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GAOUnited States General Accounting Office

Report to Congressional Requeste rs

July 2000 BOSNIA PEACEOPERATION

Crime and CorruptionThreaten SuccessfulImplementation of theDayton PeaceAgreement

GAO/NSIAD-00-156

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Page 1 GAO/NSIAD-00-156 Bo sni

Contents

Letter

Appendixes Appendix I: Benchmarks for Measuring Progress in

Im ple me nt at io n o f t he Da yt on P ea ce Agr ee me nt 4

Appendix II: Bosnian Government and Judicial System

Organization and Budgets 5

Appendix III: Bosnian, International, and U.S. Anticorruption

Efforts 5

Ap pen dix IV: Co mm en ts F ro m t he Dep ar tme nt o f St at e 6

Appendix V: Comments From the U.S. Agency for International

Development 6

Ap pen dix VI: Co mm en ts F ro m t he De pa rt me nt o f De fe ns e 7

Appendix VII: Objectives, Scope, and Methodology 7

Ap p en dix VIII: GAO Co nt ac t a nd St aff Ac kn o wle dgm en ts 7

Bibliography 7

Tables Table 1: Budget Support Committed by the InternationalCo mm un it y fo r t he F ed er at io n a nd Re pu blik a Sr ps ka 3

Table 2: U.S. Executive Branch Benchmarks for Measuring

Progress in the Implementation of the Dayton Peace

Agreement 4

Table 3: 1999 Budgets for the Fede ration and Republika

Srpska 5

Table 4: Major Bosnian, Inter nat ional, and U.S. Anticor rup tion

and Judicial Reform Efforts 5

Figures Figure 1: Destruction Caused by War

Figure 2: Geographic Boundaries of Bosnia, Its ConstituentEntities, and the Federation’s Cantons 1

Figure 3: Example of Material Used in Office of the High

Re pre sen ta tive ’s Pu blic Aw aren es s Ca mp aign 2

F igu re 4: P ro mot io nal Mat erial fo r t he Cu st oms Ho tlin e 2

Figure 5: WESTAR Operation in Progress and Seized Documents 2

F igu re 6: Cr oa t-Co nt ro lle d Paym en ts Bu rea u in Mo sta r 2

Figure 7: Holiday Inn Sarajevo 3

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Contents


Figure 8: Bosnia’s National Government Structure 5

Figure 9: Federation and Republika Srpska Entities’Government

Structures 5

Figure 10: Federation Entity and Cantonal Law E nforcement

and Judicial Systems 5

Figure 11: Republika Srpska Entity Law En forcement a nd

Judicial System 5

Figure 12: Revenue Sources in t he Fed eration and Republika

Srpska (1999) 5

Abbreviations

USAID U. S. Agency for International Development

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United State s Gene ral Accounting OfficeWashingto n, D.C. 2054 8


National Security andInternational Affairs Division

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July 7, 2000

The Honorable Benjamin A. GilmanChairmanThe Honorable Sam GejdensonRanking Minority MemberThe Honora ble Douglas K. BereuterMemberCommittee on International Relations

House of Representatives

The 3-1/2-year war in Bosnia killed over 250,000 people; forcibly displacedabout 2.3 million; and da maged or destr oyed the count ry’s ph ysical,economic, and political infrastructure. Representatives from Croatia, theFede ral Repub lic of Yugoslavia, Bosnia’s t hree major ethnic groups, a ndleaders of the international community signed the Dayton PeaceAgreement in December 1995. The agreement was designed to, among

other things, stop the warring factions from fighting, return people to theirpre-war home s, and reb uild Bosnia’s infrastruct ure—in short, to cr eate aself-sustaining peace in a multiethnic Bosnia. The agreement also

estab lished the Office o f the High Representa tive in Sarajevo, which ass istsand can direct the Bosnians in implementing the agreement.1

The internat ional commu nity, including the World Bank, the Europ eanUnion, and th e United States, committed more than $4 billion from J anuar y1996 through Decembe r 1999 to finance the inte rnational effort to

implement the civilian aspects of the agreement.2 From Janua ry 1996 toDecember 1998 the primary focus of the civilian aspects of the DaytonPeace Agreement was on reconstruction efforts, but beginning inDecember 1998 the focus changed to building basic government

1

For a full discussion of these events, including refugee returns a nd the internationalreconstruc tion effort, see Bosnia Peace Operation: Pace of Implementing Dayton Accelerated as International Involvement Increased (GAO/NSIAD-98-138, Jun e 5, 1998) a ndBalkan Suecurity: Current and Projected Factors Affecting Regional Stability

(GAO/NSIAD-00-125BR, April 24, 2000).

2Approximately $1 billion, of the over $4 billion in assistance funding was pledged by theUnited States. This does not include U.S. contributions to international organizations, suchas th e U.N. mission in Bosnia, or military co sts. As of March 2000, the U.S. military co sts fooperations in Bosnia totaled approximately $10 billion.

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institutions, such as the judicial system, and creating a free-marketeconomy. The President has requested over $100 million for assistance to

Bosnia in 2001.

The United States and the international community have succeeded instopp ing warring factions from fighting and in re building Bosnia’sinfrastructure. Now the goal of the international community, according tothe Peac e Implementation Council, is to strengthen the peace process andbuild democratic and market-oriented institutions.3 To accomplish theseobjectives, Bosnian government officials are expected to increasinglyassume greater independent r esponsibility for functions that ha d bee n

undertaken or c oordinated by the international community.4

In 1998, the U.S. government , the P eace Implementation Counc il, and t heNorth Atlantic Council adopted benchmarks for evaluating implementationof the Dayton Agreement.5 These benchmarks are intended to helpdetermine when sufficient progress has been made in recon structing

Bosnia so that forces led by the North Atlantic Treaty Organization (NATO)can be withdrawn. Three of the benchmarks—the elimination of illegalinstitutions, the creation of a democratic law enforcement system, and thereform of the judicial system—are directly related to reducing the level of organized crime and corruption.6

You expr essed c once rn abou t the impact of organized crime and pu blicsector corruption on the efforts of the international community to rebuildBosnia and meet the benchmarks for the withdrawal of NATO-led forces.

As you requested, we examined (1) how organized crime and public sectorcorruption might affect the successful implementation of the DaytonAgreemen t in Bosnia, (2) whet her the international co mmunity’santicorru ption efforts have improved Bosnia’s law enforcem ent an d

3In December 1995, the London Peace Implementation Conference established the PeaceImplementation Council to monitor and review pr ogress in peace implementation. The

Council’s steering boar d con sists of represen tatives from eight cou ntries, the Europ eanUnion, and the Euro pean Commission and is chaired by the High Representative.

4The report refers to any citizen of Bosnia as a “Bosnian,”r egardless of ethnic group.

5The North Atlantic Council is the political governing body of the North Atlantic TreatyOrganization.

6For a full discussion of the b enchmarks, see Bosnia Peace Operation: Mission, Structure,and Trans ition Stra tegy of NATO’s Stabilization Forc e (GAO/NSIAD-99-19, Oct. 8, 1998).

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judicial system and red uced c orruption, and ( 3) whether international

assistance resources are being safeguarded and whether such assistance i

being used by Bosnia in place o f domestic revenues lost due to crime and

corruption.

Our review was based on studies, documents, and information pro vided b

U.S. and international organizations involved in the implementation of the

Dayton Peace Agreement. We a ttempted to identify instances in which the

Bosnians were independently meeting the Dayton benchmark s without

international edict or direction, as this is a main goal of the international

community. (See app. VII for a more detailed discussion of our objectives

scope, and methodology.)

Results in Brief Endemic crime an d co rruption is impeding the succe ssful implementation

of the economic, political, and judicial reform goals of th e Dayton P eace

Agreement. According to senior U.S. and international officials and

numerou s studies, corruption is impeding progress toward s implementing

the Dayton Agreement, and cond itions for th e comp lete withdrawal of

NATO-led forces will not be met unless Bosnian officials make concerted

efforts to address this problem. This, however, has not hap pened: crime

and c orru ption co ntinue t o per vade Bosnia’s political, judicial, and

economic systems. U.S. and international officials further s tated that thissituation exists largely becaus e Bosnian leaders from all ethnic groups

have not demons trated the political will to reform. However, State said

some mor e mode rate government officials have cooperated w ith the

international community and others have cooperated under pressure.

Numerous asses sments have also concluded that the institutional structur

for law enforcement and public acco untability continues to be inadequate

precluding successful prosecution of government fraud, corr uption, and

complex white-collar crime. Moreover, other studies and international

donors have concluded that the judicial system is threatened by corrupt io

and is therefore institutionally incapable of effectively administering

justice.

Bosnian, international, and U.S. anticorruption and judicial reform efforts

have achieved only limited succe ss in reducing crime, corruption, and

political influence over law enforcement and judicial systems, according to

U.S. and international reports and officials. While international efforts

could provide needed sup porting structures for the rule of law, most of

Bosnia’s leaders have chose n no t to cooperate. Instead, Bosnian

government efforts h ave primarily been to create committees and

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commissions that have failed to become operational or measurably reducecrime and corr uption. The Office of the High Representa tive has developed

a strategy for coordinating international anticorruption efforts. However,these efforts have also achieved limited results to date, given the lack of high-level comm itment t o fighting crime an d cor ruption w ithin the Bosniangovernm ents. U.S. efforts, led by t he U.S. Agency for Inter nationalDevelopment (USAID), seek to curtail corruption through the eliminationof communist-era financial control structures and the privatization of state-owned enterprises. Although efforts to replace state-owned financialstructures with a private banking system are progressing, privatizationefforts have been less successful. The U.S. ambassador to Bosnia

suspended aid for the privatization effort in the Federation due to a lack ofcooperation on the pa rt of the Federa tion government.

U.S. and international donors have established procedures for safeguardingassistance to Bosnia, and there is no evidence that assistance is being lostto large-scale fraud or c orrup tion. However, due t o the fungibility of money

such assistance may be used to replace Bosnian domestic revenues lost tocrime and co rruption. Further, the United States has yet to rec overappro ximately $900,000 in U.S. embass y opera ting funds a nd loanpayments deposited in a bank that was involved in corrupt activities and isnow bankrupt. Also, $340,000 in World Bank-provided funds were lost as aresult of a procurement scheme perpet rated with fraudulent documents.Further, most of the $407 million committed by international donors to theBosnian entity governments for general budget support (i.e., monies thatare added to the entities’ general revenues and are not ea rmarked for

specific purposes) is not controlled or audited. Moreover, if the Bosniangovernments strengthened the rule of law and identified ways to collectsome o r all of the hundre ds of millions of dollars lost annua lly as a result ofwidespread tax a nd customs duty evasion, as estimated by theinternational community, budget support might not be needed.

Because senior Bosnian officials have not demonstrated the will to addressthe problem of crime and corruption and wor k toward a society based on

the rule of law, we are recommending that the Secretary of State reassessthe strategy for providing assistance to Bosnia. Such a reassessment shouldconsider making changes in the type and a mount of as sistance provided,including the possible suspension of assistance to Bosnia, unless certainagreed-upon conditions are met. We also suggest that Congress may wishto require that State certify that the Bosnian governments have takenconcrete a nd measurable steps to implement anticorruption programs and

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significantly improve their ability to control smuggling and tax evasion

before providing future assistance.

In commenting on t his report, the Department o f Defense specifically

agreed with our conclusion that crime and corruption impedes the

implementation of the Dayton Peace Agreement, and t he Department of

State and the Agency for International Development d id not d isagree with

this con clusion. All three agencies believe, and we agree, that the

international assistance effort has been successful in several areas,

including the physical reconstruction of the country and maintenance of

the c ease-fire amon g the former w arring factions. State disagreed with our

recommendation and said that a reassessment of its approach to providingassistance to Bosnia is unnecessary because a reassessment was done in

1998 and the ch ange in approac h adop ted at the time is still valid. Further,

State said that conditioning the assistance the U.S. currently provides

would be counterproductive because the assistance is designed to improve

accounta bility and transpare ncy and prom ote th e rule of law, assistance

which is unwelcome by the hard-line obstructionists who oppose the

Dayton Agreement. The U. S. Agency for International Development

echoed this concern in its comments. Despite these disagreements, we

believe a reassess ment of the strategy for accom plishing U.S. objectives in

Bosnia is warrante d. We found no e vidence that State’s re assessmen t

process addressed the underlying causes of corruption and a lack of

reform, namely the continued obstru ctionist behavior of the hard -line

nationalist political leaders an d othe rs who State acknow ledged have

obstruc ted reform efforts promot ed by the interna tional community. It is

widely recognized by U.S. and international officials that so long as th e

hard-line obstruct ionists retain co ntrol in Bosnia, the a bility to achieve the

Dayton Agreem ent o bjectives an d th e ultimate withd rawa l of NATO-led

troops is unlikely. A reassessment of the current strategy may identify a

course of action more likely to a chieve U.S. objectives.

BackgroundBosnia was one of six republics of the former communist state of

Yugoslavia. Its s ocial, political, legal, and ec ono mic syste ms w eredeveloped and shaped by 45 years of communist rule. During 1991-92,

Yugoslavia collapsed as four of its constituent republics declared

independence . In Bosnia, nationalist pa rties of the Croats , the Serbs, and

the Muslims became the local successors to the communist party and

assumed control of the s ocial, political, and eco nomic systems of the

country. The war betw een thes e ethn ic groups solidified their part ies’

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authoritarian power. (Fig. 1 contains pictures of the destru ction caused by

the war.)

