A British company comes to Bulgaria to fight financial crime at a time when the country is a byword for corruption. Unsurprisingly, it finds itself confronting powerful vested interests that don't like outsiders challenging the status quo. The same consultancy charges relatively high fees, funded by Bulgarian taxpayers. Sound like a recipe for controversy and envy – violence even? You'd be right. One of the company's employees was even the subject of an attempted assassination.  

David Smith, manager of Crown Agent's Bulgarian programme since 2001, has been in the eye of the storm throughout. And at times it's reached hurricane force. Crown Agents' objectives seemed so worthy – to combat corruption, customs fraud, and tax and excise evasion. Yet the firm has weathered vitriolic press attacks about its effectiveness, the perceived extortionate remuneration of some of its staff – in what is, after all, the EU's poorest country – and the confidential nature of the operation itself.

Now, after eight and a half years and two programmes, Crown Agents' role in Bulgaria has ended. Smith (47), who has been visiting Bulgaria on and off since 1995 and whose main office is in Skopje, Macedonia, has been a semi-permanent fixture in Bulgaria and witness to the changing fortunes of three governments – first Simeon Saxe-Coburg's National Movement for Stability and Progress, then Sergei Stanishev's Socialist administration and, since July 2009, Boiko Borissov's GERB.  

Dyankov's decision
It was Finance Minister Simeon Dyankov who decided not to renew Crown Agents' contract. Note the previous sentence carefully. Smith objects to other media descriptions of the Government supposedly "terminating" the contract as if Crown Agents had been interrupted midstream, or summarily dismissed. Not so, he insists. In fact, Crown Agents had completed its recent contract. Smith says Dyankov's decision was not unexpected, coming after two programmes and four contracts (each contract fills half a programme).

"We would have liked a fifth contract. We were disappointed but not completely surprised, especially given the current economic climate when contracts and government spending have been cut back as far as possible," says Smith.

The original contract was a customs programme which ran between 2002 and 2006, primarily designed to raise revenue. The government needed someone to help the revenue agency. But, yes, according to Smith, Crown Agents were also there to reduce corruption and prepare Bulgaria for EU accession. The second programme from 2007-10 was not so hands-on.

"On the first programme we had 25 international advisers all working in customs," says Smith. "Most of them were involved in operational stages. They would deal with customs at borders and get their hands dirty. The programme that just finished, on the other hand, had 10 long-term advisers, covering customs, the revenue agency, the Finance Ministry and other areas such as financial crime. In the last programme our role was more that of a traditional consultancy, providing strategic advice, although we did support operations."

In the second programme, in particular, Smith says that Crown Agents has had no authorisation over implementation. "We give recommendations, that is our core function. We get as far in as we can and we can monitor the implementation of those recommendations but we have no executive authority beyond that. If they are not carried out, then all we can do is highlight that omission," says Smith.

Smith says that when the first contract was signed at the end of 2001, his company's tenure in Bulgaria seemed likely to be short.

"We certainly didn't expect to be here longer than three months, the way things were going. We had so many negative reactions to our presence, primarily from economic interests who didn't want us in Bulgaria, trying as we were to raise revenue and prevent fraud. There was a huge media backlash and pressure on the then-minister. Some people threatened to take the contract to court, so there was a lot of resistance and certainly at that stage the prospect of us being here eight years later was fanciful," he says.

'Ruffling feathers'
So has it all been worth it? Smith says it has, but concedes it was easier to gauge financial dividends from Crown Agents' operation during its first programme.

"Perhaps the most significant event we had involved our mobile team," says Smith, showing me a photograph of mobile team leaders in 2005, and reflecting on that period. "By 2005 we had 15 of our guys working alongside Bulgarian mobile team leaders. We procured the vehicles ourselves and when these vehicles went live in September 2002, revenue increased by 18 per cent that month, year-on-year, as opposed to previous averages of two to three per cent. So there was an immediate hit on revenue. Between 2002 and 2006 customs revenue went up by 30 per cent a year, compared to three or four per cent in previous years. Extrapolate that out and we'd say two billion euro was the total effect up to the end of 2006. We can't claim all of the credit for that; obviously there were other factors. In the second programme it was completely different because Bulgaria joined the EU, throwing revenue figures out of kilter. Revenue fell because no duties applied to Romania and Greece. We tried to get a reputable multinational accounting company to do an assessment of revenue impact over this period but they said it wasn't possible. It's certainly in the billions, however."

