NEPAL: UPDATE ON MAOIST SOURCES OF FINANCING

S E C R E T SECTION 01 OF 03 KATHMANDU 001175

SIPDIS

DEPT FOR SA/INS
LONDON FOR CGURNEY
NSC FOR MILLARD
TREASURY FOR OFAC/NEWCOMB AND TASK FORCE FOR TERRORIST
FINANCING
TREASURY ALSO FOR GENERAL COUNSEL/DAUFHAUSER AND DAS JZARATE
JUSTICE FOR OFFICE OF THE DEPUTY ATTORNEY GENERAL/DLAUFMAN
SECDEF FOR OSD/ISA LILIENFELD

E.O. 12958: DECL: 06/19/2013
TAGS: PGOV PINS PTER NEPAL'>NP
SUBJECT: NEPAL: UPDATE ON MAOIST SOURCES OF FINANCING

REF: A. KATHMANDU 1099

B. KATHMANDU 567

C. KATHMANDU 1133

D. 2002 KATHMANDU 2254

E. 2002 KATHMANDU 2306

Classified By: DCM Robert K. Boggs for reasons 1.5 (b) and (d).

Summary
========


1. (S) Despite the agreed terms of the cease-fire with the
Government of NEPAL (GoN) barring extortion, Maoists have
continued to press businesses and local residents for
"donations," increasing both the breadth and scope of their
demands. In areas lacking a government presence, the Maoists
have begun to collect taxes and royalties on natural resource
harvests and skim proceeds from cannabis smuggling. Contrary
to earlier reports (refs D and E),the Maoists have lowered
their profile in garnering funds from remittances. The GoN
has failed to reduce Maoist access to funds and does not
appear to be in a position to do so in the near-term. If
reports are to be believed, Maoist fund-raising has increased
since the commencement of the cease-fire. Some sources
indicate that these funds may be intended to build up
military supplies for a resumption of hostilities. End
summary.

Overview
=========


2. (U) NEPAL's Maoists have adopted several methods to fund
their activities. The following provides a summary of
Mission information on Maoist sources of finances, including
extortion, taxation on natural resource harvests, drug
trafficking, and remittances. Also addressed are the limited
activities of the Government of NEPAL (GoN) to restrict
Maoist finances.

Extortion
==========


3. (C) NEPAL's Maoists have continued to extort money and
food despite specific prohibitions in the March 13 Code of
Conduct adopted as the basis for the current cease-fire (ref
A). Over the past three weeks, Maoist cadre have increased
their efforts by demanding more funds and broadening their
number of targets. According to Sandip Shah, General Manager
of Bhote Koshi Power and member of the wealthy Soaltee Group
of Companies, the business group has been asked repeatedly
for funds. The amounts demanded has tripled since the
beginning of the cease-fire. Embassy interlocutors who
reside in Kathmandu Valley report that the Maoists have
launched widespread extortion drives on a house-to-house
basis, with demands ranging up to USD 1,300.


4. (SBU) Throughout rural NEPAL, Maoists systematically
extort both food and funds to maintain their local forces.
At a June 13 meeting of international donors to NEPAL,
attendees reported an up-tick in Maoist extortion activities
nationwide and noted areas of particular concern:
-- The German development agency GTZ reported that Maoist
extortion from project staff in Ramechap District (60 kms
East of Kathmandu) was increasing and may force the project
to shut down;
-- The UN Security Office saw a substantial increase of
extortion in Dhankuta District (541 kms East of Kathmandu);
and
-- GTZ and the UK Department for International Development
(DfID) reported a sizable increase in extortion from project
staff in Surkhet District (in the Maoist-affected midwest)
over the past month.
At the same meeting DfID staff noted that villagers in Humla
(a district in NEPAL's northwest) expressed frustration that
after six years of Maoist local governance and extortion, no
services are being provided nor development taking place.

5. (C) An independent AmCit consultant provided the Embassy
with a pre-publication draft of a paper on NEPAL's Maoists.
In a footnote, he details some of the extortion (termed
"revolutionary taxation" by the Maoists) he observed in
Maoist controlled areas. Small shopkeepers in Rolpa (a
midwestern district in the Maoist heartland) report payments
of USD 0.65 per month; and government employees working in
Maoist "occupied areas" report payments equal to one day's
wages per month, USD 1.30 to 2.60. He also reports that the
Maoists are adopting kidnapping for ransom. (Note: The
Mission has no confirmation of the use of kidnapping for
ransom as a method of fund-raising. End note.)


