BAHRAIN NOT TRANSFERRING OLD IRAQI ACCOUNT FUNDS

C O N F I D E N T I A L MANAMA 000402 SIPDIS E.O. 12958: DECL: 03/24/2014 TAGS: BA EFIN IZ PREL SUBJECT: BAHRAIN NOT TRANSFERRING OLD IRAQI ACCOUNT FUNDS TO U.N.'S DFI - AT LEAST, NOT YET REF: A) MANAMA 187 B) STATE 61794 C) FORD-HEFFERNAN EMAILS 3/16 AND 3/17 Classified By: Robert S. Ford, reason 1.5 B AND D. ¶1. (C) Bahrain will not promptly transfer approximately USD 47 million in funds from old Iraqi-owned bank deposits to the United Nations Development Fund for Iraq (DFI),Finance Minister Saif told Charge on March 20. Charge had urged Saif that the issue had been outstanding since the summer of 2003. He noted that previously Saif had informed us that the funds would be transferred. The Bahraini Government's credibility would suffer just as the American and Bahraini governments are trying to finish negotiations on a free-trade agreement, Charge warned. ¶2. (C) Saif understood the argument, but said transferring the funds would be difficult legally. He said that the two Bahraini banks (Gulf International Bank (GIB) and Arab Banking Corporation) which had held the deposits had had large, uncollectible claims against the Iraqi Government. These two banks years ago had laid claim to the Iraqi deposits to off-set losses on the loans they had extended to the Iraqi government. Charge reminded Saif that per UNSCR 661 of August 1990, the GoB was to have frozen all Iraqi funds in Bahrain. Saif did not dispute this. He observed, however, that the fate of the Iraqi deposits was now a quote legal issue unquote in Bahrain. As such, the Finance Ministry had asked the Bahrain Monetary Agency (the BMA - Bahrain's central bank) for a complete study and report. ¶3. (C) BMA Governor Sheikh Ahmed had told Charge on March 16 that transferring the funds was not a simple matter. Bahraini banks had already counted these deposits against larger losses stemming from bad loans made to Iraq. Transferring the assets now would, he said, require the two Bahraini banks to revise their balance sheets and ultimately their shareholders' profits and capital. ¶4. (C) Deputy Bahraini Finance Minister and Gulf International Bank board member Sheikh Ibrahim al-Khalifa asserted to Charge over dinner March 20 that the banks had taken the offsets in 1992 or 1993. Charge observed that the Bahrain banks' action apparently came after UNSCR 661, but Ibrahim claimed not to know about that resolution. ¶5. (C) Charge followed up on March 24 with the BMA Governor who said that lawyers from the BMA and the two banks will meet next week. He underlined that UNSCRs have legal precedence in Bahrain; the GoB will meet its obligations, he stressed. Charge noted that the USG perceives that obligation to be the transfer of the assets. Sheikh Ahmed reiterated that Bahrain would meet its obligations, but the first step was having the central bank's legal team meet with the banks to determine what exactly was done to the banks' accounts. ¶6. (C) Comment: The Deputy Finance Minister confided that in view of the banks' actions from more than ten years ago, aides to Saif in Bahrain's Finance Ministry had cautioned Saif not to pledge that Bahrain would transfer the funds as he did to us (ref A). Saif did not want a confrontation with the USG then and he assured CDA that he does not now. The Central Bank Governor made the same affirmation. Protestations of goodwill aside, we do not expect quick resolution of this now old issue. It is not clear to us yet what kind of Iraqi loan-loss provisions the banks made in the early 1990s and what the exact legal status of the disputed accounts at the Bahraini banks now is. Above all, we don't yet sense here a willingness at the Finance Ministry or the BMA to compel the two banks to go to their shareholders (Gulf state governments mostly) and tell them they will have to absorb a USD 47 million loss. It would be easier for the Bahrainis, we think, if we had an authoritative interpretation of what UNSCR 661 required exactly of the Bahraini Government with respect to Iraqi bank accounts at GIB and Arab Banking Corporation back in 1991. End Comment. FORD