TREASURY U/S LEVEY WARNS AHLI UNITED AGAINST

C O N F I D E N T I A L SECTION 01 OF 03 MANAMA 000803 SIPDIS SIPDIS TREASURY FOR U/S LEVEY CAIRO FOR SEVERENS E.O. 12958: DECL: 08/20/2017 TAGS: PREL EFIN PTER PARM MNUC IR BA SUBJECT: TREASURY U/S LEVEY WARNS AHLI UNITED AGAINST EXPANDING IRANIAN FINANCIAL TIES REF: MANAMA 747 Classified By: Charge d'Affaires a.i. Christopher Henzel, reasons 1.4 ( b) and (d). -------------- SUMMARY -------------- ¶1. (C) Treasury Undersecretary Levey August 8 cautioned Ahli United Bank (AUB) officials on the bank's ties with Iranian state-owned banks. Through Future Bank, AUB was virtually the only bank in the world to be joint-ventured with Bank Melli and Bank Saderat. Bank Melli Iran had used deceptive banking practices to provide heavy financial support to Iran's Islamic Revolutionary Guard Corps (IRGC). He noted that top European financial institutions, including Deutsche Bank, have either scaled down or ceased doing business with Iran. AUB CEO Adel El-Labban replied that in recognition of mounting international concerns, AUB had already advised Future Bank not to open its anticipated branch in Iran's Kish Island Free Zone. He said AUB had also made the decision to allow its existing Iranian holdings to mature and run out and sought U/S Levey's advice on financially viable strategies for divesting its share in Future Bank. El-Labban said that AUB had contemplated investing in a private-sector Iranian financial institution as a means of preserving an entree into the strategically important Iranian financial market. Here too, U/S Levey advised caution and counseled that Bahraini financial sector officials not be lulled by Iranian attempts to discount the impact of mounting international pressure. End Summary. -------------- AUB WARNED OVER LINKS TO IRANIAN BANKS -------------- ¶2. (C) Treasury Undersecretary Stuart Levey and Policy Advisor Kristen Hecht accompanied by the Charge and Econoff, August 8 met with Central Bank of Bahrain (CBB) Governor Rashid Al Miraj, Deputy Governor Anwar Khalifa Al Sadah, Ahli United Bank (AUB) CEO Adel El-Labban and Deputy Group Chief Executive for Risk, Legal and Compliance Keith Gale. Addressing the group, U/S Levey emphasized U.S. concern over AUB's equally-shared ownership of Future Bank with Bank Saderat and Bank Melli. AUB's relationship with these Iranian state-owned banks, and its participation in the opening of a Future Bank branch on the Iranian Kish Island Free Zone (reftel). U/S Levey urged El-Labban to be cautious of these relationships because of the potential for reputational risk. Other than the Commercial Bank of Syria, AUB was the only bank in the world to be joint-ventured with Bank Melli and Bank Saderat. ¶3. (C) U/S Levey said that the IRGC relied heavily on Bank Melli Iran, Bank Mellat Iran and the Central Bank of Iran for the provision of banking services. He noted that Bank Melli had employed deceptive banking practices to obscure its involvement from the international banking system when handling financial transactions on behalf of the IRGC. One specific example was Bank Melli's increasing abuse of cover payments. Using this technique, Bank Melli had requested that its name be removed from payment instructions for transactions. ¶4. (C) U/S Levey cautioned that Iran was adept at utilizing its state-owned banking network and government-controlled entities, such as the IRGC, to facilitate both legitimate and illicit financial transactions to carry out Iran's destabilizing policy objectives and further Iran's missile program. U/S Levey passed a list of IRGC-controlled companies to El-Labban and Governor Al Miraj. He noted that top European financial institutions, including Deutsche Bank have either scaled down or ceased doing business with Iran due to the inherent risks associated with conducting Iran-related transactions. He believed that such decisions reflected not only an expedient recognition of the current suspicion with which Iranian banks are increasingly regarded, but was also the natural result of independent analysis of illicit Iranian banking practices. -------------- - REDUCING IRANIAN EXPOSURE, SEEKING U.S. ADVICE -------------- - MANAMA 00000803 002 OF 003 ¶5. (C) El-Labban replied that AUB's mission was to maintain and grow its regional financial presence. He cited AUB's presence in Iraq as an example. "We are in Iraq in order