian Federation, the Czechs insisted upon cash. The negotiations reached a standstill in April 1993 when the Czech minister of industry and trade, Vladimir Dlouhy, went to Moscow and announced that there had been a shift in Prague's strategy. The debt issue was taking a back seat to the development of trade with the Russian Federation. Dlouhy announced that the Czech Republic was ready to take the debt issue to the Paris Club, which brought together the creditors of the former USSR. There was not any resolution through the Paris Club and the issue lay dormant until June 2001.

It was then that Russian Premier Mikhail Kasyanov and his Czech counterpart, Milos Zeman, met in St. Petersburg and penned an agreement that would allow the Czech government to sell part of the Russian money owed to it. The sum agreed upon for purchase was $2.5 billion out of the total of $3.6 billion. It would be sold to a company in Prague called Falkon Capital for $570 million, or about 20 percent of the agreed upon sum. At this meeting, Kasyanov insisted upon the need to keep the details of the agreement secret. Zeman agreed to this stipulation.

On 9 October 2001, Kasyanov came to Prague at Zeman's invitation and they signed a formal agreement on the debt issue. On 11 October 2001, the Czech government and Falkon Capital signed a preliminary agreement on Falkon's purchase of the debt.

CLOUDS GATHER

When some details of this deal became public, a Czech right-of-center party, the Freedom Union, demanded that the contract between the government and Falkon be made public. This was needed, they said, since the money would be going to the state budget. The government refused to comply with this demand and the Finance Ministry issued a statement claiming that "international agreements were classified." Besides, the ministry said, they did not have the consent of Falkon to publicize the document. They added that the contract was subject to business secrecy.

As criticism of the deal grew in the press, the Czech government claimed that Falkon had won a tender for this deal in the summer of 2001. Yet, Czech journalists insist that nothing of the sort took place and challenged the government to name the other companies which submitted bids. None were ever produced.

On 13 December 2001, Falkon Capital closed the deal with the Czech government and a few days before Christmas deposited $570 million in U.S. dollars into an account at the Prague branch of Deutsche Bank. In a few days this amount was converted into Czech crowns and transferred into a government account at the Czech National Bank.

The Czech press was wondering why their government would agree to such a deal. If the citizens of the Czech Republic were legally entitled to get $3.6 billion, after all, the debt ultimately belonged to them and not the government. Why settle for some 15 percent of this and let some unknown company get the rest? Why the secrecy? Many observers began sensing that something was not right. It was also curious that besides the Freedom Union, none of the other major political parties in the republic seriously questioned the deal. The Civic Democratic Party, a power-sharing opposition party, kept a low profile and asked that the agreement with Falkon be published, but, if for some reason it had to be kept secret, then it should be discussed at a closed meeting of the lower house of parliament.

THE ALLEGED BIN LADEN CONNECTION

On Orthodox New Year (14 January), the Falkon deal was elevated to a major scandal. On that day, the Russian newspaper "Novaya gazeta" published a sensational article by an investigative reporter, Yurii Lurie, titled "Russia Owes Bin Laden $1.35 Billion." The article claimed that Falkon Capital was linked to the Saudi Arabian-based Bin Laden group of companies through an intricate system of holding. Lurie supplied a diagram of the alleged pyramid and said that he got the information "from the Americans." Lurie's conclusions were simple and to the point: Russia, by agreeing to the Czech-Falkon deal, would ultimately be aiding and abetting international terrorism.

Many Russians regard the words "from the Americans" as code for "from the CIA." Which other Americans are there with access to such information? Given that the press at this time was full of stories of bin Laden's networks and how they might be involved in money laundering, many readers likely regarded the Lurie story as reliable.

The Lurie revelations created a sensation in Prague and Moscow. Czech Premier Zeman called the Russian article a fabrication on 16 January. The Czech counterintelligence service, Zeman claimed, had ruled out any links between Falkon Capital and Osama bin Laden.

