TANZANIA'S CENTRAL BANK UNDER FIRE IN PRESS FOR

C O N F I D E N T I A L SECTION 01 OF 03 DAR ES SALAAM 001009

SIPDIS

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DEPT AF/E FOR B YODER AND D MALAC
PLEASE ALSO PASS TO MCC FOR G BREVNOV AND M KAVANAGH

E.O. 12958: DECL: 07/17/2012
TAGS: ECON EAID KMCA PGOV PREL PHUM PINR TZ
SUBJECT: TANZANIA'S CENTRAL BANK UNDER FIRE IN PRESS FOR
CORRUPTION

Classified By: D. Purnell Delly, Deputy Chief of Mission, for reason 1.
4 (b).


1. SUMMARY. Throughout June and July, a steady beat of
corruption claims against the Bank of Tanzania (BOT) have
featured on the front pages of almost every major Tanzanian
newspaper. Allegations in the press focus on the prohibitive
construction costs of the new BOT "twin towers," payments
made by the BOT's External Payment of Arrears (EPA) Account,
and suspicious liquidation of loans to gold mining companies.
With the BOT under fire in the press, President Kikwete
appointed three new deputy BOT governors on July 3,
ostensibly to ensure sufficient capacity and better
management of Tanzania's Central Bank. Although the BOT did
finally hold a press conference on July 12 to respond to
media criticism, the Bank Governor dismissed all allegations
as baseless "lies" and did not address any of the claims
specifically. The Government of Tanzania (GOT) has promised
to investigate several of the claims and the Finance Minister
has ordered a special international audit of the BOT. END
SUMMARY.

Corruption Charges Snowball Against Tanzania's Central Bank
-------------- --------------

2. (SBU) Throughout June and July, Tanzania's print media
leveled scathing criticism against the Bank of Tanzania and
its Governor, Daudi Ballali, with daily front page articles
alleging scandals and corrupt practices. Governor Ballali
was appointed to his position by former President Benjamin
Mkapa in 1998. Prior to his work with the BOT, Ballali
worked for the International Monetary Fund (IMF) in
Washington D.C. for 21 years. The three primary allegations
against the BOT and Ballali involve: (i) the skyrocketing
costs of the recently constructed BOT "twin tower"
headquarters now reaching USD 340 million; (ii) a USD 30.8
million payment from the External Payment of Arrears (EPA)
account through a fabricated company for forged deeds of
assignments; and (iii) scandals related to gold mining
ventures and an auditing assayers firm.

Over-Priced 20-Story Bank Towers....
--------------

3. (SBU) The ballooning construction costs of the BOT
headquarters - a 65,000 square meter compound comprising two
20-story towers - have raised numerous questions in the press
and in Tanzania's Parliament over the last six months. While
the final cost totaled USD 340 million, according to South
Africa's Group Five Construction firm, the buildings have
been valued at only USD 25.5 million. Construction began in
March of 2004 and was completed in December 2006, with a cost
per square meter of USD 8,625. This cost per square meter is
approximately triple the cost of building in New York City
and twelve times the average of cost per square meter in
Tanzania.


4. (SBU) According to an April 2006 report in The Citizen, a
local newspaper, Minister of Finance Zakia Meghji claimed
that an increase from USD 108 to 150 million was necessary to
pay for construction of the BOT towers due to exchange rate
fluctuations (i.e. the depreciation of the shilling against
the USD). While various price hikes in the construction
costs have been justified by the government, the final amount
of USD 340 million has yet to be fully explained by
Government of Tanzania (GOT) officials.

Fabricated External Payment of Arrears.....
--------------

5. (SBU) The second major allegation against the BOT is that
its External Payment of Arrears (EPA) Account has been
enabling local companies to negotiate settlement of foreign
creditors' debts, by receiving deeds of assessment, and
presenting these deeds to the BOT for redemption in local
currency. In September 2006, Deloitte and Touche of South
Africa conducted an external audit of the BOT and revealed
that between September 10 and November 3, 2005, twelve deeds
of assessment were signed by foreign creditor companies from
Germany, Italy, Britain, Japan, and the U.S. to the Kadoga
Agriculture Limited Company. Although the deeds were from
different companies, they contained the same wording and the
foreign creditors all signed these deeds in Dar es Salaam on

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either October 18 or 19, 2005. The audit report highlights
that this would imply several foreign creditors all traveling
to Dar es Salaam to sign deeds on the same days. Further,
the audit report notes that the BOT signed these deeds for
redemption without conducting any background checks.


6. (SBU) According to allegations in the press, the Kadoga
Agriculture Limited Company, which was established on
September 29, 2005, was hastily fabricated as a means to
absorb the USD 30.8 million in payments owed to foreign
companies. It is important to note that after Deloitte and
Touche's audit, the BOT prematurely terminated its contract
with Deloitte, citing the new BOT Act of June 2006 which
includes a provision that the Controller and Auditor-General
(CAG) take responsibility for annual BOT audits. An
international audit firm selected by the CAG's office is
expected to complete an audit by the end of 2007 following
Finance Minister Meghji's order for a special audit on the
EPA account.