Figure 1: Destruction Caused by War

Source: GAO.

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With the signing of the Dayton Peace Agreement in December 1995, the war

ended, the Bosnian national government was created, and the two entities

created during the war w ere recognized. The competing nationalist par ties

control the national government, and each of the two entities—the

Bosnian/Croat Federation an d the Republika Srpska. Each en tity has its

own government, a rmy, and police force. The Fed eration is further divided

into 10 cantons, each with its own government. The Croat-controlled

cantons constitute a de facto third entity because they do not recognize

Federation law and are run by a number of parallel institutions such as

payments bu reaus, which c ontrol financial transactions in Bosnia. At

Dayton, the parties were unable to agree on which of Bosnia’s eth nic

groups would control the strategically important area in and around thecity of Brcko. The agreement called for an arbitration tribunal to decide

this issue. The tribunal d ecided, on March 5, 1999, to m ake Brcko a self-

governing neutral district. Figure 2 illustrates the geographic bo undaries o

Bosnia, its constituent entities, and the Federation’s c antons . (App. II

contains organization ch arts of Bosnia’s n ational and entity governments

and law en forcement an d judicial systems.)

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Figure 2: Geographic Boundaries of Bosnia, Its Constituent Entities, and the Federation’s Cantons

Source: United Nations. Boundaries are as of April 2000.

Note: Cantons 1, 3, 4, 5, and 9 are under Bosnian Muslim control. Cantons 2, 8, and 10 are underBosnian Croat control. Cantons 6 and 7 are mixed. Republika Srpska is under Bosnian Serb control.

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A unique aspect of the Dayton Agreement was the establishment of theOffice of the High Represe ntative. This Office has significant power s,

including the power to impose laws and remove any government officialthat e ngages in anti-Dayton Agreement activities. A numbe r of internat ionaorganizations, including the United Nations, the Europ ean Comm ission, theOrganization for Security and Cooperation in Europe, the World Bank, andthe U.S. Agency for Interna tional Developme nt, pro vide t echnicalassistance targeted at, among other things, judicial reform and economicdevelopment to further the implementation of the agreement. TheNATO-led Stabilization Force suppor ts t hese international a gencies’ effortsby creating secure conditions for the conduct of civilian-led reconstruction

efforts in addition to implementing the military aspects of the DaytonAgreement.

Bosnia is undergoing simultaneous transitions from war to peace, fromcommunism to democracy, from a government-run economy to a marketeconomy, and from a rural population to an urban population. To

implement the provisions of the Dayton Peace Agreement and help Bosniathrough these various transitions, the international community developed acomp rehen sive $5 billion, 5-year intern ational ass istance effort. To a ssessBosnia’s pr ogress in implement ing the Dayton Agreement and deter minewhen implementation ca n con tinue without a m ajor NATO-led militaryforce, the U.S. government estab lished 10 benchmark s in March 1998. TheNorth Atlantic and Peace Implementation Councils adopted similarbenchmarks.7 (The benchmarks a nd Dayton Peac e Agreement aredescribed in app. I.) The benchmarks are as follows:

• Military stability: Maintain Dayton Agreement c ease-fire.• Persons indicted for war crimes: Cooperation with the International

Criminal Tribunal for t he former Yugoslavia, leading to the trans fer of indicted war criminals to The Hague for trial.

• Brcko: Implementa tion of the Brcko Arbitration Tribunal’s Final Award

that was issued on March 5, 1999.

7NATO agreed to ben chmarks parallel to the U.S. benchmarks as pa rt of its approval of theStabilization Forc e m ilitary p lan (OPLAN 10407). According t o the plan, NATO’s desired endstate is an environment adequately secure for the “continued con solidation of peace”without further need for NATO-led military forces in Bosnia. The Peace ImplementationCouncil established a set of c onditions that mu st be realized for a self-sustaining peace totake hold in Bosnia. The Council did not link improvements in conditions to a withdrawal ofthe NATO-led forc e fro m Bosn ia.

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• Elections and democratic governance: National democratic institution

and practices.

• Media reform: A regulated, independ ent, and democratic media.

• Displaced person and refugee returns: A functioning, phased , and

orderly minority return proc ess.

• Illegal institutions, organized crime, and corruption: The dissolution of

illegal pre-Dayton Agreem ent institutions.

• Judicial reform: An effective judicial reform program in place.

• Public security and law enforcement: A restructured and democratic

police force in b oth en tities.

• Economic development: Free-market reforms.

Some of the be nchmarks have largely been met, such as maintaining the

ceas e-fire and implementing th e Brc ko Arbitration Tribuna l’s F inal Award

and som e progress has b een made in meeting other benchmarks . Howeve

according to the High Representative, none of the progress ach ieved to

date is self-sustaining. Further, although reducing crime and corruption is

separate benchmark, the pervasive illegal activity affects progress in

meeting many important benchmarks, achieving U.S. policy objectives in

Bosnia, and th e Dayton P eace Agreemen t’s ultimate goal of a

self-sustaining peace.

Crime and CorruptionAre Per vasive

U.S. and international organization officials, as well as numerous published

reports, agreed that o rganized crime and corruption p ervade Bosnia’s

national political parties, civil service, law enforcement and judicial

systems, and the economy.8 Bosnia’s na tionalistic political par ties co ntro l

all aspects of the government, the judiciary, and the e conomy, and in so

doing maintain the per sonal and financial power of their members and

authoritarian control over th e cou ntry. The High Representative ha s stated

publicly that corruption in Bosnia is endem ic and pr ogress in achieving th

goals of the Dayton Agreement is often so incremental as to be almost

invisible, especially to the outside w orld. Further, in testimony before the

House International Relations Committee in September 1999 the State

Department’s Director of Bosnian Implementation s tated that “corruptionis undeniably one of the prime obs tacles to achieving the goals set forth a

8Corruption in Bosnia was defined by the High Representative as, among other things,

“abuse of office for private gain including awarding contracts for public works projects aspolitical or eco nomic favors; misuse of public funds and donations; disrespect of laws suchas the Procurement Law; tax evasion; bank fraud, etc.”

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Dayton.” With crime and corruption pervading every aspect of Bosnian

society and the e conomy, the Deputy High Represent ative, the Supreme

Allied Commander Europ e, and the U.N. Special Representative to Bosnia

told us that the benchmarks for evaluating the implementation of the

Dayton Agreement c annot be met.

Political Parties ControlBosnia

The curren t p olitical power structu re, like the former Yugoslavian

communist s ystem, governs by the rule of party rather than th e rule of law

with an absence of accountability and transparency according to, among

oth ers, U.S., Office o f the High Repr esen tative, and U.N. officials in Bosn ia

As a result, the political parties contro l public administration, the judiciary

and the economy. In January 2000, the U.N. Special Representative to

Bosnia stated before th e Legal Affairs and Human Rights Committee of the

Council of Europe 9 that

“war-time underground networks have turned into [political] criminal networks involved in

massive smuggling, tax evasion, and trafficking in women and stolen cars. Some politicians

play the nationalist card to mask their commitment to develop state institutions. For them,

public accountability and personal responsibility are notoriously absent.”

In his presentation to the council the High Representative stated that

“the main political parties still rule Bosnia along ethnic lines. They are interested in politicapower, not because it allows them to serve the interests of all citizens of Bosnia, but because

it allows them to pursue their own ethnic agendas.”

According to the International Crisis Group,10 the registration system for

political party can didates h as co nsistently failed to investigate the

backgrounds of party candidates for anything other than whether they are

citizens and whether the Internat ional Criminal Tribunal for the Fo rmer

Yugoslavia has ind icted t hem.11 The result is that corrupt local officials

9The Council of Europe is an international organization based in Strasbourg, France. Its

main role is to strengthen democracy, human rights, and the rule of law throughout itsmember sta tes. The defense and promotion of these fundamental values is no longer simplyan internal matter for governments but has become a shared and collective responsibility oall the countries concerned.

10Rule Over Law: Obstacles to the Development of an Independent Judiciary in Bosnia and Herzegovina , Interna tional Crisis Group (Sarajevo, July 5, 1999). The Interna tional CrisisGroup is a private, multinational organization committed to strengthening the capacity of the international community to anticipate, understand, and act to prevent impending crisesand conflicts.

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occupy elected positions with a stamp of approval from the international

community, an uncomfortable situation that has been documented by such

international groups as Human Rights Watch.12 Some international

observers, including the Internat ional Crisis Group, believe t hat the

inability of the international community to pr ohibit suspected criminals

from running for public office is one o f the major reas ons w hy organized

crime is so prevalent today.

According to the international officials we spoke to, including the U.N. and

NATO-led Stabilization Force, a complex web of interrelationships exists

between organized criminals and government officials. In congressional

testimony before the House Armed Services Committee, in February 2000,General Wesley Clark, Supreme Allied Commander Europe, stated that the

international community has to remove corrupt leaders who cooperate

with criminal elements in ord er to eliminate impediments to economic

growth and refugees’return.13

U.N. and U.S. Embassy officials in Bosnia and published reports indicate

that d uring the war individuals rose t o pow erful positions in the Bosnian

government by engaging in corrup t an d/or criminal business activities,

including illegal financial transactions and smuggling. International Crisis

Group a nd Europea n Stability Initiative14 reports indicate that some of

these individuals have continued t o con duct illegal activities bu t have no t

been prosecuted because they kept their side supplied with arms and food

during the war. Having used illegal netwo rks for military and economic

11The Organization for Security and Cooperation in Europe administers the registrationsystem with instructions from the Provisional Election Commission. The Organization is aregional security organization whose 55 participating states are from Europe, Central Asia,and North America. The Commission was created by the international community and isresponsible for, among other things, establishing electoral rules and regulations andorganizing election monitoring to ensure free and fair elections. The Tribunal for the FormerYugoslavia has the p ower to, among other t hings, pros ecute pe rsons r esponsible for ser iouviolations of intern ational humanitar ian law in the ter ritory of the form er Yugoslavia since1991.

12Human Rights Watch is a nongovernmental organization dedicated to protecting thehuman rights of people around the world.

13The Supreme Allied Comman der Europ e has military au thority over NATO-led forces inBosnia.

14The European Stability Initiative is a nonprofit think tank focusing on South EasternEurop e. It p rovides policymakers with timely, high-quality analyses of political, social, andeconomic developments in the region.

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ends during the war, political parties are no w inseparable from cr iminal

organizations. Furthermo re, the European Commission’s Customs and

Fiscal Assistance Office (h ereafter referred to a s th e Customs Assistance

Office)15 and entity customs administrations conducted investigations in

1997 and 1999 showing that certain smu ggling operations could have b een

successful only with the participation of custom s officials. In addition,

according to the Department of State, criminal elements involved in

narcotics trafficking have been credibly linked to public officials. The

proceeds from the narcotics trade are widely believed to support parallel

institutions maintained by ethnic extremists. However, there have been no

legal actions against public officials for narcotics-related offenses.16

Corruption Pervades PublicAdministration

Transparency International documented the culture of lawlessness and the

lack of institutional authority that pe rvades Bosnian society during

fieldwork conducted in 1998.17 Local polling firms that condu cted a survey

of over 2,800 individuals for the State Department in October 1999 found

that 50 percent o r more o f all three ethn ic groups believe that corrupt ion is

prevalent among the cen tral government, local governments, and b usiness

people.18 The vast majority of legal abuses occur within the Bosnian public

administration system, where government officials, appointed by local

political party bosses, scree n out public complaints and engage in corrupt

activities such as taking bribes. For example, as reported by theInternational Crisis Group , the ruling part ies app oint high-ranking

officials—whose only qualification for the most part is party loyalty.19

15The Customs Assistance Office was established in 1996 to help Bosnia form a coherentcustoms system at the national and entity levels. Loss of Revenue Within the Transit Systemand Failure of Control, A Report by the European Commission Customs and Fiscal Assistan ce Office, (Sarajevo: Oct. 24, 1997) and Report on Importations for State Directoratefor Strategic Reserves, Sarajevo and State Directorate for Strategic Reserves, Mostar, AReport by th e Euro pean Commission Customs and F iscal Assistance Office (Sarajevo:Oct. 24, 1997).

16International Narcotics Control Strategy Report, 1999, Released by the Bureau for

International Narcotics and Law Enforcement Affairs, U.S. Department of State(Washington, D.C., March 2000).

17Transparency International is a nongovernmental organization dedicated to increasinggovernmental accountability and curbing international and local corruption.

18Opinion Analysis, Office o f Researc h, U.S. Departme nt of State, December 1999.

19Rule of Law in Public Administration: Confusion and Discrimination in a Post-CommunisBureaucracy , Interna tional Crisis Grou p, (Sara jevo: Dec. 15, 1999).

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Office o f the High Represen tative and o ther officials told us that Bosnian

officials misuse t heir positions at all levels of government, a nd s anctions

are ra rely imposed unless th e international com munity intervenes. In Tuzla

the former can tonal prime minister and ot her officials have been

investigated by the F eder ation’s Financ ial Police for misusing the ir

positions.20 The international community has closely monitored this case.

