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Tuesday, February 24, 2015

Meratel : MagicSIM or MagicSCAM?

Our Adventures with the #EstonianMafia

Like a TV reality show in its third season, it's time for something different. This time, instead of talking about the taxpayer money last, we're going to get to that first:

Whenever it starts with "The project of", you know it's going to be good.

That's right, 2,360,500 euros of taxpayer money to a company called Meratel for a "MagicSIM" project.

Ever heard of them? We haven't either. But for a company to receive this much money, they must be a big company with lots of employees, doing life-changing work.

Who is this great Meratel, with magic powers to take millions in taxpayer money? Information on their website was scarce. We had to know more. Time for a roadtrip!

Taking the Road Less Traveled

Records show Meratel is located in the Mustamäe section of Tallinn, so it was time to pay them a visit. Our first task was to figure out how to get there from our secretive lair under a bridge in central Tallinn (that's where trolls live, right?).

We decided to take a taxi, and now we were faced with a tough decision. Which taxpayer-funded taxi company should we take?

We thought of taking TaxiPal, recipient of 48,731 euros of taxpayer money, but got concerned about if they were still in business. Their founder seems to be employed as IT manager at Eesti Loto for the last four years.

Then we thought we'd try Taxify, recipient of 8,780 euros of taxpayer money, but we were worried reports of their EstonianMafia-style tactics might have rubbed off on their drivers, and we weren't in the mood for a battle.

Finally, we settled on the latest upstart in the taxi business, Pedobeartakso:

No taxpayer funding here!

Our ride arrived promptly, and the driver was nice enough to share his vodka with us on the ride over to Meratel. He did rush off rather quickly after he dropped us off though -- something about needing to head to the playground.

Our Visit to Meratel

We were overwhelmed with excitement. Finally, we get to visit the headquarters of Meratel, the recipients of millions in taxpayer money, and learn about their cutting-edge "MagicSIM" technology! Could this be the cure for cancer?

World headquarters of Meratel located within.

We rushed into the building, and headed straight for their offices... only to find the door locked and no one there:

Yes, we actually did visit their offices. And yes, this really was the highlight of our week.

How could this be? Surely a company that has received this much funding to develop the "MagicSIM" project would be operating on full throttle. We envisioned a lab full of engineers, laboring from morning until late in the night on the "MagicSIM." Instead, we got an empty office.

We quickly pulled out a copy of their annual financial reports, graciously provided to us by one of our readers (who is also big in the Estonian startup community -- see not all of you hate us!). Finally we had our answer -- according to their annual report, the company has only 5 employees! We must have showed up when all 5 of them were out for coffee.

We had to know more. Through careful research (ok, reading the fire escape plan that also shows building layout), we worked out they have approximately 100 square meters of office space. Not much for a company working with millions of euros.

Fifty Shades of EAS Auditors

Now we were a bit depressed, and not only because of the crappy weather. Our hopes were dashed. Meratel was actually a tiny company, that appears to take a lot of coffee breaks. No one was busy using "MagicSIM" to cure cancer.

So what happened? Here's our theory: Meratel is a telecom company, and a lot of the money they received from the taxpayer was used to purchase specialized telecom equipment (according to their 2013 annual report) -- over 1 million euros worth of it.

What does telecom equipment look like? There's the rub. This is all very specialized stuff, and only a few people will know what it is by looking at it.

Now, we don't know if Enterprise Estonia did an audit, but let's say they did. Here's what may have happened.

EAS Auditor (like most auditors, she's a single female in her 20's, from a small town in Estonia): Hi, I'm from EAS and I'm here to do an audit. According to my files, you spent 1 million euros to buy 20 Ericsson DSLAM-VOIP-THINGAMAJIG-2001 devices. Can you show me where those are so I can be sure you received them and are using them?

Meratel Guy (also a younger guy and somewhat handsome, as confirmed by a female we had doing surveillance near their offices, and no we're not kidding about this): Ehh yes.. of course... here they are [points to empty Aura 1-liter juice box on floor]... oh and did I mention how beautiful you are? Those thick glasses make your eyes look lovely. Where are you from?

EAS Auditor: [blushing] Oh, why thank you. No one has ever said something so nice to me like that before. I'm from Abja-Paluoja [tiny town of 2,000 people but with a local government with roughly as many staff as the entire Maltese government].

Meratel Guy: [blank stare] Yes.. Abja-Paluoja. They say the most beautiful women in Estonia come from there. Hey, let's skip this whole messy audit thing. How would you like to go have a coffee with me? We might even see the other 4 people in the company while we're there.

EAS Auditor: Sure! This audit doesn't matter anyway. At Enterprise Estonia, the goal is to give out as much money as possible, not to take it back, so the audits are mostly for show in case the European Commission catches us.

Now did it really happen this way? Probably not -- there are no beautiful women from Abja-Paluoja. What it does show is it can be difficult to audit projects where complex technology is involved, because no one really knows what an Ericsson DSLAM-VOIP-THINGAMAJIG-2001 device looks like, or even how to count them. Could it be that Meratel just bought fancy equipment, then sold it off? More on that later.

