Opening the black box of Egypt’s slush funds
 
 
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A version of this article was originally published May 26 on Africa Confidential and has been reprinted courtesy of the Angaza Foundation for Africa Reporting. Mada Masr has edited this story for length. The complete article, along with infographics and supplementary information, can be found here.

One sunny day last March, Egyptian government auditors walked past the concrete barricades surrounding the Ministry of Interior. There, they sought to ferret out irregularities from the ministry’s financial records, among them allegations that seven unnamed senior officials at the Interior Ministry used state funds to distribute nearly US$12 million in bonuses to themselves. Before the auditors could inspect the records, they were thrown off the premises.

Eight months later, the audit chief complained to Egypt’s new president and prime minister that Interior Ministry staff burgled a room his auditors used to investigate the ministry, stealing investigative records and notebooks. In a memo, the audit chief said the ministry justified the break-in with Egypt’s “war on terror,” claiming that how it spends state cash must be kept a state secret.

The funds the auditors were looking for turns out to have been the tip of an iceberg. According to official records uncovered by The Angaza File in months of investigations, at least US$9.4 billion of state funds had been stashed in nearly 6,700 unaudited accounts in the Central Bank of Egypt (CBE) and — illegally — in a number of state-owned commercial banks, and spent by the end of fiscal year 2012/13.

Insiders say these accounts are used to stash stolen state funds that are never relayed into Egypt’s treasury or national budget, but instead serve as the private piggy banks of generals and other senior officials at state organs across the bureaucracy. This enables them to collect bonuses off the books, away from the eyes of regulators and their subordinates.

The beginning

Special funds (al-sanadeeq al-khasa) were created by presidential decree under former President Anwar Sadat, who pursued a policy of economic liberalization allowing various state organs to operate their own budgets independently and develop a system of financial autarky.

The program expanded under former President Hosni Mubarak. The Interior Ministry had two special funds when he joined in 1984 as a police captain, says Khaled Abdel Aziz, who left the Interior Ministry for the United Nations in New York, and is now a senior partner at a Cairo law firm. Later, when he joined the Central Security Forces, another fund was created, Abdel Aziz says. “Now, I hear there are 15 to 20 funds.”

Loosely defined and unregulated, special funds, particularly those opened in state banks, quickly became a source of rampant corruption. So much so that Mubarak passed a law in 2006 making it illegal for state bodies to operate funds in state banks.

Special funds held by various agencies and ministries administer compulsory contributions by bureaucrats for pension schemes and health insurance, and expenses for funerals, marriages, and healthcare. Others contain funds collected from citizens in exchange for public services, from tuition for over a dozen state universities from Cairo University to Ain Shams, to hospital fees.

Interviewed in his office in Cairo, Hisham Genena, who chairs Egypt’s Central Auditing Organization (CAO), calls the gargantuan network of funds the “backdoor to corruption, squandering state funds in the worst way.”

According to memos we reviewed, monies within special funds are often transferred into and held in accounts at state banks in violation of Egyptian law. This makes it effectively impossible for the entirety of their content to be inspected by government auditors, the CBE, Finance Ministry, or other — often overlapping — state institutions involved in combating corruption.

“The monopoly on information is the main issue,” says a person close to the CBE who assisted in our analysis of the memos. Like all unnamed sources in this story, he spoke on condition of anonymity, because a leaked draft law prepared under President Abdel Fattah al-Sisi’s administration seeks to criminalize all forms of dissemination of information about the military, considered as “secrets related to national security,” and because he was not authorized to talk. He says that the generals in the Interior Ministry and Defense Ministry, and senior bureaucrats elsewhere, are “free to siphon off national budget funds.”

After the uprising that swept Mubarak away four years ago, there were calls to end corruption, regulate opaque funds and incorporate them into the national budget to help close the country’s ever-widening budget deficit, which by the beginning of this fiscal year stood at US$34.2 billion.

It was soon discovered that the unregulated accounts existed within nearly all-state bodies. “Many special funds are just fronts for corruption,” says Samir Radwan, Egypt’s first post-Mubarak finance minister. “You have a slush fund. People can spend from it, and distribute amongst themselves.”

During Radwan’s brief spell as finance minister until being relieved of his position, reportedly due to his previous National Democratic Party (NDP) membership, he crunched official statistics with the governor of the CBE, Farouk al-Oqda, who declined to comment on the matter when reached. “We used to see the numbers but we didn’t know what the hell they were,” says Radwan, now an adviser to the Supreme Planning Council of Oman, recalling when he stepped into the ministry. “We had no control over these funds.”