In March 2000, the former canton al prime minister was se ntenced to

2 years an d 2 months in jail for the misuse of his position and government

funds. However, according to a U.S. official responsible for providing

training in law to Bosnian pros ecutors and judges, Bosnia has no

truth-in-sentencing laws. Consequently, it is difficult to ensure that the

officials pros ecuted in Tuzla o r o ther criminals serve their sen tences. U.N.Office of the High Representative, and U.S. officials we spoke to could not

cite a single case in which a high-level official had been jailed on a

corrup tion-related char ge prior to th e Tuzla case.21 In fact, of the 30

economic crime cases sent to the Tuzla mu nicipality prosecutor’s office in

1998 and 1999, 3 were dismissed and 27 were pending.

Office of the High Representative and U.S. officials, among others, stated

that bribery is a systemic means for poorly paid corrupt public officials to

supplement their income. The International Crisis Group and USAID have

documen ted t he p ervasive u se o f bribery. For example, USAID conducted a

survey in 1999 of Bosnian bu siness peop le and found t hat th ey routinely

pay bribes to rec eive government cont racts, obtain government loans, and

avoid being closed by government inspectors.22 According to the

International Crisis Group, the pe rvasiveness of nepotism and the ten dency

to us e contac ts to achieve one’s rights has becom e the no rm. Almost every

segment of administrative procedure is based on a grid of connections,

from friendships t o tho se of a p olitical and often criminal nature. For

example, throu gh its su rvey, USAID found that business people ro utinely

20

The Financial Police are part of the Ministry of Finance and have the authority toinvestigate government organizations and government-owned enterprises.

21According to the Office of the High Represen tative’s Anti-Frau d Unit, the inter nationalcommunity has not attempted to determine the universe of c orruption-related cases beingpursued by the entities’ legal authorities.

22Payments Bureaus in Bosnia and Herzegovina: Obstacles to the Development and a Strategy For Orderly Transformation, USAID, Sarajevo, Bosnia and Herzegovina (Sarajevo:Feb. 15, 1999).

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use con nections within the governments’ financial control organizations to

circumvent controls an d obtain financial information on c ompetitors.

Law E nforcement F avorsThose in Power

Bosnia has almost no history of democra tic governance; consequently, law

and order has been imposed on the people by whoever wielded power.

According to the U.N. International Po lice Task Forc e, Bosnia has one

police officer for every 250 citizens compared to one for every 500 citizens

in the United States. However, these police officers’ allegiance is often t o

ethnic political parties rather than t o the public. For exa mple, through its

audits of Bosnian police operations in 1998 and 1999, the U.N. mission in

Bosnia found that there was no separation between the Bosnian Croat

army, controlled by the Croat nat ionalist party, and the local police in

Stolac. The army was o perating out o f the Stolac police station.

In November 1999, the Office of the High Representative removed the

minister of the interior of one canton for, among other t hings, repeated

failure to take disciplinary action co ncerning unfit police officers des pite

court verdicts of serious criminal offenses. According to U.N., Europe an

Union, and o ther interna tional officials we s poke t o, police in some areas

continued to work for local party officials and were used to protect the

business interests of th ese individuals, intimidate citizens, and prevent the

return of refugees. For example, a Bosnian Croat police officer killed aBosnian Muslim during an atte mpted visit to a cem etery in Croat te rritory.

Although the incident was ph otographed, the police officer rec eived a

suspen ded senten ce for using excessive force, and the judgment stated that

it must be remembered that he was fighting for his coun try.

Jud icial System IsInadequate

An inadequate judicial system p recludes suc cessful prosecution o f

government fraud, corruption, and complex white-collar crime. According

to t he Office o f the High Repres ent ative’s J udicial Reform Strat egy, the

judicial system is institutionally incapable of effectively administering

justice, and political involvement occurs at man y stages of th e judicial

process. According to U.N., U.S., and Office of the High Representativeofficials we spoke to, there are good individuals t hroughout Bosnia’s

judicial system, but it would be virtually impossible to have all the pa rts o f

the system wo rk pro perly in t he s ame cas e. Ministry of Interior officials in

Republika Srpska told us that the justice system in the republic was not

functioning and that t heir work is futile becau se th e Ministry of Justice

does n ot tak e action on the investigations they con duct. A Bosnian legal

scholar stated that Bosnia has laws that could be used to prosecute

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organized crime and corruption. However, these laws are not being applied

and p olitical influences over the courts p revent cases from being heard.

According to the Office of the High Representative, the International Crisi

Group, the U.N. Mission in Bosnia, and other organizations, the selection o

judges in Bosnia is the p roduct of political patronage, and judges’ salaries

are c ontrolled b y political structures. A poll conducted by a n ational

Bosnian daily newspaper in April 2000 found that approximately 73 percen

of the respond ents in three of Bosnia’s largest cities did not believe the

court system was independent. Under the current structure judges,

prosecut ors, and all who are involved in the judicial process are vulnerabl

to p olitical, ethnic, and economic p ressures, including physical threats anbeatings. According to international officials, local criminal leaders, many

of whom are c losely linked to ru ling political parties, are ready to threaten

judges, prosecutors, police officers, lawyers, or witnesses with violence, o

even death, to act in a particular way. For example, in one case, well-know

gangsters, in an effort to intimidate a judge, monitored the trial of one of

their associates to ens ure he rece ived a “fair trial.” The d efendant, one o f

the first people indicted by the International Criminal Tribunal for the

former Yugoslavia, was acquitted o f murder. The close r elationship

between the political power struc tures and organized crime and cor ruptio

results in pressure being placed on judges and prosecutors to overlook th

crimes of know n cr iminals and those in power. One well-known criminal

was arrested numerous times on various offenses before he was

convicted.23

In May 2000, the High Representative removed the governor and prime

minister of one of the cantons in the Federation due to their persistent

abuse o f power. Under their governance, the can ton was characterized by

dysfunctional judicial system and lack of resp ect for the rule of law. These

officials refused to appo int competent pro secutors and judges for the

canton. According to the High Representative, police in the canton applie

different standard s of justice an d law enforcement for citizens based on

their ethnic origin. Since all corruption cases necessarily involve public

officials, a judiciary reliant upon the political party in power will always bquestionable.

23The conviction resulted from the beating of a police o fficer.

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Corrup tion’s Effect on theEconomy

A large portion of the Bosnian economy is underground, public utilitiesengage in corrupt practices, and international investment is stymied by

pervasive corr uption. In November 1999, Bosnia’s th ree president sappeared before the U.N. Security Council and acknowledged thatcorruption and the lack of transparency in government operations wereserious pro blems that ha ve blocked Bosnia’s econom ic developmen t.24

Accor ding to USAID, about 50 percent of Bosnia’s gross dome stic pro ductin 1999 was generated by the underground economy, and customs and tax

evasion are endemic. In addition, a number of public companies, includingelectric, water, and t elephone companies, are monopolies t hat exe rcise

power over citizens in a variety of ways.25

All three types of utilitycompanies set arbitrary prices and follow the guidelines and fund theoperations of local politicians and political parties that control the utilitiesin their areas. According to officials in Bosnia, these companies are subjecto political abuse and present a formidable tool in preventing minorityrefugees’return.

The most common complaint from business professionals in Bosnia is theexistence of pervasive corruption, according to a USAID survey of businesses and an International Crisis Group report. Corruption raises thecost of doing business so much that investors are unable to acc uratelyforecast costs and cash flows. This leads to a situation in which the return

on investment is no longer profitable and continuing operations isimpossible. Consequently, private investment in Bosnia in 1997 and 1998($160 million) wa s insignificant, thus stalling efforts to rebuild aself-sustaining econom y. One indication of how bad the c limate forinvestment in Bosnia is can be seen by the lack of interest by potentialinvestor s in the Eur opean Commission’s spec ial trust fund to insureinvestments in Bosnia. Although established more than 2 years ago, as of March 2000, the fund had not yet registered its first investmen t. The U.N.Special Representative to Bosnia believes that corruption is the biggestsingle obstacle to the achievement of a self-sustaining economy in Bosnia.

Further, international officials, including the NATO-led Stabilization Force

24The three memb ers of the Bosnia joint pres idency accepted the invitation of the U.N.Security Council to appear before it on t he eve of the fourth anniversary of the DaytonPeace Agreement. The U.N. Security Council consists of 5 per manent m embers and 10nonpermanent members and is responsible for the maintenance of international peace andsecurity.

25Each ethn ic group has its own electric, water, and telephone company. These companiesexercise monopoly powers in their own ethnic areas.

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Commander, believe that the primary obstacle to refugee return s is the

poor economy.

Anticorruption andJudicial Reform EffortsHave Been LargelyUnsuccessful

Over the last 4 years the Bosnians, the international commun ity, and the

United States ha ve initiated a wide range of reform efforts to address the

immediate effects of crime and corruption. In addition, the international

community has implemented other efforts that attempt to strengthen the

weak judicial systems and to build the capacity within Bosnia to fight these

problems. The efforts, while helping to provide the building blocks for

judicial reform, have h ad limited succ ess in reducing crime, corrup tion,and political influence over law enforcement and the judiciary. (For a more

complete listing of anticorruption and judicial reform efforts in Bosnia see

app. III.)

Bosnian Efforts Have NotReduced Corruption

The Bosnian a nd entity governments have initiated five anticorruption

committees, commissions, or groups. However, according to U.S., Office of

the High Representative, and other international officials, these efforts

have achieved little success, and the political will of government officials is

rarely demonstrated. The five initiatives are as follows:

• In 1997, the Federation’s House of Representa tives created acommission to investigate corruption. According to the Office of the

High Representative, the c ommission became operational in 1998 but

was unsuccessful because it lacked government cooperation.

• The chairman of the Bosnian presidency created an anticorruption

commission in 1997 to look into fraud an d co rruption, but it never

became operational.

• In September 1999, the Federation established a commission of

international legal experts to co mbat corr uption and w ork with

international organizations to set up a regime that promotes

transparen cy in government o perations. The com mission’s r eport,

published in February 2000,26 found that amo ng other things, corruption

is a serious problem in the Federation and is caused by a number of

factors, including Bosnia’s communist pa st a nd its current tax system.

26The commission focused on the Federation because Republika Srpska declined to

participate. The com mission’s mandate was to, amon g other th ings, examine the nature andcauses of corruption in the Federation and recommend measures to improve itsanticorruption efforts.

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The commission recommended the creation of a spe cial anticorruption

task force, led by a special prosecuto r, that wou ld lead and direct the

selection, pre investigation, and trial of major case s of corrup tion. In

April 2000, officials in the Federation began discussions to start an

anticorruption effort heade d by the prosecu tor’s o ffice.

• In November 1999, the entities’ prime ministers agreed to establish an

interentity anticorruption group. As of May 2000, this group had not

been established.

• In December 1999, the Federation’s parliament began efforts to develop

an an ticorruption strategy. The working groups for this effort intend to

analyze the Office of the High Repr esen tative’s an ticorru ption st rategy

and th en develop their own strategy and implementation plan. As of March 2000 the plan was completed and h ad been sent to th e Federatio

parliament for review.

According to the Office of the High Representative, there are no formal

anticorruption efforts in Repub lika Srpska. Further, the U.S. Ambassad or

to th e United Nations stated in a November 1999 address to th e U.N.

Security Council that “the governments of Bosnia could do far more to figh

corruption than they had over the past 4 years. There must be a stronger

fight against th e forces of dark ness; the murd erers, the fascists, the crook s

the thu gs.”

Non-U.S. InternationalAnticorr uption Efforts HaveHad Limited Success

International organizations have instituted a range of efforts tha t have

achieved limited s uccess in the fight against crime and corruption.

However, internat ional officials, including the Office of the High

Representative a nd t he Customs Assistance Office, among others, stated

that w ithout their continued involvement, the Bosnians would no t continu

these e fforts.

The Office of the High Representative initiated a number of anticorruption

efforts in 1999 and 2000, including publishing an anticorruption strategy,

establishing a public awareness campaign, and assisting the Bosnians wit

spe cific cor rup tion-related c ase s. These efforts ar e lead by the o ffice’sAnti-Fraud Unit. In February 1999, the unit published an anticorruption

strategy that bro ught together th e major an ticorruption activities of the

international community. In September 1999, the High Representative

established a n Anticorruption and Transparen cy Group comprised o f

individuals from the international agencies working in Bosnia to coordinat

the inte rnation al commu nity’s efforts to implement t he st rate gy. In March

2000, the Anti-Fraud Unit s tarted an anticorruption p ublic a wareness

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campaign. The first phase of the campaign includes a series of radio jingles

television ca rtoons, po sters, and comic strips. Figure 3 c ontains exam ples

of the material used in the campaign.

Figure 3: Example of Material Used in Office of the High Representative’s Public Awareness Campaign

Source: Office of the High Representative. Translation by U.S. Embassy, Sarajevo.

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The unit is also assisting the Bosnians in the investigation and prosecutionof significant fraud, economic crime, and corruption cases. This approach

is intended to help improve the investigative and prosecutorial capabilitiesof the Bosnians. Fo r exa mple, the u nit is working with Bosnian officials onsignificant corru ption c ases in Tuzla, Bihac, a nd Sarajevo. Although theunit is tasked to assist local authorities in investigating fraud andcorruption and prosecuting the perpetrators, it does not have the power toundertake independent investigations or law enforcement actions.

