[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
               BALKANS OVERSIGHT I: CORRUPTION IN BOSNIA

=======================================================================

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                        INTERNATIONAL RELATIONS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                                   ON

                               __________

                           SEPTEMBER 15, 1999

                               __________

                           Serial No. 106-65

                               __________

    Printed for the use of the Committee on International Relations


                                


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                  COMMITTEE ON INTERNATIONAL RELATIONS

                 BENJAMIN A. GILMAN, New York, Chairman
WILLIAM F. GOODLING, Pennsylvania    SAM GEJDENSON, Connecticut
JAMES A. LEACH, Iowa                 TOM LANTOS, California
HENRY J. HYDE, Illinois              HOWARD L. BERMAN, California
DOUG BEREUTER, Nebraska              GARY L. ACKERMAN, New York
CHRISTOPHER H. SMITH, New Jersey     ENI F.H. FALEOMAVAEGA, American 
DAN BURTON, Indiana                      Samoa
ELTON GALLEGLY, California           MATTHEW G. MARTINEZ, California
ILEANA ROS-LEHTINEN, Florida         DONALD M. PAYNE, New Jersey
CASS BALLENGER, North Carolina       ROBERT MENENDEZ, New Jersey
DANA ROHRABACHER, California         SHERROD BROWN, Ohio
DONALD A. MANZULLO, Illinois         CYNTHIA A. McKINNEY, Georgia
EDWARD R. ROYCE, California          ALCEE L. HASTINGS, Florida
PETER T. KING, New York              PAT DANNER, Missouri
STEVE CHABOT, Ohio                   EARL F. HILLIARD, Alabama
MARSHALL ``MARK'' SANFORD, South     BRAD SHERMAN, California
    Carolina                         ROBERT WEXLER, Florida
MATT SALMON, Arizona                 STEVEN R. ROTHMAN, New Jersey
AMO HOUGHTON, New York               JIM DAVIS, Florida
TOM CAMPBELL, California             EARL POMEROY, North Dakota
JOHN M. McHUGH, New York             WILLIAM D. DELAHUNT, Massachusetts
KEVIN BRADY, Texas                   GREGORY W. MEEKS, New York
RICHARD BURR, North Carolina         BARBARA LEE, California
PAUL E. GILLMOR, Ohio                JOSEPH CROWLEY, New York
GEORGE RADANOVICH, California        JOSEPH M. HOEFFEL, Pennsylvania
JOHN COOKSEY, Louisiana
THOMAS G. TANCREDO, Colorado
                    Richard J. Garon, Chief of Staff
          Kathleen Bertelsen Moazed, Democratic Chief of Staff
            John Herzberg, Senior Professional Staff Member
                    Joan O'Donnell, Staff Associate



                            C O N T E N T S

                              ----------                              

                               WITNESSES

                                                                   Page

The Honorable Larry C. Napper, Coordinator, Support for Eastern 
  European Assistance (SEED), U.S. Department of State...........     4
Mr. Craig Buck, Mission Director for Bosnia-Herzegovina, Kosovo 
  and Montenegro, U.S. Agency for International Development......     7
Mr. David B. Dlouhy, Special Advisor, Bosnia Implementation, U.S. 
  Department of State............................................     8

                                APPENDIX

The Honorable Benjamin A. Gilman, a U.S. Representative in 
  Congress from New York and Chairman, House Committee on 
  International Relations........................................    30
The Honorable Sam Gejdenson, a U.S. Representative in Congress 
  from Connecticut...............................................    32
The Honorable George P. Radanovich, a U.S. Representative in 
  Congress from California.......................................    34
The Honorable Larry C. Napper....................................    35
Mr. Craig Buck...................................................    47
David B. Dlouhy..................................................    56



               BALKANS OVERSIGHT I: CORRUPTION IN BOSNIA

                              ----------                              


                     Wednesday, September 15, 1999

                  House of Representatives,
              Committee on International Relations,
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 10:05 a.m., in room 
2172, Rayburn House Office Building, Hon. Benjamin A. Gilman 
(Chairman of the Committee) presiding.
    Chairman Gilman. The Committee will come to order. Members 
will please take their seats.
    Today we will focus on reports of wide-scale fraud and 
corruption in Bosnia that may have led to the diversion of up 
to $1 billion in assistance to that country. Today's hearing is 
the first in a series of oversight hearings. Next week we plan 
to look at the situation in Kosovo.
    I want to thank our witnesses who are here today. We will 
say a little more about them shortly.
    On August 17th, a front page story by Chris Hedges of the 
New York Times reported that international donors to Bosnia may 
have lost $1 billion since the signing of the Dayton Peace Plan 
in late 1995. Of the $1 billion, the news article alleged that 
the U.S. share was at least $20 million. Our Members will note 
on a per capita basis, Bosnia is one of the largest recipients 
of foreign aid on Earth. The international community has 
provided over $1,000 for every man, woman and child in that 
country, totaling over $5 billion. That assistance is not an 
entitlement, and will not last for long. The purpose of the 
assistance was to help rebuild a functioning multi-ethnic state 
within the Dayton Peace Accords. We have a vested interest in 
rebuilding that government because when our job is done, the 
6,000 American men and women in the Bosnian peacekeeping force 
known as SFOR will be able to return home.
    The New York Times later corrected parts of its story, but 
the underlying fact remains that there is a serious corruption 
problem today in Bosnia. There have been subsequent reports of 
wide-scale theft and corruption involving our assistance 
programs in Russia. Clearly the Clinton Administration should 
tighten up the accountability of our foreign assistance 
programs. While the U.S. and other European donors have not 
suffered losses so great as alleged, corruption does impede 
progress toward our major goals in Bosnia. Our exit strategy 
depends upon the creation of a viable government economy 
capable of sustaining peace and stability there.
    After the New York Times published its report, I sent a 
staff team to Bosnia to investigate these allegations. They 
found that the collapse of the B-H Bank had put at risk 
approximately $2 million in U.S. taxpayer money. We hope to get 
an update on our efforts to collect those funds from the owners 
of that bank.
    Working with the anti-fraud unit of the Office of High 
Representative, our investigators also reviewed the finances of 
just one of the Bosnian Federation's 10 cantons, the Tuzla 
Canton, where U.S. forces are based. There we found vast paint 
supplies bought for schools with no heat, cars purchased at 
twice their retail price, loans given to ruling SDA party 
favorites that were never repaid, and medical supplies for over 
700,000 people, all purchased from one company run out of an 
apartment.
    In the most shocking revelation, we found that funds to 
provide gravestones for the victims at the Srebrenica Massacre 
were stolen by the canton's Prime Minister. Hundreds of 
millions of dollars were stolen in the various scams. Local 
investigators refused to prosecute, forcing the international 
community to fire the whole lot of them and replace the 
government in Tuzla.
    We also found other scams. During the war, two obscure 
Bosnian officials managed a trade agreement with Croatia that 
avoided hundreds of millions of dollars in tax revenue. The 
loss equalled 20 percent of the government's total revenue. 
That would equal the theft of $300 billion if it occurred in 
our nation. These minor officials did not act alone, and the 
investigation into this matter stretches to the highest level 
of the Bosnian Government.
    We are also concerned about the murder of Bosnia's 
crusading Deputy Interior Minister who was about to uncover 
corruption in the Promdea Bank. In addition, we heard reports 
that the Renner Company is operating a huge stolen car market 
that international officials have known about for years, and 
reports that a prominent mayor in Sanski Most built his own 
race track with foreign aid dollars.
    International officials who spoke to our staff were united 
in the view that Bosnia's current police and courts could not 
clean-up this mess. Vice President Ganic has publicly called on 
the international community to help Bosnia address its serious 
corruption problem.
    It is my opinion that we should establish an Eliott Ness-
style team of untouchable investigators and judges to clean-up 
Bosnia. It should be highly trained to try to remediate this 
mess. After spending $5 billion in Bosnia, we can well afford 
to spend a few hundred thousand dollars to help Vice President 
Ganic and other officials clean-up this problem.
    With that, I recognize our Ranking Minority Member, the 
gentleman from Connecticut, Mr. Gejdenson, for any remarks he 
may have.
    Mr. Gejdenson. Thank you very much, Mr. Chairman. I commend 
you for holding this hearing. We here are the trustees of the 
American confidence in our foreign assistance program. The 
people on this Committee in particular recognize where American 
foreign assistance has been successful in nurturing democracy, 
and if we are going to be able to continue to do that, we have 
to make sure that American dollars are spent properly.
    Some of what we see here clearly will benefit from American 
involvement. American demand for transparency and reform of the 
police, court and government systems will make improvements.
    There are some areas that, without any question in Bosnia, 
the standards that we believe in, and I think most countries 
believe in, have been met. My review is that American aid has 
had a far better record, not perfect, but far better record 
than most other nations in how they disburse assistance.
    For those of us on this Committee, I think we have to do 
more than just simply repeat charges. We have to make sure we 
get to the facts, and we have the straight facts. Accusations 
with billion or multi-million dollar numbers make great 
headlines, but they do very little to achieve the kind of 
policy changes that I know you and I both believe in.
    We have to take a look at what is real here--where the real 
problems are. In some instances, clearly what we have are 
similar problems that we faced just a short time ago in this 
country. As I understand the bank in question, the real issue 
is not that the loans were not being repaid, but that they were 
self-dealing. Members of the board lent money to family 
members.
    Well, it wasn't that long ago that we had our own banking 
crisis here. Hopefully, from what we learned in our experience 
and how dangerous that is, we will be able to effect on the 
Bosnians and others.
    So I commend you for holding this hearing. I hope that we 
focus on the facts and not just inflammatory charges, and that 
we work together to make the system better so that we can build 
American confidence in a foreign aid system that has made the 
world a better place, that has nurtured democracy on every 
corner of the globe.
    Chairman Gilman. Thank you, Mr. Gejdenson. Any other 
Members seeking recognition?
    If not, again I want to thank our witnesses. Ambassador 
Larry Napper now serves as Coordinator of Assistance to Eastern 
Europe after a long career with the State Department. After 
service with our U.S. Army, Ambassador Napper served in several 
key positions at our Embassy in Moscow, as Deputy Chief of 
Mission at our Embassy in Romania, as Director of the 
Department's Office of Soviet Union Affairs, and as Ambassador 
to Latvia. Ambassador Napper has also had a taste of life here 
on the Hill, serving as Congressional Fellow with our former 
colleague on this Committee, Lee Hamilton, in 1983 and 1984.
    Craig Buck has served as the Director of the AID Mission in 
Bosnia since its beginning in 1996. Numerous hospitals, 
schools, bridges, small businesses and community infrastructure 
projects in Bosnia bear Mr. Buck's imprimatur. He has bettered 
the lives of thousands of Bosnian citizens. Prior to his 
assignment in Bosnia, Mr. Buck served in Central Asia, in Latin 
America, and in Europe. I am told that his radio call sign is 
``opener,'' because he has opened more aid missions than anyone 
else in the agency.
    David Dlouhy has served our nation in numerous posts 
overseas, in Africa, Latin America, and in Europe. The 
recipient of three Superior Honor Awards from the State 
Department, Mr. Dlouhy has served as Special Adviser for the 
implementation of the Dayton Accord since 1997.
    Prior to that, he was Diplomat-in-Residence at the 
Thunderbird Graduate School for International Studies, where I 
understand he shared an office with former Vice President Dan 
Quayle.
    All three of our witnesses are most welcome. We will begin 
with the testimony of Ambassador Napper. You may summarize your 
statement, which will be entered in full in the record, or 
replace the full statement of your testimony, whichever you may 
deem appropriate.
    Mr. Napper.

