EU: THE CURIOUS CASE OF THE "FRAUD-BUSTING" KALLAS

THE CURIOUS CASE OF THE 'FRAUD-BUSTING' EUROPEAN COMMISSIONER

April 17, 2008 |

London Miscellany
February 2008

Ashley Mote examines the chequered past of the Estonian EU Commissioner Siim Kallas, now responsible for the EU's fight against fraud.

One of the strangest coincidences that occurred when the present European Commission was appointed in 2004 was the selection of two former communists, from two of the smallest new member states, to control and manage the entire European Union budget between them for the next five years.

You may not believe in coincidences, especially when over 100 billion euros a year are involved. Many well-placed observers in Brussels at the time didn't either, especially sceptical MEPs.

Both Dalia Grybauskaite of Lithuania and Siim Kallas of Estonia were educated and learned their politics in the Soviet Union. Both were later politically active under the communist regimes in their own countries before the USSR collapsed. Siim Kallas was a member of the communist party from 1972 to 1990.

Now, Mrs Grybauskaite controls the EU's budget and Mr Kallas is responsible for its administration, which includes the apparent fight against fraud and corruption.
This brings us to the point. Mr Kallas has a curious past in the matter of money management. By the end of this story you may find yourself wondering why such a man was made a Commissioner in the first place - worse, why the president of the Commission, Manuel Barroso, then appointed him to supervise the outflow of funds.
In 1992, barely three years after the fall of the Berlin wall, Siim Kallas, then aged 43, was already the head of the Bank of Estonia. Indeed he had previously been in charge of the state-owned bank's administration during the Soviet regime, when the application of strict international banking rules was not always observed to the letter and Kallas depended on KGB support for survival.

In the spring of 1992 Estonia received 11.4 tons of gold from the Bank of England. It was - and always had been - Estonia's property. On 17 June 1940, it had been shipped to London for safe-keeping as the situation in the Baltic states deteriorated fast and occupation became a certainty.

Estonia's government-in-exile made a gentleman's agreement with the then British government, which was upheld by successive administrations. The gold would be at their disposal and returned only to a free and independent Estonia. Indeed, the British never recognized the occupation of Estonia by the Soviet Union.

In the spring of 1992, the gold held in Britain for 52 years was safely returned to its rightful owners - the people of Estonia. It was then put to good use by a young and ambitious Estonian government. They would re-launch their own currency.

The gold was crucial in the creation of the new kroon. Former Soviet slave states were still using the Russian rouble. Even if they liked the idea, they lacked the courage and the necessary reserves to support a new currency. The return of such an immense asset to Estonia, now worth many times its original value even after inflation, made such an adventurous proposal viable. The venture was a great success. The kroon quickly became serious money. The Estonian economy boomed. Over the next few years the country became a potential Hong Kong of the north.

Of course all that came to an abrupt halt when Estonia joined the EU in 2004. Nowadays the Bank of Estonia has to buy euros with its reserves every time it prints kroon. But the European Central Bank in Frankfurt does not have to buy kroon in return. The net effect is to move Estonian wealth into the Eurozone, which Estonia is obliged to join when the European Central Bank decides its economy is ready.

This little technicality has a name - seigniorage. The American Federal Reserve practised the same mischief on 'dollarised' countries for years - and probably still does. But we digress!

Siim Kallas, as head of the Bank of Estonia, presided over this daring currency reform and quickly became one of the best known figures in public life in Estonia.
Why things then went so spectacularly wrong remains a mystery to this day, but for the word 'greed'.

Using the gold as collateral, in 1993 the Bank of Estonia secretly arranged the transfer via a third party of US$10m to a Swiss bank (1). It was part of a contract in which - it was later alleged (2) - the bank was supposed to receive highly improbable dividends from oil trading.

The precise details of this contract - if that is what it was - remain shrouded in ambiguity to this day. Indeed, it took several years for even basic information to emerge in Estonia, let alone anywhere else.

