Netbox is a user-friendly and client-driven internet service provider (ISP), holding an estimated 3 percent of the market and serving municipalities and schools. But one of its three shareholders was involved in one of the biggest Czech bank frauds in the last 10 years, the case of Metropolitni Sporitelni Druzstvo.

Netbox is the brand name of a company called SMART Comp. a.s. The company offers technical solutions for regional internet service providers, and has been steadily growing in the Internet business field.

The history of the company is turbulent.

It was founded in 1998 in Brno by two 20-year-old friends, Marek Bukal and Radek Musil, who launched SMART Comp. in a garage where they assembled personal computers. The company was registered at the home of Bukal, who today is chairman of the board and a shareholder.

The following year (1999), a credit union called Metropolitni Sporitelni Druszstvo (MSD) was founded. Like SMART Comp., MSD grew quickly, attracting new members by promising high interest rates. Several of MSD’s founding members joined Bukal as SMART Comp. shareholders: Daniel Tureček and Martin Čupera.

In 2000, SMART Comp. decided to hire Čupera as managing director, which turned out to be a mistake.

Čupera, who in 2004 joined the SMART Comp. board of directors, did some controversial things during his tenure with the company. In 2006 SMART Comp. signed contracts with a company called Power Media s.r.o. that were worth only US$ 25,000 but carried a huge penalty fee for late payment of US$ 640,000. That same year, Čupera used company money to buy a BMW 530d for his personal use.

The contract between SMART Comp. and Power Media was signed on Jan. 24, 2006. When Bukal found out about the deal (and about the BMW), he filed a criminal complaint alleging fraud in March 2006. Nevertheless, the court ruled the contract was valid five months later in July, and SMART Comp. was ordered to pay the full amount of US$ 640,000 PX6.

(Čupera left the company in 2006 and eventually founded his own company, the internet infrastructure provider Fiber System Group).

SMART Comp. did not have enough capital to cover the US$ 640,000 debt and went looking for help. Given SMART Comp.’s close ties to MSD, it sought a loan there and opened negotiations late in 2006 with Tureček, MSD’s co-founder and managing director and, as noted, later a SMART Comp. shareholder.

Tureček, as a member of the board of directors of MSD, was responsible for managing the credit union, which at that time was the country’s largest.

But the financial help offered to SMART Comp. was far from a normal loan. Instead, in March 2007, MSD sold SMART Comp.’s debt to a company named Therez Ltd. registered in the Seychelles offshore tax haven. It is not clear who actually owns Therez, but it received 99 percent of SMART Comp. in exchange for the debt.

A few months later, Therez forgave PART of the debt; Therez then sold almost half of SMART Comp. back to Bukal for an undisclosed sum while one third went to Tureček.

The convoluted transaction involving SMART Comp. was just one of many deals between MSD and Therez, which held shares in multiple companies which received millions of dollars in loans. Therez was also involved in buying up MSD’s own debts.

In April 2013, the Czech National Bank (CNB) launched an investigation into MSD and discovered the credit union had been granting loans of tens of millions of dollars to finance dodgy business plans. In a scathing report on MSD’s activities issued that December, CNB said: “MSD provided loans amounting to tens and hundreds of millions of crowns to finance vague, unreal and unproven business plans.”

“MSD failed to check the proper creditworthiness of loan applicants, the prerequisites for the proper and timely repayment of the loan. MSD also ignored possible connections of individual applicants’ loans and did not considered other potential risks associated with credit transactions.”

For example, one of the loans provided was a US$ 4 million for vaguely defined investment in start-up companies. The borrower? Tureček himself, a co-founder of the credit union and member of its board of directors. All together, between 2007-2012 he received three loans from MSD totaling US$ 6 million.

In 2013, the CNB examined about 40 percent of MSD’s loan portfolio and found that the credit union provided 33 loans totaling 4.4 billion crowns (about US$ 180 million) to 60 borrowers, or an average of 133 million crowns (approximately US$ 5.5 million) per loan. CNB noted that several companies, who borrowed a total of one billion crowns (US$ 40 million) were founded by a network of the same people.

The CNB investigation led to a joint operation with state prosecutors and Unite to Combat Financial Crime and Corruption (UOKFK), a police agency. Police discovered that the credit union had loaned billions of crowns to offshore shell companies with proxy directors.

The money passed through those companies into Hong Kong banking accounts. According to the CNB report, the procedure was simple: the proxy director (often a homeless person) applied for a loan for a company established only weeks before the application, and the loan would be approved the same day.

Miroslav Singer, the CNB governor, said the pattern investigators uncovered wasn’t a matter of a poorly managed institution making mistakes, but of deliberate criminal actions.

Since 2014, Tureček has been under prosecution for fraud. Czech media has described him as the mastermind behind the fraud and the offshore schemes. He still owns a third of SMART Comp.

By Pavla Holcova

When CT jacked up prices by 60 percent in the late 1990s, Czech do-it-yourselfers took matters into their own hands.

At the time, CT was the country’s sole provider of Internet via phone lines (ADSL) service and charged around a half of an average month’s salary for not-terribly-dazzling 256 kbps data transfer speed. While few could afford those rates, demand for internet was strong and growing stronger, prompting various entrepreneurs to begin offering wireless internet service at more affordable rates.

Today the Czech Republic has the most Wi-Fi subscribers in the European Union, with more than 2,000 registered wireless internet service providers (ISPs) in a country of 10 million people or one for every 5000 people. Wi-Fi is the country’s first choice for internet and the number of subscribers continues to grow.

A mobile application called Wifič (Get Out) even provides passwords to more than 4,000 Wi-Fi hot-spots in the Czech Republic and Slovakia.

Czech Free Net, An Internet Utopia

Adam Golecký of NIX, the largest Czech internet exchange point (IXP), says that Czechs have a unique, community-based Internet thanks to “a big community of people who are working to make the Czech Internet network accessible, almost for free. They don’t make any profit providing the Internet to members

The phenomenon, he says, “is unique. People from the US are coming to study it.”

The community of do-it-yourself small Internet networks is called the Czech Free Net and it was built from scratch using essentially duct tape and wire. Today it has been professionalized and links together more than 60,000 households.

The main concept is to charge only enough to cover network development, without anyone making a profit.  The Czech Free Net’s founders also provided information about how people could build personal internet links out of readily available materials, avoiding ISPs altogether.

Once built, the link, called a Ronja (for Reasonable Optical Near Joint Access) could provide free Internet with no need for an ISP or possible interference from a government entity.

The tough part was getting it built, which required a high level of technical skill. Tomáš Bělonožník, an early adopter, recounts his struggles.

“I was a member of Czech Free Net for four years,” he says. “Sometimes, it was nerve-wracking. As there is no one supervising the network, there is also no one responsible and no one to fix your problems.”

The technology was vulnerable to certain types of weather, including heavy rain and fog. “So once, after a heavy rainstorm, we lost the Internet connection for one month. Rain put the antenna out of order and there was no one who could fix it,” he says.

But “after one month of sunny weather, the antenna dried out and we got back the Internet.”

Over time, the network developed support capabilities through online forums, and some of the regional networks developed into professional providers with 24/7 support through call centers. To date, however, there are no shareholders and earnings are invested back into infrastructure improvements.

Optic Fiber Infrastructure

Along with its Wi-Fi network, the Czech Republic is rich in optical fiber cables. The exact position of those cables is considered a trade secret, but in some cases the answers are obvious.

The lines generally utilize existing infrastructure: UPC uses oil and petrol pipes, Dial Telecom the gas pipelines and CD Telematica is using railroad structures. “It makes perfect sense. By using engineering infrastructure, you can avoid having to ask every single property owner if he wouldn’t mind having the cable in his backyard,” explains Golecký.

O2, the show stopper

The company that grew out of Czech Telecom has built on its significant advantage as the inheritor of the telephone landline network. Today O2 is a key player in information communications technology (ICT), combining mobile phones, landlines, Internet and cable TV. O2 cooperates with the recently formed CETIN (Czech Telecommunication Infrastructure); both companies are a part of the PPF group, and while O2 takes care of the internet connection services, CETIN handles the vast cable network.

The infrastructure has been modernized, but it continues to benefit from its monopoly on some services. An analysis of electronic communications made by the Czech telecommunication Office/ČTÚ says O2 is considered to be blocking an effective competitive market.

According to Czech media and ICT experts, O2 (with the support of two mobile phone network operators) is behind the recent proposal by the Czech Ministry of Industry and Trade to charge for the use of unlicensed frequencies, such as those for Wi-Fi or 10 GHz band (the study: http://www.mpo.cz/assets/cz/e-komunikace-a-posta/Internet/2015/4/Analyza_freebands_20150417_upd.pdf).

Patrick Zandl, an ICT expert, says, “I think the charges idea was initiated by O2 management,” including owner Petr Kellner, to recoup money invested. If approved, the Czech Republic would be the first country in the world to charge for those frequencies, which would probably radically slow the development of Internet connectivity.

