The Misrule of Law

The success of the free market reforms that took place in East-Central Europe after 1989 was predicated to a large degree on the rule of law. The privatization of state assets, for instance, required a high degree of transparency and a strong set of regulations. Otherwise corrupt individuals and groups could easily vacuum up the assets at low prices and make a killing.

Two decades after these initial economic reforms took place, most observers in the region acknowledge that the process was far from perfect. But some observers go further and believe that endemic corruption has fatally undermined economic and political structures, particularly in the Balkans. Natasha Srdoc, who has done stints in international banking, the think tank world, and politics, is a firm believer in free market capitalism. She doesn’t think what took place in former Yugoslavia comes anywhere close to her understanding of how capitalism works.

“Croatia and the other countries of the former Yugoslavia have never experienced real free markets,” she told me in an interview last April in Washington, DC. “They were brought from full state-owned economies or mom-and-pop entrepreneurism to a very criminal capitalism where all of a sudden state-owned companies were being sold. Franjo Tudjman in Croatia, for example, had an idea that he was proudly promoting publicly: having 200 families own the whole economy. He succeeded in having families, some that were closer to him, get the wealth of the country. That has not been corrected, and we need to reverse that.”

Together with Joel Anand Samy, Srdoc founded the Adriatic Institute, a thinktank in Croatia, to promote the kind of free-market capitalism that Milton Friedman advocated. Even Friedman, however, had second thoughts when he saw what had been done in his name in Eastern Europe. The economist had once famously offered the mantra of “privatize, privatize, privatize” as the only three polices that post-Communist countries had to follow.

“But one of the things that I truly give credit to Milton Freidman, who received the Nobel Prize in Economics, is that he admitted that he was wrong. And when we met him in 2004, he said he’d made a mistake,” Anand Samy told me during the joint interview. “He told us, ‘We took for granted that these countries would have institutions like the rule of law and independent judiciaries so that privatization would be done in a proper legal process, with transparency.’” Anand Samy cited a report that estimated, between 2001 and 2010, that $111.6 billion left the Balkans for foreign accounts.

The Adriatic Institute (AI) has focused on battling corruption in the region. Srdoc even ran in the Croatian elections in 2011 after forming a new center-right party with an anti-corruption and Euroskeptical platform.

“We thought that the EU was the best solution for Croatia and the countries of the former Yugoslavia, the best and fastest way to establish the rule of law, an independent judiciary, and the protection of property rights,” Srdoc said. “We couldn’t do it from within. We needed international pressure. I believed that in the process of accession, there would have been assistance by foreign judges and foreign prosecutors, and an effective system would have been in place to prosecute criminals and stop money laundering and retrieve some of the illicit financial outflows. We have not seen that happen. When you look at the entire process, Croatia just gave concessions to the EU. Croatia gave away its economic zone on the sea, which is protected by the UN Charter, which establishes a country’s maritime economic zone up to a certain distance from the coast. Croatians could have kept it, sold it, leased it, or used it, but they would get the benefits of the economic zone. Instead, they gave away the economic zone on the sea. They also gave away the opportunity of growing grapes, which is a potential moneymaker. Chile, for example, started by exporting $60 million worth of wine in 1980s, and it went up to $1 billion by 2005. Croatia’s politicians gave this opportunity away.”

 

The Interview

 

Do you remember where you were and what you were thinking when you heard about the fall of the Berlin Wall?

 

Natasha Srdoc: I was in Germany of all places. I was working in an exchange student program in Deutsche Bank in Cologne, and we went out on the street to celebrate. It was interesting to be with Germans that were celebrating the fall of the Berlin Wall. It was meaningful in both ways: Germans were celebrating and also my fellow Croatians were celebrating at home. And I was celebrating in Germany.

 

Did you think at that time what implications it might have for your country?

 

Natasha Srdoc: I did. The fall of the Berlin Wall gave us hope that the transition to economic and political freedom was near, and optimism spread among the people. And looking back retrospectively, I would never have thought there would have been a war in the former Yugoslavia. The people in former Yugoslavia believed that the countries and the citizens of the former Yugoslavia were much better off than any nation behind the Berlin Wall and in the former Soviet Union. From today’s perspective, we see that while the people of former Yugoslavia were dragged into the Balkan wars in the 1990s, the corrupt politicians established moneymaking enterprises involving the smuggling of arms, oil, and other commodities. The entire underground network established then has yet to be dismantled. Croatia and the countries of the former Yugoslavia have never experienced the protection of property rights, the rule of law, or independent judiciaries. There is rampant corruption without exception for all the countries in the region and that needs to be addressed.

 

Do you remember where you were?

 

Joel Anand Samy: Yes indeed. I was actually coming back from a trip to another Communist country, China, where we had a human rights initiative through a non-profit and a business endeavor through a U.S.-based company. We were a group of private citizens, and we were in Hong Kong at that point. We turned on the television to see what was happening in Berlin that night.

A group of our citizens would eventually be involved in a private initiative responding to the needs in former Yugoslavia, first in Croatia on the eastern Slavonia front and then later on in Bosnia itself. What pulled us into former Yugoslavia were the wars that took place. A number of us we were watching our television sets just like most Americans were and felt that it wasn’t enough just to send a check. We wanted to get involved personally, and that personal engagement led us to be involved on a humanitarian basis. After the war ended through the Dayton Peace Accords we helped to rebuild an orphanage in Sarajevo and also provided assistance to hospitals like the Zagreb Children’s Hospital and the Sarajevo hospital and their children’s outreach. Later on, we realized that it was vital to assist former Yugoslavia, primarily Croatia, as it was moving closer to Euro-Atlantic institutions to make sure that the reforms were done.

We all realized what Richard Holbrooke stated very clearly in his book To End a War, and I paraphrase what he communicated so eloquently: what happened with Yugoslavia was just basically bad or corrupt individuals taking advantage of the war and using that for personal gain. They exploited the ethnicity issue, and they broke apart the country in such a violent manner. As we reflect on what has happened in the last 20 years, the same group of politicians is now combining forces to enter another union called the European Union. So then I ask the question: was the war really for sovereignty, was it really for independence, or were there ulterior motives?

 

Do you think there was anything that could have been done to avert the war internally within the former Yugoslavia and then anything that could have been done externally either by the Europeans or the United States or international organizations?