Accor ding to the United States, United Nations, International Crisis Groupand other international officials in Bosnia, anticorruption efforts have not

had a major impact, in part because Bosnians are not equal partners in theeffort. Some officials further stated that the anticorruption strategy is morea recitation of existing international efforts rather than a strategy and thatalthough the work of the inter national comm unity is collegial, it is not trulycoordinated.

The anticorruption effort led by the Customs Assistance Office and fundedby the European Commission is considered to be the most successfulanticorruption effort. The Office has assisted in establishing neededcusto ms legislation and custo ms ser vices a t the ent ity level.27 Investigationsconducted and systems put in place by the Office have identified incidentsof corruption and illegal activities that have resulted in the loss of millionsof dollars in cust oms du ties and ta x revenues . In addition, custom s officialperpe trating illegal activity have bee n ex posed. According to the RepublikaSrpska Customs Administration, 45 employees have been dismissed and

criminal proceedings are pending against 30 others.

The Customs Assistance Office set up telephone hotlines in September1999 to allow c itizens to repor t illegal activities in both the Feder ation andRepublika Srpska. During the first 2 months of operation in RepublikaSrpska, 1,250 callers provided leads that led to the seizure of smuggled

goods wor th $1.5 million. (Fig. 4 is an ex ample of th e pr omotional mat eriaused to inform c itizens abo ut th e ho tline.) Although the Office’s wor k is

considered successful, officials there said that the entity customs

27In Bosnia, customs policy is developed at th e state level, but customs a dministration andenforcement are the resp onsibility of each entity. Each entity has its ow n account for thecustoms revenue collected, and the revenue belongs to the entity where the goods arecleared.

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administrations would n ot c ontinue to function if the office’s work were

terminated today.

Figure 4: Promotional Material for the Customs Hotline

Source: Customs Assistance Office. Translation by U.S. Embassy, Sarajevo.

In order to assist in the implementation of the Dayton Agreement, the

North Atlantic Council tasked the commander of the NATO-led

Stabilization Force, through the Supreme Allied Commander, Europe, with

the mission of providing a con tinued military presence in order to deter

renewed hostilities, contribute t o a secure environment, an d help s tabilize

the peace. In keeping with this mandate, the NATO-led force established an

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office of the inspector general to help eliminate fraud and corrupt ion in the

ent ities’ arme d forces . The focus o f the office’s investigations is

professional military ethics and leadership concerns. NATO officials

respon sible for es tablishing the inspector general’s office told us t hat to

date, the investigations have led to the “removal, reassignment, or

suspen sion of non-compliant” personn el. Those that have been reassigned

have been transferred out of command posts to administrative

assignments. In addition, the NATO-led force has initiated broader

anticorruption efforts, mainly for force p rotection p urposes . In October

1999, the force conducted Operation WESTAR, a major raid on Bosnian

Croat covert intelligence facilities tha t r esulted in the seizure of large

quantities of w eapons, p irated software, cou nterfeiting equipment, andintelligence information . (Fig. 5 show s th e WESTAR opera tion in pr ogress .

NATO officials stat ed that the confiscated ma terial clearly indicates that

Bosnian Croats were involved in anti-Dayton Agreement and organized

criminal activities. State Department officials hop e th at the evidence

gathered during this operation can lead to progress in overcoming

nationalistic resistance to the Dayton Agreement and the prosecution of

specific individuals on corrupt ion-related charges.

Figure 5: WESTAR Operation in Progress and Seized Documents

Source: NATO.

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The World Bank’s initiatives to help Bosn ia implement a mode rn pu blic

financial management system include, as primary objectives, the

promotion o f transparency and accounta bility in the Bosnian budgeting

process . It also implemented a study in May 2000 to determine the root

causes of corruption in t he cou ntry. Despite th ese on going efforts,

International Monetary Fu nd, World Bank, and other officials we spoke to

stated that the e ntity budgets st ill lack transp arency. The Organization for

Security and Cooperation in Europe has implemented programs to improve

budget tran sparency at the municipal level and promot e the rule of law. In

addition, its enforcement of the provisional election rule on incompatibility

and conflict o f interest h as led to t he re signation of 136 elected officials

from their positions on steering, executive, or supe rvisory board s of publicenterprises and privatization a gencies. Seven oth er officials have resigned

from their elected positions. Finally, in late 1999 and early 2000,

Transparen cy International visited Bosnia to me et with interna tional and

local personnel involved in combating corrup tion. Its intent was t o

establish a Bosnian chapter of Transpare ncy Internat ional to develop a

local “watchdo g” on corruption. As of April 2000, no local chapter had been

established.28

The United States Has

Initiated Several Efforts toEliminate Corruption

In 1998, USAID conducted a st udy of cor ruption in Bosnia and developed

an an ticorruption st rategy.

29

Since th at time, the United States has st artedseveral anticorruption efforts that address systemic issues such as public

accountability and transparency. Two major efforts involve eliminating

Bosnian communist-era financial control structures known as payments

bureaus and p rivatizing state-owned enterprises.30 In add ition, U.S.

agencies, such as th e Treasury Department and t he U.S. Customs Service,

28In general, local groups contact Transparency International to establish a local chapter. InBosnia, the Office of the High Representative contacted Transparency International.

29USAID has not updated its 1998 anticorruption strategy as it believes the strategy is still

relevant and is being implemented.30Yugoslavia developed the pa yments bur eau as a m eans to m aintain complete co ntrol overthe creation and use of socially owned capital and decision-making in a presumablydecent ralized system. Unlike mos t ot her s ocialist states , Yugoslavia had a “socially owned”economy where most firms were owned and controlled by the workers and not the state.The five basic functions of the payments bureau are (1) payments, (2) government finance,(3) central bank, (4) private sector bank, and (5) statistics and information. The bureaus areincompatible with a market economy and their activities lack transparency. Until recently,no financial transactions were legal unless conducted through the payments bureau.

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assist in taxation reform and conduct tra ining in the control of moneylaundering. In Septemb er 1999, an intera gency anticorrupt ion task force led

by the State Department was established.31 This task force functions as anadvocacy group for strengthening existing anticorruption mechanisms inBosnia, su ch a s the Office of the High Repre sen tat ive’s Anti-Fraud Unit. Asof June 2000, the t ask force ha d pro vided $1 million to t he Office o f theHigh Represe ntative’s Anti-Fraud Unit t o fund auditors, p rosec utors , andinvestigators to work with Bosnian authorities on corruption related casesThe task force was encouraging the international community to provideadditional perso nnel for th e Anti-Fraud Unit. As of Jun e 2000 the ta sk force’s efforts had not re sulted in any measurab le reduction in crime or

corruption in Bosnia.

One of the major a nticorrup tion activities is th e USAID-led effort to reformthree separate, political party-based pa yments bureaus that wereestab lished during the 1992-95 war. (Fig. 6 is a picture of the paymentsbureau in Mostar.) USAID helped to create, and acts as chair of, the

multidonor advisory group that is coordinating the reform of the paymentsbureaus and was responsible for drafting the strategy being used to guidethe e ffort. The reform includes moving the r espon sibilities of the pa ymentsbureaus to other government m inistries or banks. For example, taxcollection is being moved to the Ministry of Finance, and the paymentsfunction is being moved to public and private banks. The ultimate goal of the reform effort is to eliminate the payments bureaus by December 31,2000.

31U.S. agencies and departments participating in the task force include USAID, Treasury,Justice, and Defense, among others.

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Figure 6: Croat-Controlled Payments Bureau in Mostar

Source: GAO.

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The payments bureaus are being eliminated because they are corrupt and

their continued ope ration is impeding the development of a private bankin

system, according to USAID in Bosnia. Payments bureau operations lack

transparen cy, and the international commu nity believes th at th e p olitical

parties use income from bureau fees to fund party activities. Currently, all

revenue from private and public businesses is sent to the payments

bureaus. USAID research on th e business and ba nking community in

Bosnia indicates that ther e are su bstantive discrepancies in how the

bureaus should operate by law and how they actually operate. For

example, several resp ondents surveyed by USAID believed th at organized

crime leaders had informants within the bureaus who told them which

companies had large cash flows. Two of these companies repo rted thatorganized criminal elements had d emanded percentages of their cash flow

that were based on the payments bureaus’financial statements.

The elimination of the b ureau in the Republika Srpska a ppears t o be o n

schedule as some functions have been moved out of the bureau and into

approp riate government ministries. In addition, the Federation has passed

the internal payments law, which if implemented will remove the payment

bureaus’ monopo ly on payment services. As of March 2000, the Fed eratio

had au thorized 11 banks to pe rform certain types of payment transfers.

However, no timeline has been established for moving all payment

functions to private bank s in both ent ities. Before the bureaus can be

eliminated in either entity, a private banking system must be established.

According to USAID, experience in Central and Eastern Europe has shown

that the best, and possibly the on ly, way to accelerate the establishment o

a s ound, co mpetitive commerc ial banking system t hat fulfills key mark et

functions is the entry of rep utable foreign b anks. The U.S. government a n

international community have been trying to interest a prime-rated

international bank to com e to Bosnia, with little succe ss.

A seco nd ma jor USAID-led reform e ffort is the privatization of stat e-own ed

enterprises. USAID advisors have played a key role in drafting and

facilitating the p assa ge of pr ivatization legislation; estab lishing ke y

privatization institutions; and conducting training for government officialsenterprise managers, and th e media on the privatization process in bot h

entities. USAID is also conducting a privatization education program

throughout the entire country to increase public awareness of and

confidence in the process. Privatization in Bosnia is viewed as crucial to

the econ omic development o f the country, in part b ecause revenues from

these state-owned enterprises are used to finance political party activities

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and politically and ethnically based organizations that we re su pposed to b

eliminated after the signing of the Dayton Agreement.32

The primary form of privatization being used in Bosnia is voucher

privatization.33 When using voucher privatization programs, governments

provide c itizens with a specific number of vouchers depending on certain

criteria such as age or military service. The voucher s can then be sold for

cash or used to purchase shares in privatized companies.

Privatization is pr oceeding slowly, and corruption may und ermine the

process . According to the United Nations an d other experts, the p rocess,

which is u ltimately determined and implemented by the government, isanother opportu nity for government and party officials to p rofit throu gh

corrupt activities.34 For example, officials may solicit bribes from those

interested in obtaining certain assets or sell the assets to thems elves at

prices below their value. The problem is that c orruption discredits

privatization itself and voucher privatization does not provide the needed

capital and bus iness s kills to r evitalize a cou ntry’s eco nom y. Most o f the

companies th at are moving into private hands need significant investment

capital to m oder nize. Vouch er p rivatization will not pr ovide this cap ital

because vouchers have been issued to individuals as p ayment for

government debt, thus, the vouchers provide no capital to the en terprise

they are us ed to purchase. Eu ropean Community, European Stability

Initiative, and o ther officials believe vouche r pr ivatization cou ld legitimiz

political factions’ ownersh ip of companies if those factions have

32These organizations are referred to as parallel organizations an d include procurem entorganizations an d intelligence services among ot hers.

33The Office of the High Representative is implementing a separate privatization program in

Brcko that will not use vouchers because of the problems associated with voucherprivatization. Instead, a consultant is being employed to identify international investors foreach of the en terprises to be privatized.

34These problems have occurred in other privatization programs in Eastern Europe. SeeUnited Nations Development Pro gram: Corruption and Good Governance, Discussion Paper 3 , United Nations Development Pro gram (New York: Ju ly 1997) and Leslie Holmes,

Corruption, Weak States, and Economic Rationalism in Central and Eastern Europe,Presented at th e 9th Annual International Anticorruption Conference (Durban, South AfricaOct. 1999).

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the resources to purchase most of the better companies through privateinvestment funds or other means.35

The hea d of the Office of the High Representa tive’s Ec onomic Depar tmentpublicly state d in April 2000 that a m ajority of already privatized compa niesbelong to the nationalist parties. In the Federation, this problem isexacerbated by citizens’sale of vouchers for as little as 3 percent of theirface value through newspaper ads. In addition, the documentation requiredto privatize the companies, including opening balance sheets andprivatization plans, is being provided by enterprise managers who are notprecluded from bidding on the companies, which is clearly a conflict of

interest. Accor ding to USAID officials r espons ible for th e privatizationeffort, no audits of the ba lance she ets will be conduc ted. In a USAID surveyof businesses in Bosnia, several officials acknowledged depressing thevalue of their firms so they could purchase them for less than their truevalue.

The U.S. Ambass ador, after several war nings, suspended U.S. funding forthe Feder ation’s privatization pr ogram in Decem ber 1999. He took thisaction because Federation officials repeatedly missed deadlines forsupplying all of the re quired o pening balance sh eets a nd pr ivatization plansneede d to allow full-scale p rivatization to p roce ed. Consequently,privatization assistance was redirected to Republika Srpska, whereprivatization is pro gressing more quickly. The sus pension was still in e ffectas of May 2000. Further, in May 2000, the High Representative removed thepresident of the management board of the Federation Privatization Agency

due to persistent and serious obstruction of the privatization process in theFede ration. The board pre sident’s actions had led to unsatisfactory resu ltsand a lack of transparency in the privatization process.

As an example of how the privatization program can be manipulated, theSarajevo Holiday Inn (valued a t $10 million to $15 million) w as purch ased

for $3 million in Marc h 2000.36 The U.S. Ambassa dor t o Bosnia ha s

35Any group or organization, including a political party, can establish private investmentfunds.

