Nick Shaxson ■ Slovak govt. to enact new anti-shell company law after scandal


Flag_of_Slovakia.svgA guest blog by Miroslav Beblavy, Member of Slovak Parliament for the opposition party Sie?, (who has been involved in drafting the legislation) and Silvia Hudackova, assistant to Miroslav Beblavy.

Slovak government committed to enact new anti-shell law after the healthcare procurement scandal

The legislative interest in shell companies in Slovakia increased in November because of a scandal involving the purchase of a greatly overpriced CT scanner in the public procurement in Pieš?any hospital, which was won by a shell company.

Although corruption scandals involving shell companies occurred before, this case outraged Slovak citizens because it happened in the notorious health care sector. According to an EU poll in 2013, Slovaks consider the health care and judiciary sectors to be the most corrupt; Transparency International published a study in 2013 claiming that every fourth Slovak who used health care services experienced some form of bribery. The health care system is costly in terms of public finances, and yet patients often need to bring in basics such as toilet paper.

In Slovakia, the public is generally focused more on undisclosed beneficiaries of shell companies than on corporations that avoid or evade tax. In my view, this is for two reasons. First, Slovak taxation is quite low (19 and 21 %) and the welfare state is rather thin compared to other EU countries. Second, Slovakia is a relatively egalitarian society, given its post-communist heritage.

The public protests that followed the scandal resulted in the resignations of the Speaker of Parliament Pavol Paška (publicly perceived as the beneficiary of the shell company involved), Deputy Speaker Renáta Zmajkovi?ová (who served on the hospital board) and Minister of Health Care Zuzana Zvolenská (who had political responsibility for the personal nominations).

A more important reaction was that the government once again promised to restrict shell companies from participating in public procurement. In fact, a law promising to exclude shell companies from public procurement, prepared by the Minister of the Interior Robert Kali?ák, has been in place since 2013. The Prime Minister said:

“If a shell company from a country from where we cannot get any information would like to participate in procurement, it will be directly excluded according to the law.” 

Similarly, companies owned by public officials by more than 10 percent would be excluded from procurement.

The amendment is supposed to allow only companies that are able to disclose their owners up to the level of private persons to take part in public tenders. Companies listed on stock exchanges in the European Union, the European Economic Area or the OECD, and their subsidiaries are excluded from the obligation to disclose their owners. Bidders who provide false information regarding their ownership should be fined in range of 1,000-10,000 €.

The governmental measures were subjected to criticism by NGOs and the opposition during its preparation because of its loopholes. The Fair Play Alliance (AFP) sent a press release to the media claiming that:

The law amendment currently submitted to the parliament is just a trick that attempts to create the impression that government deals with the problem (…) This draft will affect just a few from all the cases.”

There is an absence of independent supervision, as the ownership of the companies will be evaluated directly by the procurement organizer. It is clearly beyond the institutional capacities of the hospitals, municipalities, etc. to validate the ownership structures of the companies. During the preparation of governmental measures, I and my colleague Lucia Žit?anská from the political party Most-Híd not only criticized them, but we also prepared a more complex and more efficient bill that gained the attention of the media.

On December 3, 2014, the government amended the public procurement bill. It passed in the parliament without problems since the governing party has the majority of the votes (single party government of the social-democratic party Smer-SD). However, later in the same day the government promised to enact our version and committed itself to do so by March 2015. Due to a wide political support and public promise made by the government I expect it to eventually pass.

Our measure is based on a register run by an independent institution – National Bank of Slovakia, where companies that want to benefit from public finances would have to publish their real owners. We focused on expanding the effect of the law on all companies that benefit from public finances, not only on public procurements.

This is important due to the scale of the public money loss. To give an example – the scandalous CT scan purchase was worth 1.6 million €. But Prefto Holding Limited based in Cyprus is a 50 % shareholder of the second largest Slovak health care insurance company Dôvera. This insurance company is represented by lawyers that simultaneously present themselves as the owners of the company. The second half of the shares is held by Penta Investments Ltd. that is also based in Cyprus; however, its owners are known. Due to the strange legislative changes and taxation loopholes, Penta owners managed to redeem much more profits from Dôvera than was officially stated in the accounting and that would be otherwise impossible to redeem in this highly regulated sector. Just last year more than 100 million € from public healthcare finances was siphoned off to their Cyprus accounts. The sum roughly equals to the sum of all public procurements conducted by the Slovak hospitals last year.

The principles of our proposal are:

·       Revelation of true beneficial owners, not only of the formal owners, that would be listed in the public register. The register would be linked to the existing Slovak trade registers.

·       Public verification of the information provided by the companies – information would be publicly available and regulators would have to act in case a verification from the public is requested.

·       The register would be managed by the National Bank of Slovakia since it is an independent institution and it has the necessary experience – offices and personnel fighting against money laundering.

·       The register would not accept any owners from secrecy jurisdictions or those who are not cooperative in revealing their beneficial owners, respectively

·       Binding for all public finances (such as European Funds; health insurance), not only for the public procurements above a certain sum (e.g. 1 million €). This would be also valid for the already existing contracts.

·       Enforcement and verifiability of the information: In case of false information provided or no information provided – forfeiture of financial guarantee; high fines; license loss; criminal prosecution.

We are confident that the law is in line with the European regulations. Furthermore, our measures do not prefer domestic companies over the foreign ones and do not automatically discriminate companies from secrecy jurisdictions.

Further reading:

Overview of opposition proposals to the public procurement amendment

• Detailed description of the public health insurer secret ownership

• On the procedure of enacting the law

• More detailed description of the law

• President Kiska returned the governmental law to the Parliament because of its inefficiency

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