PANDURA'S BOX: CORRUPTION SCANDAL LIFTS THE LID ON

S E C R E T SECTION 01 OF 03 PRAGUE 000117

NOFORN
SIPDIS

E.O. 12958: DECL: 02/20/2020
TAGS: KCOR PGOV EINV EZ AU
SUBJECT: PANDURA'S BOX: CORRUPTION SCANDAL LIFTS THE LID ON
CZECH DEFENSE PROCUREMENT

REF: A. PRAGUE 91

B. PRAGUE 57

C. 09 PRAGUE 147

D. 05 PRAGUE 815

E. 04 PRAGUE 747

F. 04 PRAGUE 698

Classified By: Charge d'Affaires Mary Thompson-Jones for reasons 1.4 (b
) and (d)


1. (C) Summary: Widespread Czech press reporting of alleged
corruption by Czech politicians involved in a billion-dollar
contract between General Dynamics' Austrian subsidiary Steyr
and the Czech MoD for Pandur armored personnel carriers
(APCs) is shaking the political scene. One newspaper's
series of front-page stories about the contract and its
course from 2003-2009 has now expanded to coverage by most
media. With Social Democrats (center-left CSSD) and Civic
Democrats (center-right ODS) implicated in the scandal and
elections scheduled for May 2010, both major parties are
trading accusations while trying to manage the fallout.
Party leaders Jiri Paroubek (CSSD) and Mirek Topolanek (ODS)
have called for a swift investigation and accused their
opponents of the greater responsibility in the affair. Prime
Minister Fischer pledged to carefully look into any "dirty
dealings", and the police and state prosecutor's office have
started an investigation. The main focus of the
investigation is on the role of Steyr, its lobbyists, and
Czech officials; there have been no accusations of
malfeasance by General Dynamics. While the details are still
unfolding, the episode highlights the susceptibility of Czech
government procurement procedures to corruption due to a lack
of transparency. End Summary.

--------------
Background of the Contract
--------------


2. (SBU) A CSSD Government Approves the Concept: In late
2003, a center-left CSSD-led government approved a plan to
replace Soviet-era vehicles with 240 new APCs. In 2004,
PricewaterhouseCoopers (PwC) was hired to organize a tender
for the contract, a signal that the MoD was seeking greater
assurance of transparency (reftel F). A tender for 199 APCs
was let in 2005 under the new CSSD-led government of Prime
Minister Stanislav Gross. General Dynamic's Austrian
subsidiary, Steyr, entered the APC competition, while its
other subsidiary, Swiss firm Mowag, stayed out, allowing
General Dynamics and the USG to advocate for Steyr (reftel
E).


3. (U) Another CSSD Government Makes the Deal: Early in
2006, the government of yet another CSSD Prime Minister, Jiri
Paroubek, selected Steyr as the winner of the contract for
23.6 billion crowns (USD 1B in early 2006). In June 2006,
days after national elections, ODS announced it would cancel
the tender once it formed the new government. Just before
leaving office, then-Minister of Defense Karel Kuehnl
(Freedom Union party) drew criticism from ODS for signing the
contract with Steyr for 199 APCs, with an option for 35 more.



4. (U) ODS Cancels the Deal and Remakes It: Through the
course of 2007, however, the Ministry of Defense under the
ODS-led government of PM Mirek Topolanek disputed the quality
and timeliness of Steyr's Pandur deliveries. The government
first eliminated the 35-vehicle "option" in May, and then
unilaterally canceled the entire contract in December of

2007. General Dynamics lawyers responded by preparing to
take the case to international arbitration. Intense
negotiation (including USG advocacy for Steyr) followed into
early 2008, and the Topolanek government agreed in April 2008
to purchase 107 Pandurs, subject to successful field testing.
Finally, in March, 2009, shortly before the fall of the
Topolanek government, then-Deputy Minister of Defense Martin
Bartak (ODS) signed a revised contract with Steyr for 107
Pandurs at a cost of 14.4 billion crowns (USD 692M at March
2009 rates). The Czech Army received the first 17 Pandurs in
September of 2009.

