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Wednesday, June 24, 2015

Off the books – Egypt’s hidden $9.4bn - Daily News Egypt

Why am I sending this? Because the Supreme Council of Antiquities is involved. Glenn

http://www.dailynewsegypt.com/2015/06/24/off-the-books-egypts-hidden-9-4bn-an-interview/

Off the books – Egypt's hidden $9.4bn

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Daily News Egypt speaks with the journalists behind an investigation that claims to have documented officials siphoning vast sums of public money to top-up salaries and maintain networks of political allegiances


(AFP FILE PHOTO / MOHAMED EL-SHAHED)

In May, journalists Nizar Manek and Jeremy Hodge published in the Africa Confidential newsletter an Angaza File investigation entitled 'Opening the black box of Egypt's slush funds'.

Through their report, which took a year to research, they allege that Egypt's government operates a hidden $9.4bn of public money spread around 7,000 'special funds' of ministries, local governments, and agencies. The cash goes unchecked by central government and whilst some services are being paid from them, many public officials are putting the funds to huge personal profit.

Daily News Egypt spoke with Manek and Hodge to understand the implications of what they found.

 

Can you give us a summary of what you found during your investigation?

What we uncovered was a large network of bank accounts and slush funds operating out of Egypt, estimated by non-public government records to hold a total of $9.4bn by the end of the 2012/2013 financial year. What makes these funds special is that they gather revenue from citizens in exchange for government services, and aid money delivered by international donors, but do not relay these revenues back to Egypt's Treasury or national budget. For the most part, there is no government oversight or auditing of these funds, administered by ministries and state organs themselves.

Last August, Egypt's Finance Minister Hany Kadry Dimian publicly claimed that the total size of the special funds did not exceed $3.8bn. Our independent analysis, the first of its kind, puts the figure $5.6bn higher. In many cases, the money that is collected in these funds is siphoned off by corrupt bureaucrats for personal gain, concerning especially at a time when Egypt's fiscal deficit is still recorded at over 10% of economic output. It's a situation of foxes guarding the chicken coops.

How were these special funds set up, and who do they implicate?

Special funds were first created beginning in the 1970's through a series of presidential decrees passed by [then-president] Anwar El-Sadat, as part of his policy of economic liberalisation, or Infitah, then vastly expanded under [former president Hosni] Mubarak. They were not necessarily intended as pernicious in their design, in the sense that they were planned as a way for government bodies to operate their own budgets, have some flexibility in internal management, and become more efficient. The Ministry of Interior, for instance, has funds that it operates itself; including those used to pay for police hospital services, food, prison upkeep, and so on.

This was a swing away from the focus on central planning under [former president] Gamal Abdel Nasser. But with little to no oversight, the funds were susceptible to corruption; the situation spun out of control. According to Central Auditing Organisation (CAO) and Central Bank [of Egypt] records we reviewed, there are nearly 7,000 funds in existence, and nearly all government bodies possess them. A large number of these funds are held directly by governorates and local municipalities, but can still be exploited by people working in various bodies. In an interview published last year by Al-Tahrir (since deleted from its website), CAO chairman Hisham Genena, for example, claimed that one Ministry of Interior official took home $7,000 a month in bonuses from a mining and quarrying fund held by a local governorate body. The number of agencies benefitting from this system appears almost endless.

How far up the government do you feel knowledge and approval of these 'slush funds' run?

These funds provide an important source of economic rent for many government officials, and getting rid of them would likely upset Egypt's internal balance of power between the deep state, powerful Mubarak-era businessmen, the military, security services, and other influential stakeholders. From the research we've done and interviews we conducted, we're under the impression that the phenomenon of 'special funds' is known about at the highest levels of government, including within the Office of the Presidency. This is evident for one, because so many of these funds were created by presidential decree, and because in the summer of 2014 President Al-Sisi passed a national wage cap law which sought to reign in bonuses reaped by government employees from sources other than their base salary. Although this law made no specific reference to special funds, Al-Sisi's wage cap may represent a genuine attempt to reign in special funds, but until more transparency exists there's no way to be sure.

