Index

Bosnia: Crime and Corruption Threaten Successful Implementation of the
Dayton Peace Agreement (Testimony, 07/19/2000, GAO/T-NSIAD-00-219).

Pursuant to a congressional request, GAO discussed the impact of crime
and corruption on the implementation of the Dayton Peace Agreement,
focusing on: (1) how organized crime and public sector corruption have
affected implementation of the agreement in Bosnia; (2) what the
international community has done to improve Bosnia's law enforcement and
judicial system and reduce corruption; and (3) how international
assistance resources are being safeguarded and whether such assistance
is being used by Bosnia in place of domestic revenues lost due to crime
and corruption.

GAO noted that: (1) GAO found a near consensus opinion among officials
GAO interviewed that endemic crime and corruption in Bosnia is
threatening the successful implementation of the Dayton Peace Agreement
and that until the situation is satisfactorily addressed the conditions
for the complete withdrawal of the North Atlantic Treaty Organization
(NATO)-led force will not be met; (2) although some of the U.S. and NATO
conditions have been met, none of the progress in implementing the
agreement is yet self-sustaining according to the High Representative
and others; (3) Bosnian leaders from all three ethnic groups have not
made a concerted effort to curb corruption and have often acted to
obstruct the reform process in general; (4) Bosnia's law enforcement and
judicial systems are inadequate and institutionally incapable of
prosecuting cases of corruption or administering justice; (5) Bosnian,
international, and U.S. efforts to correct weaknesses in these systems
have achieved only limited success and have not measurably reduced
political influence over the judiciary or the economy; (6) GAO found
that international assistance, including U.S. assistance, is generally
not being lost to fraud and corruption in Bosnia and that such
assistance has been protected by a number of internal controls; (7)
however, GAO did find incidents of corruption in the international
assistance effort; (8) further, the assistance provided could supplant
the hundreds of millions of dollars the Bosnian governments lose each
year to customs fraud and tax evasion; (9) moreover, the Bosnians spend
a large percentage of their revenues maintaining three competing
militaries that are primarily designed to fight each other; (10)
according to the High Representative, the size and structure of these
forces are incompatible with the defense needs of Bosnia and are
financially unsustainable; (11) the international community has provided
about $407 million in budget support to cover Bosnia's budget deficits,
and most of this support is not controlled or audited; and (12)
consequently, the international community cannot be sure how the money
it has provided is spent.

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

 REPORTNUM:  T-NSIAD-00-219
     TITLE:  Bosnia: Crime and Corruption Threaten Successful
	     Implementation of the Dayton Peace Agreement
      DATE:  07/19/2000
   SUBJECT:  International agreements
	     Organized crime
	     Foreign governments
	     Political corruption
	     International cooperation
	     Law enforcement
	     Judicial reform
	     Internal controls
	     Fraud
IDENTIFIER:  Bosnia
	     UN Judicial System Assessment Program
	     AID Business Development Program
	     General Framework Agreement for Peace in Bosnia and
	     Herzegovina (Dayton Agreement)

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GAO/T-NSIAD-00-219

I am pleased to be here today to discuss our recent report, completed at
your request, on the impact of crime and corruption on the implementation of
the Dayton Peace Agreement, which was signed in December 1995 by regional,
Bosnian, and international community representatives. The agreement was
designed to help Bosnia achieve a self-sustaining peace, under the direction
of an internationally appointed High Representative and a NATO-led military
force. With the signing of the agreement, the Bosnian national government
was created, and the two entities created during the war (the Federation and
Republika Srpska) were recognized.

During 1996-99, the United States and the international community committed
more than $4 billion to finance civil aspects of the agreement; as of March
2000, U.S. military costs to support the agreement totaled about $10
billion. The United States, NATO, and the Peace Implementation Council have
developed a transition strategy, or conditions often called benchmarks,
under which the military force could be withdrawn from Bosnia. Several of
these conditions directly relate to reducing corruption.

I will summarize our July 7 report's three main points: (1) how organized
crime and public sector corruption have affected implementation of the
Dayton Peace Agreement in Bosnia, (2) what the international community has
done to improve Bosnia's law enforcement and judicial system and reduce
corruption, and (3) how international assistance resources are being
safeguarded and whether such assistance is being used by Bosnia in place of
domestic revenues lost due to crime and corruption.

