US embassy cable - 04ZAGREB2041

UNCLAS ZAGREB 002041 
 
SIPDIS 
 
 
DOD FOR OASIA/MDM:J. FRANCO 
STATE FOR EB/IFD/OMA:L. GALLAGHER 
 
E.O. 12958: N/A 
TAGS: EFIN, EAID, MARR, HR, Defense Reform (Mil & NATO) 
SUBJECT: CROATIA: TRANSPARENCY OF BUDGETS/MILITARY SPENDING 
 
REF: SECSTATE 239929 
 
1.  In response to reftel, post provides the following, keyed 
to reftel questions: 
 
A.  General Overview of Auditing Procedures: 
 
(1) - According to the MOD, military expenditures are audited 
in various ways.  Commanders, heads of units and the 
Financial Section of the MOD are responsible for monitoring 
the budgets.  There is an internal MOD auditor (the 
Department for Programs, Budgets and Finance), and an 
external auditor -- the State Audit Agency, which examines 
financial reports annually.  There is also an Inspector 
General within the MOD for ad hoc investigations. 
 
(2) As noted above, there are both internal MOD and external 
audits. 
 
(3) The Inspector General reports to the Ministry of Defense; 
the State Audit Agency reports to the Parliament. 
 
(4) Most of the people to whom the auditors report are 
civilians (most of the top ranking people in the MOD are 
civilian). 
 
(5) There is a legislative framework for annual audits of 
military expenditures. 
 
(6) The Law on State Auditing requires annual audits of 
receipts that fund the military. 
 
--  Post knows of no recent scandals involving military 
expenditures (there were serious problems in the MOD in the 
'90s).  The local press has been active in uncovering 
procurement "scandals" in the Ministries of Health and 
Transportaion, but has not reported on any financial scandals 
in the MOD or military services in recent years. 
Approximately seventy percent of the military's budget is for 
personnel expenses, very little for procurement.  Budgeting 
and monitoring of budgeting are still developing in Croatia 
(departments and ministries routinely over- and under-spend 
their budgets), but we know of no major current cases of 
abuses or fraud in the MOD. 
 
B.  Military Budget and On-Budget and Off-Budget Revenues and 
Expenses 
 
(1) The Defense Budget includes the armed forces; the 
intelligence and internal security forces are covered by 
other budget items ("security forces" includes only police; 
Croatia does not have a gendarmerie or other paramilitary 
internal armed force) 
 
(2) There are some small off-budget receipts (from 
military-owned businesses, such as hotels and related 
businesses) which are reportedly audited by MOD internal 
auditors. 
 
-- An outstanding question currently under debate in the 
government is how to deal with the proceeds of privatized 
military property, including some desirable real estate on 
the coast.  One school advocates directing those proceeds 
directly back to MOD, to help with modernization and fund the 
social costs of the major downsizing currently going on. 
Another school believes that money should come back to the 
central treasury, which would facilitate monitoring and 
auditing.  This issue remains unresolved. 
 
C.  The Military Component of the National Budget 
 
(1) Military spending is barely two percent of GDP, scarcely 
enough to finance the modernization of the military (Croatia 
is a NATO aspirant).  We do not believe it receives priority 
over "development" spending. 
 
(2) Budget priorities can be and are debated in the 
Parliament. 
 
2.  Comment: While Croatia has a lot of room for improvement 
in its budgeting process in general -- an area it must 
improve upon to advance its NATO and EU aspirations -- we 
believe that Croatia meets the standards set out in the 
Transparency of Budgets legislation. 
FRANK 
 
 
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