BULGARIA: CORRUPTION MAKES A COMEBACK IN 2005

C O N F I D E N T I A L SECTION 01 OF 03 SOFIA 000502 SIPDIS SIPDIS E.O. 12958: DECL: 03/29/2016 TAGS: PGOV KCOR KCRM BU SUBJECT: BULGARIA: CORRUPTION MAKES A COMEBACK IN 2005 Classified By: DCM Jeffrey D. Levine, for reason 1.4 (b) & (c) ¶1. (SBU) Summary: Corruption in Bulgaria reached a high-water mark in 2005, reversing a gradual positive trend of declining rates of corruption from 1998 to 2004. This was the main conclusion of the seventh annual Corruption Assessment Report prepared by the NGO, Center for the Study of Democracy (CSD) and presented to the public on March 22. According to CSD, "soft" anti-corruption measures, such as public awareness campaigns and the training of public sector officials, have exhausted their usefulness and should be replaced with more effective and punitive measures. Anti-corruption reforms to date have primarily affected administrative graft but have left untouched large-scale political corruption. A key emphasis of the forum was the need to address high-level political corruption, particularly party financing and the circle of companies, foundations and institutes surrounding various political parties. End Summary. Corruption on the Rise -------------- ¶2. (SBU) Since 1998 the Center for the Study of Democracy has been monitoring the basic form, scale and trends of corruption in the country through a set of "corruption indexes" established under the "Coalition 2000" initiative--an effort aimed at promoting anti-corruption reforms and policies. The annual reports are designed to help Bulgarian policymakers and others understand the overall trends and dynamics of corruption and effectiveness of anti-corruption policies. According to past reports, the general trend in Bulgaria has been a gradual decline in corruption from 1998 to 2004. The latest report, however, reversed the trend, showing a significant increase in the number of corrupt deals during the last year and a half (April 2004-November 2005). ¶3. (U) According to the report, petty administrative corruption has risen, as has the number of cases in which citizens have been pressured by public sector officials to engage in corruption. As compared to March 2004, the number of corruption transactions has increased from about 80,000 per month to about 130,000 per month, according to the report. Indeed, the report cites that "in 2005 the incidence of pressure exerted by officials and of actually executed corruption deals reverted to the higher rates characteristic of the 1999-2001 period." CSD attributes part of this reversal to the recurrent increase in corruption at the end of an election cycle. It may also reflect the public's decreasing tolerance of--and willingness to report--corruption. On a positive note, corruption pressure (when citizens are asked for money, favors or gifts to resolve problems) is down in the judicial system as a whole, mainly due to reforms and internal anti-corruption measures. Police officers and doctors, however, topped the corruption charts in the last year and a half. A New Frontier for Political and Economic Corruption -------------- -------------- ¶4. (SBU) The opportunities for political and economic corruption in Bulgaria continue to fluctuate and shift as the country advances along its path of transition and eventual EU membership. Informal networks between political parties and economic groups--often in the form of favored, sometimes shadowy, companies--have developed over time. (The institutionalization of these political and business networks has become popularly known as the "circle of companies" after the leader of the Movement for Rights and Freedom, Ahmed Dogan, unabashedly acknowledged their existence as an integral part of Bulgarian political life in last year's election campaign). ¶5. (C) In a meeting before the release of the CSD report, Former Finance Minister Milen Velchev acknowledged candidly the lack of transparency in political-party financing. Noting that Bulgaria is still largely a cash economy and donations to political parties therefore usually come "in suitcases," Velchev said greater transparency is unlikely anytime soon. He said that five years after his return to Bulgaria from London, he sometimes caught himself thinking of these transactions as "normal." Velchev was quick to point out that the NMSS did not receive money from organized crime, but that legitimate businessmen also preferred to keep their donations anonymous and off the books. "I can,t imagine who would support (greater transparency) at this time," Velchev said; "It,s too much a part of the culture." He said that, SOFIA 00000502 002 OF 003 among political-party leaders, MRF leader Dogan was the most unapologetic about his sources of funding. Velchev made reference to Dogan,s televised acknowledgement that the MRF receives funding from "a circle of companies," and mentioned a discussion of party financing with Dogan wherein the MRF leader told him, "Don,t worry, you will soon learn how to do double accounting." ¶6. (SBU) These informal political and economic corruption networks continue to exploit various opportunities related to Bulgaria's transition. In the earlier part of Bulgaria's transition, these