CORRUPTION IN BOSNIA AND HERZEGOVINA
Danilo Vukovic
PARTNER Marketing Consulting Agency
April 2001
I Introduction
Corruption has become one of the main political issues in Bosnia and Herzegovina approximately at the time of the appearance of the article under the title "Leaders in Bosnia Are Said to Steel Up to 1$ Billion" in the New York Times in August 1999. Before that, corruption was, of course, shaking economy of Bosnia and Herzegovina, but only after the international community was struck by it, it became a major political issue.
Since then, the speculations started regarding the amount of damage originating from organized crime and corruption. According to the New York Times, from 5.1$ billion in international aid that arrived to Bosnia and Herzegovina since the end of the war, as much as 1$ billion has disappeared from public funds or have been stolen from international aid projects through fraud led by national leaders. Besides, it was said that international organizations and embassies have lost up to 20$ million deposited in a Bosnian bank that bankrupted.
Approximately one year latter, the Netherlands Ambassador to the UN, Peter Van Walsum, has said that B&H looses 500$ million dollars a year because of corruption involving high governmental officials. Without these looses, there would be no budget deficit, he stated, while the representatives of the International Monetary Fund cited that around 230$ million are lost annually, due merely to the black-marketing of cigarettes and that the B&H governments show little interest in regulating the marketplace .
After considerable international pressure made on domestic as well as international officials to fight corruption and organized crime, there were first sights of anti-corruption strategy in Bosnia and Herzegovina.
II Creating A Favorable Institutional And Legal Environment For Curbing Corruption
II.1. Institutional Environment
Anti-Fraud Unit
During 1997, a number of reports released by the European Commission's Customs and Fiscal Office (CAFAO) program, publicly exposed extensive corruption, fraud and diversion of public funds in BiH. At the December 1997 Peace Implementation Council (PIC) meeting in Bonn, the Council endorsed the High Representative's proposal to form and Anti-Fraud Unit to assist authorities in Bosnia and Herzegovina identify illegal activities and to coordinate international technical assistance. The Unit was established within the OHR Economics Department in April 1998.
The Anti-Fraud Unit developed a two-level strategy for curbing the corruption. The first level was aimed at establishing an overall systematic approach to combat corruption, while the second level was developed to deal with corruption on case-by-case basis.
After the Anti-Fraud Unit has developed its anti-corruption strategy, it has concentrated on individual cases of corruption. Sometimes, it appeared to be working as High Representative police forces. Unfortunately, its accomplishments were rarely published.
Procurement Monitoring and Audit Units
Organization of High Representative also established a Procurement Monitoring and Audit Unit (PMAU) in both entities concerning the procurement processes in reconstruction programs. The PMAU is primarily used to vet the use of World Bank procurement. According to the OHR representatives, the concept should be institutionalized and extended to all public sector procurement, irrespective of the origin of the funding. However, there are no publicly available data on its (further) activities.
II.2. Legal Environment
Laws
A comprehensive budget system law, which authorizes a treasury function in the Ministries of Finance and includes some transparency provisions has been adopted by the Federation and ought to be adopted by the Republic of Srpska. The Federation has also adopted a budget classification system that was used in the development of the budgets from 1998.
After the District of Brcko was established in 1999, under the supervision of Office of High Representative, Statute of Brcko District was made. The Statue explicitly refers to Conflict of Interest, stating in the Article 27 that "councilors shall not hold any other public office in either of the Entities or Bosnia and Herzegovina and shall not be Directors or members of the Board of Directors of an enterprise owned by the District or financed by the District budget".
In March 2000, Former Foreign Minister of Bosnia and Herzegovina, Jadranko Prlic, signed two Conventions of the Council of Europe - Criminal Law Convention on Corruption and Civil Law Convention on Corruption - that oblige the countries that have signed them, to introduce legal measures in civil and criminal law that sanction the offense of corruption.