We know that the bank was not, in fact, the beneficiary of income generated by the $10m. We know that the anonymous beneficiaries had given no guarantees for the safe return of the capital to the Bank of Estonia. We know they did not bear any of the attendant liabilities. So when the money disappeared, along with all the income it had supposedly generated, the people of Estonia had been defrauded.

Details of this scandal only seeped out three years later, and it took a further four years before the very same Siim Kallas found himself in the dock on charges relating to these events.

By that time, he had long since left the Bank of Estonia to found the Reform Party, a new group in Estonian politics. It soon became part of the ruling government coalition and Kallas was installed in the Estonian government as Minister of Finance, no less.

In September 1998, Siim Kallas and his advisor Urmas Kaju (of whom more later) went on trial for investing public money without the authority of the Council of the Bank of Estonia. They were further accused of causing material loss to the people of Estonia by attempting to divert interest from the investment. They were also accused of theft and Kallas of misusing his position.

According to the magazine Central European Review
Kallas was convicted on the charges. But the convictions were overturned on appeal, bar one charge of providing false information which was referred back to the lower courts.

Then, according to the same source reporting on 30 October 2000, the four-year criminal case against Kallas finally came to a close when the lower court acquitted him of the one outstanding minor charge.

Unusually, the prosecutor in the case Andres Ãœlviste then attempted to re-open the prosecution, on the grounds that Kallas had provided the auditors of the Bank of Estonia with false information. But Estonia's chief prosecutor, Raivo Sepp, overruled his deputy, took over the case and ended it. Sepp defended his controversial decision by claiming that he trusted the Estonian judicial system's judgements in bringing this long-running case to a conclusion.

The former Estonian MP and doctor of law Ando Leps has written at length about this case (3). He claims that Kallas was at the centre of money problems at the Bank of Estonia before the accusations that led to a trial, and that he had previously depended on KGB support.

It must have been a considerable help to Siim Kallas that his representative throughout this lengthy legal process was the high-profile lawyer Indrek Teder, who just happened to be the law partner of Märt Rask, then Justice Minister in the Estonian government and chairman of the Estonian Supreme Court. By a happy coincidence, Rask was also a member of the Reform Party, of which Kallas was then the leader.

Retrospective rumours
Some years later, a prominent lawyer in Estonia, who had taken no part in any of these events, found himself at a meeting with one of the leading police investigator Rocco Ots throughout the Kallas case.

The police officer was only too glad to analyse the Kallas case to a lawyer not involved at the time. Leaving aside the strength of the evidence itself, he heavily criticized the way in which various hearings had been conducted. Rocco Ots criticized the evaluation of evidence at every level. He went so far as to say he thought the whole court process corrupted.

In Estonia there is a time-limit on bringing prosecutions to court. Several years had already passed before investigations began in earnest, so investigators had little time to complete the gathering of evidence. Unsurprisingly, Kallas' Reform Party, now a part of the government, was able to exploit this lack of time. It was spectacularly slow in answering questions and providing information. The Reform Party also tried to explain away all the public interest and investigations as political theatre.

Nonetheless, valuable evidence was accumulated, including important computer-disks relating to the case, only for them to be rejected as inadmissible evidence.
There were serious doubts in the prosecution's mind about motivation. According to the investigator Rocco Ots, the main objective of Kallas and his associates was to seize the interest from the investment for their own ends and later return the money to the Bank of Estonia. In which case, what happened to the original capital and where did most of the interest go?

Another version of these events suggested that the stolen money was 'invested' in the interests of the state in an Estonian oil business. This explained its disappearance, even if it then raised questions about the ownership of the shares. This version at least had logic on its side. Oil had been one of the most profitable businesses in Estonia for many years, servicing Russian sales of oil reserves worldwide.

The police investigator Rocco Ots also described events when an official Estonian police delegation visited Switzerland to collect evidence of the misappropriation of Estonian public funds. Despite being alerted to the arrival of the Estonian police, the Swiss police failed to meet them.

The visitors eventually found their Swiss counterparts, who claimed to the astonishment of the Estonian police that, some days before, another Estonian delegation had visited and taken away all the evidence. The Swiss police claimed not to know who the first group were, except that they purported to have authority to collect and remove all material evidence.