36The Sarajevo Holiday Inn is a franchise of Bass Hotels and Resorts Incorporate d.According to a Bass official, the franchise co ntract r equires th e franchise own er to notifyBass prior to the sale of a h otel. No notification was provided to Bass pr ior to the sale of theSarajevo Holiday Inn. Failure to notify Bass can result in the termination of the franchiseagreement. The government spent $5 million to $7.5 million renovating the hotel after thewar.

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protested the sale because USAID and the U.S. Embassy believe that themethod used to privatize the hotel was inappropriate and not consistent

with the privatization program’s objectives. The prime minister of theFederation has re butted these protests by stating publicly that the sale waslegal. Governme nt officials allowed the hotel to be c lassified as asmall-scale enterprise, and it could therefore be purchased with vouchers.Accor ding to USAID, although the sale of the hotel wa s pub licized in theinternational press, foreign investors did not have enough information tomake an informed decision. The sole bidder, a Bosnian, paid a total of 15 million konvertible marka (5 million in konvertible marka and 10 millionin vouchers) for the hotel on March 27, 1999.37 Since voucher units can be

purchased for as little as 3 percent of their value, it is estimated that thelocal bidder only paid 5 million konvertible marka, or approximately$3 million, for the hotel. As of March 30, 2000, the bidder had provided onlythe voucher portion of the payment. Figure 7 is a picture of the hotel.

Figure 7: Holiday Inn Sarajevo

Source: GAO.

37Konvertible marka is the Bosnian curre ncy which is tied to the German Mark at aone-to-one e xchange rate.

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Judicial Reform EffortsSeek to BolsterIndependence andProfessionalism

The international community has implemented a number of efforts to mak

Bosnia’s wea k and politically influenc ed judiciary more indep ende nt an d

professional. In July 1999, the Office of the High Representative developed

a comprehensive judicial reform strategy for Bosnia.38 The strategy focuse

on all aspects of the criminal justice system, including initial investigation

by the police, pros ecutions, and trials. As p art o f these judicial reform

efforts, in July 1999, the Office of the High Representative imposed three

laws to expand the jurisdiction of the Federation supreme court,

strengthen the Federation prosecutor ’s o ffice, and pro vide special witness

identity protection. As o f May 2000, some steps had been taken to

implement these laws, such as the app ointment of judges to the Fe deratiosupreme court; however, none of the laws had been tested in the courts.

In April 2000, the Republika Srpska government adopted laws on the

judiciary and public pro secution. However, due to last minute a mendment

to th ese laws, the intent of the laws, that is, the remo val of political

influen ce from t he judiciary, was not fulfilled. Consequen tly, the High

Representative had to correct the flaws these amendments introduced so

that the purpos e of the laws could be re alized. In the Federation, the High

Representative imposed the law o n judicial and p rosecutor ial service due

to “intolerable delays” in the legislative proces s that r eflected a lack of wi

to allow the depoliticization of the judiciary.

The United Nations established the Judicial System Assessment Program in

1998 to monitor and assess the judicial system in Bosnia. The p rogram ha

created a database on all courts’and prosecutors’offices in Bosnia and ha

issued judicial sector-related reports with recommendations. Additionally

the U.S. Depar tmen t of Jus tice’s Office of Overse as Pr ose cuto rial

Development, Assistance, and Training, in cooperation with the American

Bar Asso ciation’s Centra l and Eas tern E urop ean Law Initiative, has been

training judges, prosecuto rs, and p olice to understan d and implement

criminal laws tha t they helped draft and that were adop ted in the

Federation.39 In 1999, the program received U.S. funding to conduct

38The judicial reform efforts within the Office of the High Representative are coordinatedthrough an internal Judicial Reform Coordination Group that provides policy guidance on

judicial reform issues.

39The Fede ration’s criminal cod e has been reform ed. As of March 2000, Repub lika Srpska’slegislature had not passed a reformed criminal code.

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training in fighting organized crime, investigating public corruption, and

prosecuting those responsible.

Police Reform Is Focusedon Training andDemocra tization of LocalPolice

The U.N. International Police Task Force has focused its efforts on

restructuring, retraining, and democratizing the local police. The task forc

has e stablished a certification process through which ea ch po lice officer i

evaluated against specific criteria, including involvement in human rights

abuses during the war. In add ition, the task force has c reated sp ecialized

units to train Bosnian police in pu blic sec urity issues such as or ganized

crime, drug-related activities, corruption, and terrorism. The United State

has assisted in police reform in Bosnia through th e Jus tice Department’s

Interna tional Criminal Investigation Training Assistan ce P rogram. This

program has helped to se t up internal affairs u nits to pursu e allegations o

police wron gdoing and d evelop sta ndardized policies and pr ocedures .

Police that engage in corrupt or anti-Dayton Agreement activities are

removed from office.

The development of a Bosnian state border service has b een a p riority

since December 1997.40 In November 1999, the pr esidents of the national

government an d two en tities agreed to supp ort the es tablishment of such

service. In January 2000, the High Representative imposed a law to

establish a s ingle state border service becau se the Bosnian House of Representatives failed to adopt the law. Initially, the border service is going

to b e resp onsible for th e Sarajevo airport and 3 of over 400 uncontro lled

border entry points in Bosnia.

Although the anticorruption and judicial reform efforts being implemente

by the United States an d international community are ne eded, U.S. and

international officials s aid that th ey have had little success because the

political will of Bosnia’s leader s is wea k or none xistent . Thes e efforts ha v

not resulted in the successful convictions and jailing of co rrupt officials,

nor have they curtailed political influence over the judiciary, as discussed

previously.

40Duties of the state bor der service will include po lice surveillance of bor ders an d contro l ocross-border traffic, including inspection of d ocuments and auth orization for crossing theborder and appr ehension or prevention of illegal entry into Bosnia.

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Internal Controls OverInternational AidAppear Adequate, butAssistance SupplantsBosnian Funds

The majority of international assistance provided by major donors is in theform of reconstruction projects a nd technical assistance and is governedby a number of internal controls. International assistance officials believethese c ontrols have protected the majority of international assistance.However, there are no controls on most of the grants and loans provided

directly to support the entities’ budgets except for those provided by theUnited States. Further, we identified instances in which corruption hasaffected the international assistance effort. All of the assistance supplantsthe mo nies of the entity government s; conse quently, it frees up governmentfunds for uses over which the international community has no control.

Finally, while the international community provides assistance and funds,the entity governments are losing hundreds of millions of dollars in publicrevenues due to corruption, an irrational tax system, and widespreadcusto ms du ty and t ax e vasion, acc ording to USAID, the Office o f the HighRepresen tative, the Customs Assistance Office, and t he Intern ational CrisisGroup.

Controls on InternationalAssistance

The unanimous opinion of the interna tional officials we sp oke t o, includingthe U.S. Ambassador, the Deputy High Representative, and EuropeanCommission officials, is that the controls on international projectassistance are adequate and that there is no evidence that assistance isbeing lost to large-scale fraud or corruption in Bosnia. The audit reportsmade available to us did not indicate that large scale losses had occurred.

The nea rly $4 billion in as sistance provided from Janua ry 1996 throughDecember 1999 by major donors such as the World Bank, the EuropeanCommission, the European Bank for Reconstruction and Development, andthe United States includes reconstruction projects, technical assistance, orbusiness development loans. The assistance is delivered and managed byinternational contractors or the assistance agencies them selves an d is

subjected to on-site monitoring and periodic audits.

Monitoring of each World Bank p roject is do ne tw ice a year, accor ding to

Bank officials. In addition, Price Waterh ouse annua lly audits a ll 20 of theWorld Bank’s pr ojects t hat are finance d with International Development

Association funds.41 The results of the audits are provided to both the

41The Intern ational Development Association is the World Bank’s con cession al lendingorganization. It provides long-term loans at zero interest to th e poo rest of the developingcountries.

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World Bank and the Bosnian government. The audits are primarily financial

audits; however, compliance w ith conditions in the loan agreements is also

examined. In addition to the annual audits, reports on completed projects

are prepa red and p rovided to the World Bank and the Bosnian government

These repor ts exam ine the impact of the pr ojects. The World Bank

conducts further reviews of the projects based on a sample of the reports.4

The European Bank for Reconstruction and Development provides

assistance exclusively in th e form of loans to th e government o f Bosnia for

business development projects. Although the loans are made to the

government , it never ac tually controls th e money. Instead, the b ank pa ys

the s uppliers of goods and services on the various p rojects directly. Inaddition , all of the ba nk’s pro grams are re gularly aud ited by one of the large

international audit firms.

To ens ure t hat USAID’s pro gram funding is accou nted for and u sed

appr opr iately, USAID’s Office of the Inspec tor General ha s co ndu cted

concurre nt au dits and investigations o f the agency’s two major assistance

efforts in Bosnia, the Municipal Infrastructure and Services Program and

the Business Development Program.43 These audits have been conducted

since the programs st arted in 1996. No major systemic internal contro l

weaknes ses or m isuse of program funds were identified in the first project

however, the following significant pro blems we re found in the Business

Development Program:

• repeated instances of program abuses and misuse of funds by

participating banks and borrowers in the program,

• inadequate monitoring of participating banks and borrowers, and

• a delinquency rate representing at least 50 percent of the loans.

42A previous GAO audit concluded that t he Bank’s effort to improve mana gement contr ols“entailed making major impro vements in the Bank’s interna l oversight structu re, projectmanagement, and institutional development strategies. However, these controls, although

improving, are not strong enough to provide reasonable assurances that project funds ar espent a ccording to th e Bank’s guidelines. Significant we akness es still exist in each of thekey components of the Bank’s m anagement control system.”( World Bank: Management Controls Stronger, but Challenges in Fighting Corruption Remain (GAO/NSIAD-00-73,April 6, 2000).

43The Municipal Infrastructure and Services Program is an initiative to rehabilitate basicinfrastructure to facilitate the return of refugees to their homes and reactivate the localeconomy. The Business Development Program provides loans to Bosnian enterprises onconcessionary terms in an effort to rebuild the economy.

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USAID has taken corrective actions in response to the problems identifiedby the a udits and investigations. Monitoring efforts have be en

strengthened, and the delinquency rate has decreased. Further, litigationand foreclosure actions are being pursued, and investigations have resultedin the termination of a foreign service national employee who used theirposition for personal gain.

Some Corruption and FraudHave Occurred in th e

International AssistanceEffort

We were told of instances in which fraud and corruption occurred withinthe international as sistance effort. Specifically, the United State s, theOrganization for Security and Cooperation in Europe, other donors, andBosnian citizens have been unable to recover funds from BH Banka, aBosnian bank involved in illegal activity, according to the U.S. Ambassadorto Bosnia. The United States had a bout $934,000 in the bank, a pproximate ly$384,000 in embassy operating funds and about $550,000 in USAID money

that was being repaid on successful business loans but was not transferredby BH Banka to Bank America a s re quired. The Fe derat ion Banking Agencyhas taken steps to rectify the situation, including closing the bank andliquidating its assets. The Fe derat ion governm ent offered to pay the UnitedStates the approximately $1 million directly, ahead of all other creditors.The United States refused this offer because it wants the matter dealt with

openly, transparently, and in accordance with international business

practices, so that all depositors will be repaid. According to the StateDepartment, the Federation Banking Administration is conducting auditsas part of a plan to keep pre ssure on the bank’s owners t o repay all of thebank’s dep ositors. The U.S. Emba ssy, Sarajevo, has brou ght press ure onFederation authorities to prosecute the bank’s corrupt owners and forcethem to repay their creditors. However, as of June 2000 the funds had notbeen returned to depositors, including the United States.

In addition to the BH Banka ca se, three other banks have been terminatedfrom the Business Development Program for repeated serious violations oftheir r espons ibilities unde r th e pr ogram’s guidelines. Fo r ex ample, inseveral cases the bank s did not disclose the status of their own existing

loans to prospective borrowers and credited the payment on program loansto their own loans with the borrowers. In one case, a borrower claims tohave been blackmailed into taking out a short-term bank loan with a bank in order to receive a Business Development Program loan. Criminal casesare being aggressively pursu ed a gainst these banks by USAID. Forexample, in one case, the criminal court issued a 54-page verdict thatconvicted a number of bank officials. Three bank officials and two cashiersrece ived jail sente nces r anging from 6 months to 4 years and 3 mont hs. The

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bank is in liquidation, and over $620,000 in u ndisbursed loans re main atrisk. Criminal investigations are ongoing in the other two banks.

Furth er, in July of 1998, the contr act of a USAID foreign service na tionalserving as the program manager for the Business Development Programwas term inated for inappropriate conduct. In this case, a potentialborrower seeking a Business Development Program loan contacted theprogram manager for as sistance. The potential borrower pa id the programmanager for the ass istance. When the program manager requestedadditional funds, the potential borrower contacted USAID in Sarajevo andreported that a USAID employee had promised to help his company but at a

price. The ensuing investigation resulted in the termination of the programmana ger’s cont ract .

The World Bank ha s also b een affected b y corrup tion in Bosnia. In 1997,approximately $340,000 in World Bank-provided funds were lost as a resultof a Bosnian procureme nt scheme perpetrated with fraudulent

procu remen t auth orization docu ment s. As of May 2000, no arr ests ha d beenmade and no funds had been recovered.

