BizCLIR

Although the team focused on separate and distinct areas of the environment affecting the growth of private enterprise, many of the findings were common to all areas. Rather than repeat these cross-cutting findings throughout the report, we have opted to present them here to help establish a broad context in which the specific elements can be better understood.

A. Legal Framework

1. Connecting Supply and Demand
FRY and Serbia are presently committed to an ambitious program of legal reform in a dedicated effort to close the gap between themselves and the European neighbors who serve as their models. Drafting teams under the Serbian Ministry of International Economic Relations and the Serbian Ministry of Justice are handling the bulk of the work, and together with their Yugoslav government counterparts, have identified more than 100 needed legislative reforms. The current agenda calls for approximately 40 significant reforms by the end of 2001, a schedule that is already slipping and cannot reasonably be met.

The community of stakeholders affected by these changes - including public and private sector actors - support the reforms in general, but complains that they are not being included in the reform process. Laws are being drafted by various governmental working groups without broad public input, then presented to the government for legislative passage without additional opportunity for significant input. In short, there is no formal mechanism currently employed to connect those being who are affected by laws with those who design and adopt them.
Several examples are helpful in illustrating this point. One of the individuals responsible for drafting changes to the banking laws regularly distributes drafts to some of the banks for their input. The distribution is based on personal commitment to obtaining relevant feedback, not on a formal requirement for including the banks or other financial institutions. Distribution is selective, related more to personal connections. Should this drafter be replaced by one who prefers expediency and does not see the need for comment, even this limited vetting system can be eliminated.

Commercial Court judges raise just this issue. These judges, many of whom are members of an increasingly strong Association of Judges, including a Commercial Law Section of the Association, have noted that although they were aware of that a new Law on Courts was being drafted, they were never given an opportunity for comment and will soon be subject to decisions made by others without their feedback and input.

Lessons learned in law-making elsewhere indicate that the process of legislative reform is essential. Legislation should be the result of a democratic process of exchange and feedback as an expression of policy agreed to by the principal stakeholders and participants. Accordingly, conflicts and questions should be addressed before a bill becomes law so that the principal stakeholders will accept the law and support implementation. Otherwise, well-intentioned drafters with well-intentioned laws may find that new legislation is never adopted in practice, or is even actively opposed. Stated simply, it is easier to fix a law before it is passed than afterwards. To achieve this, a method of public feedback and debate is needed.

The problem also has another side. Once a law is passed, amendments are likely to be needed over time based on practical problems and issues arising from actual application of the law. Those best situated to identify commercial law reform needs are the lawyers who must interpret and apply the law on behalf of their clients, the judges who must sift through differing arguments about how the law should be applied, and the private sector business community whose businesses and profitability are affected by the legal regime. However, there is currently no mechanism for capturing the experience of these stakeholders and translating it into legislative or regulatory amendments.
For example, the Law on Contracts is generally viewed as a very good law with little need for amendment. (In fact, it is the only significant commercial law not on the legislative reform agenda.) In interviews, respondents noted that the law was acceptable, but that it might need minor changes here and there. When asked how the changes would be brought to the attention of lawmakers, respondents were unable to identify a mechanism.

The making of law is a process that should include initial consultation with civil society and follow-up consultation with those affected by implementation. Serbia and FRY do not currently have a system to include the most important aspects of the process and therefore run the risk of the "hasty transplant syndrome" in which essentially good laws based on international (foreign) standards are adopted expediently but not accepted or effectively implemented.

On the very positive side, however, we found stakeholders and policy makers at all levels who are open to change and improvement. Most involved in the law-making process recognize the inherent importance of input, but have little experience in how to obtain it while balancing intense pressures to pass laws quickly to attract investment. A window of opportunity now exists for creating a commercial law process that connects the market demand from commercial actors and their representatives with the supply of legislation from the government.

2. Coordination and Sequencing of Reforms
Another foundational issue in the commercial law framework is also providing an opportunity for structural reform in the legislative process. Various actors involved in pushing forward the commercial legislative agenda have expressed concerns regarding the need for prioritization and coordination. Any ministry can prepare and propose draft legislation - which is appropriate - but it is now done without knowledge of whether the same or conflicting laws may be under preparation elsewhere. In addition, much of the legislative work on federal law is being done by Serbian ministries, without sufficient inclusion of those at the federal level to ensure ownership and adoption. Federal ministries have not necessarily opposed the idea of Serbian ministers doing the drafting work on federal laws, but they have certainly slowed the legislative process when they have not been included at the outset. There is a need and a desire for some entity to act as a coordinator and clearinghouse for commercial legislative reform.

With regard to prioritization, local counterparts expressed great interest in lessons learned elsewhere. A number of efforts in early legal reform programs demonstrated, for example, the importance of concentrating on basic property rights (contract enforcement, registration of pledges) before passing more sophisticated legislation such as capital markets laws. While there are different ways of approaching these issues, Serbian lawmakers responsible for the reform agenda do not yet have a system for prioritizing and sequencing the almost overwhelming tasks before them. The most significant impact may be in privatization, where even a well-crafted law will not overcome the weaknesses in company and property laws that lower the overall attractiveness of privatized companies to new investors.