Handling heavy traffic

The Czech Republic routes significant internet traffic through two internet exchange points (IXPs): NIX.cz and Peering.cz. These are services that allow ISPs and web pages to exchange large amounts of data quickly and easily.

NIX.cz is the older and bigger of the two, with peak capacity of 360 gigabits per second (Gbps); it is one of the ten largest IXPs in Europe. NIX.cz also created a project called FENIX in response to intense denial-of-service (DoS) attacks in March 2013 that targeted Czech Internet services, media, banks and operators.

Peering.cz gained popularity thanks to its website Uloz.to, one of the biggest Czech file-sharing server where users can download movies and upload large files. Their data peak is 180 Gbps and, like NIX.cz, they are expanding their services to Slovakia.

Super-secret Data Cables

At the top of the technological heap are the fiber-optic cables connecting the Czech Republic to the rest of the Internet world. “There are an undisclosed number of entry points located in undisclosed places,” is the most common answer to the question of where, exactly, the country’s international data cables are located.

The information on cross-border entry points and even who owns those cables is considered to be a strategic secret and is classified, so that even experts on Czech state cyber-security or some telecommunication officials don’t know it.

“I am not sure why this information is kept so hush-hush,” said NIX’s Golecký. “Terrorist attacks would be much more efficient by attacking some of Prague’s vital services, such as poisoning water sources or cutting-off electricity.”

By Pavla Holcova

Most internet service providers (ISPs) are locally owned companies that supply communications services and network access to businesses or residential customers in limited geographic areas.

These providers share transparent and easily traceable ownership structure, unlike larger organizations. Reporters for RISE Moldova focused on the major providers of cable and wireless (satellite) Internet and TV retransmission services across the country, as identified by the most recent ANRCETI fixed and mobile communications access reports: Moldtelecom/Unite, Starnet, Orange, Moldcell and Sun Communications.

Ownership

The largest ISP on the market, according to ANRCETI, is Moldtelecom, which is wholly state-owned with a market share of between 60 and 65 percent. Until August 2015, the general manager was Vitalie Iurcu, who is now Vice-Minister of Economy. Iurcu is a member of a business association created and owned by controversial businessman Vlad Plahotniuc, the first deputy chairman of the Democratic Party).

The company has the country’s most extensive fiber optic network and provides services nationwide, with network connections to IP traffic exchange centers in Frankfurt, Amsterdam, Bucharest, Kiev and Moscow.

The second largest ISP is StarNet, a group of 11 companies controlled directly or through intermediaries by businessman Alexander Machedon. StarNet has a market share of between 20 and 22 percent.

Moldtelecom and StarNet compete vigorously for market share, with unfair competition disputes arising regularly over subscribers.

For example in 2015, the Moldova Competition Council fined StarNet 0.21 percent of its turnover for 2013 for unfairly luring away Moldtelecom customers by promising to pay them € 500 leu (US $25) for switching over to StarNet.

A shrinking share of the market belongs to mobile operator Orange Moldova, which is 95 percent owned by Orange S.A., a French multinational telecom corporation; and five percent owned by the International Finance Corporation (IFC), part of the World Bank.

While Orange’s parent company in Moldova accounted for 20 percent of the market in 2006, since then it has not managed to compete effectively with the two market leaders and has seen its share fall to seven percent in 2008 and three percent in 2014.

Sun Communications accounts for another three percent of the market. Sun is nearly two-thirds owned by Management Lekert Ltd. of the British Virgin islands (63.7 percent), with the rest held by the European Bank for Reconstruction and Development (EBRD), 27.6 percent; John Maxemchuk, 5 percent;  Alexander Scerbina, 2 percent; and Neocom SRL, 1.7 percent.

Among the rest, the bigger operators are the state Center for Special Telecommunications and Molddata, Arax-Impex SRL, Globnet SRL and Rename SRL.

Five companies have the right to carry out installation, operation, management and maintenance of electronic communications networks in the border area of the Republic of Moldova: Moldtelecom, StarNet, Orange Moldova, Norma and Moldcell.

Mobile Internet

Orange Moldova is the largest mobile carrier in the country. It offers mobile Internet access via 3G and 4G networks over most of the country, holding 60 percent of the mobile access market.

Moldcell is the second largest mobile carrier in the country, offering similar service with a market share of 24 percent; state-owned Moldtelecom holds 16 percent of the mobile market.

In Transnistria, the company Interdnestrkom (IDKNet) is the leading ISP and the only operator of fixed and mobile telephony. The company is controlled by Sheriff, the largest group of companies in the Transnistrian region, encompassing stores, petrol stations, factories, banks, football teams and telephone operators.

Litigation and criminal investigations

On Feb. 26, 2015, StarNet’s database was hacked and posted on a Russian portal, exposing the data of 53,000 customers including several thousand businesses and organizations.

It was not the first attack on Moldova. Weeks earlier the databases of five public institutions were attacked by foreign hackers and only by the intervention of the Prosecutor General, the Secret Service and the Center for Special Telecommunications was a virus identified and blocked.
In the StarNet case, personal data of the company’s customers and staff were distributed on the Internet.  Alex Railean, professor at the Technical University of Moldova, said that some of the blame falls on the company for negligence in storing and maintaining their databases.

Of the top 10 broadband providers, HT controls three, while three others are starting bankruptcy procedures. Regardless, HT—along with the national Regulatory Authority for Network Industries—is on a mission to overturn broadband retail market regulation.

The Croatian broadband market has evolved over the past 15 years. And there seems to be no space left for anyone else to enter the market as HT remains the king of the hill, while the smaller alternative operators are struggling to cope with the realities of a skewed marketplace.

Dominating the market

Hrvatski Telekom (HT) was established in 1999 after the breakup of the Croatian Postal and Telecommunications company. Ten months later the government sold its 35 percent share of HT to Deutsche Telekom for US$ 850 million.

In 2001, Deutsche Telekom increased its share to 51 percent to become the majority shareholder. HT’s second largest shareholder (8.7 percent) is Raiffeisen Mandatory Pension Funds, while the third is a fiduciary account at Splitska Bank (6.6 percent); the remainder is held by minority shareholders.

Service is delivered by a variety of technologies. About 60 percent of Croatia’s internet users gain access via coaxial (copper wire) cable and as a former monopolist, HT today owns by far the largest coaxial network in the country.

The term “cable network” includes both coaxial cable service and fiber optic cable. The Croatian Surveying and Mapping Authority refused to provide detailed data regarding the ownership of the entire cable network, while the Regulatory Authority for Network Industries (HAKOM) does not have such data.

It did, however, provide a list of the top 10 cable network owners. HT sits at the top, followed by VIPNet, which will be described below. The third and fourth largest providers are Iskon Internet, which is owned by HT, and Optima Telekom, which is indirectly controlled by HT.

Overall, HT, Iskon Internet and Optima Telekom held 76 percent of all connections on the broadband retail market at the end of the first half of 2014. In terms of income from broadband access services, their share was 77 percent.  Only 23 percent of income on the market was therefore left to alternative operators, like VIPnet, H1 Telekom, Amis Telekom and others.

Take-over without taking over

Iskon Internet is wholly owned by HT and managed by its former employees with one member of Iskon’s supervisory board simultaneously heading HT. In March 2012 HAKOM—after analyzing the broadband market—declared HT and Iskon “operators with significant market power” and set strictures on them to lessen their dominance of the market.

Currently, HT is also managing Optima Telekom, the fourth largest broadband provider, which had an 8 percent share of the market in 2010. In 2013 a pre-bankruptcy settlement procedure was begun, as Optima was out of cash and carrying too much debt.

As Zagrebačka Bank and HT were the largest creditors—Optima owed both the bank and HT around € 84.2 million (US$ 92 million) apiece–Optima proposed “a strategic partnership” with HT, in which HT would manage Optima during restructuring.

In September 2013 the agreement between HT and Zagrebačka Bank was signed, pending approval by the Croatian Competition Agency (CCA). Six months later, in March 2014, the market regulator issued “temporary and conditional” permission for HT to control Optima.

The permission was good for four years, with no possibility of extension, and carried several further conditions and rules of conduct. The Croatian subsidiary of Ernst & Young was appointed as trustee to monitor the implementation.

Among the conditions set by the CCA is an obligation for HT to ensure that Optima’s management and supervisory board remain independent of HT. Managers installed by HT at Optima cannot simultaneously serve on management or supervisory boards of HT or connected entities. Similarly, HT cannot install its own managers or supervisors on Optima’s supervisory board.

However, five out of nine of Optima’s supervisors have various functions at Hrvatski Telekom, primarily as sector directors. Furthermore, the deputy president of the supervisory board, Ariana Bazala-Mišetić, is the wife of HT’s deputy president of the supervisory board, Ivica Mišetić.