Elections
Elections in Bosnia and Herzegovina are organized by the OSCE. Before the local elections, held in April 2000, Provisional Election Commission, an OSCE-run body, has made several changes in the election procedure. The first change regarded conflict of interest of directly or indirectly elected officials. According to the provision regarding conflict of interest, elected officials cannot perform any position, including the function of a steering board member, in the state owned company. A state owned company has more than 25 percent of its capital owned by the government or has more than 25% of its annual business activities financed from the budgets of the governments.
The Provisional Election Commission has also adopted new rules regarding financing of the political parties. Before the new rule was adopted, it was only an obligation of individual candidates at the elections to submit financial report. The political parties are, according to the new rule, obliged to submit an application for certification. Political parties also have to submit financial report for the period three months prior to the date of submission of the application and they have to submit additional report thirty days after the technical certification of election results.
Before these decisions were made, political parties were mainly funded from the state owned companies. After winning the elections, parties would nominate managers and steering board members from its nomenclature. Then, capital from the socially owned enterprises was redirected to parties or individual accounts. This mechanism was applied in virtually all state owned enterprises, especially ones that could serve as "cash cows".
Consequently, Republic of Srpska state owned Telecom, which had one of the highest telephone bills in the region, was claimed to be in depths at the end of the mandate of former Prime Minister Dodik's Government. Many other state-owned enterprises were also ruined, from the highly profitable oil industry, breweries and tobacco factories, to less profitable textile and food industry.
As in other cases, most of the reform initiatives came from the representatives of international community. One of them was the reform of local authorities that preceded and followed the local elections. Unfortunately, it was not conducted as a unified effort at the country level, but as partial projects conducted by state authorities and international organizations (OSCE, Open Society Foundation, Friedrich Ebert Foundation, etc.).
III Implementing Reform Of The Judicial System
The Constitution of Bosnia and Herzegovina provides that BiH shall be a democratic state operating under the rule of law. It also obliges the state and entity governments to ensure the highest level of internationally recognized human rights and fundamental freedoms, as well as the rule of law in all segments of society. These goals, naturally, cannot be achieved without independent and efficient judiciary.
Before the war, the Yugoslav legal system was modeled more so on the German model than the Soviet one (e.g. there were lawyers allowed to engage in private practice and advocacy), so there was a western legal tradition upon which to build reform of judicial system. However, the socialist tradition in former Yugoslavia (including, of course, Socialist Republic of Bosnia and Herzegovina) did include, at minimum, consultations between judges and government officials. After the civil war, judges were still subject to pressure from dominant political parties and the executive, particularly officials in the Justice Ministry, regarding their decisions and appointments.
Therefore, after the war has stopped and the processes of transformation of society have started, a need for independent judiciary appeared even more obviously. As in other cases, initiative, legal, material and technical assistance came from the representatives of international community. Coordinated by the Office of the High Representative, the Council of Europe, OSCE, United Nations and USAID are among the major actors involved in judicial reform in Bosnia. Judicial Reform Coordination Group was established to coordinate numerous efforts in judicial system reform. The OHR set the priorities as follows: constitutional reform, human rights and judicial training.
The Judicial System Assessment Program (JSAP) was established by the UN Security Council in 1998 and was mandated to monitor and assess the court system in Bosnia and Herzegovina as part of the overall program of legal reform under the coordination of OHR. JSAP published a number of reports dealing with different aspect of judicial system. After the completion of its mandate in December 2001, its functions were to be taken over by the OHR.
In June 1999, the Presidents of the Associations of Judges and Prosecutors in the Federation and the RS adopted identical Codes of Ethics containing, among others, articles on Independence of Judges and Prosecutors and Conflict of Interests. The codes are meant to apply to the members of the Association of Judges of the Federation; the Association of Prosecutors of the Federation; and the Association of Judges and Prosecutors of the RS. The codes are intended to provide a common framework for conduct for the judiciary and prosecutors throughout BiH, and to ensure that those involved in the judicial process receive similar standards of treatment.