3. Enforcing Commercial Obligations
For historical reasons, enforcement of commercial obligations has not previously been a serious issue. Under the former regime, state-owned and operated companies worked with each other by mandate and did not generally need enforcement mechanisms. Obligations of individuals and companies could be handled through attachment of funds in the payment system through ZOP, the national payments bureau. The attachment of other assets was based on possessory pledges that could be converted into ownership by creditors, but only with much difficulty. The obligations of some individuals or companies involved political issues arising from patronage and influence that simply could not be handled through market-oriented enforcement mechanisms. As a result, the overall legal framework of Serbia and FRY lacks a coherent mechanism for enforcement of commercial obligations.

This gap will become increasingly burdensome as the legal system is reformed. The law governing judicial sale of assets, for example, now requires that any auction be held only after at least two days advance public notice of the items to be sold. It does not, however, allow pre-auction seizure or attachment, so that movable items up for sale usually "disappear" prior to the scheduled auction, highlighting the weakness in existing standards for company officers. There is also no legal practice of repossession for pledged property.
For bankruptcy, a credit system, collateral lending, and numerous other aspects of the commercial system to function, there must be a system of enforcement that permits timely execution on judgments. Serbia and FRY do not have such a system, and until they do many of the reforms underway will be substantially undermined. Closing this gap needs to be a high priority.

B. Implementing Institutions: The Serbian Commercial Courts

Implementing Institutions include those government bodies legally mandated to implement or oversee implementation of a given Framework Law. For Competition Law, this is usually some sort of Competition or Anti-Monopoly Agency, whereas a Trade Commission may oversee trade law implementation. For Contracts and Bankruptcy, the courts are the implementing institution. Moreover, the courts have an impact on all areas of commercial law, including those overseen by other agencies. They are the foundation of the rule of law within the commercial law framework.
Because of this importance, we have chosen to examine the Commercial Courts separately as an institution with cross-cutting importance for all areas of commercial law, instead of our traditional approach of examining the courts as the Implementing Institution for Contracts.

1. Scope of Review
The goal of the judicial sector review was summarized in the Task Order as “aiding the judiciary so that the Commercial Court system enforces, in an even-handed manner, rights and obligations, and protects creditors as well as debtors.” The Task Order further discussed specific issues concerning the Commercial Courts: the bias of the legal system, particularly in the past decade; the inability or unwillingness of the Commercial Courts to enforce critical commercial laws such as bankruptcy and liquidation; the backlog of the Commercial Courts; and the need for training of the judiciary.

For this section of the report, we have addressed the background of the Serbian/Yugoslav judiciary in general and the proposed reform efforts; the status and structure of the Commercial Courts and areas of strength and weakness; and a review of the training needs of the Commercial Courts and the local organizations, associations or institutions best suited to provide the training.

2. Background - the Judiciary under Tito and Milosevic
The current status of the Serbian judiciary can best be described as significantly damaged during the past decade by the abuses of the Milosevic regime, but not irretrievably broken. During the Tito years the Serbian/Yugoslav judiciary had a reputation for stability with a reasonable degree of independence for an Eastern European country. If a case did not have a political interest, the judges were generally left alone. Judges were politically appointed (by Parliament) and their status was that of a government employee. A judge was just another member of the state apparatus and they had no particular status in society. The courts were not independent of the executive or dominate political parties, either in judicial selection or court funding.

With the commencement of the Milosevic regime, judicial appointments became politically motivated and a number of unqualified individuals were appointed to the bench whose only qualification was party membership. The regime then utilized those judges to influence and corrupt the administration of justice. Members of the judiciary who openly objected to these actions were removed from office. The majority of judges were not involved in corrupt practices but most of those judges remained passive while the abuses occurred. The judges who were on the bench prior to the Milosevic regime and who did not take part in this corruption form a core of judges upon which the future of the Serbian judiciary must be built. It must be recognized that these judges will need massive amounts of training in the principles of a democratic government, the fundamentals of a free market system, human rights law and EU law.

3. Current Structure of the Yugoslav Judicial System
The FRY judiciary is comprised of three branches: the Federal Court (which acts as a court of final appeal for certain civil cases and serious crimes); the Federal Constitutional Court; and the federal military court system. For the Republic of Serbia, the judiciary consists of Municipal Courts (136), District Courts (30), Commercial Courts (16), the High Commercial Court (1), the Supreme Court (1), and the Constitutional Court (1).

The current leaders in the Serbian Ministry of Justice and the Serbian judiciary are acutely aware that they have been isolated for the past 10 years and have not progressed while other Eastern European countries transitioned into democratic, free market economies - with varying degrees of success. Courts in those countries have commenced reforms to recognize the rights and obligations which accompany a democratic government and a free market economy.

In February 2001 the Council of Europe sponsored a conference on judicial practice in Serbia with a view towards Serbia’s eventual accession into the Council of Europe, which requires compliance with the provisions of the European Convention of Human Rights.13 The presenters at that conference were primarily foreign expatriates and little was presented as to the current status of the Serbian court system and the local plans for reform. On 9 April 2001 the Organization for Security and Cooperation in Europe (OSCE) held a conference on judicial reform in Serbia at which most of the presenters were officials of the Ministries of Justice, local judges, prosecutors and attorneys.
The conference identified the critical issues confronting the Serbian judiciary, which were summarized into four categories: salaries; legal and structural reform; physical working conditions and equipment; and training. The conference report concluded the judicial salaries are so low ($150 - $200/month; 300 – 400 DM/month ) that they have already resulted in a loss of qualified judges and, if not remedied, will lead to the loss of many remaining judges.

