Journalists Nizar Manek and Jeremy Hodge conducted an extensive investigation in 2014 of Egypt’s government agencies and Central Bank that revealed $9.4 billion in unaccountable state-operated “special funds,” or al-sanadeeq al-khasa. These special funds first became widely discussed in the aftermath of the January 2011 revolution, but their size and administration had remained unclear.
Revelations about the size of these slush funds are particularly timely following Egypt's highly-touted economic development conference in March 2015 and the government's appeal for more foreign investment. Incorporating these funds into the state treasury could reduce Egypt's $32.38 billion budget deficit and provide greater fiscal security. However, the ambiguity surrounding the scope and purpose of these funds shows how entrenched official corruption and opaque state accounting is in Egypt.
Rachael Hanna interviewed the journalists about their investigation into the scope and setup of Egypt’s special funds.
How are special funds set up and why are they separated from state revenue?
This is a system that was enshrined into Egyptian law. Various presidential decrees passed in the 1970s and 1980s paved the way for the establishment of special funds and granted government bodies across Egypt’s bureaucracy—such as the Ministry of Interior (MOI) and the Ministry of Defense (MOD)—sole rights to oversee and administer their finances. No mechanism for regulation was ever introduced. Knowledge regarding the activity within each special fund account is limited to those individuals and government agencies which own and administer the account itself, with each fund managed as an individual fiefdom. Special funds were created to provide flexibility and freedom to state bodies to take pressure off the central government, and are by their very definition not to be relayed into the country’s Treasury or public budget. In such a situation, transparency becomes elusive.
Ministers and their inner circles have full knowledge and control of these accounts, often at the expense, quite literally, of the central government's budget. Further, the official legal mandate of the Central Auditing Organization (CAO) does not cover auditing special funds—it is limited to auditing state finances tied to the official budget. Attempts by the CAO to exceed its mandate and learn more about special funds are largely the result of an activist agenda adopted in the aftermath of Egypt’s 2011 uprisings, when the issue of special funds became widely discussed within activist circles, government, and the media. A select core of central bankers are able to monitor how much money goes in and out of these funds, by virtue of the fact that they are opened within the Central Bank itself. However, they are technically not legally able to interfere with their activity.
These funds are not dealt with transparently because corruption and patronage is very much entrenched in the highest levels of Egyptian politics. Those who have the capability to rein in its excess are also those who benefit from it the most. Even the CAO, an anti-corruption agency, did not disclose to the public its findings about the real size of special funds. Instead, it allowed Egyptian politicians in the years following the revolution to repeatedly undervalue their true size and scope—the Finance Ministry undervalued the special funds by $5.6bn last year, as we exposed in our story.
How many of these funds are legal and how many are illegal?
By the end of Egypt’s 2010/2011 fiscal year—the year Mubarak was deposed—the Central Bank of Egypt records we reviewed show that it was holding roughly $14.1 billion worth of slush fund accounts. Because these funds are said to have been held within the Central Bank, they could be considered legal under Egyptian law. We were not able to review data for the 2010/2011 fiscal year with respect to special fund accounts operated outside the Central Bank, which, by being outside of the Central Bank, would be illegal. During this period, it was alleged that illegal capital flight of state funds smuggled out of Egypt and into financial centers in London, Switzerland, and other offshore financial centers, occurred in the immediate weeks and months following the outbreak of the January 2011 uprising.
Tracing and valuing the amount of this money proved elusive and difficult for all those who tried. Yet in February 2011, the Swiss government was able to place a freeze on 760 million Swiss francs it claimed were tied to the Mubarak family and its associates, and which had been illegally smuggled out of Egypt and into Switzerland in the wake of the January 2011 revolution. We believe that special funds could very well have been used to facilitate this alleged illegal capital flight, seeing as special funds exist outside the purview of auditors and their annual credit and debit activity has been repeatedly undervalued by Egypt’s Ministry of Finance (MOF), Central Bank, and previous Egyptian parliaments, in the years following Egypt’s uprising. The amount of money coming into the accounts and then spent annually as stated in the Central Bank, CAO, and MOF documents we have received is significantly higher then the amounts these institutions claimed publically, without any explanation provided for the discrepancy.
By the end of the 2012/2013 fiscal year, the official records we reviewed show that $3.5 billion in special funds existed in 644 accounts held illegally in state-owned commercial banks in violation of Law 139 passed in 2006, which stipulates that all special funds must be held within the Central Bank. Another $5.9 billion existed in 5,729 legal accounts in the Central Bank. However, all special funds, including those held legally within the Central Bank, are exempt from the scrutiny of auditors and are as a result potentially mismanaged and tied to corruption.
