Corruption Watch: November 13, 2003

By Roman Kupchinsky

The investigation of Ukraine's most infamous unsolved murder case, the September 2000 slaying of investigative journalist and the "Ukrayinska pravda" website (http://www.pravda.com.ua) founder Heorhiy Gongadze, suffered a new setback on 5 November when former Interior Ministry (MVD) General Oleksiy Pukach was released in return for a pledge not the leave the country.

Pukach was in charge of intelligence for the ministry at the time of Gongadze's killing. According to pravda.com.ua, Pukach was the individual who, along with his deputy, Volodymyr Bernak, approached Gongadze as he left the apartment of website colleague Olena Prytula on the evening of his disappearance and put Gongadze inside a car. And while that scenario has not been confirmed by authorities, the website stands by that version of events. Gongadze was never again seen alive. His decapitated body was found two months later in a wooded area some 80 kilometers from Kyiv.

Pukach was arrested on 23 October 2003 by Prosecutor�General Svyatoslav Piskun on charges of having destroyed all Interior Ministry records relating to the surveillance of Gongadze. This surveillance was done on Pukach's orders. According to "Ukrayinska Pravda," the records were destroyed just prior to and immediately after Gongadze's disappearance. Gongadze had discovered that he was being followed by the police and sent a letter of protest to the prosecutor-general at the time, Mykola Potebenko.

Soon after ordering the arrest of Pukach, Prosecutor-General Piskun came under criticism by the presidential commission on combating corruption. On 29 October, President Leonid Kuchma removed Piskun from his post. Among other things, Piskun was charged by the anticorruption commission with having taken an excessive number of leave days -- some of which went unreported -- meaning that Piskun would have improperly received his salary on those days. Other charges were related to alleged commercial activities and corrupt practices.

"Ukrayinska Pravda" wrote on 4 November: "According to information received by ["Ukrayinska Pravda"], Leonid Kuchma has demanded that Pukach be released." The website also wrote that deputy prosecutors in charge of the Gongadze investigation were upset by the apparent loss of a key witness. Upon leaving detention, the website reported that Pukach was driven away in an automobile with parliamentary license plates.

In November 2000, Socialist Party leader Oleksandr Moroz divulged the existence of recordings made in the president's office by a member of Kuchma's security detail, Major Mykola Melnychenko. The audiotapes contained conversations between Kuchma and Interior Minister Yuriy Kravchenko in which Kuchma is heard ordering Kravchenko to "get rid of Gongadze." The recordings of this conversation were authenticated by the U.S.-based audio-analysis firm BEK-TEK. The Ukrainian president denies the conversations ever took place, and a Ukrainian government audio lab concluded that the recordings were false.

Appearing on the Ukrainian television channel Noviy Kanal on 5 November, lawyers for Pukach said they had made an attempt to get a copy of Pukach's file but were told by prosecutors that his file, along with the file of the Gongadze case, had been classified as "secret."

The 9 November attack on the Al-Muhaya expatriate-Arab housing compound in Riyadh that killed at least 17 and wounded more than 120 people was blamed on Al-Qaeda by U.S. Deputy Secretary of State Richard Armitage, who was on a visit to Saudi Arabia at the time of the tragedy. "My view is these Al-Qaeda terrorists �- and I believe it was Al-Qaeda -- would prefer to have many such events," Armitage said, according to media reports. On 11 November, Saudi authorities reported capturing a suspect in the attack.

Earlier that week, U.S. and other intelligence agencies reported that they had information about an impending attack that might take place in Saudi Arabia but had no information on the time or place of the planned attack. An alert was issued to foreigners living in the country at that time.

The BBC's Middle East analyst, Roger Hardy, wrote on the BBC website (http://www.newsvote.bbc.co.uk) on 10 November that "it is possible they thought that among the residents were Americans working for Boeing, the U.S. aerospace company, as had been the case in the past."

The Saudi ambassador to Britain and a former head of Saudi intelligence, Prince Turki al-Faisal, said the attack was "a clear sign of a desperate group that wants to show it can do things." "The New York Times" reported on 10 November.

In an interview with the BBC, the ambassador admitted that it would be impossible to prevent such attacks from recurring.

After the 12 May attack on a compound in Riyadh that houses foreigners, which killed 35 people, some 600 people have been imprisoned by Saudi security forces. There have been numerous clashes with armed terrorist cells, and five suspected terrorists were killed in a gunfight in Mecca and Riyadh a few days prior to the early November attack.

