Popular Czech ISP Tied to Major Credit Union Fraud

Netbox, alone among the top 10 internet service providers in the Czech Republic, has convoluted links to a man accused of major crime.

Netbox is a user-friendly and client-driven internet service provider (ISP), holding an estimated 3 percent of the market and serving municipalities and schools. But one of its three shareholders was involved in one of the biggest Czech bank frauds in the last 10 years, the case of Metropolitni Sporitelni Druzstvo.

Netbox is the brand name of a company called SMART Comp. a.s. The company offers technical solutions for regional internet service providers, and has been steadily growing in the Internet business field.

The history of the company is turbulent.

It was founded in 1998 in Brno by two 20-year-old friends, Marek Bukal and Radek Musil, who launched SMART Comp. in a garage where they assembled personal computers. The company was registered at the home of Bukal, who today is chairman of the board and a shareholder.

The following year (1999), a credit union called Metropolitni Sporitelni Druszstvo (MSD) was founded. Like SMART Comp., MSD grew quickly, attracting new members by promising high interest rates. Several of MSD’s founding members joined Bukal as SMART Comp. shareholders: Daniel Tureček and Martin Čupera.

In 2000, SMART Comp. decided to hire Čupera as managing director, which turned out to be a mistake.

Čupera, who in 2004 joined the SMART Comp. board of directors, did some controversial things during his tenure with the company. In 2006 SMART Comp. signed contracts with a company called Power Media s.r.o. that were worth only US$ 25,000 but carried a huge penalty fee for late payment of US$ 640,000. That same year, Čupera used company money to buy a BMW 530d for his personal use.

The contract between SMART Comp. and Power Media was signed on Jan. 24, 2006. When Bukal found out about the deal (and about the BMW), he filed a criminal complaint alleging fraud in March 2006. Nevertheless, the court ruled the contract was valid five months later in July, and SMART Comp. was ordered to pay the full amount of US$ 640,000 PX6.

(Čupera left the company in 2006 and eventually founded his own company, the internet infrastructure provider Fiber System Group).

SMART Comp. did not have enough capital to cover the US$ 640,000 debt and went looking for help. Given SMART Comp.’s close ties to MSD, it sought a loan there and opened negotiations late in 2006 with Tureček, MSD’s co-founder and managing director and, as noted, later a SMART Comp. shareholder.

Tureček, as a member of the board of directors of MSD, was responsible for managing the credit union, which at that time was the country’s largest.

But the financial help offered to SMART Comp. was far from a normal loan. Instead, in March 2007, MSD sold SMART Comp.’s debt to a company named Therez Ltd. registered in the Seychelles offshore tax haven. It is not clear who actually owns Therez, but it received 99 percent of SMART Comp. in exchange for the debt.

A few months later, Therez forgave PART of the debt; Therez then sold almost half of SMART Comp. back to Bukal for an undisclosed sum while one third went to Tureček.

The convoluted transaction involving SMART Comp. was just one of many deals between MSD and Therez, which held shares in multiple companies which received millions of dollars in loans. Therez was also involved in buying up MSD’s own debts.

In April 2013, the Czech National Bank (CNB) launched an investigation into MSD and discovered the credit union had been granting loans of tens of millions of dollars to finance dodgy business plans. In a scathing report on MSD’s activities issued that December, CNB said: “MSD provided loans amounting to tens and hundreds of millions of crowns to finance vague, unreal and unproven business plans.”

“MSD failed to check the proper creditworthiness of loan applicants, the prerequisites for the proper and timely repayment of the loan. MSD also ignored possible connections of individual applicants’ loans and did not considered other potential risks associated with credit transactions.”

For example, one of the loans provided was a US$ 4 million for vaguely defined investment in start-up companies. The borrower? Tureček himself, a co-founder of the credit union and member of its board of directors. All together, between 2007-2012 he received three loans from MSD totaling US$ 6 million.

In 2013, the CNB examined about 40 percent of MSD’s loan portfolio and found that the credit union provided 33 loans totaling 4.4 billion crowns (about US$ 180 million) to 60 borrowers, or an average of 133 million crowns (approximately US$ 5.5 million) per loan. CNB noted that several companies, who borrowed a total of one billion crowns (US$ 40 million) were founded by a network of the same people.

The CNB investigation led to a joint operation with state prosecutors and Unite to Combat Financial Crime and Corruption (UOKFK), a police agency. Police discovered that the credit union had loaned billions of crowns to offshore shell companies with proxy directors.

The money passed through those companies into Hong Kong banking accounts. According to the CNB report, the procedure was simple: the proxy director (often a homeless person) applied for a loan for a company established only weeks before the application, and the loan would be approved the same day.

Miroslav Singer, the CNB governor, said the pattern investigators uncovered wasn’t a matter of a poorly managed institution making mistakes, but of deliberate criminal actions.

Since 2014, Tureček has been under prosecution for fraud. Czech media has described him as the mastermind behind the fraud and the offshore schemes. He still owns a third of SMART Comp.

By Pavla Holcova

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