CROATIAN STATE PROSECUTOR DESCRIBES CORRUPTION

C O N F I D E N T I A L SECTION 01 OF 02 ZAGREB 000643 SIPDIS SIPDIS STATE FOR EUR/SCE E.O. 12958: DECL: 07/02/2017 TAGS: ECON KPRV KCRM HR SUBJECT: CROATIAN STATE PROSECUTOR DESCRIBES CORRUPTION STING REF: ZAGREB 593 Classified By: Econ Officer N. Berliner for reasons 1.4 b/d. ¶1. (C) Summary and Comment: The June arrest of eight employees of the Croatian Privatization Fund (Fund) on charges of corruption marks a significant improvement in both the political will and the capacity of the Croatian government to fight corruption. The Fund has long been viewed as a font of corruption in the country, a view shared with emboffs by Chief State Prosecutor Mladen Bajic, Head of the Office for the Suppression of Corruption and Organized Crime (USKOK) Dinko Cvitan and Deputy State Prosecutor Josip Cule. Bajic revealed that the year-long operation known as "Maestro" that resulted in the arrests at the Fund began with his own suspicion, which was later confirmed by a source he developed within the Fund itself. In an operation with suspense and intensity worthy of a crime thriller, Bajic and his team employed a combination of hi-tech surveillance and insider informants, abetted by the apparently insatiable greed of the accused. The success of the operation is a strong boost for Bajic's office and its independence from political interference. Bajic said that PM Sanader authorized extraordinary financial support for the operation without any questions or strings attached, something he emphasized would not have been possible just three years ago. End Summary. Inside Informant Key to Operation -------------- ¶2. (C) Emboffs called on Croatian Chief State Prosecutor Mladen Bajic, Head of the Office for the Suppression of Corruption and Organized Crime (USKOK) Dinko Cvitan and Deputy State Prosecutor Josip Cule to discuss the arrests of eight employees of the Croatian Privatization Fund. Bajic and his deputies were still ebullient at the success of the operation, known as "Maestro" (the operation took this name because three of those arrested were vice presidents of the Fund, who became known as "The Three Tenors.") Bajic said that it was not a secret that the Fund was a prime source of corruption in Croatia, the nexus of a system where rent seekers intersect with low-paid bureaucrats responsible for disposing of the once vast and still large assets of the State. However, multiple audits of privatization deals had never uncovered sufficiently firm evidence of corruption in the Fund. Mere suspicion was not enough for Bajic to initiate a successful investigation; he needed an insider. Bajic found that insider in a friend who worked in the Fund who gave him the information he needed to get the operation started. ¶3. (C) An operation of this scale needed solid indications of criminal activity for Bajic to act. This was also essential in order for him to get the crucial approval from a judge to have the newly-reorganized security services initiate electronic surveillance of the suspects. Bajic said that he made an effort to keep the number of people involved in the operation as small as possible. He said the police were involved at the working level, but Bajic and Cvitan ran the operation out of a control room that they set up in the basement the State Prosecutor's building. The room was locked and not even the cleaning staff could enter. Strong Political Support -------------- ¶4. (C) The operation tested the ability of USKOK to act effectively and could not have been successful without the support of the highest levels of the Croatian government. The informant, who was set up to pose as a Russian investor, needed cash to pay bribes to Fund officials. USKOK, however, did not have ready access to large amounts of cash that would not have to be immediately accounted for. As Bajic and Cvitan tell it, Fund officials were taking bribes of 50,000 euros in cash that would be passed over the desk before any business was conducted. In return, Fund officials would write tenders to favor the preferred bidder or disqualify competitors. At one point, with a bribe coming due and no cash on hand, Bajic had to go directly to PM Sanader. He told the PM that USKOK needed 50,000 euros in cash immediately. The PM, without asking why, approved the request and instructed Finance Minister Suker to give USKOK the money. Bajic said USKOK would never have been able to get this kind of money with no questions asked three years ago and they was heartened that this marked a true change for Croatia. Insatiable Greed -------------- ¶5. (C) The greed of those accused seems to have grown insatiable over the years that they worked in the Fund. ZAGREB 00000643 002 OF 002 Although the Fund has a politically appointed director and four government ministers sit on its supervisory board, many of the more routine transactions were handled at the working level with relatively little oversight from the top, according to USKOK. In fact, Cvitan said that they heard the accused talk about Fund President Grga Ivescic as a "political hack" and "fool who doesn't have a clue what's going on." The sense of impunity of those involved grew to such extraordinary proportions that one of the accused, Josip Matanovic, demanded 5 percent of the value of a privatization deal from the informant and went to a notary public to sign a "contract" for that amount. ¶6. (C) Another of the accused, Ivan Gotovac, played a more sophisticated game, one that may make it harder for USKOK to seize his assets. Rather than being on the take for cash, Gotovac realized that the value of many companies was in their potential stock market value or in the land they possessed, particularly coastal properties that would later be rezoned for resort development. Gotovac engaged in insider trading, but also set up companies to acquire rights to privatized properties. ¶7. (C) With hundreds of hours of video and audio recordings of the suspects' activities, Bajic and Cvitan decided to move to arrest them when it became apparent that one of them, Matanovic, was potentially tipped off. Matanovic, during a meeting with the informant in a local restaurant the day before the arrests, insisted on changing tables, was looking around himself constantly and saying that he was being watched. That, however, did not prevent him from taking another 50,000 euros in cash from the informant. Success Boosts USKOK -------------- ¶8. (C) Operation Maestro is a huge success for USKOK. Both Bajic and Cvitan clearly feel that their credibility and independence are now firmly established, which will enable them to go farther. The investigation in to the Fund is still on-going and the arrested are being held in detention during the investigation. Bajic and Cvitan said the Fund was the font of corruption in Croatia, a hydra that began to extend its tentacles into every part of the economy following the collapse of Yugoslavia. However, they are unlikely to go digging too far in the past. Cvitan said that the next things USKOK is likely to look at are the public tenders, both at the national level for such projects as road construction and within local governments. Asset Forfeiture Still Uncertain -------------- ¶9. (C) One of the remaining weaknesses in Croatia's legal framework to fight corruption is the difficulty in seizing assets. Under current law, the state can seize all assets from an individual when they can make a charge that the individual was part of an organized crime group and the assets were likely acquired with proceeds from those activities. In this case, however, it would be difficult to bring charges of organized crime. Absent that, the burden of proof for asset seizure rests on the state that must prove that an asset was acquired with the proceeds of a particular criminal act, such as a bribe. This is extremely difficult and could result in some of the Maestro defendants keeping millions of dollars in assets. BRADTKE