Washington Post
Croatians find treasury plundered

R. Jeffrey Smith

Monday, June 12, 2000

ZAGREB, Croatia In his luxurious office atop a hill overlooking this graceful city, Croatian President Franjo Tudjman plotted with cronies in late 1997 to secretly buy the country's largest and most profitable daily newspaper.

"What have you cooked up?" Tudjman asked his chief domestic adviser, Ivic Pasalic, while hidden microphones recorded the conversation. "Mr. President," Pasalic replied cheerfully, "I made a smoke screen."

False-front corporations in London and the Virgin Islands, Pasalic explained, would be used to hide the fact that Tudjman's party was the real purchaser. The plan, he said, would create "the illusion of democracy and privatization" of the state-owned paper, one of the country's most valuable economic assets. "Fine," Tudjman said after more conversation.

The recording, made public only recently, provides a direct look at what officials in Croatia's new government say was a sustained, successful campaign by Tudjman and his allies to plunder billions of dollars from the treasury of this former Yugoslav republic during almost 10 years of absolute, nationalist rule that ended with Tudjman's death in December.

Over that decade, top Croatian officials enriched friends, family members and political allies by manipulating the privatization of state-owned companies and handing out lucrative contracts and suspect loans, government officials now say. State funds were funneled secretly to Tudjman's political causes, such as support for ethnic Croat militiamen fighting in neighboring Bosnia. Intelligence agencies even spent government money to spy on soccer clubs that competed against Tudjman's favorite team.

The misuse of state money was hidden for years through deceptive accounting practices, World Bank and government officials say. The state accumulated large debts off the books, and no treasury ministry existed to monitor or control how money was spent from the government's 3,000 bank accounts.

Corruption has been a serious problem for many East European countries--including Hungary, Bulgaria and the Czech Republic--over the past decade as they have begun the difficult transition from communist rule to market economies. But it now appears that the officially sanctioned thievery in Croatia--a country of just 4.5 million people with an area smaller than West Virginia--was greater on a per capita basis than in any other East European nation undergoing this transition, diplomats, officials and foreign economists say.

Officials in the new government that assumed power in February are still tallying the damage, but it is already clear, they say, that the corruption has reduced the Croatian economy to a shambles. Banks have collapsed, hundreds of companies are insolvent, and unemployment is at 22 percent and climbing.

Officials in the previous government "spent money like drunk millionaires," said Stipe Mesic, Croatia's new president. "There was a total lack of responsibility and . . . lack of accountability." Added Prime Minister Ivica Racan: "The losses and debts were greater than we expected; the criminality was greater; and most of all, government institutions were in decay" when the new government took power. "In virtually every job that was done," Racan said, "there was some evidence of corruption."

The Evidence of the Tapes

The extent of the corruption has come to light partly because the new Western-oriented government says it is determined to expose past abuses and align the country with European norms. But key evidence has also surfaced because Tudjman secretly ordered the taping of every conversation in his office from 1991 on--generating a trove of documents that has had the same jarring impact here as Richard M. Nixon's White House tapes did in Washington in 1974.

Peering into a small, locked room in the president's headquarters shortly after the election, Mesic and his aides were astonished to find more than 14,000 separate transcripts and 830 audiocassettes. Revelations of official skulduggery have been spilling from that room into the local media ever since.

"You can find all of Croatian history in these transcripts--the real history, behind the scenes," says Ivo Pukanic, editor of the weekly journal Nacional, which has printed some of the juiciest material.

Certain transcripts are missing and presumably were destroyed in the two-week period between the election and Mesic's inauguration, officials say. But the volume of incriminating evidence was so great that it could not all be wiped out. "They really thought they would be in power forever, a 1,000-year Reich," said one Western diplomat. "So they did some things blatantly."

World Bank officials, diplomats and economists here say the corruption has crippled the country financially. The problems include:

* The failure of 11 banks and two savings and loan companies, plus the reorganization of five others. Tudjman's regime allowed the politically well-connected to acquire big banks and plunder them, and now the government's bill for the whole mess may reach $2.6 billion, World Bank officials say.

* Extensive loan guarantees extended by Tudjman's government. World Bank officials say Croatia gave out more loan guarantees than virtually any other country in Eastern Europe, creating a potential government liability of more than $2 billion.

* Unpaid domestic and foreign debt. The government failed to keep up with its pension obligations and may owe as much as $8.5 billion--an unprecedented figure for a nation of Croatia's size, economists say. As the government stopped paying its bills, domestic and foreign debt spiraled and now totals $15.1 billion. This fostered a climate in which private businesses also stopped paying their bills, and, as a result, the bank accounts of 20,000 Croatian companies are now frozen, government officials say.

