Foreign Assistance: PLO's Ability to Help Support Palestinian Authority
Is Not Clear (Letter Report, 11/28/95, GAO/NSIAD-96-23).

Pursuant to a congressional request, GAO reviewed the Palestine
Liberation Organization's (PLO) finances, focusing on whether: (1) PLO
is able to help finance operations in the West Bank and Gaza; (2)
international donors have effectively analyzed the need to help fund the
Palestinian Authority's operating expenses; and (3) appropriate controls
are in place to ensure that donor funds are adequately accounted for.

GAO found that: (1) some PLO expenses have been subsumed under the
Palestinian Authority's budget, but several traditional PLO revenue
sources have not been included in the Authority's budget; (2) donor
contributions accounted for 68 percent of the Authority's budget in 1994
and 45 percent in 1995; (3) in an effort to eliminate the Authority's
reliance on external assistance, donors are calling on the Authority and
Israel to increase domestic tax revenues and revenue transfers from
Israel; (4) international donors have not paid adequate attention to the
Authority's expenditure plans which require large outlays to fund high
staffing levels; (5) accountability concerns about the use of donor
funds should be mitigated by the fact that most aid is being disbursed
through traditional channels which utilize established financial control
procedures; and (6) although the donors have implemented financial
controls that should reduce the risk of mishandled funds, the
effectiveness of these controls is unclear.

--------------------------- Indexing Terms -----------------------------

     TITLE:  Foreign Assistance: PLO's Ability to Help Support 
             Palestinian Authority Is Not Clear
      DATE:  11/28/95
   SUBJECT:  Accountability
             Foreign economic assistance
             Financial management
             International relations
             International cooperation
             Budget outlays
             Human resources utilization
             Budget authority
             Risk management
             Economic analysis
             Persian Gulf War
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================================================================ COVER

Report to the Chairman, Committee on International Relations, House
of Representatives

November 1995



Foreign Assistance


=============================================================== ABBREV

  CIA - Central Intelligence Agency
  NCIS - National Criminal Intelligence Service
  PECDAR - Palestinian Economic Council for Development and
  PLO - Palestine Liberation Organization

=============================================================== LETTER


November 28, 1995

The Honorable Benjamin A.  Gilman
Chairman, Committee on International
House of Representatives

Dear Mr.  Chairman: 

This report responds to your request for an unclassified version of
the classified report we issued in June 1995 on the Palestine
Liberation Organization's (PLO) finances.  The objectives of that
report were to (1) assess PLO's ability to help finance the
Palestinian Authority's operations in the West Bank and Gaza Strip,
(2) review whether the international donors effectively analyzed the
need to help fund the Palestinian Authority's operating and start-up
expenses, and (3) determine whether appropriate controls have been
implemented to ensure that donor funds will be adequately accounted

We were unable to independently verify PLO's current financial
condition since PLO was unwilling to provide us with requested
accounting records and supporting documentation.  However, we were
able to obtain some unclassified and classified data on PLO's
finances.  At your request, we asked officials from both the
Department of State and the Central Intelligence Agency (CIA) to
declassify the classified material they provided to us.\1 CIA
responded that with certain minor exceptions, none of the CIA
material used in our report could be declassified.  The State
Department allowed most of its data to be used in this report. 

\1 Information used in GAO-produced reports carries the
classification of the originating source.  The authority to
declassify or downgrade information is vested solely with authorized
executive branch officials. 

------------------------------------------------------------ Letter :1

On October 1, 1993, an international donors group met in Washington,
D.C., to raise funds for long-term development projects in the West
Bank and Gaza Strip in support of the Declaration of Principles
signed between PLO and the government of Israel.  A total of $2.3
billion for a 5-year period beginning in 1994 was pledged by 35
countries and organizations (including the United States, which
pledged $500 million).  The United States has committed $47 million
(or approximately 25 percent of its 1994 and 1995 pledge amounts) to
help fund the Palestinian Authority's operating expenses. 