There has been no evidence found in public records that Falkon Capital, which was registered in Prague on 28 November 1995, had any connections to the Saudi companies named by Lurie. If there was any links, then they were very well hidden. The companies named in the article did, in fact, exist. Some had been dissolved and some were still in operation, but mainly as shell companies in Great Britain, the Bahamas, and the Cayman Islands. But earlier investigations have also shown that many companies owned by bin Laden's relatives have nothing in common with the Osama bin Laden terrorist network.

THE LIBYAN CONNECTION

When asked if the government was now willing to make public the text of the contract with Falkon, Zeman resorted to evasive tactics. The government, he said, has no objections to declassification of the contract (he avoided the question of why it was classified in the first place) as long as Falkon agrees to let it be made public. When CT1 (Czech Television) contacted Jozef Cimbura, a member of the Falkon board of directors on 16 January, he stated: "No, we will not (agree to make the contract public). It is because of our commercial activity..."

As the story unfolded, many Czech papers claimed that Falkon Capital was an unknown entity. However, on 22 May 1998, "Mlada fronta Dnes" reported that the Finance Ministry was seeking to recover $270 million owed to the Czech Republic by Libya for weapons and technology that it purchased from Prague during the communist era. "It is true that we are trying to gain money from Libya," Finance Minister Ivan Pilip told the paper. Pilip added that he had not yet signed a contract with Falkon Capital which, "Dnes" added, was entrusted one month earlier by a ministry committee to seek the recovery of the money. Pilip was open in his remarks and had no qualms in naming Falkon as a partner.

According to the article in "Dnes," the Czech anti-organized crime police unit was following one of the Georgian founders of Falkon Capital who was suspected of having ties to the underworld.

In what was to be repeated three and a half years later, none of the company's managers could be contacted in Prague by the press, even at the address given in the register of the companies. This turned out to be a small, one-room office which the Catholic Church's Dominican order rented to Falkon. "It's a mysterious company. Sometimes people come to pick up the mail," an employee of a nearby Dominican Church told "Dnes."

As it turned out, this was not the first attempt by the Czech government to get Libya to pay its debt. In 1989 the Czech-Swiss entrepreneur Georg Brozicek made such an attempt. But in the middle of June 1996 he was killed when he fell out of his apartment window in Vevey, Switzerland, under somewhat unclear circumstances. An attempt to get Libya to pay up was also made by the South Korean Daewoo concern in 1990 that also was unsuccessful.

GEORGIAN FALKONS

In the registry of companies in Prague, Falkon Capital a.s. is listed as having been registered on 28 November 1995, and its first address was Malatova 7, Prague 5. It moved a number of times since and is now located in Prague 1. In 1995 it listed its officers as Paata Mamaladze, Vaza Kiknavelidze, Aristakes Alaverdian, and Jozef Cimbura. The first three -- two of which have ethnic Georgian names -- left the company on 17 February 1997. Cimbura left and returned to the company a number of times, leaving it for the last time on 26 November 2001 and rejoining it that same day. Other former members of the controlling board of Falkon who left were: Bohuslav Pozar (left 26 November 2001), Hans-Peter Moser, and Beat Urs Moser (both left on 26 November 2001).

Presently, the board of Falkon consists of Cimbura and lawyer Miroslav Fojt. The controlling body consists of three persons: Zeev Ofer of Highland Park, Illinois, U.S.; Jaroslav Pacak from Prague, and attorney Tomas Chloupek from Prague. All three new members of the controlling board joined on 26 November 2001, the day the others left. The founding capital of the company in 2001 was listed as 2.5 million Czech crowns (about $70,000).

A few days before Falkon was registered in Prague, a company called Falkone GmbH was registered on 10 November 1995 in Switzerland, giving its address as Pestalozzistrasse 2, 8200 Schaffhausen. The executives of the company were listed as Paata Mamaladze and Teimoraz Katshkatshvili. It listed its founding capital as 2 million Swiss Francs.

