Eliminating Dirty Money

Only verifiably clean money from individuals who have not been convicted of a crime will from now be admissible in the privatization process.

But before the rules are tightened, the cabinet's latest amendments to the Law on Privatization have to pass.

Right before unveiling the latest proposed changes in October, the cabinet issued a decree banning people indicted for property and business crimes, as well as official misconduct, from taking part in privatization auctions. The move was made after a suggestion from Economic Development Minister Mladjan Dinkic.

However, the decree cannot be implemented retroactively, which means that numerous privatization contracts, many of which are suspicious and controversial, and some of which have already been struck down, will remain open to question. For the greater part the biggest issue is dirty money. There is an air of urgency, since the entire privatization process is due to end on Dec. 31, 2007.

Economist Goran Nikolic believes that the aforementioned decree is much easier to enforce than an entire law with a host of restrictive provisions.

"A decree is a decree and even if it's a bad one, it's better than nothing," he says, adding that now people are beginning to ask where many investors got their money. This, Nikolic adds, is completely different from the situation in 2001, when "the only thing that mattered was getting as much money into Serbia as possible."

In the last five years the state has made about EUR2.5 billion from selling companies that were once designated as "socially-owned." To date, 2,585 contracts have been closed, 261 of which have been cancelled due to breaches of contract by the buyer. However, not a single privatization deal has been brought into question, let alone scrapped because it was funded with suspect cash. Since May 15, when the cabinet took office, 93 companies have been sold for a combined EUR250 million. In the same period, 316 checks were carried out, resulting in the cancellation of 25 of the contracts.

"The matter of finding out where money came from could not be brought up during the conditions prevalent in 2001, but it can easily be done today because the decree will discourage business crime typical not only of Serbia, but many conomically more advanced countries," Nikolic explains.

Pointing at France and Monaco, two countries that have had limited success in fighting off-shore companies -- the laundering method of choice for many due to the inherent tax breaks -- Nikolic adds that combating tax evasion and money laundering is extremely difficult.

"The Serbian economy is no different from any of the neighboring economies, the rest of Europe, or the world, because everywhere you can see legal money working side by side and circulating with illegal cash."

According to Nikolic, the cabinet's privatization decree can effectively and easily weed out shady potential buyers in auctions and tenders, or at least discourage their participation. He adds that the decree can be considered from two points of view, political and economic. In political terms, the advantage is a strong positive influence on public and expert opinion by giving people an impression that the state is trying to combat corruption and business crime.

"On the other hand, however, there is a danger that potential buyers from abroad will be deterred by all this talk of crime in Serbia, possibly hurting the influx of foreign money."

Another economic shortcoming of the decree in Nikolic's opinion is that most of the people who invest money in privatization are often not very good business people and irrational investors, constantly looking for new ways to avoid taxes to legalize their proceeds from crime. "Yet there is sufficient political will in Serbia to deal with business crime, although it is much better to be aware of the political instability, which is a constant hindrance."

"Every once in a while there is some good progress in fighting business crime, but as always, the key requirements are political stability and efforts to secure EU accession," says Nikolic.

In his opinion, "not even the best campaign against business crime and measures to prevent criminals from buying up the country's companies at auctions are little more than window dressing unless accompanied by progress to full EU membership."

From Farming to Industry

In mid October, the Privatization Agency put off one questionable privatization deal, pledging to evaluate environmental aspects of the arrangement within three months. The company, which is bankrupt, has vast expanses of farmland used to grow medicinal herbs and raise California trout. After being sold for 25.3 million dinars at an auction held in Belgrade on Sept. 13, the transfer of ownership is on standby for 90 days.

Miroslav Zdravkovic, a researcher with the Belgrade Economics Institute, wonders why the cabinet privatization decree was not issued six years ago. "That year brought an immense influx of capital and there really isn't any more political will today than there was back then, when officials were heralding the privatization of the big state-run firms and an economic boom."

The Money Laundering Prevention Law passed in 2002, although it has not been used to successfully prosecute a single case so far. The cabinet has announced changes to the law to introduce measures enabling the tracking of money used by terrorists. At present, financial institutions are required to notify the authorities of transactions worth over EUR15,000.

"Nobody knows how much money has been laundered to this day or how many dirty privatization contracts have been signed with the wealthiest business people," Zdravkovic says, adding that in many cases people made a great deal of money by investing proceeds from agriculture in industry.

Furthermore, Zdravkovic believes that the decree was introduced for purely political purposes, adding that none of the people who made an incredible amount of money during the tumultuous 1990s has been punished, except for Bogoljub Karic.

The latest batch of changes proposed to the Privatization Law includes provisions requiring the Privatization Agency to notify the Money Laundering Prevention Administration, Tax Administration, and Interior Ministry of every company and individual that wins a privatization tender or auction. Subsequent checks are to be carried out and if it turns out that any of the money used for payment is tainted, the offenders would lose their contracts.

Finance Minister Mladjan Dinkic, who called for the changes, says: "Not all money is good money and if we accept dirty money in
privatization, then we'll have a dirty state." Dinkic adds that none of the preventive measures will be effective until legislation is
enacted to freeze assets derived from crime and corruption.