Stróman

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Stróman
Informal practice commonly found in Hungary
Hungary map.png
Map of Hungary, where Stróman commonly takes place.
Hungary flag.png
Flag of Hungary.
Entry written by David Jancsics.
David Jancsics is affiliated to School of Public Affairs and Administration, Rutgers University.

Original Text: David Jancsics, School of Public Affairs and Administration, Rutgers University

Stróman is a Hungarian colloquial term used for a person who acts on behalf of a principal. The literal English meaning of stróman is scarecrow or hay-man. The word is widely used in Hungary; it is almost universally known. When it appears in everyday conversations, it often has a negative connotation because somebody’s stróman is regarded as an inferior servant who loyally follows his/her master’s orders. Moreover, there is also a common belief that the principal probably has an unethical or even illegal reason to use a stróman instead of acting by him/herself. Analogous practices exist in other countries. For example, the word strohmann is known and used in a similar way in Germany. Prestanome is the Italian version of stróman, while in Russian the words podstavnoe litso (literally ‘dummy person’), or frontirovanie (fronting) are used.

In Hungary the use of term stróman can be traced back to the pre-war years when the first (1938) and second (1939) ‘Jewish Law’ in Hungary significantly restricted the number of Jews in liberal professions, public administration, and in commercial and industrial businesses. As a result, about 90,000 Jewish people lost their jobs or businesses. Jewish owners were forced to pass their enterprises – from small shops to large corporations – to new Catholic owners, but many of them continued to control the company from behind the scenes[1]. Hungarians started to use the word stróman to refer to these visible but fake Catholic business owners. In fact, the widespread stróman system helped many Jewish families to maintain some level of income during the hostile anti-Semitic political environment of the late 1930s.

New forms of the use of stróman emerged in Hungary in the 1990s and have become a ‘normal’ phenomenon in the daily life of country’s post-socialist economy. Being a ‘paper’ owner of a company that provides fake receipts for fictitious services is the most typical role of a stróman in contemporary Hungary. Buying fake receipts from a stróman’s company is a response of entrepreneurs and many ordinary citizens to strong external constraints. For example, tax statistics indicate that more than one third of the Hungarian labour force earns only the minimum wage[2], yet in reality most of these employees are earning more, but declaring only a minimum wage. To avoid the tax burden on labour companies often force their employees to obtain fake receipts for bogus services in order to receive the part of their salary that exceeds the minimum wage.


left Description: Photograph taken in 2006 by Gergely Túry to document a stroman case in Hungary. The two homeless people depicted in this picture are László Kutrucz and László Baráth, who were CEOs of several fake companies; this fake companies were used to procure a significant amount of public funds and served as intermediaries for the Hungarian subsidiary of Siemens. The homeless CEOs' jobs was to withdraw money from the fake companies' bank accounts in order to give it back in cash to their shadow principals. This case was explored by an investigative journalist, Annett Sipos; it was later published in the Hungarian economic maganize HVG in 2006. Both Kutrucz and Baráth agreed to be photograph and they also gave permission to use their names. The article can be found: [1]Source: Gergely Túry and David Jancsics

The value-added tax rate (VAT) in Hungary is 27 percent, the highest in the world. Hungarian companies routinely buy receipts from stróman companies in order to prove false costs for fictitious service and so reduce the VAT they need to pay. It is reported that stróman company schemes – chains of deliberately created and managed fake ‘receipt factories’ (számlagyár) – exist in Hungary, in which the final receipt giver often happens to be a foreign company in Ukraine or Serbia that cannot be investigated by the Hungarian tax authority[3]. Many receipt schemes operate relatively securely because their shadow owners have good connections to political parties, to government officers and to the tax authority. Thus they are able to ‘turn off’ external controls of anti-corruption units, judicial authorities or prosecutors[4].

Stróman relations constitute a hybrid informal institution. Although a stróman is a visible and legal member of a formal organisation, they fulfill the principal’s hidden, often illegal, agenda that may significantly deviate from the official organisational goals. On the surface a stróman follows formal rules, yet he also has to violate them to obey his boss’s orders. A stróman is thus an intriguing type of actor who belongs to the formal and the informal realms at the same time, acting as a broker to connect the shadow principal with the outside world. According to a classification based on the group orientation of the actors in brokerage[5], stróman falls into the category of ‘representative broker’, who is delegated by another actor or a group to represent the group’s interest and deal with outsiders on behalf of the real boss.

