VZCZCXRO1308
PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHPOD #0049/01 0551917
ZNR UUUUU ZZH
P 241917Z FEB 09
FM AMEMBASSY PODGORICA
INFO RUEHC/SECSTATE WASHDC PRIORITY 1186
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHPOD/AMEMBASSY PODGORICA 1274

UNCLAS SECTION 01 OF 03 PODGORICA 000049 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV PREL EFIN ECON MW
SUBJECT: NEW CONFLICT OF INTEREST LAW: IMPROVED, BUT NOT ENOUGH 
 
REF: 08 Podgorica 279 
 
PODGORICA 00000049  001.2 OF 003 
 
 
¶1. (SBU) SUMMARY:  Montenegro's new Law on the Conflict of 
Interest, adopted in January, restricts the private business 
activities of public officials.  But while many observers 
concede that it is a step forward from the roundly criticized 
previous law, they question the independence of the commission 
charged with reviewing conflict of interest cases and express 
concerns over the absence of more severe penalties.  The law 
also appears to have some major blind spots, as in the recent 
case of a GoM loan to a bank partially owned by the PM's brother 
(and the PM himself, via a blind trust) attests.  END SUMMARY. 
 
 
 
Montenegro Adopts New Conflict of Interest Law 
 
--------------------------------------------- - 
 
 
 
¶2. (SBU) The adoption of a new Conflict of Interest Law has been 
on the GoM's plate for some time.  The European Commission and 
the Group of States Against Corruption (GRECO) had sharply 
criticized the previous 2004 law - which Vanja Calovic of the 
anti-corruption NGO MANS publicly called "the worst in the 
region," because of a number of loopholes.  As a result the GoM 
was under considerable pressure to pass a better bill. 
 
 
 
¶3. (U) After a lengthy saga, on January 9, President Vujanovic 
finally signed the new law, which among other things: 
 
 
 
--defines public officials, whether appointed or elected, who 
are covered; 
 
--requires officials to declare all income and transfer 
management of companies they own to another person within 15 
days of taking a government job; 
 
--forbids public officials from directing or serving on the 
boards of businesses and non-state public corporations; 
 
--restricts post Government employment business activities 
(e.g., there is a one-year "pause" before a former official can 
do any business with the GoM); 
 
--obliges public officials to refer to the Commission any 
question about a potential conflict of interest 
 
(i.e., before engaging in business activity, etc.); 
 
--bans gifts over 50 Euros; and 
 
--establishes a system of sanctions (fines, and in more serious 
cases, referrals to the prosecutor) for infringements. 
 
 
 
¶4. (SBU) As was the case with the previous law, the new law 
establishes a seven-person Commission to review income 
statements and possible conflicts of interest.  But unlike the 
previous law, under the new law, members of the Commission may 
not belong to a political party. 
 
 
 
Still Plenty of Flaws 
 
--------------------- 
 
 
 
¶5. (SBU) While generally praising the new law, both 
international and domestic observers have noted a number of 
flaws in the legislation.  For example, a December 5 GRECO 
compliance report criticized the fact that the law does not 
cover all public officials.  Likewise, an EC assessment noted 
that: 
 
 
 
--although Commission members may not belong to political 
parties, their independence could be compromised by the fact 
that they are confirmed by Parliament and are nominated by the 
Parliament's Administrative Board; 
 
--it is unclear how the Commission receives allegations of 
violations, and whether a judicial review by an administrative 
court is possible; 
 
PODGORICA 00000049  002.2 OF 003 
 
 
 
--there is no recusal system; and 
 
--the penalties (fines) envisioned by the law are limited, and 
the Commission is not permitted to remove officials from office. 
 
 
 
 
¶6. (SBU) During the parliamentary debate over the law, 
opposition parties also proposed more than two dozen amendments 
which they said would toughen the law.  In addition to the 
issues outlined above, opposition MPs charged that the new law 
allows MPs to sit on the boards of state-owned companies -- 
though the law forbids GoM officials from doing so. The 
opposition also argued for more stringent sanctions. 
 
 
 
President's Veto... Weakens Law 
 
------------------------------- 
 
 
 
¶7. (SBU) After Parliament passed the new law on December 15 (the 
opposition abstained), President Vujanovic vetoed it, citing an 
inconsistency - namely, that public officials serving on the 
boards of state-majority owned companies could receive 
compensation, while public officials serving on the boards of 
scientific, humanitarian, and sports associations could not. 
(Note:  Vujanovic had vetoed a previous draft as well, at that 
time asserting that public officials should not be permitted to 
serve on the boards of any state-owned company. End Note.) 
 
 
 
¶8. (SBU) In late December, Parliament responded by allowing 
compensation for all officials, including those on the boards of 
non-commercial associations (rather than forbidding it for 
officials serving on boards of state companies).  In addition, 
Predrag Boskovic, an MP of the ruling Democratic Party of 
Socialists (DPS) who is on the board of the coal mine in 
northern Montenegro, inserted a clause from the old law which 
allowed MPs to serve on the boards of any company with a state 
stake, no matter how small (the earlier version of the new law 
specified that the state had to have a majority stake). 
According to Calovic, President Vujanovic did not veto the bill 
a third time, because the rest of the GoM leadership wanted the 
law passed. 
 