As a curious footnote, it is worth mentioning that in July 2001, Jozef Cimbura reported to the Czech police that he had lost a suitcase in Prague. The suitcase was eventually found and inside was $180,000 in cash. But for reasons unknown, the Czech police did not bother to ask Cimbura why he was carrying so much money in a suitcase. Cimbura himself never offered an explanation.

On 12 November 2001, an article appeared in the "Earth Times News Service" by Lucy Komisar titled "Swiss Bank Handled Sale From Russian Bioweapons Company." In it she mentions that a "Georgian arms dealer, Paata Guramovich Mamaladze," was one of the owners of a shell company called Torola, registered in Lugano, Switzerland, which might have handled biological weapons of mass destruction. All information indicates that this was the same Mamaladze who was one of the founders of Falkon Capital and who left the company in February 1997. Another "Falkon" on the statutory organs of Torola was Zeev Ofer, who joined the Falkon controlling board on 26 November 2001.

On 25 January, "Moscow Times" correspondent Yevgenia Borisova conducted an e-mail interview with Czech investigative reporter Jan Kovalik, who works for the journal "Respekt." He told her that the UZSI special police (Czech Republic) told him that one of the founders of Falkon, who is no longer with the company but serves as an adviser, was a former member of the Russian military intelligence service (GRU). Another Falkon employee was involved with the Czech special police, Kovalik stated.

THE RUSSIANS

Some light, as well as more fog, on the Falkon deal was revealed by "The Moscow Times" on 25 January 2002. In an article by Yevgenia Borisova, "EES Struggles To Explain Debt Deal," she states that Falkon Capital agreed to transfer to the Russian state-owned conglomerate, United Energy Systems (EES), the Russian debt it had purchased from the Czech government. "The Moscow Times" claimed that the Russian government agreed, in turn, to "write off the debts of $1.35 billion that the EES owed to the budget."

"The Moscow Times" reported that on 28 December 2001, the Russian newspaper "Vedomosti" reported that the EES transferred $550 million plus interest to Falkon, which left the EES with a net profit of $770 million from the deal. On 24 January 2002, EES spokesman Andrei Yegorov claimed that "no money was involved between Russia and the Czech Republic in the settlement of the debt whatsoever." He went on to say that no cash had been transferred from the EES to Falkon on 17 December 2001 and then from Falkon to the Czech Finance Ministry on 19 December, as "Vedomosti" had reported. Yegorov categorically stated that the debt would be repaid by exports of electricity only over a period of 10 years.

However, at a meeting organized that same day by the EES for Moscow-based analysts, EES Financial Director Dmitrii Zhurba presented a somewhat different version of events: "What I understood was that EES took a loan from some commercial bank and bought the debt from Falkon."

Zhurba refused to say how much Falkon was paid and added that only $30 million worth of electricity would be supplied as payment, the remainder would be in cash.

That week, Falkon Capital would not respond to any written questions faxed to them by journalists from "The Moscow Times" and the response to phone calls was reminiscent of the response Falkon gave in 1998 when asked about the Libyan deal. At that time a voice answered the phone and said in Czech: "There are things which are not dealt with in the newspapers." Not surprisingly, the Russian Finance Ministry also refused to answer any questions about the deal and played "phone tag" with callers, forwarding them on to EES.

During a conference call in Moscow on 24 January organized by Moscow-based Troika Dialog, the first deputy head of the EES administration, Leonid Melamed, refused to answer the question of how much was paid to Falkon. "You will have to read it in the financial report, because I am bound by a confidentiality statement," was his answer.

By 28 January, the waters became muddier. "Vedomosti" announced that an unknown, not-for-profit company in Moscow, the Center for Support of Energy Reforms, acted as a shell company through which the EES funneled $775 million in loans to its subsidiaries in Russia from the $1.35 paid to it by the Russian government. The newspaper also reported that the EES had borrowed $700 million from Sberbank and transferred it to Falkon's accounts along with a promise to supply $30 million worth of electricity over the next 10 years.

