TREASURY U/S LEVEY MEETS WITH ADIA

C O N F I D E N T I A L SECTION 01 OF 02 ABU DHABI 000408

SIPDIS

SIPDIS

STATE FOR NEA/ARPI (RSMYTH)
STATE PASS USTR FOR SDONNELY, DBELL, KCLAYMAN
TREASURY FOR SLEVEY, RWERNER, JHINDI, WLANGFORD, PBROWN

E.O. 12958: DECL: 08/13/2015
TAGS: EFIN PTER ETRD ECON AE
SUBJECT: TREASURY U/S LEVEY MEETS WITH ADIA

REF: 05 ABU DHABI 4105

Classified By: AMBASSADOR MICHELE J. SISON FOR REASONS 1.4 B & D


1. (U) This is an action request. Please see paragraph 9.


2. (C) Summary. On January 24, Treasury Under Secretary
Stuart Levey met with Abu Dhabi Investment Authority (ADIA)
officials to discuss security of assets and tax issues in the
context of ongoing U.S. - UAE FTA negotiations. ADIA
officials explained that they were not seeking a prohibition
on freezing UAEG assets or even prior notification, but that
they were seeking a transparent way to resolve any asset
freezes that might occur. In response to U/S Levey's
questions, they acknowledged that the risk of asset freezing
was slight, but stressed that they were dealing with a
perception on the part of Emiratis that the risk was greater
than it might be in reality. They also implied that
resolution could increase ADIA's investments in the U.S.
(currently around a third of their portfolio). End summary.


3. (SBU) Treasury Under Secretary for Terrorism and Financial
Intelligence Stuart Levey met with Abu Dhabi Investment
Authority (ADIA) Executive Director Salem Al-Mazroui, ADIA
Senior Legal Advisor William Brown, and ADIA Tax Advisor
Robert Peake on January 24 to discuss security of assets and
tax issues related to the Free Trade Agreement being
negotiated with the UAE. Al-Mazroui noted that ADIA had had
good discussions with representatives from Treasury,s Office
of Foreign Assets Control (OFAC) during the January 16-17 FTA
finance discussions in Washington, but also wanted to explain
their concerns to U/S Levey (Note: OFAC Director Werner was
not at the Jan 16-17 meetings). U/S Levey replied that the
USG viewed the UAE as partners and that, even without an FTA,
the UAE should always feel free to discuss its concerns with
the USG. Al-Mazroui stated that the tax discussions had gone
well from ADIA's specific point of view, though he cautioned
that he was not speaking for the UAEG as a whole on tax.


4. (SBU) Al-Mazroui then turned the discussion to security of
ADIA's assets from freezing or seizure. He explained that he
wanted ADIA and the UAEG in general to feel more comfort that
the U.S. was a safe investment destination. He emphasized
that every time the U.S. froze assets it had an impact on
investor confidence. U/S Levey acknowledged the risk to
investor confidence, but stated that he believed and knew
that Treasury Secretary Snow believed that the U.S. was still
a safe and appealing investment destination, and were
committed to keeping it that way. Levey added that --
statistically -- the risk of ADIA assets being frozen was
slight, adding that he understood that the UAE had been
affected when the U.S. froze the assets of ARBIFT. Levey
asked if Al-Mazroui could enlighten him on where ADIA saw the
risk.


5. (C) Al-Mazroui noted that as a global financial
institution, ADIA invested everywhere and could wind up
partnering with a country that the U.S. would later decide to
act against. He turned the discussion over to Brown to give
a more detailed description of ADIA. Brown explained that
ADIA was the investment arm of the Emirate of Abu Dhabi and
the way that Abu Dhabi "monetized" surplus funds from its oil
exports. As such, he added, ADIA had a special status,
participating as part of the UAE negotiating team in tax
treaty or FTA negotiations, for example. He said that ADIA
was one of only three Abu Dhabi government entities that were
responsible for the Emirate's revenues and expenditures. The
Abu Dhabi National Oil Company (ADNOC) sends surplus funds to
ADIA. ADIA invests and manages the funds -- and serves as a
"checkbook" for the government. The Abu Dhabi Department of
Finance handles the budget for the Emirate of Abu Dhabi and
is the only organization that can draw from ADIA's assets.
(Note: Brown's remarks track what the Under Secretary at the
Department of Finance has told us. ADIA gets any budget
surplus and finances any deficit. With recent high oil
prices, Abu Dhabi's budget has moved back into surplus and
Abu Dhabi is again paying into its investment fund. Because
the Emirate of Abu Dhabi directly and indirectly funds much
of the UAE's federal expenditures, ADIA is by extension the
"check book" for the UAE. End Note.)


6. (C) Brown acknowledged that the risk to ADIA of having its
assets frozen was slight. It was the perception of risk,
however, that ADIA was trying to deal with. Brown said that
over 80% of ADIA's large portfolio was in market traded
securities. The rest was in real estate, private equities,
and other alternative investments. Generally, he said,

ABU DHABI 00000408 002 OF 002


ADIA's strategic plan called for investing about one-third of
its assets in the U.S. As the portfolio increased, however,
he explained that ADIA had difficulties maintaining or
expanding its U.S. investment base if it could not moderate
its investment risk (including the risk of an asset freeze.)
Peake added that as ADIA continues to develop its asset base,
it could invest in a joint venture or private equity
arrangement, where the USG had -- or developed -- concerns
about some of the partners. In that case, he said, ADIA's
assets -- and reputation -- could be compromised. Ideally,
the USG would let ADIA know of its concerns and ADIA could
extricate itself. He speculated that a lack of clear
communication had hindered the UAEG's and the USG's ability
to resolve the freeze of ARBIFT's assets.


7. (SBU) Brown explained that ADIA was looking for a
consultation mechanism should assets be frozen. He noted
that Central Bank Governor Sultan Nasser Al-Suwaidi (a former
ADIA employee) had wanted the U.S. to provide prior
notification before freezing any assets, but that ADIA had
argued that the USG would not be able to agree to this
condition. ADIA drafted a side letter to the FTA, which the
UAEG presented in the May 2005 FTA negotiating round. The
letter states "No party shall continue to hold any such
assets which it contends are subject to seizure for a period
greater than 30 days without establishing the propriety of
such seizure under standards and procedures to be mutually
agreed upon not later than 180 days following the entry into
force of the Agreement (FTA)." Brown briefly described what
he saw as the "standards and procedures." What the UAE was
asking for was an "obligation to consult" after assets were
frozen, but not an "obligation to remedy." If the U.S.
wanted to continue to freeze the assets of an ally after
high-level consultations, he noted, it could continue to do
so. The consultation mechanism, however, would give a
transparent way for both sides to try and resolve the
problem. Brown suggested that the first round of
consultation would be the "Financial Services Committee"
provided for in the FTA. The next level up would likely be
at the undersecretary level (or possibly the ministerial
level for the UAE) and the third level would be at the
political level (i.e., the Secretary of Treasury for the
U.S.).


8. (SBU) U/S Levey said that he understood ADIA's concerns,
althugh he stressed that the risk appeared to be
"miiscule." He said that he was open to the idea of rying
to work something out that could address the UAE's concerns,
but stressed that any decision would need to be an
interagency one.


9. (C) Action Request: This continues to be an important
issue for the UAE. Post requests Washington interagency
guidance as to whether the UAE's proposal is workable or
desirable, both from a bilateral relations perspective and
from the perspective of removing one of the UAE's concerns
impeding negotiations of an FTA with the U.S. End Action
Request.
SISON