Eurasia Press & News
Auditors have flagged “anomalies” worth almost 14 million euros in deals between a Serbian arms factory and a Belgian machinery manufacturer, BIRN can report.
In 2017, in the southwestern Serbian town of Pozega, President Aleksandar Vucic cut the ribbon on a factory built to produce ammunition.
“Out of nothing, out of nature and the forest, one of the most beautiful factories in the defence industry has sprung up,” Vucic said at the event.
The factory, Belom, was the latest sign of recovery for Serbia’s once-thriving arms industry, which was devastated by NATO bombs during the 1998-99 Kosovo war but has since clawed back many of its old export markets.
Belom is owned by the state company Borbeni slozeni sistemi, BSS, itself owned by the state arms giant Yugoimport SDPR. Vucic said the factory would contribute 100 million pieces of small-calibre ammunition annually.
Six years later, however, a former KPMG forensic investigator has flagged signs of fraud in the purchase of machinery for producing bullets, to the detriment of the Serbian taxpayer.
Two audits conducted by KPMG in 2022, and seen by BIRN, identified “two anomalies” in the pricing for a 2016 purchase of production equipment from Belgian New Lachaussée, NLC, that inflated the price by at least 13.8 million euros, allegedly in the form of penalties for contract violations by the Serbian side and pricey ‘know-how’ provided by NLC.
The KPMG reports indicate that prices were being pumped up without logical explanation, proper calculation or documentation, or even a communication trail.
“There are indications of fraud in the sale of the ammunition production lines to Yugoimport,” said Cihan Kuzkaya, a forensic investigator who conducted the investigation for KPMG.
“Without doubt, any fraudulent activities of New Lachaussée are to the detriment of the Serbian taxpayer.”
Kuzkaya told BIRN he had detected a “hidden” intermediary in the deal – the private firm Intermerkur, owned by Vladimir Ivanovic.
Intermerkur was not listed among NLC’s commission agencies, yet it was seen to be coordinating the deal via emails that not everyone involved in the deal was privy to – “a strong indication of corruption payments”, said Kuzkaya.
Contacted by BIRN, Ivanovic said he had provided NLC with information and advice but had not been paid.
A former employee of Yugoimport SDPR who worked for the company at the time when the deal with the Belgian company was contracted told BIRN that it was already known back then that too much money was being paid for the ammunition-manufacturing machines.
“It was talked about in the company even then. Also, the acquisition of machines from Belgium was talked about in military circles. I received the confirmation for overpaying [for the machines] from a source working in the Defence Ministry,” he told BIRN under the condition of anonymity.
“Any indications of extracting of money through overpayment would have to be investigated by the prosecution and the relevant authorities,” he added.
Price hikes
Serbia’s recuperating weapons industry is no stranger to scandal, from the involvement of internationally blacklisted traders to the cut-price sale of weapons from state-owned factories to private companies linked to the country’s ruling party.
Belom joined the market in 2015 when it was registered in the Serbian business registry. BSS had already signed a first contract with NLC in December 2014 for the purchase of production machinery worth 18.25 million.
That deal would see Belom produce 9 mm calibre ammunition primarily for handguns and 7.62×39 mm for assault rifles.
A second deal, worth 56.2 million and signed in June 2016, was for machinery to produce 12.7x108mm military ammunition caliber production line for armour-piercing cartridges of the kind used in heavy machine guns.
In total, the business between the two companies was worth some 74.5 million euros.
The KPMG audit – commissioned by Magtech Europe GmbH, a shareholder in NLC – found no irregularities in the 2014 deal, but the 2016 project was a different matter.
First was a price hike of 1.8 million euros as a penalty imposed on BSS for late payments; BSS and NLC signed an annex on the penalty in December 2020, but KPMG could find no evidence of any late payments or any proper calculation of costs to support such a penalty.
“Shortly before the end of the investigation, I was forwarded an email showing a basic calculation created by the Head of Sales [at NLC],” the auditor wrote in a report in September 2022. “The metadata showed that the document was created on the same day the email was sent.”