Reigning in these funds may prove too destabilising for the government to pull off and, for instance, we have already seen mass protests against the wage cap law by public bankers and members of the judiciary. There may be some within the government who disapprove, but in the grand scheme of things the network appears to be largely tolerated. The failure by key bodies such as the finance ministry to properly assess the size of these funds is also evidence that the issue is not being taken entirely seriously – or that they feel there is a necessity to brush under the carpet a lot of state money that has been frittered away into private hands, and perhaps still being frittered away.

What's more, the 'Sisileaks' tapes clearly show President Al-Sisi discussing the possibility of setting up funds outside the purview of the state budget, abroad, and using those already in existence domestically in Egypt, both in and outside of the Central Bank [of Egypt]. One fund allegedly belonging to the Tamarod protest movement which led the ouster of former president Mohamed Morsi was discussed in connection with the transfer of aid received from the Gulf.

In your investigation Hisham Genena of the Central Auditing Organisation seems to be genuinely trying to reform the system. Can you tell us about him? Would you say Genena has the right intentions, but is stuck in a system bigger than he can challenge?

Assessing Genena's character can only be done by those who truly know him. Whether his intentions are motivated entirely by the desire to do good and reform Egypt is, in our view, open to question, but the fact that he has been willing to risk so much, suggests that he is attempting at least to some extent to initiate genuine reform, and is maybe doing all he can considering the circumstances.

He has proclaimed in interviews that he has received the support of the president himself in conducting his campaign, which suggests that he is not entirely unbiased in his pursuit of corruption, a theory reinforced by the fact that he has also publically proclaimed that no one within the office of the Presidency or the armed forces are engaged in any form of corruption. Yet he has also made other, earlier, statements to the press in which he admits that all bodies within the government possess special funds, including the Office of the Presidency, so there appears to be a contradiction there. This suggests that he may be cherry-picking to some extent in where he decides to look, but that is often the approach of regulators the world over with limited time and resources and strategic choices about case-selection to make. Perceived or real patronage from President Al-Sisi himself is likely what has enabled Genena to speak so publically and frankly on these issues, and may be what has kept him protected until now despite the many attempts by people such as Justice Minister Ahmed Al-Zind to have him impeached, and aggression from the interior ministry who have threatened, refused to cooperate, and even allegedly stole CAO documents.

Can you tell us about Egyptian military expert Professor Robert Springborg's thoughts on what the new push for auditing from the CAO and others may actually be for?

Professor Springborg and some others suggested to us that auditors may be utilised by certain factions within Egypt's bureaucracy as a means to put pressure on their rivals and prevent them from becoming too influential. We know that, under Mubarak, an intense rivalry existed between the armed forces and the Ministry of Interior, with Mubarak favouring the latter due to his fear of a potential military coup, often using the Ministry of Interior to spy on and limit the power of the armed forces.

Following the events of 2011 and after, it is likely that this rivalry has continued to exist to a certain extent, although its tenor has likely altered alongside changes in Egypt's political landscape. In the aftermath of the 2013 deposal of Morsi, and before Al-Sisi rose to the presidency in 2014, we do know that there was some backroom bickering among members of the old regime, security forces, armed forces, influential Mubarak-era businessmen, and other stakeholders, all of whom were vying for power in the new Egypt. Al-Sisi making use of the CAO's auditors as a means of reigning in these players and ensuring the supremacy of the armed forces within the new order is a very real possibility.

Who else would you say are key players in this story?

The Ministry of Finance, and Egypt's former parliaments, who have repeatedly undervalued, whether intentionally or not, the size of special funds by significant amounts. Other anti-corruption bodies such as the Administrative Control Authority (ACA) which has been silent regarding the issue of special funds, are thought to operate funds of their own. The ACA is a body that should be looked at more in depth. Under Mubarak, the ACA was headed by Al-Sisi's reputed mentor General Mohamed Farid El-Tohamy, who became Al-Sisi's director of the Mukhabarat (General Intelligence Directorate) -and recently retired.

