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