Identifier
Created
Classification
Origin
07ALGIERS129
2007-02-04 13:12:00
CONFIDENTIAL
Embassy Algiers
Cable title:  

SKEPTICISM HAILS BEGINNING OF KHALIFA BANK TRIAL

Tags:  EFIN ECON PGOV AG 
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SIPDIS

SIPDIS

E.O. 12958: DECL: 02/04/2017
TAGS: EFIN ECON PGOV AG
SUBJECT: SKEPTICISM HAILS BEGINNING OF KHALIFA BANK TRIAL

REF: ALGIERS 00100

Classified By: DCM Thomas F. Daughton; reasons 1.4 (b) and (d).

C O N F I D E N T I A L ALGIERS 000129

SIPDIS

SIPDIS

E.O. 12958: DECL: 02/04/2017
TAGS: EFIN ECON PGOV AG
SUBJECT: SKEPTICISM HAILS BEGINNING OF KHALIFA BANK TRIAL

REF: ALGIERS 00100

Classified By: DCM Thomas F. Daughton; reasons 1.4 (b) and (d).


1. (C) Summary: The trial stemming from the collapse of the
Khalifa Bank empire started January 8 without the key
defendant, bank founder Abdelmoumen Khalifa, who remains in
exile in London. Some of Algeria's most powerful ministers
and other economic luminaries have been called as witnesses,
but Algerians remain skeptical that the trial will
incriminate those truly responsible and are frustrated about
the seeming incompetence of Algerian regulators. Conspiracy
theories abound, but most Algerians seem to believe that the
bank's demise was politically motivated. Indicative of the
GoA's sensitivity over the case has been the Algerian
reluctance officially to demand Khalifa's extradition from
the UK, according to the British Embassy in Algiers. End
Summary.

"SCANDAL OF THE CENTURY"
--------------


2. (U) The Algerian media has regularly referred to the
collapse of Khalifa Bank as the "scandal of the century."
Within a few years of its establishment in 1999, the bank had
60 branches and provided services to Algerian consumers that
they had never seen before -- like credit cards. Moreover,
what started as a bank soon expanded into a multinational
empire consisting of an airline, television stations,
construction firms and telecom holdings. After billions of
dollars went missing and thousands of ordinary Algerians lost
their savings, President Bouteflika authorized the
liquidation of the bank in 2003. After it folded, the
Algerian government passed an August 2003 ordinance raising
the capital requirements of banks and requiring state-run
industries to do business exclusively with public sector
banks. The government subsequently pulled the licenses of
seven banks and financial establishments that did not meet
government standards. In addition, the government
established a financial intelligence unit and tightened its
money-laundering and counter-terrorist financing legislation.

TRIAL BEGINS
--------------


3. (U) The trial of 104 conspirators for fraud, money

laundering and corruption related to the collapse of the
Khalifa Bank empire started January 8 in Blida, a town just
south of the outskirts of Algiers. Absent was the most
prominent of the defendants, bank founder and erstwhile
pharmacist Abdelmoumen Khalifa, who remains in exile in
London and is being tried in absentia. While the other
defendants in the trial are mainly mid-level functionaries
from the defunct bank and various state-run industries, the
witnesses called to testify made up a veritable Who's Who of
the Algerian economic scene. Three current ministers, past
and present heads of the Algerian central bank, and the
leader of Algeria's largest trade union have all traveled to
Blida in recent days to testify.


4. (U) Revelations from the trial thus far have been minor
compared to the magnitude of the scandal. When Khalifa Bank
came to its crashing demise, an estimated USD 3 billion had
been embezzled. The disclosure during the trial that the
nephew of Movement for a Society of Peace (MSP) head and
Minister of State Soltani had been hired by Khalifa Airways
in Paris, or that Minister of Employment and National
Solidarity Abbas was granted a limitless Khalifa Bank credit
card, pale in comparison. The Algerian press also reported
that a firm employing a niece of President Bush had received
money from Khalifa on two occasions in 2002 (reftel).

CONSPIRACY THEORIES ABOUND
--------------


5. (U) Many Algerians believe that the bank collapsed for
strictly political reasons and that the Algerian government
does not want Abdelmoumen Khalifa to return to Algeria lest
he implicate politicians or high-ranking military officers.
In an interview on Al-Jazeera from London January 31,
Abdelmoumen Khalifa pointed the finger directly at President
Bouteflika. "Frankly, the state has nothing to do with it,"
announced Khalifa. "It is with Bouteflika that I am having a

problem. He did everything." This sentiment was most
clearly expressed by a former Algerian diplomat in London,
Larbi Zitout, who told the BBC that Khalifa Bank had been a
tool of high members of the Algerian military and
intelligence services to launder money, finance militias,
purchase weapons, and buy political loyalty. Zitout declared
that "as long as the generals continue to be the real
decision makers in Algeria, the 'trial' will not reach its
end. What we will see is a sentencing of some ordinary
people -- the small fish if you want -- those who steal one,
two, or even 10 million dollars; those who smuggled something
here and something there will be jailed for 10 or 15 years
and some ministers who have been mentioned will be dismissed."