STATEMENT OF THE HON. LARRY C. NAPPER, COORDINATOR, SUPPORT FOR 
     EASTERN EUROPEAN ASSISTANCE, U.S. DEPARTMENT OF STATE

    Mr. Napper. Thank you very much, Mr. Chairman. I thank you 
and Mr. Gejdenson for your opening statements, which we greatly 
appreciate.
    I appreciate also the recognition that you have given to 
Mr. Dlouhy and to Craig Buck. They are indeed valued colleagues 
of mine and of my office. I particularly wanted to join in your 
commendation of Craig, who is finishing his fourth year as our 
USAID Mission Director in Bosnia. He has done a terrific job. 
He is an opener. We are going to use his talents to help us 
open our operations in Kosovo. So we are going to keep Craig 
involved in the Balkan work.
    Mr. Chairman, I would like to begin by addressing very 
briefly some of the specific allegations that were made in the 
August 17th New York Times article to which you have referred. 
Then I would like to again briefly place our views about the 
problem of crime and corruption in Bosnia into the context of 
our overall policy in that country. I would like to summarize 
my statement, and if you would agree, then the full statement 
will be put in the record.
    Chairman Gilman. Without objection.
    Mr. Napper. Mr. Chairman, I want to start out by assuring 
you and this Committee that the U.S. Government and I 
personally are fully committed to the integrity of all USG 
assistance programs in Central and Eastern Europe. We employ 
strict controls against the loss or misuse of any U.S. funds in 
such programs, and when there are allegations that there may 
have been a loss or misuse of any funds in our assistance 
programs, we investigate any such allegations with great 
thoroughness.
    That is what has happened in the case of the allegations 
that were raised in the August 17th New York Times. We have 
looked into these very carefully, and I would like to give you 
an update in particular on the question of the B-H Bank in 
Sarajevo and the U.S. funds in that bank.
    This bank was one of the banks that was handling our 
business finance program in the country which makes loans 
available to private enterprises. The bank did not properly 
transfer to USAID $520,000 in repayments from these loans.
    The B-H Bank is currently under provisional administration 
by the Federation Banking Agency, and we are vigorously 
pursuing all avenues to ensure repayment of these U.S. funds.
    In addition, the U.S. dollar equivalent of $393,000 held in 
German marks in operating funds for USG agencies in Bosnia were 
frozen in the B-H Bank when it went into liquidation. Again, we 
are vigorously pursuing the full repayment of all of these 
funds.
    So, I think you can see that while there is an issue here 
with the B-H Bank, and again I want to underscore to you and 
this Committee that we will vigorously pursue the repayment of 
all these funds that were caught up in the liquidation of the 
bank or in its movement into provisional administration, there 
is no evidence of large scale misuse or loss of international 
funds on anything near the scale that was contained in the 
August 17th New York Times article. In fact, as you pointed 
out, the Times itself presented a correction to that effect on 
August 20th.
    If I might now move then to the question of our overall 
policy in Bosnia and the role of our anti-corruption and anti-
crime efforts in that policy. The U.S. has pledged just over $1 
billion to the World Bank's long-term reconstruction plan for 
Bosnia, approximately 18.5-percent of all international pledges 
within that reconstruction program. Our SEED request for Bosnia 
in Fiscal Year 2000 is $175,000.
    Now, there has been an enormous amount of progress made in 
Bosnia since the end of the war, the Dayton Accords and the 
beginning of our assistance program. Most especially, the war 
and the ethnic cleansing have been halted.
    Voters in several elections throughout Bosnia have 
increasingly begun to turn to moderates and to reject the 
radical nationalists on all sides. Returns of minorities to 
areas previously denied to them or areas involved in ethnic 
cleansing, including some of the worst areas such as Mostar and 
Prijedor, have begun to increase. Our Embassy this year 
estimates as many as 80,000 refugees may return to these areas.
    The joint institutions of the government of Bosnia-
Herzegovina have been created and are functioning more 
regularly. This was demonstrated when the government was able 
to bring off the Sarajevo Summit of the Stability Pact. The 
infrastructure reconstruction program, the program for 
reconstruction of the infrastructure that was destroyed in the 
largest conflict in Europe since the end of World War II, has 
been largely restored and completed.
    There remains a long way to go in Bosnia. The radical anti-
Dayton parties continue to impede progress and ethnic 
reconciliation. There has been little headway in privatization 
in the Bosnian economy. The party control of enterprises and 
the continued functioning of the Yugoslavia era payments 
bureaux prevents the emergence of free markets.
    Then there is the problem of crime and corruption. Crime 
and corruption, as you have pointed out, Mr. Chairman, have 
deep roots in Bosnia. There is a communist legacy in that 
country, a legacy of communist government, in which the 
government itself stole from the people and created a climate 
in which people resorted to corruption as a survival strategy.
    With this legacy, the concept of conflict of interest and 
personal ethics has been slow to gain ground. The poverty of 
Bosnia continues to create fertile ground for corruption, 
especially among poorly paid civil servants. The Balkan Wars of 
the past decade have further impoverished the region, 
undermined the legitimacy of governments, and created the chaos 
on which crime and corruption flourish.
    These historic legacies do not make the corruption problem 
hopeless, but they do underscore its difficulty, and they 
underscore the necessity for supporting and insisting upon 
reforms.
    We have put in place a broad anti-corruption effort, which 
has been implemented and will continue to be implemented in the 
future. We have made clear to Bosnians that an attack on crime 
and corruption is essential to their integration into Western 
institutions. We have warned them publicly and privately that 
corruption, if not aggressively checked, will jeopardize 
foreign assistance, drive away investors, and undermine 
Bosnia's efforts to join European and global institutions.
    We have provided assistance to a number of Bosnian partners 
who share our view of the problem of crime and corruption and 
are working to try to deal with it.
    Our assistance has been crucial to the creation of the 
Central Bank of Bosnia and to bank supervision structures in 
both the Federation and the Republika Srpska. The United States 
and the European Union have worked with the Bosnian custom 
services to increase their capabilities.
    We have worked to improve and to make more transparent the 
budget processes at canton and municipal levels so that 
ordinary citizens can participate in the budget process and can 
work to be sure that their funds are not misappropriated.
    We have worked with the OHR, the Office of the High 
Representative in Bosnia, to put in place a comprehensive anti-
corruption strategy, and the Bosnian authorities are beginning 
to act. In fact, you have mentioned the problems in Tuzla 
Canton. In fact, it is the Bosnian Federation Tax Police that 
have compiled the report on these activities in Tuzla Canton 
and are beginning to act aggressively to investigate them.
    This is our bottom line, Mr. Chairman: We only need to 
remember the horrific images of the war, the four year conflict 
in Bosnia, to recall why the U.S. Government brokered the 
Dayton Agreement and why we are firmly committed to seeing 
through the process of bringing peace and prosperity to Bosnia. 
We believe that peace and prosperity in Bosnia is vital to the 
overall stability of the Balkan region and that in turn, we 
will not be able to achieve our overall objective of a Europe 
whole and free and at peace unless Southeast Europe is part of 
that process and unless we can transform and integrate 
Southeast Europe into the broader European mainstream.
    As I pointed out, Bosnia has made progress, but it is 
essential to continue our efforts to combat crime and 
corruption as part of a coordinated strategy for reform. We 
will vigorously continue to protect the integrity of all USG 
assistance programs in Bosnia.
    Finally, Mr. Chairman, I would like to announce this 
morning that in connection with our anti-corruption efforts, 
the Administration is forming a new task force headed by 
Ambassador Robert Frowick to lead in the work on the fight 
against crime and corruption in Bosnia. Ambassador Frowick and 
his team will work with Bosnian parties and the international 
community to identify and to attack the roots of crime and 
corruption in that country.
    As you know, Ambassador Frowick is a senior American 
diplomat with extensive experience in the Balkans, having been 
the first representative of the OSCE in Bosnia, and later our 
Charge and Acting Chief of Mission in Albania.
    Ambassador Frowick will begin his work with a visit to 
Bosnia next week. While he is on the road, we will begin the 
work here of putting together the task force and setting it in 
motion.
    So, Mr. Chairman, thank you very much for allowing me to 
summarize my statement. I would like now to turn the floor to 
my colleagues.
    [The prepared statement of Mr. Napper appears in the 
appendix.]
    Chairman Gilman. Thank you, Ambassador Napper. I want to 
commend you for forming the Frowick Task Force. We look forward 
to observing it closely and working with that task force in 
trying to resolve these issues.
    Mr. Buck.

