Ensuring Payment through Caution, Muscle and Computers

Emil Kučković, executive director of LRC Inženjering says credit bureau system does not only help to creditor to collect debt, but also to debtor to pay off his debt even when he has no money.

By The Center for Investigative Reporting

Courts in Bosnia and Herzegovina (BiH) are so unreliable in helping collect debts that businessmen are coming up with their own methods, from hiring muscled persuasion to demanding payments up front.

TCM Group, a debt collection organization that does business in 155 countries, ranks BiH among Belarus, Palestine and Cuba when it comes to credit-worthiness. ‘Bosnia-Herzegovina and Belarus are the European countries where creditors can kiss their money goodbye’ a recent TCM report said.

Trying to collect payments has become a crucial concern, especially for small businesses, according to business advisor Emir Medanhodžić, owner of ProBeneFit Consulting in Sarajevo.

‘Everyone owes to everyone else’ he said. ‘They take goods without paying. The courts simply cannot adjudicate so many cases. Cases are being stretched to two, three, five years. This is a horrible problem and people are giving up on business because of it.’

Many debtors avoid paying bills by changing addresses or company names.

‘I have a full cupboard of court taxes that I cannot collect’ said Gara Šahinović, Head of the Commercial Department of the Municipal Court in Bihać. ‘I often say to a client: why are you still pursuing the lawsuit? If you’re unable to track him down for a hearing, how can you find him for a collection?’

With litigation to collect payments expensive, lengthy and highly uncertain, businessmen have found more effective means to get their money.

A Dangerous Business

Dagoja boasts that he and four employees, plus five lawyers and psychologists working under contract, collect around 70 percent of the debts clients hire him to pursue. He takes a percentage of what he collects, up to 30 percent, depending on the amount and age of the debt.

The Center for Investigative Reporting in Sarajevo (CIN) talked to four clients listed on Alfa’s web site and two said they had not yet received any money. One had been waiting over a year. Another client claimed not to know Dagoja but may have been simply hiding the fact that they used the service.

Dagoja said his employees are armed, but use only legal methods. However, he would not give CIN the names of any debtors or allow a reporter to spend a day with his collectors.

Dagoja portrays his service as a combination of business advisor, mediator and judge, more flexible than government agencies but also more nervy.

‘Our economy cannot move forward as long as I owe you, you me, this one to him and so on, do you understand?’ he said. ‘It definitely cannot.’

You Don’t Have Debts If You Don’t Give Credit

Some businessmen sidestep the issue of collecting debts by not allowing credit in the first place.

While dealing ‘from one hand to another’ can give relative security to individual businesses, it slows the cash flow, growth and employment-expanding capacity of the economy as a whole.

Borko Vrhovac, a co-owner of Bor Wood Industry, sued a delinquent client once but said he would never go to court again.

‘It doesn’t matter what evidence you’ve got, what contract’ he said. ‘It takes years of procrastination by the courts. Now I have secured myself…supplying goods only after I have received a down payment which is big enough to cover my costs.’

Kinder and Gentler Collections

The Association of Mediators in BiH was set up in 2004 with the aim of helping cut court backlogs by settling cases out of court.

Thirty-three mediators now work around the country, and since 2005 they have mediated in 625 cases, successfully resolving 320. But this is only a drop in the ocean. The Municipal Court in Sarajevo alone has a backlog of 6,513 commercial cases since July 1.

Other legal reforms aimed at speeding up cases through the courts, like setting up 16 registry courts and the new Law on Civil Procedure, have also shortened litigation delays.

‘Prior to that I was not able to solve one case, but from then on it got better. This is my experience, but there are differences depending on the court’ said Omer Abdagić, a Cazin-based lawyer.

Still, at the current pace, the judges of the Commercial Department of Sarajevo Municipal Court will need seven and a half years to adjudicate their backlog.

Slobodan Pavić, a Bosanski Novi lawyer, said that the new departments handling commercial cases were under pressure almost as soon as they were set up under a 2004 law, when it was determined that they should handle not just new cases but the 100,000 existing cases as well.

‘This is … utmost stupidity…and this was done by someone who wanted to hurt this country and economy’ said Pavić. He blames passage of the botched law on the High Judicial and Prosecutorial Council and on the Office of the High Representative. It would have been wiser to let old cases continue to move through the old procedure while speeding up new cases coming in.

