At Europe’s wild frontier

How Bulgaria is struggling to combat organised crime

(Stefan Wagstyl, www.ft.com, 12.06.2008)

Svetlana Stoeva pulls on her cigarette as she recalls the moment she learnt that her husband was dead – shot on his way to a buy a newspaper in a busy street in Sofia, the Bulgarian capital.

“I saw the news on television. The words came up on the ticker at the bottom of the screen. I was shocked,” she says, recalling the day in April when Georgi Stoev became the latest victim in a long line of contract killings.

Mr Stoev, a 32-year-old writer on crime (whose funeral is pictured above), was shot twice in the head at close range by an assailant who ran off into the crowds near a bus station. For the elegant Ms Stoeva, the worst moment was explaining the killing to their seven-year-old daughter. “I had to tell her the truth because she asked. She had to understand it. She cried for two or three days,” says Ms Stoeva.

Speaking to the Financial Times in a Sofia hotel lobby, she freely admits that her husband was no angel, maintaining contacts with the underworld to research books with lurid titles such as “BG Godfather 1”. Prosecutors say he might have been killed over his revelations or over the settling of criminal scores or unpaid debts. Rumours abound in Sofia, but nobody knows except for those involved – and they are not telling.

Mr Stoev’s death is more than a tragedy for his family. It is a serious headache for Bulgaria’s government as it tries to persuade its European Union partners that it is getting tough on organised crime and on widespread corruption, not least among those officials charged with fighting organised crime.

At stake are Bulgaria’s reputation as a law-abiding EU democracy, its access to Union funds and the stability of its fragile ruling coalition. As José Manuel Barroso, the European Commission president, said on a visit to Sofia in March: “High-level corruption and organised crime have no place in the European Union and cannot be tolerated ... It is a matter of public confidence that those who break the rule of law are not above the rule of law.”

The controversy raises questions about the EU’s whole eastward enlargement programme. Sceptics argue that if current members cannot meet Union standards, the EU should reconsider the planned accession of other states far removed from its west European core – including the war-torn countries of the former Yugoslavia and Turkey.

EU members knew when they admitted Bulgaria and Romania in January 2007 that the two countries might struggle to meet EU standards, including in the sensitive fields of justice and home affairs. They ordered the Commission to monitor the pair for two years and consider possible sanctions. In an interim report in February, the Commission criticised both countries over corruption and singled out Bulgaria over organised crime. Now Bucharest and Sofia are working frantically to make legal and administrative improvements before the Commission publishes its final monitoring report next month. As Sergei Stanishev, the Bulgarian prime minister (pictured below), says: “If we have negligence, if we have corruption, if we have problems communicating with the Commission, we have to correct this now.”

According to a recent United Nations report, Bulgaria’s general crime levels are no worse than those of other EU members. Ordinary people complain about car thefts, burglaries and vandalism but feel safe in the streets of Sofia and other cities.

However, organised crime reaches deep into everyday life through an underground economy that supplies everything from cocaine to VAT-free building materials. Some 30 per cent of retail fuel comes illegally from duty-free sources, says the Bulgarian Petrol and Gas Association. About 25 per cent of the cigarette market and 75 per cent of that for ready-mixed concrete is untaxed, says the Center for the Study of Democracy (CSD), a local think-tank.

Broad-shouldered men with short haircuts loosely describing themselves as “businessmen” drive top-class BMWs, Mercedes and Porsches around Sofia, often spending their nights in clubs with names such as Sin City. Ognian Shentov, CSD chairman, says: “Foreigners say you have all the advantages of modern life but ... all the thrills of living in a frontier society.”

The origins lie in Bulgaria’s difficult transition from communism. Like Romania, Bulgaria suffered from a particularly repressive communist regime, but unlike its northern neighbour it mostly disbanded the security apparatus, sacking thousands of security personnel, some of whom set up clandestine enterprises. The Yugoslav wars of the 1990s, combined with international embargoes, created huge opportunities for smuggling everything from guns to glass for bomb-damaged buildings. Bulgaria became a natural channel for smuggling narcotics overland from Asia to Europe.