When "The Moscow Times" asked why the Czech government sold the debt so cheaply to Falkon, investigative reporter Jan Kovalik suggested that $550 million is nearly 3 percent of the Czech budget and, in an election year, the news that the government had received such a sum from Moscow might win the sympathy of voters. Then Kovalik surprised many when he stated that the Czech government's explanation had changed. Russia, government officials said, demanded that Falkon broker the deal or Russia would not pay at all. According to EES spokesman Andrei Yegorov, "We would not go for this partnership (with Falkon) if it did not prove to be a reliable one." Apparently, Falkon had worked with the EES for a number of years on various deals.

Earlier, on 3 January, the chairman of the Social Democratic Party's deputies group in parliament, Bohuslav Sobotka, told CTK that "...it was the Russian side rather than the Czech Republic who decided about who will be in charge of the Russian debt."

By now a clearer picture of the deal emerged. The Russian government paid the EES (and did not write off its tax debt as was earlier reported) $1.35 billion. The EES then took a loan from Sberbank for $700 million and transferred some money to Falkon -- not the $550 million as was originally stated, but $700 million. Falkon paid the Czech government $570 million and was left with $130 million. Falkon also stood to make millions more in the resale of electricity over a 10-year period. The EES paid off its tax arrears to the government, helped out its subsidiaries, loaned Gazprom $340 million, Rosenergoatom received $170 million, and the EES made its own stock more attractive in the eyes of investors.

What emerges from all the subterfuge around this deal is a very disturbing episode of pressure and possibly criminal involvement in Russian-Czech relations.

A POSSIBLE SCENARIO

One plausible scenario: the Kasyanov government told the Czechs in 2001 that if they wanted any of the money owed to them they would have to play by Kremlin rules. This would have meant that they would have to accept Falkon Capital as the broker in the deal and that they would keep silent about the details. The Czech government was caught between a rock and a hard spot and agreed to Kasyanov's terms. There never was any fear that Falkon would expose the deal, since Falkon was a company that was perhaps influenced by the Russian side and thus not an honest broker. This would explain why there was no tender, no criminal investigation of Falkon, and why Falkon was able to get $700 million from the EES -- a state-owned Russian monopoly -- in almost record time.

The Lurie story about bin Laden and Falkon seems to have been nonsense, and smelled of disinformation. It did, however, serve one purpose: it placed Falkon under a magnifying glass, something the Russian side did not care for. Suddenly attention was drawn to a shadowy company and its board of directors came under public scrutiny in the press. And, while nothing unusual was discovered about its current executives (the incident with Cimbura's suitcase full of cash being the only exception), the trail ended there.

It is possible that the actual owners of Falkon Capital are not Czechs. They are, perhaps, people connected to the EES, Kasyanov, or to the Russian security service (FSB). What would possess the Russian government to pass on to a small firm almost three quarters of a billion dollars in record time? The answer could be that a hybrid Czech/Georgian Falkon grew another head and became a Russian double-headed falcon.

In this scenario, the Zeman government understood that this was the only deal they would get from Kasyanov if they wanted cash for the debt and they went along with it unhappily but knowingly.

This, in part, could explain the bitter statement made in Moscow by Czech Foreign Minister Jan Kavan on 24 January that the Czech government has no intention of selling the remaining part of the debt. From now on, he said, the Czechs would consult with the Russians on ways to settle it and would be happy to accept part of the payment in the form of goods and technology.

The question of why the EES sent Falkon $700 million, $130 million more than the $570 million needed to pay back the Czech government for the purchase of the loan, remains unanswered. One explanation could be that the extra $130 million was recycled to bank accounts belonging to certain Kremlin, Czech government, or EES managers. The Russian demands for secrecy throughout the transaction and the large amounts of money involved led many observers to suggest that bribery through the paying of "commissions" should not be excluded. In the end, a debt of $2.5 billion was erased from the books for a mere $570 million.