     STATEMENT OF CRAIG BUCK, MISSION DIRECTOR FOR BOSNIA-
      HERCEGOVINA, KOSOVO AND MONTENEGRO, U.S. AGENCY FOR 
                   INTERNATIONAL DEVELOPMENT

    Mr. Buck. Chairman, since the Dayton Peace Accords were 
signed, we have seen a period of very large economic growth in 
Bosnia and Herzegovina, rates of growth of over 30 percent each 
year within the Federation. While this has been largely foreign 
fueled, we have seen significant domestic investment. Our 
business development program, which makes available business 
credit and consulting services, is responsible for a large part 
of this economic growth. In fact, a study that we have done, 
two separate studies, indicate that the United States program 
is responsible for between 20 and 25 percent of the economic 
growth that Bosnia-Herzegovina has seen since the Dayton Peace 
Accords were over, or signed. We have placed 425 loans in 
private and public businesses in Bosnia and Herzegovina. We 
have put 17,000 people back to work directly, and many 
thousands more indirectly.
    The bulk of these loans are performing. They were made in a 
risky atmosphere, in an atmosphere of uncertainty, where trade 
patterns and technology had changed, and where new markets were 
beginning to emerge, but in an atmosphere in which business 
term lending was alien. But the bulk of these loans are 
performing.
    We are not, however, without problems. We have had to 
foreclose on 25 loans because the recipients have failed to 
meet all of the loan conditions and failed to remain current. 
We have other loans that are past due. We have developed a loan 
workout unit to ensure that these loans are ultimately repaid.
    To conclude, our program began in an atmosphere of 
uncertainty, yet we have protected the integrity of these 
resources and we will ensure that we will pursue all avenues to 
protect U.S. resources.
    Thank you.
    [The prepared statement of Mr. Buck appears in the 
appendix.]
    Chairman Gilman. Thank you, Mr. Buck.
    Mr. Dlouhy.