In the midst of 2000 the Law on Judicial and Prosecutorial Service in the Federation of Bosnia and Herzegovina was imposed by the High Representative. Similar laws were also passed by the Republic of Srpska National Assembly - Law on Courts and Judicial Service and the Law on Public Prosecutor Office. These laws create a legal basis for the comprehensive review of judges and prosecutors. Detailed provisions contain grounds for finding a judge or a prosecutor unsuitable, and corruption is one of them.
The Central and East European Law Initiative (CEELI) with USAID funding coordinated several seminars for the members of the Association of Judges in the Federation (AJF) and the Association of Judges and Prosecutors of the RS (AJPRS). The topics ranged from current problems in Juvenile Legislation (protecting the rights of minors), legal remedies in criminal proceedings, to criminal procedure training for lower court judges.
Anti - Corruption Laws
While the current Criminal Codes in both the Federation and the Republic of Srpska contain a Chapter entitled "Criminal Offenses Against Official Duty or Other Responsible Duty", neither Entity has modern, comprehensive anti-corruption laws. Therefore, the Office of High Representative has made following conclusions:
"A number of Central and Eastern European countries have developed, in addition to specific provisions in criminal codes, special anti-corruption legislation. One of the goals of enacting a special anti-corruption law is to raise political and public awareness of the fight against corruption. These special laws define corrupt behaviors, who is subject to corruption prohibitions, and the social areas particularly vulnerable to corruption.... BiH should immediately take steps to become aware of relevant international conventions and programs which will enhance their anti-corruption efforts. The legal framework of BiH and the Entities should be strengthened to reflect the 20 Guiding Principals Against Corruption adopted by the Committee of Ministers of the Council of Europe (6 November 1997). The Council of Europe Criminal Law Convention on Corruption (4 November 1998), the 1957 European Convention on Extradition, the 1959 European Convention on Mutual Assistance in Criminal Matters and the 1990 Convention on Laundering, Search, Seizure and Confiscation on the Proceeds from Crime also need to be considered."
However, until now nothing has been done in introducing new and modern anti-corruption law in neither entity of Bosnia and Herzegovina.
IV Curbing Corruption In The Economy
Reform of Payment System
The Payment Bureaus in Bosnia and Herzegovina were direct descendants of the former socialist Yugoslavian payment system. The Payment Bureaus in the Federation (Zavod za Platni Promet - ZPP) and in the Republic Srpska (the Sluzba za Platni Promet - SPP) exercised monopoly powers over the payments sector and had considerable additional authority. Further, although there was legally only one payment system in the Federation, the Payment Bureaus in the Croat majority areas (ZAP-Zavod za Platni Promet) continued to operate independently as a parallel institution. In addition to their payment system responsibilities, the Payment Bureaus were involved in: the collection of financial data; tax collection; treasury operations; accounting services; and the management of the reserve accounts of banks along with the Central Bank of Bosnia and Herzegovina.
With these powers, the Payment Bureaus played a central role in the economy of both Entities. Due to the lack of transparency, strong linkage to political parties and their unprecedented power and authority over all economic and financial activities, the Bureaus had a serious negative impact on the business and financial sectors. As a result of these restrictive controls, an estimated 50% of the economy operated underground, thus depriving the government of significant revenues. Unquestionably, these institutions exerted a degree of control over the fiscal management decisions of private business that was inconsistent with a free market economy. The strict limits on businesses stifle business independence and flexibility. The role of banks in BiH was marginalized as a result of the Bureaus' dominance in the financial sector. To develop sustained growth in the economy, a vibrant innovative banking system was required.
The Office of the High Representative, The BiH Central Bank (with the Governor appointed by the international community), International Monetary Fund (IMF), the World Bank, USAID and EC PHARE made a significant effort in reform of payment systems. Upon the completion of a final study by USAID on the structure, conduct and function of the Bureaus, as well as survey results from both the banking and business sectors, comprehensive strategy for reform of bureaus was conducted in December 2000 and Payment Bureaus were reformed into commercial banks, while the whole payment system were transferred to commercial banks.
Direct Foreign Investment
The rule of law and political and economic stability are perceived as the main conditions for direct foreign investments. In this respect, Bosnia and Herzegovina hasn't mane considerable improvement by the end of the war. Therefore, the perception of the rule of law in Bosnia and Herzegovina by potential investors is not favorable and certainly has an impact on their investment decisions.