 

Natasha Srdoc: I come from Rijeka, the city port on the western side of Croatia. At that time in the areas bordering Serbia — eastern Slavonia in Croatia and the area bordering the Bosnian Serb communities — there were tensions among people that we really didn’t feel in the western parts of Croatia. So I never thought that the war was possible. Or I thought that if there would have been tensions then they would have been alleviated by the international community, by the European Union or the United States. There would have been an intervention to stop any potential tensions leading to war. But I believe there was a purpose behind the war. The ethnic tensions were just a distraction thrown out there by politicians. It seems that there was a hidden agenda. It’s also coming out now that the authoritarian regimes of Serbia and Croatia in the 1990s were looking at how to divide up Bosnia, which is also mentioned in Holbrooke’s book. So, I’m not sure whether that could have been prevented from within because political leaders were pushing for the war.

But there should have been stronger pressure from the U.S. side early on. When you think about the lack of a timely reaction from Europe – it wasn’t until the United States got involved that the war was actually brought to the end. Primarily the NATO military intervention in Bosnia in 1995 brought the sides to the table to sign a peace accord. The war should have been prevented in the first place through international pressure that would have upheld the Yugoslav constitution and allowed every then-republic to become an independent state. While the war was raging, the organized crime groups from Serbia, Montenegro, Croatia, and Bosnia and Herzegovina all remained inter-connected. There was an underground structure established that was involved in oil and arms smuggling and included intelligence networks, politicians, and their private partners in crime. This underground structure was never dismantled. The war profiteering proceeds were siphoned off to private bank accounts primarily in Austria and Liechtenstein.

One of the banks was Hypo Group Alpe Adria (HGAA), which was taken over by Bayerische Landesbank in 2007. At the time of this purchase, Prince Michael von Liechtenstein took control of HGAA’s Liechtenstein’s branch, thus sheltering the accounts of corrupt politicians and their private partners in crime, with bank secrecy. It wasn’t just the profits from arms smuggling that went into these secret accounts. There was also a diaspora that was sending money and that money was not used for humanitarian purposes. This is an issue that we have to resolve. For the last 20 years, there has been money laundering going on with the money accumulated during the war and then through corrupt and phony privatizations and other aspects of illicit financial outflows and illegal trade. Those monies have been coming back to Croatia and other countries in the region in the form of investment in real estate and loans by HGAA without any collateral. It is political figures and their private partners in crime who are benefiting by getting such loans. A huge injustice has been done that has to be corrected. Now is the time to bring the culprits to justice and confiscate the illicit enrichment amassed by corrupt politicians ad their private partners in crime during the last 23 years. Maybe we won’t be able to punish those responsible for the war itself, but by following the money we will be able to find those who benefited from the war and the post-war plunder. While real patriots were fighting and dying for their country these corrupt politicians were stashing money in their private accounts.

 

Joel Anand Samy: After World War II, we asked the question, will it ever happen again in Europe? And the world said, “No, we will never let this happen again. For so many millions of people to lose their lives because of the war and the aftermath was unacceptable.” Yet in our lifetime, as reported in To End a War and a lot of other books, nearly 250,000 people lost their lives in the wars in former Yugoslavia. It was civilians primarily: children, women, elderly. This war was directed towards civilians, and we just basically allowed this to happen in our lifetime.

Your question was whether it could have been avoided, and in retrospect I think there were so many missed opportunities to bring this war to a halt or at least to reduce the impact or the adverse effects of what transpired. With all due respect, U.S. foreign policy was deeply flawed, with Secretary of State James Baker going only to Belgrade and not visiting other places and saying “we don’t have a dog in this war.” They realized that the economic issue needed to be resolved. Inflation was out of control, and things were just basically erupting. Yes of course there were concerns about the Soviet Union, the nuclear arsenal, and so on. But they basically dropped the ball on this one. The Bush administration was at fault, and very clearly Brussels and the European Union lost its bearings. They could have responded and saved so many lives: 250,000 lives lost in our lifetime in Europe’s backyard.

On the other side, when you look at what Natasha was describing within Serbia, Croatia, and Bosnia, in a sense the worst really rose up to the top. People talk about the glorified transition from Communism to free markets, but all we saw was actually the transition from Communism to a very dark episode of war and plunder — and now to a period of criminal enterprises and criminality. There really was no transition to the rule of law, to democratic institutions, to real free media. Look at the Balkan region today. Global Financial Integrity’s report says that from 2001 to 2011 $17 billion in illicit financial outflows left Croatia for foreign accounts. Now AI and GFI are looking at the Balkan region’s illicit financial outflows from 1991-1999..

For the Balkan region as a whole over that same nine-year period of time (2001-2010), $111.6 billion left these countries for foreign accounts. It not only hemorrhaged the economies of these various countries, but it blocked real reforms of the rule of law, protection of property rights, and the creation of an independent judiciary that could address issues of minority cases or the confiscation of property that took place during the days of Communism or during the war. As Natasha said, a tremendous injustice was done, and unfortunately today Brussels and Washington have a very flawed policy in addressing some of these issues. Yes, let’s have these countries cooperate. But we need to deal with the very basic issues that could lead to the region not becoming the next Greece from an economic point of view. Principle, not expediency.

 

When you think back to your philosophy or your worldview circa 1989-90, almost 25 years ago, has anything changed in any major respect? Have you rethought any positions you had back then?

 

Natasha Srdoc: I remember those years because I initiated a court case against the city of Rijeka, Croatia. The city of Rijeka took the property of my family, a portion of that was mine as well, and so I was involved in the case. They took my property and sold it to other individuals. My worldview and philosophy of protection of private property rights, the rule of law, and the need for limited government as a means to obtaining individual liberty and curtailing corruption – I strongly held those principles then and now.

 

When did they take that property?

 

Natasha Srdoc: In 1989. Because of the fall of the Berlin Wall, the Communists anticipated that they might not continue doing business in their old corrupt ways. The Communists and political opportunists knew that new times were coming, that they may lose their benefits and positions, so they decided to take advantage of their last days in power (as it looked like back then) because nobody was going to challenge them. I just could not figure out how they could take my private property and sell it to other individuals. They took money from those individuals because they sold the property, and they haven’t compensated me. This was a daylight robbery! There were other different cases in which many more families were affected. I rebelled and initiated a court case. The prevailing thought at that time was – the city can do that, because the city is the government and government can take away people’s property. I decided to challenge this decision. It got a lawyer and went to court.

