NEPAL: ANTI-CORRUPTION AGENCY IN TROUBLE IN FIGHT

C O N F I D E N T I A L SECTION 01 OF 02 KATHMANDU 001370

SIPDIS

STATE FOR SA/INS, SA/RA
DEPT PLEASE PASS TO USAID FOR SA/ANE
LONDON FOR POL/GURNEY, NSC FOR MILLARD

E.O. 12958: DECL: 07/21/2013
TAGS: KCOR EAID PGOV NP GON
SUBJECT: NEPAL: ANTI-CORRUPTION AGENCY IN TROUBLE IN FIGHT
AGAINST BIG BUSINESS

REF: KATHMANDU 1221

Classified By: Ambassador Michael E. Malinowski for reasons 1.5 (b,d).


1. (C) Summary. The head of Nepal's anti-corruption agency,
CIAA Commissioner Surya Nath Upadhyaya, met with the
Ambassador on July 18 to discuss the agency's investigation
into allegations of corruption within Nepal's two
government-owned banks. The cases involve at least five of
the country's largest business houses and many high-level
bank officials. As a result, the CIAA is coming under
increasing pressure from the political elite, banking and
business sectors and the media not to prosecute these cases.
Commissioner Upadhyaya appealed to the Embassy, and the donor
community at large, for its public support of the CIAA's
efforts. Post plans to provide behind-the-scenes advocacy
for this vanguard organization active in promoting government
transparency. End Summary.


2. (C) On July 18, Ambassador Malinowski met with head
Commissioner Surya Nath Upadhyaya of the Commission to
Investigate Abuses of Authority (CIAA). USAID Country
Director and PolOff also attended the meeting. Commissioner
Upadhyaya explained that he had requested the meeting not
only to provide the Ambassador with an update on the CIAA's
pending cases, but also to seek the Embassy's moral and
financial support, particularly in the CIAA's investigation
and prosecution of bank cases (versus property cases)
involving some of Nepal's most influential families.


3. (C) Nepal Bank Limited (NBL) and Rastriya Banya Bank
(RBB),both government-owned banks, dominate the banking
sector in Nepal; approximately 60 percent of loans and 70
percent of deposits nation-wide reside in these two banks.
Due to lack of sufficient capital, two years ago both banks
stopped issuing new loans. After pressure from the World
Bank, in 2001 the Government of Nepal agreed to privatize the
banking industry, and subsequently foreign consultants were
brought in to restructure NBL and RBB. In early 2003, the
foreign consultants brought to the CIAA's attention evidence
of corruption in the handling of bank loans to private
entities. At least five of Nepal's 25 big business houses
have been implicated in these allegations, said Upadhyaya.


4. (C) After six months of work, Upadhyaya confided, the CIAA
has been able to complete investigations into several bank
cases and has found clear evidence of corruption. The basis
for the original loan awards was "shaky," he said. Moreover,
Upadhyaya stated that the loans were extended again and again
so that the original loan amount was doubled and "nothing was
ever repaid." He specifically mentioned the case involving
the Amatya family, who own and operate the five-star Fulbari
Hotel in Pokhara, 180 kilometers west of Kathmandu. Nepal
Bank Limited had awarded the original loan for the
construction and initial operation of the Fulbari Hotel.
After unsuccesful attempts by NBL to extract payments from
the Amatya family for the loan, the bank sought to go after
the family's other assets. However, the other assets are
protected through incorporation elsewhere, Upadhyaya said.
After evaluating the hotel's assets using standards
formulated by the Asia Development Bank, Upadhyaya explained,
a clear case of bad investment, misrepresentation and fraud
was discovered. Moreover, he said, there is evidence that
bank officials involved in granting the loans knew that the
loans would not be repayed. Upadhyaya also suggested that
money for the Fulbari hotel was siphoned off for use in other
projects not covered by the loan.


5. (C) Because these bank cases involve Nepal's most
influential families, the CIAA is under pressure from some
political influentials, the banking and business sectors and
the media not to prosecute. Upadhyaya reported that in early
July, the Federation of Nepal Chambers of Commerce and
Industry (FNCCI) staged a demonstration of at least fifty
people in front of the CIAA building to protest the CIAA's
involvement in reviewing and investigating loans. The media
also have been at the forefront; Upadhyaya expressed his
suspicions that several recent articles in the Telegraph and
People's Review suggesting that the CIAA should not be
involved in bank cases had been paid for and planted by some
of the wealthy families implicated in the cases. Upadhyaya
also indicated that some of the defendents in these cases
were at various times the Ministers under whom he used to
work.


6. (C) The Commissioner concluded the meeting with an appeal
to the Ambassador for his public support of the CIAA's role
in prosecuting bank cases. Upadhyaya said that without the
support of the international community, the CIAA "alone could
not make a difference." He even suggested that he had been
subject to threats, saying "I'm ready to risk my life, but
without your help, I won't get anywhere." Upadhyaya also
requested U.S. assistance in training CIAA prosecutors in
investigation techniques as well as the provision of
equipment, such a lie detectors.


7. (C) Comment. The CIAA has taken an increasingly tough
stance on prosecuting high-level corruption cases.
Commissioner Upadhyaya is a strong leader and has taken an
impartial and professional approach in the investigation and
prosecution of corruption. However, Nepal's highly
politicized and partisan civil society, combined with ongoing
political instability, has significantly challenged the
CIAA's effectiveness. All the large business houses are
involved directly in politics and well-connected within the
political class. Likewise, local publishing houses are
subject to the political persuasion of their owners. To
counter this pressure, Post believes CIAA needs increased
international support. Post plans to provide
behind-the-scenes advocacy as well as a coordinating role in
pushing for more plublic support of the CIAA by the
diplomatic and INGO community in Nepal. End Comment.
MALINOWSKI