The Wall Street Journal's Central European Economic Review provided, in a quite old study (1999), comparison of 27 countries in Central/Eastern Europe and the former Soviet Union. When it compared a number of political and economic categories, Bosnia and Herzegovina ranked 26th, or next to last , in the rule of law category.
Consequently, it is not surprising that in a recent estimation presented in Bosnia and Herzegovina, the World Bank experts stated that after the war, there had been only 5$ million direct foreign investments in BiH per year.
In the midst of 2000, the High Representative, Wolfgang Petritsch, issued a Decision amending the Framework Law on Privatization of Enterprises and Banks in Bosnia and Herzegovina to protect investors from restitution claims.
According to the OHR officials, the Decision tackles the result of the combination of two problems, which had a deterrent effect on potential investors because they created a situation of great uncertainty. Firstly, there was still no restitution law on the level of the State. Secondly, the actual ownership of many enterprises and banks that were slated for privatization was unclear. As a result, potential investors intending to buy assets in Bosnia and Herzegovina did not know whether a former owner might appear and be given the assets that the investor wanted to acquire.
The Office of the High Representative believes that investors are now legally protected from such situations. The Amendment issued by the High Representative states that the privatization of enterprises and banks will not prejudice possible restitution claims that may be brought in accordance with the future Entity restitution laws but only if these restitution laws incorporate the following two conditions: they exclude from restitution in kind those enterprises and banks as well as their land, assets and buildings, which are in the process of being privatized; and they stipulate that competent authorities will provide fair compensation if there are legitimate restitution claims.
CEELI organized its first continuing education seminar for young lawyers on January 13th, in Sarajevo. The seminar was attended by 25 young lawyers and was concerned with the subject of representing foreign investors. This topic was selected pursuant to a survey of desired topics, which CEELI previously conducted among young lawyers.
Privatization
Voucher privatization is being conducted in both entities of Bosnia and Herzegovina. The international community and local authorities have imposed strong regulations demanding high level of transparency in the privatization process. However, major scandals do follow this process, especially in very attractive enterprises, such as breweries, oil refineries, etc. The scandals range from public disputes over the real value of such enterprises before the auction to rapid impoverishment of the enterprises by the managers, so they could be easily and cheaply bough .
The Conditions for Private Business Development
Roughly speaking, period from the end of the civil war until 1999 was designated as the "reconstruction period". The international community and domestic politicians designated the past two years as the period of economic reconstruction. However, the improvement in the field of economic development lacked.
The registration of private business is still accompanied with the old, pre-war, socialist and very complicated administrative procedure. However, there were few municipalities that have made significant process - above all, the municipality of Laktasi in northern Republic of Srpska, which has been even baring the label of "experimental municipality" for its highly modernized procedures.
The main advantage for the development of private business are numerous micro-credit lines, organized by international and local NGOs - USAID; CARE, etc. - and banks, too - Micro Enterprise Bank (MEB), for example.
An International Advisory Group on Taxation was established in July 2000, comprised of representatives from OHR, IMF, WB, US-Treasury, USAID, GTZ and CAFAO. The IAGT's goal is to address the deficiencies of the pre-sent tax system, move toward medium term sustainability of the public finances and create an environment conducive to private sector development. One of the most urgent objectives is to eliminate all types of double taxation. Longer-term recommendations include broadening the bases of various taxes in order to facilitate reductions of the very high rates currently in force and move towards a value added tax.
V Enhancing Civic Control In The Fight Against Corruption
Non-government Organizations
The role of civil society in anti-corruption programs in Bosnia and Herzegovina has been minor. Although the NGO sector was rapidly developing in the post war period, until recently non of the NGOs from Bosnia and Herzegovina was dealing with the issues of corruption.