      STATEMENT OF DAVID DLOUHY, SPECIAL ADVISOR, BOSNIA 
            IMPLEMENTATION, U.S. DEPARTMENT OF STATE

    Mr. Dlouhy. Thank you, Mr. Chairman. I welcome the 
opportunity to visit with the Committee this morning to talk 
about corruption in Bosnia, and with your concurrence, I would 
like to summarize my statement.
    Chairman Gilman. Without objection.
    Mr. Dlouhy. For the past two years, Mr. Chairman, I have 
served as the United States Representative to the Steering 
Board of the Peace Implementation Council, the oversight body 
for the Dayton Peace Accords.
    Some two years ago in the Fall of 1997, the Peace 
Implementation Council, which I will refer to as the PIC, 
formally incorporated fighting corruption as an integral 
implement of the Dayton implementation process. However, while 
we discussed this critical issue, it is important to keep in 
mind that it has not prevented recent positive developments in 
Bosnia related to refugee returns.
    As the Committee is aware, some two million Bosnians were 
displaced by the horrific war there. Today, some four years 
later, 1.2 million Bosnians remain displaced. This includes 
836,000 internally displaced persons, and about 450,000 outside 
of Bosnia.
    By way of comparison, on April 20th of this year, there 
were 1.4 million displaced persons in Kosovo. Today we estimate 
there are about 100,000. While the situation in Kosovo has 
improved in terms of refugee return, this problem remains the 
number one issue in Bosnia. Up to now, we have seen marginal 
progress.
    However, while the war was being fought in Kosovo, 
something significant seems to have happened in Bosnia this 
summer. In the first eight months of this year, in fact, SFOR 
has announced that minority returns are running 65 percent 
higher than last year. The number of minority returns this year 
who have registered with UNHCR is 10,000, and when one adds 
unregistered returns, the number is about 40,000. These returns 
include about 5,000 Serbs who have returned to Drvar in the 
Federation. If this war was fought by nationalists for a 
separate homeland for Serbs who oppose Bosnia's independence 
from Yugoslavia, the action by the Serbs returning to Drvar has 
shown that home and not a homeland is what matters most.
    In the Republika Srpska, Bosnian families are returning to 
Prijedor in the west and to Gacko and Nevesinje in the east. 
Just yesterday, Mr. Chairman, 30 Bosnian families, totaling 87 
people, returned to Pale. Croats account for 25 percent of all 
minority returns, and they are going back to central Bosnia.
    Undeniably, however, barriers to minority returns remain 
and corruption plays a role in that. That is one reason why we 
have been working for the past two years, through the vehicle 
of the Peace Implementation Council as well as bilaterally, to 
address it.
    The 4,000 pages of documentation on corruption in the Tuzla 
Canton case, produced by local Bosnian authorities and referred 
to in the August 17th New York Times article, is an encouraging 
result of our efforts over the past two years to push the 
Bosnians themselves to develop the political will to fight this 
issue, and to help them develop the institutional capability to 
do so.
    Corruption is undeniably a fact in Bosnia, a country 
ravaged by war during which corruption flourished and burdened 
with well-entrenched vestiges of a communist economic system 
and mindset. Not surprisingly, democratic concepts of 
accountability to the public and transparency are not yet 
second nature to most Bosnians.
    Moreover, during the war, the nationalist parties took 
advantage of the breakdown in government structure to gain 
control of large parts of the Bosnian economy. This economic 
power enabled, and continues to enable, the large mono-ethnic 
parties to sustain their party apparatus and exert their 
influence at all levels of society.
    I would like to say a few words about the anti-fraud unit 
in the Office of the High Representative. Public recognition of 
this extensive corruption began during 1997, with a number of 
reports released by the European Commission's Customs and 
Fiscal Assistance Office. It was concern about corruption and 
its potential effect on assistance funds that pushed the PIC in 
the Fall of 1997 to highlight the problem of corruption and 
endorse the establishment of an anti-fraud unit.
    Specifically, at the Bonn Ministerial meeting in December 
of 1997, the PIC endorsed the establishment of the anti-fraud 
unit. I would like to quote from that document: ``The Council 
is deeply concerned by the potential for corruption and 
diversion of funds for unauthorized purposes as outlined in the 
two reports submitted by the European Commission's Customs and 
Fiscal Assistance Office. Corrective measures must be taken 
against corruption. Foreign aid must not be a substitute for 
diverted state resources. Donors have to protect their 
assistance funds from possible misuse as well as having to 
compensate for misappropriation.''
    In December 1998, the Madrid PIC again spoke out against 
corruption. In December 1997, the anti-fraud unit came into 
operation, and following the securement of personnel, the unit 
was fully operational by the Fall of 1998. In February of this 
year, the unit issued a comprehensive anti-corruption strategy, 
which was approved in March by the Steering Board of the Peace 
Implementation Council.
    A copy of that report can be provided to the Committee.
    To compliment this case-specific approach, the anti-fraud 
unit is also working on systemic changes. This second track has 
identified four strategic pillars to fight corruption in 
Bosnia: Eliminating opportunities; transparency and reporting; 
control and penalty; and education and awareness. It was in the 
context of this fourth pillar, public awareness, that the New 
York Times was invited to a briefing at the anti-fraud unit to 
discuss the results of the first large-scale Bosnian 
investigation of public corruption in Tuzla Canton.
    Keying off these strategic pillars, the anti-fraud unit is 
working on four other areas: Public revenue; rule of law; 
institution building; and public education.
    In addition to being one of the proponents of the creation 
of the anti-fraud unit, the United States is also working 
bilaterally through the Department of Treasury on budget and 
taxation reform, banking privatization, and reform of the 
payments bureaux.
    As a counterpart to the anti-fraud anti-corruption 
strategy, the Peace Implementation Council also mandated a 
judicial reform strategy to compliment the anti-fraud strategy. 
Not surprisingly, the judicial sector in Bosnia suffered 
tremendously from the war and is saddled by the habits of the 
communist past. Close party control of the budgets of, and 
appointments to, the judiciary crippled efforts to render 
justice. Both the anti-corruption and anti-fraud strategy 
documents mandated by the PIC form the basis for our 
operational efforts.
    Finally, on another area with regard to police, which is 
another component of the overall anti-corruption efforts, the 
IPTF has been at the core of our efforts in Bosnia. The 
International Police Task Force has focused its efforts on the 
restructuring, retraining and democratization of the police 
force, whose pre-Dayton role had been to maintain control on 
behalf of an authoritarian regime. The United States continues 
to assist vigorously in all aspects of police reform through 
various U.S. Government programs, and training has been under 
way in both entities since 1996. All of these efforts must be 
continued. They seem to be bearing fruit, though significant 
challenges lie ahead.
    As a result of the police investigations, indictments for 
corruption are expected to be handed down very soon for Tuzla 
Canton Prime Minister, Hazim Vikalo. Directly related, Tuzla 
Minister of Interior Ferid Hodzic has been removed by the High 
Representative for attempting to block the investigation into 
corruption in Tuzla Canton. He is expected to be indicted as 
well. Police in the Federation and RS also have begun 
cooperating on stolen vehicle investigations and in dealing 
with organized crime, such as the joint effort which closed the 
Otoka Market in Una Sana Canton. Police in Stolac arrested the 
head of the Renner Market, and investigations there are 
continuing. This a particularly salient case, as the 
disappearance following the arrest of the principal accused 
seems to encapsulate the problem confronting Bosnia on links 
between political officials, Mafia members, politically 
intimidated corrupt judges, insufficient domestic law 
enforcement capacity and overall lack of political will.
    Besides working multilaterally through the Office of the 
High Representative of the United States, the Embassy in Bosnia 
has been actively engaged in diplomatic efforts to generate 
political will to fight corruption. Since August 1998, we have 
deployed a full-time officer to the Embassy to coordinate with 
the international community's efforts on corruption in 
conjunction with SFOR. As recently as June 2nd of this year, 
the Embassy issued a press statement criticizing President 
Izetbegovic for downplaying the seriousness of the corruption 
problem.
    In sum, the problem of corruption is undeniably one of the 
prime obstacles to achieving the goals set forth in Dayton, and 
that is why we have made fighting corruption a central focus of 
Dayton implementation and will continue to do so.
    Mr. Chairman, I thank you for the opportunity to discuss 
with you this problem of corruption in Bosnia, because the 
public recognition and discussion of the problem, both 
internationally and by the Bosnian people, is one of the most 
important steps in the battle against corruption. In this type 
of discourse, the press coverage and publicity that will flow 
from this Committee's attention to the problem will gradually 
encourage Bosnian society to develop into a true democracy 
where rule of law and not rule of nationalist party politics 
reigns. For this to happen, we hope that all Bosnian officials 
will see corruption as a major threat to the integrity of their 
country.
    Thank you.
    [The prepared statement of Mr. David B. Dlouhy appears in 
the appendix.]
    Chairman Gilman. Again, I thank our participants today. 
This is a serious problem for us as we address future funding 
for this region. The military implementation of the Dayton 
Accords was completed within months of its signing. The civil 
implementation of the Accords has languished now almost four 
years since its beginning. One of the keys to getting out of 
Bosnia is a strong economy, yet communist era institutions like 
the payments bureaux still remain, scaring off potential 
investors. While the abolition of the payments bureaux has been 
promised, it has not happened. The ruling ethnic parties in 
Bosnia will not let go of the power the bureaux gives them.
    Should Congress condition further assistance to Bosnia on 
the elimination of such communist era institutions? I address 
that to all of the panelists. Ambassador Napper?
    Mr. Napper. Mr. Chairman, first of all I think I misspoke 
in my statement. I said that the President's request for Fiscal 
Year 2000 for Bosnia is, I think I said $175,000. I meant $175 
million.
    The payments bureaux do, in fact, represent a major 
impediment to the development of a genuine market economy in 
Bosnia, and we have worked hard with the IMF and the other 
international financial institutions to develop a substitute 
for the payments bureaux.
    There has to be a banking system in place that is a 
reliable banking system so that when the payments bureaux are 
eliminated, there is in fact an alternative to the role that 
they play.
    So, yes, we will continue to push and to press for the 
elimination of the payments bureaux in an orderly fashion over 
time so that their function can be assumed by a modern, genuine 
banking system.
    As to conditioning assistance, we do condition our 
assistance in the sense that we work with the parties on the 
ground in Bosnia who share our values and our commitment to 
Dayton and our commitment also to the building of a market 
economy in that country.
    We deny assistance to those parties, and individuals and 
entities in Bosnia who do not share those objectives and 
concerns. So we do make every effort as we go along to 
condition our assistance on that convergence of our objectives 
with those of the parties with whom we are working.