Additionally, Siniša Đuranović, the president of Optima’s supervisory board, has been helpful in the past to HT’s majority owner, Deutsche Telekom. In November 2013 he lobbied Slovenia’s former state secretary at the Ministry of Finance, Mitja Mavko, with regard to the privatization of Telekom Slovenije.

He was then HT’s Head of Operations, and visited Mavko along with Axel Scheuermann, senior project leader at Deutsche Telekom, and Oliver Knipping, member of the supervisory board at Hrvatski Telekom. Deutsche Telekom was long thought of as the frontrunner to buy the Slovene state’s majority shareholding in Slovenia’s largest ISP, Telekom Slovenije.

After the CCA reached its decision, in July 2014 HAKOM declared Optima was a (temporary) operator with significant market power, and assigned it the same regulatory obligations as it had previously assigned to HT’s Iskon Internet. It noted that these obligations would remain in place until HAKOM completed analyzing the broadband internet retail market.

To regulate or not regulate

In 2012, before the temporary decision regarding Optima Telekom’s significant market power status under temporary management of HT, HAKOM had completed an analysis to determine whether the market is susceptible to ex-ante regulation, meaning rules should be passed governing anticipated future actions, such as rate increases, given the internet’s importance as a utility.

It found that the broadband internet retail market in Croatia needs such rules because of HT’s dominant position in the market. Consequently, HT and Iskon were given the status of “operators with significant market power”.

The CCA supported HAKOM’s findings, albeit with some reservations. HT opposed them, while Optima Telekom supported the findings and added that “regulation of the broadband internet retail market comes too late”. Moreover, Optima claimed the proposed rules still left enough maneuvering space for HT to push smaller operators out of the market as the question of broadband access via optical fiber cables (FTTH) was not addressed, as HAKOM felt it represented a new service.

Three years later, with Optima under HT’s belt, the story is quite different.

In 2015, HAKOM completed another market analysis, this time concluding that due to increased competition, the rules could be eased for HT, Iskon Internet and Optima. At the same time it stated it would monitor the development of the market and perform the analysis again, if necessary.

The regulator found that HT’s market share (along with Iskon and Optima) has been declining since the 2012 analysis, falling 10 percentage points to a 77 percent market share. Meanwhile market shares of alternative operators like VIPnet and H1 have grown 5.5 percentage points and 3 percentage points, respectively.

Regardless, under the new findings HT’s market shares remain high nationally as well as in terms of income from its broadband segment. Yet, Optima Telekom’s stance changed significantly and it now supports the analysis findings.

Ultimately,HAKOM decided to free HT, Iskon and Optima of regulatory restraints, and issued a decision to this effect in June.

Second best

VIPnet, the second largest Internet Service Provider according to HAKOM, opposes market deregulation. It said in April 2015 that freeing HT, Iskon’s and Optima from the rules would not create equal market competition.

Of the top 10 broadband service providers, only VIPnet seems problem-free. Its market share increased while HT and its affiliated companies were regulated and it currently has nearly 16 percent of the cable internet market, while owning the second largest share of Croatia’s telecommunications infrastructure.

VIPnet is wholly owned by Austrian Kroatien Beteiligungsverwaltung, whose ultimate owner is Telekom Austria Group. Its majority owner with a 60 percent shareholding is the Mexican company America Movil, controlled by the Slim family.

And the rest is (almost) bankruptcy

The future of HT and VIPnet could benefit from other developments.

The sixth largest Internet Service Provider is Amis Telekom, which was owned by the Belgian company Amisco, which also owns Slovenia’s Amis internet provider. Amis was recently bought by Telekom Austria’s regional company Kroatien Beteiligungsverwaltung, as HAKOM was informed in June 2015, approving the merger a few weeks later. Croatia’s company register does not show this change yet. With Amis’s users, VIPnet’s market share will rise 2.3 percentage points to 18 percent.

At the end of November Amis Telekom merged with VIPnet.

Amis is so far surviving in Croatia’s market. However, three others—H1 Telekom, Metronet and Novi-Net—are undergoing pre-bankruptcy settlement proceedings.

Proceedings for H1 Telekom began in September 2013, and the amount of established claims ran up to € 70 million (US$ 76.4 million). In June of the same year Metronet, Croatia’s 7th largest ISP, filed for pre-bankruptcy settlement. Its established claims are € 69 million (US$ 75.3 million).

Last but not least, Novi-Net, which is Croatia’s 10th largest broadband provider with only a regional reach, entered pre-bankruptcy in December 2013 with € 589,000 (US$ 643,000) in claims.

Novi-Net’s immediate owner is an offshore company, Herlong Investments, which was incorporated in Cyprus. In 2012 the American company VelaTel Global Communications acquired 75 percent of Herlong and along with that control of Novi-Net and the Montenegrin ISP Montenegro Connect. But the partnership went sour quickly.

Novi-Net’s business plans were ambitious. In 2006, 20-year old Karlo Vlah, then the company’s owner and director, announced significantly faster yet cheaper internet access through WiMAX (Microwave Access) technology as Novi-Net was the first company to receive a permit to use it. After its owner Herlong was acquired by VelaTel, Vlah announced at the end of 2011 the company will build base stations on 50 locations for a total value of € 4.8 million (US$ 5.2 million). Again, he maintained, its service will be significantly cheaper.

Today, Novi-Net is still the sole holder of a WiMAX permit. When HAKOM was performing its recent broadband retail market analysis it noted that it did not take into account the market for microwave broadband access because it found there was “little interest for WiMAX access in Croatia”. Only Novi-Net was offering this service, and only in of one out of 20 Croatian counties.

By Anuška Delić Delo

Now the Serbian government is preparing to privatize Telekom, the biggest state-owned telecommunications company. It’s early to say who might buy it, but given the high prevalence of murky private ownership, it may well be a mysterious company from Panama or some other exotic destination.

Offshore paradise for Internet owners

It’s interesting that so many domestic ISPs operate in secrecy, given their unfettered access to users’ highly personal data. While state institutions control the use and sharing of this data, they don’t seem overly interested in who owns the ISPs, some of which disappear into a maze of offshore companies, proxies and lawyers obscuring the real owners.

There are more than 200 ISPs in Serbia but many are small companies, with very little influence. Ten can be described as leaders. Two are state-owned, Telekom and Pošta Net; two others are owned by European communication companies, the Telekom Austria Group (VIP) and Norway’s Telenor Group. Four others are owned by offshores or private equity firms.

That was the case with Sat-Trakt, a company formerly based in the small Serbian town of Bačka Topola. Until recently, its ownership chain led to a company registered offshore in Cyprus, STSE Investment. The Cyprus company is owned by a Panama-based foundation, also named STSE. Its true owner is hidden behind lawyers whose names are listed in the Panamanian business registry.

One of them is a partner in the law office Dankovic Jovanovic Tomic, which notes on its website that it participated in the takeover of Sat-Trakt by the Cyprus fund, STSE. The site also notes that the firm has experience in privatizations, founding companies and real estate.

In late December 2015, ownership of Sat-Trakt changed. The majority owner became Јános Zsemberi who previously held 6 percent; STSE kept just 10 percent.

Another example of a complicated ownership structure is Serbian Broadband (SBB), which is nearly as big as Telekom. Owned by the New York-based private equity firm Kohlberg Kravis Roberts & Co. L.P. (KKR), SBB over the last couple of years has bought several smaller providers and internet hosting firms which serve different parts of Serbia.

KKR also founded the cable TV station N1, which has a deal with America’s CNN to broadcast programs. Previously, SBB was owned by another private equity firm, Mid Europa Partners. Both equity firms owned SBB through the Netherland United Group, a telecommunications leader in southeastern Europe with subsidiaries in Balkan countries.

All of these transactions were routed through different offshore companies to end up in private equity firms, some of whose investors are anonymous. Others are not; one of the best-known investors in the Netherlands United Group is the European Bank for Reconstruction and Development (EBRD).

Another equity fund that owns ISPs in Serbia is 7L Capital Partners, which holds Beotelnet through the Cyprus-registered company, Kerseyco. Like SBB, its investors are unknown. Kerseyco owns one other Serbian ISP, Veratnet.

Problematic owners and unlawful deals

While Serbian ISPs seem scandal-free, the same cannot be said of their owners.

Bogoljub Karić, who accumulated his wealth during the Slobodan Milošević era, fled the country in 2006 when the state began to investigate his businesses. He is now living in Moscow, awaiting court rulings. He and his family retain about 17 percent of one of the 10 biggest ISPs, Yunet International (the state holds a larger stake). The family’s former bank, Astra, holds more than 60 percent of the shares but is now in liquidation.

A more notorious case involves a Slovenian-owned company, Nuba Invest. In 2012, organized crime prosecutors opened an investigation into how Nuba obtained permits to build a network of fiber-optic cables on strategic routes: from Belgrade to the borders with Croatia, Romania, Hungary, Bulgaria and Macedonia.

Investigators say Nuba Invest illegally obtained the permits and edged out competitors thanks to help from influential people in Serbia, including Oliver Dulić, at that time Serbian Minister of Environment and Spatial Planning. Dulić and several associates are awaiting trial in this deal.

