ALGERIA BANKING SECTOR SUFFERS ANOTHER SETBACK

UNCLAS SECTION 01 OF 02 ALGIERS 002293

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON EINV EIND ETRD EFIN AG
SUBJECT: ALGERIA BANKING SECTOR SUFFERS ANOTHER SETBACK


1. (U) SUMMARY: The Algerian banking system was recently
hit by another scandal of fund embezzlement at the state-
owned National Bank of Algeria (BNA). This comes at a time
when the GoA is making a big push to privatize and reform
the banking sector. According to media sources, between
2002 and 2005 about one hundred complex transfers caused
AD15 billion ($205 million) in losses for the treasury.
Several high-ranking officials have been implicated in the
scandal, including the former CEO of BNA. Six of these men
have been formally charged and placed under legal
proceedings. One official is said to be hiding in Great
Britain and others are expected to be implicated following
additional investigations. Following the past bankruptcy of
private banks due to fraudulent activities, it appears to
be the turn of public banks to cause problems for the GoA.
End Summary

EMBEZZLEMENT OF $205 MILLION
--------------


2. (U) The embezzlement of $205 million was recently
discovered at the state-owned Banque Nationale d?Algerie
(BNA). Some specialists are speculating that actual losses
may reach as high as AD160 billion ($2.19 billion).
According to initial inquiries, between 2002 and 2005 large
amounts were transferred from account to account within the
country to branches in the small cities of Kolea, Cherchell
and Bouzareah. The funds were then diverted overseas to
European banks, making it difficult to identify the
perpetrators. The most recent transaction of $27 million
may have been as recent as September 2005. Minister of
Finance Mourad Medelci declared in an interview on national
Arabic radio that this was unfortunate and announced that
in cooperation with the Ministry of Justice, an
investigation was underway at the Bank of Algeria and at
the Ministry of Finance to uncover the facts. He added
that an enquiry commission composed of Algerian and foreign
experts was currently working on the case.

HIGH RANKING OFFICIALS IMPLICATED
--------------


3. (U) Since the discovery of the fraudulent activities,
six high officials, including the former CEO of BNA and
regional Directors of the Bank?s subsidiaries, have been
charged and placed under legal proceedings. The press has
speculated that the enquiries may reveal the involvement of
additional parties. One official was reported to have fled
the country and is allegedly hiding in Great Britain.
Media reports are claiming that these six officials are
merely ?fall guys? and that the real actors who
orchestrated the theft are still in hiding.

AFTER PRIVATE BANKS, PUBLIC BANKS
--------------


4. (U) The Algerian banking system was first weakened by
the 2003 bankruptcy of the two largest private banks,
Khalifa Bank and Banque Commerciale et Industrielle
d?Algerie (BCIA),owing to violations of bank regulations
and reserve requirements. The Khalifa Bank collapse hurt
millions of ordinary Algerians, revealed serious
deficiencies in government supervision of banks, and
seriously undercut support for bank privatization. It also
threatened other local private banks, despite their limited
size, as clients lost overall confidence in private
financial institutions and the government drew the wrong
lesson from Khalifa?s negligence and proceeded to instruct
public enterprises to deposit their funds only in state
banks. The decision by the GoA to strengthen bank controls
appears to have applied only to local private banks, while
public banks subject to the same regulations continued to
benefit from state ?protection?.


5. (U) Between 1999 and 2002, the Treasury bailed out
public banks to enable them to meet reserve and debt ratio
requirements. Following the recent scandals of Banque de
Development Local (phony accounts causing $164 million in
losses),Banque Exterieures d?Algerie (numerous non-
performing loans) and the Banque Algerienne du Developpment
Rural (questionable loans granted to a big packaging
company),long running efforts by the GoA to modernize and
privatize banks are once more in question. Former Finance
Minister Benachenhou, expressing the disgust, frustration
and mistrust of most Algerians, was quoted in a recent
press article as declaring the current financial system of
Algeria a threat to the security of the state.


6. (SBU) Embassy contacts in the private banking sector
told EconOff that the GOA brought in a French expert to
assist in the ongoing investigation. One source said the
Algerians do not even know how much money was taken. There
are all sorts of figures floating around the banking system
but no one really knows how large this scandal may be.
Asked about the effect this will have on the hopes of the
Algerian government to privatize the BNA, the same source
laughed and said we should first wait to see if the
Algerians are successful with the privatization of the
first bank, Credit Popular d?Algerie (CPA). He added that
BNA privatization is a long shot at best. BNA is a much
bigger bank than CPA with a lot of non-performing public
sector loans. EconOff will follow up with private sector
contacts for additional information and insights following
the as yet unscheduled banking committee meeting that has
been called to address the scandal.

ERDMAN