Cablegate: Podravka Corruption Case Tied to Xxxxxxxxxxxx And

DE RUEHVB #0097/01 0431151
P 121151Z FEB 10

Friday, 12 February 2010, 11:51
C O N F I D E N T I A L SECTION 01 OF 02 ZAGREB 000097
EO 12958 DECL: 01/01/2020
Classified By: Political Officer Chris Zimmer for Reasons 1.4 (b) and ( d)

1. (C) SUMMARY: The investigation of former Deputy Prime Minister Damir Polancec and the Podravka food company (which is 26 percent state-owned) is uncovering a growing scandal and has now tied Podravka’s financing schemes to the XXXXXXXXXXXX. The majority of Podravka’s board are under arrest. Prosecutors are seeking information from XXXXXXXXXXXX, who provided XXXXXXXXXXXX to the Podravka management board. Prosecutors believeXXXXXXXXXXXX was then used in the board’s scheme to take over the company, which led to subsequent illegal actions to cover up their activities and financial losses. Media are beginning to speculate on the role of former Prime Minister Ivo Sanader in the affair. End Summary.

2. (C) Croatia’s Chief State Prosecutor Mladen Bajic met with RSO and Poloff on February 2 to outline the prosecutor’s “Operation Spice” investigation into Podravka and former Deputy Prime Minister Polancec. Bajic presented two documents. The first was an unsigned financing agreement between XXXXXXXXXXXX and Podravka from November 2006. The second was a completed financing agreement between a company called XXXXXXXXXXXX and from XXXXXXXXXXXX which was secured by Podravka shares. Bajic said that under the equity acquisition financing agreement, XXXXXXXXXXXX approximately 34 million euro (with an additional 39 million euro available in a second tranche) for purchase of nearly 600,000 ordinary shares of Podravka. XXXXXXXXXXXX Bajic said Podravka’s management, under a plan spearheaded by Polancec, had arranged the deal in order to use the proceeds to purchase a controlling interest in the company. (NOTE: Four members of Podravka’s former management board are currently in detention. The board, which is appointed by parliament, was composed of members supported by various parties within the ruling coalition. End Note.) XXXXXXXXXXXX and XXXXXXXXXXXX replaced an unnamed “Podravka Management Approved Holding Company” as the borrower of record.

3. (C) Prosecutors from the Office of Suppression of Corruption and Organized Crime (USKOK) are interested in learning the details of XXXXXXXXXXXX, including who approached XXXXXXXXXXXX (NOTE: Post forwarded copies of the XXXXXXXXXXXXagreements to the FBI office in Vienna on February 8. End Note.) Bajic told EmbOffs that the XXXXXXXXXXXX agreement is legal -- his interest is in learning who was involved on the Croatian side. According to prosecutors, the criminal aspects of the deal involveXXXXXXXXXXXX and actions taken by Polancec and others in order to XXXXXXXXXXXX.

4. (C) Due to the economic crisis, the value of Podravka shares fell more than 50 percent, from approximately 600 kuna (120 USD) per share XXXXXXXXXXXX. According to prosecutors, as the value decreased, Podravka management, XXXXXXXXXXXX had to meet margin calls for the shortfall. In one scheme to increase Podravka’s revenues, at least on paper, Bajic said the management engaged in money laundering by funneling Podravka money XXXXXXXXXXXX in order to pay fraudulent contracts with Podravka.

5. (C) While Polancec’s scheme at Podravka was unraveling, he was simultaneously involved in negotiations with XXXXXXXXXXXX END NOTE.) Hungarian prosecutors forwarded to Bajic their report on an investigation of XXXXXXXXXXXX in the Podravka deal. According to the report, when the XXXXXXXXXXXX of the equity agreement dropped to 35 percent in December 2008, it triggered an early termination agreement. Hungarian prosecutors say that at this point, Deputy Prime Minister Polancec, who was also Minister of Economy and deeply involved in the XXXXXXXXXXXX negotiations, approached XXXXXXXXXXXX and asked XXXXXXXXXXXX to be a consultant to Podravka. As a result of these consultations, XXXXXXXXXXXX. XXXXXXXXXXXX for his failed schemes at Podravka.

6. (C) Press reports on the XXXXXXXXXXXX connection to the Podravka case within the past week have also speculated on the possible involvement of former Prime Minister Ivo Sanader. Sanader was closely involved in XXXXXXXXXXXX negotiations and it would have been difficult for Polancec to have taken some of the actions prosecutors are alleging he did in the XXXXXXXXXXXX talks without Sanader’s knowledge. Bajic declined to tell us on February 2 whether Sanader is a target of this investigation, but he has told us on previous occasions that his office is investigating the former PM in several cases.

7. (C) Bajic has said privately that Podravka could be Croatia’s Enron, a game-changing case in the GoC’s efforts to tackle corruption, particularly if he can obtain sufficient evidence that Polancec intentionally undersold XXXXXXXXXXXX. Cooperation with Hungarian prosecutors continues to improve. Bajic said he was very impressed with the evidence and analysis the Hungarians provided on the XXXXXXXXXXXX connection.

8. (C) COMMENT: The Podravka case is one of the major cases that the EU is watching to determine Croatia’s commitment to fighting corruption. The results to date are positive. The willingness and ability of USKOK to investigate an incumbent Deputy Prime Minister, almost immediately after suspicions were raised, shows that, as Prime Minister Kosor has contended, there may no longer be “untouchables” in Croatia. Post will continue to work with the FBI in order to facilitate USKOK’s contact with XXXXXXXXXXXX. END COMMENT. FOLEY

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