to support investment there." He said AUB's investment in Future Bank had exemplified AUB's wish to establish a "low cost, early entry" Iranian presence in anticipation of eventual normalization of Iran's international relations. However, he said that despite the strategic importance of AUB's Future Bank partnership, "No investment will ever be handled in a way that jeopardizes our ability to do business going forward." He then stated that AUB had advised Future Bank not to open its planned Kish Island branch. He said AUB's advice was not binding, since AUB holds no managerial role in Future Bank. Nevertheless, he said Future Bank had "taken the advice on board. The branch is now idle." ¶6. (C) El-Labban said that as international attention on Iran's financial institutions grew, AUB's management and shareholders were sensitive to the potential liability posed by its investment in Future Bank. He proposed three possible courses of action: AUB could retain the Future Bank investment as a "useful entity"; AUB could sell its shareholding at a reasonable valuation approved by the CBB. However, the remaining shareholders were under no obligation to purchase it; or AUB could transfer its shares of Future Bank into a blind trust under the approval and supervision of the CBB. El-Labban asked U/S Levey for his recommendation. U/S Levey replied that this would be a decision for AUB to make under the guidance of the CBB. ¶7. (C) El-Labban said that in its quest for avenues into Iran's financial markets, the bank had "a real interest" in investing in an appropriate private-sector financial institution. He said AUB had had evaluated several possible Iranian private sector financial investments, such as EN Bank and Saman Banking Corporation. "Some are banks with ties to the International Finance Corporation and the World Bank. Some have been established by wealthy Iranian business families to fund their business ventures. Others are stranger, such as banks established by the Union of Teachers or banks established by municipalities." El-Labban noted, however, that AUB's plans to invest in a private-sector Iranian institution are in abeyance. "We seek your guidance. We want to hear your opinion on this." ¶8. U/S Levey advised caution, noting that in the current climate, the CIB was signaling that they would become increasingly reliant upon private-sector financial institutions to sidestep international sanctions. (Comment: The potential acquisition that El-Labban mentioned is likely the same one described reftel by CBB Senior Advisor for Compliance Richard Ellis. However, Ellis believed the subject Iranian entity was largely or wholly controlled by the Government of Iran. End Comment.) ¶9. (C) El-Labban said that AUB's financial exposure to Iran was limited compared to other banks in the region. He said that in terms of its other Iranian investments, AUB had made the decision to allow its existing holdings to mature and run out. AUB had closed the account it held for Bank Melli. El-Labban said that while Bank Saderat and Bank Melli have repeatedly asked AUB to open accounts on their behalf, his answer has always been "no". He added that the market for Iranian investments was drying up. AUB could not withdraw from these holdings early without taking significant losses. "We had difficulty selling our Iranian portfolio. There weren't any takers." (Note: While banks have undoubtedly become increasingly cautious about handling Iranian investments, deep regional liquidity virtually assures that a market remains. For example, shares in Bank Melli's 300 million euro (roughly $400 million) "Mehr" Tehran Stock Exchange fund, listed in Dubai, sold briskly in Bahrain. End Note.) ¶10. (C) U/S Levey thanked Al Miraj and El-Labban for their engagement in constructive dialog on the issue of Bahraini financial involvement with Iranian banking institutions. He warned of an Iranian campaign to discount the impact of mounting international pressure. They will try to point to various cooperation agreements they have made in an attempt to portray that everything is fine. Don't be lulled by it." ¶11. (U) U/S Levey's office cleared this message. MANAMA 00000803 003 OF 003 ********************************************* ******** Visit Embassy Manama's Classified Website: http://www.state.sgov.gov/p/nea/manama/ ********************************************* ******** HENZEL