One broadband provider licensed to operate in Serbia cropped up in US National Security Agency (NSA) secret documents released by Edward Snowden in 2013.

Level 3 Communications is the third largest provider of fiber-optic broadband in the United States by coverage area. Snowden’s documents indicated the NSA gained access to Google and Yahoo data centers, seeking communications between users by tapping fiber-optic cables that connected the centers.

The cables tapped were owned by Level 3, which declined to comment on the issue after media exposed it in 2013. At about that time, Level 3 received its license to operate in Serbia.

This story has been updated to reflect a change of ownership that occurred during the editing of this story.

Slovenian Sovereign Holding (SSH), which was selling a 72.75 percent stake of TS on behalf of the Republic of Slovenia, received just one binding offer to acquire the telecommunications giant.

The sole bidder, a private equity company called Cinven, said it plans “to invest significantly to upgrade the network, to stop the company’s revenue decline, stabilize and then grow revenues sustainably for the long term”.

The single bid by Cinven caught Slovenian media and industry analysts by surprise, given that Deutsche Telekom had been lobbying hard for some time to buy TS.

The Commission for the Prevention of Corruption gathers lobbying reports from officials in the public sector. Its documents show that in 2013, Deutsche Telekom’s representatives lobbied Mitja Mavko, the former state secretary at the Ministry of Finance, at least twice.

In June of that year, Mavko was visited by three employees of Magyar Telekom, which is wholly owned by Deutsche Telekom: Károly Schweininger, the head of mergers and acquisitions; Márton Szot, senior mergers and acquisitions manager; and advisor Gábor Kiss.

And what did they talk about? “Expressed an interest about the privatization of (TS),” states the lobbying report.

Five months later, Mavko was visited by Siniša Đuranović, then the head of operations for Hrvatski Telekom (Croatian Telecom).  Deutsche Telekom holds 51 percent of Hrvatski Telekom and is also involved in Hrvatski Telekom subsidiaries in Croatia and in Bosnia and Herzegovina.

Đuranović was accompanied by Axel Scheuermann, the senior project leader at Deutsche Telekom, and Oliver Knipping, a member of the supervisory board at Hrvatski Telekom. Again, the topic of the lobbying contact was stated as “expressed an interest about the privatization of (TS).”

Military Intelligence Analyzes TS

But Deutsche Telekom never put in a bid to acquire TS, and it is not clear why not.

Shortly before the bids were due, TS became the center of a political firestorm. Then-Minister of Defense Janko Veber ordered the Intelligence and Security Services at the ministry to perform a “security analysis” of the sale of TS, citing potential national security issues if it was sold to a foreign buyer.

Veber is a member of the Social Democrats, which opposes current privatization plans. Prime Minister Miro Cerar asked Veber to resign for overstepping his powers; Veber refused. Next the Parliamentary Assembly voted 68 votes to 11 to dismiss Veber.

Four days later, the bids for TS were due.

Despite early interest from the Russian company MTS, which had also lobbied Mavko regarding TS in September 2013, in the end Cinven was the sole bidder.

Cinven has invested in the telecommunications industry in the past, and today holds shares in two relevant companies: The Numericable Group (made up of French cable operator Numericable and Completel, a business-to-business telecommunications operator), and Ufinet, which provides fiber optic cable to operators in Spain and Latin America.

The government placed TS on the list of critical infrastructure of national importance in April 2014, because it has the biggest cable network in the country. Veber was conviced it was necessary to consider possible national security issues arising out of the sale to a foreign entity.

According to data from the State Surveying and Mapping Authority, TS owns 68 percent of the cable network. Consequently, whoever buys TS will have access to two-thirds of Slovenia’s telecommunications network.

But the sale eventually tanked. After long deliberations Cinven decided to pull its offer, citing “a highly uncertain business environment in which Telekom Slovenije operates, highlighting the complex nature of the political environment in Slovenia, together with the strong response by the public in regard to this sale process,” as was reported by SSH.

Up-and-coming regional player

As the largest internet service provider in the country, TS has a market share of 35.1 percent of all connections, according to Agency for Communication Networks and Services (AKOS).

The second largest is Telemach, which reigns as the largest provider of Internet via coaxial cables in the country with a market share of 59 percent, and 76 percent along with the providers it controls or recently acquired.

Telemach is a part of United Group, a company incorporated in the Netherlands, which was acquired by the American investment fund KKR in October 2013 for around € 1 billion (US$ 1.1 billion), media reported. United Group has a complex offshore ownership structure and history of moving its assets around.

United Group is well-placed in the wider Balkan region as it owns Serbia Broadband, the largest internet service provider in that country; Telemach in Montenegro and Bosnia and Herzegovina, as well as other media content providers in the region; various TV sports channels and the new 24-hours news network N1 which has an exclusive affiliate agreement with American CNN.

Buying spree

In Slovenia, Telemach holds about 20 percent of the broadband internet connections market, which rises to about a quarter thanks to its shares in other providers: Tušmobil, Elektro Turnšek, Telemach Rotovž, and Telemach Tabor.

Telemach is second only to TS in the larger telecommunications cable network, controlling about nine percent: eight percent in its own right, and another one  percent thanks to shares in other companies.

It’s the majority owner of Telemach Rotovž, and in March it published a takeover intention notice to buy up the remaining 22 percent of shares, offering € 1,100 (US$ 1,235) per share, or € 2,550,000 (US$ 2.5 million) for the entire stake. However, when the sale went through Telemach ended up with an additional stake of about five percent.

In October of 2014, Telemach bought Tušmobil, the third largest mobile phone service provider, which was owned by Tuš Holding, which in turn is solely owned by businessman Mirko Tuš. Telemach acquired Tušmobil’s subscribers and about 27 kilometers of Slovenia’s cable network (less than 1 percent), while for Tuš it was a necessary deal as his main creditors (the banks) pushed him to sell off some of Tuš Holding’s investments.

Tuš and his wife, Tanja, own the Tušmobil trademark. On Oct. 16, 2014, Telemach’s owner—Slovenia Broadband in Luxembourg—approved the trademark transfer in exchange for a € 29 million (US$ 32.7 million) loan note.

On Oct. 17 of that year, Telemach and Tušmobil signed a letter of intent at a sale price of € 110 million (US$ 124 million). It was a move Slovenia Broadband had clearly been thinking about for some time, as it stated in its 2012 consolidated financial report that “the acquisition is in line with the Group’s efforts to take advantage of Slovenia’s growing mobile telephony market and will provide us with increased base of potential quad-play subscribers”.

Competitors Seeing Red

Quad-play denotes a package of broadband internet access, wireless internet access (WIFI), as well as TV and mobile services. And it seems the United Group’s quad-packages or individual services might soon be marketed under new trademark names: UNIFON, UNIFI, UNIFI Powered by United Group and UNIHOME.

Those are trademarks that Telemach applied to register with the European Union’s Office for Harmonization in the Internal Market (OHIM) at the end of September 2014. Meanwhile, Telemach is already offering its subscribers wireless service under the brand UNIFI in Slovenia, Serbia, Macedonia and Bosnia.

But the trademark registration is not going smoothly.

While the trademark applications for UNIFON and UNIHOME have so far not been challenged by other trademark holders, two others have: UNIFI and UNIFI Powered by United Group. The German telecommunications giant Deutsche Telekom filed its protest on the last day of the scheduled opposition period.

It is objecting to the trademark’s color (Pantone Rhodamine Red), which it had registered for its own trademarks with the German Patent and Trade Mark Office several years ago.

Two other companies are objecting to the UNIFI application, citing the “likelihood of confusion on the part of the public”: a Germany-based global communications software and services company called Unify, and an American networking technology manufacturer called Ubiquiti Networks.

Ubiquiti, which filed its challenge on the same day in April as Deutsche Telekom, says it registered the UNIFI trademark in February, 22 days before Telemach did.

Meanwhile, Telemach managed to register UNIFI Powered by SBB (SBB stands for Serbia Broadband) with the Slovenian Intellectual Property Office in November 2014, albeit in different colors than the UNIFI mark it is trying to register with OHIM. The Unifi color that Telemach is using for its regional WIFI network is Pantone Rhodamine Red.

However, both Ubiquiti and Deutsche Telekom applied for an extension of the “cooling off period” along with Telemach during which the parties can terminate proceedings at no additional cost. This period ends in July 2017.

Telemach says it is keeping both Tušmobil and Telemach trademarks for the moment, noting that expected “synergies of fixed and mobile services” will benefit from a single trademark and the Unifi and other new trademarks are meant for branding wireless internet services through public hot spots that Telemach is building.

Fallen from grace

The third largest broadband internet service provider, T-2, was pushed into liquidation in the summer of 2015, but then the Slovenian Constitutional Court stopped the action in its tracks.