    Chairman Gilman. I believe our other panelists wanted to 
comment on that question. Mr. Buck?
    Mr. Buck. I will talk about the payments bureaux for a 
minute. We have an agreement with the government of the 
Federation and with the government of the Republika Srpska that 
the payments bureaux will be eliminated by the end of December 
of the Year 2000. This is a very complex issue.
    Chairman Gilman. That is over a year away.
    Mr. Buck. There are a number of functions that the payments 
bureaux perform that must be orderly transferred to other 
government entities or to the private sector.
    For example, they perform tax collection and tax 
determination for all enterprises. We need to establish a 
separate mechanism so that people can have their taxes 
accurately determined and paid.
    Second, they collect government statistics. We need to move 
that function to another agency.
    Third, they function as the government treasury. We need to 
establish government treasury functions, not only in the state, 
but in the two entities. As Ambassador Napper mentioned, we 
need to ensure that banks can orderly transfer funds within 
banks and between banks, and we do have a comprehensive, 
internationally endorsed effort to totally eliminate the 
payments bureaux function by the end of next year.
    Chairman Gilman. It sounds like a good plan, but I hope you 
can accelerate it to make it less than a year away. With an 
institution creating so many problems, with millions of dollars 
at stake, it seems to me it needs a better expedited process.
    Did you want to comment, Mr. Dlouhy?
    Mr. Dlouhy. Mr. Chairman, the Peace Implementation Council 
has identified the payments bureaux as one of the key 
impediments of privatization in Bosnia, and there is an 
extensive plan laid out in the December Madrid Ministerial 
statement that forms the script for the plan that Mr. Buck is 
referring to.
    It is noteworthy that in both Croatia and Slovenia the 
payments system, which is a vestige of the former Yugoslavia 
system, still functions. The problem in Bosnia is that the 
three ethnic groups have maintained control of the payments 
system for their own purposes. Whereas the system seems not to 
have been an impediment to privatization in Slovenia, it is in 
Bosnia.
    Chairman Gilman. As it is, as you say, a key impediment, 
again, I think more attention is needed to the removal of this 
institution and the replacement of it.
    Our government placed heavy reliance on the success of the 
Bosnian businessman, Mr. Mirsad Delimustafic. This man is the 
son of one of Bosnia's top arms merchants and established a 
bank called B-H Bank that both USAID and the U.S. Treasury used 
extensively.
    Mr. Buck, it is my understanding that your staff discovered 
problems with that bank and foreclosed USAID-funded loans 
there. Rumors of that action got out and started a run on the 
bank. It is my understanding that some USAID loan proceeds have 
not been repaid by this bank, and that the U.S. Treasury is 
also out some $400,000 with the collapse of that bank.
    Can you tell us a little more about this businessman's 
links to the Bosnian Government?
    Mr. Buck. Mr. Chairman, I am not aware of his links to the 
government itself.
    Chairman Gilman. You have no information about that?
    Mr. Buck. Correct. I have no information. I know that 
members of his family were--.
    Chairman Gilman. Isn't he the son of a top arms merchant in 
Bosnia?
    Mr. Buck. I know that one of the five brothers was a 
minister in the government at the time that the war started. I 
am not familiar with other ties to the government officials.
    Chairman Gilman. Do other panelists have any information?
    Mr. Napper. There probably are, Mr. Chairman, some links 
between this individual and people within the Bosnian 
Government. I think what we would like to focus on is the 
recovery of these U.S. Government funds. They are the funds to 
which I referred in my statement. We, as I said, are using 
every appropriate means to recover these funds, including 
through the legal system in Bosnia and through the process of 
foreclosure rules as they exist in Bosnia. We will use our 
contacts with the Bosnian Government in that regard.
    So I am not saying that these individuals' links to the 
government may not exist. What I am saying--is the question for 
us is what do we do about it--and what we do about it is, in 
the first instance, see to the recovery of our funds. I can 
assure you today we are doing that, and will continue to do it.
    Chairman Gilman. How much in funds are involved in this 
bank?
    Mr. Napper. Just short of $1 million. The figures that I 
went over with you a few minutes ago are as follows: In USAID 
funds, transfers from repayments of loans, $520,000, and then 
$393,000 in USG funds for the functioning of our various USG 
organizations, the Embassies, the aid mission in Bosnia.
    Chairman Gilman. What are the prospects of recovering any 
of those funds?
    Mr. Napper. Well, we have a legal judgment saying that 
these funds are to be remitted from the bank to us. The bank is 
in provisional administration by the Federation authorities 
right now. We certainly will make every effort to recover these 
funds. We are committed to doing so. I am very hopeful and 
indeed optimistic we will be able to do so, but we are not in a 
position to guarantee that to you this morning, Mr. Chairman.
    Chairman Gilman. I have one other question. Our armed 
forces in Bosnia are based around the city of Tuzla. It is my 
understanding the Prime Minister of Tuzla, Mr. Vikalo, his 
interior minister and prosecutors all were involved in scams to 
steal hundreds of millions of dollars from the government, 
scams that I described in my opening statement, which included 
massive paint purchases for schools with no heat and stealing 
funds from massacre victims. I understand these corruption 
allegations totaling $700 million came to light from the work 
of one brave Bosnian policeman, Officer Osman Osmanovic. This 
policeman has been threatened and no longer works on matters in 
his home city.
    The international community should support the creation of 
Bosnian ``Untouchables'' like Chicago's federal agents of the 
depression to support officers like this. Should Congress 
earmark funds for a Bosnian ``Untouchables'' police corruption 
unit?
    Mr. Napper. Well, Mr. Chairman, we will look into that as a 
possibility. I mean, we see your idea and we will certainly 
give it every consideration, and Ambassador Frowick and his 
task force that have been called in to look into this ought to 
give this idea very serious consideration.
    It is worth noting in the Tuzla case that, as you point 
out, it was the Federation financial police who did the most 
work on this case and who compiled this 4,000 page document, as 
Mr. Dlouhy has said, detailing these allegations. In fact, I 
think one of the most encouraging things to come out of this 
whole episode is that one now sees that the Bosnians themselves 
are beginning to develop the capability to do precisely what 
you want, which is to go after large-scale graft and 
corruption, even at the top. We do hope to see the indictments 
of these individuals in the Tuzla Canton who are responsible 
for this corruption.
    David, do you want to add anything to that?
    Chairman Gilman. You are going to have to find a way to 
protect these kinds of officers that come forward, since he has 
been threatened and had to leave the community.
    Mr. Dlouhy. Mr. Chairman, in conjunction with the 
restructuring and reform of the payments bureaux, there is a 
general review under way of what the structure ought to be for 
this type of function for the police. Currently there are 141 
financial police in the Federation and approximately 100 
judicial police.
    One of the things that Ambassador Frowick could provide to 
the Committee afterwards is some view on what the proper role 
of those two institutions ought to be in a new alignment. That 
is currently being looked at. But I couldn't agree with you 
more that we need more people like Osman Osmanovic to get to 
the bottom of what has been going on. I think we need to help 
him personally and help his colleagues who are trying to do so.
    Chairman Gilman. Mr. Gejdenson.
    Mr. Gejdenson. Mr. Chairman, I am a little confused here. I 
have heard so many numbers this morning, maybe others are 
better at keeping up with it. Let me start at ground zero. How 
much American money is missing? What is the total dollar amount 
that American taxpayers gave to the government of the United 
States that we sent over there to help that is now in question? 
Is it $1 billion? Is it $700 million? Is it $200 million? How 
much is it? What is the total? In every category, whether it is 
a bad loan that has not been paid off, or money that 
disappeared because they paid twice what they should have for 
paint?
    Mr. Napper. Mr. Gejdenson, the figures that I have and that 
we are working with are as follows. Again, as I said earlier, 
we are talking about just short of $1 million: $520,000 in 
repayments from loans that were not properly remitted by the 
bank to USAID, and then $393,000 in USG operating funds.
    Mr. Gejdenson. That is right. So the total of American 
taxpayer money that is in question is $913,000, is that 
correct? I wasn't a math major. The money in question, whether 
in bad loans or losses in operating expenses, is $913,000, yes 
or no?
    Mr. Napper. $913,000 in these two categories. There are 
also a number of loans, as Craig Buck has pointed out, made in 
the Bosnia business loan program, which are not current, which 
is a different category in the sense--.
    Mr. Gejdenson. Not current means they are not being paid 
back?
    Mr. Napper. Exactly.
    Mr. Gejdenson. How much is that?
    Mr. Buck. The 25 loans that are in foreclosure amount to 
$11.6 million.
    Mr. Gejdenson. That is $11.6 million.
    Mr. Buck. Right. I point out those are fully collateralized 
and we expect to collect these funds.
    Mr. Gejdenson. That is a normal banking transaction. These 
loans represent a percentage that is consistent with normal 
banking practices, that if you made these loans in an 
economically similar situation, it is not 100 percent of the 
loans that fail, these 25 in question.
    Mr. Buck. That is correct, 25 out of a total of 425 loans.
    Mr. Gejdenson. It is 25 out of 400 loans.
    Mr. Napper. 425, Mr. Gejdenson.
    Mr. Gejdenson. 425 loans. You think that is totally 
collateralized. We are going to get that money back?
    Mr. Buck. I think we will collect a substantial amount.
    Mr. Gejdenson. We are back to my other figure. So there is 
$913,000 that is in real question.
    Mr. Napper. Yes.
    Mr. Gejdenson. That isn't because somebody made a mistake 
with the loan. That has happened here too on a couple of 
occasions.
    Now, of the $520,000, that is at the bank in question, B-I 
something?
    Mr. Napper. Yes, this is the B-H Bank.
    Mr. Gejdenson. This $520,000, these are loans that were 
given out to board members' relatives, is that correct?
    Mr. Buck. No, sir. These were loans that were made to 15 
separate companies for which there was no question about the 
legitimacy of these loans. These were loans, repayments made to 
the B-H Bank, that B-H Bank failed to remit to our loan 
repayment account. In other words, it kept them aside.
    Mr. Gejdenson. So the companies that the money was lent to 
were legitimate loans made under legitimate banking practices. 
The bank itself then put the money in some other account?
    Mr. Buck. It retained it in its own account, correct.
    Mr. Gejdenson. Where is that money today? There was then a 
run on the bank when you guys complained.
    Mr. Buck. That money remains as part of the assets of B-H 
Bank that we have a court judgment that they must return.
    Mr. Gejdenson. Are there sufficient assets to pay back the 
$520,000?
    Mr. Buck. There is a provisional administrator assigned by 
the Federation Banking Agency to deal with the problem of B-H 
Bank. Whether it is liquidated, whether it is recapitalized, 
whether somebody puts an investment in it, we don't know how 
that will end up. On the 24th of September, the provisional 
administrator may make a decision as to what the next steps in 
this will be, whether they close it out and pay the creditors.
    Mr. Gejdenson. Let's start out with they close it out. If 
they close it out, how many cents on the dollar do you think 
