Identifier
Created
Classification
Origin
06ULAANBAATAR881
2006-12-22 08:18:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Ulaanbaatar
Cable title:  

Shadowy Buyers Near Purchase of Largest Mongolian Bank

Tags:  EFIN EINV PREL ETRD EMIN ENRG MG 
pdf how-to read a cable
VZCZCXRO2190
PP RUEHLMC RUEHVC
DE RUEHUM #0881/01 3560818
ZNR UUUUU ZZH
P 220818Z DEC 06
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC PRIORITY 0618
INFO RUEHMO/AMEMBASSY MOSCOW 1652
RUEHBJ/AMEMBASSY BEIJING 5339
RUEHUL/AMEMBASSY SEOUL 2565
RUEHKO/AMEMBASSY TOKYO 2320
RUEHOT/AMEMBASSY OTTAWA 0373
RUEHML/AMEMBASSY MANILA 1277
RUEHLO/AMEMBASSY LONDON 0073
RUEHVC/AMCONSUL VANCOUVER 0015
RUEATRS/DEPT OF TREASURY WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0429
RUEKJCS/SECDEF WASHDC
UNCLAS SECTION 01 OF 03 ULAANBAATAR 000881 

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM, EAP/EX, EB/IFD, EB/ESC/TFS,
AND CA/EX
STATE PASS USTR, USTDA, OPIC, AND EXIMBANK
USDOC FOR FLAVIN AND ITA
MANILA AND LONDON FOR ADB, EBRD USEDS
JUSTICE FOR AFMLS, OIA, AND OPDAT
TREASURY FOR FINCEN AND WORLD BANK,IMF USEDS

E.O. 12958: N/A
TAGS: EFIN EINV PREL ETRD EMIN ENRG MG
SUBJECT: Shadowy Buyers Near Purchase of Largest Mongolian Bank

Ref: 870 Ulaanbaatar

Sensitive But Unclassified - Not for Internet Distribution.
Contains proprietary business information.



UNCLAS SECTION 01 OF 03 ULAANBAATAR 000881

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM, EAP/EX, EB/IFD, EB/ESC/TFS,
AND CA/EX
STATE PASS USTR, USTDA, OPIC, AND EXIMBANK
USDOC FOR FLAVIN AND ITA
MANILA AND LONDON FOR ADB, EBRD USEDS
JUSTICE FOR AFMLS, OIA, AND OPDAT
TREASURY FOR FINCEN AND WORLD BANK,IMF USEDS

E.O. 12958: N/A
TAGS: EFIN EINV PREL ETRD EMIN ENRG MG
SUBJECT: Shadowy Buyers Near Purchase of Largest Mongolian Bank

Ref: 870 Ulaanbaatar

Sensitive But Unclassified - Not for Internet Distribution.
Contains proprietary business information.




1. (SBU) SUMMARY AND COMMENT:
There are major concerns about the impending sale of Trade and
Development Bank (TDB),Mongolia's largest bank overall and the key
bank for foreign exchange and foreign transactions, to a shadowy
100% Mongolian-owned consortium with unknown financing. The IFC and
the ADB, which are minority shareholders, plan to sell their shares,
fearing a risk to their institutional reputations. The foreign
management firm currently running TDB in accordance with
international standards may also leave after the sale. The central
bank has the power to halt the transaction but, considering its
generally poor regulation of other banks, there are serious
questions about its will to do this or to ensure that after a sale
TDB would continue to meet international standards. The embassy
currently uses TDB for banking transactions, and has expressed
concerns to the Bank of Mongolia both as a depositor and as an
observer worried about the potential negative influences of a bad
sale of Mongolia's largest bank for Mongolia's economic development
and risks posed to its financial system's stability. END SUMMARY
AND COMMENT.

