Ceska posta case and advisory mandates

Most frequent myth

CSOB influenced state officials through the law of a certain Mr. Jansta in order to win a contract with Ceska posta.

 

 

Description of the affair from the media’s perspective

CSOB needed to arrange the prolongation of its contract with the state-owned company Ceska posta, and Mr. Jansta, a lawyer who circulates in the governing party’s top echelon like a fish in water, helped to organize its smooth passage in ČSSD. This gives rise to the question of whether some of the hundreds of millions of crowns may have been used as a bribe for some government officials or as a gift to the party’s coffer. The contract between CSOB and Ceska posta has seven hundred pages. But was the contract worth a hundred million crowns?

 

 

CSOB quotation regarding the issue

“Before, our payment for the post office was comprised above all of a flat rate with a small component for performance on top of that. With the arrival of a new general director, Ceska posta’s management wanted to reverse that arrangement. We agreed, but we needed a strong and motivated team in order to manage the related business strategy in the short period of time remaining,” says Pavel Kavánek, CEO of CSOB.

 

Brief factual account

When IPB collapsed, Postovni sporitelna was one of the bank’s divisions without its own legal status, similar to its status within the framework of CSOB. The relationship between IPB and Ceska posta was regulated by a contract concluded for a period of ten years (1997-2007), which established that by the end of 2005 the two contractual parties could agree to continue the contract beyond the year 2007.

In 2002, CSOB commenced talks with Ceska posta on an annex to the valid contract that would, besides extending the cooperation for another 10 years (until 2017), also define some partial changes in the project. Those talks occurred irregularly until mid-2004, when there was a change in the position of general director of Ceska posta; the new director came up with a conceptually and fundamentally new requirement for the entire Postovni sporitelna project.

Ceska posta wanted to acquire a larger volume of banking transactions, and in exchange for that wanted to establish not a flat rate as it had been up to that point, but rather progressive fees depending on the fulfilment of agreed quantitative and qualitative parameters. CSOB was forced to react to this new situation with a fundamental change in its approach to the negotiations: the likeness of the new project had to be agreed on by the end of 2005 at the latest, i.e. within about 14 months. At the same time, this provided an opportunity to revise the entire strategy of Postovni sporitelna, which would open up opportunities for rapid commercial expansion.

CSOB therefore created a team comprised of internal employees and external advisors (an investment bank, a law firm) whose aim was to define the entire Postovni sporitelna project from the ground up, including the creation of a new strategy and completely new contractual documentation. The scope of the project is documented by the fact that it related to more than 2 million clients, 700 employees of CSOB, and more than 3,400 service workplaces, while the expected yield for both contracting parties would amount to tens of billion of crowns.

The strategy for Postovni sporitelna is motivated by an ambition to rapidly increase its market share and assume the leading market position in the retail banking sector for mass clientele. The new contractual documentation was ultimately completed by the deadline at the end of 2005, and external advisors played a key role in this feat.

The fact that setting up and contractually securing a brand new type of cooperation between CSOB and Ceska posta was managed in such a short period is documented by an overview of the main differences between the contract valid from 1997 and the new contractual documentation concluded at the end of 2005:

The complicated approval process through which the new contract successfully passed on both sides also testifies that the work performed by all involved parties to define the new model of cooperation and its contractual safeguarding was of extremely high quality.

On CSOB’s side, the process of developing the new business alliance with the post office’s contractual documentation and the Postovni sporitelna project itself were reviewed by the internal auditing department and an external auditor, and subsequently approved by the bank’s Board of Directors, Auditing Committee, and Supervisory Board.

On the state’s side, the contract was discussed by the Czech Government and the Supervisory Board of Ceska posta, and it will be reviewed by the Office for Trade Competition.

Media response to negotiations with Ceska posta

During the election campaigns in the spring of 2006, parts of the alleged contractual documentation between CSOB and its external advisors – the investment bank CA IB, and the law firm Jansta, Kostka and Partners – appeared in some media. Those materials supposedly cast doubt on and  politicized their contribution to the Postovni sporitelna project through the following assertions and actions:

1. contractual remuneration for the external advisor (CZK 100 mil. for the law firm and CZK 200 mil. for the investment advisor) was reportedly unjustifiably high
   
   
2. Mr. Jansta, a partner in the law firm, is reportedly a controversial and untrustworthy person due to his past activities and political contacts
   
   
3. remuneration for the external advisors reportedly may have actually been a hidden bribe for government politicians or parties
   
   
4. the contract with the external advisors was reportedly too short for them to perform such an extensive job (“too much money for too short a time”)
   
   
5. the law firm Jansta, Kostka and Partners is being investigated by the bar association, which is reportedly a strong sign of wrongdoing
   
   
6. launch of an investigation by the Czech Police
   
   
7. supervision by the Czech National Bank

CSOB’s position on the issue

In this regard, CSOB stresses the following facts:

 
Interview of Jan Lamser for MFdnes (short version)  (73 kB)

1. In the second half of 2004, CSOB was put in the position of having roughly 14 months to define the entire Postovni sporitelna project from the ground up, including formulating Postovni sporitelna’s new strategy and completely new contractual documentation with Ceska posta. The resulting project expressed by the extensive business contract is among the longest contracts in the world of banking. With contracts of similar importance, where the value of the counter-performance by the bank amounts to tens of billions of crowns, CSOB customarily works with external advisors. Although the amount of remuneration is purely a trade figure and therefore undisclosed, the publicly released amount corresponds to the importance of this contract.
   