Every instance of this case demonstrates how private property rights were not protected, the rule of law subverted, and the court including the lawyer submissive to the authorities.

The city made an offer:, “We will give you 40 German marks per square meter at today’s currency rate.” With a one percent daily inflation rate, a 45-day deadline to pay the debt, and a subsequent 7 percent annual penalty rate, the value of the entire compensation could have been nullified in three months, paid out in one year, without any consequences for the city.

I said, “I want 40 German marks in the counter value of the Croatian kuna on the day of the payment.”

They said, “No, we can’t do that.”

I brought an invoice showing that we were paying electricity based on the German mark counter value and pointed out, “The state-owned electricity company is using German marks, why can’t you stipulate it?”

I clearly remember my lawyer saying, “This is not the American system. We don’t have a precedent here.” After firing the lawyer, I came to his office to provide the payment for his last service, when he requested 100 German marks. I gave him 100 German mark note and told him that we don’t live in Germany.

So, that was a microcosm of the rule of law. The rules are set by men, and the same laws are not valid for everyone. The same sets of laws and regulation affect different people differently. We are still in the same situation today. There is no rule of law. Private property is not protected. The EU has pointed out, and we also raised this early on, that the legislative framework established in 1997 for the restitution of property confiscated during Communism favors the state and allows political corruption. Today, there are about one million cases backlogged in the Croatian court system. Some cases have been backlogged for more than 20 years. Most of them deal with property rights.

Individual rights, including property rights, are not protected in the same way as in Western democracies. My thinking about private property, the rule of law, government transparency, and accountability has not changed because of my personal experiences.

 

Joel Anand Samy: In terms of how our opinions have changed, I think back to how parents raise their children, the guidelines that they provide and what they instill: the importance of justice, of fair play, of giving, of responding to crisis and the needs of others. Those issues have not changed and those values have not changed. They have only deepened. We all have a responsibility as citizens not to just think of ourselves as taxpayers in this sort of very artificial confine. We as individuals do have a commitment to our society. If we do not take responsibility, we cannot point fingers at anyone else. Those values have remained the same. But the context of what has happened in the former Yugoslavia and in the former Soviet republics — the post-Communist countries — was best stated by Milton Friedman when he said “privatize, privatize, privatize.” A lot of people said, “Lets take that path.” But one of the things that I truly give credit to Milton Freidman, who received the Nobel Prize in Economics, is that he admitted that he was wrong. And when we met him in 2004, he said he’d made a mistake.

 

About?

 

Joel Anand Samy: About this whole concept of privatizing. He told us, “We took for granted that these countries would have institutions like the rule of law and independent judiciaries so that privatization would be done in a proper legal process, with transparency.” One of the things that Milton Friedman, along with others that were from a different perspective of thinking, stressed to us was: when you advocate for reforms, focus on the basics. Milton Friedman’s message for Eastern Europe and former Yugoslavia was: “Firstly, the rule of law must be established,” an issue which has been overlooked by the Western democracies.

When we think about reconciliation in the region and cooperation and all these wonderful buzzwords that are being communicated and backed by EU and U.S. taxpayer aid funding for these projects, we do not emphasize the basics. That probably has changed in my thinking. We should have supported a just intervention in the Balkans with the condition that we will provide taxpayer funding to the tune of a $100 billion over the past 15 years or so, but we will do so only if these conditions are met. We want these countries to be democratic, but there has to be that foundation of the rule of law. We missed an opportunity there. The West had an opportunity to assist and to provide the training. Visiting judges could have helped the good folk rise up to the top. However, we relegated those responsibilities to a very corrupt bunch of people. So what do you expect? More of the same.

 

One of the changes in the accession process for Serbia is supposedly a lesson learned by the EU, and that is precisely that none of these other reforms can take place until there has been the establishment of the rule of law and transparency. These chapters of the accession agreement have been put ahead of other chapters. But I hear from you that you are not enthusiastic about the European Union. First I’d like to hear what your chief criticisms of the European Union are and then what you think of this attempt by the EU to emphasize precisely what you are emphasizing, which is the rule of law.

 

Natasha Srdoc: We thought that the EU was the best solution for Croatia and the countries of the former Yugoslavia, the best and fastest way to establish the rule of law, an independent judiciary, and the protection of property rights. We couldn’t do it from within. We needed international pressure. I believed that in the process of accession, there would have been assistance by foreign judges and foreign prosecutors, and an effective system would have been in place to prosecute criminals and stop money laundering and retrieve some of the illicit financial outflows. We have not seen that happen. When you look at the entire process, Croatia just gave concessions to the EU. Croatia gave away its economic zone on the sea, which is protected by the UN Charter, which establishes a country’s maritime economic zone up to a certain distance from the coast. Croatians could have kept it, sold it, leased it, or used it, but they would get the benefits of the economic zone. Instead, they gave away the economic zone on the sea. They also gave away the opportunity of growing grapes, which is a potential moneymaker. Chile, for example, started by exporting $60 million worth of wine in 1980s, and it went up to $1 billion by 2005. Croatia’s politicians gave this opportunity away. .

On the other hand, no rule of law was established, no independent judiciary, no protection of property rights. It should’ve been done totally different. We were for the EU as long as it meant some improvement in the country. But this was a lose-lose proposition.

The other thing is that the EU was originally designed as a free market area for the free movement of goods, capital, and labor. It was designed to produce the largest benefits for economic growth and for competition between countries and for reducing the tax rate and for boosting employment. If you can’t find a job here, you can move to another country without any limits. But the killing of the Croatian grape industry, so it can’t compete against the French or Italian wines, that’s not about removing market restrictions on imports or exports or dumping. This was the killing of an industry in the name of the free market. In that respect there is a lack-of-mission problem in the EU. Is it about the free market, or is it about political expediency? Brussels is growing through directives, passing laws that are imposed on member countries. Great Britain might take the law seriously and implement it, but maybe Greece or Italy or Spain doesn’t. There’s a very uneven enforcement of the laws, so in that respect there is no unity.

