RIGA - Ilze Znotina is an associate partner at Deloitte Legal and a member of the Association of Certified Fraud Examiners (ACFE), so what she does most is fraud and corruption investigation. But, let’s start by asking: what is corruption or fraud? What do these consist of?
“We have very many clients who have experienced some fraud. In this sense, let’s say that I understand fraud as corruption, but [corruption] is something bigger because it concerns the behavior of the public and private sectors. Nevertheless, I want both concepts together because normally, they are always in the same case,” says Znotina.
Znotina is one of the most respected anti-corruption and anti-fraud professionals in Europe, invited to the first Baltic conference Corruption and Fraud: Detection, Prevention and Investigation. Why in the Baltics? Interest about the Baltic area has increased over the last years, mostly when the economic situation has been going through huge turmoil. “Basically for us here in the Baltics, corruption is everywhere. It is a surprising phenomenon for us that there is corruption [here] as no other part of the world has such,” she says.
In the case of Latvia, according to the last non-governmental organization Freedom House’s dossier about corruption, it has become one of the most important political issues for the current coalition government, and this mostly after former President Valdis Zatlers called for the dissolution of Parliament due to one member, Ainars Slesers’ relations with corrupt activities investigated by the Corruption Prevention and Combating Bureau (KNAB).
Political parties and financing procedures
For some other experts participating in the last National Integrity System (NIS) report, the overall picture in Latvia shows a general weakness in the party-political sphere. Political parties and Parliament are the least trusted of all institutions and sectors analyzed within the framework of the NIS. The figures of the last Eurobarometer poll in 2010, about the public’s confidence with political representatives, showed that 95 percent of Latvians didn’t trust politicians, evidenced by the public perception of political corruption.
This perception goes even further: the linking of corruption with particular social groups or the developing of patronage relations and clientelism.
KNAB is mainly focused on the control of financing of political parties, analyzing the party budgets and reporting non-compliance with restrictions established by law. The limitations of parties’ financial transparency and accountability exist. According to the NIS report, during 2012 the party system in Latvia was funded mostly through private means, mainly high levels of donations.
“[At Deloitte] we are interested especially in Latvia, because usually the public and private sectors are tied together in economic crimes. What is interesting here in Latvia is the fact that economic crimes tie up public and private officers: very influential people from municipalities and managers from big companies get assets from these public companies,” says Znotina.
For KNAB it can be observed that corruption practices change, and corrupt offences are now more sophisticated. “The corruption has not increased, but the cases are more difficult to follow (…) but even [despite that fact] we can follow these cases nowadays,” says Strelcenoks, referring to the corrupt arrangements between the private and public sector.
This sophistication is observed in bribery offences, which are planned and committed frequently in cooperation with those in law and finance. This is mostly used for hiding the real sources of income through fictitious brokerage accounts or consultancy agreements.
Strelcenoks highlights the case of the biggest public energy company Latvenergo involved in the largest bribery case in Latvia. KNAB detected illegal activities among top Latvenergo officials, such as misuse of an official position for the purposes of acquiring property, passive bribery and laundering of criminally acquired assets on a large scale in an organized group from 2006 until June 2010. The accepted bribes were made in order to ensure the favorable decisions concerning public procurements and reconstruction work for the company. The procedure, according to KNAB, was to organize a large network in order to conceal the illegal origin of assets through different money transfers, transactions and investments in companies owned by officials at Latvenergo.
“This case was proof of how important it is for KNAB for the coordination of all institutions involved in border and customs control,” adds Strelcenoks, pointing to its special collaboration with Sweden.
For Znotina, the current economic bad times, especially since 2008, have made institutions and companies more sensitive to corruption, but mainly in the environmental and energy sectors, the building and equipment sector and the healthcare services field. “Especially in the cases of public hospitals buying unnecessary and expensive equipment and pharmaceuticals from specific, private companies,” says Znotina.
According to KNAB’s last periodical update about progress and the results in preventing and combating corruption, approximately 33.3 percent of the population agress that administrative or low level corruption is still very common in the healthcare area. “Our social research shows that the first public fear is the healthcare system, when patients pay for the services of doctors,” says Strelcenoks.
Public vs. private
In the public sector, the sophistication of fraud cases is higher than in the private sector.