networks, along with organized crime, had numerous opportunities to redistribute national wealth by siphoning money from state-owned enterprises and banks, bogus privatizations, and tapping into smuggling channels. As most of these channels have gradually dried up and the process of EU harmonization has narrowed available channels for crime and corruption, the focus of these networks have shifted to control over public procurement, concessions, EU funds, VAT fraud, and securing appointments to the executive or judiciary in order to facilitate corruption schemes and ensure freedom from prosecution. ¶7. (SBU) Public procurement and concessions represent a key area of growth for such groups. According to CSD, politically favored firms in Bulgaria are usually financed through public procurement contracts and concession agreements. In return, these firms reward their patrons with direct or indirect financing of party activities, hiring of party functionaries or associates, or payment of overseas studies for the children of senior party officials. CSD estimates that the companies that finance political parties have diverted roughly 320 to 370 million Bulgarian leva (USD 196-227 million) in public funds through public procurement deals in ¶2005. It is no accident that the amount of abuse peaked last year. CSD has established a clear link between the awarding of public procurement contracts and the timing of elections, either local or national. In 2005 the number of public procurement contracts signed by state institutions rose disproportionately on a year-to-year basis. ¶8. (SBU) Over the last five years the public procurement market in Bulgaria has grown substantially both in terms of the number and total value of contracts. In 2003, public procurement contracts were valued at 1.5 million leva or USD 920,000 (19.6% of the budget); this amount doubled in 2005 to 3.3 million leva or USD 2 million (31.3% of the budget). Since 2003, the public procurements tenders have been won by a decreasing number of companies. Part of this is due to a natural consequence of market specialization of certain companies working with the central and local administration, but it also reflects the fact that many companies will not consider bidding for contracts if they do not have a political patron beforehand, according to CSD. ¶9. (U) CSD estimates that an average of 7% of the total value of a contract--or a total of 55 million leva (USD 34 million) worth of public resources--ended up in the pockets of people from the central or local government administration. CSD is not alone in highlighting the increasing corruption pressure in Bulgaria's public procurement process. The EBRD, in its latest report on economies in transition, stated that corruption payments for awarding public procurements contracts was the only type of corruption in Bulgaria's business sphere which clearly worsened in 2005 (rising to 2002 levels). Bulgaria was the only country in Southeastern Europe to decline compared with last year's survey and now is running second--only to Albania--in terms of the level of public procurement bribery, according to EBRD. Public Growing More Intolerant of Corruption -------------- ¶10. (SBU) According to CSD, the Bulgarian public is becoming less and less tolerant of corruption. CSD has witnessed a steady decline in the number of citizens willing to engage in corruption and believes people are increasingly starting to feel victimized when subjected to corrupt practices. Values in the "susceptibility to corruption" index were at their lowest level in late 2005. There also is a widening gap between the perceived spread of corruption and the actual level of victimization, which reflects people's ethical assessment that the observed level of corruption is too high, according to CSD. Similarly, there has been an upward trend in the public's perception of corruption as a growing concern. Since 1998, corruption has consistently ranked among the top five socio-economic problems, typically falling in SOFIA 00000502 003 OF 003 the fourth or fifth position after economic issues or general crime. However, in 2004-2005, corruption was identified as the third most important problem (followed by low incomes and unemployment). Part of this increase may be attributed to the 2005 election cycle, when the public's expectations regarding such issues are usually heightened. COMMENT -------------- ¶11. (C) Though none of the information in the CSD report comes as a surprise to Bulgarians, its publication generated significant media coverage by shining a particularly bright spotlight on the financing of political parties and corruption in public procurement. Unfortunately, the media bounce lasted only a few days, and there is little short-term prospect of serious reform. In the longer term, efforts by the new Chief Prosecutor to lift the parliamentary immunity of allegedly corrupt MPs may have a chilling effect on some of the most egregious acts of corruption, but true reform will require a change in Bulgaria's political culture. As former Finance Minister Velchev told the Ambassador , there is little interest in changing the way political parties are financed because "everyone benefits" from the current system. Beyrle