Top ministers say that dozens of government-run companies have not paid their employees for six months and will likely be closed soon. Fifty thousand people have lost their jobs this year; another 40,000 will likely lose theirs in the next six months.

"They are still finding things in the drawers that indicate the situation is worse than they thought," said Per Vinther, head of the European Commission's office here.

The depth of the problem is surprising because, to the outside world, Croatia's economy had long appeared a model of fiscal discipline. Inflation was low, the currency was stable, and there was almost no budget deficit. Zagreb, a tidy capital city filled with 18th-century baroque palaces and pretty shops selling designer clothes and expensive electronics, conveyed an image of prosperity.

It turns out that Croatia had what a Western diplomat here described as a "virtual economy," in which the government accumulated huge debts off the books and used deceptive accounting practices that hid spending sprees. Government wages were doubled even as productivity slumped. The nation's real deficit was eight times greater than the government had claimed.

"Nothing was happening in the economy, except assets were dripping," said the Western diplomat.

Privatization Schemes

Croatia's small privatization agency, established in 1992, was supposed to help oversee the nation's transformation from socialism to free enterprise. Instead, it became a headquarters for institutionalized looting, officials here now say.

Djuro Njavro, an economist and top adviser to Tudjman's political party, the Croatian Democratic Union, said that communist managers "used the privatization process to create a new elite, the same as in other transition countries." He also acknowledged that "some people who were close to" the party took advantage of "the lack of transparency" in the transactions and the fact that "everyone in that period . . . didn't ask for the sources of the money."

Perhaps the biggest of all the tycoons minted by Tudjman's government was Miroslav Kutle, a onetime bartender hired as a clerk at the privatization agency. Kutle was allowed to buy company after company at a discount with little or no cash of his own, allegedly in exchange for payoffs to party officials. Eventually, he acquired about 170 businesses, including the nation's largest grocery store chain and its monopoly newsstand company, a firm that in its heyday grossed $1 million a day.

Like other well-connected officials who tapped into easy money, Kutle bankrupted the firms he controlled by pocketing the profits while refusing to pay suppliers, many of which failed in turn. Kutle spent some of the money on a corporate jet and a fancy house in the capital, while some has been traced to banks in Austria and corporations in the Virgin Islands, officials here say. But Kutle successfully hid most of the money by forging documents.

Kutle was arrested shortly after the new government took power and now sits in a Zagreb jail. He has denied any illegal conduct. But the U.S. ambassador to Croatia, William Dale Montgomery, said Kutle "nearly bankrupted the whole country" and described him as the embodiment of Tudjman's view that "anybody who helped build [the party] deserved to have all the riches this country had to offer."

Kutle and other well-connected officials were able to fund their acquisitions by buying controlling shares in banks with government help and then obtaining hundreds of millions of dollars in loans from the banks. Throughout Tudjman's tenure, banks were allowed to operate with little supervision, diplomats and officials in the new government said, and many eventually collapsed. Investors lost millions.

"All of our funds went missing," said Ive Farac, a Zagreb resident who deposited his family's entire savings of $180,000 in one of Kutle's banks, Glumina, in 1998. The bank folded last year. "My family and I were just devastated. We had to borrow money from other members of the family just to survive," said Farac, who added that his plans to open a business, refurbish his apartment and send his eldest daughter to a trade school have all been scrapped.

Of the more than 1,800 state companies sold by Croatia's privatization agency to such "private" investors as Kutle, roughly half are insolvent today. Hrvoje Vojkovic, the new head of the privatization process, says he has evidence that employees at the agency collected personal fees in exchange for selling companies at prices well below their real value.

"The privatization deals were . . . a disaster," said Goranko Fizulic, the country's new economic minister. "They didn't create more efficiencies. They didn't create more income for the budget. They did not create new employment." He says many of the agency's reports were falsified, so no one is sure how much money the government actually collected from those who purchased state firms.

When Tudjman and Pasalic, his chief domestic adviser, arranged the sale of a portion of the national mobile telephone concession to Deutsche Telekom in 1999, $100 million of the proceeds were deposited in an Irish bank account controlled by just a few top presidential aides. Evidence of the diversion turned up on one of the Tudjman tapes, and the international police agency Interpol has since been called in to help retrieve the money, which was subsequently transferred to another bank.

A Nationalist Dream

Throughout Tudjman's years as president, parliament was controlled by his party and the government was run as his personal fiefdom; even kindergarten principals and hospital directors were appointed by party officials. So in addition to enriching allies through privatization deals, Tudjman was able to lavish hundreds of millions of dollars on his political obsessions.

