By a special correspondent of The European Financial Review
This article first appeared in the European Financial Review April-May edition
Polish tax police operate in a way unknown in other EU member states.
Below, a Special Correspondent argues that the behavior of the tax police does serious damage to Poland by discouraging foreign investors or Polish citizens living elsewhere in Europe or North America who are not confident they will receive fair and proper treatment.
When will Poland stop crude communist-era attacks on EU businesses (and home grown Polish businesses) trying to make a zloty in the country?
In 2011, Poland secured $18.9 billion of foreign direct investment according to the OECD. This was a remarkable achievement during the period when most EU economies were reeling as a result of the 2008 world banking crisis and the slow down in credit and investment.
The 2011 figure was an increase of $5 billion on the previous year and showed that the Polish government with its able Anglo-Polish finance minister, Jacek Rostowksi, was seen as one of the EU countries foreign businessmen were confident to invest and do business in.
But the latest figure from the OECD and the UN Trade organisation show a dramatic slump to just $3.4 billion.
At the same time the New York based Heritage Foundation 2014 report which scores countries’ performances across a range of economic measurements shows that Poland has a poor score for business corruption. Compared to a similar sized country, Spain, which also left a background of political authoritarianism, Poland cannot shake off a bad name for a poorly functioning relationship between foreign companies, local Polish business executives and the Polish state authorities.
The main complaint comes from the approach of the tax police in Poland which operate in a way unknown in other EU member states. If for personal or political reasons, the director of local tax polices want to shut down a company they allege is guilty of some breach of Poland’s complex business and social security tax laws, they can do so without any obligation to explain their actions.
One prominent Polish businessman and philanthropist, Marek Kmetko, had decided to operate out of Germany and Switzerland after his student daughter was harassed and threatened with arrest by Polish tax police who accused him of illegally taking money out of Poland even though he had been cleared of the charge by the German investigative authorities.
“It’s very worrying when the Polish police-judicial system refuse to accept the rulings from a neighbouring EU member state,” said Kemtko. “I have employed hundreds of people in Poland and want to keep investing and operating in my country. But there is no rule of law such as it is understood elsewhere in Europe,” he said.
Business journalists and business lawyers in Warsaw are aware of the behavior of the Polish tax police which dates back to communist era operations but the high state authorities admit privately they are powerless to reform the way some prosecuting officials work.
Now in a remarkable new book by a foreign investor in Poland comes detail after detail of corrupt attacks by local police and municipal authorities in Poland acting on behalf of rival interests who do not want to face competition from modern entrepreneurs.
John Borrell gave up a distinguished career as one of the star foreign correspondents of Time magazine twenty years ago. A native New Zealander, Borrell had met and married a Polish woman on his foreign correspondent travels. He decided to retire from endless jumping on planes to report wars. Instead he set out to build a hotel lodge on a lake in north east Poland. He added to that a successful wine importing business and even his own brand of vodka.
“Now in a remarkable new book by a foreign investor in Poland comes detail after detail of corrupt attacks by local police and municipal authorities in Poland acting on behalf of rival interests who do not want to face competition from modern entrepreneurs.”
No problem one might think and surely a welcome new economic activity after the end of communism. But Borrell reckoned without the local police, mayor, newspaper and every neighbour who did not want to see him succeed.
His account in his book The White Lake (Quartet Books, 2014) is a triumph of New Zealand grit and smart tactics over a Polish local bureaucracy that even today has not shaken off the habits of communism and records money-making as suspicious activity.
Polish law allows for pre-trial detention of up to two years, longer in special circumstances and many public prosecutors use it as a means of extracting “confessions” or simply to punish people they lack evidence to prosecute in court. Bureaucrats, public prosecutors and judges are never held accountable for wrongly depriving people of their liberty. As a result more than ninety-five per cent of requests by public prosecutors for pre-trial detention are approved by judges. In less than half of such hearings is the accused represented by a lawyer.
Borrell cites the case of Lech Jeziorny and Pawel Rey. “The two entrepreneurs from Krakow were detained for nine months without trial in 2003 while prosecutors hunted for evidence they had acted illegally in a complex management buyout of a slaughterhouse. They were bankrupted by this pre-trial detention and faced another seven years of investigation after their release. All the charges against them were then dropped without apology or compensation for the time they had spent in jail.”
Another case is that of businessman Roman Kluska who was bankrupted by a tax investigation that courts later ruled to have been improper. He had to post more than €2 million in bail to avoid lengthy pre-trial incarceration. Kluska received a derisory €1,250 in compensation from the government.
“Mitch Nocula, an American businessman who had to close down his machine tool business when inspectors wrongly accused him of using illegal software, received just €315 in compensation,” write Borrell.
There is growing concern in the European Parliament and in Brussels at the unaccountable operations of the tax police. They can detain without charge any business executive they do not like. They are not obliged to present to courts within a reasonable delay clear evidence or proof to justify their arrests.