At the beginning of 2001 BiH chapter of Transparency International was launched. After considerable administrative complications, it was finally registered in April 2001. The first initiative was launched in cooperation with national chapters from Serbia, Croatia and Slovenia, the so called "Istanbul Initiative on Public Procurement in South East Europe". Representatives of the four above mentioned TI chapters, recalling that the countries of South East Europe seriously lack transparent procedures and institutions for public procurement that has assisted in increasing fiscal deficit or harmed public finance, adopted the initiative on the harmonization of the public procurement procedures in South East Europe.
Initiative presupposes following stages:
- Assessment of the existing legislative framework and practice,
- Proposal of a legal reform basis, - Assistance in capacity building, and
- Active role in monitoring implementation
Beside Transparency International, there are few other NGOS engaged mostly in training for local authorities or development of legal framework for fight against corruption. However, these attempts are individual and are not connected with lobbing for the passing of particular laws and procedures.
Media
In the post war period international community has laid significant effort in creating independent media scene. However, the results were mainly poor. There are several reasons for this.
First of all, the market of Bosnia and Herzegovina is small and incapable of supporting "self sustainable" commercial media. Therefore, BiH media need to rely on foreign help - donations. Unfortunately, as in other fields, international organizations and officials requested "political correctness" as a condition for foreign donation. Therefore, few independent media with their own production and with strong investigative journalism were developed. Among them the most important are weeklies Dani and Reporter and partly Nezavisne novine, Alternative television from Banja Luka and several local radio stations.
Independent media rarely practice independent journalism. Very few affairs, political as well as economic or criminal were discovered by BiH journalists. However, there are some successful examples. Among others, Banja Luka based daily Reporter has revealed major corruption scandal in Republic of Srpska Custom Service. It has been claimed that it was among the largest corruption or even the largest one, discovered by BiH journalists.
Nezavisne novine, another Banja Luka based daily and weekly, have been engaged in investigative journalism. Owner and Editor in Chief of Nezavisne novine, Mr. Zeljko Kopanja has survived bomb attack, but lost both legs. It was claimed that the attack was direct consequence of NN writing on war crimes during the war and present criminal. However, these claims haven't been proved. Nezavisne novine have, as a matter of fact, always been very close to the government of former RS Prime Minister Mr. Dodik and gained large support from the international community due to strong criticism of Serb Democratic Party, the leading Serb party in BiH before, during and after the war.
International organizations have conducted numerous activities to support investigative and independent journalism in Bosnia and Herzegovina. OSCE has opened and open telephone line for journalists' victims, where they can report any threats or attacks. Further, IREX and Inter News have conducted numerous trainings for journalists and editors. They have financed launching of the major BORAM network of local radio stations around BiH, supported edition of Nezavisne novine for the whole BiH, etc. Organization of High representative has created Independent Media Commission (IMC, later transformed into Regulatory Agency for Communications, RAC as supreme regulatory body in the area of media with authority to issue temporary and permanent licenses. The idea was to cover the area of work of former Information Ministries that attempted to put private as well as public media under the political control. However, IMC from time to time, turned out to be a complementary of Information Ministries engaged in control of politically incorrect, so called nationalistic media.
VI Changing Public Perceptions Of Corruption
Although the institutions of civil society are underdeveloped in Bosnia and Herzegovina, the influence of NGOs and media, as well as attention that international organizations paid to the issue of corruption have increased attention of general public. PARTNER Marketing Consulting Agency in its regular public opinion polls has measured significantly higher index of perception of corruption in, for example, custom service after the series of articles on major corruption that was going on in customs that appeared in Reporter weekly.
VII International Cooperation
As it has been already stated, international organizations operating in Bosnia and Herzegovina have been much more active in terms of anti-corruption projects then local, BiH authorities. In September 2001, OSCE has launched public information anti-corruption campaign "Nadglasajte korupciju - Overvote corruption", intended, according to OSCE officials, "to encourage citizens to consider the issue of corruption during the campaign for the November 2000 general elections". The campaign consisted of brochures, fact sheets, radio and TV spots, and billboards. As a part of the campaign, OSCE has organized training courses in investigative journalism for BiH media.