After their own investigations conducted throughout early 2011, the pair concluded that the total sum of special funds was LE36.4 billion (US$5.2 billion.). This figure is close to other estimates put forth by the Parliament in the months following the uprising, in the LE30 billion-LE40 billion range, in line with other estimates. The CAO’s own annual report for FY 2012/13 puts the size of Egypt’s special funds at US$9.4 billion — but neither this figure nor the CAO’s report were ever made public.

Foreign aid flows

Money that ends up in these shadowy special funds does not just originate from within Egypt. Foreign aid and investment also find their way into secret accounts.

A 2013 report by the European Union’s Court of Auditors — which sought to track the whereabouts of 1 billion euros in aid the EU provided to Egypt in the period between September 2007 and the same month in 2012 — concluded that EU auditors were unable to trace or account for anywhere between 60 to 80 percent of the aid provided to Egypt during the five-year period. It also mentioned LE36 billion (4 billion euros) discovered in a series of unauditable “special accounts” existing outside the state budget.

Like the unaccounted for EU aid to Egypt pursued by the EU Court of Auditors, there are other funds that have collected revenues in the form of grants and loans from multilateral institutions. The CBE records we have reviewed show the OPEC Fund for International Development providing Egypt US$40 million in loans in December 2007 to finance construction of its El-Tebbin Electric Steam Power Plant. The memos show total funds in an account at the end of June 2010 as money re-lent to “various special accounts” belonging to the Egyptian Electricity Production Company (EEPC), the national electric-supply monopoly that owns most electrical power generation, transportation and distribution companies in Egypt. The memo provides no further details. Hassan Younis, minister of electricity and energy under Mubarak, told The Angaza File that the money from the loan was spent on a “variety of projects,” but wouldn’t elaborate.

Foreign companies and investors can also be pulled unwittingly into a vortex of corruption. Markus Müller, the German manufacturer Utsch’s MENA region sales director, told The Angaza File that the Finance Ministry placed an order in 2008 with Utsch to produce and deliver materials and machine tools. That same year, Egyptians were astonished to learn that 26 million vehicle licenses would be forcibly issued with no change other than the word “Egypt” written in English to accompany the Arabic.

Two months after Mubarak fell, a set of transactions connected to the license plates were the subject of a Cairo court case. Mubarak’s Interior Minister Habib al-Adly, Finance Minister Youssef Boutros-Ghali and Prime Minister Ahmed Nazif were accused of purchasing 9 million vehicle registration plates at an inflated price from Utsch in an illegal no-bid contract, and the court handed Adly a five-year prison sentence for squandering over US$15 million of state funds. “As far we know, the Finance Ministry then sold the ready-made plates to the Interior Ministry, and then the Interior Ministry sold the plates to car owners,” said Müller. He said Utsch did not know about what profits the Interior Ministry made with these plates or how these profits were spent.

According to one CAO memo, dated September 2009, two special funds accounts held by the MOI boasted a combined total balance of US$2.48 million and were connected to sales of car license plates. The memo provides bank account numbers, and says both were interest-bearing accounts at two of Egypt’s largest state-owned commercial banks, the National Bank of Egypt and Banque Misr. Although there was no reason to think Utsch paid bribes for the deal, Müller told The Anagaza File that it had commissioned a KPMG audit of its books which proved it did not pay kickbacks to officials or third-party agents. NBE’s chief executive at the time, Tarek Amer, declined to comment, and Banque Masr’s then-CEO Mohamed Kafafi could not be reached. Adly and Nazif were cleared of corruption charges in the “license plates” case in February, and in March, Adly was released from prison, according to the state-owned Middle East News Agency (MENA). 

Internal affairs

These funds stretch from the Interior Ministry to the Defense Ministry, which Sisi headed before rising to the high office, said the audit chief. Genena has given the military a clean bill of health, but remains locked in a conflict with the Interior Ministry.

Since Genena’s attempted inspection last year, the ministry has undergone a change of face at the top. Interior Minister Mohamed Ibrahim was sacked in March, replaced with retired Major General Magdy Abdel Ghaffar, who headed the infamous National Security Agency. Despite this shake-up, Genena still claims he is being hounded by the Interior Ministry. The audit chief appeared on Egyptian television in April, claiming he had been verbally threatened by General Khaled Tharwat, another ex-head of the National Security Agency, a security service whose responsibilities include counter-intelligence, surveillance and border security.

Part of the money allegedly stolen by Interior Ministry top brass is said by insiders to have come from a series of secret bank accounts used to stash opaquely administered funds collected directly by the ministry in exchange for services, from traffic fines to the sale of license plates, and various forms of extortion police mete out to Egyptian citizens. Officially, these funds are used to pay for ministry expenses, including the purchase of uniforms, food and equipment. According to insiders, the seven senior Interior Ministry officials even stole from police pension funds which officers pay into for themselves through monthly contributions from their meager salaries of around a hundred dollars a month. One of those Interior Ministry staffers told The Angaza File that these accounts are usually managed internally by “inexperienced, trustworthy people promoted to these positions through favoritism who will bury certain numbers.”