International donors traditionally insist that aid go to specific
development projects rather than to general government expenses. 
However, the donors decided they would temporarily help the
Palestinian Authority meet its civil servant payroll expenses, police
salaries, and start-up costs.  The rationale for providing this
assistance is that the Palestinian Authority is working to establish
an adequate domestic tax collection system and acceptable
revenue-sharing arrangements with Israel. 

The donors formed an Ad Hoc Liaison Committee that meets periodically
to discuss funding and coordination issues.  The World Bank acts as
the Secretariat for the Committee and has assumed responsibility for
tracking donor commitments, helping coordinate donor assistance, and
managing several trust funds geared toward providing the Palestinian
Authority with technical assistance and support for short-term
operating costs and start-up expenses. 

------------------------------------------------------------ Letter :2

We were unable to reach a definitive conclusion on PLO's ability to
assist the Palestinian Authority with its operating expenses.  We
were able to determine, however, that some of PLO's administrative,
military, and social welfare expenses have been subsumed under the
Palestinian Authority's budget.  At the same time, we found that
several traditional PLO revenue sources were not included in the
Palestinian Authority's budget. 

In 1994, donor contributions accounted for $120 million, or 68
percent, of the Palestinian Authority's budget.  In 1995, donor
contributions are expected to account for about $200 million, or 45
percent, of the budget.  In an effort to control and eventually
eliminate the Palestinian Authority's need for external assistance,
the donor community called on the Palestinian Authority and Israel to
implement an action plan designed to increase domestic tax revenues
and revenue transfers from Israel.  The donors, however, have not
paid equal attention to the Palestinian Authority's expenditure
plans, which require significant outlays for a 30,000-member civil
service and an 18,000-member police force.  The donors agreed to help
fund these staffing levels without adequately appraising the
rationale behind them. 

Most donor aid is being disbursed through traditional channels, such
as bilateral aid programs, nongovernmental organizations, and the
United Nations, which utilize established financial control
procedures.  In addition, the donors implemented a number of
financial controls that are designed to reduce the risk that
operating funds provided directly to the Palestinian Authority will
be mishandled.  These controls include (1) a World Bank-managed trust
fund, which relies on audits of filed claims to monitor the use of
donor funds; (2) the establishment of a Palestinian Economic Council
for Development and Reconstruction (PECDAR), which serves as a focal
point for receiving and accounting for aid that is disbursed to the
Palestinian Authority; and (3) a standard disbursement mechanism for
police salary payments, with accounting and oversight controls
provided by the United Nations Relief and Works Agency.  We have not
independently determined that these controls are effective.  As we
were finalizing our June 1995 report, we received documents from you
and Senator Jesse Helms having possible implications that some funds
may have been diverted by the Palestinian Authority.  We are
reviewing this matter and will advise you of the results in a
separate report. 

------------------------------------------------------------ Letter :3

Our review of available information did not lead to a definitive
conclusion on whether PLO could financially assist the Palestinian
Authority.  We generally could not verify the accuracy of public
reports on PLO's finances.  Most significantly, we were unable to
verify a widely quoted estimate of PLO's finances prepared by the
British National Criminal Intelligence Service (NCIS).  A February
1994 NCIS briefing document stated that:  "A conglomeration of
Palestinian movements [under the umbrella of the PLO] constitutes the
richest of all terrorist groups.  Despite denials to the contrary, it
is estimated that they have world wide assets approaching $8-10
billion." Citing the confidential nature of his sources, the author
of this statement declined to provide us with any data or
documentation to support this claim. 

Media allegations of tangible assets proved difficult to confirm or
refute.  Since at least the mid-1980s, newspaper and magazine
articles have identified general or specific assets alleged to be
owned or controlled by PLO or its economic arm--Samed.\2 For example,
several media reports alleged that PLO owns or controls several
national airlines around the world.  We were unable to confirm such
allegations.  In general terms, we did establish that Samed operated
a number of different businesses in the past, including agricultural
cooperatives, a film studio, a children's clothing factory, and a
shoe factory.  According to a State Department cable, PLO owned a
duty-free shop in Tanzania that subsequently closed down.  The cable
also notes that "the PLO has other money-making ventures here.  A
popular Middle Eastern restaurant, the Cedars Club, is run by the
PLO.  Undoubtedly, there are other economic enterprises as well."