--------------
The Current Scandal
--------------


5. (U) For most of the week of February 14, leading daily
Mlada Fronta Dnes's (MFD) front pages and lead inside
coverage have alleged a major bribery scandal in which six
percent of Steyr's Pandur contract was supposedly parceled
out as payoffs to CSSD and ODS. Those implicated include:

- Stanislav Gross (no longer in politics),whose government

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let the tender
- Karel Kuehnl (now Czech Ambassador in Croatia),who signed
the 2006 contract with Steyr
- Martin Bartak (current ODS Minister of Defense),who signed
the renegotiated 2009 contract with Steyr as Deputy MoD
- Jiri Paroubek (CSSD party chairman, and front runner for PM
in the next government),whose government approved the 2006
deal with Steyr
- Lubomir Zaoralek (CSSD shadow FM, and front runner to head
the MFA for Paroubek),who was allegedly lobbied by Steyr in
2003

Now all media outlets have begun to run major stories about
the affair. The primary focus is on Steyr, though at least
one recent story speculates that General Dynamics' full
ownership of Steyr could lead to FBI involvement in an
investigation. MFD's reporting relies on conversations with
two Austrian businessmen, Wolfgang Habitzl and Herwig
Jedlaucnik, both former employees of Steyr and associated
with the Pandur sale. They were recorded by hidden camera
while MFD's reporter posed as a consultant seeking
information about how to influence Czech politicians. (Note:
Habitzl and Jedlaucnik have now retracted the information
they provided to the MFD reporter about the purchase of
Pandur vehicles, stating to the Austrian Press Agency, "It
was a bad joke." End Note.)


6. (U) MFD also published two pages of a confidential 2002
agreement between Hans Malzacher, then CEO of Steyr, and
Czech consultant Jan Vlcek. According to the agreement,
Vlcek was engaged by Steyr (before the company's acquisition
by General Dynamics in 2003) to arrange meetings with Czech
officials to advance Steyr's Pandur marketing efforts. Vlcek
claims to have withdrawn from the arrangement when he
realized that bribery was involved. Habitzl and Jedlaucnik
allege that, after Vlcek's departure, the payoffs were
funneled through PAMCO, a Czech consulting firm owned by
entrepreneur Pavel Musela, a friend of former PM Stanislav
Gross.

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Political Reactions
--------------


7. (SBU) Because the Pandur contract was launched by
CSSD-led governments in 2003-2006, then canceled and
renegotiated by an ODS-led government in 2007-2009, both
parties are vulnerable to accusations. Both have firmly
denied wrongdoing while trying to shift blame to the other
side. Concern about May election fallout was evident in Jiri
Paroubek's initial reaction: "We expect...a prompt
investigation with a preliminary report before the elections
in May." Before meeting with Prime Minister Fischer about
the case, Paroubek declared in a press release partially
entitled, "Corruption is the cancer of this society," that
the investigation should "let the chips fall where they may."



8. (U) CSSD is seeking bribery charges against Habitzl and
Jedlaucnik in case their story is true, and a charge of
slander against unknown perpetrators in case the affair is a
politically-motivated ruse, or an attempt to exact commercial
revenge. Regarding the latter scenarios, Paroubek claims the
likely suspects are Miroslav Kalousek (currently a member of
the newly-formed TOP09 party),arms trader Omnipol's head
Richard Hava (whose firm would have acted as middleman for
Finland's Patria, a loser in the APC tender),and lobbyist
and one-time ODS media advisor Michal Kuzmiak.


9. (U) ODS's most vocal response has come from Defense
Minister Bartak. Reacting to charges that the price of the
renegotiated contract was suspiciously higher than the
original cost -- and considerably more than the per-vehicle
cost of Portugal's Pandur contract -- Bartak's MoD has issued
detailed press releases. These statements argue that
differences in the number of Pandur variants, contract terms
and vehicle features, the impact of logistical support and
training, and the role of industrial offsets account for the
increased per-vehicle cost.


