GOVERNMENT OF THE REPUBLIC OF SERBIA

-Prime Minister Mirko Cvetkovic-

B e l g r a d e

Dear Sir,

We are addressing you in connection with the continuous pressure of the executive power exerted on the Zrenjanin pharmaceutical factory Jugoremedija, with the aim of removing from the office the management elected by the votes of its majority private owners, so that the Ministry of Economy could install its own management in this company, where the state is a minority shareholder, and a shareholder without the voting right to elect management members, in light of Article 11b of the Law on the Privatization Agency.

Jugoremedija was privatized in accordance with the Law on Ownership Transformation. At the time when the Law on Privatization 2001 came into force, a majority part of Jugoremedija (58%) was privately owned, while a minority part (42%) was state-owned, which was sold to the Company Јака 80 from Macedonia on 10 September 2002. Јака 80 and the Cyprus off-shore company Demeno Trade were owned by Jovica Stefanovic-Nini, who was on the Interpol Wanted List at the time. In 2004 the Anti-Corruption Council furnished information on the ownership structure of Јака 80 to the Agency for Prevention of Money Laundering. So far we have received no response.

The Shares Fund concluded a sales contract with Јака 80, according to which the buyer undertook the obligation to increase the capital of Jugoremedija and thus become a majority owner. The other shareholders, the majority shareholders of the factory, agreed that the capital increase be carried out through investments and modernization of the production plants. However, at the Shareholders’ meeting in 2003 Stefanovic proposed that the increase of the capital be carried out in another way – by conversion of Jugoremedija‘s debt to Јака 80, created on the basis of a disputable purchase of raw materials. The shareholders rejected this proposal. However, Јака 80 registered itself with the court register as the majority owner on the basis of the Contract with the Shares Fund and a forged decision of the Shareholders’ Meeting. In April 2004 the shareholders initiated a court dispute for the cancellation of the capital increase. Responding to their actions, in August 2004 Stefanovic expelled them from the factory with the help of private security staff, the Zrenjanin police and Belgrade gendarmerie units. The Anti-Corruption Council informed the Government in detail about this problem in its Report on Jugoremedija, dated 16 September 2004. The Government responded that it would wait for the outcome of the court dispute initiated by the shareholders.

By the end of 2006 the court deleted the capital increase of Jugoremedija by a final decision and annuled the contract for sale of the shares. The state became again the owner of 42% of shares and the stake of the private shareholders was reverted to 58%. However, before the Shareholders’ Meeting appointed a new management in accordance with the ownership structure established by the court, Stefanovic had concluded a great number of asymmetric contracts between Jugoremedija and his associated companies, with the aim of preventing the change of management by forcing Jugoremedija into bankruptcy and taking it over as the majority creditor. In addition, the production at the factory was stopped in November 2006, also with the aim of preventing business operation of the company after the change of management.

At the Shareholders’ Meeting held on 1 March 2007 the private shareholders appointed a new management, which found the debts of the factory amounting to 2,030,090,824.23 dinars and the first order mortgage over the property of Jugoremedija for a loan drawn by Stefanovic’s company, MD Nini, in an amount of 12.6 million euros. Due to such a situation, no bank wanted to grant a loan for the resumption of production; and, besides the financial problems, the factory was obliged to reconstruct its production plants. Specifically, the Drug Inspection of the Ministry of Health ordered Jugoremedija on 22 March 2006 to bring the production of drugs into compliance with good manufacturing practice (GMP) within a period of six months as of the receipt of the decision. The employees had been insisting on this investment since the 2003 Company Meeting, but Jaka 80 had declined to do it.

After the court had established the violation of the law in the sale of Jugoremedija shares and deleted the contracts between Jaka 80 and the Shares Fund, it was necessary that the collusion between the officials from the state institutions and the criminal circles be investigated, the liability for the violation of the law established, and that the state, in agreement with the private shareholders, initiate proceedings for compensation of damage caused to the factory by unlawful actions of the responsible persons at the responsible state agencies. Instead of that, the executive power continued exerting pressure on Jugoremedija private shareholders and the management appointed by them.

While the new management was struggling to restart production and prevent bankruptcy, by 13 March 2007 the Tax Department of the Ministry of Finance had already delivered an order to Jugoremedija to immediately, under the threat of enforcement, settle the entire debt for tax and social insurance contributions incurred during Stefanovic’s management, dating from December 2003. In other words, even the state agency, which had tolerated Stefanovic’s failure to settle these debts and allowed an accrual of tax debt to an amount of 79,787,950.93 dinars and contributions debt to an amount of 26,084,610.64 dinars, now, after the establishment of the legal order at Jugoremedija, threatened to initiate the procedure for enforced collection of the debt. The Anti-Corruption Council informed the Government that the Ministry of Finance used the collection of the tax as an instrument of pressure on the new management. The Government did not respond to this letter, and Jugoremedija managed to pay the entire accrued debt within a short time and remove the bankruptcy threat. Mladjan Dinkic was the minister of finance at the time.