It has been suggested since by people close to the case that the only credible explanation is that the earlier visitors were from the Estonian secret service. Were they acting on the instructions of someone involved in the defence?

The decision of the Prosecutor General to stop the appeal for a re-trial and refuse a renewal of the investigation astounded the investigating team.

Little wonder the police were convinced long before Kallas' acquittal that members of the government, and the Reform Party, were taking all measures to undermine the case, better still stop it altogether.

One prosecutor, who was working in the office of the prosecutor general when the Kallas case was in the courts, now believes that Raivo Sepp was personally threatened. Certainly attempts were made to bring criminal charges against him, but they led nowhere and few thought the accusations credible.

Meanwhile, there was palpable tension within the prosecutor's office, and bonuses were stopped. Yet, once the Kallas case was dropped, the bonuses returned and an extra payment arrived at Christmas.

Throughout this long and sorry tale, Siim Kallas was advised by a close associate, Urmas Kaju. At least one prominent Estonian businessman has confirmed recently that Mr Kaju approached him during the early 1990s with an invitation to join in what the gentleman concerned now believes to have been the very same $10 million scam. In his case, another bank was also to be involved - the Northern Estonian Bank. He declined the invitation, and doesn't regret it. But he can't help wondering whether his business life in Estonia might not have been a great deal more successful if he had agreed. He suspects that the Northern Estonian Bank held the accounts into which the $10 million and the proceeds disappeared, and thinks they probably hold them to this day. But as we shall see, other evidence suggests it was stolen before ever being returned to any bank in Estonia. Urmas Kaju was an alcoholic who had a serious car accident in 1996 (4). He still lives in Estonia.

Given all these circumstances it is quite extraordinary that the Estonian government never invited Interpol to help with enquiries. None of the main characters were ever interviewed by Interpol. The newly formed Europol has taken no interest either, despite being set up precisely to deal with cross-border organized crime in Europe.

Bank 'management'
We now know, from his own account of these events (5) that it was Urmas Kaju, Kallas's advisor at the Bank of Estonia, who opened the account in Switzerland, on the basis of a private placement agreement. The funds were then transferred by yet another Estonian bank, Põhja-Eesti Pank (PEP). Later those funds were withdrawn by unidentified persons and disappeared without a trace.

PEP has justified its actions by saying that the transaction was prepared by the management of the Bank of Estonia. The contract that formed the basis of the ill-fated investment was signed by a representative of the Bank of Estonia (Kaju himself, authorised by Kallas), and the details for the money transfer were received directly from the Bank of Estonia.

The private placement agreement was the formal banking basis for PEP to make a transfer of $10 million dollars to a Swiss bank, for one year and a day. In order to receive the funds, the recipient was supposed to submit a guarantee from a reliable independent credit institution (with at least AAA rating), to ensure the return of at least the same amount after the term specified in the agreement.

Urmas Kaju has since claimed (6) that Delaware companies with offshore accounts had been opened to receive the interest payments on the 'investment'. He further claims that the supposed involvement of oil traders was to hide the high profit potential, and also to encourage the Swiss to think such a transfer a perfectly ordinary transaction between major banks.

According to Kaju, the false references to oil were quite believable. Most of the money in the oil business between Russia and the rest of the world then moved through Swiss bank
accounts, and still does. So an account opened for such purpose would not draw any particular attention among dozens of the same kind. Indeed, many of these other legitimate accounts would routinely involve much larger sums.

