U.S. GOVERNMENT PRINTING OFFICE

61–110 CC WASHINGTON : 2000

BALKANS OVERSIGHT I: CORRUPTION IN BOSNIA

HEARING

BEFORE THE

COMMITTEE ON

INTERNATIONAL RELATIONS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

ON

SEPTEMBER 15, 1999

Serial No. 106–65

Printed for the use of the Committee on International Relations

(
(II)

COMMITTEE ON INTERNATIONAL RELATIONS

BENJAMIN A. GILMAN, New York, Chairman

WILLIAM F. GOODLING, Pennsylvania

JAMES A. LEACH, Iowa

HENRY J. HYDE, Illinois

DOUG BEREUTER, Nebraska

CHRISTOPHER H. SMITH, New Jersey

DAN BURTON, Indiana

ELTON GALLEGLY, California

ILEANA ROS-LEHTINEN, Florida

CASS BALLENGER, North Carolina

DANA ROHRABACHER, California

DONALD A. MANZULLO, Illinois

EDWARD R. ROYCE, California

PETER T. KING, New York

STEVE CHABOT, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

MATT SALMON, Arizona

AMO HOUGHTON, New York

TOM CAMPBELL, California

JOHN M. MCHUGH, New York

KEVIN BRADY, Texas

RICHARD BURR, North Carolina

PAUL E. GILLMOR, Ohio

GEORGE RADANOVICH, California

JOHN COOKSEY, Louisiana

THOMAS G. TANCREDO, Colorado

SAM GEJDENSON, Connecticut

TOM LANTOS, California

HOWARD L. BERMAN, California

GARY L. ACKERMAN, New York

ENI F.H. FALEOMAVAEGA, American

Samoa

MATTHEW G. MARTINEZ, California

DONALD M. PAYNE, New Jersey

ROBERT MENENDEZ, New Jersey

SHERROD BROWN, Ohio

CYNTHIA A. MCKINNEY, Georgia

ALCEE L. HASTINGS, Florida

PAT DANNER, Missouri

EARL F. HILLIARD, Alabama

BRAD SHERMAN, California

ROBERT WEXLER, Florida

STEVEN R. ROTHMAN, New Jersey

JIM DAVIS, Florida

EARL POMEROY, North Dakota

WILLIAM D. DELAHUNT, Massachusetts

GREGORY W. MEEKS, New York

BARBARA LEE, California

JOSEPH CROWLEY, New York

JOSEPH M. HOEFFEL, Pennsylvania

RICHARD J. GARON, Chief of Staff

KATHLEEN BERTELSEN MOAZED, Democratic Chief of Staff

JOHN HERZBERG, Senior Professional Staff Member

JOAN O’DONNELL, Staff Associate
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C O N T E N T S

WITNESSES

Page

The Honorable Larry C. Napper, Coordinator, Support for Eastern European

Assistance (SEED), U.S. Department of State .................................................. 4

Mr. Craig Buck, Mission Director for Bosnia-Herzegovina, Kosovo and Montenegro, U.S. Agency for International Development ........................................... 7

Mr. David B. Dlouhy, Special Advisor, Bosnia Implementation, U.S. Department of State ........................................................................................................ 8

APPENDIX

The Honorable Benjamin A. Gilman, a U.S. Representative in Congress from

New York and Chairman, House Committee on International Relations ....... 30

The Honorable Sam Gejdenson, a U.S. Representative in Congress from Connecticut .................................................................................................................. 32

The Honorable George P. Radanovich, a U.S. Representative in Congress

from California ..................................................................................................... 34

The Honorable Larry C. Napper ............................................................................ 35

Mr. Craig Buck ........................................................................................................ 47

David B. Dlouhy ....................................................................................................... 56
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BALKANS OVERSIGHT I: CORRUPTION IN

BOSNIA

Wednesday, September 15, 1999

HOUSE OF REPRESENTATIVES,

COMMITTEE ON INTERNATIONAL RELATIONS,

Washington, D.C.

The Committee met, pursuant to call, at 10:05 a.m., in room

2172, Rayburn House Office Building, Hon. Benjamin A. Gilman

(Chairman of the Committee) presiding.

Chairman GILMAN. The Committee will come to order. Members

will please take their seats.

Today we will focus on reports of wide-scale fraud and corruption

in Bosnia that may have led to the diversion of up to $1 billion in

assistance to that country. Today’s hearing is the first in a series

of oversight hearings. Next week we plan to look at the situation

in Kosovo.

I want to thank our witnesses who are here today. We will say

a little more about them shortly.

On August 17th, a front page story by Chris Hedges of the New

York Times reported that international donors to Bosnia may have

lost $1 billion since the signing of the Dayton Peace Plan in late

1995. Of the $1 billion, the news article alleged that the U.S. share

was at least $20 million. Our Members will note on a per capita

basis, Bosnia is one of the largest recipients of foreign aid on

Earth. The international community has provided over $1,000 for

every man, woman and child in that country, totaling over $5 billion. That assistance is not an entitlement, and will not last for

long. The purpose of the assistance was to help rebuild a functioning multi-ethnic state within the Dayton Peace Accords. We

have a vested interest in rebuilding that government because when

our job is done, the 6,000 American men and women in the Bosnian peacekeeping force known as SFOR will be able to return

home.

The New York Times later corrected parts of its story, but the

underlying fact remains that there is a serious corruption problem

today in Bosnia. There have been subsequent reports of wide-scale

theft and corruption involving our assistance programs in Russia.

Clearly the Clinton Administration should tighten up the accountability of our foreign assistance programs. While the U.S. and other

European donors have not suffered losses so great as alleged, corruption does impede progress toward our major goals in Bosnia.

Our exit strategy depends upon the creation of a viable government

economy capable of sustaining peace and stability there.
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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.
3

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.
4

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
5

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
6

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.
7

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.
8

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.
9

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 largescale 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,
10

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 antifraud 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 fulltime 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 poli-
11

tics 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.
12

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.
13

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
14

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 largescale 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.
15

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
16

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.
17

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
18

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
19

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.
20

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 infor-
21

mation 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?
22

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
23

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.
24

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;
25

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 Bos-
26

nian 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 antiDayton 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 lev-
27

els, 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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