10. (U) Concerning the comments of the Austrians, Bartak
issued a personal statement labeling the affair "an
intentional political game of discreditation...in the
pre-election season" and repeated his message at a February
22 press conference. Meanwhile, Mirek Topolanek and his
former Defense Minister Vlasta Parkanova (who is now with
TOP09) have also been trading accusations in the media.
Responding to Topolanek's statement that, "Parkanova bears
full responsibility. I can only speculate as to why she
wanted to allow an apparently corrupt project to remain
valid," Parkanova insisted, "The Prime Minister himself

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supported the project from start to finish. There was a
great rush to conclude a contract...(Topolanek) had a great
interest in having the project shifted to Deputy Minister
Bartak."

-------------- --------------
Talk of Corruption in Defense Procurement Extends Back
-------------- --------------


11. (S) In mid-2004, a Steyr official told us (reftel E)
about "shadowy forces" already at work in the tender, but
pledged his company would adhere to ethical standards while
lobbying Czech officials. One year later (reftel D) it
appeared that PwC was preparing a transparent and open
process. During this period, a member of the Czech
Parliament familiar with military acquisition also indicated
to us that a significant measure of transparency was being
achieved in the tender process.


12. (U) Late in 2006 however, in connection with competitor
Patria's legal challenge of the contract award to Steyr, the
Anti-Corruption and Financial Crimes Unit (AFCU) of the Czech
National Police began an investigation of the APC tender.
The investigation was transferred to the Special Department
of the Czech Military Police at the end of 2006 when it was
discovered that they too were looking into the tender. An
unidentified Military Police source is quoted in MFD saying
that the tender was found to have been conducted "in
accordance with the rules". (The AFCU announced on February
19 that it is reopening its investigation.)


13. (C/NF) During renegotiation of the Pandur contract in
early 2008, we were told by a Steyr representative (reftel C)
that Minister Bartak had engineered an opportunity for former
Topolanek protege and lobbyist Marek Dalik to solicit a
substantial bribe from Steyr in exchange for getting the
contract back on track, an allegation which we could not
independently confirm.

--------------
Comments
--------------


14. (C) As a military analyst noted in May of 2004 (Reftel
E),"While the MoD is attempting to forestall any allegations
of corruption in this (APC) tender, hiring (PwC) will not fix
the acquisition system itself, which will continue to suffer
from a lack of transparency." Six years later the same
concerns exist regarding Czech procurement procedures. While
several political parties have seized on the need to "get
tough" on corruption, and there is proposed anti-corruption
legislation making its way through Parliament now (reftel B),
the Czech public remains skeptical that this is anything more
than campaign rhetoric in the lead-up to May elections.
Recent public polling indicates that two-thirds of Czechs are
dissatisfied with the current political situation and just 20
percent of the public considers parliamentarians in the lower
house "trustworthy." Considering that so many parties and
politicians appear to be involved in this case, one likely
result is that it will strongly reinforce the public's
perception that all Czech politicians are tarred with the
same brush.


15. (SBU) Embassy Prague regularly advances the importance of
transparency with Czech officials, as we are currently doing
in negotiating the Research, Development, Testing and
Evaluation Agreement and the Reciprocal Defense Procurement
MOU (reftel A) with the MoD. As well, post is collaborating
with Ministry of Interior officials on training next month
for law enforcement officials, judges, and prosecutors
regarding combating corruption. Clearly, there is much room
for more to be done.


16. (SBU) While this particular case appears to demonstrate
that Czech government tenders remain flawed and nearly
impossible to monitor, there are two positive elements worth
noting. Czech media are vigorous and willing to take on
officials, regardless of party or position. Second, Prime
Minister Fischer, who leads the current interim government
and was not aligned with any party before he was elevated to
PM from the Czech statistical office, appears genuinely
focused on getting to the heart of any wrongdoing.
Nonetheless, with something at stake for almost all of the
political parties and an election in May, it remains to be
seen whether the major parties will, as CSSD leader Paroubek
has suggested, "let the chips fall where they may."

Thompson-Jones