6. (C) The Maoists typically defend their continued practice
of extortion by claiming funds so collected are "voluntarily"
donated. When a representative of a prominent American firm
pressed the issue, he was told that traditional sources of
financing--including bank robberies that reportedly had
netted them USD 6 million--have been restricted by the
cease-fire, requiring the Maoists to fund-raise in other
ways. In this particular instance, the Maoist representative
stated that he took direction from Maoist negotiator and
Central Committee member Krishna Bahadur Mahara (ref A).

Taxation of Natural Resource Harvests
======================================


7. (SBU) The Embassy has learned through both press reports
and visits to rural areas that the Maoists are collecting
taxes on harvests of natural resources. During a tour of
Doti (a district in NEPAL's far-west),the Ambassador was
told by a district forestry official that the Maoists had
taken over ranger posts and are now collecting fees for
harvesting forest products. Forestry fees were previously
collected by forest rangers and placed in government coffers
(ref B). In an extreme case, the press reported June 14,
Maoists in Baglung (a district in NEPAL's midwest) were
collecting royalties on the harvest of Yarchagumba (an
herbal/insect product with a reported effect similar to
Viagra). The rare herb ranges in price from USD 1,300 to USD
1,800 per kg in India and China. Under normal circumstances,
the government collects royalties of USD 260 per kg. The
destruction of forestry offices in the district has left a
void in the government's collection capacity which the
enterprising Maoists are only too eagerly filling. The press
also regularly reports that Maoists stop illicit timber
harvesters in NEPAL's lowlands and request funds for the
harvesters' passage. Those who pay are normally left alone,
while those who refuse are usually beaten and have their
timber confiscated. (Comment: The taxation of natural
resource harvests is difficult to generalize. Maoist
activities reflect the resources available in their area of
operation and the level of government presence.)

Drug Trafficking
=================


8. (C) Superintendent of Police for the Narcotic Drug
Control Law Enforcement Unit Hemant Malla reported to poloff
and econoff that Maoist insurgents in the middle hills of
NEPAL levy a tax on both the cultivation and transportation
of cannabis. Malla stated that most of the cannabis is
smuggled to India. He went on to report that there is some
anecdotal evidence that the Maoists are taking a cut of from
the Indian smugglers, but of an unknown amount. One source
told Malla that a 35 percent tax is being levied on cannabis
sold to China through rural Dolpa (ref C). The Dolpa route
is not normally a significant route for cannabis smuggling,
due to the lack of roads. However, the closure of the
NEPAL-China border due to Severe Acute Respiratory Syndrome
(SARS) led to an increase of cultivation and shipment through
Dolpa.

Remittances
============


8. (S) Embassy reports of increasing Maoist interference in
remittances (refs D and E) during the November/December 2002
timeframe could not be reaffirmed during interviews with
contacts in June 2003. Reports in late 2002 alleged that
Maoists were designating individuals to be sent overseas for
employment, were recruiting members from overseas to send
remittances for the Maoist cause, and extorting remittances
from recipient family members in NEPAL. In interviews in
June 2003, however, interlocutors reported not receiving
extortion requests. (Note: The lack of Maoist contact with
manpower agencies and others involved in NEPAL's growing
remittance business does not match recent reports of the
Maoists' fund-drive activities. This change in Maoist
approach came during a period when remittances were labeled
in press and government statements as the only healthy
economic sector. The Embassy will continue to expand
contacts in this area in an attempt to corroborate and
account for this apparent shift. End note.)

GoN Actions
============


9. (C) The GoN has done very little to suppress Maoist
fund-raising or to seize Maoist assets. According to
Executive Director Rajan Singh Bhandari, NEPAL's central bank
(NRB) seized roughly USD 65,000 from accounts of prominent
Maoists in early 2002. All of the accounts were held at the
Agriculture Development Bank of NEPAL. The NRB has made no
subsequent seizures and lacks a investigative arm to seek out
further Maoist assets. The NRB can claim, however, some
success in moving remittance transfers from the traditional
hundi/hawala to formal banking channels. The NRB reports
that this change increased its foreign exchange holdings by
twenty-five percent in the last fiscal quarter.

Comment
========


10. (S) Maoist claims that they can no longer fund their
activities through traditional sources, i.e., bank robberies,
belies the scope of their financial operations. Extortion in
Kathmandu Valley and the increase in the demands on NEPALese
business groups could well make up for the amounts stolen
over the past seven years. It appears that the GoN, out of
fear of hampering the peace process, has restrained its
police forces from arresting Maoist extorters. The lack of
GoN pressure may have emboldened the Maoists to grab as much
as they can during the peace process. The level of
fund-raising seems to have increased beyond the revenues
required to maintain Maoist cadres in the field. Reports of
excesses funds has fueled speculation that the Maoists may be
using the money to restock and re-equip in possible
preparation for a resumption of hostilities.
MALINOWSKI