And the Yellow Brick Road
--------------

7. (SBU) English daily newspapers such as This Day and the
East African have also alleged scandals linking the BOT to
gold mining ventures. In particular, the press has
questioned payments totaling over USD 110 million by the BOT
to the bankrupt Meremeta Gold Mine to liquidate a loan issued
by Nedbank Ltd. According to the press, it remains unclear
why the BOT decided to clear the loan on behalf of Meremeta
Gold instead of Nedbank Ltd filing its claim directly with
the liquidator. The press has also focused on controversial
BOT payments to TANGOLD - another gold mining company with
GOT interests.


8. (SBU) Another controversy related to the gold mining
sector involves a U.S. based firm called Alex Stewart
Assayers. The BOT contracted Alex Stewart Assayers from June
2003 until May 2006 to address and determine the actual
investment and operational costs incurred by Tanzania's big
mining operators. Although the BOT paid Alex Stewart
Assayers almost USD 31 million for the three years of work,
the primary conclusion of the firm was that the annual
statements of big mining firms were not accurate in terms of
the quantity of their gold production and transportation
costs. According to the press, Alex Stewart never determined
the actual expenditures of international mining firms in
Tanzania which would have enabled the GOT to set more
appropriate taxes.


Press Conference: Bank Governor Calls all Allegations "lies"
-------------- --------------

9. (SBU) In the wake of investigative news articles and
mounting rumors about BOT scandals, the BOT organized a press
conference on July 12, 2007. After discussing the state of
the Tanzanian economy for approximately one and half hours,
Governor Ballali shifted to the topic of alleged corruption
within the BOT. Ballali asserted that all allegations of
misappropriation of funds within the BOT were "lies." He
refused to comment further on the allegations, stating that
the scandals were under investigation by the government.


10. (SBU) On July 13, front page articles in five major
English dailies (The Guardian, The Citizen, The African, This
Day, and Daily News) correctly reported Ballali's statement
that all allegations against him and the BOT were unfounded
"lies" and most likely put forth by disgruntled businessmen
whose deals had backfired. Ballali made clear to the press
that, in the face of mere rumors, he had no plans to resign
as Governor. (Note: Although President Kikwete has not
publicly signaled any discontent with the BOT Governor, on
July 3, he appointed three new BOT deputy governors -
Professor Benno Ndulu, Lila Mkila, and Juma Reli - although
the BOT typically only has one deputy governor position.)


11. (C) IMF Country Representative, David Robinson, expressed
his concern regarding the alleged BOT scandals to Emboff on
July 16. He noted that until external audits were completed
on the Bank's External Payment of Arrears (EPA) Account and
the alleged gold scandals, it would be difficult to assess

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the legitimacy of the media's claims. However, in Robinson's
view, the cost of the BOT towers was the most suspicious and
also would not be included in the special, international
audit ordered by the Finance Minister. Further, Robinson
pointed out that even an external audit on the BOT might not
be able to detect corrupt practices whether it involved
liquidated loans to a gold mining company or disbursements
from the EPA. "If the BOT's paper trail is good enough, if
may be very difficult for any audit to directly prove corrupt
practices," he said.


12. (SBU) Allegations against the BOT seem to have even
caught the IMF's attention in Washington D.C. According to a
July 18 front page report in This Day, IMF Executive Board
Members issued the following statement after holding a
meeting on July 16: "The IMF welcomes efforts to address the
allegations of improprieties in the management of the
External Payment Arrears account at the Bank of Tanzania and
looks forward to timely completion of the special audit."
IMF Directors have also recommended a safeguards assessment
of the BOT as a complement to the audit. (Note: A
safeguards assessment is a diagnostic exercise carried out by
IMF staff to identify vulnerabilities in governance and
internal controls.) In practice, all countries that request
loans from the IMF must undergo a safeguards assessment.
However, given the IMF's declining role in Tanzania as far as
issuing loans, the IMF's recommendation appears to be more of
a means for the BOT to regain credibility and address
persistent gaps in its internal governance structure.

Comment:
--------------

13. (C) Corruption stories against the BOT have snowballed
to a point where GOT officials including the Finance Minister
feel compelled to publicly promise investigations into the
various claims and order external audits. As disturbing as
the accusations against the BOT are, the Governor's opaque
responses to the allegations at the July 12 press conference
were also deeply troubling. Although the BOT press
conference appeared an attempt to address ongoing rumors and
media criticism, the Governor focused his remarks on the
economic health of Tanzania, brusquely dismissing corruption
claims. The Kikwete administration has taken relatively mild
actions related to the deluge of negative press against the
BOT to date only appointing new deputy governors and
promising investigations or external audits. The real test
of President Kikwete's commitment to good governance and
anti-corruption will be demanding that the concerned
officials provide transparent and thorough evidence to
explain the BOT's actions whether they involve payments to
gold mining firms or massive expenditures on construction
projects.
RETZER