WATANI BANK CASE UNEARTHS PERVASIVE CORRUPTION

C O N F I D E N T I A L SECTION 01 OF 02 SANAA 000323

SIPDIS

E.O. 12958: DECL: 02/08/2016
TAGS: ECPS EINV PGOV KMPI CASC YM ECON COM
SUBJECT: WATANI BANK CASE UNEARTHS PERVASIVE CORRUPTION

REF: 2005 SANAA 3609

Classified By: Ambassador Thomas C. Krajeski for reasons 1.4 (b) and (d
).


1. (C) SUMMARY: The Central Bank announced its plan to
liquidate Watani Bank. The decision is being appealed, but
there appears to be little hope of rescuing the failed
financial institution. Watani's Amcit General Manager, Dr.
Hamdani, and seven others are being tried in Yemen's
Specialized Penal Court for crimes in connection to the
bank's collapse. The DCM visited the Attorney General to
inquire about Hamdani's prison conditions, and received
promises that he would be treated well. The case has opened
a window into both public and private sector corruption in
Yemen, making clear that Watani was the rule and not the
exception. END SUMMARY.

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Central Bank Decides to Liquidate
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2. (U) The Central Bank of Yemen (CBY) announced on January
31 that it planned to liquidate Watani Bank. The decision
was temporarily suspended by the Sanaa commercial court,
pending settlement of a counter-suit by Watani's lawyers.
The bank's legal team argues that the CBY did not have legal
standing when it took control of Watani, and violated the
Banking Law in its procedures. Dr. Olafi, CBY Sub-Governor
for Banking Supervision, countered that the liquidity
problems left the ROYG no choice but to close Watani, and
that a full audit by the independent accounting firm Deloitte
and Touche revealed that Watani could not be saved. The case
has now spiraled into a series of suits and counter-suits,
with the CBY encouraging depositors, including the Ministries
of Justice and Health and the Cigarettes and Tobacco Company,
to file their own charges against Watani.


3. (U) February 5 marked the second day of criminal hearings
for Dr. Ahmad Hamdani, former General Manager of Watani, and
seven co-defendants from Watani's board of directors. Two
members of the board are being tried in abstentia after
fleeing arrest (one to Cairo, the other to his tribe),and
another received automatic immunity as a member of the Shura
Council. Judge Nagib Qaderi adjourned the session early,
after repeated interruptions by the prosecution. Qaderi also
insisted that the defense be granted access to key documents
relating to the case, after the prosecution claimed it did
not have a working photocopy machine to provide the materials.

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Claims of Abuse in Prison
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4. (C) The DCM met Attorney General Ali al-Olafi January 30
to discuss the case. The Hamdani family has repeatedly
complained to post that Dr. Hamdani, an Amcit, has been
mistreated in prison. Bail was set for Dr. Hamdani at the
prohibitive sum of YR 47 billion (USD 241 million),
equivalent to the bank's total outstanding loans. His family
has complained that prison guards refuse to allow them to
visit or to deliver food and medication. Hamdani's lawyers
claim they have not been able to consult with their client.
Embassy consular officials were promptly given access when
Hamdani was first arrested. A follow-up visit the week of
February 6 was refused at the prison level, however, and the
matter was referred directly to the AG's office. The AG
assured the DCM that the case was being prosecuted according
to the law, and promised to investigate and correct any cases
of mistreatment. (NOTE: In the criminal investigations prison
where he is being held, the authorities do not provide
prisoners with regular meals. END NOTE).


5. (U) Hamdani and Watani's board of directors face official
charges of "dishonesty, unsecured lending, mismanaging
deposits, and damaging the national economy." The defendants
are also accused of embezzling a total of YR 19.8 billion
(USD 101.5 million),and of insider lending at reduced
interest rates. Dr. Hamdani is also accused of bribing a tax
collector (also on trial) and lending himself YR 611 million
(over USD 3 million) from bank deposits.

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Hamdani a Scapegoat for "Business as Usual" in Yemen
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6. (C) In general, the Hamdani family does not so much deny
the charges as insist that Dr. Hamdani is being unfairly
scapegoated for what amounts to business as usual in Yemen.
Dr. Hamdani's wife admitted that Watani loaned to its own
management and board of directors, but countered that this
true of all commercial banks in Yemen. "Unlike other
borrowers," said Mrs. Hamdani, "my husband is paying the
money back." Hamdani's uncle claimed that all businesses in
Yemen cut deals with tax collectors out of necessity, or else
face retribution from the Tax Authority. He also admitted
that many of Watani's loans were unsecured, but added that
they were made to some of the most powerful figures in Yemen,
including Northwest Military Commander Ali Mohsen. (NOTE:
Bankers often do not have much of a choice when it comes to
providing loans to Yemen's powerful elite, many of which end
up non-performing. END NOTE).


7. (U) The defense further contends that Dr. Hamdani should
not be tried in the Specialized Penal Court, generally
reserved for cases of terrorism and national security.
Hamdani's lawyers believe this is essentially a commercial
matter, without any connection to public institutions or
property. The lawyers contend that the AG chose to try
Hamdani for security crimes, because under the Banking Law,
sentences are limited to one year. They also accused the AG
of over-reaching his power in freezing the assets of Dr
Hamdani's relatives, a point the AG eventually conceded by
releasing the frozen assets.

8. (C) COMMENT: The CBY's decision to close Watani, although
regrettable, was probably the only remaining course of
action, given the bank's total financial collapse. Dr.
Hamdani and his co-defendants, by their own admission, are
guilty of at least some of the charges against them. At the
same time, the case has opened a window into the pageant of
corruption that is Yemen's business environment. Illegal
practices, such as insider lending, are widespread in Yemen's
financial sector and at least three other commercial banks
are thought to face similar liquidity problems. The Tax
Authority is widely regarded as one of the most dysfunctional
ROYG agencies, and most businessmen confess that bribing tax
collectors is a part of doing business. Powerful ROYG and
military officials use their influence to obtain favorable
loans and contracts, without any obligation to abide by the
law. Dr. Hamdani is likely no better or worse than other
businessmen, but was left holding the bag when the shell game
that was Watani Bank finally came to an end. END COMMENT.
Krajeski