Attorneys in private practice attorney can earn up to 10 times the salary of judges while the more successful private attorneys can earn up to 25 times more. The Ministry of Justice (MoJ) will propose an increase in judicial salaries in the draft Law of Courts, which is currently being prepared by a MoJ working group. Salary levels have not been decided but increases to 1000 – 1200 DM are being considered and would be acceptable to the judges. It is problematic whether the necessary funding can be found from current government revenues. OSCE is exploring the possibility of providing “bridge” funding to “top-off” judicial salaries through the end of the year.

Radical changes must be made in the current Law on Courts to establish an independent judiciary, including both the independent selection of judges and financing separate from the executive branch. The draft Law on Courts contemplates judicial selection based on merit, the establishment of a Judicial Council for the selection of judges (with two thirds of the members selected by other judges), and a method for reviewing current judges and removing those who were appointed without qualification. A reduction in the overall number of judges must be also be considered, but the MoJ has not yet developed a strategy to address that issue.

Overall working conditions for the judges are poor with little technical equipment such as computers, photocopiers, fax machines, etc, all of which impede the efficiency and timeliness of the courts.

There is an obvious need for training in all areas of the law, including training in the use of technical equipment. The recently revived Association of Judges is already working in this area and the MoJ, the judiciary and the Association of Judges are also working on the establishment of a Judicial Training Institute. The Judicial Training Institute contemplates training at three levels: (1) domestic laws, (2) laws of the European Union and (3) the European Convention on Human Rights.

The MoJ, judicial officials and the Association of Judges are enthusiastic about the necessary reforms. There was a mixed response as to whether the necessary reforms would be adopted by parliament, but most officials interviewed believed the entire reform package (including salary increases) would be adopted this summer, effective 1 January 2002.

4. Structure and Status of Commercial Courts
The Commercial Courts are “specialized” courts in the Serbian court system as opposed to the “regular” courts. There are 16 regional Commercial Courts of the first instance and one second instance court, the High Commercial Court. At the present time the President of the High Commercial Court is a Milosevic appointee; it is expected that he will soon be removed. The third instance court in the Commercial Court system is the Serbian Supreme Court which has a division to hear appeals from the High Commercial Court.
There are approximately 220 judges in the various Commercial Courts, with the Belgrade Commercial Court being the largest with 69 judges. There are 30 judges on the High Commercial Court. The Serbian Supreme Court division which hears commercial law appeals is comprised of six judges.

The current Law on Courts clearly sets forth the jurisdiction of the Commercial Courts:
• commercial disputes between enterprises and other legal entities
• commercial disputes between domestic legal subjects and foreign individuals and legal entities
• maritime law disputes
• aviation law disputes
• trademark and copyright disputes
• cases involving status changes in enterprises and other legal entities, and
• commercial offenses.

The Commercial Courts are also responsible for maintaining company registers, bankruptcy and liquidation proceedings, the execution of decisions, and determining the validity of foreign court and arbitration decisions. Interestingly, much of the substantive commercial law interpreted by the Serbian Commercial Courts is adopted by the federal Yugoslav parliament rather than the Serbian parliament.

The Commercial Courts are divided into 5 divisions: litigation (biggest); registration of companies; commercial law offenses; bankruptcy and liquidation; and execution of decisions. There is also an office of the court which handles court administration.

The High Commercial Court is responsible to:
• decide appeals from Commercial Courts
• decide first instance cases when determined by law
• decide administrative accounting disputes between state bodies
• decide jurisdictional conflicts between Commercial Courts
• monitor and harmonize court practice in the Commercial Courts
• provide opinions on practices for the trade of goods and on rules adopted by the Chamber of Commerce.

The Serbian Commercial Courts are established under the European civil law system as opposed to the common law system utilized in England and the United States. A characteristic of the civil law system is that each case is decided individually and prior decisions are not officially used as precedent. The Serbian Commercial Courts, however, have developed a hybrid system where decisions of the High Commercial Court and Supreme Court are published and can be used by lower courts as guidance. The lower courts are not required to follow these decisions but in practice usually do. This concept of “persuasive precedent” provides both attorneys and the courts with the consistency required for a stable commercial law environment.

The Commercial Courts are a microcosm of the overall Serbian court system. They suffered from the same problems as other courts under the prior regime, including the appointment of unqualified judges and the manipulation of the court system for the benefit of the government and dominate parties. In cases where political interests were not involved the Commercial Courts generally remained objective.
A number of those interviewed noted a pro-debtor bias in the courts (with one calling Serbia a debtor's paradise). Much of this bias is the result of debtor-favorable provisions in current Serbian law. Because of these laws, and Serbian judicial and business traditions, a pro-debtor mentality permeates the judicial philosophy of the Commercial Courts. Despite these problems, attorneys who practice in the area stated that their domestic clients are not reluctant to submit disputes to the Commercial Court system, however foreign business clients remain less confident. The willingness of domestic clients to submit disputes to the Commercial Courts may be due to the lack of any viable alternative.
Areas where abuses commonly occurred in the last ten years were in the registration of companies, bankruptcy and liquidation. Certain judges would allow individuals to improperly alter the ownership of companies in the company register maintained by the court and participate in insider trading. In addition, the liquidation and bankruptcy procedure was used to punish individuals and companies that opposed the Milosevic regime. There was also political direction from the regime that socially-owned companies in bankruptcy should not be closed. As a result, the number of pending cases in the Bankruptcy and Liquidation Department of the Belgrade Commercial Court has dramatically increased since 1999.