When it comes to market competition, Brussels’ approach is to harmonize the laws and create a level playing field, which is a good idea if it is done under the rule of law. The talk about harmonizing taxes is actually defying market competition. Above all, taxation is a revenue-gathering mechanism for the respective national budgets and the EU should not have a say in it. Any attempt at harmonization of taxation by Brussels would reduce the competitive advantage of new member countries, which are poorer, since tax harmonization would tend to go upwards. Harmonizing at Germany’s level, which has a 30 percent corporate tax rate, would not benefit countries like Albania, which has a 10 percent corporate tax. Without a low tax rate, no capital would go into Albania and many other East European nations.

When it comes to the rule of law, the EU should insist on imposing visiting judges and prosecutors from the strong rule of law nations on those countries that cannot prosecute corruption from within — such as Croatia, Bosnia, Serbia, Montenegro, Macedonia — but with a sunset clause so that they don’t impose on the sovereignty of the nation.

 

Joel Anand Samy: The European Union does influence the lives of the individuals in Croatia and the region. Many people were expecting a lot of great things to come out of the EU accession. We thought the EU had a unique opportunity to say, “We have learned from the lessons of the accession of Bulgaria and Romania, and that has given us a template so that countries like Croatia and the other Western Balkan countries will not have to go through that experience.” But Croatia today is repeating the same mistakes, and who is going to be at risk now? It’s not Brussels officials but the EU member state taxpayers. If you don’t implement the right kind of reforms, you get what happened in Greece. Daniel Kaufman from the Brookings Institution did a great study on what precipitated the problems in Greece. It wasn’t just purely economic factors, he argues. It was opaque public finances and rampant corruption. About $200 billion left Greece in outflows. And now the EU member state taxpayers have to provide $240 billion to bail out Greece. In fact, American citizens through the IMF have had to send some money to bail out Greece as well.

In Croatia there are still one million back logged cases in the judiciary system. So, has Croatia really made improvements over the years? From an independent perspective, Croatia today is no different than it was five years ago, 10 years ago, or 15 years ago. If there were real differences, we would have seen a stop to the illegal financial outflows. But no, averaged out over those nine years, $1.5 billion left that country annually whether it was a socialist government or the center-right government of HDZ, which was so corruption-ridden that the party is now under investigation. There has been some effort from Brussels to address some of these issues. But there has been no verification of these reforms. Instead, billion of dollars have gone into the so-called reform process, including $500 million of American taxpayer money. Yet there is no real rule of law or attempt to address political corruption or to investigate the one million illegal votes that were cast in the EU vote of 2012 so that Croatia could join the European Union. As a member of the European Parliament shared not too long ago, the European accession process has become a politicized process. As a verification process, it’s a failure.

 

But as you point out the vote did take place and everyone in Croatia and in Europe is preparing for July. Slovenia has settled the outstanding banking dispute; the European Union is preparing to disburse quite a large amount of money as part of this process. So at this point, from your point of view, do you want to declare the EU process flawed and try to reverse it, or do you want to promote change within the accession process and within the EU relationship with Croatia?

 

Joel Anand Samy: When you look at the EU laws, and the EU accession process, there is a clause that says that if a country does not meet the standards it can be expelled. In the case of Romania and Bulgaria, funds were withheld. And in Romania and Bulgaria there was a post-EU accession monitoring mechanism. That is something the Adriatic Institute had advocated for. In fact, on our advisory board we have Romania’s former Justice Minister Monica Macovei, who until the very last moment just a month ago had pushed for an amendment to the post-EU accession monitoring mechanism for Croatia. Unfortunately, Croatia lobbied members of the European parliament. And when I talk about lobbying, we have to keep in mind that there was a court case in Croatia whereby officials of the government stated that Croatia had bribed officials. But no investigation was done in Brussels. I’m not indicting the European Parliament. I am just questioning their motives in giving Croatia a free pass. Monica Macovei clearly says that without a monitoring system they would not have been able to go after 1,000 politicians in Romania and put them behind bars or at least investigate them and actually hold them to account. In Croatia just a handful have been held to account, but their illicit enrichment has not been confiscated. So they will serve maybe a reduced sentence before going back and enjoying the money that they plundered from the state entities. No other country would allow that if it were a strong rule-of-law country. But Croatia, under the supervision of the EU, has just let this pass. And, as I said, who will pay for this? This risk is not going to be placed on Croatia but on EU member state taxpayers.

Croatian politicians are now salivating for another $15 billion to come from EU taxpayers from 2014 to 2020. That money is basically going to prop up the economy and sustain the status quo. But is real reform going to be done? Look at Greece, look at Cyprus. Do we really want to solve these problems, or are we just going to apply a Band-Aid? The EU’s response of putting a Band-Aid on this cancer is going to haunt the EU and EU member state taxpayers. So, there has to be a reform of the EU process as well. There has to be accountability placed on the EU commissioners. Stefan Fule has given a thumbs’ up to Croatian accession. He says Croatia is a reformed country. Three years from now, five years from now, there has to be a court hearing to say, “Mr. Fule you promised us, you signed your name to it and said that Croatia has passed with flying colors, but where is Croatia now? Have you really addressed the illicit financial outflows? Have you recovered the money for the people, for the treasury?”

The BBC and independent groups did raise the issue of illegal votes in the 2012 referendum. The Croatian government, after a lot of external pressure, admitted that they had a million illegal votes. They apparently say that they have addressed some 700,000 of these votes, but that has not been verified. And what’s wrong with the other 300,000? But there was a low turnout of some 20 percent voting in the European parliament elections, and there was a very low turnout in 2012 as well. If you take into account the illegal votes, I don’t think the Croatian public has given a thumbs up to accession. The Croatian government says, “Our polls have said that Croatia wants to join the European Union.” But then you have to ask, who paid for these polls? It was paid for by the Croatian foreign ministry. So if you paid for the polling and if you write certain questions down in a certain way, then of course you’re going to get the kind of answers you want. The vast majority of Croatians, and we have done our informal surveys and focus groups, some 80-90 percent do not want to go into the European Union. They see the tremendous pitfalls. They look at what’s going on in Greece, where you have more food lines than people going into a restaurant. That reality brings home the fact that the EU is not a panacea and Croatians are worse off by giving away their competitive advantages on the economic zone and in the agricultural sector and not getting in return what we had hoped for: the rule of law, an independent judiciary, and a cleanup of the corrupt political elite that exists today.