There are three functions that a stróman, sometimes simultaneously, performs: (1) fall guy, (2) hidden identity, and (3) hidden ownership.

A stróman may fulfill a fall guy function that buffers risk between the outside world and his principal. Whenever a company gets involved in illicit practices such as bankruptcy fraud, tax evasion or embezzlement and when things go wrong, the stróman as the formal owner or executive of the company will be responsible for tax, salary, or mortgage debts, while the authorities cannot reach the real owner since they are not officially affiliated with the company. In this way the use of a ‘representative broker’ reduces the transaction costs derived from high-risk illegal business activities[6][7].

Another function of stróman is to keep the identity of the real actors hidden in different deals. In the case of offshore schemes or trust ownership the right of the real owner is usually guaranteed by a private contracts such as declaration of trust. Here stróman is just a trusted individual and there is not any formal relationship or contract between the fake and the real owner. The practice of some multinational companies in Hungary offers an example. In order to keep the price down, a stróman’s company is used to buy property that later will be bought and used by a foreign carmaker, bank or merchandise retailer. If a financially strong and a well-known brand negotiated directly the seller, often a local government would set a much higher price for the property. A similar stróman function can also be found in corrupt procurement cases, when tender winner principals try to hide the fact that they informally control all the subcontractors in a project. Hungarian oligarchs often use this arrangement. Here seemingly independent companies perform different works while in fact all subcontractors are run by a stróman, and ultimately every penny ends up in the principal’s pocket. This structure also allows the principal to control and manipulate the prices and resources at all levels of the project.

Principals may also use stróman when their ownership rights are limited or banned by law. For example, despite the fact that foreign citizens are prohibited from buying agricultural land in Hungary, German and Austrian farmers have bought large areas of land by using a Hungarian stróman. Public servants whose business activity is limited by law also hire stróman to run their companies. Such companies often receive big government contracts from the department where the shadow owner is in a position of power.

In most cases, there is an unequal power relationship between the stróman and the principal. Sometimes socially marginalised people, homeless or foreign refugees are chosen as company owners and CEOs. They are willing to take huge risks for a relatively small amount of compensation. It is also typical that people who are unemployed or retired ‘on paper’ are owners of several companies and the stróman’s apartment in a poor residential area is the ‘headquarters’ of dozens or even hundreds of companies. However, since the global economic crisis severely hit Hungary, and it is much harder to find good white collar jobs more and more well-educated young people are willing to take the risk and become visible but fake leaders of companies with suspicious activities. In cases when the ownership rights of the principal are limited but the company’s operation and assets are real, the shadow owner needs a reliable stróman to actually run the company. Here a socially closer stróman, such as a family member, friend, former colleague or classmate is chosen to be the visible representative of the company.

Although the stróman is usually in a subordinate position he still has some leverage with his boss. The fact that he knows a lot about the shadow principal’s illicit practices makes their relationship dynamic and complex. The actors become interdependent and capable of blackmailing each other and this provides bargaining chips in negotiations between them.

Notes

  1. Kadar, G. and Vagi, Z. 2004. Self-Financing Genocide: The Gold Train, the Becher Case and the Wealth of Hungarian Jews. New York: Central European University Press, p.63.
  2. NAV. 2013. NAV Évkönyv: Tények, információk a Nemzeti Adó- és Vámhivatal szervezetéről és annak 2012. évi tevékenységéről.
  3. Baka, F. Z. 2014. ‘Titkos zugok - A fordított áfa a NAV csődje?’ Figyelő.hu, 04 January, http://figyelo.hu/cikkek/titkos-zugok---a-forditott-afa-a-nav-csodje
  4. Jancsics, D. and Jávor, I. 2012. ‘Corrupt Governmental Networks’, International Public Management Journal, 15: 62-99
  5. Gould, R. and Fernandez, R. 1989. ‘Structures of Mediation: A Formal Approach to Brokerage in Transaction Networks’, Sociological Methodology, 19: 89–126
  6. Della Porta, D. and Vannucci, A. 2012. The Hidden Order of Corruption: An Institutional Approach. Farnham: Ashgate. p158
  7. Lambsdorff, J. G. 2007. The Institutional Economics of Corruption and Reform. New York: Cambridge University Press. p.160
[[Category:Functional]