The Central Bank also plays a key role in overseeing all this. It was almost absurd that Central Bank officials, including the General Risk Manager of its Risk Department since 2010, told us they did not know what was going on. The apparent lack of awareness, neglect, incompetence, or whatever, from the Central Bank's risk division is interesting, given that when the Central Bank's foreign currency reserves dropped so low as to risk a balance of payments crisis in late 2011, the Central Bank accepted $1bn worth of foreign currency from the armed forces, who gifted it this vital foreign currency as if from thin air. The memos show the Central Bank did actually have over $1bn worth of foreign currency, in a variety of currencies, in the form of 820 separate, undisclosed unaudited special funds accounts.

If the funds were initially conceived as a tool of budget flexibility for ministries and governorates, what kind of indication do you have for how much is used for personal gain? The whole $9.4bn is not used corruptly?

 

Without greater transparency and more intensive auditing, this isn't a question we're able to assess completely, but, yes, it's very unlikely the whole $9.4bn is used for corrupt payments. We reported that the nearly 7,000 accounts were unaudited and prone to corruption. In terms of the armed forces and the Office of the Presidency, given that Genena is so certain that they are without blemish, there seems no reason the administration shouldn't adhere to its constitutional obligations, and disclose the financial records of these two institutions to prove this publicly. 'Monopoly on information is the main issue,' as a person close to the Central Bank, quoted in the story, told us.
Each special fund should be considered on a case-by-case basis, although many experts we have spoken with suggested that a direct correlation can be drawn between the level of theft occurring within a particular state body and its administrative efficiency. When senior officials engage in theft of state money through special funds, this deprives the bodies they work in from much needed operational revenue. If this stands, then bodies that are failing to perform their job functions efficiently are likely suffering from high levels of theft.

For example, the Supreme Council of Antiquities (SCA) within the Ministry of Culture is known to operate a large fund that collects money from the sale of ticket sales to historical sites and international donor funding aimed at preserving Egyptian antiquities. People we spoke with who have direct knowledge of the fund allege it has long been a source of theft and a way to award over-valued contracts to army affiliated companies charged with making renovations to various Egyptian antiquities.

Ex-SCA Chairman Zahi Hawass was previously reportedly tangled in the U.S. Department of Justice's criminal probe into violations by National Geographic of the U.S. Foreign Corrupt Practices Act, with the American website Vocativ reporting that the organisation paid Hawass between $20,000 and $80,000 a year for his expertise while he oversaw access to Egypt's antiquities. In another case, reported by Al-Masry Al-Youm, in 2012 an Egyptian court ruled that an agreement signed by Hawass violated Egypt's Antiquities Protection Act, because 179 artefacts sent for private exhibitions in the U.S. (the signatories reportedly included the National Geographic Society) were regarded as private institutions rather than public museums, and the agreement had also not been signed by President Mubarak, as legally required. The level of efficiency with which the SCA is run today erupted in comical form earlier this year after the beard attached to Tutankhamun's burial mask at the Egyptian Museum in Cairo was found damaged and broke off during routine cleaning. Rather than being renovated and preserved, the artefact was kept on display, its beard having simply been glued back on using basic adhesives. Some might draw a correlation between the apparent theft and corruption plaguing this fund and shoddy work when it came to preserving Tutankhamun's burial mask.
In the Ministry of Interior, much theft by high-ranking officials takes place from funds which lower ranking officers pay into, which are supposed to serve either as pension funds or funds used to pay for food and equipment for lower ranking officers. This normalises a culture of corruption within the ministry which, if the lower-ranks gain knowledge of, incentivises officers out on the street to mete similar forms of harassment, in order to extract bribes or over-payments from citizens. Lower ranking officers are further motivated to continue extracting such bribes due in order to make up for amounts plundered by higher ups. In short, human rights abuses and excess committed by the Ministry of Interior may itself be a symptom of kleptocracy, or rule by thieves.

Why would a minister or a president of a third-world country with huge economic problems allow huge sums of money to be siphoned out of the budget?