 

The EU represents different things for different people. Obviously a lot of Croatians are upset about the potential of overspill of the Greek crisis. They’re upset with austerity measures. But on the other hand for a lot of Croatians, the European Union means being welcomed back into Europe. There’s also the ability to travel. Is it possible to have that without the economic price?

 

Joel Anand Samy: It will certainly benefit a group of Croatian citizens. The first ones to benefit will be the corrupt political elite that has siphoned off these funds. They will make sure that they get the top jobs in Brussels to earn some 7,000 Euros a month as a member of the European parliament in Brussels. Meanwhile, Croatia has the third highest brain drain rate after Spain and Greece. Croatia is losing its youngest, brightest, and most mobile, and we’re not even talking about the forthcoming pension crisis. As more young people leave the country, not enough is going into the pension fund. We’ve warned the EU that the pension fund is going to collapse much sooner than what the government is projecting.

It comes down, to the average Croatian, to whether it means a great deal to have an EU passport to be able to travel. The symbolism may have a positive spin for some, but if people don’t have the money to travel, it doesn’t matter. Nor will they have the wherewithal to enjoy trading at the table from an equal perspective as equal partners. How can Croatia have fair representation in the EU when it will have only 12 seats out of 700 and some members? They left one union, which was called the Yugoslavia union, and they actually had more clout there. A realistic perspective is growing within Europe. Some call it Euro-skepticism, others call it Euro-realism. It involves what’s going on in Cyprus, Greece, Spain, and other countries, and it also involves the Euro-zone. The Croatian individual is less jubilant about the EU. Young people are looking at it from a different perspective, because it’s their one ticket to get out of the country. That’s what we were hoping would not be the case. We want young people to remain in the country and contribute through their talents in innovation and creativity in service industries to really help their nation. From a nation-building point of view, if you lose the best and brightest, it’s much more difficult to build a society that benefits each and everyone.

Croatia has also blatantly abused human rights at various levels. In the area of political rights, it is a fundamental issue to have the opportunity and privilege to vote your conscience and your beliefs. That’s been taken away from them because of these one million illegal votes. There’s also the human right of not having to deal with a politically influenced judiciary. The EU has written about this, but the European Commission has looked the other way. The great injustices of the 1990s are now being repeated in a blatant manner. So, the individual citizen in Croatia is not excited and jubilant about the EU. The government would like to spin it differently. But if Croatians were so excited then 70-80% would have come to the polls to vote to get into the EU, and that wasn’t the case.

 

I want to ask you about a leader in the region who was one of the greatest advocate for free market reforms, but on the other hand has also acquired a reputation for facilitating the same kind of corruption that you’ve been criticizing, and that’s Vaclav Klaus in the Czech Republic. Shortly before leaving office, Klaus declared an amnesty for people whose legal cases had been going on for longer than eight years. But everyone in the Czech Republic knew that Klaus was dismissing the cases of people responsible for stealing money through the privatization process. What do you think was going on there?

 

Joel Anand Samy: I think that the Vaclav Klaus issue is a disappointment, but a minor issue. A greater disappointment involves all those who communicated that they are for free-market reforms in Eastern Europe – the self-proclaimed “liberty lovers”. A huge problem is the fact that think tanks in Eastern Europe are funded by those who have benefited from illicit financial outflows, for instance from criminal enterprises in the Balkans worth $111.6 billion or the heroin trade of $20 billion per year that’s connected to Afghanistan and Pakistan via Iran. I think the spotlight should be actually placed on Vienna and Lichtenstein.

 

Did you have particular think tanks in mind?

 

Natasha Srdoc: Indeed, on example is the think tank called the F.A. Hayek Institute in Vienna and the cross-directorships of its board, which includes Prince Michael von Liechtenstein, the CEO of LGT Austria, and the CEO of the world’s largest gaming company Novomatic. This institute organizes events in Eastern Europe calling for lax laws and policies in countries with colossal corruption that do not have the rule of law and protection of property rights.

Liechtenstein has long been accused of sheltering dirty money and funds tied to criminal enterprises. In 2008, the US Senate Permanent Subcommittee on Investigations exposed the LGT Group as, “a leading Liechtenstein financial institution that is owned by and financially benefits the Liechtenstein royal family,” accusing them of “advising U.S. clients to open accounts in the name of Liechtenstein foundations to hide their beneficial ownership of the account assets; advising clients on the use of complex offshore structures to hide ownership of assets outside of Liechtenstein; and establishing ‘transfer corporations’ to disguise asset transfers to and from LGT accounts.” “LGT clients were enabled to use the bank’s services to evade U.S. taxes, dodge creditors, and ignore court orders.”

Austria’s Finance Minister Karl-Heinz Grasser allegedly received a €450,000 bribe from Novomatic to change gambling laws in Novomatic’s favor. Novomatic was reported by whistleblowers for money laundering and operating in the Balkans with bribes to government officials. Casinos in Paraguay, Peru, and South Africa, countries where Novomatic operates, were tagged by the United States as money-laundering conduits for criminal bosses and drug barons, as reported by Bloomberg. Prince Michael von Liechtenstein is involved in the think tank arena as a board member, founder and financier. According to published and public reports, allegations abound of Prince Michael von Liechtenstein controlling entities that are involved in money laundering and sheltering the assets of corrupt politicians and their private partners in crime. According to the European Council’s Compliance Report Liechtenstein, the principality’s rule of law is suspect since its constitution “includes the right of the Reigning Prince to quash initiated investigations. This situation could represent a threat to the independence of the justice system as expressed in the Evaluation Report.”

 

Joel Anand Samy: We actually co-signed an open letter to German Chancellor Angela Merkel. It was co-signed by Natasha Srdoc and Boris Divjak, who’s a senior fellow in our organization and founded Transparency International Bosnia. It was also co-signed by Maurice McTigue, who has been an adviser to U.S. administrations and also advised countries in Eastern Europe as well as a former cabinet member in New Zealand. The message of this letter is that we need to address the Lichtenstein/Austria problem – the rogue states that have fueled colossal corruption in the Balkans.