I should note at the outset that in doing our review, we did not conduct
independent investigations of specific corruption-related cases. Instead, we
examined studies, reports, and other documents published by NATO, the
Department of State, the U.S. Agency for International Development, the
United Nations, and many other international organizations. The evidence and
conclusions presented in these documents are based on analyses and
investigations of corruption in Bosnia. We also interviewed an extensive
list of top-level officials, both governmental and non-governmental,
responsible for or knowledgeable about programs and activities in Bosnia. We
based our conclusions and recommendation on this extensive documentation
coupled with the first-hand experience and judgments of high-level
international officials in Bosnia.

RESULTS IN BRIEF

We found a near consensus opinion among officials we interviewed that
endemic crime and corruption in Bosnia is threatening the successful
implementation of the Dayton Peace Agreement and that until the situation is
satisfactorily addressed the conditions for the complete withdrawal of the
NATO-led force will not be met. Although some of the U.S. and NATO
conditions have been met, none of the progress in implementing the agreement
is yet self-sustaining according to the High Representative and others.
Bosnian leaders from all three ethnic groups have not made a concerted
effort to curb corruption and have often acted to obstruct the reform
process in general. Bosnia's law enforcement and judicial systems are
inadequate and institutionally incapable of prosecuting cases of corruption
or administering justice. Bosnian, international, and U.S. efforts to
correct weaknesses in these systems have achieved only limited success and
have not measurably reduced political influence over the judiciary or the
economy.

We found that international assistance, including U.S. assistance, is
generally not being lost to fraud and corruption in Bosnia and that such
assistance has been protected by a number of internal controls. However, we
did find incidents of corruption in the international assistance effort.
Further, the assistance provided could supplant the hundreds of millions of
dollars the Bosnian governments lose each year to customs fraud and tax
evasion. Moreover, the Bosnians spend a large percentage of their revenues
maintaining three competing militaries that are primarily designed to fight
each other. According to the High Representative, the size and structure of
these forces are incompatible with the defense needs of Bosnia and are
financially unsustainable. The international community has provided about
$407 million in budget support to cover Bosnia's budget deficits, and most
of this support is not controlled or audited. Consequently, the
international community cannot be sure how the money it has provided is
spent.

CRIME AND CORRUPTION THREATEN THE DAYTON AGREEMENT

Pervasive illegal activity is negatively affecting progress in reforming
Bosnia's legal, judicial, and economic systems; achieving U.S. policy
objectives in Bosnia; and attaining the Dayton Peace Agreement's ultimate
goal of a self-sustaining peace. Unless Bosnian officials make concerted
efforts to address this problem, the benchmarks for the complete withdrawal
of NATO-led forces will not be met. According to U.S. and international
organization officials, to date, Bosnian leaders have not demonstrated
sufficient political will to reform. Bosnia's nationalistic political
parties continue to control all aspects of the government, the judiciary,
and the economy. Thus, they maintain the personal and financial power of
their members and authoritarian control over the country. Bosnian leaders
from all ethnic groups may have little incentive to combat corruption, since
curbing corruption may reduce their ability to maintain their control.

Wartime underground networks have turned into political criminal networks
involved in massive smuggling, tax evasion, and trafficking in women and
stolen cars. Investigations have shown that certain smuggling operations
could have been successful only with the participation of customs officials.
In addition, according to the Department of State, criminal elements
involved in narcotics trafficking have been credibly linked to public
officials. The proceeds from the narcotics trade are widely believed to
support illegal institutions maintained by ethnic extremists.

Numerous reports show, and international organization officials confirm,
that Bosnian law enforcement officers' allegiance is often to ethnic
political parties rather than to the public. For example, police in some
areas work for local party officials and protect the business interests of
the officials, intimidate citizens, and prevent the return of refugees.
Similarly, political officials are involved at many stages of the judicial
process. The selection of judges in Bosnia is the product of political
patronage, and judges' salaries are controlled by political party
structures. We were told that there are good and honest individuals
throughout Bosnia's judicial system. However, criminal leaders, many of whom
are closely linked to ruling political parties, are ready to threaten
judges, prosecutors, police officers, lawyers, or witnesses with violence,
even death, to act in a particular way. Such influence over the courts often
prevents cases involving organized crime and corruption from being heard.

ANTICORRUPTION EFFORTS HAVE ACHIEVED LIMITED SUCCESS

Bosnian, international, and U.S. anticorruption and judicial reform efforts
have been initiated over the past 4 years, but they have achieved only
limited success in reducing crime, corruption, and political influence.
While international efforts could correct weaknesses in Bosnia's legal and
judicial systems and provide needed supporting structures for the rule of
law, the Bosnian government's efforts have primarily been to create
committees and commissions that have failed to become operational or
measurably reduce crime and corruption.