Currently it is commonly recognized that “Serbia is bankrupt”, meaning that most socially-owned companies are either in or should be in some phase of bankruptcy. Judges even joke about it. These bankruptcies are not actively processed since those companies employ thousands of workers and closure of the companies would cause serious social disruption. The courts feel that that this problem is more a societal problem which must be addressed in parliament rather than a problem that can be resolved by mechanically processing these companies through bankruptcy. That philosophy reflects the realities of the prior system where the courts routinely implemented the government’s policy directives. While that type of political interference is unacceptable in an independent judiciary, it is just as important to change the mindset of current judges who believe that courts are just another arm of government policy apparatus. That philosophy must be changed if any meaningful reforms are to take place in the Commercial Court system.

All those interviewed agreed that the time from filing a typical complaint in Commercial Court to a final decision was 1-1 ½ years, while the quickest cases were processed in 6 months. There are examples of egregious delays in every court system and while some cases have taken 4-5 years to resolve, those cases do not appear to be the rule. During the period of hyperinflation debtors took advantage of the current system to delay the payment of debts and judgments as the longer they delayed, the less they would have to pay in real money.
An expedited procedure was adopted in June 2000 by the Commercial Courts for small claims which are based on a written document, which has increased the efficiency of the courts in these disputes. Despite these somewhat reasonable timelines, the Commercial Court procedure does appear to have some procedures which could be streamlined to speed up the process. The backlog of cases in the Company Registration Department and the Litigation Department in the Belgrade Commercial Court continues to increase.

While the Commercial Courts had unqualified individuals appointed as judges by the Milosevic regime, the identities of those individuals are known and some have been already removed. The reforms contained in the draft Law on Courts will apply to the Commercial Courts and most of the systemic problems will be addressed and hopefully resolved in that legislation. This should remove the unqualified judges, provide the necessary independence and address the inadequate salaries.

The consensus is that the Commercial Courts are adequately staffed. Under Western standards the Commercial Courts suffer from a lack of financial resources to provide for comfortable and efficient physical working conditions and support equipment, but they are in better shape than the regular courts. Nevertheless, there is very little computerization and those computers which do exist are not networked or used efficiently.

The High Commercial Court operates in a relatively efficient manner with most appeals being completed in six months. The process, however, could be more efficient in regard to company registration and bankruptcy appeals. Some of the delay experienced in the High Commercial Court is attributed to the support staff which is low paid and demoralized. For instance, a dictated decision can wait for as long as a month to be transcribed. The High Commercial Court experienced more political interference during the Milosevic regime than did the regional Commercial Courts and one High Commercial Court judge was removed by the regime for refusing to comply with the political directives.
There is currently little use of arbitration in commercial law in Serbia at the present time. Most international companies doing business in Serbia have foreign arbitration provisions in their contracts. There is an International Arbitration Court in the Yugoslav Chamber of Commerce but its decisions are treated as domestic decisions under Serbian law and as such can be challenged during the enforcement proceedings. Foreign arbitration decisions are enforceable in Serbian courts but the courts cannot review the substantive decision, making foreign arbitration preferable for foreign investors. There is no domestic arbitration structure in Serbia. The larger companies will often seek and obtain out of court settlements, but those are the result of informal efforts of the attorneys.

5. Commercial Law Training Needs
Everyone interviewed agreed that judicial training was a crucial area where a great deal of work needs to be done quickly. One of the difficulties will be the fact that many judges sincerely believe that they are up to speed on the basics of a free market economy and also believe that their current commercial law system, while inadequate, needs little change. The isolation of the commercial law judiciary from the developing legal trends in the last decade has left the judges far behind their contemporaries in other countries. Initial training for Commercial Court judges will need to concentrate on the role of a judge in an independent judiciary, the free market system, and the current status of contemporary international business practices and commercial law.

The judges need to be trained on the substantive provisions in the new commercial laws which will be adopted, but that training will find little success until the judges understand their role in both the domestic and global business environments. Training should not be limited to the judges. The legal assistants in the courts should also receive appropriate training. Attorneys practicing in the commercial law area should also be provided with training opportunities on free market commercial concepts and the new laws.

The Association of Judges will soon create a Commercial Law Section and the Association will be the natural vehicle for the training of commercial law judges until the Judicial Training Institute is created and operational. Training areas should include the role of a judge in a democracy (independent judiciary), the dynamics of a free market economy and the role of the courts in that context, modern business principles and practice, newly revised procedural laws, the new commercial laws as they are enacted, international trade laws, the European Convention on Human Rights, training on modern technical equipment as it is made available (computers), and English language training.

C. Supporting Institutions

Serbia has a strong base of Supporting Institutions compared to other transition countries studied. There are large numbers of legal and other commercial professionals who have traveled and studied abroad and have brought back a good comparative understanding of legal traditions and modern commercial transitions. They form a sizable pool of local resources that can support the reforms underway.
Even so, there are still substantial gaps in the Supporting Institutions. During recent years, most associations and organizations were highly political, not practical. Isolation under the sanctions kept them from developing strong ties with organizations elsewhere, and many business-related associations (such as chambers of commerce) were quasi-governmental bodies with mandatory membership, thus not responsive to demands of their constituencies or the market.

The team identified a number of institutions, associations, and NGOs that can already provide support to reform efforts and act as effective local counterparts for technical assistance. Others need further development, and some need substantial assistance to become effective. On the whole, there seems to be a basic openness of the local population to form associations, although not necessarily the resources to fund them. Governmental institutions, however, are generally weak.