   
2. In financial terms, this is a project that will generate tens of billions of crowns in the next ten years for both parties (for its services to Postovni sporitelna, Ceska posta will gain up to 17 billion crowns over the duration of the contract). Thanks to intensive work by employees and external advisors, this challenging situation was managed in full. The result is new contractual documentation, which passed through the demanding approval processes of a number of committees and institutions. (see above).
   
   
3. The contractual remuneration for the external advisors fully corresponds to, on the one hand, the value of the resulting contract, and, on the other, the demanding nature of the work carried out under very constrained deadlines (see above).
   
   
4. CA IB is a leading investment bank in the Central European region and was named Investment Bank of the Year in 2005, among other awards. The law firm Jansta, Kostka and Partners was recommended by CA IB long before the government of Jiří Paroubek, whose relations with Mr. Jansta are the subject of media speculation, was named.
   
   
5. To create motivational pressure, the contracts with the advisors were conceived as short-term roll-over contracts; instead of an hourly rate for running compensation for services (retainer), remuneration for the successful achievement of targets was chosen. The intensive engagement of advisors from the outset of their involvement was secured by the principle of short-term (approx. 3-month) roll-over contracts; in combination with remuneration for accomplishments, the advisors were, if they wanted to attain remuneration, thus motivated to work intensively in each of the short-term periods.
   
   
6. While Czech citizens’ experience with inefficiency and red tape in their dealings with all types of authorities is bad, it is made even worse for companies by the fact that companies deal with the state on matters involving much greater sums. Try to recall the number of documents and amount of time required to acquire a building permit for a single-family home. Or the documents and time needed to arrange a mortgage. From that one can infer whether, where and how much efficiency increases and red tape diminishes.
   
   
7. Concluding any extensive, long-term relationship with the state is a considerably complicated matter in the Czech Republic. To begin with, it is encumbered by a lack of clarity regarding which authority and which officials has the appropriate jurisdiction. The authorities’ frequently changing personnel (in the case of the contract with Ceska posta, for example – changes in the post office’s supervisory board and top management, at the Czech Ministry of Information, in the government, etc.) leads to contracts that have been painstakingly negotiated over a long period repeatedly being handled by new officials. In this sense, Czech public administration – unlike the corporate sector – does not have a “corporate memory.”
   
   
8. A nasty habit in the Czech Republic is that the process of negotiating a future contract commands any authority, and, as it were, any staff member who believes he/she has even only a formal pretext, to comment on the subject of the contract.
   
   
9. Public administration’s hesitancy when it comes to approving documents often brings business partners considerable difficulty in determining which documents the officials actually want, how the contract should be conceived according to the clerks, and what all a contract should address.
   
   
10. A fundamental legal risk in the Czech Republic is the attempt of public administration to invent ways of interpreting agreements reached with commercial partners that go against their contractual partners; in so doing, public administration always defends itself by claiming that the other party simply had to know of the possibility of misinterpretation. CSOB is familiar with that type of approach from the past with the “Slovenska Inkasni” affair, and now from the “asset with legal shortcomings” case, which it is currently negotiating with the Czech Consolidation Agency. CSOB is therefore maximally prudent in its legal dealings and extremely demanding when it comes to ensuring that arranged contractual documentation is straightforward and is resistant to the danger of misinterpretation by the other party. The legal advisors must therefore exclude thousands of generally improbable scenarios that could ensue under certain circumstances from the train of clerical thought. They must analyze to what extent such scenarios are materially grounded.
    
    
    
11. The time of advisors, lawyers and managers is not cheap, and everyone who does business with the state pays them. According to the media (May 2006), CZK 68 billion annually is spent by companies in the Czech Republic due to obstructions, delays, bureaucracy or indecision by public administration.
    
    
12. The above-stated fully applies to the negotiation of the contract with Ceska posta. The nature of the contract is that which we illustrated generally above. Yes, the negotiation of this contract confirms that concluding contracts with the state is a procedurally and legally demanding affair that is commensurately costly. The sums paid to the advisors in the case of the contract with the post office must indeed be judged in this context: the money spent on advisors is part of that gigantic amount of 68 billion spent annually that was identified in the last paragraph.
    
    
13. The Czech Bar Association's probe into the subject and volume of the activities performed for CSOB by Mr. Jansta’s law firm showed no wrongdoing by the law firm.
    
    
14. The bank will provide full cooperation in the Czech Police investigation, about which all we know is that it was instigated by a non-existent individual.
    
    
15. CSOB gave the Czech National Bank (as the regulator of the Czech banking sector) access to minutes from the meetings of its statutory bodies and the positions of internal and external auditors, who were constantly discussing the concept of the new contract between CSOB and Ceska posta; CSOB is cooperating with the regulator to satisfy its inquiry on compliance with the rules of prudence in business in this particular case.
    
    
16. Judging from citations in the media, the contractual documentation between CSOB and its investment and legal advisors that was presented to Czech media anonymously can not be the complete or authentic document. At best, it might be an outline of the document. Any conclusions reached based on it are thus essentially incorrect.
    
    
17. From the above-stated it follows that the media presentation of the problem of the “advisors for the contract with the post office” is manipulative and intentional. For example, in his report for Parliament, Captain Kubice, the chief of the Czech Police’s anti-corruption unit, shows that someone really had to devise such things with the aim of harming CSOB’s reputation and influencing the stance of the state administration and the political representation.
    
    
18. The contract between CSOB and its investment and legal advisors, like the contractual relations between CSOB and Ceska posta, conforms to the legal framework of the EU and the Czech Republic, including meeting all the requirements of competition law. Therefore there is not even the slightest reason to assume any trace of corruption in the case in question.