"MagicSIM" Saving the World, One Taxpayer at a Time

Who cares how they used the money though. The goal here was to develop the great "MagicSIM" and save the world, right? That project was funded back in 2011. What happened since then?

The project must have been a success, because then in 2013, Enterprise Estonia gives Meratel more money. Apparently 2.3 million euros was not enough for a 5-person company:

Throwing good money after bad?

Meratel got another 189,000 euros of taxpayer money, this time for product marketing for their "MagicSIM". We can only assume the "MagicSIM" was ready for the market, since they were ready to take taxpayer money to market it.

So let's have a look at what all this money bought, marketing-wise. Here is the only information on the great "MagicSIM":

What 189,000 euros of marketing budget gets you

Yes, that's right -- one webpage and a slogan, "Everywhere like at home" that's not even in proper English! This company is definitely going to be a winner!

Does the man in the image look familiar? He should -- it's a stock image that can be found on websites like this one, this one, this one, this one and about 100 other websites. We guess there wasn't enough money left from the 189,000 euros to pay a real photographer.

EstonianMafia at Work

In our opinion, "MagicSIM" was a big scam. Millions of euros to a tiny company, that seems to have produced little from the project.

How did they do it? It's complicated. We haven't figured it all out, but here's what we figured out so far. If you get bored easily, skip to the next section.

For the type of projects they received funding from Enterprise Estonia, there is a requirement that 50% of the funding come from other sources, and typically this funding comes from the company itself. Meratel is a small company, so it would be difficult for them to come up with funding equal to about 3 times their annual revenue at the time.

Instead, they did two things. First, they got around 970,000 euros from a Swiss company called Rudsteff. There's little information on this company, but it looks like at the time, Dimitry Ivanov was a board member at Rudsteff.

Then, they got about 5 million euros from an Estonian company Vivex. The board members are the same two board members as Meratel, plus one more: Andrey Ivanov. Notice the similarity in last names?

Vivex appears to be just a shell company, so to get the 5 million euros to give to Meratel, they got a 5 million euro, 10-year 0% loan from Optiroam, a Hong Kong company. The CEO of Optiroam is Andrey Ivanov.

That tells us how they got money into Meratel, so that Meratel could get money from Enterprise Estonia. We pieced this together by going over financial reports for the companies. How they got it out is more difficult to determine from financial reports because the level of detail isn't there. Here are the three possibilities we think are likely:
  1. Intangible assets. Meratel shows about 6 million euros on their balance sheet for "Concessions [goodwill], patents, licenses, trademarks", which is basically intellectual property. Since that is hard to value, and easy to trade, they could have purchased this from one of the other companies in their scheme as a way of getting money out of Meratel.
  2. Goods invoices for equipment. When they bought their million euros of equipment that was funded by Enterprise Estonia, they could have bought it from one of the connected companies, and either paid an inflated price (see our Publification post for how that works) or never actually received the goods in question.
  3. Giving goods away through debtor write-offs. Meratel shows about 2.8 million euros they are owed for unpaid invoices from customers. They also show 2.9 million euros in sales to China/Hong Kong, where Optiroam is located. They could provide goods to Optiroam, and never receive payment and write it off as bad debt. That amount represents 84% of Meratel's entire yearly sales.

Of course, we could be wrong about all this. Maybe Meratel is the most legitimate, honest, law-abiding company ever created. They set up this complicated structure of companies for some good reason, and "MagicSIM" is in fact a great technology used throughout the world. It's improving millions of lives and creating thousands of jobs in the Estonian economy.

It's possible, but we doubt it. It's just another "win" for the EstonianMafia of misusing taxpayer money.

Lessons Learned

Meratel, a five-person company, has received a total of 2,549,500 euros in taxpayer money. Estonia's business newspaper, Äripäev, included Meratel on a list of companies that received the most taxpayer money that year. Despite that, there was no reporting on how this was spent, nor any information on audits. Enterprise Estonia should have stringent audit requirements on all large projects, and the results of those audits should be made public.

In other news, over 20% of Estonians live in poverty. Maybe a "MagicSIM" will help?


  1. Sounds like outright stealing to me.

  2. wow, is this all public record ? Post up some pics of this guy :) lets see what he looks like.

  3. This is public information years later. You get financial reports 1,5 y later.

  4. Why didn't ee.Bubble win Bonnier prize in Estonia..?

  5. This one really looks to take the cake :) Good digging.

  6. You should be more positive. This case shows that there's no racism in EntEst - not only Estonian-Estonians are getting government freebies...Estonian-Russians also get their fair share :D

  7. I would say this is a story about Estonian Gay Maffia. :)

    Here is the main guy behind :)

    And this is his "handsome", but very stupid lover, who was put as a CEO just after the ee.Bubble blog post was published: