TELEKOM SERBIA SCANDAL GROWS, IMPLICATING EU

UNCLAS ROME 004032

SIPDIS


E.O. 12958: N/A
TAGS: PINR PREL PGOV SR IT EUN
SUBJECT: TELEKOM SERBIA SCANDAL GROWS, IMPLICATING EU
COMMISSION PRESIDENT PRODI AND ITALIAN DIPLOMATS



1. Summary: Over the past several weeks, pro-Government
daily "Il Giornale" published numerous articles on the
1997 sale by Telekom Serbia of a stake to Telecom Italy -
- a ruinous financial speculation that helped keep
Milosevic in power and allegedly involved kickbacks to
several members of Italy's then-governing center-left
majority, including current EU Commission President
Prodi. Although Prodi and the others rejected the
allegations as rightist propaganda, the rest of the press
has recently picked up the story and calls for
clarification are rising from Prodi's own political
allies. Prodi and others have confirmed their
willingness to testify before a parliamentary commission
-- and maybe even judicial authorities -- investigating
the scandal. End summary.

Igor Marini is arrested and talks
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2. The "Il Giornale" stories stem from the arrest in
Switzerland in May on charges of illegal financial
dealings of an ex-financier, Igor Marini, who -- by his
own account -- was materially involved in money
laundering activities and the consignment of bribes in
connection with the Telekom Serbia affair. Prior to his
arrest, he was called to testify before the Italian
parliamentary commission investigating the deal and the
arrest occurred when Marini and four commission members
traveled to Lugano to pick up some documents that he
claimed would back his statements.


3. Marini has since been transferred to a Turin jail and
is now also being questioned by Turin judicial
authorities. According to "Il Giornale," and recently to
the rest of the press, he is revealing an enormous amount
of facts regarding alleged underhand dealings in
connection with what was a secret agreement signed in
June 1997 between Italy's then-public telecommunications
company, Telecom Italy, and Telekom Serbia. Under that
agreement, Telecom Italy bought 29 percent of the Telekom
Serbia shares for 900 billion lire (roughly 450 million
dollars). It then reportedly sold them back in February
2003 for less than half their original cost. Calculating
an annual interest rate of 12 percent on the total sum,
the parliamentary commission gauged a net loss for
Telecom Italy of exactly 900 billion lire -- equal to the
total cost of the original deal.

Igor says the left got kickbacks
--------------


4. According to "Il Giornale," the agreement with
Telekom Serbia served to supply Milosevic's regime with
direly needed fresh cash, at a moment when Italy's
international allies were preparing to clamp down on
Milosevic because of Kosovo. Reportedly, Marini told the
judicial authorities and the parliamentary commission
that bribes were paid in connection with the deal to,
among others, then-PM Romano Prodi (an expected
challenger to PM Silvio Berlusconi in the next national
elections),then-FM (and current Senate Vice President)
Lamberto Dini, and then-MFA Under Secretary for the
Balkans (now head of the largest center-left opposition
party, Democrats of the Left, DS) Piero Fassino.

Bascone said "watch out"
--------------


5. "Il Giornale" cited one of fourteen letters and
cables by the then-Italian Ambassador to Belgrade and
current Deputy Director of the MFA Europe Bureau
Francesco Bascone to then-MFA U/S Fassino, in which
Bascone underscored his strong concerns over the deal.
Bascone reportedly cautioned against possibly getting
involved in money laundering activities, highlighted the
"illegitimacy of the acquisition," and warned against
"scandals on the improper use of fresh moneys from
Italy." He also noted that the funds "would be at the
direct disposal of Milosevic and of his power group" and
"the danger cannot be ignored." He said, "the government
must assess if the economic and political benefits are
greater than the dangers." Bascone repeated much the
same statements when he was heard by a parliamentary
commission several months ago.

Sannino said Bascone said
--------------


6. In addition, "Il Giornale" reported the involvement
of another Italian diplomat, Counselor Stefano Sannino.
Prior to the events, Sannino was First Secretary in
Belgrade, and during them he was Chief of Secretariat to
then U/S Fassino. Sannino is at present EU Commission
President Prodi's Personal Representative to the G8 and
his cabinet adviser on external relations, foreign trade,
and security and defense. Sannino reportedly stated
before the parliamentary commission that Bascone had
fully informed Fassino of the deal before the contract
was signed and that Fassino had fully briefed then-FM
Dini. Sannino specifically said he was not aware of
Prodi's ever having been informed.

Vattani did not know?
--------------


7. The press did not dwell on a third diplomat who was
also questioned by the commission some months ago,
Umberto Vattani, then Dini's Chief of Cabinet, later MFA
Secretary General, and currently Italy's Ambassador to

SIPDIS
the EU. However, Vattani was cited in the Italian news
agency ANSA as denying ever having been informed of the
affair, saying he had learned about it later in the
press, and claiming that Bascone's statements were
"totally false."

The story is old
--------------


8. The Italian public first became aware of the deal in
February 2001, when center-left, independent daily "La
Repubblica" disclosed the story. Then-FM Dini told
Parliament at that time that neither the MFA nor the
Treasury Ministry -- Telecom Italy's controller -- had
been informed in advance that Telecom Italy was
concluding the deal, nor were they provided information
afterward. According to Dini, there was no technical
reason for Telecom Italy to inform the government,
because Telecom Italy was buying minority shares and
would have no control over the decisions of Telekom
Serbia. Telecom Italy could legally make its own
decisions, in particular because it was not violating any
sanctions, he said. He said that, when the deal was
signed, EU, U.S., and UN sanctions against Serbia had
already been lifted and the general feeling following the
November 1995 Dayton Agreements was that the
international community had to prepare the groundwork for
a normalization of relations with Serbia. Milosevic had
started a privatization plan and many foreign companies,
including U.S. companies, had begun negotiating with
Belgrade. Dini remarked that the "Repubblica"
allegations seemed to be the work of "CIA blue collar
workers." The story died there until the "Il Giornale"
articles this summer, where Dini's reference to the CIA
was put into context: he thought the previous U.S.
Administration had passed the story to the press to get
back at him for allegedly being pro-Serbian. (Note: Some
papers have reported that Dini's wife, an independent
businesswoman, was a beneficiary of the kickbacks.)
Former U/S Fassino now reportedly claims that the U.S. in
1996-1997 was encouraging other nations to invest in
Serbia.

Bob Gelbard has something to say
--------------


9. Robert Gelbard, the Clinton Administration's Special
Envoy for the Balkans, refuted Fassino's claim as
"ridiculous" and "totally false," in an interview in the
wide-circulation, centrist news weekly "Panorama." He
remarked, "Washington had no reason in the world to
encourage companies to give money to Milosevic: we wanted
investments in Bosnia, certainly not in Serbia."
According to Gelbard, the deal between Telecom Italy and
Telekom Serbia negatively affected U.S.-Italy relations
for a while, even though it did not dent their soundness.
"That mountain of Italian money gave Milosevic a breath
of air and allowed him to buy new loyalties and continue
to pay the military's wages," he said. He added, "The
news of the Italian investment, in fact, was received
with serious concern by the U.S. government. We had
reasons to believe that the agreement contained some
illegal elements."

Prodi and the others want to testify


--------------


10. Prodi, Fassino, and the other individuals involved
initially reacted with heated indignation, characterizing
financier Igor Marini as a "lying imbecile" and a
"braggart." But the scandal is not going away this time
and denying involvement seems not to have helped those
fingered. Some of the leftist press and even some
leftist politicians are beginning to doubt the innocence
of those allegedly involved and are beginning to demand
public explanations. In an open letter to the press
August 27, Prodi said he wants to be heard by the
commission as soon as possible and will tell the
commission he had never been -- as there was no reason he
should have been -- informed of the deal until after it
happened. In press statements the same day, all the
others named in the press stated their intention to
testify before the commission. Some have even indicated
their availability to be heard by the Turin magistrates.

European Parliament also interested in Prodi's activities
-------------- --------------


11. In addition, "Il Giornale" reported that Prodi is
coming under fire at the European Parliament, where he
has been asked to answer formal queries about his
involvement in the Telekom Serbia affair, as well as in
the EUROSTAT scandal, in which two high-level EUROSTAT
officials are under judicial investigation in a French
court on charges of having taken approximately 900
million euros from EUROSTAT funds. (Note: EUROSTAT is
the EU Commission's statistics agency. End note.)
Instead of firing the officials, Prodi has reportedly
reassigned them to other positions within the Commission.


12. Comment: Accusations and denials of wrong-doing by
politicians played out in the Italian press are everyday
occurrences in Italy, and it is unlikely that the current
resurgence of interest in the Telekom Serbia deal will
keep Prodi from completing his mandate and term as EU
Commission President. He has promised to return to Rome
when his current tenure is finished, in November 2004,
and is considered a virtual shoe-in as the center-left's
candidate to run against Berlusconi as Prime Minister in
the next national elections. It is at that time that
these most recent allegations may return to haunt him.

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2003ROME04032 - Classification: UNCLASSIFIED