Bank for Sale
--------------


2. (SBU) Trade and Development Bank is the key Mongolian financial
institution servicing international accounts and transactions,
holding nearly 70% of Mongolia's dollar and foreign currency
deposits. The bank currently nets US$10 million in annual profit,
which is a 25% return on its US$40 million in shareholder equity.
TDB is currently owned by a consortium led by U.S.-based metals
trader Gerald's Metals of Stamford, Connecticut, which owns 64%.
The Asian Development Bank (ADB) and the International Finance

Corporation (IFC) each own 7.5%. The remaining 21% is owned by
identifiable Mongolian private citizens.


3. (SBU) The ADB and IFC only invested in TDB following an extensive
review process that certified the bank's financial stability and
commitment to following the best international practices for
transparency and accountability. TDB is run for the owners by a
management team from the Netherlands-based ING Financial
Institutions. It was these certifications and management provisions
that led the United States Disbursing Officer to select TDB to
handle most of its banking arrangements in Mongolia, including
disbursement of payrolls and off-site payment for visa processing
(scheduled start-up, January 2007). (Note: Embassy has begun to
examine alternatives to TDB.) In addition to the US, almost all
other multilateral donors (ADB, WB, UN, etc.) use TDB for their
financial transactions. According to local banking experts, there
is currently no ready substitute to handle the volume of foreign
exchange transactions dealt with by TDB. These experts say that a
disruption of the bank would be a serious impediment for Mongolia's
ability to transact normal business.


4. (SBU) Gerald's acquired its majority share in a privatization of
the TDB by the Government of Mongolia (GOM). The company has always
stated that, being a metals trader, it had no long-term interest in
running a bank in Mongolia. It saw the bank as a stepping stone to
achieving stability in its metals trading activities, especially in
acquiring copper concentrate from Mongolia, and would sell its TDB
stake at the first propitious opportunity. This opportunity arose
over the last two months in the form of a 100%-Mongolian-owned
consortium that seems willing to pay the reported US$70 million
purchase price for shares of Gerald's and other stakeholders.

Beware of the Buyers

ULAANBAATA 00000881 002 OF 003


--------------


5. (SBU) However, aspects of the deal have raised flags among
members of the financial community and TDB's minority shareholders.
First to complain was the American CEO of TDB's chief competitor,
Khan Bank (KB). Japanese-owned and American-operated, Khan Bank has
the largest branch and Mongolian Currency deposit base in Mongolia.
Khan Bank had hoped to acquire TDB itself, but found itself locked
out by Gerald's decision to sell to the Mongolian consortium. Khan
Bank complained to post about the sale, noting that it could neither
identify the buyers nor the source of their funds.


6. (SBU) Post then went to other shareholders and sources to confirm
the sale and its nature. IFC declined to respond to post inquiries
about its response to the sale, only confirming that a sale was
occurring and that IFC had concerns about it. The ADB was more
forthcoming about its concerns. The ADB shareholder representative
confirmed that the bank is being purchased by a consortium led by
Capitron Bank and Ulaanbaatar Bank. A single press account of the
sale also identified these institutions as the prime buyers.
(Comment: In post's view, both banks are poorly run with real
default loans which are believed to be extremely high. An MP with
an unsavory reputation is believed to be the real major owner of
Capitron -- a belief lent substantial credence by the MP's reported
beating last year of a senior civil servant who is a small
shareholder in Capitron, after the official declined to sell the MP
his shares.) In addition to these two banks, the ADB and other
sources confirmed that a separate block of shares, some 8% held by a
Mongolian citizen, had been sold to a woman whose identity no one
could conclusively affirm. Overall, neither post nor other credible
local sources has been able to identify the purchasers with any
certainty.


7. (SBU) The European Bank of Reconstruction and Development
representative (EBRD) voiced extreme concern about the lack of
transparency in all aspects of the sale. The EBRD representative
told emboff that he had gone to both the IFC and ADB with a proposal
that the EBRD buy Gerald's shares outright and run the bank with the
two multilaterals. However, both organizations nixed the idea
because, according to the EBRD, they wanted out of an arrangement
that no longer suited them.