On the day of the early November attack, Britain's "The Independent" reported that Control Risks, identified by the paper as "the world's leading business risk consultancy," had released a report predicting that Islamic extremists "will pose a major terrorist threat to the West over the next 12 months, despite the arrests of Al-Qaeda leaders." The Control Risks report reportedly claimed that the most likely targets will be shops, buses, or hotels in such countries as Kenya, Morocco, Indonesia, and Saudi Arabia. Control Risks warned that "high-profile Western companies, especially those with strong U.S. ties, will also be a primary target," according to "The Independent." RK

In what clearly is one of its most difficult missions ever, the Federal Bureau of Investigations (FBI) has dispatched more than 30 agents to Iraq to investigate the bombing of civilian and government targets in that country, according to AP on 11 November. The agents must be accompanied by U.S. troops, AP wrote, whenever they leave their secure compound at Baghdad Airport. Their job is complex, since they have neither informants nor high-quality intelligence information, and they lack technical surveillance equipment.

The job of the FBI in Iraq is multidimensional. One task is to conduct forensic analysis of bombing sites in the hope that the source of the explosives used in the attacks can be identified. Another is to fingerprint and interview detainees, many of whom are among the 3,400 members of the Mujahedin Khalq Organization of Iranian fighters on the U.S. State Department's list of terrorist organizations, and who were backed by Saddam Hussein but were eventually disarmed by U.S. forces and allowed to remain in Iraq.

According to AP, some 80 FBI agents helped Saudi security forces in the wake of the 12 May bombing of compounds that housed Westerners, and 20 agents are still in Saudi Arabia. They are presently helping in the investigation of the latest bombing. RK

THE K&H SCANDAL AND ITS IMPLICATIONS FOR HUNGARY

By Terrence Moore

An attack on Karoly Szasz, the head of Hungary's Financial Supervisory Authority (PSZAF), by unknown assailants on 16 June marked the beginning of a saga that has led to allegations of high-level corruption and money laundering involving millions of dollars through one of the country's largest banks.

The affair has also led to thinly veiled infighting between police and state prosecutors over how the investigation should be conducted, while the government and the opposition parties have attempted to fend off allegations that their clienteles were involved in the scam.

Who Is Karoly Szasz?

Szasz has been a target of the Socialist-led coalition since it came to power after narrowly winning elections in 2002. As an appointee of former FIDESZ Prime Minister Viktor Orban, Szasz �- along with State Prosecutor Peter Polt �- Szasz was regarded as unreliable by the new government and probably responsible for cover-ups concerning some of the more dubious business affairs of the previous administration.

Both have been under immense pressure to resign since the new government took office, but they have been protected by loopholes in the constitution that make them responsible to a parliament that is unable to remove them.

After Szasz was attacked on his way to his regular early morning dip at a Budapest swimming pool on 16 June, he immediately made allegations of a "wide-ranging conspiracy" against him. He also pointed the finger at a ruling the PSZAF was due to publish the next day regarding irregularities in the murky acquisition of Pannonplast, a successful plastics and wrapping-products manufacturer.

The Pannonplast Takeover And K&H Bank

Pannonplast CEO Erzsebet Feher had turned to the PSZAF in April regarding attempts by several small companies to gain control of his company. Two directors at Britton, one of the companies allegedly involved in the takeover, had been questioned by officials from the PSZAF only three days before the attack on Szasz.

As an investigation by police into the incident got under way and media interest increased, it became apparent that the brokerage arm of K&H Bank, the country's second-largest commercial bank, had played a key role in financing the takeover bid.

A key figure at K&H Equities was its director, Attila Kulcsar, who had operated a separate equities fund for VIP clients during the past six years. Those clients included Britton, Pevdi (the other main protagonist involved in the takeover bid) and the State Highways Management Company (AAK).

Opposition media soon alleged connections between Britton's offshore owner, Britton Ltd based in Delaware, and Alexander Mudura, a Romanian entrepreneur known to be a close friend of Prime Minister Peter Medgyessy. Britton had taken part in financing the construction of a shopping mall run by Mudura in the Romanian town of Oradea.

Kulcsar Arrested In Vienna

As the investigation into K&H Equities began, Kulcsar fled to Vienna after being tipped off by a girlfriend who worked at one of the commercial television channels reporting on the case. Investigators soon concluded that his qualifications as a broker were forgeries.

Police investigators also allege that Kulcsar had improperly funneled off more than 10 billion forints ($100 million) from the equities fund over the past six years. Antal Gera, the head of the Hungarian Police's effort to combat organized crime, said Kulcsar had transferred assets between the fund and various other companies -- including the State Highways Management Company, in order to hide his activities.