The report quoted the managing director of NLC as later saying that “only EUR 0.6m were a penalty payment for the delayed payment caused by BSS”, while “the remaining EUR 1.2m were in fact a compensation paid to NLC for speeding up the process for the delivery of the remaining machines.”
Multi-million-euro ‘know-how’
The second anomaly flagged by KPMG was the sale of NLC production line ‘know-how’ for 14.7 million euros.
The auditor quoted the NLC technical manager as likening it to fitting a new kitchen – “someone can have the finest kitchen with the best tools available,” he said. “However, without the right recipe, it is impossible to cook a good meal.”
It turned out, however, according to the KMPG report, that NLC had not previously sold any other equipment of the specific type in question and had no ‘know-how’ of its own to provide.
NLC “could not provide any document at all” to justify the price, the auditor wrote.
The NLC managing director conceded that in fact only 2.7 million euros was for ‘know-how’. The other 12 million was billed because, due to cash-flow issues, NLC needed a bigger advance payment in order to start production, he told the auditor.
BSS itself estimated the cost of NLC ‘know-how’ at around two million euros, according to an assessment of BSS capital worth conducted at the end of 2022 and seen by BIRN.
Also, when the KPMG auditor took a deeper look into the accounting software used by NLC, it emerged that the company had originally budgeted 11,000 euros for know-how.
“I cannot rule out the possibility that the entire know-how transaction close to EUR 15m was a fake transaction, possibly to sell another line off the records and/or to bribe individuals, including government officials,” the report states.
Kuzkaya said he would be interested in hearing the opinion of Yugoimport concerning such costs.
“Since they have signed the contract with New Lachaussée I must assume that Yugoimport believed that the know-how was worth this huge amount of money,” he told BIRN.
However, neither BSS nor Yugoimport responded to requests for comment. BIRN also contacted NLC but did not receive a reply by the time of publication.
By 2022, according to financial reports reviewed by BIRN, Belom was struggling financially, saddled with short-term liabilities that exceeded its assets at the time by more than six million euros. It was running losses of 9.6 million euros more than the value of its capital.
Auditor remarks on the financial reports warned of “significant uncertainty” that may affect the company’s continued operations, though it cited management as saying the company was in a phase of investment and expansion.
The financial website Poslovna.rs describes the company as “performing below average and has an increased probability of failure in the future”.
BSS, Belom’s owner, has its own financial issues having posted losses of more than 8.5 million euros for the past three years.
The former Yugoimport SDPR employee told BIRN that the fact that Yugoimport SDPR and its subsidiary BSS put themselves in debt by issuing corporate bonds worth a total of 675 million euros in the past three years shows how poorly they are doing.
In September 2020, SDPR and BSS borrowed a total of 100 million euros in this way. Two years later, in October 2022, these two companies issued corporate bonds worth 175 million euros.
In February this year, SDPR issued corporate bonds for as much as 400 million euros.
“We have known for a long time that extracting money from arms industry became a kind of standard practice. State-owned companies are doing more and more badly, while privileged individuals are getting richer,” the former Yugoimport SDPR employee said.
The ‘off-books’ intermediary
Another red flag in the KPMG reports is the role of Intermerkur and its 50-year-old owner, Ivanovic.
Kuzkaya said that, based on email correspondence between Ivanovic and NLC officials, Intermerkur played a significant role in coordinating the deal with BSS and Yugoimport.
Yet there is nothing down on paper defining Intermerkur’s official involvement. In fact, internal NLC documents name a different company entirely as its agency for the Serbian market – Consult Company SRO.
“From the very few documents made available by New Lachaussée, it appears that Mr Ivanovic and Intermerkur remain in the background and neither Mr Ivanovic, nor Intermerkur is copied into the email communication between Yugoimport and New Lachaussée,” Kuzkaya told BIRN.
“It could also be that only isolated people at Yugoimport were aware of Intermerkur and Mr Ivanovic.”
