On October 1, 1993, an international donors group met in Washington, D.C., to raise funds for long-term development projects in the West Bank and Gaza Strip in support of the Declaration of Principles signed between PLO and the government of Israel. A total of $2.3 billion for a 5-year period beginning in 1994 was pledged by 35 countries and organizations (including the United States, which pledged $500 million). The United States has committed $47 million (or approximately 25 percent of its 1994 and 1995 pledge amounts) to help fund the Palestinian Authority’s operating expenses. International donors traditionally insist that aid go to specific development projects rather than to general government expenses. However, the donors decided they would temporarily help the Palestinian Authority meet its civil servant payroll expenses, police salaries, and start-up costs. The rationale for providing this assistance is that the Palestinian Authority is working to establish an adequate domestic tax collection system and acceptable revenue-sharing arrangements with Israel. The donors formed an Ad Hoc Liaison Committee that meets periodically to discuss funding and coordination issues. The World Bank acts as the Secretariat for the Committee and has assumed responsibility for tracking donor commitments, helping coordinate donor assistance, and managing several trust funds geared toward providing the Palestinian Authority with technical assistance and support for short-term operating costs and start-up expenses. 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. For example, several media reports alleged that PLO owns or controls several national airlines around the world. We were unable to confirm such allegations. In general terms, we did establish that Samed operated a number of different businesses in the past, including agricultural cooperatives, a film studio, a children’s clothing factory, and a shoe factory. According to a State Department cable, PLO owned a duty-free shop in Tanzania that subsequently closed down. The cable also notes that “the PLO has other money-making ventures here. A popular Middle Eastern restaurant, the Cedars Club, is run by the PLO. Undoubtedly, there are other economic enterprises as well.” 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. 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. Other transferred expenses included social welfare expenses, martyr family payments, civil servant pensions, and supplementary civil servant salary costs. 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. 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. 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. The donors have pledged that they will strive to cover the Palestinian Authority’s estimated 1995 budget deficit of over $200 million. As noted earlier, the United States has committed $47 million (or close to 25 percent of its 1994 and 1995 pledge amounts) to help pay the Palestinian Authority’s operating costs. The vast majority of this support has gone to civil servant and police salaries. U.S. funds have not been used to pay PLO administrative expenses, armed militia salaries, or martyr payments. In an effort to control and eventually eliminate the Palestinian Authority’s reliance on external assistance, the donors have pressured the Palestinian Authority and the Israeli government to improve their revenue collection efforts. However, less attention has been paid to the Palestinian Authority’s expenditures, and the donors have agreed to pay for certain costs, most notably civil servant and police salaries, without an adequate analysis of the support for such costs. For example, it is not clear why the Palestinian Authority needed to hire about 9,000 employees to replace the approximate 1,600 Israeli employees who previously worked for the Israeli civil administration. Nor is it clear why the Palestinian police force has grown to an 18,000-member force when the Gaza/Jericho Agreement between PLO and Israel stipulates a 9,000-member force for the Gaza/Jericho enclave. The donor community has capped the number of policemen it will fund at 9,000. However, Palestinian Authority spending above this level decreases the amount of local revenue that can be devoted to the expenses the donor community is willing to underwrite. At a donors’ meeting in Brussels in November 1994, a memorandum of understanding with the Palestinian Authority was developed that outlines the need for greater progress in revenue collection efforts. On the issue of expenditures, the donors’ focus was on holding the Palestinian Authority to the expenditure totals in the budget presented to the donors at that meeting. After a donors’ meeting in Paris in April 1995, at which the donors agreed they would strive to cover the Palestinian Authority’s budget deficit through December 1995, an action plan was developed that again stresses the need for continued progress in generating additional revenues. The action plan also noted the Palestinian Authority’s commitment to freeze salaries and hiring at existing levels and the need to hold expenditures to the levels outlined in the Palestinian Authority’s March 1995 budget. The action plan makes clear, however, that the donors will consider underwriting additional expenses related to the implementation of subsequent phases of the peace accord. State Department officials told us they were not aware of any analysis performed by the United States or any other donor nation that examined the appropriateness of the Palestinian Authority’s staffing levels or mix of job skills. However, a team of financial experts from the International Monetary Fund did work with Palestinian Authority officials to produce the budget provided to the donors in early April 1995. State officials believe that this involvement by the International Monetary Fund suggests that the Palestinian Authority’s staffing levels have been generally validated. State Department officials noted that the United States and the other donors were not consulted about the Palestinian Authority’s hiring plans and that early consultations, while not required, could have been useful. 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.