One of the shareholders filed a complaint with the court claiming its constitutional rights had been breached when its main creditor, the Bank Assets Management Company (BAMC) had forced the liquidation. (The BAMC or “bad bank” was established in 2013 to restructure bad loans made by the country’s state-owned banks). Thus, the court also decided that the liquidation procedure must be halted until it reaches a decision.

T-2 has an 18.4 percent broadband market share and its own fiber optic network; it was in the middle of a financial reorganization when it was pushed into liquidation. Creditors claim a total of € 181 million (US$ 203 million) in unpaid claims; the bankruptcy manager acknowledged € 114 million (US$ 128 million) of them, and the expected payout is 44 percent.

But one of the main keys to acquiring T-2 lies with the state.

Long before the company’s downfall, its indirect owner was the Maribor Archdiocese. After T-2 was pushed into bankruptcy, one of its creditors, Gratel—the company that built the optical fiber cables  network for T-2—and its partners got into the ownership structure by converting the money owed them into shares.

However, this debt was allegedly never proven and the maneuver is now under investigation by Slovenian authorities. Data of the Surveying and Mapping Authority shows that T-2 owns 1.4 percent of the telecommunications infrastructure network and Gratel owns 1.3 percent; their shares of the network consists of fiber optic cables.

During T-2’s upward rise to third place among internet service providers, state-owned banks made many loans to the company. In the end, the BAMC bought up all € 145 million (US$ 163 million) worth of bad debt T-2 owed the banks.

In March 2014, BAMC published a notice for prospective buyers of the debt. However, a year later it published a disclaimer stating: “Because of an ongoing sale procedure we are currently not accepting bids to buy said debt from new interested buyers. Further information will be available on May 20, 2015.”

Then in August, the BAMC and two other lenders succeeded in challenging a previously overturned decision to liquidate T-2 as the Court agreed with their arguments and effectively called for the beginning of a liquidation procedure.

Slovenian media have speculated about who the buyers of the debt could be, and the names always come down to two: the KKR fund, one of the ultimate shareholders of Telemach; and Simobil, the second-largest mobile phone service provider with roughly a third of market share.

Simobil is owned by Telekom Austria Group, which owns VIPnet, an internet service provider in neighboring Croatia, and also VIP in Serbia. Simobil does not own its own share of the cable network, and is therefore logically interested in buying the debt.

Currently, T-2 is controlled by the Krč brothers and owned by companies Garnol (majority shareholder), Gratel and Lokainvest. These companies are directly or indirectly controlled by Jurij Krč, the majority shareholder of Gratel and previous sole shareholder of Garnol, which he later transferred to his brother Štefan.

As mentioned before, Gratel had an important role in the expansion of T-2 as it was building its fiber-optic-to-the-home (FTTH) network. It was one of the first companies that started building fiber cable networks after Slovenia joined the European Union and its laws were changed to allow private companies to build telecommunications networks.

Eyeing the third place

At least one of the last two in the top eight—Amis with a 11 percent market share and Teleing with a mere 1 percent of the market—will remain vulnerable. Entrepreneur Janez Smolkovič owns Teleing, which is a regional operator that will face challenges in future development facing off against larger players.

In June, Amis’s majority shareholder Amisco in Belgium  was acquired by Telekom Austria. But Amis does not have its own cable network; it is buying access from those who do, therefore Telekom Austria could still be in the market to acquire T-2 with its optical fiber network once the court drama is over. It could thus become the number 3 player on the Slovenian internet service market.

That was until a change in relations between the owners and the government led to the most of the staff resigning, leaving the portal struggling to re-establish itself on the domestic media landscape.

The drama unfolded in June 2014 when Origo.hu’s editor-in-chief, Gergő Sáling, unexpectedly quit, triggering a series of events that resulted in the mass resignations.

Sáling resigned after Origo.hu journalist András Pethő was repeatedly blocked in his efforts to obtain the details of official trips made by János Lázár, Minister in Charge of the Prime Minister’s Office. Lázár, the “strong man” of the Fidesz government, has had multiple run-ins with critical NGOs and civil society in general since 2014.

Pethő was seeking official records for some of Lázár’s foreign trips, including the cost and who else was in attendance. The Prime Minister’s Office declined, stating that Lázár’s negotiations involved matters of national security which could not be revealed to the public.

Sources had indicated that Lázár was accompanied on the trips by a specific person and that together they had run up hefty hotel bills. Responding to the public outcry, Lázár decided to return the amounts in question – about 2 million Hungarian forints, or nearly US$ 7,000 — to the treasury from his own pocket, but when a judge recently ruled that the documents must be disclosed, he said he would appeal to a higher court.

Magyar Telekom, the local subsidiary of German telecommunications giant Deutsche Telekom, owned Origo.hu until last December, when it was sold to New Wave Media Kft. Relations between the government and the telecom sector had been tense ever since Prime Minister Viktor Orbán’s government levied a special tax on the sector cutting into margins and making operation significantly more difficult and unpredictable.

By 2014, through extensive negotiations, the terms became more amicable, and the government struck a deal with the country’s three mobile telecoms operations to extend their licenses. One of the reported aspects of the Hungary-Deutsche Telekom talks was that Lázár demanded the telecom either rein in or sell its media outlets.

The telecom apparently complied, as shown by its license renewal and an increase in the number of advertisements from state agencies, which remains a crucial source of revenue for Hungarian media outlets on all platforms. Hungarian journalists say senior editors are often pressured by officials to slant coverage, and outlets heavily dependant on state advertising are more likely to oblige.

After Saling’s resignation Origo.hu quickly started to unravel, as first the domestic staff and then the photo department quit. Departing staffers said they viewed the news portal as compromised by political interests. Many of them found employment with rival independent outlets, while those at the center of the affair, led by Sáling, have founded Direkt36.hu, which provides a new investigative portal on the Hungarian scene, with in-depth analysis and stories.

Origo.hu continues to operate, but it is moving in a new direction, focusing more on entertainment.

An analysis of who owns Bulgaria’s internet service providers (ISPs) shows that the sector is generally clean and not infiltrated by organized crime figures or corrupt politicians.

But fears are growing that a wealthy Russian businessman with close ties to the Kremlin is seeking to control Vivacom, the biggest and most strategic Bulgarian telecom.

Market structure and particularitie

In the mid-20002, the Bulgarian internet market was fragmented, with hundreds of small local access providers.  The market began consolidating with acquisitions of smaller providers by larger one and some ISP mergers; a significant number of small providers remain, however.

According to the ranking from an unofficial study, by the end of 2014 the four biggest national ISPs–Vivacom, Blizoo, Bulsatcom and Mtel–had 52 percent of the market (about 900,000 subscriptions), while the rest is split among mid-sized cable providers and many small local LAN providers.

Top 15 internet providers 2014 (source Kapital)

In recent years there is a clear leveling of the market. The distinction between carrier operators (providing connectivity to and from abroad) and transmission operators (providing transport inside the country) became less evident.

After the big companies started to build their own intercity networks and bought fiber optic cable from abroad (Bulsatcom, Blizoo, Globul), the carrier and transmission business became more competitive and less profitable.

Now, the list of the biggest carrier and transmission operators is led by those same companies: Vivacom (BTK-Net division) and Mtel (through Spectrum and Orbitel). GCN, Evolink, Neterra. PanTel, NovaTel (Deutsche Telecom division), the state-owned Bulgartel and Vestitel are still active in the carrier and transmission market, but their significance is decreasing.

     
National and International Backbone of the GCN operator. Source: http://www.gcn.bg

Ownership issues

A scrutiny of the ISP ownership shows, that the assets are generally clean from infiltration by organized crime. Gone are the days when Russian tycoon Michael Cherney was the owner of the single GSM operator in Bulgaria. The hi-tech complexity of the IT-business is probably one reason the mobsters avoided it. They preferred investments in real estate, construction and tourist services, a much more familiar and less accountable sector, where fast money can be made and dirty money laundered. The long-term result is that the IT in Bulgaria and in particular the ISP business is an almost clean sector. Even the offshore ownership in some companies seems to be a choice of tax optimization, instead of hiding the real owner.

However, some issues still exist and the main issue is the opaque ownership of the historically biggest operator Vivacom, owned by  fugitive Bulgarian banker Tzvetan Vassilev and the Russian bank VTB. The disputes related to Vivacom’s ownership are ongoing and the company is in danger falling under the full control of the pro-Putin oligarch Konstantin Malofeev or the Russian VTB Bank.

Another point of concern is the ownership of the infrastructure operator GCN, hidden by an offshore company. GCN is operating critical government infrastructure, including the e-government network and secret services networks. In 2013 a scandal broke after controversial bank FIBANK, (which was involved in money laundering activities) launched an unsuccessful raider attack over GCN and tried to seize its servers. The representative of GCN is Dimitar Angelov whose business connections include Yavor Djidjev, a person close to Alexei Petrov (AKA The Tractor). Petrov is a controversial  tycoon, and former advisor in the National Security Agency DANS, and now stands accused of racketeering and other orgnized crime activities. An insider source also pointed to a link between Petrov and the GCN financing, but no documented link could be established.