you will get?
    Mr. Buck. In a discussion with the provisional 
administrator, he indicated that if the bank were closed out 
immediately, people would get perhaps 40 cents on the dollar.
    Mr. Gejdenson. Forty cents on the dollar.
    Mr. Buck. The bank, according to the administrator, is 
technically solvent, but illiquid. There is the possibility, 
according to the administrator, that if we were to wait for 
some period of time, the assets that the bank has could be sold 
off or could be applied to the bank and people would get paid 
off 100 cents on the dollar.
    Mr. Gejdenson. So that leaves us somewhere between, if your 
estimates are correct, that the worst case scenario is a total 
of somewhere around $600,000, to possibly down to $393,000.
    Now, what is the $393,000?
    Mr. Napper. Mr. Gejdenson, when our Embassies or aid 
mission, or other USG organizations have to have cash in order 
to operate, what happens is our regional financial management 
center in Paris transfers to local banks all over Europe the 
cash that is necessary to conduct operations. What has happened 
is that this B-H bank was used for that purpose. When they 
transferred these operating funds into the bank, they got 
caught up in this freeze-up in the liquidation process.
    Mr. Gejdenson. This is the same bank?
    Mr. Napper. Yes.
    Mr. Gejdenson. Basically you are telling me that the only 
problem with American taxpayer dollars is the dealings in this 
one bank, and that looks like an outside liability--if you look 
at the outside liability, you would get 40 cents on the dollar.
    Mr. Napper. Yes.
    Mr. Gejdenson. So you are really closer somewhere around 
half a million dollar liability that we should be worried about 
here, which is something we ought to worry about. American 
taxpayers work hard to get us that portion of the money.
    All right, so the American liability in what you consider 
to be in your professional estimate is a half million dollar 
liability.
    Now, my friend the Chairman here goes on to talk about $700 
million worth of missing money or stolen money that you say the 
Bosnians took some action on their own in that area, and the 
New York Times talks about $1 billion. Where is the $1 billion? 
Even if you take the original estimate, you are only talking 
about less than $1 million, which is a lot of money, of 
American money. But where is the rest of the $1 billion?
    Chairman Gilman. If the gentleman will yield, let me just 
recite what the New York Times reporter said.
    Mr. Gejdenson. Mr. Chairman, if I could reclaim my time--
Mr. Chairman, I let you go. You can cut me off if you want. You 
had a long time to ask your questions. I want to see if I can 
get from my simple point of view an answer from these three 
gentleman. I would love to have a conversation with you as soon 
as I get that.
    Chairman Gilman. The gentleman is focusing now only on the 
potential loss of our dollars. You are forgetting the rest of 
the problem.
    Mr. Gejdenson. Mr. Chairman, I am happy to have that 
discussion. I didn't try to interrupt you. I got very confused, 
frankly, with all the numbers that are out there. I have tried 
to deal with the American problem first. That is my first job 
as an American Member of Congress. We now recognize that it is 
somewhere between a half a million and $913,000, if these 
gentleman are correct. Now I have asked them how do we get from 
$913,000, worst case scenario, to $1 billion. I was waiting for 
their answer.
    Mr. Napper. Let me ask Mr. Dlouhy to address that question.
    Mr. Dlouhy. Mr. Gejdenson, the $1 billion number is 
impressionistic.
    Mr. Gejdenson. What does that mean?
    Mr. Dlouhy. It means there are no hard numbers that one can 
add up to come up with that number.
    Mr. Gejdenson. What are the hard numbers in theft? I 
understand from my staff that in some cases we found that first 
the Germans trained their police and then the French trained 
their police, and then the U.N. trained their police. That is 
stupid, but that is not theft. We should stop stupidity. I want 
to know how much of the $1 billion, which is a frightening 
number, is theft?
    Mr. Dlouhy. The short answer to your question, Mr. 
Gejdenson, is we don't know. The number that was used was 
mixing up an estimate of loss of domestically generated revenue 
with international--.
    Mr. Gejdenson. That means that taxes that weren't 
collected, the people who avoided or cheated their government.
    Mr. Dlouhy. Both, money that was collected and ripped off, 
and money that was not collected through fraud.
    Mr. Gejdenson. How much is that?
    Mr. Dlouhy. There is no hard number. In the Tuzla case, 
they were trying to put a number on the things that the 
Chairman enumerated, the paint, the medical supplies, the 
gravestones, which is outrageous, and they were trying to come 
up with some number. I think that was the process in which they 
started adding up numbers, and they got up to about $700 
million equivalent in local currency. But that is an 
impressionistic number. But you think it is in the ball park, 
and it is something the Bosnians need to deal with.
    Mr. Gejdenson. Mr. Chairman, I would be happy to hear your 
spin on it now.
    Chairman Gilman. Mr. Dlouhy, it is not my spin. The New 
York Times reported that the Federation financial police report 
documented waste, fraud and mismanagement of funds of more than 
$200 million in 1997 and 1998 on purchasing huge quantities of 
material that was not needed and misappropriated. The 
Federation financial police report also implies an additional 
estimated amount of $300,000 in other spending, subject to 
auditors' challenges. Then the report goes on that an 
additional $200 million in internally generated revenue was 
collected but does not appear in the budget.
    So it all adds up to close to $1 billion, based on these 
figures. But that comes out of money for the Bosnian 
government. When it comes out of money for the Bosnian 
government, it is not just our money that is immediately not 
resolved, but we are also now facing a government with hollow 
finances that someone is going to have to meet in order to keep 
the Bosnian government afloat. That is why we are concerned, 
not only about the American loss, but also about the loss to 
the Bosnian government. If we don't have the Bosnian government 
stable, it means our troops are going to be committed there for 
a longer period of time than we would like to see.
    Mr. Napper. Mr. Chairman, I agree with that analysis, and I 
agree with Mr. Gejdenson's point that we have two tasks here. 
The first task is to see to--the best possible way that we 
can--to the protection of the U.S. taxpayers' funds, and we are 
doing that. Then the second task is to deal with the overall 
problem of crime and corruption in Bosnian society, which you 
both pointed to as being absolutely important. So we take both 
tasks with absolute seriousness and we will do our dead level 
best to continue the work and to improve it with the Bosnians 
on both counts.
    Chairman Gilman. Mr. Cooksey.
    Mr. Cooksey. Thank you, Mr. Chairman. In reviewing your 
resumes, your CV's, I have found some evidence that concerns me 
about the possibility of either a coincidence or a conspiracy. 
You are all three Texans. Is that a conspiracy on the part of 
the State of Texas?
    Mr. Dlouhy. We made a commitment when we came up here not 
to talk Texan to you.
    Mr. Napper. Not only that, but Mr. Buck and I are from 
Texas A&M University.
    Mr. Dlouhy. I will not have anything to do with them.
    Mr. Cooksey. I have one of my degrees from the University 
of Texas and was at an alumni function this week.
    Mr. Napper, you referred to the communist era payments 
bureaux. Will you explain that to me? I am not familiar with 
that.
    Mr. Napper. The payments bureaux are essentially a way, in 
the former Yugoslavia and in many other communist countries, to 
control the economy by controlling the flow of cash in the 
economy. For instance, if you have an enterprise, if you have a 
hotel, that enterprise has to every night take the full cash on 
hand revenues to the payments bureaux where it is then taken, 
secured, and they go back the next day to get operating cash. 
It is the equivalent of a bank, but it is not a bank doing it, 
it is the government. So it gives, as Mr. Dlouhy pointed out, 
that payments bureaux an opportunity not only to control 
enterprises, but also to rip-off, to take a slice off the top 
of whatever is collected.
    Mr. Cooksey. Has this continued in some of these former 
communist governments since the end of the Cold War?
    Mr. Napper. It has continued in some cases, and with 
particularly pernicious consequences in Bosnia, which is why we 
are trying to get rid of the payments bureaux at the earliest 
possible time. The problem is that you can't overnight decree 
that they are to go out of business, because some entity, if it 
is not the payments bureaux, then the banking system, has to 
control or has to provide cash management services in the 
economy. So you have got to have a functioning banking system 
to take over as the payments bureaux are eliminated.
    Mr. Cooksey. What are the responsibilities of the OHR that 
you alluded to, and what is its role?
    Mr. Napper. The OHR is the international community's 
principal administrator in Bosnia, and I think Mr. Dlouhy is 
our resident expert on the OHR.
    Mr. Dlouhy. Mr. Cooksey, annex 10 of the Dayton Peace 
Agreement established the Office of the High Representative. 
The High Representative then created an institution. It is 
unique. It is a stand-alone international organization not 
related to any other. It is created by the treaty signatories 
and supported by them. The international community selects an 
international person to be its chief representative, and 
seconds personnel to his office. It now consists of about 700 
people with headquarters in Sarajevo and regional offices 
throughout Bosnia. It is the chief institution for implementing 
the Dayton Peace Treaty.
    Mr. Cooksey. Good. Another question, does anyone have the 
number about the total amount of U.S. taxpayer dollars which 
have been put into Bosnia military USAID, and the whole term 
foreign aid? Just a quick, brief answer?
    Mr. Napper. Our contribution on the civilian reconstruction 
side is roughly a billion dollars.
    Just over a billion dollars from 1996 to 1999.
    Mr. Cooksey. Did you say civilian construction?
    Mr. Napper. In other words, the civilian side. I don't have 
with me the cost of the SFOR commitment. We could try to get 
that for you, but that is a matter that the Pentagon would have 
to supply.
    Mr. Cooksey. That would be interesting to know. My question 
is directed toward the success or failure of the banks in 
Bosnia. How many banks have started in Bosnia since they 
started all over, and how many are still functioning?
    The second question along those lines--is there a firewall 
between their banks and their government, because I know that 
in some of these former communist countries, the old communists 
have managed to move into the government structure and have 
created chaos in some of these other countries. Is there a 
firewall between government and business?
    Mr. Napper. Mr. Buck lived with this for four years, and is 
in a good position to answer that question.
    Mr. Buck. When the Dayton Peace Accords were signed, there 
were 59 banks in the Federation, far more than that economy 
could sustain. The banks are going through a process of 
consolidation and privitization. There are now around 50 banks 
because a number of them have had their licenses revoked. 
Within the next 12 months we will probably see this number go 
down to perhaps 20 to 25, as banks have to meet new capital 
requirements of 5 million Deutschemarks in capital and as 
government banks are privatized.
    Within our own business lending program at one point, we 
had a total of 33 banks that were qualified as agents. As we 
began to see problems emerge, as banks began to do things as B-
H Bank has done, we have tightened up the qualification 
requirements, and we have reviewed all of them. We are now down 
to 19 banks that serve as agents.
    Mr. Cooksey. That is good to know.
    I still don't know the answer about the conspiracy. Thank 
you, Mr. Chairman.
    Mr. Crowley. Thank you, Mr. Chairman.
    Ambassador, could you restate the amount you gave in terms 
of the civilian side?
    Mr. Napper. Yes, just over a billion dollars.
