For 17 days, Mahmoud Hamdouni sat in a dank Palestinian jail on trumped-up charges, brooding over the fortune he had hoped to make once peace came. Hamdouni had bought 30 acres of land in the desert outside the West Bank town of Jericho. He had built a gas station and planned a housing development. But his dream collided with the grim reality of Yasir Arafat's rule. Accused by Palestinian security services of treason two years ago, he was freed from jail only after he signed over his land to the Palestinian Authority, Arafat's government. Within months, a front company for the Authority had taken an undeclared 28 percent stake in a casino built on what had been Hamdouni's land. The glittering Oasis Casino, across the road from the dusty Aqabat Jabr refugee camp, now makes an estimated $15 million in monthly profits. Hamdouni, meanwhile, sits at home, chain-smoking Dunhills. "The Authority is like the 40 thieves and Arafat is Ali Baba," says Hamdouni. "We got rid of the Israeli occupation. Now we are under Palestinian economic occupation."
For now, Arafat can still channel the brunt of Palestinian anger and frustration toward Israeli occupiers: widespread clashes last week in the West Bank and Gaza left at least five Palestinians dead, and for the first time in four years, Palestinian police fired on Israeli soldiers. On Saturday, clashes continued for a seventh straight day, and Israeli soldiers shot dozens of Palestinian demonstrators with rubber-coated steel pellets. Many observers on both sides of the conflict accused Arafat of stirring things up, mainly to distract attention from his own failures and to prove to disillusioned Palestinians that he is not in Israel's pocket. But that tactic may backfire. Arafat promises to declare a sovereign Palestine as soon as September, and his Palestinian Authority already has all the trappings of independence, from uniformed police to postage stamps. Soon enough, Palestinians may have no one to focus their fury on but their own government.
A NEWSWEEK investigation reveals abuses at almost every level of the Palestinian Authority. Many top ministers staff their offices with cronies, dole out contracts without oversight and create their own monopolies. The courts are powerless because Arafat simply ignores any inconvenient rulings. His 14 separate police forces enforce the whims of PA officials rather than laws aimed at protecting ordinary Palestinians. "It's a mafia state," says Abdul Jawad Saleh, a former Agriculture minister who was beaten by security forces recently for leading an anti-corruption protest.
Both the Israeli government and foreign aid donors are quietly complicit in the corruption. Critics say Israel uses its stranglehold over the Palestinian economy to create an elite that is dependent on the good will of Israel and prone to compromise in land-for-peace negotiations. International aid organizations fear that a full assault on corruption would destabilize the Arafat regime, damage the peace process and, in turn, threaten many of the projects that have already eaten up $3.8 billion in donor cash since 1994. The donors claim that abuses have been reduced since a report three years ago showed a third of the Authority's $800 million budget had been wasted or skimmed off by corrupt officials. They point to stringent auditing for specific programs to show that they are keeping a close eye on the $520 million annual aid budget. Yet the aid groups can't do anything about kickbacks ultimately paid out of donor money, because the Authority's general audits are not made public. Arafat, according to a knowledgeable source, keeps them in the drawer of his desk.
Arafat has used tax income to buy political loyalty. Until this month, he directly received hundreds of millions of dollars in VAT and customs receipts collected by Israel. The Palestinian leader was free to dispense the cash to those who toed the line. It took three years of intense pressure from donor groups like the International Monetary Fund to persuade Arafat to funnel the money through his Finance Ministry. The IMF also pushed Arafat to reveal the Authority's business holdings, but he's still sitting on the audit report from PricewaterhouseCoopers.
Palestinian businessmen are among the first to argue that the moves toward accountability are not enough. Mohamed Masrouji, owner of the Jerusalem Pharmaceuticals Co., has long labored under difficult conditions: Israeli distributors of foreign drugs take a big cut of the pharmaceuticals Masrouji buys for his Ramallah company. But recently the people who should be helping Masrouji made things even worse. Jamil Tarifi, Arafat's minister for Civil Affairs and a key negotiator with Israel, formed a pharmaceutical-distribution company of his own. Masrouji says that in one day, Tarifi registered dozens of drugs with the Palestinian Ministry of Health--a process that routinely takes Masrouji a year. "They have the contacts and the money," says a bitter Masrouji. "I lived all my life dreaming of a Palestinian state as something beautiful. I am sad and disappointed." Tarifi refused repeated requests for an interview.
The latest to feel the pain of unfair competition are West Bank merchants who import flour. The mayor of Ramallah, who is appointed by Arafat, built the first flour mill in the West Bank five months ago and quickly persuaded Palestinian ministries to give him, in effect, a monopoly on flour sales in the territory. Within the last month Palestinian merchants who import flour were ordered to pay as much as 60 percent of their earnings to the Authority. That leaves the field clear for the mayor, Ayoub Rabbah, who is exempt from the new "tax." "People will be paying more than they pay now for flour," concedes an unrepentant Rabbah. "The only way we can improve our economy is to protect local businesses, like my flour mill."
No one has accused Arafat of lining his own pockets. Rather, he uses perks and sweetheart deals as political tools. When Saleh, the former Agriculture minister, discovered that one of his deputies spent $20,000 in donor money on a BMW instead of the fisheries research for which it was earmarked, he fired him. A few days later Saleh received a tartly worded letter from Arafat. "It seems you have forgotten that this man is one of my appointees," Arafat wrote, according to Saleh. The employee stopped coming to work but remained on the payroll. "Corruption is being rooted in our institutions," Saleh says.
Critics say the corruption is, in fact, part of the peace process itself. Many PA officials are appointees who would not be elected in popular polls. They are awarded so-called VIP passes by Israel, allowing them to travel freely and putting them at risk of losing such privileges if they are critical of Israel. Arafat's ministers defend their perks, such as the $1,000 air conditioner that negotiator Yasser Abed Rabbo installed in his home with ministerial funds. "A minister has a right to good conditions," says Ahmad Abdel Rahman, one of Arafat's inner circle.
Not a single corruption case has been successfully prosecuted in Palestinian courts, say human-rights activists. When 20 council members and intellectuals signed a petition calling for true democracy late last year, Arafat had several of them jailed. One, Moawiyeh Masri, was confronted by three masked men outside his home in Nablus. When he resisted, they shot him in the foot. "Nobody would dare to do this to me on their own," says Masri. "Arafat is the big chief."
Arafat's autocratic style deafens him to good advice. When Hasib Sabbagh, the 81-year-old billionaire who heads the Athens-based international contracting company CCC, offered Arafat a list of 100 expatriate Palestinians who could help form an efficient new administration, Arafat ignored him. Sabbagh's company is now constructing a $70 million power station in Gaza; about $20 million of that cost apparently goes toward Israeli customs duties and "fees" paid to Palestinian middlemen. Still, Arafat has scolded the elderly entrepreneur for not investing more. "Palestine needs a Rothschild," he told Sabbagh, referring to Baron Edmond de Rothschild, the financier who helped the early Zionists. Sabbagh hit back with an unfavorable comparison between Arafat and the political founder of Israel: "You will have a Rothschild when Palestine gets a Ben- Gurion." Arafat could use more brutally honest criticism. In the emerging state of Palestine, he may not be able to ignore it.