 

Natasha Srdoc: The open letter asked Angela Merkel to block Croatia’s accession or require conditions. If accession can’t be blocked, at least require Croatia to accept foreign judges and prosecutors who will be able to recover the$17 billion in illicit financial outflow from 2001 to 2011 as well as all the illicit enrichment amassed by corrupt politicians and their private partners in crime since 1990s. Over the 20 years, illicit gains from bribes, phony privatization schemes, illegal trade, and arms and oil smuggling left Croatia and allegedly landed in secret HAAG bank accounts in Austria and Liechtenstein. Today in Croatia, a media tycoon is implicated in the Hypo scandal, with the minister of interior having resided in the media tycoon’s apartment, a former prime minister receiving a bribe from HAAG, a brother of the current prime minister receiving the most favorable loan from HGAA, a former chief of staff of the president in the 1990s receiving some €30 million without collateral, and other unresolved HGAA cases in Croatia and the rest of the Balkans. Hypo owns some of the media themselves, and a number of politicians are protecting them. Our letter also talks about a prosecutor being captured as well. That’s why we are where we are. We cannot improve the economy because you cannot have any certainty being an entrepreneur or doing business in Croatia. That’s why investors with honest intentions are avoiding Croatia. They don’t know the cost of doing business there. You can’t have your property rights protected, and you cannot rely on the judiciary to be independent from political pressures.

 

Joel Anand Samy: Many of us are quick to criticize U.S. policy around the world. However, I have had the privilege of working with Senator Carl Levin on the humanitarian front in the Balkans. He is a man of integrity and has been a principled leader addressing the Lichtenstein problem, tax havens, and money laundering. The financial institutions in Austria and Liechtenstein are financing terrorism via the Balkan Route’s illicit trade; tax havens and money laundering are very much a part of this process. It should be a wake-up call to both sides to really address this issue. Senator Carl Levin, through his leadership, addressed these issues in Lichtenstein. But we believe a more robust initiative from the United States is needed, because the EU is divided and a number of member states are complicit in this process of benefiting from illicit financial outflows.

 

I’m more familiar with illicit money transfers out of Africa and not so much in terms of the Balkans.

 

Joel Anand Samy: With the exception of Nigeria and a few other countries because of their mineral resources, the Balkan countries per capita have a much higher rate than the African countries. There is more coming through the $20 billion heroin trade. The $111.6 billion outflow does not include cash transactions or the heroin trade. So it’s a huge problem, and certain business entities and politicians in the West are complicit in this evil.

 

Natasha Srdoc: Last year in February some Balkan criminals were captured in Spain. They all possessed legal Croatian passports. The passports were traced back to the Croatian ministry of foreign affairs and ministry of interior. The illegal sale of passports has been going on since 2006, maybe even longer. So, the ministry of interior of Croatia has been working with criminals in the whole region. This is the Balkan route. Americans are more concerned about the Balkan route than Europeans are. When you ask about who is responsible for dismantling these criminal networks, Brussels points back to the individual countries. But if you have mafia states, how can you fight the mafia from within?

One of the mafia states is Montenegro, which has had the highest illicit financial outflows via crime and corruption per capita in the Balkans: every Montenegrin lost $10,000 to crime and corruption between 2001-2010. There was an Italian anti-mafia agency that investigated Prime Minister Djukanovic of Montenegro. In Italy, Bari prosecutor Giuseppe Scelsi accused Djukanovic of  “having promoted, run, set up, and participated in a mafia-type association.” The American DEA assisted in breaking up a cocaine ring, led by recently arrested Darko Saric, which brought cocaine from Latin America via a Montenegrin port into Europe. Based on a report published by a Canadian government portal which is reporting on money laundering, “Serbian authorities claim that Saric used offshore companies to ‘invest’ 100 million euros in HGAA’s bank accounts, which are primarily in Liechtenstein … laundered that amount through the bank between 2007 and 2009” These years coincide with Prince Michael von Liechtenstein having control of the HGAA branch in Liechtenstein. Furthermore, based on research published by the BBC, Prva Banka (First Bank), which is controlled by Prime Minister Djukanovic’s family, provided loans to Saric. We would need an independent investigation by a third party to resolve this complex mafia net, which cannot be dismantled from within any of mentioned countries.

 

Joel Anand Samy: When we talk about corrupt countries in the world, the focus is on Southeast Asia or Africa or Latin America. But I think the greatest threat to the West and to American interests are Balkan nations, which truly are mafia states, and the perilous Balkan route. In the last three years Hezbollah has been involved in the bus bombing in Bulgaria. Many Americans don’t even know that in October 2011, a lone gunman unloaded 100 shells at the U.S. Embassy in Sarajevo.

If we are to talk about free markets, we must first talk about the rule of law. In this case, these illicit transactions are fueling so-called free market think tanks in Vienna or in Montenegro where apparently there is a free market institution owned and funded by Prime Minister Djukanovic. So, we do have some more serious issues with the West and its complicity in the region.

 

It seems to me is that you are quite upset at how institutions or individuals use the free market label to smuggle in different ideas. When do you date that to? Is it a relatively recent phenomenon or would you bring that all the way back to 1989?

 

Joel Anand Samy: If we look at what happened in the early 1990s in the former Soviet Union, Milton Friedman was quick enough, and I would say prudent enough, to say, “I didn’t realize that there would be this vacuum there, so my suggestion is the rule of law.” When he sat down with us in 2004, he also stressed for the Balkans the rule of law as the foundation for any society. If a society is to flourish with democratic institutions and laws that are governed by honest people you have to have the foundation of the rule of law. Unfortunately individuals from the United States, individuals even from entities that call themselves free-market think tanks in Washington, DC, have unfortunately colluded with criminals. They have looked the other way, received money from them, hosted programs with them. While talking to their donors here about their efforts to advance human freedom, they have actually allowed those that are involved in criminal activities to suppress millions of people. This must be exposed and donors must be aware of self-proclaimed free market proponents’ unscrupulous activities with criminal enterprises.

 

Natasha Srdoc: Croatia and the other countries of the former Yugoslavia have never experienced real free markets. They were brought from full state-owned economies or mom-and-pop entrepreneurism to a very criminal capitalism where all of a sudden state-owned companies were being sold. Franjo Tudjman in Croatia, for example, had an idea that he was proudly promoting publicly: having 200 families own the whole economy. He succeeded in having families, some that were closer to him, get the wealth of the country. That has not been corrected, and we need to reverse that. I don’t care that 20 years have gone by. Privatization was done in a very corrupt way. It was like El Dorado there, like the Wild West, with mostly German and Austrian companies coming here and establishing dominant positions. Privatization in a free market comes with deregulation. You privatize and bring in competition so that you can lower the price for everybody. But those companies paid bribes to keep the competition out of the market and to maintain monopoly pricing.