The transmission operator Vestitel BG is controlled by businessman Sasho Donchev, a Russian gas distribution mogul with a questionable reputation; Online Direct, a small regional operator, was taken over recently by a former organized crime figure Kolio Kolev; Finally, the small access operator MSAT in the city of Varna is linked to the business empire of the TIM organized crime group.

Politically connected ownership appears in SKAT, which is owned by current nationalist MP Valeri Simeonov, and in Powernet, whose ownership structure is linked to the current Minister of Finance of Slovenia Dušan Mramor and the former Slovenian Minister of Finance Franc Križanič.

Police and intelligence services are supposed to get a court decision to gain access to the private data of online users. But in Serbia, it isn’t clear that they bother to do so.
There is a law that regulates electronic communications. But not all internet service providers (ISPs) seem to understand what is meant by “retained data,” or how they should store or destroy it. And out of three ISPs that allow direct access to data, two of them say they don’t keep records about how often police and intelligence agencies gain direct access to customers’ private data.

What Your ISP Knows About You

Whenever you send an e-mail, your internet provider keeps a record of it: the time you sent information or a message, to whom, and so forth. This data, stored by the ISP, is called “retained data.”
Some ISPs provide phone and SMS services in addition to internet, and they can’t legally retain the content of your messages or phone calls unless they first get permission from a court. But they do retain data on when you make a call, who you called, how long the call lasted, when it ended and where you were when you placed the call, based on which mobile towers were used.
Serbian law sets restrictions on the circumstances under which state authorities such as police, security agency or military security agency can ask for data and the request must include a court order. But in reality, the situation is far different.
“State authorities have the de facto ability to access our private data without a court decision,” said Đorđe Krivokapić, legal and policy director of Share Foundation, a non-profit organization dedicated to protecting citizens’ Internet rights.

Privacy Protector

One office is charged with protecting personal data: the Commission for Information of Public Importance and Personal Data Protection, or Information Commission for short. The post of Information Commissioner is currently held by Rodoljub Šabić.
His office has done two reports: one in 2012, on landline and mobile telephone companies, and a second, released in June 2015, on ISPs.
The ISP report was the first ever produced by the Information Commissioner’s office and covered requests to share data that ISPs received from state authorities during 2014.
All active ISPs in Serbia were surveyed to determine their data-sharing practices. The second phase of the study included site visits to 26 operators, based on market share, type of Internet services offered, geographical coverage and so on.
For police or security personnel to see retained data, they need court approval. One method involves submitting a request which should spell out exactly what data the state institution wants to access, along with a determination of court order authorizing it. These requests were submitted by fax, email, phone or in person.
While in 2014 most ISPs had received fewer than 10 of these requests, others received significantly more. Telenor led the field, with 4,599 requests, followed by Telekom Serbia, 344; Vip, 109; and Serbia Broadband (SBB), 48. The total number of requests for 2014 was just over 5,000.
A similar survey in 2012 examined telephone data retention in Telekom Serbia, Telenor, Vip and Orion.
For the year ending in March 2012, 4,382 requests were submitted. For example, Telenor received 513 written requests from state institutions, with another 1,559 email requests from the Ministry of Interior. Telenor approved all of the MOI’s email requests, although none of them specified the legal basis on which they were made.
A quicker and easier way to get data is through direct access. State institutions can get user names and passwords to access the ISPs’ internal systems, allowing them to access retained data at any time. According to the report from 2012, it is unknown how many people use these user accounts or whether every access is based on a court order.
“When it comes to direct access, it’s online access, so you can’t know if the (user) has a judicial decision,” said Radoje Gvozdenović, who works in the Information Commissioner’s office. “The operator leaves it up to the state body, as to whether they have a court order or not.”
Such decisions, he says, “cannot be left (up) to the state bodies.”
Of the ISPs surveyed, only Telenor (one of the biggest) kept data on direct access.
In 2014 Telenor recorded 202,118 direct accesses to retained data. Most – 199,818 – were by Serbian police, followed by the Military Security Agency (VBA), 1,068; and Security Information Agency (BIA), 993. The state institutions examined data traffic for 29,333 telephone numbers and retained data for 18,020 different mobile devices.
Since other ISPs say they did not record access, “We can only guess what the real number is,” said Commissioner Šabić.
In 2012, Telenor was using an application called Info System which allowed police and both military and security intelligence agencies to access the databases whenever they wanted for whatever reason they wanted. Those three institutions together had 75 user accounts, used by an unknown number of persons. In one year, the accounts were used 272,327 times, or an average of 746 times per day. Telenor also used to automatically provide all metadata from the Mobile Switching Center daily to BIA.
The situation was similar at Vip Mobile, a subsidiary of Telekom Austria Group that started working in Serbia in 2006, which gave to police and intelligence microchip-equipped cards for data access. Vip says it did not track how many cards were issued nor how many times retained data was accessed.
The 2012 Information Commissioner’s report said that Orion Telekom Company, one of the biggest ISPs, routinely allowed police and intelligence services free access to a listing of the emails which passed through Orion’s server. This company also allowed the BIA free access to the system database, with permission to intercept traffic within the network.
The watchdog Share Foundation analyzed the Information Commissioner’s 2012 report, and drew some conclusions. Secretive methods of handling data retention implies the existence of a mass data collection, the foundation said. And while the law says retained data should be kept for no longer than 12 months, this may not apply to BIA, “because no authority monitors BIA for handling retained data,” the analysis said.
When it comes to ISPs, the Information Commissioner’s office believes the situation is better concerning access to data than it was with telecommunication companies earlier. But, beside problems with direct access, there are other misuses of retained data.
The commissioner’s 2014 report noted that in one place in Serbia, an ISP offers police data without even requiring an official request. Police officers in one police administration verbally ask for (and get) a list of all users of the Internet and cable television, as well as all documentation and lists of customers and suppliers of the ISP.

Retained data

According to Serbia’s Law on Electronic Communications, ISPs are to keep retained data for a year, after which they are required to erase it. The commission report said most ISPs don’t follow the law and, in fact, some don’t even know what retained data is.
“Supervision has confirmed the earlier Commissioner’s estimates about an unsatisfactory, very worrying state of personal data protection in electronic communications, especially in the ISPs,” said Commissioner Šabić.
When the commissioner’s office asked all ISPs how they destroyed retained data after 12 months, they got unexpected answers. One ISP said “by hammer” and another said that staffers “tear it up and throw away.”
This approach to retained data is unusual given its importance in modern society.
Says Krivokapić of the Share Foundation, “The importance of retained data in the modern information society is immeasurable.” He says it is possible to find analytical tools that can extract from mobile and internet retained data “insights” about individuals that should be protected by privacy laws. “In these circumstances the potential for abuse is great and protection capabilities are limited.”
By law, the Ministry of Trade, Tourism and Telecommunications is obliged to inspect the work of ISPs. Ministry officials told OCCRP reporters they completed nine inspections between January 2014 and April 2015, mainly related to the use of radio-frequency spectrum and quality of services.
“Inspectors haven’t found any problems,” Sava Savić, Deputy Minister, told OCCRP.

What data do providers collect and share?

According to the Commissioner’s report from 2012, the telephone companies share personal data of their users, including national ID numbers and addresses. Some also share data related to cell phone activity, including the caller’s number, the number called, the phone’s unique identifier (IMEI), details about which base station forwards a call, date and time of the call, duration of the call, type of service, details about the identity of both parties, list of all SIM cards that have been used in the current device for the last year.

Vladimir Kostic and Bojana Jovanovic

ArmenTel, using the trade name Beeline, now provides mobile and fixed telephone and internet service throughout Armenia.

Since 2007, the company has offered broadband internet services via asymmetric digital subscriber line (ADSL) technology under the brand name HiLine. This provides fast internet service over copper telephone lines. In 2008, ArmenTel also launched the first 3G cell network in Armenia.

In March 2012 it began offering faster service via fiber optic cables, marketed as Hi-Line Optic.

In the first quarter of 2015, the latest data available, ArmenTel had 152,500 internet subscribers. The country has a population of just over 3 million, and about two-thirds of those are internet users.

VimpelCom, operating in 14 countries and headquartered in Amsterdam, is one of the world’s largest telecommunications companies, with customers in Russia, Italy, Ukraine, Kazakhstan, Uzbekistan, Tajikistan, Armenia, Georgia, Kyrgyzstan, Laos, Algeria, Bangladesh, Pakistan, and Zimbabwe.

VimpelCom provides services under the brand names Beeline, Kyivstar, WIND, Infostrada, Mobilink, Banglalink, Telecel, and Djezzy. VimpelCom’s major shareholders are LetterOne Holdings (56.2 percent), and Telenor (33 percent).

LetterOne Holdings was established in 2013 by Alfa Group, which was initially set up to invest in oil, gas and telecommunications, but is legally entitled to expand into virtually all geographical and industry segments.

