Tunneling (fraud)
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Tunneling is a colloquial for financial fraud committed by company's own management or major shareholders, consisting of legally pumping out valuable property into their own, private firms. It should be distinguished from theft which is illegal.
[edit] A new term
The term 'tunneling' was probably first noted in this context in the Czech Republic (tunelování in Czech, tunelář for the fraudster) during the first half of 1990s, when first of large, previously privatised banks and factories went bankrupt with huge debts and bank accounts virtually empty. It was discovered later that managements of such were deliberately transferring company's property and real estate into their own, private businesses, sometimes in offshore locations.
The term became common label for this kind of criminal activity among Czechs and it is also widely used by Slovaks. Subsequently the term had appeared in specialised literature in English and was subsequently used during the Asian financial crisis in the late 1990s.
[edit] Examples
Most usual scheme in Central Europe in the post-privatization era was transferring funds and property from high cash flow corporations to companies privately owned by the very same management. Transfers were done either via huge loans never planned for being payed back, massive overpaying for outsourced services or just selling corporate's real estate for a fraction of market price. Main conditions enabling such a fraud is weak law against conflict of interests, non-existent legal liability of managers for leading their employer towards bankruptcy and incompetence of financial authorities.
A typical example was huge industrial complex Škoda Works in Plzeň, Czech Republic that was tunneled by its top manager. The fraud, together with failures in management strategy resulted in bankruptcy (2001) and then restructuring of the company. The manager was later acquitted by a court claiming that "such practices were common at the time". [1]
Martin Frankel's scam is an example of tunneling, however called differently at his time.