Finally, an American citizen employed as the Deputy Commissioner of theU.N. International Police Task Force in Bosnia was removed in the summerof 1999 because of his involvement in c orrup t ac tivities.44 Accord ing to theU.N. mission in Bosnia, Bosnian Croat governme nt officials we re providingthe deputy commissioner with in-kind payments, including an apartmentand a car. Although removed from office and returned to the United States

as of June 2000, neither the United Nations nor the U.S. government hadbrought any further charges against the former deputy commissioner orconducted an investigation to determine whether the DeputyCommissioner had used his position to benefit the entity ministries of theinterior. In commenting on a draft of this report, the State Departmentindicated that the case is now being referred to its Office of the Inspector

General.

Budget Support AssistanceFrees Money for Other Uses

The World Bank, the International Monetary Fund, the European Union,the U.S. governmen t, and other s have comm itted over $407 million in direc

44The U.S. Department of State provides Americans serving in the U.N. International PoliceTask Force through a contract with a private company. The officers’ salaries are paid by theState Department contracto r; their per diem is paid by the United Nations.

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support to the en tities’ budgets. This budgetary support was provided foragreed-upon entity budgets and included conditions on strengthening

public financial management and transparency in public spending.45 Table 1lists the amounts of budgetary support committed by the internationalcommunity.

Table 1: Budget Support Committed by the International Community for theFederation and Republika Srpska

aWorld Bank funding includes trust funds financed by other donors.

bIncludes $22 million committed to Republika Srpska and $5 million committed to the Federation butnot disbursed due to the Federation government’s lack of compliance with U.S. conditions placed onthe funding. The United States has tried to persuade other donors to place conditions on the budgetsupport they provide.

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

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

As r econstruction project-related assistance has been reduced, budgetsupport is ac counting for a larger percentage of total assistance. Forexample, the Republika Srpska Aid Coordination and Development Unitestimated that budget support accounted for approx imately 20 percent of total a ssistance being provided as of Decembe r 30, 1999. The World Bank plans to provide an a dditional $150 million in budget s uppor t to Bosnia

over the next 2 to 3 years. The World Bank’s bud get suppo rt is c onditionedon th e ent ity government’s implementing cert ain budgetary reform sdesigned to improve accountability and transparency.

45Appendix II provides information on e ntity revenues and budgets.

Organization Amoun

World Banka $244.

International Monetary Fund 70.

European Union 60.

United Statesb 27.

Other 5.

Totalc $407.

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Despite running budget deficits, the Federation and Republika Srpskaspent approximately 41 and 20 percent, respectively, of their average

annual, domestically financed revenue on military expenditures from 1997through 2000, according to budget documents they submitted to theInternational Monetary Fund.46 This percentage does not include militaryfunding provided by other nations, most notably from Serbia to theRepublika Srpska and from Croatia to the Bosnian Croat military in theFederation.47 International Monetary Fund, World Bank, and EuropeanCommission officials told us t hat t he funding provided by th eirorganizations is not audited, pr imarily due to its fungibility, and thatsupport funding does free up d omestic revenues that can be used by the

entity governments for any section of their budgets. According to theDirector of the Republika Srpska Aid Coordination and Development Unitthe international community attaches little consideration to how the moneyis spent. Further, because of the lack of transparency in entity budgets andthe fungibility of money, it may be impossible to deter mine how the m oneywas used. According to the World Bank, no audits of the entities’

expen ditures have bee n con ducte d. The Office of th e High Represe ntative’scomptroller told us that due to the lack of adequate bookkeeping in Bosniano major accounting firm would do an audit of Bosnian governmentaccounts and come up with a firm audit opinion on which they would staketheir reputation.48

In 1998 and 1999 the United States provided $22 million directly to theRepublika Srpska budget to pa y the salaries of teachers, doctors, and staffof the Ministry of Refugees. Accord ing to the Departme nt of State , the

budget support provided to Republika Srpska, among other things,“bolstered a moderate government and helped prevent Belgrade-supportedpart ies from deter ring Dayton implementation.” The Office of the HighRepresen tative administered the U.S. budget sup port funds. USAID, in

46In an address to the North Atlantic Council in May 2000, the High Representative statedthat “a stable security environment in Bosnia will not be possible so long as three, relativelylarge, separate armies exist in Bosnia which are primarily designed to fight each other … th e

current s ize and struc ture of the Entity Armed Forces are at gross variance with the defenseneeds of Bosnia and are n ot financially sustainable.”

47According to the Organization for Security and Cooperation in Europe, in 1999 theCroatian Ministry of Defense provided the Bosnian Croat army $71 million that was used forundisclosed operational costs. On March 8, 2000, after a change in the Croatian governmentCroatia signed an agreement un der which all requests for and appr ovals of securityassistance to Bosnia will be made tran sparent.

48In April 2000, the Parliamentary Assembly appointed auditors for Bosnia.

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conjunction with the Office of the High Representative, designed theinternal con trols for th e distribution o f this mone y. The High

Represen tative’s com ptrollers office au dited the program t wice using asta tistical sam pling met hod ology. USAID’s Ins pec tor Gener al’s Officepart icipated in the a udits and reviewed Office of the High Represen tative’saudit re ports. USAID’s Inspect or Gener al audit repo rts o n the programindicate that the support funds were used for their intended purpose andno major problems occurred in the program. The High Representativescomp troller’s office sta ted tha t no oth er pr ogram in Bosnia has as r igorousa follow-up program or audit program as the USAID support program.

Customs and Tax EvasionAre Believed to Result in theLoss o f Hundre ds o f Millions of Dollars inRevenue

Widespread customs duty and tax evasion result in massive revenue lossesDetermining the total amount of revenue lost would be difficult, and theinternational comm unity has not systemat ically attempte d to quantify these

losses. However, evidence gathered during successful customsinvestigations and partial ana lysis by the Office o f the High Represen tativesuggest that the losses total hundreds of millions of dollars annually. Forexample, two investigations conducted by the Customs Assistance Officein 1997 found that $22 million in customs and tax revenues were lost overthe period of 1 year. A later investigation conducted by the Republika

Srpska custo ms administration in 1998 identified illegal activity that

resulted in the loss of $29 million in re venue. In still another investigationinvolving customs administrations in both entities, revenue losses wereestimate d at over $78 million.

The overall loss of revenue from the underground economy—including theloss of sales, business, and income taxes—is far greater than the lossesresulting from customs duty evasion according to the Customs AssistanceOffice. Fo r e xamp le, according to USAID and Intern ational Crisis Group

reports, an irrational tax system forces business to evade taxes in order tooperate; consequently, government revenue is lost. For example, tax andbenefit cont ributions amou nt to 87 perc ent of a worke r’s salary. Theamou nt is not deduc ted from a wor ker’s salary but instead is paid to the

state in addition to the salary. In addition, a warm m eal tax o f $42 must alsobe paid mon thly. Consequently, if an em ployee is paid $100 a m onth, t heemployer must pay the state an additional $129 per month. According tosurveys of the business comm unity by USAID and the International CrisisGroup, such irrational taxes are almost always evaded. Businesses avoidthese taxes by paying their employees in cash and do not re port to thegovernment information on the people they hire.

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Bosnia’s physical reconstruc tion, which h as largely been success fully

completed. The internat ional efforts also include p rograms to fight

corruption, promote democratic government based on the rule of law, and

facilitate a free-market economy—all of which co nstitute important

building blocks toward reform. Senior U.S. and international officials in the

region have concluded that this assistance has not resulted in

self-sustaining reforms.

U.S. and international officials believe the benchmar ks for implementing

the Dayton Agreement cannot be met because Bosnian leaders have not

demonstrated a commitment to combat corruption and remove political

influence from the judicial system and the economy. Consequently, theinternational community, through t he High Represen tative, has been forced

to d ictate reforms. Federation o fficials’lack of cooperation with the U.S.

assistance p rogram to p rivatize state -run e nterprises cu lminated in the U.S

Amba ssad or’s Decemb er 1999 decision t o sus pend U.S. fund ing for su ch

efforts, an example of U.S. officials’growing frustration. Although a few

government organizations a nd officials have investigated corruption in

Bosnia, they have acted against political and eco nomic vested interests at

risk to the ir own perso nal safety and that of their families. In the absence o

Bosnian leaders comm itment to addres s crime and corrupt ion, Bosnian law

enforcement and judicial systems continue to be subject to corruption and

influence, and efforts t o rebuild the eco nomy have been st ymied.

Bosnian leaders may have little incentive to co mbat cor ruption and tax

evasion, since re ducing corruption ma y reduce t heir ability to maintain

their powe r and authoritarian con trol over the country. However, if

customs and tax evasion were reduced and accountability improved,

government revenues would increase; this increase would reduce the need

for external budget support from international donors.

U.S. and international dono rs are now faced with a dilemma. On one hand

after 5 years of dono r funding for civilian r eform programs, Bosnian

political leaders have not demonstrated a commitment to reform and in

fact continue to block well-intentioned reform efforts. On the ot her hand ,some fundamental str uctural initiatives, such as eliminating payments

bureaus , need to go forward with associated financial support. Without the

benefit of a fundament al reassessmen t of the st rategy for pro viding

assistance and a chieving the goals of the Dayton Agreement, th e United

States and other donors may continue to expend funds on initiatives that

have little h ope o f resulting in a self-sustaining democratic government and

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market eco nomy based o n the r ule of law, thus cre ating the con ditions th a

could lead to the complete withdrawal of NATO-led forces.

Recommendations We recomm end th at the Secretary of State take the lead in condu cting a

reassessm ent o f the U.S. strategy for assisting Bosnia to achieve the

objective of establishing a de mocratic government and a mar ket eco nomy

We recomm end th at the Department of State:

• evaluate unilateral and multilateral options for modifying the type and

amount of assistance p rovided (including a review of theapprop riateness of pro viding general budget s upport), place strict

conditions on future assistance, and p ossibly suspend assistance until

Bosnian political leaders independently demonstrate their

determination to fight organized crime a nd co rruption;

• consider whether direct budgetary support is an appropriate form of

assistance in the current environment in Bosnia; and

• determine how it can support those political leaders in Bosnia whose

goals for addressing the problem of crime and corrup tion are consisten

with the goals of the U.S. and the international community.

Matters forCongressionalConsideration

Congress may wish to consider co nditioning future U.S. assistance to

Bosnia on an explicit requirement that the State Department certify that th

Bosnian governments have taken concrete and measurable steps to

implement anticorruption efforts and significantly improve their ability to

control sm uggling and tax e vasion.

Agency Comme nts andOur Evaluation

The Departments of State and Defense and the U.S. Agency for

International Development provided w ritten comments on a draft of this

repo rt. (These comm ents are r eprinte d in their en tirety in apps. IV, V, and

VI, respectively) The Department o f Defense agreed with o ur assessmen t

that crime and co rruption are en demic in Bosnia and are impeding theeconomic, political, and judicial reform aspects of the Dayton Peace

Agreement. USAID did not disagree with our findings, conclusions, or

recommen dations, and stated that it is now reas sessing its coun try strategy

It said that the information co ntained in our rep ort will be con sidered in it

development, but it cautioned against the use of broad bas ed con ditions

such as su spending U.S. government ass istance until the conditions are

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met. We do not s pecifically suggest the use o f such conditions but r ather

we suggest that all options be reassess ed given the cu rrent situation.

The Department of State did not d isagree that cr ime and corruption imped

the s uccess of the Dayton Pea ce Agreement, and it specifically agreed tha

direct budget suppo rt shou ld be carefully evaluated bec ause of the

difficulty in establishing firm controls over its use. However, State

disagreed with our report’s cha racterization that Bosnian leaders have no

demonst rated the political will to com bat crime and corruption. State

acknowledged that while cert ain government officials oppose reform,

some moderate officials have cooperated and others have cooperated

under pressure. State pointed to several laws that have been adopted as asign of succ ess.

State disagreed with our recommend ation that its assistance strategy be

reassesse d. According to State, by 1998, it had undertake n a broad

reassess ment of its assistance, and that it continually reassesses assistanc

priorities towards Bosnia. State’s comments outlined a se ries of program

and funding adjustments made as a result of its reassess ment. We reco gniz

that State assess es assistance levels for various p rogram categories on an

ongoing basis; and we s upport such p eriodic reas sessmen ts. However, we

found no evidence that State’s reasse ssment pro cess add ressed th e

underlying causes of corruption and a lack of reform, namely the continue

obstructionist be havior of the hard-line nationalist political leaders and

others who State acknowledged have obstructed reform efforts promoted

by the intern ational com mun ity. As indicated in State’s com ment s, there ar

moderate political leaders in Bosnia with w hom it can wor k. Reassessing

the ass istance strategy, taking into ac count r oot cau ses, is important

because crime, corruption, and political influence over the judiciary,

government o perations, and the eco nomy continues to b e endemic. Despit

State’s 1998 reasses smen t, Bosn ian lead ers st ill have not ta ken ow ners hip

of the r eform efforts encouraged by the international commun ity, nor hav

they independently demonstrated that they are willing to take action to

curb crime and corruption an d develop and suppor t a functioning judiciar

We believe that wh ile State’s rea sse ssme nts o f program pr iorities ar e

important, such asses sments h ave been limited and have not fully

examined the root causes of the endemic crime and corruption in Bosnia

nor have they considered what adjustments in assistance strategy would

address these root c auses. Adjusting the level of U.S. support for b usiness

lending or b udget supp ort as cited by State, for ex ample, while important

on their own merits, does not address the linkage that exits between

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Bosnia’s po litical leaders and the co rrupt entities contro lled by th e po litica

parties. It is matters such as these that we believe should be examined as

part of a comprehensive reassessment of the assistance strategy for

Bosnia.