But when telecommunication companies dominated the market with landlines and mobile, they pushed up the prices and people were paying the highest prices for telecommunication services. There was no competition in Croatia. You can choose between Deutsche Telekom or Deutsche Telekom. Those companies were even partly owned by their governments,. The privatization contracts between Deutsche Telekom and the Croatian telecommunication company, which were supposed to be transparent, haven’t been released to date. These companies were owned by taxpayers on both sides at the time of purchase. Those taxpayers are entitled to know what they’re getting for their money. We have requested that information through the Adriatic Institute, but haven’t received any answers. The fact is that Deutsche Telekom was accused of dominant position abuse in Montenegro, in Hungary, in Macedonia. The U.S. Securities and Exchange Commission initiated a case against Deutsche Telekom. They asked the German prosecutor to investigate the cases of Deutsche Telekom in Hungary, Montenegro, and Macedonia – it wasn’t Germany that initiated it. They could care less. The investigation revealed that Deutsche Telekom paid 8 million euros to government officials in Montenegro to get a monopoly position. Deutsche Telekom paid the bribe so that they can keep the competition out of the market and charge the highest price for their services, so people were paying more than they were supposed to. In Macedonia, 6 million euros in bribes were paid. This was done in such a corrupt way with the consent of those governments that owned telecommunication companies. Individuals who received the bribes have not been found and brought to justice.

 

Joel Anand Samy: That’s where you need principled leadership, such as the leadership of Senator Carl Levin and others who understand the history of the region, who have been involved since 1991, who know what happened. It goes back to Richard Holbrooke’s statement that these people deliberately took advantage of the process. These leaders in Zagreb, Belgrade, and Sarajevo should have been held accountable for crimes against humanity. It’s a great injustice to take just a few people, put them up at the Hague, and say they’re responsible and not the people that fueled the whole process and gained financially, who let 250,000 people suffer and die. And now in the former Yugoslavia another 20 million continue to suffer under the worst conditions possible. US leadership could make a difference, but the question remains: will U.S. legislators take that responsibility? I believe they will because Croatia today is a NATO member, and NATO does have a Charter, and the Charter states that they belong to a rule of law nation. Does Croatia meet those criteria today? What about Albania? Bulgaria? Romania? Principled external pressures can make a difference. We do have a responsibility, and the legislators have a fiduciary responsibility to us as taxpayers. We have to know what happened with all our taxpayer money sent to the Balkans. If we’re going to continue to send in more money and assistance, there has to be accountability in place.

 

Natasha Srdoc: Without U.S. leadership, nothing is going to get done. Nothing would have happened with the war in the 1990s if the United States hadn’t gotten involved. It was too late, but at least the war was brought to an end. The other issue is corruption. If it weren’t for U.S. leadership, there wouldn’t be the cases against German companies such as Deutsche Telecom or Siemens or Daimler Chrysler. Those European companies wouldn’t have been prosecuted on European soil. It was the U.S. leadership that helped prosecute the bribery cases in the region. The problem is that although the companies paid the penalties, we didn’t get the culprits because it wasn’t in the mainstream media. They were just covering it up. Obviously there were individual government officials that received the money, but we don’t know who they are. We need to find out who they are. So we’re coming back to the U.S. leadership because it is not just about political corruption or money laundering. It’s about terrorism financing. These mafia states in the Balkans are helping organized crime and the Balkan route to flourish.

 

Joel Anand Samy: This effort is a private initiative. If you have corrupt governments and if they fund organizations in the region, they will certainly put a muzzle on or influence the outcome. From the very beginning, the Adriatic Institute realized what was going on in the country, and we said we’re not going to get any money from the Croatian government or from the EU or from the United States government. We’re just working through individuals who are really concerned about these issues, experts like Maurice McTigue who volunteers his time to provide the advice and the resources he has. That’s the way we will hold these individuals and governments accountable. Richard Holbrooke said it best when he said that Europe is asleep. To a certain degree that’s still true today. We need a greater number of leaders like Senator Carl Levin and others on the Hill to continue efforts through the Department of Justice and other institutions to really address these issues.

We ought to examine the role of the U.S. State Department too. It has been very easy on Croatia. The Wikileaks reports have shown that the U.S. Ambassador to Croatia Mr. Foley had asked and actually at one point pressured the UK Ambassador to Croatia to stand down on the rule of law issue for Croatia so that Croatia could get into the European Union quickly. U.S. foreign policy has to take a whole different approach. Do we want to put a Band-Aid on the Balkans and in the next five years it becomes the next big Greece, or do we want see real reforms take place that liberate people.

 

You could have just decided to stay in the think tank world. But you decided to go into politics. You’ve already described politics in Croatia in not very flattering terms. So I’m curious to hear about your experience. What it was like to step into Croatian politics? What lessons have you learned from that experience?

 

Natasha Srdoc: Getting into politics was something I never thought of doing. From the very beginning I thought the goal of achieving the rule of law, protection of property rights, being able to have a normal life in Croatia where you can earn your income honestly and move up in your standard of living like you can do in any other country, I thought that was very achievable. I want everybody to have that opportunity in Croatia. Croatians are leaving Croatia to achieve the American dream, the Australian dream, the New Zealand dream, the Canadian dream. You can see very talented Croatians living all over the world, getting to the highest positions as entrepreneurs, having their own companies, being very known in their fields. You can’t do that in Croatia. There’s nobody that can honestly make a comfortable living these days in Croatia.

We’ve tried to reform the country through the think tank because we thought through a public policy institute we could bring in reformers from countries that have done such reforms. They would talk to government leaders in Croatia and the region who would then see the light. They would learn what reforms to do and how to do them and they would just implement them. That’s how we entered the public policy arena through the Adriatic Institute. It wasn’t long before we realized that we weren’t moving anywhere. As long as political corruption is allowed to continue unpunished, there is no incentive to do any of the reforms because reforms mean more accountability, more transparency, no government ownership of companies. Politicians are siphoning money through the state-owned companies including shipbuilding. The whole system is made to benefit the political class of the two major coalition groups that have just rotated in power for the last 23 years. Although they purport to be Left and Right, they’re the same bunch of people benefiting from the same deals for the last 23 years. They just cannot risk losing power to a third party because that would disrupt the whole system.