Since the late 1990s, successive governments have stabilised Bulgaria’s democracy, implemented widely praised market-oriented reforms, battled drug traffickers and joined Nato as well as the EU. Foreign investment has poured in, notably into property, including Black Sea holiday homes. The economy has grown recently at the enviable rate of 6 per cent and unemployment has fallen from 17 per cent five years ago to 6.5 per cent, generating skills shortages. About 1m Bulgarians working abroad remit funds that are invested mainly in homes, education and new cars.

According to Bulgarian newspaper reports, the country’s richest men are Tihomir Mitev, Martin Mitev and Ivo Kamenov, the main owners of TIM Group, a diversified conglomerate with interests in chemicals, property and finance. The three men served in a naval unit before they went into business in the early 1990s – initially in security and debt collection. Not far behind them in wealth is Vassil Bojkov. Mr Bojkov, who last year acquired stakes in two listed construction companies through his group Nove Holding, earlier made money through investments in Bulgaria’s biggest private lottery, betting and casinos.

These are the survivors of some of Europe’s most brutal business conditions. Others were not so fortunate, notably Ilya Pavlov, a billionaire former wrestler who headed the Multigroup trading company until he was shot dead in 2003. Mr Pavlov was followed in 2005 by Emil Kyulev, a former international swimmer who owned DZI Bank, who was shot driving his sports utility vehicle in central Sofia. This year has seen the killing of Borislav Georgiev, director of Atomenergoremont, a nuclear power repair company, shot in Sofia the day before Mr Stoev.

These murders are unsolved, along with another 120-plus contract killings carried out since 2001 listed by western diplomats. Bulgarian officials cite figures of around 80, but do not dispute the seriousness of the situation.

Bulgaria also suffers from rampant corruption. Georgi Shivarov, vice-president of the Bulgarian Industrial Association, says companies complain about corruption in almost everything involving officialdom – including planning permission, alcohol licences and refuse disposal. “Corruption has a great impact on business, increasing costs and causing delays and promoting unfair competition – because those who achieve good results through unfair measures are unfair competitors.”

Boyko Borissov, the mayor of Sofia and a former bodyguard elected on an anti-corruption ticket, says “big corruption” – involving, for example, top officials accepting bribes to sell land cheap – is linked to the “small corruption” that affects ordinary people, such as doctors taking payments from patients. Public bodies losing money through fraud then cannot pay staff properly, leaving employees open to temptation, he says. “This is a vicious circle.”

Worse, corruption has undermined the judicial process, with alleged criminals bribing investigators, lawyers and judges to delay or drop cases. Kamen Sitnilski, the deputy chief prosecutor, says such approaches have become subtler over the years, with threats giving way to conversations with mutual friends. “Pressure can be applied at any stage in the investigation.”

Even honest judges struggle to avoid cases running into the sand because of over-elaborate rules, obsolete equipment and excessive workloads. For example, at Sofia district court the busiest, cases are adjourned for three to six months between hearings. On a recent visit, the atmosphere hangs heavy over the assembled lawyers, defendants and witnesses as they wait for appointments. Officials complain there is no air-conditioning and little heating in winter. In one of the wood-panelled courtrooms, judge Nikolai Vassilev is hearing a bicycle theft case from 2005. But he explains this is not unusual. Last year he finished an embezzlement case that began in 1990.

As elsewhere in eastern Europe, corruption is deeply embedded in the hidden money flows generated in the untaxed or “grey” economy, which Mr Shivarov puts at 20-30 per cent of gross domestic product, including 50 per cent of the construction industry. He says legitimate businesses often tacitly co-operate with “grey” economy companies, for example banks that give mortgages to borrowers failing to provide documents to substantiate their income.

Allegations of crime and corruption have touched almost all post-1989 governments and Mr Stanishev’s Socialist-led coalition is no exception. Last year, Rumen Ovcharov, the economy minister, left the cabinet after he was accused of interfering in a corruption probe at Sofia’s municipal heating company. He denied wrongdoing. Like most other scandal-tainted ex-ministers, Mr Ovcharov has retained his political authority.

