VZCZCXRO2096
RR RUEHAG RUEHROV RUEHSL
DE RUEHPG #0117/01 0551440
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FM AMEMBASSY PRAGUE
TO RUEHC/SECSTATE WASHDC 2205
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE

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 
 
PRAGUE 00000117  002 OF 003 
 
 
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. 
 
------------------- 
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 
 
PRAGUE 00000117  003 OF 003 
 
 
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