“In my opinion, companies are not open to fraud, because those which follow the law receive help from the State. But what I don’t like is the fact that this year we have realized that some companies return to [money] laundering services in this post-crisis period, which is the most damaging to the public budget. Here I talk about big companies (between 100 and 200 employees),” says Kaspars Cerneckis, director of the Financial Police.
For Deloitte staff there are also issues of corruption in the court system for insolvency cases. “Administrators of companies are tied to a friendly court which, in many bankruptcy cases involving liquidation of property, make it easier such that debtors can be discharged from most of their debts without objection. This means that the company (debtor) is no longer personally liable for repaying the debts,” says Znotina.
“I can say that there are some cases like this, but if we are looking at the number of such cases, this is relatively stable, although not going down. [However] these cases are more related with [the individual] gaining their own benefit in fulfilling their duties as administrator, and not for the company itself,” says Juris Juriss, prosecutor at the General Prosecution Bureau of the Republic of Latvia.
According to the NIS’ latest report, the general weakness is in implementing the legislation in actual practice. This gap between legislation and implementation significantly impacts on the overall integrity of the system. “Procedures are so long and complicated in this [bankruptcy] field of Latvia’s legal system,” says Juriss.
The main goal today is to make clearer what the technical aspects are of such mechanisms for responsibility for legal persons; this means “Concrete [decisions] if skipping court procedures, because in other countries, if someone admits guilt, [the prosecutors] can deal with these things more easily and quickly,” points out Juriss.
Methods for prevention
“[As we can see], corruption practices and fraud are at every stage. The number of these cases is so big, so I really understand that we have to talk about how to fight this in Latvia,” says Znotina.
For Deloitte staff, the Latvian government is in the development phase in regulating the influence of companies and their activities. For public sector companies there is the need for more effective efforts in the implementation of anti-corruption methods.
Experts point out that the process has to be focused on the control of the people responsible for designing the business decisions and contracts, just because they are the people most exposed to fraud and corruption activities. “It can be done with a low budget. The way to understand this is education, with more seminars and conferences where experts talk freely about these kinds of problems. The education in this field is basic to understanding that there is a duty when facing economic crimes and reporting them to the police,” says Znotina.
Accordint to Transparency International, KNAB seems to be implementing the right methods during the last years, primarily after lessons learned in the Latvenergo case. “Here in Latvia we still have to improve to fight corruption, (…). [For this reason] our next step is to get international cooperation, as the Group of States against Corruption (GRECO) recommends. Also, another [part] is the education done through social associations and schools,” says Strelcenocks.
Better methods are implemented now. Companies have better internal systems to catch fraud activities through internal networks. Many of these anti-fraud activities and procedures are focused on detection and prevention, which means that having an interest in detecting the mistakes in the system is more effective that just punishing after-the-fact, as is generally done.
“The worsening reputation of Latvenergo in 2010 motivated a revision in the structure and improvement of internal governance, restoring our status as an industry leader in terms of reputation in the year 2012,” says Ivita Bidere, Latvenergo’s Press Secretary.
This public company has developed its Fraud Risk Management Plan, which looks for improving the controls of business partners and employees. This new law has been accepted by international creditors – the European Bank for Reconstruction and Development, the European Investment Bank and others.
Challenges for the future
KNAB has shown enthusiasm for the future in fighting corruption and fraud, but for experts, Latvia has so much more to do in its regulations and laws for effectively preventing the fraudulent and corrupt activities in both the private and public sector. It is not just a question of laws, but also a question of education and mentality. “Baltic people are so individual, and the mentality is not to report, maybe due to the Soviet times. In this sense, fraud and corruption fighting starts from fighting Latvian silence mentality,” says Znotina.
All the public institutions that battle against corruption and fraud have pointed out that people are a key factor in discovering and resolving this issue. But it is also agreed that this is a recent situation.
“Most probably there is a mentality of silence, but this is changing. We are joining Europe progressively in our mentalities. Today there is being developed a new, more European generation born in the 90s and this makes Latvia move gradually to a more open society,” says Strelcenoks.
For Znotina this could be an inflexion point, in the fact that people understand that reporting a fraud or corruption case doesn’t mean bad consequences for themselves. It is beginning to represent a good impact on their status as citizens, those who pay taxes and abide by the law, and preserve the right for a better and more fair public environment.