In 2008 the Shareholders’ Meeting of Jugoremedija decided that the company would provide investments on its own in the reconstruction of the factory in order to bring it into compliance with the GMP requirements, and the Ministry of Economy agreed that a new tender for the sale of shares be organized only after the completion of this investment. However, at the moment when the investment in the construction works had been completed, before Jugoremedija was awarded the GMP Certificate and the investment could be realized through an increase of the value of the shares, the Ministry started putting pressure on the management to promptly organize a tender. The factory management did not agree to publish the tender before the completion of the months-long procedure of obtaining the GMP Certificate. Soon after that, on the basis of tabloid texts and anonymous complaints, a police investigation was initiated against the director of Jugoremedija because of alleged abuses during the reconstruction, which has continued from the first police factory raid on 18 June 2010 until the present. The investigation started eighteen days before the Shareholders’ Meeting, with an obvious aim to arouse mistrust among the private shareholders in the work of the management, and that a new management, which would accept the proposals of the Ministry of Economy, be appointed at the Shareholders’ Meeting. In spite of the pressures, the private shareholders backed the business policy of the management at the Shareholders’ Meeting. On 9 August 2010 the Anti-Corruption Council informed the Government about the abuse of police at Jugoremedija and recommended the Government examine the actions of the Ministry of Economy and the Ministry of Interior and inform the public of its findings. The Government did not respond to this letter either.

On 11 May 2011 inspectors of the Zrenjanin Police Administration carried out another raid on the factory and confiscated the documentation relating to the joint investments of Jugoremedija and a group of its shareholders in the new penicillin factory. It was an investment which was a part of the reconstruction of the production plants of the factory so that it would be in compliance with the GMP requirements. When an official of Jugoremedija asked on whose complaint the police acted, they replied “on an order from above”. The Anti-Corruption Council advised the Government with its letter of 24 May that the result of the police investigation that had been continuously conducted at Jugoremedija was that business banks decided not to cooperate with the company, assessing it as unstable, which has seriously jeopardized its financial state and business capability. At the same time, the Anti-Corruption Council addressed the High Prosecutor’s Office in Zrenjanin requesting information on whose order the investigation at Jugoremedija was conducted. We have received no response to either of these letters.

At the meeting at the Ministry of Economy held on 7 July this year, the state secretary Branislav Zec set a condition to Jugoremedija saying that the state would help them to overcome the problems with the business banks if the management elected by the votes of the private shareholders resigns, and is replaced by persons nominated by the Ministry. Article 11b of the Law on the Privatization Agency does not provide that votes borne by state-owned shares are used for the election of the company management members, which means that the Ministry’s request was that, at the Shareholders’ Meeting scheduled for 8 August, the private shareholders were to elect with their votes a management that would be controlled by the minority shareholder. Branislav Zec again threatened the director of Jugoremedija with a police investigation related to the construction of the new penicillin factory, and after the meeting at the Ministry, the Revenue Department has been conducting detailed controls at Jugoremedija on a daily basis. According to the statements made by the inspector conducting the control, it is conducted on the basis of an order of the Minister of Economy and Regional Development Nebojsa Ciric.

The present situation at Jugoremedija does not differ at all from the situation in 2002, when the Shares Fund imposed Jovica Stefanovic’s management on the majority shareholders. It is indispensable that the Government examine this case and urgently take necessary measures, the more so because in 2006, after the court had cancelled the contracts for sale of Jugoremedija shares and its capital increase, it failed to initiate proceedings for the establishment of the liability for the violation of the law and the caused damage, which enabled that the violation of the ownership rights of the private shareholders be continued to date.

The worrying conclusion can be inferred from the actions of the Ministry of Economy and the Ministry of Interior at Jugoremedija that in case of companies where the state is a co-owner, its representatives abuse the fact that they are at the same time a part of the executive power, using their position to exert pressure on private owners. At Jugoremedija such pressure has gone so far that business decisions made at the Shareholders’ Meetings and the Management Board in accordance with the law have become the subject of a constant police investigation. At the same time, this investigation does not cover all the members of the management bodies where such decisions were made; rather, they are exclusively directed at prominent business officials, which paralyzes the business operation of the company and discredits its business reputation to such an extent that it jeopardizes its survival. Therefore, it is very important that the Government establish the background of this constant pressure.

Only in this way will the Government eliminate the suspicion of its involvement.

Specifically, considering the fact that in 2006 it failed to investigate the existence of the collusion between the executive power and the criminal circles which enabled suspicious capital to control a pharmaceutical factory for four and half years, and especially considering the fact that the relation of the state representatives towards the private owners of Jugoremedija has not changed even after the court decisions of 2006, a conclusion can be inferred that the collusion between the executive power and the criminals has effectively remained intact. Moreover, it can be concluded that only owing to the pressure of this collusion, the Government has not taken any action in the meantime to provide equal protection of the ownership rights of all the owners and the security of contracts, which are the basic preconditions for the development of the economy and which are the basic tasks of the Government. Therefore, the Government must establish who is behind these pressures whose aim is the removal of the company’s management elected legally by the votes of the private shareholders. What is behind these actions of the state agencies which discredit the reputation of Jugoremedija and cause damage to the private shareholders and to the state? What interests motivated the state secretary at the Ministry of Economy when he presented untrue information about the situation at the company and falsely presented the private shareholders of Jugoremedija as its workers?

The professional and wider national public and the European Commission share the same attitude that curbing the collusion between the executive power and criminal circles is the most important issue in combating corruption in Serbia, which makes it indispensable that the Government examine in detail the drastic violation of the elementary rights of the private owners of Jugoremedija and inform the public of its findings within the shortest possible time. As the problem at Jugoremedija is manifested in a very dangerous way, because it threatens to fully destroy this factory with a majority private ownership, whose products are at the same time of strategic importance for Serbia, the Anti-corruption Council is going to submit all the documentation it has at its disposal to the Republic Public Prosecutor’s Office for the purpose of the initiation of an investigation and shedding light on all the circumstances in connection with this drastic case of systemic corruption which has already been going on for almost ten years.

Yours faithfully,

Council PRESIDENT

Verica Barac