Auditing Arafat

By Nathan Vardi, Forbes Magazine, March 17, 2003.

The Palestinian leader has more than Israeli tanks to worry about. He may be
brought to heel by, of all things, honest financial accounting.

Frozen out by the Bush Administration and hemmed in by the Israeli military,
Yasir Arafat is now facing a new threat: the cutoff of funds from his very own
Palestinian Authority. Financial reforms might succeed in hampering the flow of
money to terrorists — might even end up toppling Arafat himself.

Money keeps Arafat in power. With a tight grip on much of the $5.5 billion in
international aid that has flowed into the PA since 1994, he appears to have
overseen virtually all disbursements, from $600 payments to alleged terrorists
and $1,500 in “tuition” for security officers, to $10 million, reportedly paid by a
company controlled by friends of Arafat, for a 50-ton shipment of weapons
from Iran.

Take the money out of his hands, reform a corrupt financial system and you
could reduce the violence. That’s the thinking of U.S. and European officials
who insisted on the appointment of a new finance minister for the PA. Salam
Fayyad, 50, is the chain-smoking Palestinian technocrat armed with little more
than a Ph.D. in economics from the University of Texas who got the finance job
last June.

Israel has responded by resuming the transfer of $30 million or more per
month in tax revenues to the PA, disbursements that were frozen in December
2000 following an outbreak of terrorist bombings. Israel may even release the
$500 million-plus that piled up during the freeze.

“I am here to tell you it’s not Arafat’s money anymore,” says Fayyad, sitting in
his office in Ramallah, three miles from the Arafat base that Israeli tanks have
all but destroyed. A portrait of the Palestinian leader looms above him. “I’m not
going to accept anything but total transparency.”

He is using standard accounting to take control of the PA’s mysterious finances
and open them up for all to see. Arafat’s three main sources of cash: foreign
aid, Israeli tax transfers and profits from PA-controlled companies.

Fayyad’s first move was to consolidate the PA’s funds into a single
treasury account under his control. That change ended the autonomy wielded
by ministerial fiefs that were free to collect their own revenues and redistribute
the funds as they saw fit.

It amounts to a direct attack on Arafat’s elaborate patronage system, which
ensures the loyalty of the Palestinians’ fractious factions. “He is always ready
to pull money out of his pocket to buy people,” says Said Aburish, an Arafat
biographer.

An Israeli intelligence report pegs Arafat’s personal holdings at $1.3
billion (a claim dubbed “ridiculous” by the Arafat camp), but Israeli officials say
Arafat uses his largesse mainly to buy friendships.

“Until the last six months PA money was a power instrument for Arafat,” says
Eran Lerman, a retired colonel in Israel’s military intelligence. “Calling what
Fayyad is doing a threat to Arafat is an understatement.”

Fayyad, for his part, dismisses any such notion. Arafat, he says, “is the
person who appointed me, and I am confident in a few months we will have
one of the most accountable systems around.”

In late December Fayyad took another step toward that goal. He submitted the
first publicly disclosed PA budget, a $1.3 billion plan approved by the
Palestinian Legislative Council. Auditing of the spending is being supervised by
Ernst & Young, hired by the United Nations, and Deloitte & Touche, hired by the U.S.

His latest move: the February delivery of the first meaningful annual
report, conducted by Standard & Poor’s, on the finances of ten PA-owned
businesses once controlled by Arafat. Fayyad has lumped these and other
interests together in the Palestine Investment Fund, of which he now is
chairman, though the fund is managed by Arafat’s trusted financial adviser,
Mohammed Rachid.

The businesses include a 23% stake in the Jericho casino (worth $28.5 million)
and 20% of a Tunisian telecom company ($50 million), as well as a $55 million
firm that controls most of the cement imported into the territories and 13
accounts holding an estimated $73 million. At Fayyad’s behest S&P is now
valuing the fund’s other 50 or so holdings, including a gasoline monopoly that
is believed to net $1 million a month.

Israeli officials began releasing tax proceeds in July, beginning with a trickle of
$14 million payments, rising to $58 million in February. The money, which is
deposited into the central account Fayyad controls, includes excise taxes of up
to $8 million a month collected by Israel on oil sold to Palestinian-controlled
areas. The oil-tax collections – some $500 million from 1996 to 2000 -
previously flowed into a separate account controlled by Arafat and Rachid.