A former CEO of the State Highways Management Company was then arrested after police alleged that Kulcsar had withdrawn 4 billion forints from the company's bank accounts between February and May of 2003. The money was transferred to a variety of offshore companies, according to Csaba Molnar, the head of the national police force's anti-money-laundering unit. The money was later transferred back to the company from Betonut, a large construction company, which police say was also heavily involved in Kulcsar's network. Betonut's former deputy chairman was also arrested by police.

Investigators have suggested that Kulcsar used money from the state company to help finance the Pannonplast acquisition.

On 10 July, K&H Bank Director Tibor E. Rejto resigned from his post, although he claimed that he had not known of such financial misdealings. The foreign owners of the bank, Belgian KBC and Dutch ABN Amro, launched internal investigations to determine precisely what happened.

Two weeks later, Kulcsar was arrested outside Vienna's opera house by Austrian police after he arranged to meet a Hungarian officer handling the case for talks. After initially agreeing to quick extradition procedures so that he could "name names," Kulcsar appeared to change his mind. The procedure could take several months as a result.

But Kulcsar's arrest led to at least one unexpected development: within days, the head of the Interior Ministry's Anti-Mafia Center, an agency set up to coordinate the work of different agencies in fighting Russian organized crime in the late 1990s, was suspended from his post and placed under investigation by the military prosecutor's office. The investigations into Janos Bacskai were immediately declared a state secret, but the intelligence services did confirm that they had recorded telephone conversations between Bacskai and Kulcsar, and that the two had met on at least one occasion in Vienna after Kulcsar had fled.

Reports also began to appear of a report Kulcsar had written at the request of Andras Toth, a deputy in the prime minister's office in charge of the civilian intelligence services. Toth confirmed that he had been approached by Kulcsar before the scandal broke, and that he had asked the broker to put the information in writing but had never received the report.

However, one newspaper, the pro-opposition daily "Magyar Nemzet," claimed to have obtained a copy of the report, which it said named two government politicians, including a state secretary, as being involved in the scandal. In the meantime, the anti-organized-crime squad began tracking the laundered money, claiming several dozen offshore companies were involved.

Missing Money And Syrian Siblings

However, police said that more than half the money had found its way back to Hungary and had been picked up in cash at two Hungarian banks by two Syrian brothers who had been resident in Budapest with a travel agency and money-changing outlet under their control for the past decade. One of them had left the country, investigators said, and the other had been arrested by police. Once in custody, Hassan el-Abed claimed that he and his brother had passed on all the money they received to Kulcsar.

The opposition FIDESZ party, keen to play down a meeting between its own parliamentary group leader, Janos Ader, and Kulcsar just before the scandal broke, pointed to the fact that Socialist Prime Minister Medgyessy had been head of Inter-Europa Bank -- one of the banks from which the Syrians had collected the payments -- at the time the money was received. Medgyessy countered that he had resigned before the transactions took place and that, as president of the bank, he was not involved in daily transactions. Two cashiers at the bank, and a third cashier at OTP bank, were later taken into custody by police for not reporting the suspicious transactions.

Police then arrested former bank chief Rejto as he tried to cross by car into Austria to "buy curtains" on the day he was due to appear for questioning by the police. Also arrested was Gabor Garamszegi, the former deputy head of the State Highways Management Company. Swiss authorities confirmed in mid-October that considerable funds belonging to the two men had been frozen at banks in the country.

A company belonging to high-profile television reporter Tamas Forro was also fingered by investigators as having received over 70 million forints from Kulcsar. It has been suggested that Forro is a financial straw man for Gabor Princz, the former head of Postabank who has been under investigation in connection with a fraud involving millions of dollars since being ousted by the FIDESZ government in 1999. He also sought refuge in Vienna but has returned to Budapest regularly since the elections.

The Investigation Expands

Meanwhile, mistrust between the police �- regarded by many opposition politicians as a bastion of the ruling Socialist Party -� and the State Prosecutor's Office �- regarded by the Socialists as being under the control of FIDESZ �- came to a head in mid-October. The local Prosecutor's Office removed Rejto from his cell at the organized-crime squad's headquarters without informing police in advance and only hours before he was due to be questioned in detail for the first time.

The Budapest Prosecutor's Office said Rejto had asked to be moved because of poor conditions in his cell. The office also said they had questioned Rejto for several hours about the affair. Police received a transcript of the interview on October 16, more than a week after the questioning took place, and accused the office of hampering the investigation it was officially supervising.

With 14 people held in detention and Kulcsar unlikely to face extradition for another two months, the affair is set to rumble on for some time to come. But as Justice Minister Peter Barandy remarked in a television interview on 13 October, one of the most severe side effects of the K&H scandal is likely to be the public's loss of what is already minimal trust in the increasingly politicized role of state institutions.