Even if the courts were not buried in work and too slow, the essential problem of collecting debt remains. The courts have limited power to make debtors pay up. Entrepreneurs who end up with a favorable court decision enjoy a moral satisfaction but too often nothing concrete. And they still have to pay legal fees and court costs.

Slavko Simić, who owns the Bross Trade shoe factory in Banja Luka, has won court rulings against debtors, but still has been unable to collect cash. ‘There is a ruling saying that they have to pay and blocking their accounts. But still nothing, no money.’ In 2000, he said he carried 70,000 to 80,000 KM in his books as uncollected late payments, enough to pay for two apartments in Banja Luka. Even if he were to magically collect that money now, at today’s prices it would buy only one small apartment.

One problem is that once a ruling is granted courts have trouble serving the judgment.

‘We often cannot find a company to serve summons or complaints’ said Šahinović in the Bihać court. ‘The companies change addresses and don’t register it.’

Summons or motions can be published in newspapers as a way to reach lost firms, but collection is still difficult.

Hiding Behind the Law

A number of changes to entity business incorporation laws have ended up benefiting fraudsters. Con men can run a shell business then close it down. Once erased from the business register, its debts evaporate. Even if owners were tracked down, they would no longer be responsible for any debt larger than 2,000 KM. That is the amount of ‘founding capital’ the law requires that all new firms deposit as a condition to register.

Šahinović said, ‘they incorporate a company, get five or six good deals and then vanish into thin air.’

In many cases there is nothing left to collect damages from, said lawyer Abdagić. ‘Since 2004 I have had around 15 such rulings. Simply there is no money in the frozen account; the company has no assets…’ Once, he said, he went after a company owner’s property, but the court required him to prove fraud.

An ineffective judiciary just encourages questionable companies to cheat, said Salih Alispahić, assistant secretary of the Business Service Center from Zenica-Doboj Canton.

‘If they understood that there were agencies there to solve this, they would refrain from such crimes’ he said.

Creative Solution

Business expert Medanhodžić said other countries don’t have trouble collecting debt.

‘If you are on a collection blacklist in the USA, nobody will give you credit, or a credit card, or allow you to buy on credit. You are dead, and that is how things should be set in BiH also.’

Adnan Hrenovica, executive advisor, and Emil Kučković, executive director of LRC Inžinjering, does not use physical or psychological pressure, believing that it is ineffective.

‘So, what’s going to scare a man in Sarajevo?’ said Hrenovica. ‘A grenade will find you? Well, 1,000 bombs fell down day in and day out.’

They note that Dagoja, the official debt collector, came to them to collect money from a bank client who reneged on payment.

Credit bureaus using the same principles as their firm have helped to formally and easily collect debt in many countries, according to Adnan Hrenovica, executive advisor of LRC Inžinjering.

LRC doesn’t like using the courts. It uses a database.

In it are the records of 130,000 firms in BiH, constantly updated with new information from the Central Bank. In seven years of operation, LRC programmers have collected and merged information on customer contacts and the payment histories of other sources such as commercial banks, microcredit organizations, embassies, pension and health funds and public companies. This has given LRC the power to make debtors’ lives miserable.

For example, the executives explained, if a person were to neglect to pay a water or heating bill and then try to get a loan, a visa or to buy a car on credit, those agencies could check with LRC, learn of the person’s poor credit and deny them.

The database has helped LRC clients collect on debts ranging from 1.65 KM to over 220,000 KM. LRC has collected 9 million KM in 2007 for clients including money owed to state water and heating companies.

The system can also make life easier for debtors by allowing for bartering in cases where people want to pay debts but cannot.

Kučković said that if a debtor has no money to make good on what he owes, but does have goods or services he might sell in order to raise money, that information is sent to 4,000 firms that are potential buyers. The debtor can quickly raise money in this way.

The executives tried to interest government officials in passing a law that would make it obligatory for banks and state agencies to check on the loan histories of the individuals and companies with which they deal. But they were rebuffed.

Officials worry that this suggestion is simply a way for LRC to make more money. This might be one result, LRC officials say, but the system could also help cut the huge backlog of debt collection cases, while the government could benefit from increased collection of worker benefit contributions and utility bills.

BiH Finance Minister Dragan Vrankić did not respond to repeated requests from CIN for an interview regarding better debt collection.

‘God willing’ she added.

First published on December 24, 2007