Smith says that in 2006 the return on revenue set against the payment of salaries, as quoted by the ministry themselves, was in the ratio of 60 to 70 to one. "It's certainly been a very successful investment as far as Bulgaria is concerned," says Smith.

Indeed, one measure of Crown Agent's effectiveness could be that certain people tried to warn them off.

"We had done quite a few operations that had ruffled feathers at border points and inland customs clearance houses. We'd go into abandoned warehouses and then suddenly several figures appeared, lurking in the shadows, deliberately trying to intimidate us. We saw them off and made it clear we were not going to be intimidated," he says.

Yet things got worse. In January 2003, soon after Crown Agents' mobile teams went live, one of the team's officers had a bomb thrown from the street onto his balcony.

"It was a Saturday evening, so fortunately he was not at home," says Smith. "Whether they knew that and therefore it was designed to intimidate, rather than a direct attempt on his life, we can't be sure. Fortunately, the next morning, the minister and the team leader at that time appeared shoulder to shoulder on national TV to make clear that they would not be dissuaded from doing their job. Intimidation since then has generally been limited to local Bulgarian staff, rather than our own people."

16 000 pounds a MONTH??
Within two weeks of the first contract being signed it had been leaked verbatim in the media. Dyankov subsequently declassified it anyway, but that was much later. Back in 2002 the media was already highlighting what was to become a contentious issue. Reading between the lines, the media's message seemed to be that over-paid British executives were making a financial killing out of Bulgaria's misfortune. Smith has no problems with transparency but objects to what he sees as dishonest reporting.

"When our original contract was leaked to the media, certain salaries were quoted that were inaccurate," he says.

"Like someone earning 16 000 pounds sterling a month?" I ask.

"That was a fee rate for one of our senior advisers, a wrap-up salary that included a full office support staff for that particular person who, at the time, was advising a minister," says Smith. "It included travel, subsistence and all office running costs, so that rate was not for him as an individual. He wasn't earning anything like that."

Such headlines, according to Smith, promoted debate, but also envy.

"It's been an interesting story with the media over the past eight years," says Smith. "The stuff in 2002 was vicious and organised and stemmed primarily from economic interests. They really did try to use every possible means to undermine us. After that we had a fairly low media profile. So much so that I asked a Bulgarian journalist – 'how come you're not covering us now?' – because when the mobile teams started work and revenue started flowing in, we got relatively little publicity. 'This is good news; we're not interested in that,' he told me. The truth is, we're happy to maintain a relatively low profile but equally we've got a lot to be proud of and we shouldn't shy away from that," he says.

Smith says he always consented to interviews by Bulgarian media despite the acrimony.

"We always try and agree on principle. The problem is that the questions they want to ask are not those we want to answer, purely because a lot of the work we do involves recommendations on how to deal with fraud or organised crime, or whatever,  and these are not things we, or the Government, want to announce because it would give information to the very people we're targeting. If our advice, hypothetically, is that there is a major problem in a particular place, and we must do an exercise there, then that's not something we want to publicise in advance. Having said that, there are times when we do want to forewarn about something because it will increase compliance in advance of us going there. After all, we are in the business of increasing revenue, not necessarily catching criminals," says Smith.

Corruption
Like it or not, Bulgaria is still synonymous with corruption, even if the word springs readily from the lips of those who encounter it infrequently. So is it really so bad?

"It's a lot better than it was," says Smith. "Credit for that can be shared among a number of organisations, not only us. It's definitely improved. Perception is always a problem. The general public, if they're travelling, will lump everyone together – everyone from border police, through to airport security, under the umbrella of customs. Yet speaking to the international business community, problems on the customs tax side are nowhere near as bad as some people think. It's still out there but other countries' customs agencies are perhaps more corrupt."

"Which ones?"

