The Czech tunnel—what goes in never comes out

Picture the scene: The femme fatale enters the room, slyly eyes the corporate detective and then lays it on him.

“I believe my business partner is up to no good.”

Now imagine this is a daily occurrence—only (unfortunately) without the alluring femme fatale. In fact, most of the time we are looking at a wide-eyed private equity consultant or a nerve-wracked entrepreneur bordering heart attack mode.

No, it’s not a pretty picture, but yes, it indeed is a daily occurrence in the world of risk consulting. Sadly, by definition both of the above have arrived too late—i.e. after they money is gone—but  let’s assume that such criticism is a moot point. The money is gone, nobody conducted any checks  so no need to rub it in.

So I won’t. Instead, beginning in this series I will outline a few common scams and the trouble you will run into should you become a victim. And in order not to induce instant heart attacks, I will proceed from more historical somewhat (emphasis on that word) antiquated scams that will serve as a basis as to more complicated “endeavors” that are commonly seen in the region today.

The Czech tunnel…

Perhaps it is indeed best to begin in the beginning, which for many expatriates would mean “tunneling” in Prague. The basic premise was and is quite simple: insert an employee (preferably with fictitious identity) into a company for the sole purpose of draining accounts. The monies would then be bounced from account to account around the world in order to not only confuse authorities but to simply make it impossible for them to conduct a true investigation.

This was first popularized, as you might guess, in the early 1990s, so let’s jump to a real incident from 1991. A new secretary was hired at a small company. Three months into the job, she suddenly did not report for work—a strange incident as she was always the first person in the door.

Unfortunately, it turned out that both her outstanding work ethic and punctuality were quite nefarious in nature—as was her sudden absence. The company soon learned that CZK 1.2 mln had been transferred abroad the evening prior to her disappearance. Private enquiries proved that the money bounced from one jurisdiction to another at least eight times.

And that, my friends, was the end of it—I mean the end of the company itself. A privately-funded start up, the firm simply could not take the hit. Neither could it pay employees or fulfill orders. Paradoxically, the owner only narrowly avoided spending time in jail. Apparently, what he did not avoid was returning to the U.S. to work as a bartender, but that is another story.

So what happened?

What happened is what commonly happens even today, only on a much broader level. The police were skilled, but the police budget was all but non-existent. This meant that liaising between just one offshore jurisdiction (think translation and travel costs) was patently out of the question. Moreover, the Czech was likely at least half-Russian and never properly identified. Whether she was seriously investigated remains a question to this day.

True, in 2014 such a scenario would be much more difficult to pull off. Records are now computerized so the employee “insertion” phase of a scam is no simple thing. But to this I say, details, details. The ever-present moral is that police have budgets and limited staff.

As late as 2004 a UK Serious Fraud Office investigator lamented that he had only six staff for the whole country qualified to investigate money laundering. Now imagine investigator staffing in Central Europe. Then imagine that first you must find the qualified cop, then you have to come up with a budget. In the big picture, CZK 1.2 mln might be big money for you, but it’s nothing compared to what went out the door at a crooked state company.

Then the final reality: a private consultancy was hired. This costs money. But what cost real money were the lawyers needed to deal with various offshore cops and financial fraud commissions.

In short, ugly, ugly stuff. What I am unsure about is how far the victim went in contacting U.S. authorities, but I suspect not very far (for reason that I will address next issue). At any rate, I personally thought tracking the cash through seven jurisdictions was quite a feat. I’m sure the once-and-future bartender whole-heartedly disagrees.

(Next issue: The morphing of insertion—i.e tunneling will never die)

Preston Smith is managing editor for CEE Insight and managing director of CEE Consulting Group. Please feel free to contract him at.