The most elaborate of these was his dream of annexing more than a third of neighboring Bosnia following the 1992-95 war among that republic's Croats, Serbs and Muslims--an area stretching from the Croatian border east and south to the Bosnian city of Mostar. Most inhabitants of the region were ethnic Croats, and Tudjman believed it should be his.

Publicly, Tudjman embraced the 1995 Dayton accord, which ended the war and established Bosnia's borders, and he demanded publicly that Croatian officials cease meddling there. But privately, he sought to keep his hopes of a "Greater Croatia" alive by secretly paying for the training of Bosnian Croat militiamen, funding their salaries and diverting huge sums to hard-line Croatian nationalist politicians in Bosnia. At its peak, the flow of funds to Bosnia exceeded a half-million dollars a day, top officials in the new government estimate.

According to Mesic, some of these payments were routed through the accounts of four different ministries and overseas accounts controlled by ethnic Croats abroad; other funds were channeled through a clandestine bank account on the island of Jersey that is controlled by Croatia's state oil company, INA.

Many of the payments--including funds for militia salaries--were sent to a construction firm in Bosnia called Monitor, which was run by a former bus driver named Ljubamir Cesic-Roijs, whom Tudjman appointed as an assistant minister of defense. According to Mesic and other officials, the government also gave the firm $100 million to buy road-building equipment under a budget allocation listed as "cultural assistance"; on top of that, it paid the firm a fee for using the equipment.

Jozo Rados, the new defense minister, said in an interview that he had reviewed records associated with Monitor's work and concluded "there were irresponsible business dealings . . . with no clear contracts or bills. There was room for money to leak out."

"The higher the amount of money spent, the less transparency there was," said Radimir Cacic, the new minister of public works, reconstruction and construction. "To buy a chair, there would be a public tender, and they would get three offers. For contracts to spend $300 million to $500 million, there was nothing" but political deal-making.

Veterans of Croatia's war of independence from the old Yugoslav federation formed the backbone of Tudjman's party and were rewarded with lavish benefits. Government records indicate that more than 26,000 men were awarded disability pensions for war injuries, for example, roughly double the number that actually suffered such injuries.

Operatives with Croatia's half-dozen or so intelligence agencies--including one controlled by Tudjman's son Miroslav--helped establish the secret bank accounts and shuttle government funds among the president's friends. "These agencies were, to put it roughly, privatized and working exclusively in the service of certain individuals," said Tomislav Karamarko, Mesic's intelligence adviser.

But this was not Tudjman's only abuse of the intelligence agencies. Karamarko says he has evidence the agencies were also used to spy on the media, Tudjman's political opponents, Zagreb city council members and even--in one of Tudjman's quirkiest obsessions--a series of Croatian soccer clubs that played against the president's favored Zagreb team.

"We are surprised every day by new problems . . . [and] overwhelmed by new discoveries," said Zlatko Tomcic, the new speaker of parliament and a member of a commission studying past intelligence community misdeeds.

The possibility that corrupt officials could be prosecuted during the Tudjman era was negligible, because Tudjman controlled both the court system and the police, according to Ranko Marijan, the new deputy justice minister. For example, police last year conducted a lengthy probe of allegations that the country's tourism minister was diverting funds to his wife's bank account, but they did not arrest him until January--on the same day voters ousted Tudjman's party.

"Nobody dared to touch officials who they knew were close to the former government," said Marijan. "Those cases never made it into court; they wound up in the desk drawers of police officials."

After Tudjman's death in December, squabbling among his top aides contributed to the party's defeat by a bloc of four opposition parties. Western governments have since hastened to extend olive branches and tens of millions of dollars in financial aid to Mesic's new government, which they hope will serve as a model to the people of neighboring Yugoslavia of peaceful transition to democratic rule.

The Clinton administration is pushing a $55 million Croatian aid package through Congress, and with its European Union allies has promised more than $2 billion in future construction aid and interest-free loans. The popularity of Mesic--the most outspoken official here about past government abuses--and his pro-Western policies has been rising.

Many of those implicated in questionable activities during Tudjman's rule--such as Pasalic--retain seats in parliament, which gives them immunity from prosecution. But Prime Minister Racan and others have vowed that many criminal prosecutions lie ahead.

"We lost 10 years," said Deputy Finance Minister Damir Kustrak, adding that "a significant part of the economy" has been crippled. But, he said: "We are optimistic. We think, how could it get much worse?"

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