United States General Accounting Office

GAO Report to the Chairman, Committee on

International Relations, House of

Representatives

November 1995 FOREIGN

ASSISTANCE

PLO’s Ability to Help

Support Palestinian

Authority Is Not Clear

GAO/NSIAD-96-23

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-270066 

November 28, 1995

The Honorable Benjamin A. Gilman

Chairman, Committee on International

 Relations

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 for.

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.

Background 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.

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.

Page 1 GAO/NSIAD-96-23 Foreign Assistance
B-270066 

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.

Results in Brief 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

Page 2 GAO/NSIAD-96-23 Foreign Assistance
B-270066 

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.

PLO’s Ability to

Contribute to

Palestinian Authority

Expenses Is Not Clear

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

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 contributions.

Page 3 GAO/NSIAD-96-23 Foreign Assistance
B-270066 

here. A popular Middle Eastern restaurant, the Cedars Club, is run by the

PLO. Undoubtedly, there are other economic enterprises as well.”

Certain PLO Expenses

Subsumed Under

Palestinian Authority’s

Budget

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 terrorists.

Page 4 GAO/NSIAD-96-23 Foreign Assistance
B-270066 

Palestinian Authority

Budget Does Not Include

Traditional PLO Revenues

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

Palestinian Authority

Spending Has Not

Been Fully Analyzed

by Donors

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

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.

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.

Page 5 GAO/NSIAD-96-23 Foreign Assistance
B-270066 

civil servant and police salaries. U.S. funds have not been used to pay PLO

administrative expenses, armed militia salaries, or martyr payments.9

Donor Attempts to

Eliminate Future Calls for

External Assistance

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.

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.

Page 6 GAO/NSIAD-96-23 Foreign Assistance
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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.

Donor Financial

Controls Remain in

Place Despite

Chairman Arafat’s

Opposition

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

Authority.

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

Page 7 GAO/NSIAD-96-23 Foreign Assistance
B-270066 

achieved through several mechanisms. The World Bank’s Holst Fund10

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 auditors.

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

10After 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.

Page 8 GAO/NSIAD-96-23 Foreign Assistance
B-270066 

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.

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

Page 9 GAO/NSIAD-96-23 Foreign Assistance
Contents

Letter 1

Appendix I 

Scope and

Methodology

12

Appendix II 

Comments From the

Department of State

14

Abbreviations

CIA Central Intelligence Agency

NCIS National Criminal Intelligence Service

PECDAR Palestinian Economic Council for Development and

Reconstruction

PLO Palestine Liberation Organization

Page 10 GAO/NSIAD-96-23 Foreign Assistance
Page 11 GAO/NSIAD-96-23 Foreign Assistance
Appendix I 

Scope and Methodology

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

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.

Page 12 GAO/NSIAD-96-23 Foreign Assistance
Appendix I 

Scope and Methodology

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.

Page 13 GAO/NSIAD-96-23 Foreign Assistance
Appendix II 

Comments From the Department of State

(711163) Page 14 GAO/NSIAD-96-23 Foreign Assistance
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