1. Governmental Institutions
a. Bailiffs
Institutions relating to the enforcement of judgments are among the weakest of those examined for this study. Essentially, there has been little practice in the attachment or seizure of assets other than through the payment bureau which involves only bank accounts. Thus bankruptcy and contract cases requiring repossession of collateral or assets are not supported by a professional body of bailiffs or other agents who can effectively seize and deliver or seize and auction property. This gap will need to be addressed systematically in connection with the Law on Execution. Use of private persons to fulfill the functions of a bailiff should also be explored.

b. Notaries
Unlike most other European countries, Serbia has few if any notaries and very few requirements for their use. In other countries - including the former Yugoslav republic of Croatia - there is a strong tradition of notaries who provide a number of specialized services relating to the production, authentication and legalization of certain types of documents, such as company charters, contracts for the sale of real property, and other documents of high value or subject to registration. One such function is the creation of a “public document” that has the same status of a court decree without the necessity of the delays of court procedures.
However, these notarial traditions elsewhere in Europe often tend to represent a professional cartel, frequently at odds with the development of market-oriented service delivery. Notaries in a number of countries have a mandatory fee structure, monopoly rights over certain transactions, and veto power over documents prepared by lawyers. The absence of such an institution in Serbia, therefore, is a benefit rather than a detriment.

At this point in time, there is little reason to focus on notaries. Their principle function is to provide authentication for parties who voluntarily choose to have certain transactions or documents authenticated for purposes of veracity and authenticity. This means that notaries must be responsive to market demand, rather than distorting the market through exercise of monopoly privileges.17 Donors providing assistance in areas normally requiring some form of notarization - such as registries - should be careful to avoid creation of this kind of cartel mentality and organization.

c. Registries
For purposes of this project, the team studied registries related to collateral, companies, and real property. Each of these is discussed specifically within those sections of the report. There is no registry of non-possessory pledges of movables. In addition to the land and company registries, there are registries of ships and aircrafts, which are in compliance with international standards. Commercially-related registries not reviewed are those associated with tax, trade, exchange of securities (stocks) and credit tracking.

2. Professional Associations
a. Accountants
Accounting firms and accountants in Serbia are not yet well organized or well developed. Most respondents noted that few accountants can apply International Accounting Standards, and that substantial assistance and training will be needed to upgrade the overall level of accounting skills. Large international firms have only recently begun to provide extensive services locally due to sanctions, so even they do not yet fill this void.

This situation is not surprising. Application of proper standards by companies is generally a market response: a company must have audited or auditable books to obtain commercial credit or to effectively negotiate with a strong tax authority. In FRY, there was little commercial lending during the Milosevic years, as loans tended to be made on the basis of political connections rather than commercial standards. Tax enforcement was also politicized, but also handled through the payment bureau and not necessarily based on proper auditing. As a result, Serbian companies have not had to incur the expense of higher quality auditing. In addition, there has been no significant foreign investment, which usually requires high accounting standards.
Assistance in improving the level of accounting will be needed as FRY rebuilds its banking and investment structure. Such work, however, is outside the scope of this project.

b. Economists
Despite its socialist past, Serbia has developed a strong body of market-oriented economists, due in great part to the openness of Yugoslav society to foreign study and travel. One association of economists, G17+, has become highly influential as an economic and political think-tank, which can and does provide economic studies to government and private sector clients. Several state and private universities and colleges teach market-oriented economics, ensuring a growing supply of qualified economists for the future. Specialized economists - such as privatization experts - are still needed and can be supplied in the short term by donor organizations during these transition years. Over time, however, it is expected that Serbia will meet its own demand for economists through local supply.

c. Lawyers and Judges
Like many countries within the civil tradition, law in Serbia is an undergraduate field of study with a large number of students who obtain a degree without ever moving into the practice of law. Unlike some other countries, however, the supply of law students is so abundant (over 12,000 enrolled at the Belgrade Law Faculty alone, of which 4-5,000 are actively pursuing their degree), that there is also a large supply of highly dedicated legal professionals graduating each year and going on to join the professional legal community.

Lawyers in Serbia are divided into two classes: lawyers and advocates. Lawyers are those who have obtained a law degree and provide legal counsel as employees of corporations or other entities but who have not done an internship with a law firm or sat for the bar exam. They are permitted to work as in-house counsel, but are not permitted to appear in court or be members of any of the mandatory bar associations. (However, advocates who leave independent practice to become in-house lawyers are permitted to appear in court for their employers.) Advocates, on the other hand, are those who have passed the bar exam after a completing a legal internship. They may represent clients in court as well as provide numerous other legal services. This system is not unlike the British division between solicitors and barristers.
Associations of legal professionals are also divided along these lines. The bar associations are mandatory membership organizations of advocates within Serbia. There is also, however, an organization of in-house lawyers that is quite active, holding annual conferences on legal issues important to banks, corporations, and other entities who employ in-house attorneys.

Before discussing the local bar associations, it is important to clarify their structure and avoid confusion often resulting from U.S. preconceptions. In the United States, the "bar" has two distinct meanings. First, admission to the bar is a licensing requirement and refers to the internal body within a state that licenses, disciplines and oversees the professional practice of law. Membership (or dues, at least) are mandatory. The "bar" does not necessarily provide any services other than licensing, data collection, and professional discipline. A "bar association", on the other hand, is a voluntary organization of lawyers admitted to practice who pay dues in order to belong to the association and obtain services. Such organizations can provide substantial benefits, ranging from library and resource access, referral networks, continuing legal education opportunities, specialized committees and task forces, and various professional publications.