8. (SBU) A TDB executive told post he had been kept in the dark by
Gerald's about the specifics of the deal until last week. The
executive revealed that the two banks will be minority shareholders
and that the bulk of the shares will be purchased by a private
Mongolian citizen, whose identity he declined to reveal until the
deal was formally signed and approved by all shareholders at a
meeting to be held on December 28, 2006.


9. (SBU) The executive related that the CEO of one of buying banks
had asked him to stay on. The CEO asserted that the new owners
wanted to continue to run TBD as Gerald's had, adhering to the best
international financial and reporting practices. ADB confirms that
the buyers -- through Gerald's -- had expressed the same desire to
the ADB, asking ADB to identify a Western management team once ING's
contract to run TDB expires. The TDB executive expressed
reservations about these sentiments, noting that neither Capitron
nor UB City Bank are currently following these practices, and that
the private buyer has no apparent experience running a bank.


10. (SBU) The TDB executive noted that both the IFC and the ADB had
the right to stop the sale if they had reservations of the quality
of the buyers, and asserted that therefore the two institutions must
have been satisfied with their bona fides. By contrast, the ADB
representative noted to commoff that continued association with such
murky dealmakers could harm ADB's reputation, and thus that it is
better to take the money and depart.


11. (SBU) The TDB executive asked how the buyers might address
concerns that the USG had about the new ownership. Commoff noted

ULAANBAATA 00000881 003 OF 003


that much of the problem had originated from the combined failure of
Gerald's and the buyers to reach out to their customers in the media
and more personally to explain the nature of the sale. The focus on
secrecy had created an unhealthy atmosphere of doubt about the real
intentions of both buyer and seller, which undercut statements that
the new owners wished to continue running the bank according to best
practices. Good faith gestures of openness to customers, among
which TDB numbers the USG, might lessen our deep concern.

The Position of the Bank of Mongolia on the Sale
-------------- ---


12. (SBU) On December 20, DCM and Senior Commercial Assistant
discussed the proposed sale of TDB with Mongolia (BOM) Head of
Supervision Ganbaatar, the country's banking regulator. Emboffs
asked about BOM's plans to supervise what promises to be the largest
commercial transaction in Mongolia's modern history. Post raised
two concerns: the identity of the buyers and their source of
funding remains unclear; and the commitment of the buyers to follow
best international best practices is unknown.


13. (SBU) Ganbaatar acknowledged the validity of these concerns and
said that the BOM has been in un-official contact with the sellers
and buyers. However, the official said, BOM had not begun its
formal review and would not do so until TDB officially requested
such a review of the in-coming owners' bona fides. Once the
official request was made, the official stated, Mongolian banking
law requires each buyer to prove his fitness to run any bank. This
requires divulging sources of financing, criminal records, banking
experience, etc. BOM's supervision department would lead the
review, but would draw heavily on the resources of the newly created
Financial Investigative Unit (FIU). (Note: The FIU was created as
part of the recently passed anti-money laundering law. However,
although it has a new director, the agency has no staff to conduct
any reviews at this point and there remains no date for when the FIU
will become fully operational.)


14. (SBU) Ganbaatar stated explicitly that BOM could ban the sale of
TDB to shareholders it found unsuitable, but acknowledged that, over
the last six years, BOM has not disciplined any bank for malfeasance
or non-compliance with the banking laws and regulations, even in the
face of clear evidence of such abuses. Emboffs noted that the bank
had a new governor and regulatory team that might take a different
tack than the regime of ex-BOM governor Chuluunbat, and that the TDB
transaction would prove an interesting test of BOM's commitment to a
well-run banking system committed to best practices. The BOM
official agreed that the size, scope, and importance of TDB made
their coming assessment of the buyers an important milestone for
their agency.

Minton