3 Whiz Kids Take Poland's Bankers for a Costly Ride : Scandal: Art-B was a symbol of the new economic order. But its collapse shows a darker side of reform.

By CHARLES T. POWERS

Aug. 14, 1991 12 AM PT

TIMES STAFF WRITER

WARSAW — The first time most Poles heard the name of the company Art-B was last winter, when it was announced that the three young entrepreneurs who owned the firm had signed a deal to buy the entire year’s output of the huge Ursus tractor factory in Warsaw.

Since Ursus was in deep financial trouble, the news was taken as a tonic--a sign that, however messy, sluggish and crisis-ridden the transition from a state-run economy to a private one, Poland’s vibrantly energetic, hurry-up new class of youthful business wizards was emerging to show the way. Art-B, like the 7th Cavalry, was riding to the rescue.

Last month, the Warsaw daily Zycie Warszawa interviewed one of the three founders of Art-B, 28-year-old Boguslaw Bagsik, and one exchange seemed to sum up the situation.

“How was it possible,” the interviewer asked, “that a guy like you, who three years ago began by importing from Germany food, simple electronics and cheap clothing, today owns an assembly line of (Korean) Gold Star TV sets, a medical equipment factory, the chicken (processing) plant Karczew, a dairy, an edible-oil refinery, has signed a deal with Chrysler to assemble this company’s cars, wants to be the only buyer of the Ursus factory output, is the biggest importer of Argentine wines and through Art-B directs a yearly turnover of $300 million and controls companies and factories employing 30,000 people--how did it happen?”

“Everything that happens has a reason,” said Bagsik, in an elliptically philosophical manner that has now become familiar. “If I were to use a musical analogy, at the beginning of every work, there is a short theme, one or two musical sentences--just a few notes--and on the basis of this, a great symphony is created. From less than one minute, hours of music are created. So it was with Art-B.”

Or so it seemed, as recently as two weeks ago. Since then, the props have collapsed under the risers of the great symphony, and amid the continuing, dissonant crash, Bagsik and his partners have left the country, the head of Poland’s central bank has been removed from his post, seven of his deputies have been arrested and early estimates of the financial losses from Art-B’s activities range from $180 million to $300 million.

Bagsik is in Israel, relying on his Israeli passport (he also holds Polish and German passports) to stave off arrest by Polish authorities on charges of bribing bank executives in Poland. Bagsik’s highly publicized deal to buy an Israeli oil refinery, called Paz, has been canceled by Israeli authorities. (Initial awed reports, last month, had him flying to Israel, in his company’s private jet, with a $30-million cash down payment packed in a suitcase.) And the shards of Art-B have been turned over to Alexander Gawronik, a businessman from Poznan whose fortune has been based on a chain of currency exchange shops, to salvage.

“Our conscience is clear,” Bagsik, a former musician, told an Israeli newspaper Monday. One of Bagsik’s partners, Andrzej Gasiorowski, who is also in Israel, applied for citizenship there two weeks ago, according to the Israeli daily Yediot Aharonot. The newspaper reported that the men have about $14 million on deposit in Israeli banks. Both men, who are accompanied by their families, say they have no plans to return to Poland.

“In my mind and in my heart,” said Bagsik, “I have emigrated from Poland a long time ago.”

The third partner, Jerzy Pagielo, has reportedly left Poland, but his whereabouts is unknown. So far, Polish prosecutors have filed charges only against Bagsik.

In an interview with the Solidarity movement’s weekly newspaper Tygodnik Solidarnosc, Bagsik denied any wrongdoing and said the practice of piling up interest by switching money rapidly between banks, although illegal in the United States, is allowable and easy to practice in Poland.

In Bagsik’s absence, Polish authorities are trying to piece together a picture of what is easily the biggest financial scandal of the post-Communist era. Some commentators are suggesting that its cost to the Polish treasury could threaten economic reforms, adding heavily to the state’s already burdensome budget deficit.

The sketch that is emerging shows the Polish banking system in a grim light, with its sluggish, antiquated and monopolistic practices both a partner and a victim in the Art-B scam.