In most transition economies, bar associations are mandatory organizations more in the nature of an American state bar licensing and discipline board responsible for the regulation of the legal practice. Sometimes they also provide services to members, but because they are not accountable to membership and do not have to depend on meeting market demand for their survival, they are often seen by members as a mandatory tax with few or no benefits.

For Serbia, the bar associations are mandatory, but they are also striving to provide services in the nature of an American voluntary bar association. All lawyers admitted to practice are members of a local bar association in their region (such as Nis or Novi Sad). The Serbian Bar Association is comprised of these regional units. These associations are increasingly seeking to provide meaningful services to their members, although most members still tend to see membership as a burden rather than a benefit. It is likely that they could become important vehicles for continuing legal education and for legislative input, but need assistance in developing these services. They do provide legal commentary through professional publications, however, so there is precedent for service provision.

There is also a growing demand for voluntary associations of lawyers with specialized interests. Presently, a group of top level law firms who represent foreign investors is exploring the possibility of creating a formal association to track international standards in legal practice and provide continuing legal education and practical assistance for their advocates in order to compete with the inevitable influx of foreign law firms. To organize themselves, however, they must be careful not to run afoul of laws providing the bar associations with monopoly powers over bar association functions. Legal aspects are currently being explored. It may be that legal reform will be needed before voluntary organizations of advocates can supply the kinds of services offered by voluntary organizations in the West.

In addition to lawyers, there is a strong association of judges. The Serbian Judges Association is a mandatory membership organization comprised of the 2000 judges from the various courts in Serbia. Like other mandatory organizations, it does not have a strong record of providing services to its members in the past (other than some annual meetings), but the leaders are trying to change this. The SJA has specialized sections, including a recently formed Commercial Section that has expressed great interest in a more active role in legal and judicial reform. In addition, the SJA is seeking to provide services to the members.

The Commercial Courts do not have a separate association. Instead, they are beginning to use the Commercial Section of the SJA as a forum for their particular interests.

Sometimes frustration acts as an excellent driver for change. The Ministry of Justice recently released a draft Law on Courts, amending the prior law in various ways, including mechanisms for appointment and removal of judges. While the law may or may not be sufficient, it has created a strong reaction among at least the Commercial Court judges because they were not included in the preparation and analysis of the law, or even given an earlier draft for review and comment. The resentment over this is likely to lead the SJA to take a more proactive role in legal reform issues affecting the courts.

d. Statisticians
The team did not directly examine the level of statistics and statisticians in FRY/Serbia. Two observations can be noted, however, which were gleaned from interviews with numerous respondents. First, Serbian professionals involved in commercial law reform are generally aware of the importance of statistics, and many institutions collect data for the purpose of publishing statistics either internally or publicly. The courts, for example, were able to provide relatively useful statistics on case backlogs and types of cases processed, and the Office for Accounting and Payments (Zavod Za Obracun e Placenja - ZOP) maintains a sophisticated and detailed set of statistics regarding their functions.
On the other hand, a number of respondents questioned the reliability of local statistics, especially in recent years under Milosevic. We did not attempt to verify the overall quality of statistical data, but instead note that it is under a cloud of doubt among local professions.

3. Specialized Services
a. Appraisers, Liquidators, and Bankruptcy Trustees
All of the support services related to bankruptcy and liquidation matters are weak, at best. First, the bankruptcy law as it exists has been used more as a political tool than a mechanism for orderly exit from the market by failed commercial endeavors. Moreover, the social and political implications of bankruptcy are so great that both the government and the courts have been reluctant to fully prosecute cases or to place companies - especially large state-owned enterprises - into bankruptcy proceedings. In fact, it is reported that no single bankruptcy case has been fully prosecuted yet under existing law.

Because of this situation, there has been no real demand for the various support services related to bankruptcy, such as appraisers, liquidators, and trustees. To the extent a basic corps of such professionals exists, they have had too little practical experience thus far to gain the level of expertise they need. Substantial assistance will be needed as an important adjunct of any bankruptcy law reform program.

b. Brokers
The team did not examine customs and trade issues in any depth, and therefore did not examine customs brokers and similar import/export professionals. Likewise, for those who think of brokers in terms of securities, the team did not examine the securities law environment in any depth either.

c. Credit Rating Agencies
There are two organizations that currently aspire to be credit rating agencies, but they have not arrived. The Yugoslav Chamber of Commerce has a Financial Standing and Credit Rating Office, but, to the extent it is functioning, has little more than information on whether a company has paid its mandatory dues and is in good standing with the Chamber. ZOP, the National Payment Bureau, plans to provide financial standing reports on the based on filings of financial statements by registered companies. There is no capacity, however, to verify the accuracy of the statements. Additionally, the information will have little value unless based on International Accounting Standards or rules that will provide a means of comparing the information with that produced in other countries.
While both of these plans are well intentioned and could add value to credit rating services, the efforts will not have a significant impact until there is a public registry of credit information available for viewing by those with a legal right to obtain such information.18 Development of a collateral registry and standardized accounting methods will be important steps in creating credit information and a culture of credit information. Over the long term, the existence of any such agency will depend on demand of the private sector financial and credit system for inexpensive, reliable credit information as an integrated part of the credit application process. Such demand does not currently exist due to the breakdown of the commercial banking system and its reliance on personal relations and extensive guarantees.

d. Enforcement Agents
Enforcement is a glaring hole in the commercial law system. There is currently no effective mechanism for enforcement against movable property, only against bank accounts through ZOP, the national payment bureau. Repossession, according to one deputy minister, simply does not exist. Self-help, in the American sense, is unknown.