According to the email correspondence between NLC and Ivanovic, it appears that Ivanovic stood to receive compensation worth at least 15 per cent of each deal. “This could be an indication for corruption payments,” Kuzkaya wrote in his report.
The auditor told BIRN that, in his experience, services provided by intermediary agencies in such transactions usually amount to a maximum of 8-10 per cent of the total value of the deal. Two Serbian experts told BIRN that in the case of arms deals, the cut is rarely more than five per cent.
Ivanovic frequently changed his email address, Kuzkaya noted, and asked in some emails that the recipient should “only use this email address for further communication”. In one exchange between Ivanovic and an NLC official, Ivanovic asks that nothing be sent to “Mr Ilak”, an apparent reference to Yugoimport purchasing manager Nenad Ilak.
“When I reviewed the very few communications made available to me, I had the impression that the owner of Intermerkur was rather orchestrating the entire sale to Yugoimport, giving clear instructions to New Lachaussée,” Kuzkaya said.
The communication between Intermerkur and NLC dates to August 2013, when Ivanovic requested a meeting with the NLC Head of Sales. That’s a year before the first contract between BSS and NLC.
Ivanovic denied playing a formal intermediary role but said he had been in touch both with BSS and NLC and provided “good information” about procurement. Later, he said, NLC informed him that it was already in contact with another Serbian company.
“Then I told them it’s not okay to kick us out of the business,” he told BIRN.
Ivanovic said he did not have a contract with any of the parties involved but that his continued involvement was motivated by “patriotic duty”, believing the deal to be good for the country.
“I asked them [NLC] for at least 25,000 euros for my costs, since I had a lot of meetings, dinners etc,” Ivanovic said. “But they didn’t pay, even after I asked them five times to do so.” Asked why he hadn’t sued, Ivanovic said he did not wish their relations to end in such a manner.
He said he had no recollection of an email that mentioned a fee for his services of 15-17 per cent. Asked why he used so many different email accounts, Ivanovic replied: “You need to understand that sometimes you have to use other emails because sometimes you don’t want to be involved in certain things.” He did not elaborate.
Intermerkur was owned by INTERMERKUR HANDEL AG, registered in Switzerland. It was previously represented by the law office of Igor Isailovic, who has represented a string of powerful politicians and business figures in Serbia, from Finance Minister Sinisa Mali to Zvonko Veselinovic, who was sanctioned by the United States in 2021 for alleged organised crime.
In 2015, Ivanovic became the sole owner of Intermerkur, which is registered at the same address as Ivanovic’s home address. On its website, the company claims to act as authorised representative of a number of renowned Swiss, German, Italian and Turkish companies doing business in Serbia, Bosnia and Herzegovina, Montenegro and North Macedonia.
The website makes no mention of NLC.
According to financial filings, Intermerkur owns capital worth 252,000 euros and reported revenue in 2022 of 1.7 million euros of which 58,000 was profit.
Origins of the audit and Russia controversy
Anonymous cyber-attacks in 2022 against Russian companies following Russia’s invasion of Ukraine brought to light contact between NLC and a number of Russian firms, prompting media reports that NLC was in breach of European Union sanctions.
Brazilian CBC Ammunition Group, which owns Magtech, and Ceska Zbrojovka Group SE hold 80 per cent of shares in NLC. The rest is owned by the Wallonia region, one of three regions of Belgium alongside Flanders and Brussels.
In response to the reports, Germany-based Magtech commissioned KPMG Germany to conduct a forensic investigation.
The investigation uncovered numerous instances of contact between NLC and Russian arms companies after 2014, when the EU first imposed sanctions following Russia’s annexation of Crimea and military meddling in eastern Ukraine.
KPMG also noted NLC’s dealings in Serbia. Kuzkaya later left KPMG and decided to speak out about NLC.
It is notable that export licences in Belgium are not issued at the national level but regional, meaning that NLC’s export licences were approved by the government of Wallonia, which simultaneously owns a fifth of NLC shares.
