[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
BALKANS OVERSIGHT I: CORRUPTION IN BOSNIA
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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
U.S. GOVERNMENT PRINTING OFFICE
61-110 CC WASHINGTON : 2000
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For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
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
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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
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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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SEPTEMBER 15, 1999
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