Three Russian businessmen control most of Alfa Group – Mikhail Fridman, German Khan, and Alexey Kuzmichev. LetterOne, registered in Luxembourg, also owns 13.2 percent of Turkcell, Turkey’s leading mobile phone operator.

The Telenor Group, headquartered in Oslo, is 54 percent owned by the Norwegian government. Telenor operates in 13 markets around the world, including Sweden, Denmark, Serbia, Montenegro, Malaysia, Bangladesh, Pakistan, India, and Thailand.

ArmenTel director vanishes

A money-laundering scandal that engulfed ArmenTel in 2014 is being investigated by Armenia’s National Security Service (NSS). Prime suspect Igor Klimko, ArmenTel’s former director, has decamped for Moscow, from which it is unlikely he will be extradited.

According to Armenian press reports, also missing is most of the money paid to make international phone calls to Armenia via ArmenTel from 2009 to 2012. Such payments averaged US$ 20 million per month.

All or parts of these payments were deposited into various offshore accounts rather than going to ArmenTel. Over the three years in question, some US$ 500 million went missing.

On his Facebook page, Klimko labels such reports as slander, threatening to sue. He alleges that an “information war” is being waged against Russian citizens, painting them as thieves and robbers in the public eye. He says this is being done to divert the attention of people from the real problems in Armenia and to conceal the “dirty deeds” of certain individuals in ArmenTel and other companies.

Klimko doesn’t identify who these individuals might be.

Police have had better luck with other suspects in the same case. Vladimir Sachkov, a Russian citizen and former official at ArmenTel, was arrested in Belarus in May 2014 and extradited to Armenia in March 2015.

Sachkov is charged with cooking the books at ArmenTel and embezzling the funds for international calls. Sachkov came to Armenia in 2009. In 2013, when ArmenTel’s management changed, he left for Belarus and was later appointed as deputy director of technology-related questions at Velcom, a mobile phone operator there.

Armenia’s NSS filed criminal charges against him in 2013 and he was arrested while attempting to flee Belarus for Austria. Sachkov’s lawyer says that his client admits his culpability and is ready to testify.

ArmenTel owner VimpelCom is also caught up in scandal. The company’s name has surfaced in connection with Gulnara Karimova, eldest daughter of Uzbekistan’s president. Karimova is charged with accepting bribes in return for using her influence to obtain telecommunications licenses for companies including VimpelCom, which, along with a parent company, allegedly paid her US$ 176 million. The company is being investigated in Sweden, the Netherlands and the US.

VivaCell-MTS: Russian-Lebanese internet with Armenian connections

While ArmenTel held a monopoly position for years, it began to lose market share in 2005, when K-Telecom entered the Armenian market and began to offer mobile phone and internet services under the brand name VivaCell.

Now VivaCell is the second-largest internet provider in Armenia. By the end of the second quarter of 2015, just over one million people were using the company’s internet services via mobile phones while 73,515 were using its broadband service (including connections via wireless equipment).

VivaCell operates its own network that connects to the Trans-Asia-Europe fiber optic cable system via Georgia and Rostelecom in Armenia.

The company grew out of events in 2002, when the Fattouch Investments Group of Lebanon founded Karabakh Telecom in Artsakh (the disputed territory of Nagorno-Karabakh), then the territory’s only mobile and internet provider. In 2004, Fattouch founded K-Telecom; in 2005 it became a mobile operator under the VivaCell brand.

According to the Lebanese State Registry, the Lebanese company KT (Holding) SAL wholly owns K-Telecom. International Cell Holding Ltd., registered in the British Virgin Islands, is the major shareholder of KT (Holding) with 29,998 shares, while the remaining two shares are controlled by Artem Vasiliev and Pavel Masharov, two management officials at Mobile TeleSystems OJSC (MTS), the largest mobile operator in Russia and the CIS.

In 2007, MTS purchased 80 percent of International Cell Holding Ltd.

The acquisition price was € 310 million (US$ 347 million), including € 50 million (US$ 56 million) to be paid to the seller between 2008 and 2010, provided that K-Telecom reached certain targets in revenues and profitability. MTS also loaned K-Telecom € 140 million (US$ 157 million) to repay existing debt and finance investments.

The parties also signed an option agreement that would allow MTS to acquire the remaining 20 percent of K-Telecom at some future date.

However, VivaCell-MTS General Manager Ralph Yirikian told hetq.am that the Fattouch Group still owns a 20 percent stake in International Cell Holding Ltd.

According to the Lebanese State Registry, the Fattouch Investments Group is owned by brothers Pierre and Mosa Fattouch (50 percent and 49 percent respectively) with the remaining 1 percent owned by Rashid Hovsep Abu Shakran.

The Fattouch brothers have a third sibling, Lebanese parliament member and former minister Nicolas Fattouch. Their business interests are varied, including projects won via government contracts.

As for Russian MTS, its website says nearly half of the company’s shares are publicly traded, but 51.46 percent are owned by Sistema JSFC, the largest publicly-traded diversified holding company in Russia and the CIS.

Sistema, founded in 1993, is one of Russia’s largest holding companies, with stakes in predominantly Russian businesses in telecommunications, utilities, consumer, high tech, healthcare, pharmacy and others.

Robert Kocharyan, Armenia’s second president, has been a member of the company’s board of directors since 2009. As of July 2014, Kocharyan, in compensation, owns a 0.0052 percent stake in the company.

Vladimir Yevtushenkov, one of the richest men in Russia, owns 64.1 percent of shares in Sistema and serves as the board’s chairman. In September 2014, he was placed under house arrest on charges of embezzlement and legalization of the company’s shares. He was freed from house arrest in November 2014. About 20 percent of Sistema stock is traded on the London Stock Exchange.

ADC Internet – Ex-President’s Son, Minister’s Son and Cadastre Official

Several well-connected Armenian citizens were involved in the Armenian Datacom Company (ADC), a joint Armenian-Norwegian company which was founded in 2006.

Sedrak Kocharyan, son of the second Armenian president, Robert Kocharyan, was involved from the start. So too was Artak Zakharyan, (a former judge and the son of Yervand Zakharyan, Armenia’s Minister of Energy and Natural Resources). Finally, there was Khajak Karayan, deputy to the president of Armenia’s State Real Estate Cadastre.

The company is presently going through a rough period.

In 2007, ADC entered the market providing broadband internet services to corporations. Its website says the company has 1,299 subscribers (690 individuals and 609 legal entities).

In 2010, it purchased the assets, valued at 734,678 million AMD (about US$ 1.5 million today, in 2010 it was about US$ 2 million) of Fibernet Communications Ltd.

Four years later, both ADC and Fibernet were declared bankrupt. In October 2014, VTB-Armenia petitioned the courts to have ADC declared bankrupt in order to recoup a US$ 4 million loan plus penalties. Yerevan’s Arabkir and Kanaker-Zeytun Court of jurisdiction sustained the petition and declared the company insolvent on Nov. 28.

According to Karen Sargsyan, ADC’s director of business development, the verdict was designed to rebuild the company’s financial health and would not affect shareholders or investors.

“Given our charter, these two processes are running concomitantly. In other words, for financial health to be restored, we are obligated to go to the courts and be declared insolvent so that our financial obligations are put on hold for a certain period. Reaching an agreement with the bank, we went that route,” Sargsyan said.

Who are ADC’s shareholders?

Officially, ADC has one shareholder – the Norwegian-registered ADC Holding AS. Sedrak Kocharyan is a board member and Khajak Karayan is the board’s president.

According to a document retrieved via OCCRP’s Investigative Dashboard from the Norwegian Corporate Registry, the main shareholders of ADC Holding AS as of December 2014 are Cupizinco Holdings C. LTD (37.65 percent), Yerevan Telecom CJSC (23.21 percent), and Telesto Norge AS (3.01 percent).

Yerevan Telecom has three shareholders: Sedrak Kocharyan owns 33 percent and Artak Zakharyan owns 30 percent. (Zakharyan resigned in September 2014. While regarded as one of the richest judges in Armenia, he did not declare dividends from Yerevan Telecom since 2007).

Global Soft, a company registered in Armenia, owns the remaining 37 percent.

Global Soft is 95 percent owned by Vahe Khachikyan, with the final five percent held by the law firm Concern Dialog. Khachikyan is also a member of the ADC Holding AS board of directors.

Khajak Karayan, deputy to the president of Armenia’s State Real Estate Cadastre, once owned 47.5 percent of Global Soft shares but unloaded them in 2013. (When Yervand Zakharyan served as the head of the cadastre prior to becoming energy minister, Karayan was his advisor and later became the deputy president. Karayan still serves on the board of ADC Holding AS).

Karayan confirmed to hetq.am that he was a founding member of ADC but says that he no longer has any connection to the company (it is illegal for certain government officials to engage in business). “I’m engaged in other things. In the first place, I have no right, but I can advise you regarding the sector if you’re interested,” said Karayan.

