1. (SBU) On August 19, Nepalese Police arrested an
administrative staff member of the Pakistani Embassy,
allegedly carrying counterfeit Indian currency. The staff
member was released into the Pakistani Ambassador's custody
and deported over the weekend. The Pakistani Embassy denies
all the charges and alleges that this was an Indian
Government setup. This is the fourth incident in the past
five years involving Pakistani Embassy personnel with
counterfeit currency or explosives. The Indian Ambassador
has requested the Government of Nepal (GoN) to reduce the
size of the Pakistani mission here. Continuing security
concerns involving Pakistani nationals and embassy have led
the GoN to conclude that it should not reestablish civil air
links with Pakistan. End summary.

Caught Red-Handed
==================



2. (U) On August 19, Nepalese Police arrested Mohammed
Masood (a.k.a. Mustafa), an Upper Division Clerk of the
Pakistani Embassy, at a restaurant in Kathmandu. He is part
of the Embassy's administrative staff and an official
passport holder. Masood reportedly was found to hold 90
counterfeit Indian Rupee 500 notes (a total of Indian Rupees
45,000, roughly USD 990). After over seven hours of
questioning, Masood was handed into the custody of the
Pakistani Ambassador at 3 am the next morning, with the
reported understanding that he would leave the country.
Masood stated to the local press that he was framed and that
the counterfeit currency was planted on him by the Police.
The Embassy's press secretary, Kamal Ahmed, issued a
statement denying the allegation that Embassy staff possessed
counterfeit currency. Ahmed counter-charged that the arrest
was a result of "opposition forces." (Comment: Ahmed's
statement was intended to refer to the Government of India.
End comment.) He also claimed that the arrest was intended
to divert attention from the arrest of two Indian businessmen
who had been caught earlier for illegal currency exports.



3. (C) The Nepalese police confirmed to Embassy officers
Masood's arrest for possession of counterfeit currency. The
Police had established that at least ten of the ninety 500
Indian Rupee notes were counterfeit. While Masood has been
released, the Police report that their investigation
continues. Masood was deported over the weekend.

Pakistani Ambassador Refutes Charges
=====================================



4. (SBU) Pakistani Ambassador Zamir Akram reported to the
DCM on August 22 that the press had the case all wrong.
According to Akram, Masood was shopping in the New Baneshwor
area of Kathmandu when he was confronted by Police. The
Police led him into a restaurant where they searched him,
finding nothing. Akram states that the Police then planted
an envelope of cash on Masood and took him to Kathmandu's
central jail. Akram expressed his frustration at not being
called by the Nepalese Police and only receiving a report of
his disappearance from Masood's wife. Akram went to the
jail, where the Police officials denied that Masood was in
their custody. After a call to Nepalese Foreign Secretary
Madhu Raman Acharya, Masood was finally led out of the jail
and placed into Akram's custody. When the DCM asked where
the case stood, Akram said his understanding from talking
with the GoN's Foreign Ministry was that the case was closed.
In his opinion, "our friends to the south" (a.k.a. India)
had set up up Masood using the Nepalese Police.

Indian Ambassador Requests Pakistan Reduce Presence
============================================= =======



5. (U) At a press conference on August 26, Indian Ambassador
Shyam Saran requested the GoN to reduce the size of the
Pakistani Embassy, alleging that the Embassy housed Pakistani
intelligence officers. Saran argued that Pakistani
representation in Kathmandu should be at par with Nepalese
representation in Islamabad. During the question and answer
period, an astute reporter asked if Indian representation in
Kathmandu would also be reduced to match Nepalese
representation in New Delhi. The Ambassador had no ready
response. Later in the day, a press statement by the
Pakistani Embassy noted that the Indian Embassy in Kathmandu
has a staff of 300 personnel compared to the Pakistani's
"skeleton staff."

A History of "Shenanigans"
===========================



6. (U) This case is the fourth such instance involving staff
at the Pakistani Embassy in the last five years:

-- On January 3, 2002, Upper Division Clerk Diraj Ahmed Siraj
was arrested in Kathmandu with 9,200 dollars in counterfeit
U.S. currency and 47,000 counterfeit Indian rupees
(approximately USD 1000).

-- On April 12, 2001, First Secretary (Consular) Mohd Arshad
Cheema and his wife Rubina Cheema were arrested in Kathmandu
with counterfeit Indian rupees and 16 kgs of RDX explosives.

-- November 1998, Nepalese Police arrested Upper Division
Clerk Asam Saboor in Kathmandu for attempting to exchange
50,000 counterfeit Indian rupees.

Nepalese Concern Limiting Commercial Air Links
============================================= ==



7. (C) Nepalese concern with the flow of illegal activity
from Pakistan to Nepal has led the GoN to prohibit Pakistan
International Airways (PIA) flights to and from the country.
Director General of Civil Aviation Upendra Dhital and Joint
Secretary for Civil Aviation Nagendra Ghimire told EconOff

SIPDIS
that PIA would not be allowed to reenter Nepal's aviation
market due to security concerns. The two cited the 1999
hijacking of an Indian Air jetliner from Kathmandu's
international airport and the continuing illegal conduct of
Pakistani Embassy members as reasons for the decision.

Comment
========



8. (C) We are not in a position to judge the merits of
Masood's claims to have been "set up" by the Indians. The
Nepalese Chief of Army Staff told the DCM that RAW, India's
external intelligence agency, is very active in Nepal and
could have been involved in Masood's arrest. He had no
doubt, however, that Pakistan uses Nepal as a distribution
base for currency, real and counterfeit, to Kashmir and other
parts of India. This incident will only reinforce the
Government of India's repeated complaints that Pakistani
intelligence agents use Nepalese territory to subvert Indian
interests. The charges and counter-charges have subsided for
the moment, but we expect that Nepal will continue to remain
a peripheral theater for Indo-Pak tensions.
MALINOWSKI