Mr Stanishev and his officials insist Bulgaria is making serious progress on all fronts. Government statistics show a sharp decline in crime since the 1990s, including in homicides, which have fallen from nearly six per 100,000 of the population to around two. (The EU average is 1.6.) The CSD think-tank says that contract killings are also down sharply from a peak of 26 in 2003 to 12 in each of 2006 and 2007. On corruption, CSD estimates that reforms have helped push down the incidence of small-scale bribery – such as payments to doctors – from 250,000 cases per month in 2000 to about 115,000. The share of the “grey” economy may also have been reduced, with tax cuts reducing the temptations of tax evasion. “I am deeply convinced that Bulgaria now is a more transparent and better organised country that it used to be,” says Mr Stanishev.

But others are less convinced. One west European ambassador in Sofia says bluntly: “There is no noticeable progress in the fight against corruption and organised crime”. Transparency International, the anti-corruption campaign group, estimates Bulgaria has fallen in its global ranking of countries by perceived corruption levels from 47th place in 2001 to 64th last year – albeit among a larger number of countries. Its ranking is close to other corruption-prone EU states, just below Greece and Poland and just above Romania. These countries rank well above the ex-Yugoslav states, where the aftermath of war has dogged efforts to build transparent economies.

Mr Sitnilski, the prosecutor, says the nub of the problem is that Bulgaria’s white-collar crime is increasing as crime bosses seek to legitimate their wealth. “‘Elegant’ crime is growing – for example trading on political or administrative power, corruption and, especially, money-laundering. This is a process which transforms criminal capital into legitimate business and allows criminals to behave more openly and not stay in hiding. They simply behave like normal rich representatives of society.”

The government says it is doing all it can – at considerable political cost – in response to pressure from Brussels and domestic public opinion. Even though the government is weak, Mr Stanishev is determined to press ahead with reforms.

In a controversial move, he has moved to close the duty-free shops this month on Bulgaria’s borders with Turkey, Serbia and Macedonia after they were condemned by the European Commission as “a focal point for local corruption and organised crime”. There is extensive evidence of smugglers stocking up with untaxed alcohol, cigarettes and fuel, crossing the border and then heading straight back to Bulgaria. Fuel and other goods nominally destined for duty-free sale is diverted into the domestic market. Border and customs officials are sometimes complicit in the operations.

Mr Stanishev has also established this year a new investigation unit – the State Agency for National Security – to tackle crimes including high-level corruption. This follows the establishment last year of two standing commissions – on disciplinary proceedings and corruption within the Supreme Judiciary Council that supervises the courts. New laws on their way through parliament include legislation on public procurement and on conflict of interest.

The authorities have scored a big success with a rare high-level corruption conviction. In the incident that resulted in the resignation of Mr Ovcharov, Valentin Dimitrov, the former head of Sofia’s municipal heating company, was sentenced this year to five years, for failing to make proper financial reports to the central bank. He was cleared of money-laundering charges. Separately, a top drugs baron has been put behind bars for the first time, although only for two years under a plea bargain.

The government has been hampered by scandals. First, the chief of the highways agency was forced to quit after it emerged that contracts were awarded to his brother’s company. Next, Brussels raised questions about possible irregularities in the distribution of pre-accession funds – and suspended some payments while investigations are carried out. Finally, Rumen Petkov resigned as interior minister after two officials were accused of leaking information to criminals and the minister himself admitted meeting crime bosses.

Mr Stanishev has responded with a government reshuffle, appointing new interior, health, agriculture and defence ministers as well as a new deputy prime minister to supervise EU funds – Meglena Plugchieva, the former ambassador to Germany. Further changes are on their way at the level of top civil servants, following the resignation of the customs chief and two top deputies.

The reforms and changes address concerns raised by the European Commission. But the measures are so recent that it may struggle to judge their effectiveness. Also, with elections due next year, it is uncertain how long the government will focus on reform, despite its pledges. If opinion polls are right, it faces a drubbing.

But one point is clear. There is strong support for the fight against corruption and crime from the Bulgarian public. As the country develops and modernises within the EU, Bulgarians will demand higher standards in public life. Whether they will get them is another matter. The experience of crime-and-corruption ridden southern Italy shows there is no automatic link between EU membership and a transparent society.