 
 
Blind To The Biggest Conflicts? 
 
------------------------------- 
 
 
 
¶9. (SBU) The law also appears to concern only public officials 
and members of their "household" (i.e. immediate family) - but 
not other relatives - and does not limit officials who place 
property or assets in a blind trust.  These loopholes were 
brought into stark relief in the controversy surrounding Prva 
Banka, Montenegro's largest domestic bank, which has recently 
encountered severe financial difficulties. 
 
 
 
¶10.  (SBU) Prva Banka has strong links to family and friends of 
PM Milo Djukanovic.  The PM's brother, Aco Djukanovic, who 
bought into the bank in 2007, is its largest shareholder.  The 
PM's sister, Ana Kolarevic, has a small stake, and the managing 
board of the bank includes a number of Djukanovic cronies.  In 
August 2007, Milo Djukanovic himself, who was then out of 
government, took a 1.5 million Euro loan from an obscure London 
bank to purchase shares in Prva Banka through his company 
Capital Invest. 
 
 
 
¶11. (SBU) Critics contend that DPS officials encouraged 
state-owned companies (and private companies as well) to shift 
deposits to Prva Banka.  The bank expanded rapidly, with assets 
growing from 29 million Euros in June 2006 to 546 million Euros 
in mid-2006.  But the bank's allegedly lax lending practices - 
often to DPS cronies, according to critics - landed it in 
financial hot water when the global economic crisis began.  And 
as the bank foundered, the following sequence of events 
occurred: 
 
 
 
PODGORICA 00000049  003.2 OF 003 
 
 
 
--In late October, Parliament passed a new Law on Measures to 
Protect the Banking System (reftel), which permitted the GoM to 
grant loans to banks in return for shares as collateral; in 
addition, the amount of the loan could not be more than the 
nominal value of the shares. 
 
 
 
--On November 25, Prva Banka's two biggest shareholders, Aco 
Djukanovic and Montenegro's (state-owned) electricity company 
(Elektroprivreda Crne Gore - EPCG) participated in a 
re-capitalization of the bank worth 20 million Euros; Aco's 
share of the bank increased to 46.48 percent, and EPCG's share 
went from 9.46 percent to 18.24 percent.  Milo Djukanovic's 
Capital Invest ended up with 2.86 percent; and with his sister's 
one percent share, the Djukanovic family is now the majority 
shareholder.   The opposition also noted that EPCG put six 
million Euros (as "an investment") into the recapitalization at 
a time when that company was experiencing its own financial 
difficulties (EPCG had just decided to raise electricity prices 
to consumers).  Overall, Prva Banka's nominal value increased 
from 26.7 million to 46.7 million Euros. 
 
 
 
--On November 28, immediately following the recapitalization, 
Prva Banka requested a 40 million Euro loan (an amount made 
possible by the bank's recapitalization) to improve its 
liquidity.  Despite protests from the opposition - who pointed 
out that the government was supporting a bank controlled by the 
PM's family and friends - the GoM (from the budget and 
administered through the Ministry of Finance) granted a 
three-month loan at a 2.5 percent interest rate; however, the 
terms of the loan allowed the repayment period to be extended to 
one year. The PM told Parliament in December that the GoM had 
stepped in to protect Prva Banka's depositors, not its 
shareholders. 
 
 
 
¶12. (SBU) At least one opposition party appealed to the 
Commission on Conflict of Interest to ascertain the legality of 
granting a loan to a bank in which the PM's brother is the 
largest shareholder.  MANS' Calovic told us that she had 
consulted with several lawyers on the question, who agreed that 
the PM did not violate either the old or new laws on conflict of 
interest.  According to Calovic, since Aco Djukanovic is not a 
member of the PM's "household," his ownership of Prva Banka 
shares does not constitute a conflict of interest.  Moreover, as 
long as the PM had put his own shares into a blind trust - he 
was required to hand over the management of his company Capital 
Invest to another person when he returned to head the GoM in 
2008 - the PM was also in the clear, according to the letter of 
the law. 
 
 
 
Comment 
 
------- 
 
 
 
¶13. (SBU) A number of our interlocutors, including opposition 
political leaders and Calovic, have told us that the new law on 
conflict of interest is an improvement over the old one. 
However, as the Prva Banka case demonstrates, it contains some 
massive loopholes.  In addition, implementation of the law has 
been lackluster.  The Commission on Conflict of Interest 
referred only five cases to the prosecutor between 2004 and 
2008, and the press recently reported that less than 20 percent 
of public officials filed the required income declarations last 
year.  The authorities clearly need to do a better of job of 
enforcing the provisions that the law does stipulate. 
KONTOS