Presidents of some developing countries, or those that are unstable or prone to internal disputes, often have to placate internal stakeholders to maintain and protect order and a set of common elite interests, even if it is at the expense of the economy or national budget. Many of these stakeholders are self-interested and obviously don't consider the broader macro-economic consequences of their actions, but their participation in the political process is at times deemed necessary. We believe this is the legacy of special funds, allowing powerful stakeholders to collect their rent in various ways as a means of keeping the state as a whole intact. Of course, this is the theory of it all, there's absolutely squander, graft, negligence, mismanagement, corruption and excess that comes as a result. How Egypt deals with this system is part of its transitional process, from the Mubarak administration to the administration of Al-Sisi.

How did the work begin and how did you acquire your evidence?

We began the initial stages of work on this piece towards the end of 2013, following up with it more seriously beginning March 2014, at which point we began conducting interviews, gaining access to new public and non-public documents we knew existed, and doing public records research – Arabic and English news media, gathering publicly available documents, and so forth; the usual methods you'd expect in an investigative process. This began with a review of the memos and the figures and institutions mentioned in various accompanying tables, and the corroboration, narrative, and writing process remained fairly intensive for about six months. But in reality the interviewing and being introduced to people within the networks we were working within, following up on certain information, pursuing leads, staying up to date with new developments, and conducting research ended up taking about a year, with discussion throughout with our excellent editors and mentors on the story, Bernd Debusmann and Bobby Block, two veterans of international reporting who had the patience and editorial vision to see this through. It often wasn't possible to quote people on-record and we often chose not to due to precautions related to source safety; in any case we were more interested in testing the integrity of the facts we were going to report. Up until publication we were thinking and working on it in one way or another.

Has there been any reaction to your investigation? Do you think it can prompt anything further?

While we would welcome a public official response to our findings, the administration has so far remained surprisingly silent. We were surprised and pleased at the level of interest it sparked on social media and the Arabic and English world of Egypt watchers and media, including from some in the diplomatic and donor communities. This issue of special funds was first mentioned internationally in 2013 when the EU Court of Auditors mentioned the existence of EGP36 billion in special funds within Egypt as part of an audit of €1bn in EU aid given to Egypt between 2007 and 2012. As such, we're not the first to hear about this issue outside of Egypt, and there may be interest from EU taxpayers who see the possibilities when their hard-earned tax money ends up as unaccountable aid to Egypt.

In terms of prompting anything further, if the relevant local regulators of special funds, namely the Central Bank of Egypt, Central Auditing Organisation, and Finance Ministry, and various local anti-corruption bodies, wish to pursue the illegality, theft, and potential post-Mubarak capital flight associated with these funds, then it seems one clear starting point for investigation would be the almost 650 illegal special funds accounts held in state-owned commercial banks by the end of the 2012/2013 fiscal year. Who were the beneficial owners of these bank accounts? Where did the money come from? Where did the money go? Who were the decision-makers at these state banks responsible for the illegal transfers? Was there connivance from officials at the CBE? How high up did it go?

What is the future of these special funds in your opinion? 

This depends on the seriousness with which the current administration takes economic reform and the need to combat corruption. The presidency instituting a national wage cap law to limit bonuses of officials from sources beyond their salary is perhaps a good start, however again, there has already been much pushback to this law and it has likely not been implemented in its entirety.

In some sectors, such as the state-owned banking sector, higher salaries are required in order to attract skilled, qualified workers to oversee and administer these banks. EGP 6,000 a month for the CEO of a state owned bank is unlikely to attract the appropriate talent when the private sector pays its executives more, and one possibility is that state banking executives will try to compensate themselves through other means, increasing the likelihood of cronyism and poor lending decisions. Not all funds should be appropriated as this would do more harm than good, while others simply need more oversight, and may work well outside the purview of the budget if auditors were able to regulate them. Yet, due to repeated under assessments by the finance ministry of the size of these funds, and little effort taken it seems to attempt to reign them in, they will likely continue to exist in some form or another and even expand further, beyond the purview of auditors, and the public.


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