Enter two other characters in this extraordinary plot. First is Abram Sher, an Estonian businessman who served time during the Soviet era for illegal currency speculation. He helped set up the Bank of Estonia scheme, acted as mediator and made sure the first few interest payments arrived on time. Then, suddenly and without warning, he declared that the money had 'disappeared' (7)

This brings us to Sher's contact Victor Schiralli. Schiralli is a doctor-at-law, but Kaju describes him as a small-time Sicilian crook - "the type you could find in the lobbies of most hotels in Zurich"? (8). He survived by posing as a financial intermediary. Later it was discovered that the Sicilian was not intermediating for anyone. Instead he and Sher gave the post-Soviet bankers their first lesson in capitalism. They exploited a technical gap in a money transfer order prepared by inexperienced banking staff in the Baltic. In vulgar terms, they pickpocketed a thick wad from a yokel just arrived in town. And the yokel was Peeter Vähi, president of Põhja-Eesti Pank. Before his appointment he had had no professional experience of banking, except as a customer. He had previously sold Soviet Lada vehicles to Belgium.

PEP was created in the aftermath of an earlier banking crisis, largely to cover the tracks of the money lost by the Bank of Estonia to the Vne_ekonombank of Moscow. The survival prospects of the credit institution were so much in doubt that Siim Kallas personally invited Peeter Vähi to manage it.

In his new position, Vähi was similarly convinced that the new central authority - the Bank of Estonia - would know and control everything. And, in any case, he owed Kallas a big favour. He was a soft touch at both ends of the deal.

After Vähi had been handed an authorising document from Switzerland and separately received $10 million from his new 'superior', the former car dealer probably did not dare to consult even with the specialists of the money market department of his own bank. Instead he handled the paperwork himself - and screwed up.

Vähi assumed that Kallas, his boss, knew what he was doing. Having received from Vähi, their boss, the order to transfer the funds, the dealers at PEP processed the order. They assumed that Vähi knew what he was doing.

Thus the money for this adventure was readily lent by the Bank of Estonia to another Estonian bank, PEP, which was not unusual. But it simultaneously transferred the liability to return the loan in due course to a third party. Thus PEP became liable and it is virtually certain that the president of PEP did not fully understand the position he was now in. The Bank of Estonia had overstepped its own rules, but now apparently had clean hands.

Greed, ignorance and incompetence
So, in the end, we are left with a prima facie fraud based on an explosive combination of greed, ignorance and incompetence. Those in the know did not fully understand, and those who understood said nothing.

All the evidence suggests Kallas and his cronies allowed greed to overwhelm both their judgment and their knowledge. It was a daring and dangerous illegal adventure for which they had no expertise. They merely had access to the opportunity.

The Swiss account should have been opened with the condition that the $10 million could be withdrawn from the account only by a person presenting a guarantee from a third bank with reliable AAA rating. This guarantee was never demanded or presented. Instead the money was simply stolen from Põhja-Eesti Pank by small-time crooks with connections in Switzerland.

Since independence, Estonia has sadly grown accustomed to political scandals and lies. It seems that the Estonian voter is somewhat indifferent when one of his elected leaders is accused of being a cunning fraudster, corrupt or incompetent. Quite possibly he is seen as a combination of all three.

The only villain who comes out of this with any credit - even by his own warped standards - is Victor Schiralli, the Sicilian opportunist who found a way to remove $10 million from a Swiss bank account and walked clean away. To this day there is an arrest warrant out for him. His eventual arrest may even open the Kallas case again.

Meanwhile, Siim Kallas, the greedy and incompetent former head of the Bank of Estonia, now spends his time in Brussels - would you believe - fighting fraud and corruption in the EU which - as the EU itself admits - currently costs taxpayers over €2 million a day.

This is why nothing much has changed on that front since his appointment in 2004, and nothing much is likely to change while he is in office.

(Ashley Mote in an independent MEP for South-East England who has researched EU financial mismanagement over many years. Since his election in 2004 he has had a seat on the European Parliament's Budget Control Committee.)

Footnotes

(1) Eesti Pank: Persoonid ja saladused. Author: Urmas Kaju. Tallinn 2003 p. 145
(2) Ibid p. 140
(3) Kesknädal. 06.12.2000
(4) Eesti Pank: Persoonid ja saladused. Urmas Kaju. Tallinn 2003
(5) Ibid pp. 139-141
(6) Ibid
(7) Ibid p. 145
(8) Ibid p.140

See also: OLAF CAN'T INVESTIGATE THE ECB EURO-SEIGNIORAGE SCANDAL