AMBASSADOR'S MEETING WITH CENTRAL BANK GOVERNOR

S E C R E T SECTION 01 OF 03 MANAMA 000747

SIPDIS

SIPDIS

ISN/CPI, T, NEA/ARP, EEB

E.O. 12958: DECL: 07/26/2017
TAGS: KNNP PREL PARM MNUC ECON IR BA REGION
SUBJECT: AMBASSADOR'S MEETING WITH CENTRAL BANK GOVERNOR
AND AHLI UNITED BANK

REF: A. BAGWELL-SIMPSON JULY 31 EMAIL


B. MANAMA 714

C. MANAMA 692

Classified By: Ambassador William T. Monroe, reasons 1.4(b) and (d).

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SUMMARY
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1. (S) The Ambassador July 31 cautioned Central Bank of
Bahrain (CBB) Governor Miraj and Ahli United Bank (AUB) CEO
El-Labban regarding the inherent risks associated with
Iranian banking relationships. The Ambassador also noted
that Treasury Undersecretary Stuart Levey intends to visit
Bahrain in August to engage Miraj and El-Labban on this
issue. Miraj and El-Labban responded that a Future Bank
branch to be opened in Iran's Kish Island Free Zone would not
contravene UN Security Council Resolutions directed against
financial institutions supporting Iran's nuclear weapons
program. Bahrain remained in full compliance of UNSCRs 1737
and 1747. El-Labban said that while Future Bank fit with
AUB's stated strategic vision and offered AUB a foothold in
Iran's lucrative financial market, it represented a small
percentage of AUB's interests. The Kish Island branch was a
smaller element still. AUB would divest itself of its 1/3
Future Bank interest before jeopardizing its access to the
dollar clearing system. He said AUB does not seek random
Iranian business. Subsequently, a CBB official clarified
that AUB was seeking approval for a separate transaction
involving the acquisition of an Iranian bank; this
transaction was not raised in the discussion. Meanwhile, the
International Bank of Qatar may be preparing to acquire a
controlling interest in AUB. End Summary.

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UNSCR COMPLIANCE HIGHLIGHTED
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2. (S) The Ambassador called on CBB Governor Rashid Al Miraj
and AUB Group Chief Executive Officer Adel El-Labban July 31
to engage in follow-up discussions on Ahli United's
participation in the prospective opening of a Future Bank
branch in Iran's Kish Island Free Zone. Miraj said he felt
that after his last meeting with the Ambassador, it would be
useful to allow El-Labban to clear up any U.S. concerns. The
Ambassador delivered Ref. A points, emphasizing the inherent
risks associated with Iranian banking relationships.


3. (C) The Ambassador informed Miraj and El-Labban of U.S.
Treasury Undersecretary for Terrorism and Financial
Intelligence Stuart Levey's intention to visit Bahrain in the
coming month to meet with them. Miraj welcomed the visit and
said he would be available throughout the month of August.
El-Labban replied that he would be abroad but said an
appropriate executive should be available to represent him.


4. (C) Miraj said that for his part, he was satisfied that
Bahrain was in full compliance of UNSCRs 1737 and 1747. "We
implement such resolutions immediately. Based on our regular
communication with our institutions, we are in compliance."
Miraj added that Bahrain could not allow anything to
jeopardize the country's standing as a well-regulated,
respected financial jurisdiction. "We in Bahrain cannot
afford and will not tolerate anything that will compromise
our standing. We will not tolerate any mistakes. That is
clear for us and we make it clear to all of our institutions."

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AUB SHOWS MOST, BUT NOT ALL IRANIAN CARDS
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5. (C) El-Labban said AUB had been established seven years
ago with the intent of developing a regional financial
presence, seeking to establish itself in countries
overlooking the Gulf. "We stated our intentions openly." In
line with AUB's regional vision, he noted that the bank has
branches in Oman, Kuwait, Qatar, The United Arab Emirates and
Iraq. Referring to Iraq he added, "We're glad to be there
and hoping to be able to keep a presence there under such
difficult conditions."