We are providing copies o f this report to t he Honorab le Madeleine K.

Albright, the Secretary of State; the Honorable William S. Cohen, the

Secretary of Defense; the Honorable J. Brady Anderson , Administrator for

the Agency for Internat ional Development; and interested congressional

committees. Copies will be made available to o ther intereste d part ies upon

request.

If you or your staff have any questions abo ut this rep ort, please contac t me

at (202) 512-4128. An additional GAO contact and staff acknowledgements

are listed in appendix VIII.

Harold J. Johnso n, Associate Director

International Relations a nd Trade Issues

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Appendix I

Benchmarks for Measuring Progress inImplementation of the Dayton PeaceAgreement

The General Framewor k Agreement for Peace in Bosnia and Herzegovina,

more co mmonly known a s the Dayton P eace Agreement, was initialed in

Dayton, Ohio, on November 21, 1995. The agreement contains 11 articles

endorsed by the parties to the peace settlement and 11 annexes containing

details for implementation. Representatives from Bosnia, Croatia, and the

Fede ral Republic of Yugoslavia signed the agree ment in Paris on

December 14, 1995. Table 2 lists the a nnexes and ties them to 10

benchmar ks tha t the U.S. executive branch believes must be achieved if the

Dayton Agreement is to succeed. The Dayton Peace Implementation

Council and the North Atlantic Council have adopte d similar benc hmarks

for evaluating the implementation of the Dayton Peace Agreement.

Table 2: U.S. Executive Branch Benchmarks for Measuring Progress in the Implementation of the Dayton Peace Agreement

Annex Benchmark

Annex 1-A: Agreement on the Military Aspects of thePeace Settlement calls for a cease-fire, withdrawal of foreignforces, redeployment of national forces, and deployment of aninternational Implementation Force.a In addition to ensuringcompliance with the agreement and maintaining a secureenvironment, the Implementation Force assists internationalagencies in the provision of humanitarian and development

assistance.Annex 1-B: Agreement on Regional Stabilization dealswith regional and subregional arms control.

Military stability: Continued cease-fire.Persons indicted for war crimes: Cooperation with the InternationalCriminal Tribunal for the former Yugoslavia, leading to the transfer ofindicted war criminals to The Hague for trial.

Annex 2: Agreement on Inter-Entity Boundary Line andRelated Issues establishes the interentity boundary line andthe arbitration for the Brcko area.

Brcko: Implementation of the Brcko Arbitration Tribunal’s Final Awardthat was issued on March 5, 1999.

Annex 3: Agreement on Elections lays the foundation fordemocratic elections, establishes a permanent electioncommission, and requests that the Organization for Securityand Cooperation in Europe supervise and monitor elections.

Elections and democratic governance: Establishment of nationaldemocratic institutions and practices.Media reform: Establishment of a regulated, independent, anddemocratic media.

Annex 4: Constitution of Bosnia and Herzegovina sets theresponsibilities of the entities and the institutions in Bosniaand the national government structure.

Illegal institutions, organized crime, and corruption: Dissolution ofillegal pre-Dayton Agreement institutions.

Annex 5: Agreement on Arbitration requires the entities todesign and implement a system of arbitration to resolvedisputes between them.

Annex 6: Agreement on Human Rights describes thefundamental rights and freedoms of Bosnian citizens andestablishes the Commission on Human Rights, the HumanRights Ombudsman, and the Human Rights Chamber.

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Appendix IBenchmarks fo r Measuring Progress inImplementation of the Dayton Peace

Agreement


aThe Implementation Force was the predecessor of the NATO-led Stabilization Force that is currentlyresponsible for implementing Annex 1-A.

bUnder the Dayton Agreement, the United Nations International Police Task Force oversees judicialactivities. In 1998, the U.N. Security Council adopted resolution 1184, which established the U.N.Judicial Assessment Program to monitor and assess the court system in Bosnia.

Annex 7: Agreement on Refugees and Displaced Personsdefines the rights of refugees and displaced persons, statesthat suitable conditions for return must be created and localleaders must cooperate with international organizations, andestablishes a Commission for Displaced Persons andRefugees.

Displaced person and refugee returns: Establishment of a functioning,phased, and orderly minority return process.

Annex 8: Agreement on Commissions to PreserveNational Monuments establishes the Commission toPreserve National Monuments.

Annex 9: Agreement on Establishment of Bosnia and

Herzegovina Public Corporations establishes theCommission on Public Corporations.

Economic development: Implementation of free-market reforms.

Annex 10: Agreement on Civilian Implementation of thepeace settlement sets up the Office of the HighRepresentative.

Annex 11: Agreement on International Police Task Forceestablishes the international police assistance program to,among other things, monitor, observe, and advise on lawenforcement matters, including judicial activities.b

Public security and law enforcement: The restructuring anddemocratization of the police force in both entities.Judicial reform: Establishment of an effective judicial reform program.

Annex Benchmark

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Appendix II

Bosnian Government and Judicial SystemOrganization and Budgets

Figures 8-11 show t he o rganization of the Bosnian governments and

judicial systems. Figure 12 shows where the tw o entity governments, th e

Federation an d Republika Srpska, generate revenues. Table 3 desc ribes th

entities’budgets.

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Appendix II

Bosnian Government and Judicial Syste mOrganization and Budgets

Page 51 GAO/NSIAD-00-156 Bosn

Figure 8: Bosnia’s National Government Structure

Source: The U.S. Embassy, Sarajevo.

Memberof

Presidency

Memberof

Presidency

Chairof

Presidency

Council ofMinistersChairman

Ministries:Ministry of Foreign AffairsMinistry of Foreign Trade

Ministry of FinanceMinistry of Civil Affairs and

CommunicationsMinistry of European

Union IntegrationMinistry of Human Rights

and Refugee Affairs

ConstitutionalCourt

BorderPolice

ParliamentaryAssembly

Houseof

Peoples

Houseof

Representatives

BosniaCommission on

Human Rights

Human RightsOmbudsperson

Human RightsChamber

ExecutiveBranch

JudicialBranch

LegislativeBranch

Human RightsBranch

FederationOffice of the Legal

Representative

Republika SrpskaOffice of the Legal

Representative

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Appendix IIBosnian Government and Judicial SystemOrganization and Budgets


Figure 9: Federation and Republika Srpska Entities’ Government Structures

Source: The U.S. Embassy, Sarajevo

Republika Srpska Ministries

Ministry of Finance; Defense; Interior; Justice;Information; Refugees and Displaced Persons,

Administration, and Local Self-Rule;Education; Health and Social Welfare; Economic

Relations with Foreign Countries; Science and Culture;Religions; Veterans, War Casualties, and Labor; Energy

and Mining; Agriculture, Water Management andForestry; Industry and Technology; Trade and

Tourism; Sports and Youth; Urbanism, Infrastructure,and Environment; Traffic and Communications

Vice President

President

Prime Minister

Municipalities

10 Cantons, each with their ownministries, including

Ministries of Finance;

Interior; and Justice

President

Vice President

Prime Minister

Federation Ministries

Municipalities

Deputy Prime Minister

Federation Republika Srpska

Ministry of Justice; Health; Finance; Defense; Internal Affairs;Trade; Physical Planning and Environment; Social Policy,

Displaced Persons, and Refugees;Transport and Communications;Energy, Mining, and Industry; Agriculture, Forestry, and Water

Management; and Education, Science, Culture, and Sports

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Figure 10: Federation Entity and Cantonal Law Enforcement and Judicial Systems

Source: The U.S. Embassy, Sarajevo, and the U.N. Judicial System Assessment Program.

Municipal Courtsof

Minor Offenses

Federation

Ministry

ofJustice

Federation

Ministryof

Finance

Federation

Ministryof the

Interior

Customs

Administration

TaxCollection

FinancialPolice

PaymentsBureau

CriminalPolice

Judicial Police

Human Rights Court

Constitutional Court

Supreme CourtFederation

Prosecutor’s

Office

CantonalProsecutor’s

Office

Ministry

of Justice

Ministry ofthe Interior

Cantonal Courts

Municipal Courts

Cantonal MinorOffenses Court

TrafficPolice

Entity Level

Cantonal Level

Ministry

of Finance

Municipal

Prosecutor’sOffice

UniformedPolice

CriminalPolice

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Figure 11: Republika Srpska Entity Law Enforcement and Judicial System

Source: The U.S. Embassy, Sarajevo, and the U.N. Judicial System Assessment Program.

Ministryof

Justice

Ministryof

Finance

Ministry

of the

Interior

Customs

AdministrationTax

CollectionPublic

Security Centers

Constitutional Court

Supreme

Military CourtSupreme Court

District Courts

Basic Courts

Minor Offense Courts

FinancialPolice

Payments

Bureau

Republika

Srpska

Public

Prosecutor’s

Office

District

Prosecutors

Basic

Prosecutors

Traffic

Police

UniformedPatrol

Criminal

Police

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Appendix II

Bosnian Government and Judicial Syste mOrganization and Budgets

Page 55 GAO/NSIAD-00-156 Bosn

Figure 12: Revenue Sources in the Federation and Republika Srpska (1999)

Source: International Monetary Fund.

Republika Srpska

Federation

53%

40%

5%

2%

Excise Taxes

Trade Taxes

(Customs duties)

Profit Taxes

Non-tax Revenue

Other Taxes

39%

26%

16%

12%

7%

Taxes on goods and

services

Trade Taxes

(Customs duties)

Non-tax Revenue

Income Taxes

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Table 3: 1999 Budgets for the Federation and Republika Srpska (average exchangerate for konvertible marka in 1999 was $1=1.836km)

Dollars in millions

Federation Fiscal Operations 1999Percentag

of tota

Excise tax revenue $236.4 52.

Trade taxes 179.7 40.

Profit tax 7.1 1.

Non-tax revenue 23.4 5.Total Revenue $446.6

Wages and contributions $45.4 9.

Goods and services 17.6 3.

Military 200.4 40.

Reconstruction expenditure 11.5 2.

Subsidies 7.6 1.

Transfers to war invalids 147.6 29.

Other transfers to households 6.6 1.

Transfers to the state government 47.9 9.

Transfers to cantons and municipalities 1.4 0.Other expenditure and unallocated 14.9 3.

Total expenditures $500.9

Budget deficit $54.3

Foreign loans and grants for budget support $54.3

Republika Srpska fiscal operations 1999

Taxes on goods and services $120.4 38.

Trade taxes 82.4 26.

Taxes on income 37.3 12.Other taxes 21.5 6.

Non-tax revenue 49.9 16.

Total revenue $311.5

Wages and contributions $102.3 29.

Goods and services 66.3 19.

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Source: International Monetary Fund.

Republika Srpska fiscal operations 1999

Military 46.4 13.

Reconstruction expenditure 21.1 6.

Banking fees 0.4 0.

Transfers to social funds 16.5 4.

Subsidies 6.0 1.

Transfers to war invalids 30.5 8.

Other transfers to households 8.1 2.

Transfers to the state government 32.7 9.

Transfers to municipalities 0.7 0.

Other expenditure and unallocated 15.9 4.

Total expenditures $346.9

Budget deficit $35.4

Foreign loans and grants for budget support $35.4

(Continued From Previous Page)

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Appen dix III

Bosnian, International, and U.S.Anticorruption Efforts

The Bosnians and the international commun ity have implemented a wide

range of anticorruption and judicial reform efforts. Although necessary,

these e fforts h ave done little to r educe crime and co rruption or political

influence and control of the judicial and law enforcement systems in

Bosnia. Fur ther, as of April 2000, the Office o f the High Repres enta tive

stated that n one of the ac hievements are se lf-sustaining.

Table 4: Major Bosnian, International, and U.S. Anticorruption and Judicial Reform Efforts

Implementor Date established/activity Comments

Bosnian efforts

Entity governments Ongoing: Modernization of laws The fundamental basis for fighting corruption is themodernization of laws. An example is the passage of thecriminal code in the Federation. This code provides lawenforcement officials the foundation for prosecutinggovernment officials and others for corruption charges. Thecriminal code in the Republika Srpska is currently pendingapproval in parliament.

Entity governments Ongoing: Implementation ofanticorruption legislation

The federation has adopted legislation, such as the specialwitness identity protection in criminal proceedings, the law on

judicial selection process, and the Bosnia customs laws. TheFederation is also adopting the law on auditing the budget,

under which an audit office would be established to review thedisbursements, expenditures, financial reports, andtransactions of the Federation.

Entity governments Ongoing: Financial police Under the Ministry of Finance in the Federation. Theresponsibilities of the financial police include investigations oftax and customs evasion.

Entity governments Ongoing: Judicial police The judicial police were established in the Federation in 1996and are being established in the Republika Srpska. This is amechanism to ensure the functioning and security of courtproceedings, including securing information, witnesses, andaccused persons. As of July 1999, the police were operationalin 2 out of 10 cantons in the Federation.

Federation government—Chairman of Bosnia presidency

1997-98: Corruption Commission The Commission never became operational.