The Office of the High Representative has developed a strategy for
coordinating international anticorruption efforts. However, the strategy is
essentially a recitation of existing international efforts, and although the
work of the international community is collegial, it is not truly
coordinated. Despite the lack of a truly coordinated effort, international
organizations, including the European Commission, NATO, and the United
Nations, have implemented a number of anticorruption and judicial reform
efforts. For example:

   * The European Commission's Customs Assistance Office has established an
     anticorruption program that is considered the most successful effort.
     The Office has assisted in establishing needed customs legislation and
     customs services at the entity level. Investigations conducted and
     systems put in place by the Office have identified incidents of
     corruption and illegal activities that have resulted in the loss of
     millions of dollars in customs duties and tax revenues. In addition,
     customs officials perpetrating illegal activity have been exposed.

   * The NATO-led Stabilization Force (SFOR) helped the entity armed forces
     establish an office of the inspector general to help eliminate fraud
     and corruption in the entities' armed forces. The office's
     investigations have led to the removal, reassignment, or suspension of
     noncompliant personnel.

   * The U.N. International Police Task Force has focused on restructuring,
     retraining, and democratizing the local police. The task force has
     established a certification process through which each police officer
     is evaluated against specific criteria, including involvement in human
     rights abuses during the war. In addition, the task force has created
     specialized units to train Bosnian police in public security issues
     such as organized crime, drug-related activities, corruption, and
     terrorism. Some progress is being made, but the linkage between the
     police and the political parties still has not been broken.
   * The international community has implemented a number of efforts to make
     Bosnia's weak and politically influenced judiciary more independent and
     professional. The Office of the High Representative for example, has
     imposed laws to expand the jurisdiction of the Federation Supreme
     Court, strengthen the Federation prosecutor's office, and provide
     special witness identity protection. In addition, the United Nations
     established the Judicial Assessment Program in 1998 to monitor and
     assess the judicial system in Bosnia.

Despite the need for these and other efforts, they have had limited impact,
partly because high-level Bosnian officials have not shown a sufficient
commitment to fighting crime and corruption.

U.S. anticorruption efforts, led by the U.S. Agency for International
Development (USAID), seek to curtail corruption through the elimination of
communist-era financial control structures and the privatization of
state-owned enterprises. Experience in Central and Eastern Europe has shown
that the best, and possibly the only, way to accelerate the establishment of
a sound, competitive commercial banking system is to attract the business of
reputable foreign banks. Although efforts to establish a private banking
system in Bosnia are progressing, the U.S. government and international
community have had little success in attracting a prime-rated international
bank to come to Bosnia.

Privatization efforts have encountered problems, and corruption may
undermine the process. According to the United Nations and other experts,
the privatization process is another opportunity for government and party
officials to profit through corrupt activities. For example, officials may
solicit bribes from those interested in obtaining certain assets or sell the
assets to themselves at prices below their value. Further, privatization
could legitimize political factions' ownership of companies if those
factions have the resources to purchase the better companies through private
investment funds or other means. The documentation required to privatize
Bosnian companies, including opening balance sheets and privatization plans,
is being provided by enterprise managers who are not precluded from bidding
on the companies, which is clearly a conflict of interest. Several officials
told the U.S. Agency for International Development that they were depressing
the value of their firms so they could purchase them for less than their
true value. The head of the Office of the High Representative's Economic
Department publicly stated in April 2000 that a majority of already
privatized companies belong to the nationalist political parties. In May
2000, the High Representative removed the president of the management board
of the Federation Privatization Agency from his post due to persistent and
serious obstruction of the privatization process in the Federation.

INTERNAL CONTROLS OVER INTERNATIONAL AID APPEAR

ADEQUATE, BUT ASSISTANCE SUPPLANTS BOSNIAN FUNDS

The United States and other international donors have established procedures
for safeguarding assistance to Bosnia, and we found no evidence that
assistance has been lost on a large scale because of fraud or corruption.
Most of the $4 billion supported Bosnia's physical reconstruction, which has
largely been successfully completed. However, we did find instances of
corruption within the international assistance effort. For example:

   * The United States has yet to recover about $935,000 in U.S. embassy
     operating funds and USAID Business Development Program loan payments
     deposited in a bank that was involved in corrupt activities and is now
     bankrupt.
   * In July of 1998, the Business Development Program's manager, a foreign
     service national, was terminated for receiving payments for helping a
     USAID loan applicant.
   * About $340,000 in World Bank-provided funds was lost as a result of a
     procurement scheme perpetrated with fraudulent documents. As of May
     2000, no arrests had been made and no funds had been recovered.