"I'd say that one or two customs services within the EU are more corrupt than Bulgarian customs. If you look at corruption in Bulgaria, customs always rank near the top, but you also have other areas in Bulgaria which are perceived to have a major problem. For example, doctors come out very high in Bulgaria in corruption perceptions. Perhaps that's mainly because people see doctors more often than they see customs officers. League tables are a bit invidious anyway; it's always hard to measure real corruption in terms of the damage it does to society. It's high-level corruption, rather than the relatively junior border official, or doctor, that does the most damage."

Smith believes that the UK press gives Bulgaria a raw deal, contributing to its poor international image. "They don't give Bulgaria a fair crack of the whip," he says.  

Despite all the brickbats in the media, Smith hopes that Crown Agents' connections with Bulgaria are not severed.

"We have projects all over the world. With luck we'll use Bulgarian experts to assist other countries in the region to meet their pre-EU accession requirements. Currently I'm in Macedonia advising the customs director general there on his strategic plans preparing for accession.  I hope this is not the end. We may not do the same work again – Crown Agents carries out a whole host of other consultancies – so perhaps we can perform a different consultancy in Bulgaria in the near future."  

Does he leave with fond memories?

"Yes, very favourable ones. Obviously, there are some things we wish we hadn't done, or at least had done better, but overall we go away very satisfied with our achievements. We have built up Bulgaria's capacity to fight financial crime, which has brought in representatives from police, the state agency for national security and from the Finance Ministry and customs, getting them to work together."

Who did Smith most enjoy working with?

"Enjoying working with someone is not always the same as them being good employers. Sometimes it's good to be challenged and asked difficult questions, even though it might not be 'enjoyable' as such. It's been a pleasure to work for all three Governments but if I had to single out one person – not from a party point of view but as an individual – it was Georgi Kadiev, deputy minister of finance in Stanishev's government. In a sense he was also the most demanding to work for because he would see reports, ask tough questions, and push us to do more. But I've worked with ministers, deputy ministers, heads of customs and other revenue agencies and, overall, had good relations with all of them, apart from at the very beginning of the programme with customs."

Smoking gun
Smith says that crime inevitably increases during an economic crisis as everyone tightens their belts.

"You have to be prepared for that and that's why preparation for EU accession was crucial. It brings benefits but problems, such as VAT fraud, what they sometimes call carousel fraud, whereby fictitious goods are exported, and then re-imported, and then claimed from exports that never happened. That's very common within the EU, so it was very important that Bulgaria prepared for that. During a crisis money is tighter and there's more inclination to try to suppress revenue."

A big "opportunity" for fraud, says Smith, was the recent hike in excise duties on cigarettes.

"You must have a system in place to deal with the consequences. We saw a similar situation in the UK where tobacco smuggling became more serious than drug smuggling. Now we have a major differential in prices between Bulgaria – where cigarettes cost 2.50 euro a packet – and its neighbour. That may seem ridiculously cheap by British standards but in Macedonia they only cost one euro. That's a huge differential that didn't exist three or four years ago."

When it comes to other common perceptions, that, for example, many businesses in Bulgaria are just fronts for money laundering, or that the wealthy customs officer with a big house in Simeonovo and three cars outside, must be a crook, Smith says we should avoid over-hasty judgments.

"The customs officer in question might have had an inheritance or something like that. As for money laundering, there are many reasons why a company may choose to have a shop in a particular area, beyond just short-term profitability. It could be a useful long-term commercial investment. Look at Heathrow Airport where half the shops are empty and people just browse. That doesn't necessarily mean, however, that these are just outfits for money laundering. There are weaknesses in the Bulgarian system that make it attractive for money laundering. Money launderers try to make the route as complicated as possible. So we have created a fiscal crime co-ordination group that brings together all the agencies involved to counter it."

Smith says that co-operation between different agencies is vital.

"Criminals are criminals. If someone suppresses their company's turnover so that they pay less VAT, they're probably also suppressing their personal income tax payments," he says.

Smith believes that the 10 per cent tax rate – although he emphasises that it is not in Crown Agents' remit to advise on macro-economic policy per se – generally increases revenue. "It does dramatically increase compliance. At the beginning there may be a drop in revenue but the flat tax eventually simplifies everything so that people earning less become more compliant and the person who previously exploited every loophole ends up paying the same amount."

When I interviewed Smith he was busy clearing out his office, discreetly located on the top floor of an inconspicuous block in central Sofia. The new tenants can hardly be more controversial.