“There is no ‘Art-B affair,’ ” said Grazyna Taladaj, a spokeswoman for the prosecutor’s office. “The investigation concerns management of state financial resources by state-owned banks that was (not according to) regulations.”

Over the last six to eight months, the heart of the company’s operation, investigators say, centered on moving checks in large denominations, sometimes several million dollars, from one bank to another and drawing interest on the money credited to the accounts simultaneously. Allegedly, letters of credit were also issued by bankers who failed to ensure that adequate funds backed up the documents.

Until May, banks in inflation-ridden Poland paid an effective annual interest rate of 84%. Interest rates on some types of checking accounts ranged to 20% annually. At interest rates of 20%, the daily return on $25 million is $13,698. Until last month, Polish banks allowed the transfer of large sums--hundreds of thousands of dollars--without telegraphic confirmation. In short, Art-B, and its scores of subsidiary operations, appear to have figured out how to take advantage of the high interest rates and the slow processing systems of the banks to draw interest simultaneously.

With confirmation by mail taking usually at least three days, the bank on which the check was written would continue to pay interest on the money until confirmation was received. Meanwhile, the bank receiving the deposit would pay interest from the moment the deposit was made.

Art-B (short for Artistic Business) helped to speed the front end of the transaction by using helicopters to fly around the country depositing its checks. The mail confirmations, of course, were left to move slowly through the system.

The arrests of the seven banking officials, scattered across the country, suggest that the scheme could not have been carried out without the assistance of at least some bank employees.

Investigators told the newspaper Gazeta Wyborca that the scheme was “very profitable because great sums were involved and because this operation was carried out many times by Art-B.”

Bagsik has claimed that Art-B’s deposits in Polish banks were about $100 million. There has been no official confirmation of that claim, nor is there any accounting yet of the company’s liabilities.

According to records in Bielsko-Biala, in southern Poland, Art-B was registered in 1988 with a capital of 100,000 zlotys (about $10). In 1989, it showed profits of about $1,200. From that slow start, it began to take off in 1990, the first year of Poland’s economic transformation process.

After a start based on importing food products from Austria and Germany, Bagsik and his partners began banking on two features of Poland’s economic reform--its stable exchange rate for the Polish zloty, and the high rate of inflation.

Using profits from the food importing operation, they obtained letters of credit from foreign banks to import electronic gear from the Far East. The imports would be sold quickly, with proceeds going into Polish banks, where the high interest rates would produce enough to pay off the letters of credit, plus profit.

“We made money on finance, not trade,” Bagsik’s partner Gasiorowski told Newsweek. “You can’t make our kind of profits on trade.”

By the end of 1990, Art-B had established an assembly plant in Walbrzych to assemble South Korean television sets. It also opened a string of stores to sell electronics and luxury clothing.

Art-B set up a major holding company in Katowice, eventually occupying 20 rooms of a motel, and expanded into food processing, automotive parts, aviation, computers and textiles. It purchased two Soviet-made helicopters, a Canadian-built executive jet and four Czechoslovak propeller planes. The Art-B bosses also recently talked with Chrysler executives about selling (not assembling) the company’s cars in Poland.

Bagsik, who had won election to the city council in his hometown of Cieszyn, donated $2 million to the city. He was also negotiating to buy controlling interest in two city-owned factories. On Tuesday, the governor of the region told reporters he had warned the Cieszyn city authorities to exercise “great care” in their negotiations with Art-B over the sale of the factories.

He added that he had sent a memorandum to higher authorities on June 13, outlining what he called “disquieting facts” relating to the financial operations of Art-B with several banks, particularly in issuing uncovered checks and the use of state funds.

“Many bankers were very incautious,” he said, “which is clear from the fact that two bankers from this province have been detained by the prosecutor’s office.”

In interviews with the weekly Solidarity newspaper, Bagsik and Gasiorowski, in Israel, asserted their innocence, claiming to have made about 100 billion zlotys (roughly $8 million) in recent months through “legal operations of financial arbitrage.”

“We’re not crooks,” Bagsik said, “we’re financiers.”