6. (C) El-Labban said that AUB's stated ambition to be a
regional bank is what prompted the Bahrain Monetary Agency
(BMA - now CBB) to approach AUB over three years ago with the
news that Bank Melli and Bank Saderat, both of which had
branches in Bahrain, wished to establish a joint venture in

MANAMA 00000747 002 OF 003


Bahrain. El-Labban said Future Bank was conceived as a
bridge between Bahrain and Iran. "Iran is a prime market.
Before the Revolution, Citibank, Deutsche Bank, many major
institutions were there. After things turn around and Iran
eventually opens up, they'll all be in line to come back."
He said that AUB would also wish to enter, but would normally
be unlikely to merit immediate consideration. However,
Future Bank presented a practical entree. He reasoned that
since banking in Iran is owned or dominated by the public
sector, Iran would be inclined to grant expanded
opportunities to banks already operating there. "The BMA had
selected AUB as the local partner in the joint venture
because of the bank's regional vision. Bank Melli, Bank
Saderat, and AUB each hold 1/3 interest. The "Future Bank"
joint venture, including five Bahraini branches and the Kish
Island branch, was approved in 2004, though it was not until
May 2007 that the Central Bank of Iran (CBI) had approved
Future Bank's Kish Island branch. CBI would act as the
branch's local regulator, while the CBB would serve as the
parent regulator.


7. (C) (Note: Following this meeting, Econoff consulted
Central Bank of Bahrain Banking Supervision Advisor to the
Governor Richard Ellis to clarify the status of the CBB's
approval of the Kish Island branch. Ellis had previously
indicated that AUB's acquisition of an Iranian financial
institution was currently pending Prime Ministerial approval
(Ref. C). However, El-Labban clearly indicated that the
Future Bank Kish Island branch had been approved in 2004.
Ellis clarified that AUB's application to acquire an Iranian
bank was a separate transaction and that the bank in question
was either wholly or largely controlled by the Iranian
Government. He said the information continued to be closely
held and that he doubted that Miraj or El-Labban had raised
it during the Ambassador's meeting. Shortly thereafter,
Ellis contacted Econoff to relay that Miraj had ordered that
any further inquiries regarding AUB be directed exclusively
to Miraj himself. End Note.)

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FUTURE BANK A SMALL, EXPENDABLE HOLDING
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8. (C) El-Labban said the Kish Island branch was a small
branch, and held a branch capital requirement of just two
million dollars. It would be staffed by just 10 employees,
one or two of which had already been hired. He said that
despite being located in a free zone, the branch's rather
isolated island location would limit its prospects. (He
noted that the CBI had also granted approval for Standard
Chartered Bank to open a branch there.) He also observed
that, given the Kish Island branch's relatively small size,
any untoward transactions would be readily apparent. In any
event, a real-time data link would allow Future Bank branches
in Bahrain to see the Kish Island branch's activity.


9. (C) El-Labban said that although AUB exercises a high
level of management control over its other holdings, this was
not the case with Future Bank. AUB was not a managing
partner. He acknowledged serving as a director on Future
Bank's board, which he said also held another director and a
deputy director from AUB. He added that Future Bank
maintains $120 million in standing capital, compared to AUB's
$1.2 billion in total assets, making the point that Future
Bank represents but a fraction of AUB's business. He also
observed that the Future Bank joint venture had forced a
contraction of Bank Saderat's holdings in Bahrain. Saderat
typically books very large transactions, but any position
Future Bank takes is required to be a certain percentage of
capital.


10. (C) El-Labban said Future Bank was principally involved
in the financing of businesses and pointed to Iran
Petrochemical and enterprises supporting Iran's pistachio
industry as typical examples. Future Bank's 2006 net profits
were $16 million, compared to AUB net profits of $200
million. "AUB's involvement with Future Bank is not mission
critical," said El-Labban. He added that even if it were, no
business line would be worth harming AUB's reputation, ethics
and standards. El-Labban then added that AUB would sacrifice
its ties to Future Bank before losing its access to the
dollar clearing system. "This is not just a management
position, it's a board position."


11. (C) El-Labban said AUB did not seek or market for random
Iranian business. AUB was currently holding $20 to $30
million in Iranian commercial deposits and $68 million in

MANAMA 00000747 003 OF 003


debt from a high of $106 million in January 2006. He said
that as the result of loan repayments, this figure would drop
to between $30 and $35 million by April 2008, with the
balance coming due over the next 12 to 18 months. Most of
the Iranian debt had been in the form of sovereign bonds or
loans to the Iranian oil industry. "It's not trade finance
and hasn't been for a while. Those lines were never really
very active." El-Labban compared these figures to the size
of Iranian loans and deposits booked by Germany and the UAE.
"They're running balances ten times this size."

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QATARIS MAY ACQUIRE AUB
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12. (C) On speculation that the International Bank of Qatar
(IBQ) might soon acquire a controlling interest, El-Labban
said there had, as yet, been no official developments. He
said Kuwaiti shareholders had opened their books to IBQ, but
that there had been no formal due diligence. "But there is
strong interest. Things could progress further."


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