6. (C) In a January 31 conversation with us, Mohammed
Ghernaout, a financial expert who spent most of his career at
Algeria's central bank, agreed that the downfall of Khalifa
was for strictly political reasons and that the trial
currently underway would lead nowhere. Ghernaout is the
author of "Financial Crises and Failures of Algerian Banks:
From the Petroleum Shock of 1986 to the Liquidation of
Khalifa and BCIA Banks." He conceded that Abdelmoumen
Khalifa had made some improper business decisions, but
claimed that his downfall was largely the result of a deal
struck between the Algerian leadership and French
intelligence to open up the Algerian market to French banks.
He told us that Khalifa had simply gotten too big too fast.
Ghernaout argued that the French wanted a piece of the action
and capitalized on Abdelmoumen Khalifa's reputation as a
reckless, jet-setting playboy to support their case that the
bank needed to be brought down. (Note: Ghernaout's prophecy
has largely come true. In the past few years, French banks
Societe Generale and BNP Paribas have opened over 50 branches
in Algeria and are considered among the top contenders for
the pending privatization of Credit Populaire d'Algerie. End
Note.)


7. (C) Just as critical to the fall of the Khalifa empire,
Ghernaout asserted, were its media interests. At its zenith,
Khalifa had TV stations broadcasting from London (in Arabic)
and Paris (in French). It had plans to rival al-Jazeera and
move into print media. The Algerian leadership, Ghernaout
said, viewed this unfiltered satellite coverage as a
significant threat. Many argue that Khalifa television's
failure to endorse Bouteflika in the lead-up to his 2004
reelection was the final straw.

DISINGENUOUS CALLS FOR EXTRADITION
--------------


8. (C) The head of the political section at the British
Embassy in Algiers told us in mid-January that the Algerians
were disingenuous about their stated desire to have Khalifa
extradited from the UK. He said that while they frequently
criticized Britain in the press for not returning Khalifa,
the Algerians had in fact never officially asked for his
extradition. The GoA had not acted on a paper that the
British Embassy had supplied containing the required
technical language to request Khalifa's extradition. The
British diplomat drew the conclusion that the Algerian
government had more to fear from Khalifa's return than from
popular discontent at his continued residency in Britain.
While there was no guarantee that HMG would return Khalifa if
asked, "blaming it on the British nicely suited Algerian
purposes," he told us.

GOVERNMENT COMPETENCE QUESTIONED
--------------


9. (C) Mokrane Ait Larbi, a defense attorney with experience
in financial crimes, told us in late January that the
competence of Algerian financial regulators was just as much
on trial as the defendants in Blida. Larbi argued that
financial regulators should have raised a red flag when
Khalifa deposits were earning 11 percent as all other banks'
interest rates fluctuated between five and six percent. "John
Doe might not have a clue," he stressed, "but I refuse to
believe that a governor or a minister was not aware of the
weaknesses or dysfunctionality of the whole bank." Algeria's
most famous political cartoonist similarly skewered the
government's competence in a drawing of Finance Minister
Medelci testifying at the Khalifa trial. The drawing depicts
Medelci asking for clemency on the grounds that he was too
stupid to understand what was going on. The caption below
explains that this goes without saying, since he is a
minister.
COMMENT
--------------


10. (C) While everyone here seems to have his or her own
conspiracy theory of who was behind the collapse of Khalifa
Bank -- be it Bouteflika, the military, or French
intelligence -- most seem to agree that the trial currently
underway will not close the book on the case. Despite the
high-profile list of witnesses, many Algerians are grumbling
that the true powers involved in the Khalifa scandal have
escaped scrutiny. Neither Ali Benflis nor Ahmed Ouyahia --
the two successive prime ministers as the scandal was
unfolding -- has been called to testify. Lending credence to
suspicion of some degree of high-level government involvement
has been the scant coverage of the Khalifa trial in the
Algerian state media in comparison to the private press. In
the end, it seems likely that no senior government official
will be held accountable. We also note that thanks to
Khalifa, ordinary Algerians have become distrustful of
placing their assets in private banks, thereby complicating
efforts to encourage much needed banking reform.
FORD