\2 PLO's Executive Committee created Samed in 1970 and tasked it with
establishing profitable businesses that could provide employment
opportunities for thousands of Palestinians from the refugee camps in
Lebanon and Jordan.  Samed was expected to operate as a profit center
that could help alleviate PLO's dependence on Arab state

---------------------------------------------------------- Letter :3.1

Historically, PLO's major expenses have included (1) an
administrative staff in Tunis, Tunisia; (2) diplomatic missions in
over 100 countries; (3) armed militias in several Middle Eastern
states; (4) civil servant pensions and supplementary salary payments
for certain Palestinian civil servants in the West Bank and Gaza
Strip; and (5) several social welfare programs offering such benefits
as free schooling, free health care, and martyr payments to
compensate families of deceased fighters or those injured or disabled
in fighting for the Palestinian cause. 

Prior to the outbreak of the Persian Gulf War, PLO spent heavily in
all these areas.  However, as a result of Chairman Arafat's support
for Iraq's invasion of Kuwait, PLO had to significantly cut back its
expenses after August 1990 when the Gulf states stopped all official
aid to PLO. 

Early budgets prepared by the Palestinian Authority showed that
certain PLO expenses were transferred to the new civil
administration.\3 This was done with the knowledge and encouragement
of the World Bank.  As explained by a senior World Bank official, the
Palestinian Authority was asked to maintain unified budgets showing
both PLO and civil administration costs.  The goal was to avoid
having two budgets, that is, a public budget for the Palestinian
Authority and a shadow budget covering PLO's expenses. 

One major PLO expense transferred to the Palestinian Authority was
the salaries of former PLO militia members hired by the Palestinian
Authority to join its police force.\4 Other transferred expenses
included social welfare expenses, martyr family payments, civil
servant pensions, and supplementary civil servant salary costs. 

\3 The Palestinian Authority has developed a series of four
prospective budgets beginning in January 1994 and concluding with its
latest budget issued March 27, 1995.  These budgets have been
rudimentary in nature and generally do not include detailed cost and
revenue schedules, although early versions of the budget did include
footnotes that stated certain PLO expenses were included in the
Palestinian Authority's budget.  It is unclear whether other PLO
costs (such as those costs associated with its office in Tunis and a
number of overseas missions) are included in the budget since they
are not explicitly identified.  The World Bank and the International
Monetary Fund are working with the Palestinian Authority to improve
its accounting and budget development apparatus.  A more formal
budget is not expected until 1996. 

\4 Under the peace accord, PLO and Israel must approve all proposed
police force hires to prevent the hiring of former known or suspected

---------------------------------------------------------- Letter :3.2

Historically, PLO has had four principal sources of income:  (1)
official contributions from Arab states, such as Saudi Arabia,
Kuwait, Libya, Iraq, the United Arab Emirates, Algeria, and Qatar;
(2) the Palestinian Liberation Tax Fund--a 3.5- to 7-percent tax on
Palestinian workers in Arab states; (3) income from investments; and
(4) donations from wealthy Palestinians and various philanthropic
organizations.  Each PLO faction apparently has its own sources of
funding, such as membership dues and contributions from Arab states
and other sympathizers.\5 The Palestinian Authority's budgets do not
include references to any of these traditional PLO revenue
sources--some of which have lapsed and some of which remain active.\6

\5 Several analyses of PLO's finances we reviewed included
allegations that PLO amassed significant sums of money from illicit
activities, such as extortion, theft, arms dealing, and drug
trafficking.  Most of these allegations were linked to the period PLO
was based in Lebanon (1970-82).  According to Drug Enforcement
Administration officials, there was no evidence to suggest that PLO
was ever formally involved in the production, transportation, or sale
of illegal drugs. 

\6 One partially active revenue source is Palestinian Liberation Tax
Fund receipts and private donations.  State Department documents
indicate that Saudi Arabia and Qatar continue to collect taxes and
private donations for PLO, while Kuwait and the United Arab Emirates
have officially discontinued this activity. 

