Management of foreign claims in the Czech Republic is governed by outdated principles and faces several challenges.
Press release on audit No 19/34 – 7 July 2020
The Supreme Audit Office (SAO) scrutinised the procedure followed by the Ministry of Finance (MoF) in the management of foreign claims of the Czech Republic between the years 2016 and 2018. Most of the claims are against developing countries and their origin dates back to the 1970s and 1980s. At the end of 2018, the claims amounted to CZK 18.7 billion and the SAO examined 87% of this sum. The management of foreign claims cost more than CZK 65 million in the audited years and the total income from collected claims amounted to more than CZK 504 million. The audit has revealed that the Czech government’s principles for the management of these claims are obsolete and do not correspond to current needs.
The management and recovery of foreign claims is guided by the principles approved by the Czech government in 2006, since then the rules set out in these principles have not been updated. They are therefore no longer in line with current needs.
This can be demonstrated, for example, by claims for which an agreement has not been made with the borrower on debt repayment within four years. According to the principles, the MoF should propose to the government how to deal with such a claim, i.e., if the borrower is unable to repay the debt. However, a situation in which the Debtor State is unable to repay its debt is not possible. Claims against states cannot be time-barred, so there is always the possibility that the Debtor State will repay its debt. This is why the MoF did not submit to the government proposals for the settlement of claims.
The Czech state deals with the recovery of certain foreign claims through so called “unblocking agents”, the debt is enforced for the Czech Republic by someone else in return for payment, or the Czech state sells its claims to a third party. In the years 2016 to 2018, the MoF registered cooperation with four unblocking agents, but it concluded a contract with only three of them. Moreover, only very little has been collected by the MoF from each unblocking agent. For one claim, this was 1.2% of the price of the assignment of the claim, for the second claim, the MoF received nothing, and for the third claim, it received 7.2%, but from enforcement proceedings.
The SAO also looked into a claim against Cuba which amounted to more than CZK 1.33 billion at the end of 2018. Following the disintegration of Czechoslovakia, the claim was divided between the Czech Republic and the Slovak Republic in a 2:1 ratio. While the Slovak Republic completed the negotiations on its part of the claim in 2015, the Czech Republic had not concluded an agreement with Cuba by the completion of SAO’s audit. The MoF paid CZK 3.56 million a year for the management of this claim. In the audited years only, it paid more than CZK 10 million.
Some contracts with the Debtor States did not include an exact date for debt repayment or no date was set at all. This is why the MoF in its accounts set a fictitious date of 31 December 2030. The MoF thus registered these claims as “until maturity” claims. Therefore, so-called “provisions”, which reflect a temporary decrease in the value of claims, could not form a part of these claims in the accounts. Under the current legislation, these items are specifically linked to a maturity date. Provisions are included in the accounts for reasons of caution due to a possible impairment of assets.
Supreme Audit Office