For the commercial legal system to function effectively, it must be possible for creditors to enforce their rights against recalcitrant debtors, including attachment and seizure of property. Long-term assistance will be needed to correct the legal framework and construct the supporting institutions necessary to turn a judicial decision into an enforceable right.

e. Feasibility, Turn-around, and Management Consultants
Several schools in Serbia are teaching management principles, but the population of experienced management consultants is quite limited. With the upcoming wave of privatizations, the demand for such services will very quickly outstrip the supply. Assistance is needed in the short-term to begin training such professionals and partnering them with experienced foreign advisors to handle the first waves of privatization. Otherwise, privatizations are likely to be little more than an interim step on the way to bankruptcy for most state-owned enterprises.

f. Filing Services
Filing services are a niche service industry for filing of documents at registries, including company, collateral and property registries. Individuals and companies with established expertise in the mechanics of filing can reduce the cost incurred by attorneys in having to spend their own, more expensive time performing such ministerial acts.
Before such services appear, however, the conditions must be right. There must be a high enough demand for "filers" to be able to support themselves through providing services on a full time basis, and the cost structure must make it more beneficial for an attorney to delegate the work to someone else.

These conditions do not yet exist in Serbia. Perhaps filing services will appear as the collateral lending industry grows (on both movables and immovables). In any event, this is a low priority at this time, and should ultimately be left to the private sector based on market demand, not on donor assistance.

g. Specialized Publishers
Yugoslavia has an excellent foundation in legal publications. In addition to an up-to-date official gazette, there are two magazines that republish all laws, many with commentary, and are available on a subscription basis. The bar associations publish legal articles and even the Serbian Judges Association publishes significant decisions from the upper level courts. Legal information is relatively easy to obtain. Moreover, most recent laws are available in English on a subscription bases from Yugoslav Survey, and independent publisher of legal and economic information.

Interestingly, law has not yet moved to the internet as rapidly as it has in many other countries. The Official Gazette sells copies of the law in hard copies to subscribers and other purchasers and apparently is reluctant to change this practice because of the revenues produced. This has given rise to two other publications that purchase the laws in document form (the Gazette will not sell CDs, diskettes or other electronic formats), scan them, then republish them for subscribers with commentary or scholarly articles on legal issues. It is hard to imagine that the law will not soon be converted to electronic publication over the internet as well as in hard copy on the basis of public interest in providing the law to the public as cheaply, quickly, and effectively as possible. This will, of course, have an impact on the republishing market, causing the existing magazines to re-engineer themselves for survival.

Standardized forms do not yet constitute a significant number of legal documents. Unlike many countries in which standard commercial transactions have been reduced to highly standardized commercial forms and contracts, Serbia has only a few legal documents that must be or are preferred to be in a pre-printed format. On the other hand, the publishing industry is quite good and can produce whatever forms may be developed. It would be useful to provide assistance to practicing lawyers and law faculty to design standardized forms both as an improvement in efficiency and as a training tool for law students, lawyers, business people, judges, and even bankers.

h. Universities, Foundations and Think Tanks
Serbia has a substantial supply of educational institutions. There are currently four law schools operating in the country (not including the law school in Pristina, Montenegro) - at Belgrade, Nis, Novi Sad and Kragujevac. The quality of education has been compromised somewhat by political manipulations of the faculty under the prior regime, but the damage has been contained. Even so, these schools suffer to some extent from outmoded teaching techniques in which some of the professors do little more than read notes to the classroom with little or no discussion. Many of the best students study independently and skip these classes to do the reading on their own. Others are more progressive, using new techniques as well as actively participating in legal changes in Serbian society. Significant change is unlikely in the near term, because the supply of lawyers is more than adequate and there is little demand for change other than complaints of the students.
There are also several faculties of economics around the country. Many law professors teach at these institutes in addition to or instead of at the law faculty.

4. Trade and Special Interest Groups
a. Banks and Banking Associations
The Serbian and Yugoslav banking systems are in complete disarray. Of the 60-70 existing national and federal banks, it is estimated that no more than 10 are financially solvent, and even those are not particularly strong. The banks were badly damaged by misuse of the system under the Milosevic regime through politically based loans that could not be enforced. The system also suffered from an inability to make the transition to market-based lending after decades of socialist banking practices, which were not sufficiently grounded in commercial requirements based on cash flow, asset quality, and other risk reduction factors. Pyramid schemes in the early 1990s damaged consumer confidence, so that today much of the economy is based on cash transactions and hoarded savings, rather than productive investment and higher liquidity afforded by a system of healthy financial institutions.
The government has begun, with donor (including USAID) assistance, a program to liquidate insolvent institutions. While this is unlikely to restore consumer confidence, there is a slow inflow of foreign banking investment. The MicroFinance Bank, a European-funded and German-managed institution, for example, is offering traditional banking services, including loans up to $25,000 to qualified individuals. Societe Generale of France has opened an office to provide financial services to larger companies, and Raiffesenbank is scheduled to open in September. The government is seeking foreign investors to help restore some of the domestic banks, but the recovery process may be slow and deliberate.

