Tunneling (fraud)

Tunneling is a colloquial for financial fraud commited by company's own management or major shareholders, consisting of illegally pumping out valuable property into their own, private firms.

A new term

The term 'tunneling' was probably first noted in this context in the Czech Republic during the first half of 1990s, when first of large, previously privatised banks and factories went bankrupt with huge debts and bank accounts virtually empty. It was discovered later that managements of such were deliberately transferring company's property and real estate into their own, private businesses, sometimes in offshore locations. The term tunneling was then subsequently used during the Asian financial crisis in the late 1990s.

Examples

Most usual scheme in Central Europe in the post-privatization era was transferring funds and property from high cash flow corporations to companies privately owned by the very same management. Transfers were done either via huge loans never planned for being payed back, massive overpaying for outsourced services or just selling corparate's real estate for a fraction of market price. Main conditions enabling such a fraud is weak law against conflict of interests, non-existant legal liability of managers for leading their employer towards bankruptcy and incompetence of financial authorities. Martin Frankel's scam is an example of tunneling. However called differently at his time.