Beyond special funds controlled by state agencies, does the military have access to any other funds?
Regarding additional special funds held by the Armed Forces, it would only be possible to speculate as substantial and sensitive financial information in relation to the Armed Forces is unavailable in the records we reviewed. We do know that in the 2010/2011 fiscal year, about $4.9 billion in legal special fund accounts held within the Central Bank belonged to "economic authorities," a term which refers to a series of large state entities, including the Suez Canal Authority (SCA), Egyptian General Petroleum Corporation (EGPC), the Arab Organization for Industrialization (AOI), and others, most of which are run and operated by generals within the Armed Forces. This suggests that the military had at least some access to this $4.9 billion—but to what extent, we don’t know.
It’s likely the military has access to other accounts both in Egypt and abroad that as of now remain outside the limited scope of auditors. The "Sisileaks" tapes broadcast earlier this year from the Mekameleen channel in Istanbul, which show the president casually discussing the possibility of siphoning off $30 billion ($10 billion of which would apparently go into to a so-called "army account" set up in the Gulf), gives a sense of the potential size and scale of these accounts that still remain unknown to auditors and the world at large. We believe what we reported from the official Central Bank, Ministry of Finance, and CAO records itself represents the tip of an iceberg.
Much of the investigation concerns special funds under he MOI and MOD's control. Currently, the MOD and its intelligence-gathering apparatuses are encroaching on ground traditionally reserved for the MOI—do the funds serve this strategy?
The rivalry between the Armed Forces and the Office of the Presidency, which controls the MOI, did not really begin to materialize until the late 1950s, after Nasser had already spent several years working in a civilian capacity. This rivalry set a precedent that lasted until the end of Mubarak’s rule. As of now, Sisi has served in a civilian capacity for just over one year, not long enough for his interests to diverge significantly from those of the Armed Forces. Also, for a year following the 2013 military coup, Sisi was still minister of defense and not president (although still the public face of the regime). During this time, the military was interested in solidifying its position and acquiring more power, which it has steadily done since the 2011 uprising began. Sisi was the face of this consolidation, and now that he is both the president and a civilian, we’ll see if he will develop a personal power base that is separate from that of the Armed Forces. It might not yet be politically expedient for him to do so, but as his term continues we’ll see if it eventually happens.
It’s possible and highly likely that this shift in allegiance from the MOI to the MOD and the Armed Forces affects the distribution of special funds. The expansion of the Suez Canal, for example, means that eventually the SCA, which is run by military officers, will be taking in much more revenue—this could be diverted into special funds that we already know the SCA operates. This is one example, and other bodies controlled by the military may be set to expand their special funds as well.
Since the July 2013 military takeover, the army has also entered into a number of other construction and public works projects in cooperation with investors and contractors from the Gulf. One of these includes a project for the military to construct one million new housing units in cooperation with an Emirati company, at an estimated cost of $40 billion. It is very possible that some of this money, in addition to money from other, similar projects, could be diverted into new or previously existing special fund accounts operated by the Armed Forces.
Was President Morsi or the short-lived Brotherhood-controlled parliament willing or able to exert any control over these funds during their tenure?
Egypt’s 2012 parliament led by the Muslim Brotherhood made a point of discussing them frequently, and attempted to pass laws with the purpose of reining in special funds and appropriating them into the budget. Yet, the figures produced by this parliament for the size of special funds were almost always undervalued, compared to our own analysis, which estimates them somewhere between $4.2 and $5.6 billion.
The Brotherhood-controlled parliament did pass a 2013/2014 public budget law which called for ten percent of known special fund revenue to be appropriated, collected, and put into state coffers—but this law was never fully implemented as parliament was disbanded following the coup. Conversely, the recent release of Saudi diplomatic cables by WikiLeaks indicated that the Brotherhood may have attempted to serve its own networks through the use of special funds as a means to unaccountably administer large sums of money. An authenticated, non-dated Saudi cable prepared by the Saudi Foreign Ministry for internal use, labeled "Top Secret," and which would appear to be written in 2012 given the broader political situation described in the cable, quotes an unnamed Egyptian official saying the Brotherhood would agree to release Mubarak in exchange for $10 billion, "since the Egyptian people will not benefit from his imprisonment." No evidence is provided in the Saudi cable as to where specifically this $10 billion would have gone if delivered, but in any case the money was never delivered and the proposed deal was never concluded.
Nizar Manek is a contributing writer for Africa Confidential newsletter and Jeremy Hodge is a journalist, research consultant, and Arabic translator. Rachael Hanna, associate managing editor of the Harvard Political Review, conducted the interview. The interview was lightly edited for style.