------------------------------------------------------------ Letter :4

State Department cables indicate that the United States had
originally hoped that the Palestinian Authority could operate without
any external assistance.  Later, however, it became apparent that the
Palestinian Authority could not immediately finance its operations
with local tax collections and revenue transfers from Israel.  To
meet the Palestinian Authority's need for immediate cash assistance,
the donors have spent $120 million to cover the Palestinian
Authority's operating deficit for 1994.\7 The donors have pledged
that they will strive to cover the Palestinian Authority's estimated
1995 budget deficit of over $200 million.\8 As noted earlier, the
United States has committed $47 million (or close to 25 percent of
its 1994 and 1995 pledge amounts) to help pay the Palestinian
Authority's operating costs.  The vast majority of this support has
gone to civil servant and police salaries.  U.S.  funds have not been
used to pay PLO administrative expenses, armed militia salaries, or
martyr payments.\9

\7 The Palestinian Authority reported that its total operating budget
for July through December 1994 was $176.5 million.  Palestinian
Authority revenues were reported to be $57.1 million over the same
time period. 

\8 The Palestinian Authority's estimated operating budget for 1995 is
$443.6 million, with estimated revenues of $216 million. 

\9 As a general rule, the donors have avoided paying for traditional
PLO expenses.  However, the Palestinian Authority is free to spend
domestic tax revenues and revenue transfers from Israel on budget
items the donor community will not fund.  As noted by World Bank
officials, Palestinian Authority spending has increased the financial
burden on donors since less local funds are available to cover
donor-approved expenses such as civilian salaries. 

---------------------------------------------------------- Letter :4.1

In an effort to control and eventually eliminate the Palestinian
Authority's reliance on external assistance, the donors have
pressured the Palestinian Authority and the Israeli government to
improve their revenue collection efforts.  However, less attention
has been paid to the Palestinian Authority's expenditures, and the
donors have agreed to pay for certain costs, most notably civil
servant and police salaries, without an adequate analysis of the
support for such costs.  For example, it is not clear why the
Palestinian Authority needed to hire about 9,000 employees to replace
the approximate 1,600 Israeli employees who previously worked for the
Israeli civil administration.  Nor is it clear why the Palestinian
police force has grown to an 18,000-member force when the
Gaza/Jericho Agreement between PLO and Israel stipulates a
9,000-member force for the Gaza/Jericho enclave.  The donor community
has capped the number of policemen it will fund at 9,000.  However,
Palestinian Authority spending above this level decreases the amount
of local revenue that can be devoted to the expenses the donor
community is willing to underwrite. 

At a donors' meeting in Brussels in November 1994, a memorandum of
understanding with the Palestinian Authority was developed that
outlines the need for greater progress in revenue collection efforts. 
On the issue of expenditures, the donors' focus was on holding the
Palestinian Authority to the expenditure totals in the budget
presented to the donors at that meeting. 

After a donors' meeting in Paris in April 1995, at which the donors
agreed they would strive to cover the Palestinian Authority's budget
deficit through December 1995, an action plan was developed that
again stresses the need for continued progress in generating
additional revenues.  The action plan also noted the Palestinian
Authority's commitment to freeze salaries and hiring at existing
levels and the need to hold expenditures to the levels outlined in
the Palestinian Authority's March 1995 budget.  The action plan makes
clear, however, that the donors will consider underwriting additional
expenses related to the implementation of subsequent phases of the
peace accord. 

State Department officials told us they were not aware of any
analysis performed by the United States or any other donor nation
that examined the appropriateness of the Palestinian Authority's
staffing levels or mix of job skills.  However, a team of financial
experts from the International Monetary Fund did work with
Palestinian Authority officials to produce the budget provided to the
donors in early April 1995.  State officials believe that this
involvement by the International Monetary Fund suggests that the
Palestinian Authority's staffing levels have been generally
validated.  State Department officials noted that the United States
and the other donors were not consulted about the Palestinian
Authority's hiring plans and that early consultations, while not
required, could have been useful. 