Despite the international community's success at controlling the use of its
assistance funds, such assistance has supplanted millions of dollars the
Bosnian governments lose every year to corrupt activities such as customs
fraud and tax evasion. Determining the total amount of revenue lost because
of corrupt practices would be difficult, and the international community has
not systematically attempted to make such a determination. However, evidence
gathered during successful customs investigations and partial analysis by
the Office of the High Representative show that the losses total hundreds of
millions of dollars annually. For example, the Office of the High
Representative concluded that a moderate estimate of revenue lost due to tax
evasion in Republika Srpska is $136 million, or 40 percent of Republika
Srpska's annual $347 million budget.

Due to shortfalls in revenue--partly because of corrupt practices noted
above--the entity governments incur annual budget deficits which are then
funded through direct budget support (that is, monies added to general
revenues and not earmarked for specific purposes) provided by the
international community. Most of the $407 million committed by international
donors for general budget support is not controlled or audited. (App. I
shows the organizations that provided direct budget support and the amounts
provided.)

Meanwhile, the Federation and Republika Srpska budgeted about 41 and 20
percent, respectively, of their average annual, domestically financed
revenue on military expenditures from 1997 through 2000 despite the High
Representative's opinion that sustaining three large, separate armies,
primarily designed to fight each other, is not financially feasible.

If the Bosnian governments strengthened the rule of law and identified ways
to collect some or all of the hundreds of millions of dollars lost annually
as a result of widespread tax and customs duty evasion, the international
agencies' budget support might not be needed.

Our report recommended that the Secretary of State lead a reassessment of
the U.S. strategy for assisting Bosnia in establishing a democratic
government and a market economy. We believe such a reassessment is necessary
because without it the United States and other donors may continue to fund
initiatives that have little hope of resulting in a self-sustaining
democratic government and market economy based on the rule of law and thus
lead to the complete withdrawal of NATO-led forces. In particular, we
believe State should consider whether direct budget support is an
appropriate form of assistance in the current environment in Bosnia, and how
it can support those political leaders in Bosnia whose goals for addressing
the corruption problem are consistent with the goals of the U.S. and the
rest of the international community. Our report also suggests that the
Congress may wish to require that the State Department certify that the
Bosnian governments have taken concrete and measurable steps to implement
anticorruption programs and sufficiently improved their ability to control
smuggling and tax evasion before providing future assistance.

State disagreed with our recommendation. According to State, by 1998, it had
undertaken a broad reassessment of its strategy for Bosnia and it
continually reassesses assistance priorities in Bosnia. However, we found no
evidence that State's reassessment or its current strategy address the
underlying causes of corruption and the lack of reform, namely the continued
obstructionist behavior of hard-line nationalist political leaders.

- - - -

Mr. Chairman, this concludes our prepared remarks. We will be happy to
answer any questions you or other Members of the Committee may have.

CONTACT AND ACKNOWLEDGMENTS

For future questions regarding this testimony, please contact Harold J.
Johnson at (202) 512-4128. Individuals making key contributions to this
testimony include F. James Shafer, David M. Bruno, Hynek P. Kalkus, and E.
Jeanette Espinola.

APPENDIX I APPENDIX I

BUDGET SUPPORT COMMITTED BY THE INTERNATIONAL COMMUNITY

FOR THE FEDERATION AND REPUBLIKA SRPSKA

Dollars in millions

 Organization                   Amount
 World Banka                    $244.5
 International Monetary Fund    70.0
 European Union                 60.0
 United States b                27.0
 Other                          5.9

 Total c                        $ =SUM(ABOVE)
                                407.4

a World Bank funding includes trust funds financed by other donors.

b Includes $22 million committed to Republika Srpska and $5 million
committed to the Federation but not disbursed due to the Federation
government's lack of compliance with U.S. conditions placed on the funding.
The United States has tried to persuade other donors to place conditions on
the budget support they provide.

c Total does not include all budget support provided by all international
donors because information on all donors is not readily available. Total
does not include cash transfers from Serbia or Croatia. Estimates of these
transfers total more than $500 million from 1996 through1999.

Source: World Bank, International Monetary Fund, European Union, USAID,
Office of the High Representative, and International Management Group.

(711555)

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