Obviously when key managers or executives are removed from day-to-day operations, a business stops functioning and all the employees down the employment chain have to find other work if they can. Polish unemployment rose to 14 per cent in January 2014 well above the EU average as a result of this loss of business confidence in the country.
Moreover Poland exports its unemployment westwards to other EU member states who have to offer work to Poles who cannot find jobs in their own country because of the lack of confidence by investors and business executives that they will face arbitrary harassment and even arrest by local prosecutors working with the tax police in a manner unknown elsewhere in the EU.
“There is growing concern in the European Parliament and in Brussels at the unaccountable operations of the tax police in Poland. They can detain without charge any business executive they do not like.”
Borrell describes the film, Uklad Zmakniety (Crooked Cabal) “about the behavior of prosecutors, judges and police as they attack businessmen. It shows a scene of the heavily armed police battering down a door and pinning one of the entrepeneurs and his pregnant wife to the floor with guns to their backs while the children look on. It showed a running dialogue between the public prosecutor and the regional tax collector as they stitched up the entrepeneurs. It was frightening to think that public officials could be so corrupt and immune to censor of any kind.”
“It was such a powerful film that even Poland’s President, Bronislaw Komorowski, was moved to declare it essential viewing for officials with power over other people’s lives. It would be even better if Poland took this often misused power away from prosecutors by making pre-trial detention illegal.”
Unfortunately even if Poland’s president says his officialdom should look at the film the message has not been received. Polish businessman Marek Kmetko saw an attack on his Berlin-based KuK employment agency network which led to it closing down in Poland earlier this year without any trial or court hearing. Key managers in Wroclaw found themselves detained without charge for months including a 71 year old woman who did some work for Kmetko in Berlin who was visiting Wroclaw to see grandchildren.
The allegation is that Mr Kemtko has not paid social security tax for his employees. Since they are all sub-contracted to other firms there is no clarity as to who is responsible for the social insurance payments. Mr Kmetko offered to pay any claims following arbitration but the response of the Wroclaw tax police and their friends in the prosecutors’ office was to issue an arrest warrant for Anna Kmetko, his 22 year old daughter studying English in London.
The tactic was a crude attempt at intimidation such as are described in John Borrell’s book.
Borrell adds further charges with his charge that the “Polish bureaucracy is so obstructive and petty that importers, me included, sometimes choose Rotterdam or Hamburg as the port of entry. Poland loses out every time a cargo is not shipped through Gdansk or some other Polish port. Surprisingly little is being done to streamline bureaucratic procedures so that Poland, rather than Holland or Germany, benefits from EU imports duties. Polish bureaucrats either don’t see or don’t care about the consequences of what they do.”
Borrell speaks for many struggling to make a success of business in Poland when he writes “It was tempting to think that corruption was a transitional product of the collapse of Communism and the privatisation of tens of thousands of state-owned companies, large and small. There had been no wholesale clearing out of the Communist-era bureaucracy when Poland shrugged off its Soviet shackles and became a democracy in 1989. This meant that the old nomenklatura, at the higher levels consisting of card-carrying members of the party itself and closed linked to the old order’s politicians, played a big part in the privatisation process.”
“Little is being done to streamline bureaucratic procedures so that Poland, rather than Holland or Germany, benefits from EU imports duties.”
“One company paid me in advance for an all-inclusive weekend stay for someone they described as ‘an important business partner.’ He arrived on a Friday evening in a shiny new car. Out stepped an expensively dressed woman whom he introduced as his wife. The pair didn’t behave like a married couple and sent much of the weekend in their suite where they consumed prodigious amounts of alcohol. I later found out from the manager of the company paying for the weekend that he was the chief tax inspector for the region in which the company was located. ‘We had a tax inspection during which a few problems came up,’ the manager said. ‘I think everything has been resolved now.’”
Members of the European Parliament are concerned that public prosecutors and courts could keep people in jail for two years or more without charge. As Borrell writes “Those who were not prosecuted received neither apology nor redress. In one celebrated case, the head of a regional tax office and his public prosecutor friend conspired to keep two businessmen in jail for nine months while they searched for evidence to charge them with corruption in a business deal involving state property. No evidence materialised, but the businessmen were ruined by the time of their release. Both officials kept their jobs. One was promoted.”
It is always difficult to criticise tax police raids and Polish politicians who themselves can easily face accusation, justified or false, to dubious relationships with the business world and are not willing to criticise or investigate the tax police.
Any politician who does dare raise the issue can find himself smeared in the different media outlets in Poland as the Polish police operation still retains many aspects of the old pre-1989 era of black propaganda, disinformation and blackmailing threat of media exposure.
In the end the behavior of the tax police does serious damage to Poland by discouraging foreign investors or Polish citizens living elsewhere in Europe or North America who would like to help their country of origin but are not confident they will receive fair and proper treatment.
Once the European Parliament election is over, a new generation of Polish MEPs is expected to take up this problem and send out a signal that the era of arbitrary and politically or cash motivated arrests, detentions and destruction of businesses by the tax police and their friends in prosecutor offices will come to an end.
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