------------------------------------------------------------ Letter :5

The bulk of donor funds will be distributed through existing
bilateral aid channels, nongovernmental organizations, and U.N. 
agencies for specific development projects.  Donor concerns about
accountability have tended to focus on the use of donor funds by the
Palestinian Authority to pay for certain recurring and start-up
costs.  In response to these concerns, the donor community, in
coordination with the World Bank and the United Nations, has
developed a number of controls to monitor the expenditure of such
funds.  The United States has generally relied on these
donor-developed controls to distribute assistance to the Palestinian

Chairman Arafat has stated publicly that he would refuse to accept
donor controls over funding and has launched several attempts to
frustrate these controls.  He initially attempted to appoint himself
as PECDAR's director but was rebuffed by the donors who demanded that
a more independent director be appointed.  He established competing
decision centers in the Palestinian Authority and Tunis in an attempt
to diminish PECDAR's role as a central contact point for donor aid. 
He also worked directly with certain donors to establish marquee
development projects, such as airports, without the involvement of
PECDAR officials.  Although these attempts have created difficulties
for the donors, the donors have consistently demanded that the
Palestinian Authority manage donor funds in accordance with strict
standards of accountability and transparency. 

The World Bank, with the support and encouragement of the United
States, has been implementing a transparent and accountable system to
handle donor funds provided to the Palestinian Authority.  This has
been achieved through several mechanisms.  The World Bank's Holst
Fund\10 ensures transparency and accountability by (1) specifying the
types of expenditures for which funds may be used, (2) using an
established auditing firm to verify documentation of expenditures,
and (3) stipulating that donor funds be channeled to the Palestinian
Authority only to replenish approved and documented disbursements. 
PECDAR serves as a common address for all donor aid to be provided to
the Palestinian Authority.  Further, all Holst funds destined for
individual Palestinian Authority ministries flow through this entity,
which, in turn, interfaces with Touche Ross, Saba & Co.--the Bank's

The donors have established a separate control mechanism for handling
the disbursement of police salaries.  This mechanism relies on a
United Nations Relief and Works Agency-managed disbursement and
accounting system.  The United States disbursed $5 million for police
salaries in 1994.  These funds were provided directly to PLO for the
benefit of the Palestinian Authority because a disbursement mechanism
was not in place when these funds were transferred.  The United
States contracted with an Egyptian audit firm to monitor the
disbursement of these funds.  The auditor's report documents that the
$5 million was appropriately disbursed and used only for approved
purposes.  The United States does not plan to provide any further
funding for police salaries. 

We have not independently determined that donor-developed controls
are effective.  However, evidence that these controls appear to be
working is provided in the payments that have been rejected by the
World Bank and its auditors.  For example, in violation of its grant
agreement with the World Bank, the Palestinian Authority spent $2
million of Holst funds on martyr payments.  When the Palestinian
Authority applied for a replenishment of its account, this charge was
noted by the Bank's auditors and promptly disallowed.  A Bank
official also told us that the Palestinian Authority filed claims for
expenses relating to PLO's office expenses in Rome and Washington,
which were disallowed. 

A group in Israel called Peace Watch alleged that the first $13
million in Holst funds was disbursed to the Palestinian Authority
without any conditions and that these funds were diverted to PLO
forces operating in Lebanon.  This $13 million appears to be related
to the monthly funding cap that Holst fund administrators placed on
Palestinian Authority spending.  A written statement from the Bank's
auditors indicated that the Palestinian Authority actually received
an initial advance of $15 million.  A Bank official told us that this
initial advance was never diverted to Lebanon and that the entire
amount was spent on authorized purposes, such as civilian salaries. 
The statement from the Bank's auditors confirmed that the entire $15
million was replenished on the basis of applications filed by the
Palestinian Authority that were audited in accordance with standard
Bank practices. 

\10 After the signing of the Declaration of Principles, the World
Bank established three trust funds to act as central repositories for
donors wishing to have their pledges disbursed through the World
Bank.  The largest of these funds is the Holst Trust Fund, which was
established to provide funds to the Palestinian Authority and PECDAR
to help cover operating expenses. 