The OSCE measures to fight corruption include Draft of the Freedom of Information Legislation, the Law on Party Financing, The Provisional Election Commission rules and Regulations, Articles 108. 109 and 1606, and the Municipal Infrastructure Finance and Implementation Training (MIFI) program.
Another anti-corruption public information campaign was launched by the Office of High Representative during 2000. It was called "Ovaj i onaj u borbi protiv korupcije - This one and that one in fight against corruption", and it consisted of a series of cartoons broadcasted on BiH media.
The OSCE campaign was directed at supporting parties and coalitions that included strong anti-corruption line in their program. In the Federation of Bosnia and Herzegovina it was supporting Socialist Democratic Party (SDP), the only multi-ethnic party http://www.seldi.net/BiH.htm#7 in Bosnia and Herzegovina, while in Republika Srpska it caused certain confusion: former Government, which received strong support from international community, was accused of crime and corruption, while present government with "nationalistic" Serb Democratic Party (SDS) gained votes, among other things, on strong anti-corruption promises.
[1]. Republika Srpska annually looses 100$ million on cigarettes smuggling and another 50$ on smuggling of beverages and oil. The annual RS budget is approximately 400$ million.
[2]. Under the former Yugoslavian justice system, the prosecutor's role was relatively weaker than was generally found in modern western and central European countries. The Luxembourg and Madrid Peace Implementation Council (PIC) recognized this inadequacy in calling for the enhancement of the prosecutor's role.
[3]. The reasons for the reform of payment systems are briefly drafted in a report made by the OHR: "Short-term reforms are needed in regard to tax collection and financial control. The concept of transparency and public scrutiny is virtually non-existent. The internal operations of the Bureaus remain a mystery and international organizations not only have been unable to obtain reports of their activities, they were unable to ascertain whether these reports were even prepared by the Bureaus. Though the income of the Bureaus is thought to be considerable, its disposition is unknown. There is significant concern that revenue from the Bureaus is used to finance illegal, parallel institutions. Existing laws must be amended or repealed and new laws need to be developed in regard to the commercial bank payment services and other reform areas. International lenders and businesses as well as local business organizations and the public need to be informed of the details of the reforms to foster confidence in the economic system.
[4]."Wall Street Journal's Central European Economic Review, December 1998 - January 1999. Overall, Bosnia and Herzegovina tied for 24th place with Albania and ahead of only Belarus and Tajikistan. The study reviewed the following categories (with BiH's ranking): Economic Strength (21); Business Ethics (17); Rule of Law (26); Balance of Payments (27); Integration into World Economy (19); Liquidity/Ease of Buying Stocks (27); Price Stability (18); Productivity (17); Current Stability/Investment Climate (24); Political Stability (25).
[5]. One of the illustrative cases was the one of the Banja Luka Brewery. It was to be privatized through a public auction. An international consultant company was engaged to evaluate the assets of the brewery and when the results were published, RS public and some experts claimed that it was underestimated. Managerial team and former Government were then connected to the alleged fraud, while now, former Government accuses present Government for attempting to privatize Brewery under worse conditions.
[6]. Paradoxically, these institutions were, according to some information that leaked to BiH press, connected with the high level corruption. Namely, IMC was transformed into RAC and it covers the fields of media and communications - including highly profitable mobile telephony. Presently, there are two operators in BiH. There was a third candidate - Zeptel. Zeptel is part of Zepter International, owned by a Serb from RS, with good connections, large investments and good reputation in RS and Serbia, too. There were rumors in BiH media that High Representative Mr. Petritsch has personally stopped issuing the license for Zeptel although the company had all required equipment and license from RS Government. Several months latter, transformation of IMC into RAC was announced, and a legal control over mobile telephony licenses was obtained.
[7]. It needs to be noted that leadership is multiethnic, while the party receives support only from Bosniaks (Muslims), and it represents ideas of unitary Bosnia and Herzegovina, the same ideas pleaded for by the Muslim nationalistic Party of Democratic Action (SDA) - although it is in a civil "clothes" in case of SDP, while in rahter clerical one in the case of SDA.