Karayan said the Norwegian Corporate Registry isn’t up to date and that he should rip up the document confirming that he was president of the board of directors. He says that the board hasn’t been active for a long time. Karayan says that he sold his shares two years ago and has no connection to the company, but remains well-informed regarding the company’s activities. “I looked into it. I know. What do you want with that company? It’s in bad shape now. It wouldn’t be desirable for me to expound,” said Karayan.

As for Vahe Khachikyan, Karayan says he is “ an old school buddy. I’m a good friend of his.”

Cupizinco Holdings C. LTD, which owns 37.65 percent of ADC Holdings AS, is in turn owned by The Amicorp Group, a worldwide network of companies that specializes in management and financial services in the secretive offshore realm. A team of lawyers runs Amicorp and the company’s shareholders are not public knowledge.

Some of the companies it manages have been implicated in money laundering and tax evasion cases. Amicorp Netherlands Holdings B.V. was embroiled in a case involving former Indonesian dictator Suharto. Amicorp managed the business dealings of the Suharto family, earning US$ 15 million in profit.

Telesto Norge, which owns 3 percent of ADC Holdings, was founded by the family of Snorre Osvald Bentsen.

In January 2009, according to adc.am, it merged with Delta Partners (registered in Bahrain) which promotes itself as a leading advisory and investment firm specialized in the telecoms, media and digital industry globally. It has offices in the United Arab Emirates, South Africa, Spain, Singapore, Colombia and the United States.

The current legal status of ADC could not be determined, as requests for comment to the company went unanswered.

Ucom – Unknown shareholders: from Gagik Khackatryan to the Virgin Islands

Gagik Khachatryan (Armenia’s current Minister of Finance and former State Revenue Committee Chairman) has said repeatedly that he is not the owner of internet provider Universal Communication (Ucom) in Armenia.

“I do not own Ucom. In addition, it’s a company making a 100 percent profit,” Khachatryan told A1+ TV. He also denies having any stake in the company. “I don’t own any business. Prove otherwise.”

Khachatryan was appointed finance minister in April 2014 after serving as the State Revenue Committee Chairman since 2008. The ministerial appointment required him to file a financial disclosure form.

Khachatryan says he is a modest man who lives solely on his government salary of US$ 21,000 but his financial disclosure showed US$ 2.5 million in the bank. As assets, he also listed five mature saplings, a private house with acreage and commercial structures, and two apartments.

So what links Khachatryan to Ucom?

Ucom, founded in 2007, offers broadband internet, television and fixed telephone service. As of March 24, 2015, it had 67,303 internet subscribers. The company enjoys a 26 percent share of the country’s fixed-line internet market. Overall, it has a 13 percent share of the fixed and mobile internet market in Armenia.

It began in Yerevan before branching out into the provinces.

By 2009, the sole shareholder was Khachatryan’s cousin, Armen Nazaryan. Two years later, shares were split between three people: another cousin, Aram Khachatryan, who held 41 percent; and two brothers, Hayk and Aleksander Yesayan, who each held five percent. (Both brothers held positions at Ucom, Hayk as general director and Aleksander in charge of external affairs).

The remaining 49 percent was owned by IU Telecomunicate Ltd., which in turn was wholly owned by Darison Management Ltd. registered in the British Virgin Islands, an offshore location known for its secrecy. It’s a favorite haven for officials wishing to hide commercial dealings.

Ucom business director Aram Barseghyan told hetq.am that IU Telecomunicate was owned by “a foreign investor.” He would not reveal the country or the investor’s name. “Naturally, they are individuals. But since I am the business director and have nothing to do with it. I cannot say,” Barseghyan replied.

Hayk Yesayan, Ucom’s general director, did not respond to a query about the identity of the hidden owner.

As Ucom developed, Khachatryan became more prosperous. According to official tax records, 2011 proved to be a break-out year for Ucom when its market position improved greatly. In 2010 it was listed as the 664th largest taxpayer; by 2014, its position had soared to 55th.

Financial records indicate 2011 was also a banner year for Khachatryan. According to his 2009 financial disclosure, Khachatryan had 54 million Armenian drams (US$ 113,000) in revenues. In 2010, his disclosed revenues amounted to 59 million AMD (US$ 124,000).

His revenues shot up in 2011, when he served as president of the State Revenue Commission. While he declared no real estate or other transactions, other investments or securities, he declared overall financial holdings including cash, 278 million AMD (US$ 600,000) and another US$ 3 million. His only declared revenue for the year was 8 million AMD (US$ 16,000) in salary. In 2012, he declared US$ 3.6 million and in 2013, US$ 3.5 million.

From 2011 to 2014, Khachatryan’s wife Laura Yepremyan also declared a total of US$ 3.2 million in cash, although her only known source of income was her salary, which ranged from US$ 1,500 in 2011 to US$3,800 in 2014.

Based on Hetq investigations, Transparency International Armenia, an anti-corruption non-governmental organization (NGO) petitioned the State Ethics Committee for Top Government Officials in 2012. The NGO asked the committee to look into a possible conflict of interest regarding the business interests of the State Revenue Commission president and his duties.

The committee found no such conflict of interest despite evidence proving that Khachatryan’s children were shareholders in MegaMotors and Apeeron. It also found that his cousins were shareholders in the companies Megafood, Ucom and Chronograph.

Ucom Eats an Orange

In July of 2015, Ucom bought out Orange Armenia, whose chief executive officer, Francis Gilbert, was asked why Orange decided to sell and leave the country. Gilbert said Orange could not offer the increasingly popular consumer option of packaging four services for one price: cellular connection, landline connection, landline internet and cable television.

He said the sale will allow Ucom to corner 20 percent of market share while providing such a package. Orange’s market share was so small that it had lost about € 185 million (US$ 207 million) in recent years and did not see realistic opportunities for growth, he said.

Orange had provided wireless broadband internet via H+ radio links. According to the company’s 2014 year-end report, it had 130,725 broadband internet subscribers (not counting users via telephone).

GNC Alfa – Who is behind Rostelecom?

Under the brand name Rostelecom, GNC Alfa CJSC provides fixed-line telephone, internet, and new-generation IP TV (streaming video) services to private and corporate customers in Armenia. As of Dec. 31, 2014, Rostelecom (Armenia) had 27,554 internet subscribers.

Rostelecom’s network in Armenia is based on fiber-optic cable (FOC) infrastructure covering 80 percent of the country. It is connected to the region’s main terrestrial networks and largest traffic exchange nodes, as well as international channels from Iran and Georgia.

GNC Alfa was founded in 2007. The founder and sole shareholder was Armen Melik-Santurdichyan. The company quickly reorganized and became a closed stock company. The shareholders also changed.

The private company entered the market in 2012 when Rostelecom purchased 75 percent of GNC Alfa’s stock for US$ 22.5 million, according to a company statement. The purchase expanded Rostelecom operations outside Russia for the first time and enlarged its network, connecting the Persian Gulf overland with Europe.

Hayk Faramazyan, GNC Alfa’s executive director, told hetq.am the company’s sole shareholder was Rostelecom.

But in fact, the company’s stock now belongs to Filor Ventures, a company registered in Cyprus. Filor Ventures has two shareholders: Bovlon Investments Ltd. (25 percent); and Rostelecom International Ltd. (75 percent).

Rostelecom International Ltd. is a 100 percent subsidiary of the Russian Rostelecom OJSC, whose largest shareholders are various Russian government agencies: the Federal Agency for State Property Management (Rosimushchestvo), 43 percent; the National Settlement Depository, 42 percent; Vnesheconombank, 3.8 percent;, and the Russian Direct Investment Fund controlled by Vnesheconombank, 1 percent; Rostelecom, 6.8 percent, and Mobitel, 12 percent. (These figures are posted on the company website; it is unclear why they add up to 108.6 percent).

Based on that information, hetq.am contacted Faramazyan again, asking who owns the remaining 25 percent of GNC Alfa Bovlon Investments Limited. Faramazyan said again, “One hundred percent of the shares are owned by Filor Ventures Ltd. Rostelecom OJSC controls (the shares).”

Local Providers

The other relatively large internet providers are local limited liability companies: Interactive TV, Aranya, Arpinet, Maylan and Web.

In 2012, Ucom bought Interactive TV.

Aranya joined Rostelecom’s fiber optic cable network and offers broadband internet to the entire Ararat Province of Armenia. It has three shareholders –Andranik and Stepan Minasyan, who are brothers; and Arman Gabrielyan.

Arpinet services Armenia’s Armavir Province, providing internet and IP television to private and corporate customers. The sole shareholder is Grigor Babakhanyan.

Mylan Ltd. is registered in Vanadzor and provides internet to Lori Province. Armen Merdjanyan is the shareholder.

Web has three shareholders: Albert Doneyan, Kolya Hovhannisyan, and Ruben Mkrtchyan. It was founded in 1996 and now has 1,265 subscribers.

Edik Baghdasaryan and Kristine Aghalaryan