We did as much as we could with the institute. We brought in real reformers like Mart Laar, the former prime minister from Estonia, the former Finance Minister Ivan Miklos of Slovakia, Alvin Rabushka of the Hoover Institution. Maurice McTigue was the star reformer. He’d held seven different ministry positions in New Zealand that did reforms that were noticed around the world, including the privatization of the postal service. We did everything we could through the Adriatic Institute, and we didn’t move an inch. So, then we said, “Let’s start a party, because with a party we could get into the parliament and get some reformers to start talking about things that we need to do.” Because we obviously cannot do anything from the public policy point of view. That’s how we started the party.

Croatia 21st Century was launched in 2011, and the lesson learned is that anything is possible — in a negative way. You would not believe what we went through! That period is like a novel, a thriller. The way we were sabotaged, the way the mainstream media didn’t give us any access! It went all the way to having our candidate arrested on the day we announced he was on our party list. He was arrested on trumped-up charges for extorting an ex-general whose huge illicit enrichment was being investigated by journalists, by our colleague who was writing a book about it, and even a British paper raised the issue. But not by Croatia’s prosecutors. What came out of this was that there’s unreformed intelligence network dating back to former Yugoslavia and connected to then minister of interior. According to published reports, this interior minister and current president of HDZ, Croatia’s party in opposition, had his own group of people, which he put into the police departments. This group of people arrested Croatia 21st Century (H21) political party candidate, set up the scene, made up the story, and had it published by media owned by a tycoon connected to the Hypo Alpe-Adria scandal. They tried to kill our party with this story. We didn’t back down and asked for an independent international prosecutor The party candidate continued to be on our list. We moved forward. The mainstream media continued with their attacks with all sort of stories. Actually, it was before the elections that we came to the States and raised the issue of Croatia’s fraudulent elections and one million of illegal votes with members of Congress and different entities. Croatia never had legal elections.

With the media it was another story. By law, the media was supposed to cover us because everybody had to get equal time. They give you one minute to present yourself and then one minute for discussion. But Joel told me that the moderator stood in front of me so that the camera could not capture my face. There is more anecdotal evidence. We were supposed to be in the studio for the first allotted party presentation time, and nobody invited us. The state-owned television just didn’t send us an invitation. We were supposed to find that information on the Internet – which even the TV staff could not find when we confronted them.

Also, the legislators were not supposed to change the electoral law in an election year, but they changed the rules anyway. They changed the rules on political party financing by limiting the funding a party could raise. But you cannot put limits on funding. You have two incumbents. The Left inherited all the Communist properties, and made a lot of money this way. The so-called Right, got even more money out of corrupt privatization. Those 200 families are financing the party. Then they both pass the law to limit campaign financing to 3,000 euros per individual contribution and so much per company and no financing from abroad. So how can a new party compete? They changed the law to eliminate the third option. These two coalition groups are perceived to be different, but they are the same bunch of people and they continue to hold on to power in order to retain and increase their wealth. The new generation is coming in but the parties are quite hierarchical, so they’re not letting young people rise to the surface. It’s a very closed network.

So that was the experience. It was dangerous at some moments.

 

But you continued?

 

Natasha Srdoc: We realized even in 2006, and it’s especially true now, that we are more effective outside of Croatia in applying pressure for things to change. This year we’re dedicated to putting the most pressure because of the EU accession. We’re trying to get this last condition, which is to get visiting judges and prosecutors from strong rule-of-law nations because this is the only way we can do something from within the country. While in Croatia, we received threats and I was called an “enemy of the state.”

 

Joel Anand Samy: By the prime minister and the finance minister.

 

That’s a high compliment.

 

Joel Anand Samy: But the problem was that the person who delivered the news was killed in a car bomb explosion seven months later. Natasha was the one running, while I was the observer watching what was happening. Individuals from the party were threatened. Individuals who were entrepreneurs, when they announced that they were joining the party Natasha was spearheading, they would lose a contract right away. The harassment and threats were just non-stop. Yet the amazing part about this political party was that the 72 people running in the different electoral units — after the individual was arrested on trumped-up charges — none of those individuals backed down. They all stood because they really wanted to change the country.

As an observer from the States looking at what was going on, there was no difference from what Moscow is experiencing. It’s only since Croatia is getting into the EU that it’s more camouflaged. But it’s the same experiences where independent voices are not given the public opportunity to communicate their concerns, where independent voices are marginalized and sometimes threatened and derided by those in the media who are involved in corruption or controlled by the politicians. Natasha was told by leaders from Europe and the United States that if you want change it would be wise to start the process from within. Well, she did it and she found out that the donors of the Adriatic Institute were being harassed. They sent a mafia group to harass one of the Croatian entrepreneurs providing funding. A company that sponsored an event for a finance minister from Slovakia to discuss reforms in the arena of finance and tax reform, that particular company was given a 4 million euro fine right after the event. So, principled external pressures are the only way to resolve these issues, along with visiting judges from strong rule-of-law countries that can assist honest independent judges to establish the rule of law. All this other talk about a free market economy is just a waste of time.

 

The last questions are quantitative. When you look back to 1989 and everything that has changed or not changed in Croatia since that period of time, how would you evaluate that on a scale of 1 to 10, with 1 being most dissatisfied and 10 being most satisfied?

 

Natasha Srdoc: 2

 

Same period of time, same scale but your own personal life?

 

Natasha Srdoc: 10

 

And then looking into the near future, when you are thinking about the next two or three years for Croatia, how would you evaluate the prospects for the country, on a scale from 1 to 10, with 1 being most pessimistic and 10 being most optimistic?

 

Natasha Srdoc: It could go very well if we can get foreign judges and prosecutors that would be really independent and if the US leadership puts some pressure to break these mafia states. If that happens, we could get to 7. If we don’t get foreign judges and prosecutors and things continue as they are, I don’t see any improvements and I would say the same 2.

 

What is your gut feeling? Which do you think will happen?

 

Natasha Srdoc: We’re going to do everything we can, but we cannot do what is not within the realm of our possibility. We will try to get to 7 with our own efforts, and we’ll see.

 

 

Washington, DC, April 26, 2013


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