Federation government—House ofRepresentatives

1997−98: AnticorruptionCommission

The Commission became operational in 1998 but had littleeffectiveness because it lacked government cooperation.

Federation government September 1999: Commission ofInternational Legal Experts

The Commission’s mandate was to examine the nature andcauses of corruption in the Federation and recommendmeasures to improve the Federation’s anticorruption efforts.The Commission produced the final report in February 2000and disbanded.

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Appendix IIIBosnian, International, and U.S.Anticorruption Efforts


Bosnian government—agreed byPrime Ministers Bicakcic andDodik

November 1999: Joint-entityAnticorruption Coordination Group

As of May 2000 the group had not been established.

Federation government—House ofRepresentatives

December 1999: Anticorruptionstrategy

Working groups are developing an anticorruption strategy andimplementation plan for the Federation’s House ofRepresentatives. As of March 2000, the Federationgovernment had completed the strategy for fighting corruptionand was preparing to send it for parliamentary approval.According to the Deputy Minister of Justice, this document isthe first comprehensive strategy document created by

Bosnians.International efforts

European Commission 1996: Customs and FiscalAssistance Office

Office was established to help Bosnia form a coherentcustoms system at the national and entity levels. The officehas assisted in passing needed customs legislation andidentified incidents of corruption and illegal activities resultingin the loss of customs duties and tax revenues. Asrecommended by the Peace Implementation Council inDecember 1997, the office expanded to include assistance inthe taxation field.

Office of the High Representative April 1998: Anti-Fraud Unit Unit was created at the request of the December 1997 PeaceImplementation Council in Bonn, Germany, to combatcorruption and organized crime. The unit works with localauthorities to investigate and prosecute significant fraud and

corruption cases.Office of the High Representative February 1999: Anticorruption

strategyStrategy addresses systemic and case-level corruption. Thesystemic approach is based on four strategic “pillars”:(1) eliminating opportunities, (2) transparency and reporting,(3) control and penalties, and (4) education and publicawareness. Reform is underway or planned in four majorsectors: (1) public revenue, (2) the rule of law, (3) institutions,and (4) public awareness.

Office of the High Representative July 1999: Judicial reform strategy Strategy called for by the 1998 Madrid Peace ImplementationCouncil. The strategy focuses on all aspects of the criminal

justice system, including police investigations, prosecutions,and trials.

Office of the High Representative September 1999: Anticorruptionand Transparency Group

Group established to reinvigorate international anticorruptioninitiatives. Meets monthly.

Office of the High Representative Judicial Reform Coordinating Group Group established to develop a coordination structure for theinternational community’s efforts in the judicial reform area.The group meets every 4 to 6 weeks to discuss progress andproblems and recommend changes in the judicial reformstrategy.

Office of the High Representative On-going: Imposed laws Examples include three laws imposed in July 1999−theamendments to the law on the Supreme Court of theFederation, the amendments to the law on the FederalProsecutor’s Office, and the law on special witness identityprotection proceedings.


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Office of the High Representative On-going: Remove officials foranti-Dayton Agreement activities

Example: In November 1999, 22 officials were dismissed.Among the 22, 9 were mayors, 2 were cantonal ministers, and1 was a cantonal governor.

Organization for Security andCooperation in Europe

1999: Municipal infrastructurefinance and implementation training

Direct assistance is provided to local governments to improvetransparency and accountability and to increase citizens’participation in policy-making at the local level.

Organization for Security andCooperation in Europe

1999-2000: Prosecutor training Prosecutors are trained with the goal of strengthening theirrole in the Bosnian legal system.

Stabilization Force December 1998: Entity armed

forces Inspector Generals Office

Office established to professionalize the entities’ armed forces.

The focus of investigations is professional military ethics andleadership. To date, several noncompliant officers have beenremoved, reassigned, or suspended as a result of theinvestigations of the office.

Stabil ization Force On-going: Intell igence gathering,raids

SFOR’s intelligence gathering led to the October 1999 raid onBosnian Croat facilities in west Mostar, Operation WESTAR.During the operation, SFOR seized large quantities ofweapons, pirated software, counterfeiting equipment, andintelligence information.

Swedish InternationalDevelopment Agency/SwedishNational Audit Office

June 2000: Audit institutiondevelopment

Long-term institutional support for the development ofsupreme audit institutions. As of June 2000, auditors generaland deputies had been selected for Bosnia at the state level.Efforts were underway to select an auditor general for eachentity.

Transparency International Ongoing: Establishment of localchapter

Transparency International officials visited Bosnia three timesbetween December 1999 and March 2000 to identify Bosniansinterested in establishing a local chapter.

United Nations December 1995: InternationalPolice Task Force

Annex 11 of Dayton Agreement established the internationalpolice assistance program to, among other things, monitor,observe, and advise on law enforcement matters.

United Nations 1998: Judicial System AssessmentProgram

Program monitors and assesses the court system in Bosnia inthree main areas: technical, political, and institutional.Achievements include the creation of a database on all courtsand prosecutors within Bosnia.

World Bank 1998: Public finance structuraladjustment credit

Provides policy advice and assistance in public financereforms. Examples are the development of a budgetarystrategy aimed at improving fiscal efficiency and control andthe establishment of a public audit system to promotetransparency and accountability in the government.

World Bank May 2000: Corruption studyimplemented

The Bank extended an invitation to the Bosnian government toconduct a study of the root causes of corruption in Bosnia. Theinternational community will be asked to finance this study, andall three ethnic groups will be asked to sign on to the study.Study was implemented in May 2000.


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U.S. Efforts

Justice Department 1996: International CriminalInvestigation Training AssistanceProgram

Program provides training and equipment to develop the policeforces in both entities. The program includes institutionaldevelopment, police academy development, criminalinvestigations, forensic capacity, and specialized training.Internal affairs units have been established with thisassistance.

Justice Department 1998: Overseas ProsecutorialDevelopment, Assistance, andTraining with the American Bar

Association’s Central and EastEuropean Law Initiative

Purpose is to train judges, prosecutors, and police in reformedcriminal laws adopted by the Federation in 1998. Training givenin fighting organized crime and investigating and prosecuting

public corruption. Works on programs to strengthen theindependence and efficiency of the judiciary.

Justice Depar tment 2000: Federal Bureau ofInvestigations

FBI agents are examining public sector corruption in Bosnia.They will also investigate other high-profile cases and preparethe cases for trial.

U.S. Agency for InternationalDevelopment (USAID)

March 1998: Anticorruptionstudy/strategy

USAID believes it is still relevant and thus has not updated it.

U.S. Agency for InternationalDevelopment

On-going: Payments bureausreform

USAID chairs the multi-donor advisory group that assists inpayments bureau reform. Program goals includethe development and implementation of standards to permitbanks to provide payment services; the abolition of overnightceilings on cash holdings and the requirement that businessesdeposit cash with the payments bureaus; the transfer of taxcollection and Treasury functions to the Ministries of Finance;

and the transfer of statistical functions to other institutions.

U.S. Agency for InternationalDevelopment

On-going: Privatization effort USAID played a key role in drafting and facilitating the passageof privatization laws and the establishment of key privatizationinstitutions. Conducted training for government officials,enterprise managers, and the media on the privatizationprocess in both the Federation and the Republika Srpska. Alsoconducting a privatization education program countrywide toincrease public awareness of and confidence in the process.

State Department Ongoing: Training courses throughthe Bureau of InternationalNarcotics and Law EnforcementAffairs

State provides specialized training courses for lawenforcement personnel. For example, the U.S. CustomsService is providing a course in money-laundering control.

State Department September 1999: U.S. interagency,Anticorruption task force

Task force focuses on strengthening the existing anticorruptionmechanisms in Bosnia, such as the Office of the High

Representatives Anti-Fraud Unit.Treasur y Depar tment On-going Treasur y assistance in budget and taxation reform, banking

privatization, and payments bureaus reform. Has alsodeveloped a program to establish the efficient management ofpublic funding through transparent budgets and accountability.


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Appen dix IV

Comments From the Department of State

Note: GAO comments

supplementing those in the

report text appear at the end

of this appendix.

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Appendix IVComments From the Department of State


See comment 1.

See comment 4.

See comment 5.

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See pp. 40-41.

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The following are GAO’s com ment s on the Depart ment of State’s lette r

dated June 2, 2000.

GAO Comments 1. We do not believe our report implies that because of corruption in

Bosnia assistance over th e past 4-1/2 years has b een wa sted. It points

out that the United States and the international community focused a

large part of their aid on p hysical reconstruction. We did no t evaluate

the large ex penditure of funds to rebuild Bosnia’s physical

infrastructure but acknowledge that this phase of the assistance

program has largely been completed. This progress n ecessitates a nassessme nt of the direction of future aid. We agree that State completed

an assessment and made decisions on future funding directions by

1998. Our re port, ho wever, focuses on U.S. and international efforts

over the pas t 4-1/2 years to address crime and corr uption and to

develop a functioning judiciary in Bosnia.

2. We modified our recommendation to make clear that we believe that

the str ategy for providing assistance should be reevaluated.

3. Our report states that crime and corruption pervade Bosnian political,

judicial, and econo mic systems and th at Bosnian leaders have not

demonstrated a desire to eliminate corruption and develop a societybased on the rule of law, despite 4-1/2 years of international and U.S.

efforts to redress these problems, including more emphasis in the past

2 years. State said that while certain government officials oppo se

reform, some more moderate officials have cooperated with the

international community and others have been pressured into

cooperat ing. We mod ified our report to a dd t his persp ective; however,

this does not alter our basic assessment that crime and corruption

pervade Bosnian political, judicial and e conomic s ystems.

4. We agree with State on its point that as a resu lt of U.S. leadership, the

international community has taken a much mo re aggressive stance with

the Bosnian aut horities in exacting reform commitments. However,there is no evidence that these efforts have resulted in a change in

Bosnian desire to eliminate co rruption.

5. We recognize the risk of withdrawing U.S. aid, but have suggested th at

State reevaluate its strategy for addressing this problem so that there

will be a bette r likelihood that t he bro ader goals of the Dayton

Agreement w ill be met. We n ote that the U.S. Ambassad or to Bosnia is

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successfully conditioning U.S. aid to elicit better cooperation in

economic reform efforts. This success indicates th at more extensive

use of conditionally is justified.

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Appendix V

Comments From the U.S. Agency forInternational Development

Note: A GAO comment

appears at the end of this

appendix.

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Appendix VComments From the U.S. Agency forInternational Development


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Appendix VComments From the U.S. Agency forInternational Development


The following is GAO’s c omme nt on the U.S. Agency for Interna tional

Development’s letter date d J une 9, 2000.

GAO Comment We agree that the “elimination of corruption in Bosnia” is an unrealistic

goal and have changed our report to indicate a need to address corruption

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App end ix VI

Comments From the Department of Defense

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App end ix VII

Objectives, Scope, and Methodology

At the request of the Chairman, the Ranking Minority Member, and a

Member of the House International Relations Committee, we exa mined

(1) how or ganized crime and pub lic sector corruption affect the succe ssfu

implementation of the Dayton Agreement in Bosnia, (2) wheth er th e

interna tional commu nity’s anticor rup tion and judicial reform efforts h ave

improved Bosnia’s law enforcement a nd judicial systems, and (3) whethe r

international assistance is being safeguarded and is being used by Bosnia i

place of domestic revenues lost due to crime and corruption.

To add ress these objectives, we cond ucted c omprehen sive interviews wit

and collected and analyzed documen tation from key U.S. government

officials engaged in the reconstruction of Bosnia, including officials at theDepartments of State, Defense, Justice, and Treasury; USAID; and the

American Bar Asso ciation’s Centra l and Ea st Eu rop ean law initiative in

Washington, D.C. Additionally, we reviewed reports prepared by the

International Management Group (an intergovernmental o rganization

dedicated to the reh abilitation/reconstruction o f the infrastructur e of

Bosnia), Transpare ncy International, and the Commission of Internationa

Legal Experts on co rruption and anticorruption efforts in

Bosnia-Herzegovina.

We also conducted 2 weeks of fieldwork in Bosnia-Herzegovina, where we

interviewed over 40 members of the international commun ity and Bosnian

governme nt officials, such as th e Fede ration’s Prime Minister a nd Finan ce

Minister. Additionally, we interviewed officials from the Fede ration

Banking Agenc y and the Republika Srps ka’s Ministries of Financ e, Interior

and Customs Administration. We co llected and analyzed docu ments such

as an ticorruption and judicial reform strategies pr ovided to us by the

Departm ent of Ju stice; USAID; the U.S. Embass y in Sarajevo, Mosta r, and

Banja Luka; the Organization for Security and Cooperation in Europe;

NATO’s Stabilization For ce; the E urop ean Commission Cus toms and Fisca

Assistance Office; the International Monetary Fund; the World Bank; the

U.N. Mission in Bosnia; the Office of the High Represe ntat ive; the Eu rop ean

Bank for Reconstruction and Development; the European Commission

Monitoring Mission; and the International Crisis Group.

We conducted our review from December 1999 through May 2000 in

accordanc e with generally accepted government auditing standards .

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App end ix VIII

GAO Contact and Staff Acknowledgments

GAO Contact F. Ja mes Shafer, ( 202) 512-6002

Acknowledgments In addition, David M. Bruno, E. Jeanette Espinola, and Hynek P. Kalkus

made key contributions to this report.

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(711473) Letter

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