As a result of this crisis, there is currently little credit available of any sort. Many importers and exporters rely on either countertrade arrangements or consignment agreements built up over several years through growing trust with foreign suppliers. Letters of credit and other trade finance mechanisms are often used. On the consumer side, there is also little credit. The local Visa card operation currently works only on a debit card basis, with cards being used to withdraw from existing deposits. Large items, such as automobiles, must generally be purchased for cash, possibly through three payments over a six-month period, otherwise through pre-payment "lay-away" plans.

Although land can be used as collateral for mortgages, banks have generally discontinued the practice because such lending, at least until recently, was a commercial farce. Many loans were made for political reasons and no amount of collateral could secure a loan to someone who would be protected upon non-payment. Moreover, even in commercial loans, the debtor-protection biases of the courts and contract law made it difficult if not impossible to enforce a loan effectively. One bank currently takes collateral on movables and immovables, but only for psychological pressure: the bank considers it unlikely that the pledges will actually have much value in an enforcement proceeding. For some customers, banks will provide a loan against cash deposits, with security of 30% or more of the value of the loan.

Despite the rather dismal banking climate, there is a relatively good bankers association. The Yugoslav Association of Banks (YAB) was once a reasonable strong organization representing interests of the numerous banks of Yugoslavia and Serbia, but was undermined by the misuse of the banking system under Milosevic. The organization is currently seeking to rebuild its credibility and services, and is thus very open to working as a counterpart in banking reforms. YAB leadership has also expressed strong interest in supporting the development of a collateral lending and registry system.

Liquidation of insolvent banks plus foreign investment in new and existing banks will be needed to restore confidence in the system and convince the general population to move their money from their socks to a bank account.

b. Business Associations
For the past ten years, most associations were political in nature, representing the rise of opposition parties. In this highly political climate and deeply dysfunctional economy, there was no significant development of business associations. Under the controlled economy, they were generally not needed, and have not yet made the turn to a market economy.

It is reasonable to expect a large growth in associations over the next few years. The well-educated professional class in the various economic sectors of society is familiar with these organizations and their roles elsewhere and can be expected to create appropriate domestic models. Assistance will be needed, however, to help organize the commercial associations an and NGOs, many of which will have little if any experience in providing services to members based on membership demand.

c. Chambers of Commerce
The Yugoslav Chamber of Commerce and industry describes itself as "an autonomous, non-governmental, business and interest association" for the Federal Republic of Yugoslavia. From a Western perspective, it would be better described as a semi-autonomous, quasi-governmental association for the simple reason that it is funded by fees extracted by law from registered businesses who are mandatory members. In essence, the Chamber exists only through government funding, even though it is not directly influenced or governed by government officials. Although it is seeking to provide services, the service model is based on supply-side strategy, not necessarily the demands of the members it is supposed to represent.

Even so, it should be noted that the Yugoslav Chamber has a well-organized, well-conceived management and infrastructure plan to provide a number of services for the various departments it has constructed on paper. The Chamber recently received support from the Konrad Adenauer Foundation to establish European Business Information Centers, an international, state-sponsored network of decentralized business information providers who will work from the numerous Chamber offices throughout the country. This could be a very useful source of information to small and medium producers and consumers, and to foreign investors. It will also produce a great deal of statistical data about local business, which could serve to enlighten policy discussions and initiatives.

The ambitious mission of the Chamber is currently more a document than a program. Numerous contacts for specific services are listed in their materials, but attempts to phone the desk officers resulted in very few contacts. The Chamber is an excellent source of preliminary contact information for foreign investors, including ministries and other government agencies, and it produces useful statistics and profiles regarding the various economic sectors. Still, lessons learned elsewhere suggest that such an all-encompassing chamber is unlikely to realize its dreams as a clearinghouse for all sectors of commercial society. Generally, competing interests prefer to have their own organizations, which might eventually form into a federation for certain purposes. For example, many transition and developing countries start with a similar chamber, and soon have separate associations of producers, exporters, service providers, merchants, and others who may or may not wish to cede authority to a single body to represent even common interests.

The Chamber may also be hampered in its goals by its incentive structure. Although currently well meaning in its ambitious plans, the fact is that funding is mandatory and the Chamber leadership does not have to answer to its membership. Structurally, there is no accountability based on demand. In many other countries, such a system has led to a shell Chamber abandoned by its mandatory members, many of whom will pay to belong to competing voluntary associations that more directly answer them. The Chamber has very good human and infrastructural resources, and could provide various valuable services. Over the next few years, it will be useful for the Chamber to reconsider its mission and incentive structure to adjust to a demand driven civil society.

Bilateral Chambers of Commerce are expected to appear shortly. The American Chamber of Commerce (AmCham) has already begun to organize locally, and other significant trading and investment partners can be expected to follow suit, or, if already here, to increase the scope of their activities under the liberalized political and economic regime. These chambers are generally more like voluntary business associations, providing a crucial source of information regarding foreign practices, partnering opportunities, and feedback to policy makers issues affecting the commercial community.

d. Foreign Investors Associations
At the time of this writing, Serbia did not yet have a foreign investors associations or council. Such bodies in other countries are an important lobbying group for legal and policy reforms needed to improve the investment environment. It is expected that at least one such organization will arise on its own without donor assistance, because the potential members tend to be significant investors who can afford membership and understand the goals and functions of the such an organization.