Central Bank officials, including Hatem Ibrahim, the general manager of its Risk Management Department since 2010, say they have no details on how much generals receive in bonuses, nor who monitors such payments, and would not comment on non-public information. When contacted, the Interior Ministry’s Major Mohamed al-Serty said Egypt’s courts were investigating the allegation that CAO auditors were harassed and thrown out of the building. He would not identify the court, judge,or lawyers handling the case, nor provide any details. On three occasions, he told The Angaza File that the ministry’s official spokesperson Major General Hany Abdel Latif was “too busy” to clarify the allegations against the seven senior Interior Ministry officials or answer our questions. When asked to schedule an interview, Finance Minister Hany Qadry referred us to his staff, who did not respond. His predecessor Ahmed Galal told The Anagaza File that he knew nothing about the subject of special funds.

Undisclosed purposes

Since his presidential campaign, Sisi has remained silent on speculation about the size of the military’s so-called “economic empire.” Would the military budget be supervised during his presidency, television presenter, Ibrahim Eissa, asked him during his campaign. Sisi maintained an impenetrable stare; the section was cut from the broadcast. Little has been forthcoming in official statistics on Egypt’s military’s undisclosed, untaxed budget, nor about the scale of its special funds.

But by late 2011, the reach of that empire went on display. In December of that year, the CBE announced that its foreign currency reserves dropped to US$15 billion, compared to the US$36 billion it possessed before the uprising, risking a balance of payments crisis. Shortly afterwards, an emergency meeting was convened among the country’s top 19 generals, attended by Sisi, then-director of military intelligence. It ended with the Supreme Council of the Armed Forces (SCAF) announcing it loaned 1 billion dollars’ worth of foreign currency to the beleaguered Central Bank.

No explanation was given as to why the military held so much foreign currency and the Central Bank so little. But the memos we have reviewed show that by June the Central Bank did in fact have more than a billion dollars’ worth of foreign currency slushing about in a set of 820 separate undisclosed, unaudited special funds accounts held in its own vaults. According to people close to the Central Bank, those accounts were illiquid and impossible to disentangle because they belonged to various state organs that operate like fiefdoms running their own budgets.

Major General Mohammed al-Assar, deputy minister of defense for armament affairs and a SCAF member, declined to comment, saying he was not authorized to talk to the press. Military spokesperson Colonel Ahmed Ali declined to answer our questions, including how the military accumulated this off-budget foreign currency.

In early 2015, Sisi himself was drawn into scandal when an audio recording was leaked from his time as defense minister in early 2014. The recording features an alleged leaked conversation in February in which the then-defense minister is heard talking with Major General Abbas Kamel, his chief of staff, funneling Gulf aid into private accounts operated by the Armed Forces abroad in the Gulf and outside the purview of the Central Bank of Egypt. “We need 10 placed in the army account,” Sisi said, according to the recording, which Sisi tacitly alluded to in a pre-recorded televised speech in February, but did not deny its authenticity. “Those 10 will be for the state. We need another 10 from the UAE and 10 more from Kuwait.” Sisi never specifies where the latter two “10s” are intended to go. (Middle East media reports have interpreted “ten” as meaning US$10 billion). Kamel, seemingly taken aback by Sisi’s brazenness, asks, “This is a large amount, how will they be able to send it?” To which Sisi responds, “Why don’t we open our own office there?” Kamel then asks, “And they can deposit directly into the account?” and Sisi answers, “Yes.”

A study of two of these secret recordings uploaded to YouTube (“Sisi loots the Gulf; we have taken from the Gulf more than 200 billion (Egyptian) pounds” and “Sisi despises the Gulf – new leak from Sisi’s office”) by British forensic speech and acoustics experts JP French Associates concludes, “Our opinion is that the evidence provides moderately strong support for the view that the questioned speaker is Abdel Fatah al-Sisi … All the indications are that the speaker in each of the questioned conversations is the same man,” says the 26-page report signed on March 20, 2015, by Peter French and Sam Hellmuth, and prepared on instructions of former President Mohamed Morsi’s London-based lawyers ITN Solicitors. The report, reviewed by The Angaza File, finds features common in Sisi’s colloquial Cairene, Egyptian Arabic.

Additional reporting by a local reporter whose name is being withheld for security reasons.

Unless otherwise indicated, currency conversions at Egyptian pounds 7.02 per US dollar, the rate at the end of FY 2013/14 , i.e. end June 2014.

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