    Mr. Crowley. OK, just over a billion dollars.
    So roughly--well, really a very small percentage at this 
point in time in terms of using Mr. Gejdenson's analysis.
    Mr. Napper. If you use Mr. Gejdenson's analysis, you are 
right. It is infinitesimal when you compare the two.
    Mr. Crowley. I look at U.S. aid and investment abroad, 
particularly in countries or regions like Bosnia, as 
investments by the American people to ensure the growth of 
democracy. That investment comes with some risk, sometimes 
considerable risk. Not to minimize or diminish the loss of U.S. 
taxpayer dollars in those regions, can you give me an 
assessment overall in terms of maybe similar--that you may be 
aware of--investments that we have made around the world in 
terms of loss or theft of American dollars? What would be your 
perception of this particular type of loss of U.S. investment?
    Mr. Napper. I think Mr. Crowley, we talked here about a 
rate of nonpayment of loans made in a business environment like 
that, I would say in some cases in Central and Northern Europe 
and Poland and the Baltics, where I served, the nonpayment from 
USAID lending institutions is considerably less than that. In 
other words, we have had a better record in Central and 
Northern Europe than we have in Bosnia and in the Balkans. I 
think that reflects, in fact, the faster pace of reform in 
central and northern Europe as compared with that in the 
Balkans.
    So in many cases, we have done better; and I suspect that 
there are cases in which we have done worse.
    So perhaps Mr. Buck would like to address that, but that 
would be my sort of impressionistic answer to your question.
    Mr. Buck. I would like to say that any loss is really 
unacceptable. But I would say the amount of $913,000 out of a 
billion dollars is indeed, as Ambassador Napper said, 
infinitesimal.
    But with respect to the 425 loans that we have made, we 
have had to foreclose on 25 of them. There are other loans that 
are delinquent that we are having to work with to ensure 
payment. The bulk of our loans are being repaid, but I don't 
want to leave you with the impression that there are not 
problems. This was to be expected because of the emergence of a 
private sector, the change in modifications of trading 
patterns, et cetera. But we will be pursuing payment and trying 
to ensure that all loans are up to date.
    Mr. Crowley. In reference to the New York Times article of 
October 17th, the American lead, anti-fraud unit is the unit 
that exposed the so-called billion dollar theft; is that 
correct? What would be the motivation, in your thoughts, as to 
why that was given to the New York Times?
    Mr. Napper. Mr. Dlouhy will answer that question.
    Mr. Dlouhy. The anti-fraud unit, as I mentioned in my 
opening remarks, was mandated by the Peace Implementation 
Council, and was created by the member states to address the 
issue of corruption.
    One of the components of the strategy that we agreed to in 
the board, in March of this year, was public awareness and 
education. And frankly, the interview with the New York Times 
was done in order to force Bosnian officials to come to grips 
with this issue--to bring this issue out in the public and to 
generate a public reaction to those officials who have not 
taken corruption seriously.
    The anti-fraud unit is led by a German national, and it has 
many investigators assigned to it, including American 
investigators. But specifically, the interview was done on 
background to provide information on the first large-scale 
public corruption investigation conducted by Bosnian officials.
    It was done to highlight the fact that they had conducted 
this investigation themselves.
    Mr. Napper. There is a little bit of a paradox here. What 
in many ways is a positive thing--an investigation being 
carried out by Bosnians and aggressively pursued in that 
direction--has turned into a different spin, and that is that 
there is corruption. We knew that, but the problem is what do 
you do about it?
    Mr. Crowley. Thank you.
    Thank you, Mr. Chairman.
    Chairman Gilman. Mr. Gejdenson.
    Mr. Gejdenson. Thank you, Mr. Chairman.
    One of the things that strikes me here and is of great 
concern is, not just in this area but almost in the entire 
Soviet Union, we are facing a crisis where you have gone from 
the police state that did very terrible things, but crime was 
low and if there was theft, it was organized theft by the 
government from the people.
    We have tried to give them the benefits of democracy, and 
this is not the only place in the world that it is a tremendous 
challenge to build a government that serves the people and does 
not plunder and leave many of its citizens helpless and 
starving. I don't think that we have an instant answer. Clearly 
in our history, we have come to a point where we worry about 
corruption in matters outside of government. We have gone to 
the point where we review our officials for their own personal 
relationships and whether they fit the standards that society 
expects. It was not that long ago that Mayors and Senators and 
Governors and even Congressmen were being led away in handcuffs 
for taking bribes and stealing. Thank God we don't see much of 
that in this country.
    Take these societies where there is no history of due 
process and independence of the judiciary and the police--what 
more can we do, not simply just to guard our own money when 
they are not collecting their own revenues? One of the problems 
in Russia today is that some of the wealthiest people are not 
paying taxes. Pensioners are going hungry. It is very hard to 
convince people that democracy is a great thing if they are 
hungry and cold.
    I don't have a great answer here. I don't know how you do 
this. The Chairman is frustrated with your failure to get rid 
of this agency within a year's time and replace it with proper 
institutions to fulfill those duties of tax collection and bank 
transactions and changing institutions is difficult everywhere. 
Here we basically have countries with no democratic 
institutions.
    Are there things that Congress can do that would help you 
in developing institutions within these countries, not just 
here in Bosnia but in Russia and in other countries? Some have 
done better. Some are actually starting to thrive. Some are 
still doing pretty badly. Albania is still a basket case. There 
are lots of countries where it is horrendous, and they are not 
able to provide orderly functions of basic government.
    Aside from the specifics of recovering our funds and making 
sure that funds are not lost, stolen, or double counted, are 
there actions that we can take?
    Even in Latin America, we see in places like Peru and 
Venezuela, questions about what is happening to democracy. Some 
may be that the democratic institutions there did not provide 
basic services for the people in that society, and now we may 
lose those democratic institutions. I think it is terribly 
critical that we find a way to help establish orderly 
democratic governments that can provide the fundamental 
functions that we expect government to do honestly. I am not 
sure that I have a great answer.
    Mr. Napper. But you certainly have a good analysis of the 
problem, Mr. Gejdenson, and I agree with it in virtually every 
respect.
    One of the things to look at is the track record of what we 
have accomplished in our efforts in Central and Eastern Europe. 
The SEED program has now graduated eight countries from the 
program. So if you look at the Czech Republic, Poland, Hungary, 
the Baltic countries, these are places where the original goals 
of SEED in terms of democracy, market economics, and the rule 
of law have been established. They are not perfect, just like 
our country is not perfect. But there is that establishment of 
institutions that function in a working democracy.
    I guess my approach to this is that there ought to be no 
reason a priori why we cannot accomplish the same thing in 
southeastern Europe with more time. It is going to take more 
time and more perseverance, but there is no reason a priori why 
we should not be able to help these countries achieve what has 
been achieved in Central and Northern Europe, and that is what 
we are trying to accomplish in our SEED assistance program.
    What Members of Congress can do, and I don't mean this as a 
commercial for additional funding for SEED, but we do need a 
continued understanding here on a bipartisan basis that it is 
important to maintain this program and see that it has the 
resources to do the job.
    I also think that in many of these countries the weakest 
part of the government structure is the legislature, the 
parliament, and there is no oversight and no means to see that 
officials are called to account for their stewardship of the 
public funds. I think it is important for Members to visit 
these countries and to welcome exchanges of parliamentarians 
from these countries to see how our Congress does its job. That 
is a very important contribution that the Congress can make.
    Mr. Gejdenson. Thank you. I visited Lithuania in 1982, and 
I was there again in 1999. It is astounding the change that has 
occurred there and in Poland, which I didn't visit, but my 
parents came from Poland, Lithuania and Belarus. I also went 
into Belarus to see that it is a place that is even worse than 
when it was under the Soviet control. They have not implemented 
political and social reform, and their crisis is worsening. A 
lot of people are worse.
    In Lithuania, you didn't need to do a lot of extensive 
research to get a sense of what has happened. The change in the 
economy is very exciting. We forget often the places where we 
have had success.
    That is the great part of America, once we have success, we 
want to move on to new challenges and not sit around saying how 
great we did there. We don't want to be discouraged from 
continuing these efforts because we run into some challenges. 
It is difficult, as the Chairman knows, in getting our 
colleagues to meet with foreign legislators. Even when they are 
here in the Capitol, the Chairman often is running from one to 
another to get our colleagues to come visit and have some of 
these very serious discussions with foreign legislators. Most 
of us are domestically focused first, but this is an important 
part for an economy like ours which is so interwoven with the 
rest of the world, and it is a big challenge.
    Mr. Dlouhy. Mr. Gejdenson, while you were talking, I was 
looking at my talking points here about the details on what you 
can do. You planted an idea that I think we ought to follow-up 
on, and Ambassador Napper mentioned it also. That is the 
question of Congressional oversight. The one thing that is not 
included on my tick list here is what should be the proper role 
of the three levels of parliament in Bosnia, the national level 
and the Federal level and the RS.
    It seems to me that it would be appropriate to communicate 
with your counterparts in Bosnia to explain to them what their 
proper role should be in oversight of these funds and how they 
should hold these people to account, and we cannot do that for 
them. But instilling that sense of their responsibility to 
ensure the well-being of their own funds is something that has 
to be an integral part of an anti-corruption strategy, and I 
would welcome Congressional involvement in that process to help 
us with your counterparts in Bosnia.
    Chairman Gilman. I think that is an idea worthwhile 
pursuing further.
    Mr. Gejdenson, any other questions?
    Mr. Gejdenson. No.
    Chairman Gilman. Gentlemen, I understand that $20 million 
was stolen from the Promdea Bank and the Bosnian Interior 
Minister, Mr. Leotard, was investigating that crime. Leotard 
was killed in a massive car bomb explosion. Our FBI 
investigated that crime. What has happened with the 
investigation of his murder? Were Croatian intelligence 
officials responsible, and what has happened with the 
corruption investigation of the Promdea Bank?
    Mr. Dlouhy. Mr. Chairman, I have been involved with Promdea 
Bank for almost a year and a half, including diversion of EC 
funds destined for housing reconstruction. The principal 
involved in that bank was killed as well. The facts of the 
Leotard assassination are not clear at this point. We don't 
know the answer. I can't give you the details today. I would 
say, though, that the Administration is extremely concerned 
