THE FALL OF A POLITICAL AND BUSINESS HEAVY Damir Polancec was forced to step down under public pressure from the post of Deputy Prime Minister and is in fact the only suspect in the Podravka scandal still at large A few days ago USKOK (Bureau for the Prevention of Corruption and Organized Crime) questioned a witness whose testimony could help reveal the chief political patrons of the scandal linked to the food company Podravka. This witness has indicated that the mastermind of all the suspicious dealings in Podravka was Damir Polancec, until recently the Deputy Prime Minister and Minister of the Economy.

The witness has accused Polancec of being the chief coordinator of transactions that would have, in the final tally, after several complicated phases, put Podravka in the majority ownership of a handful of managers in the company. The witness has told USKOK that the mangers, detained by the police as suspects, undertook none of the controversial activity that has seen them placed in temporary police detention without Polancec's knowledge of it. It is an open question whether this statement alone is sufficient to file criminal charges against Polancec. But this new development in the scandal is considered significant because it could prompt some of those detained to cooperate with the competent authorities, which could assist in finally revealing all of the details of the scandal.

So far USKOK has drafted almost five thousand pages on the case, and requests for international legal assistance have been sent to five foreign countries. Answers are expected from Hungary, England, Malta, Switzerland and the Czech Republic. Among other things, USKOK has Podravka internal business documentation that gives cause for suspicions that the detained managers were not out to protect Podravka from a hostile takeover attempt in order to indirectly protect the Government's interest as one of the major stakeholders in the company. This documentation allegedly reveals that the detained managers, together with some still unidentified persons, were out to take over 75 percent of the stock in Podravka, and to do so using the company's money. At USKOK they believe that this documentation could be the key evidence that will in the end secure prison sentences for the detained managers. As things now stand, the first preconditions have been set to formally connect Damir Polancec with these activities. If that were to happen, Polancec would not be charged only with abetting a criminal act, but would in fact be charged as the mastermind of a criminal enterprise. In that case Polancec would, like the other members of the group, answer for all of the illegal activity the group is charged with.

Arrested so far in the Podravka scandal are Darko Marinac, the former CEO and president of the supervisory board at Podravka, the current Podravka CEO Zdravko Sestak, Sasa Romac and Josip Pavlovic, members of the board at Podravka, Milan Horvat, the head of the Varazdin-based FIMA company, and Srdan Mladinic, the head of SMS company. They are charged with a criminal enterprise that through abuse of office and authorities caused millions in damages to Podravka. The scandal has garnered massive public interest, and besides the arrests has caused major political problems for the current Government, above all because Damir Polancec has been forced to step down from his cabinet post in the wake of massive media pressure.

It all started with the news that Darko Marinac, as the top man at Podravka, had during his mandate entirely of his own volition provided a line of credit worth in excess of 60 million kuna to Srdan Mladinic's SMS company, which was presented as a criminal decision that no one in the company knew of. It is interesting that a similar proposition has been presented to USKOK by the witness that has accused Polancec of being behind it all. According to this witness, these and some other dubious decisions were made without the knowledge of a part of the top management and without the involvement of the supervisory board. Not long afterwards Marinac and Polancec came under suspicion that they, in part likely for their own needs, used Podravka's money to through several complicated monetary transactions made with the help of the FIMA Company in an attempt to come into a controlling package of Podravka shares. Marinac presented the Podravka privatisation program in question to Government and local politicians on several occasions, and personally presented it twice to over a hundred Podravka managers. The preparations for this project in part coincided with the intention of Franck and Privredna Bank to unload their ten percent stakes in Podravka.

At the time the representatives of the Norwegian firm of Rieber & Son official stated their desire to purchase these shares, and another 10 percent of stock under the care of one of the funds operated by the Raiffeisen Bank. Marinac consulted with Government representatives on the matter and was given a clear political signal that Podravka should be kept in domestic hands. This was exactly why the drafting of the controversial model of privatisation was undertaken. And while critics of that kind of privatisation model had already then stated to the press that the privatisation model in fact had quite another background, the Podravka leadership undertook the controversial transactions with the help of the FIMA company saying that they were meant to protect Podravka from a foreign takeover. In the end the Podravka shares, then owned by Franck and the Privredna Bank (PBZ), where bought by FIMA with the aid of the Varazdin-based Vaba Bank.

In order to strengthen the Vaba Bank and to help it finance the transaction, Podravka placed a part of its deposits in Vaba, instead of with PBZ, which had decided to sell its shares in Podravka and whose supervisory board was headed at the time by Bozo Prka, the head of PBZ in Croatia. In the end FIMA succeeded in buying the stock, partly with the help of a loan from Merrill Lynch. A part of the transaction was carried out via a FIMA company in Malta. FIMA and Podravka also concluded an options contract, which gave Podravka pre-emptive rights to the purchase of these shares if FIMA was forced to sell them as a result of unfavourable market conditions. The price of the stock, namely, started dropping soon afterwards as a result of the recession, and the creditor of the transaction, Merrill Lynch, issued a margin call, in order to sell the Podravka shares and recoup the loan. The Podravka leadership decided to prevent this scenario and deposited money in the bank to prevent the sale of the shares. This was carried out with the help of Srdan Mladinic's SMS company. The money was transferred from Podravka to SMS, and thence to the bank as a guarantee that would prevent the sale of the shares. This was allegedly done surreptitiously, without the knowledge of a part of the board of directors and supervisory board. USKOK is now convinced this is the case, even though the contract in question between FIMA and Podravka does not mention that the shares would in the end be controlled by a minority of the company's managers.Podravka CEO Zdravko Sestak – arrested in the ongoing investigation into the scandal – and Damir Polancec, until recently the Deputy Prime Minister

No firm evidence has been presented to date that would confirm that the detained managers did in fact intend to use the company's money to take over the ownership of Podravka. The attorneys of some of those detained in the case say that these suspicions cannot be proven. USKOK, however, does not share their opinion and wants to prove that it all started happening thanks to the political blessing of the political heavies of the time. As of recently there are the claims of a witness that Damir Polancec was behind it all, of which various newspapers wrote extensively prior to his stepping down from his cabinet post.

After stepping down Polancec gave a number of critical interviews, and at USKOK they are convinced that these public statements were intended to send a message to his friends in police detention to keep their lips sealed. In a few days time the first month of police detention will expire and the courts will decide again whether they are to be kept in police detention or will be allowed to defend themselves at large. The people at USKOK are convinced that their detention will be extended, which could be an additional encouragement to some of the detainees to start cooperating with the competent authorities.

Some claim that the real escalation of tensions is yet to follow, because there are suspicions that Damir Polancec was certainly not the ultimate political authority pulling the strings in this tale. While Ivo Sanader was the Prime Minister he personally made all key decisions in all significant areas of the Government's sphere is responsibility. That is why the desire of the State Attorney's Office to find the ultimate coordinators of the Podravak scandal comes as no surprise. If these suspicions are turned into criminal charges, it could be the real start of a Government crackdown on the corruption and organised crime that extends to the highest ranks of the nation's leadership.