---------------------------------------------------------- Letter :5.1

We conducted our review from July 1994 through April 1995 in
accordance with generally accepted government auditing standards.  We
obtained comments on the classified version of this report from the
State Department and CIA.  The CIA comments remain classified;
however, the State Department did agree to have its comments
reproduced in this report.  State Department's comments are contained
in appendix II. 

Copies of this report are being provided to the Secretary of State,
the Director of Central Intelligence, the Director of the Office of
Management and Budget, and interested congressional committees.  We
are also providing copies of this report to Members of Congress who
specifically requested that we issue an unclassified report on PLO's
finances.  We also will make copies available to others upon request. 

This report was prepared under the direction of Joseph E.  Kelley,
Director-in-Charge, International Affairs Issues.  Other major
contributors to this report were Diana Glod, Assistant Director;
Michael ten Kate, Evaluator-in-Charge; Albert Fleener, Evaluator; and
Kevin Craddock, Special Agent.  Please contact Ms.  Glod at (202)
647-1588 if you or your staff have any questions about this report. 

Sincerely yours,

Henry L.  Hinton, Jr.
Assistant Comptroller General

=========================================================== Appendix I

The starting point for our review was an attempt to obtain financial
information directly from the Palestine Liberation Organization
(PLO).  PLO told us to provide written questions on the information
we required and then declined to respond to them.  PLO also chose not
to respond to our written request for meetings with PLO and
Palestinian Authority officials in the self-rule territories. 
However, in the Gaza Strip, we were able to meet with a senior
Palestinian Authority official. 

In Washington, D.C., we interviewed Palestinian affairs experts and
program officials from the Department of State, the U.S.  Agency for
International Development, the Overseas Private Investment
Corporation, the Department of Treasury (Office of Foreign Assets
Control and the Financial Crimes Enforcement Network),\1 the Drug
Enforcement Administration, the Congressional Research Service, and
the World Bank.  We also conducted fieldwork in London, Tel Aviv, and
Jerusalem and interviewed officials from the State Department, the
U.S.  Agency for International Development, the Drug Enforcement
Administration, the World Bank, the United Nations Relief and Works
Agency, nongovernmental organizations, and private industry in these
locations.  We also met with a number of private researchers who have
studied and written about PLO's finances. 

We reviewed relevant State Department cables prepared between January
1990 and February 1995 and conducted a detailed search of public
articles and books on PLO.  We developed a list of potential PLO
agents and operatives using a number of sources.  We gave this list
to Treasury's Financial Crimes Enforcement Network, which searched
its databases to identify the personal or corporate assets of these
individuals.  In collaboration with Treasury's Financial Crimes
Enforcement Network, we attempted to verify media reports of specific
assets alleged to be held or controlled by PLO. 

We developed a data collection instrument to collect a wide variety
of financial and operational data on PLO.  We analyzed responses to
this data collection instrument from U.S.  embassies in 13 Middle
Eastern States and 5 European countries.  We also received
information from U.S.  embassies in one Latin American country and
three African countries addressing public allegations that PLO owned
duty-free shops in these locations. 

We met with U.S.  intelligence experts from (1) the State
Department's Intelligence and Research Bureau, (2) the Central
Intelligence Agency, (3) the Defense Intelligence Agency, and (4) the
National Security Agency.  British intelligence officials declined
our request for meetings on the basis that they had no useful
information to share.  However, we did interview a senior official
from Britain's National Criminal Intelligence Service to discuss a
February 1994 estimate of PLO's finances. 

(See figure in printed edition.)Appendix II

\1 The Office of Foreign Assets Control is responsible for enforcing
presidential executive orders mandating the seizure of assets
controlled by sanctioned states.  This office prepares
agent/operative analyses that can lead to a Specifically Designated
National label that permits the freezing of any assets belonging to
Specifically Designated Nationals in U.S.-controlled accounts or
assets.  PLO has never been placed under the U.S.  sanctions program. 
However, a number of prior PLO subfactions were named in the
President's recent executive order pertaining to freezing the assets
of several terrorist groups and individuals. 

*** End of document. ***