about the delay in finding the culprits, and there is a sense 
that the trail is going cold and that we are not going to get 
to the bottom of this.
    But as recently as a few weeks ago, the department 
communicated with the Embassy and reiterated that the Leotard 
investigation has to be a top priority and that we need to 
continue to devote resources from U.S. Government agencies to 
assist in that investigation.
    As you know, Mr. Chairman, the FBI was also deployed to 
help with the forensics in that case. But the answer to your 
question is that we don't know, and we are very concerned about 
where we are.
    Chairman Gilman. Was any of the $20 million involved in 
that bank part of U.S. funds?
    Mr. Dlouhy. No, sir, they were not.
    Chairman Gilman. What is the Croatian Government doing to 
enhance this investigation? Are they doing anything? Are they 
cooperative?
    Mr. Dlouhy. I believe that they are cooperating in the 
investigation.
    Chairman Gilman. Has the Croatian Government been helpful 
regarding the problems that we are uncovering here and 
regarding corruption?
    Mr. Dlouhy. Generally, yes. Foreign Minister Granic has 
been receptive to our expressions of concern. In November of 
last year, Ambassador Montgomery and I raised with government 
officials, including the President's special adviser, the issue 
of the Promdea Bank and asked the Croatian Government to 
directly address the theft of EU funds. That concern was raised 
directly with President Tudjman, and we had subsequent 
discussions with Foreign Minister Granic.
    Chairman Gilman. Gentlemen, I understand that Mr. Yeoso 
Peric runs a vast market for stolen cars from inside of Bosnia. 
The cars are stolen and sold under a vast criminal enterprise 
known as the Renner Company. Why is that operation still 
running, and how can we shut down such an infamous operation?
    Mr. Napper. This operation is a major concern to us and it 
has--
    Chairman Gilman. Is a major concern?
    Mr. Napper. It has been and is a concern for us. We have 
noted that there have been some efforts to move against the 
Renner market in recent days, and perhaps David can provide a 
little more detail on that.
    Mr. Dlouhy. Mr. Chairman, the question of why refugee 
returns to the Stolac area were so difficult lead to an 
investigation of the police military mafia structure in the 
region that then focused on Yeoso Peric and his conglomerate of 
companies that collectively go by the name of Renner. It also 
includes hotels, transport companies, and the infamous stolen 
car market, probably the largest in Europe.
    We began approximately one year ago, and in my opening 
remarks I referred to the statement of a U.S. official to the 
U.S. Embassy to coordinate anti-corruption efforts, and that 
individual has been working with the international community on 
this problem to try to regain control of the Stolac area.
    The initial attempt to arrest Mr. Peric failed. He was 
arrested. He was then released. He was rearrested and released, 
and has since fled.
    The efforts to dismantle this mafia structure in Stolac are 
ongoing. It has the full attention of the international 
community and of SFOR. It is one of our top priorities in the 
law enforcement area in Bosnia.
    Chairman Gilman. The international crisis group has 
identified the following international investors that failed to 
succeed in Bosnia: Aluveneto, Italy's biggest aluminum company; 
AES Cargo, a U.S. freight forwarding company; Gluck Norm, 
Germany's largest PVC manufacturer; Pilkington, Britain's 
biggest glass company; Volkswagen, Germany's largest automaker; 
Coca-Cola; Prohigy, Slovenia's largest detergent maker; and 
Plena, Europe's biggest cement maker. Based on this kind of a 
record of international investment failure, will we ever be 
able to get out of Bosnia, or will the economy depend on 
dwindling aid from the West?
    Mr. Napper. You put your finger on a vitally important 
problem, Mr. Chairman. Bosnia has not succeeded to date in 
creating an investment climate that is attractive to foreign 
investors. That is why the foreign investment is so low there.
    It is a huge problem and one which we continue to discuss 
at every level with the Bosnians. This was a point made again 
by Ambassador Holbrook when he was out there. We have made 
clear to them that foreign assistance is not an entitlement. 
That it will diminish over time, and that foreign assistance to 
Bosnia will become more consistent with what we are doing 
elsewhere in the region. In other words, it will not be so much 
larger than the rest of our assistance programs. And the same 
is true of the rest of the international community.
    So unless there is a growth of private enterprise and 
foreign investment to take up that slack, you are right, the 
prospects for the Bosnian economy in the future are dim. We use 
every opportunity to press them and take the steps that are 
necessary to create an environment that is attractive to 
foreign investment.
    Chairman Gilman. What steps are you recommending to improve 
the economic climate?
    Mr. Napper. We have referred to elimination of the payments 
bureaux. I think one thing that really bugs foreign investors 
and makes it seem unattractive to come to Bosnia is the 
existence of the payments bureaux, and you have pointed out the 
importance of that.
    The other aspects are to streamline and make more 
predictable the tax environment, and to streamline what it 
takes to set up a private enterprise in Bosnia. There are a 
whole range of factors, and maybe Mr. Buck could add a couple 
of points in this regard. Again, the models are there in 
Central and Northern Europe. Bosnia needs to get privatization 
going, to begin to move economic productive assets out of the 
hands of government and out of the control of political 
parties, and into the hands of entrepreneurs and people who 
will run this as a market enterprise.
    I think what needs to be done is fairly apparent. What has 
not been available or present up to now has been the political 
will to go ahead and take some of these difficult steps.
    Chairman Gilman. To have all of these leading companies 
fail should be a glaring concern to the government in that 
area. If they are ever going to pull themselves out by their 
boot straps, they had better find a way to improve the economic 
climate or they are going to be left in an even greater dire 
situation.
    Mr. Napper. You are exactly right, Mr. Chairman. All of 
these decisions by major internationals not to invest in Bosnia 
are a very clear signal of what the problem is and its 
intractability up to now.
    Chairman Gilman. What lessons are we learning from Bosnia 
that we are applying to Kosovo?
    Mr. Napper. I think the situation is quite different in 
Kosovo. In Bosnia the entities that signed the Dayton 
Agreement--the Bosnian Federation and the Republic of Srpska--
were in existence prior to the Dayton Agreement, therefore 
there was much less control as it were by the international 
community over what happened next.
    We do have the OHR and there is a structure. We have used 
that structure. The OHR has acted to remove politicians that 
were anti-Dayton and to take other steps to move the process 
forward.
    In Kosovo, the situation is different in the sense that 
according to U.N. Security Council Resolution 1244, the United 
Nations Security Council is the legitimate authority in Kosovo, 
and it will have the capability to act to establish the 
institutions of a government and of a market economy in a way 
that the tools were not quite as readily available to us in 
Bosnia. We hope that we can learn from that experience and that 
will happen.
    Mr. Buck. Mr. Chairman, I would just point out that 
regarding the barriers to foreign investment, Ambassador Napper 
pointed out, the payments bureaux elimination is really key. I 
understand your frustration of our being put off until the end 
of the Year 2000, and we have accelerated this schedule 
considerably with the international community, which was going 
to drag this on to the Year 2002.
    In the meantime, a number of the elements of the payments 
bureaux will be spun off so the process will be totally 
completed by the end of the Year 2002. A number of the elements 
of a market economy that will facilitate foreign investments 
are areas where we are working, such as developing an 
enterprise law for the rapid entry and exit of businesses, 
developing of laws on collateral, developing commercial laws 
and contract law, setting up a securities commission, setting 
up a securities registrar--all of the elements needed for 
proper corporate governance are the components we are working 
on and that are needed to facilitate foreign investment.
    Chairman Gilman. The Bosnian finance ministry has estimated 
that of their 880 million Deutsche Mark budget, 250 million 
Deutsche Marks are missing due to corruption. I guess that 
amounts to close to 500 million. The total is about 125 million 
still missing. Do you agree with that estimate? What are we 
doing to try to help them collect those funds?
    Mr. Napper. That is an estimate, Mr. Chairman. We don't 
think that it is out of the ballpark, but it is very difficult 
to have much precision on some of this, especially when it 
involves income foregone because of failure to collect taxes or 
other kinds of failure to, as I say, forgo income that would 
otherwise be available to the government.
    We are working in a range of ways to help the ministry of 
finance. We have a number of advisory services in the tax area 
that we are making available to them to more effectively 
collect taxes.
    Chairman Gilman. This was not tax collection, they say it 
was due to corruption, the missing 250 million Deutsche Marks 
that were missing.
    Mr. Napper. Again, I don't find that figure to be 
implausible, although I cannot personally corroborate it.
    What I would reiterate is that we have, all three of us, 
described a range of anti-corruption measures that we are 
taking at all levels, including the central and local levels of 
the government in Bosnia, and we will continue to do so.
    Ambassador Frowick has his mandate to take a fresh look at 
this and see if there is anything more that we can do that has 
not occurred to us already. All I can do today is assure you 
that we will continue what we are doing. We will take a fresh 
look at it through Ambassador Frowick's task force, and we will 
come back and let you know what further steps we think can be 
taken. We would like to maintain a dialogue with you on this 
question.
    Chairman Gilman. We welcome that. I have a current rundown 
on what you are doing.
    I have one last question. Despite the Congress offering a 
$5 million reward for the arrest of some of the top Bosnian war 
criminals, such as Radovan Karadzic and Ratko Mladic, we have 
failed to capture any of them. Can you give us an update on the 
arresting of persons indicted for war crimes in that region?
    Mr. Napper. I certainly can, Mr. Chairman. It is very 
important to apprehend these war criminals. We are committed to 
doing so, and we have made progress in getting those publicly 
indicted for war crimes turned over to the Hague. In January 
1997, only eight Bosnian war criminals were in custody. Today, 
39 are in the Hague; 18 of these were voluntary surrenders, 
many of which were encouraged and/or abetted by the moderate 
government of the Republic of Srpska. In other cases, it was 
SFOR that apprehended these individuals. Some 25 publicly 
indicted war criminals are still at large in Bosnia, most all 
of them are holed-up in the Republic of Srpska or in Serbia 
itself. We continue to believe that these individuals must be 
apprehended and must go to the Hague. We will do everything in 
our power to see that that comes about. There has been 
considerable progress, but not yet enough.
    Chairman Gilman. Again, I want to thank our witnesses for 
taking the time to be with us. We hope that you will keep this 
Committee informed of any progress in cleaning up the 
corruption and trying to provide a better economic climate in 
that part of the world. Thank you, gentlemen.
    Mr. Napper. Thank you, Mr. Chairman.
    Chairman Gilman. The hearing stands adjourned.
    [Whereupon, at 11:50 a.m., the Committee was adjourned.]
      
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                            A P P E N D I X

                           SEPTEMBER 15, 1999

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