CORRUPTION AND MONEY LAUNDERING IN GOS SALE OF

S E C R E T SECTION 01 OF 04 DAKAR 000588 SIPDIS STATE FOR AF/RSA, AF/EPS, AF/W, EB/IFD/ODF TREASURY FOR RHALL, DPETERS ABU DHABI FOR OTA GRIFFERTY STATE PLEASE PASS MCC E.O. 12958: DECL: 05/21/2028 TAGS: EFIN EINV KCOR PGOV PREL EAID SN SUBJECT: CORRUPTION AND MONEY LAUNDERING IN GOS SALE OF TELECOM SHARES REF: 07 DAKAR 2091 DAKAR 00000588 001.2 OF 004 Classified By: CHARGE D'AFFAIRS, A.I. JAY T. SMITH, for reason 1.4 (b) and (d). SUMMARY -------------- ¶1. (S) Senior Senegalese and IMF officials have confidentially shared with us their concerns that the government, apparently with President Abdoulaye Wade's blessing, is preparing to enter into a privately negotiated, potentially corrupt deal to sell the government's holdings in Sonatel, Senegal's most profitable company. The windfall to the government could be USD one billion or more, with at least USD 15 million going to Rothschild Bank, the advising/administering entity. The widely held belief is that the goal is to help Karim Wade and his associates gain control of the shares as a massive money-laundering scheme. The Presidency pressured the official in charge of public tenders to sign a waiver while her boss, the Minister of Finance, was out of town. Should the transaction be completed, it will have grave consequences for Senegal's already large budget deficit and will likely add to inflationary pressures. It would also likely bring about a suspension (at a minimum) of Senegal's IMF program, which is based on the GOS's claims of seriousness in pursuing economic reform, one of its pillars of concurrence with the broader donor community. End Summary. DIVESTING BEHIND CLOSED DOORS -------------- ¶2. (S) On May 2, Sogue Diarisso (strictly protect),a senior official at the Ministry of Finance and a close confidante to Finance Minister Abdoulaye Diop, presented Econ Counselor with the outline of a secret and corrupt plan for the sale of the GOS's approximately 28 percent stake in Sonatel, Senegal's largest telecommunications company (now majority owned by France Telecom/Orange). Much of what Diarisso reported was confirmed in EconCouns's subsequent meeting with IMF Resident Representative Alex Segura (also strictly protect). The outline of the scheme was reported in two press articles on May 9, but has not yet generated the kind of public attention it deserves. The current value of Senegal's Sonatel shares is estimated at CFA 500 million (approximately USD 1.2 billion). For a time, the deal was being held up by Ms. Magette Diop Kane, the head of the Direction Generale des Marches Publiques (DGMP),Senegal's pubic procurement office, which is part of the Ministry of Finance. According to Senegalese law, such a transaction needs to be open, transparent, and competitive and approved only after a review by an investment committee and the approval of DGMP. ¶3. (S) EconCouns asked Budget Minister Sarr on May 2 about the rumors of the impending divestiture and the Minister said that the GOS had not yet made up its mind and was conducting an extensive study of the possibilities. Sarr, who is a close confident of Karim Wade and was, according to both Diarisso and Segura, working behind the back of his boss, the Finance Minister, admitted that the sale might be done as a "strategic private investment" rather than a public sale through the regional stock market. ¶4. (S) EconCouns met with Diarisso again on May 19 and was told that Kane had "buckled under pressure from high officials at the Presidency" and had signed a waiver on May 16 to allow a private negotiation for the deal ("marche gre-gre" in local parlance). Diarisso said that the letter of instruction from the Presidency indicated that President Wade himself approved the approach. According to Diarisso, that letter and the approval from DGMP were marked "Secret" and it was unlikely that the information would leak to the press. The Minister of Finance, who we believe strongly opposes both the sell-off and the private transaction, would DAKAR 00000588 002.2 OF 004 normally be required to approve this waiver, but he was in Mozambique at a meeting of the African Development Bank. Diarisso was very disappointed that Kane had not held out until the return of Minister Diop, even though it would have undoubtedly cost her job. A "DEMAND-DRIVEN" PRIVATE DEAL -------------- ¶5. (S) According to Diarisso, with the DGMP's waiver, the government can now conclude an exclusive deal with the investment bank Rothschild (which was also noted in the press articles) to act as the advisor and sole agent for the sale, including "deciding" who gets the opportunity to buy the shares. The widely held belief in Dakar is that the main beneficiary will be President Wade's son (and Special Economic Advisor) Karim who, along with his cronies (close business partners in Kuwait) and whatever shell companies they may have now or will establish, would be granted an insider opportunity to buy the shares. ¶6. (S) Even though President Wade first announced the government's planned sale of its Sonatel shares back in October 2007 (and later retracted due to IMF and donor concerns),it now appears that the deal will happen soon due to pressure from Karim Wade and other potential beneficiaries, not because it will help the country's fiscal position. There is consensus among observers of the government's actions that the primary purpose of this divestiture is to help Karim Wade and his associates launder huge sums of cash that they have collected in recent years through "contributions," "donations," kickbacks, and the sale of illegally acquired assets, much of which was generated in the preparations summit of the Organization of Islamic Conference (OIC) held in March in Dakar. Our interlocutors are convinced that Senegal's high-level corruption could have easily generated level of receipts equal to the value of the Sonatel shares; however, the scale of this scheme is audacious by Senegalese standards. As Diarisso noted, "the country can accept Karim's frequent efforts to launder CFA one billion or 5 billion (USD 2-10 million),but this is beyond acceptable." Holding these assets for steady dividend income or selling these directly back into Dakar's regional stock exchange in a routine and unsuspicious manner will, in theory, "wash" the money to the point of plausible deniability. ¶7. (SBU) Adding to the fiscal irresponsibility of this scheme, the arrangement with Rothschild's reportedly includes paying the bank a 1.5 percent commission on the value of the shares, for a cool and corrupt USD 15 million. WHAT ECONOMIC REFORMS? A THREAT TO IMF PROGRAM -------------- -- ¶8. (SBU) If this deal goes through as outlined, at some point after the privileged buyers have been confirmed the government will be forced to announce the sale (if not the buyers) and try to defend it. The actual sale may require approval by the National Assembly, but that should not prove to be a barrier since the legislative branch is overwhelmingly dominated by President Wade's PDS party. We would expect, however, a vigorous debate on the economic reasoning and the negative precedent it would establish for the GOS's much-touted economic reforms. ¶9. (S) Segura told EconCouns he could not see how the IMF could continue its Policy Support Instrument (PSI) program with Senegal if the government turns its back on all its pledges of reform and improved transparency to conclude this deal. Equally damaging would be the credibility of the DGMP, which was only established in October, 2007 under a widely praised law to significantly reduce non-transparent public tenders. Diarisso claims that the DGMP will be "dead." ECONOMIC IMPACT DAKAR 00000588 003.2 OF 004 -------------- ¶10. (C) The IMF, World Bank, and senior officials at the Ministry of Finance are deeply concerned about the deal's short- and long-term consequences for Senegal's public finances. As Diarisso recently told the Econ Counselor, "it's much worse than serious." Currently, dividends from the government's stake in Sonatel are the biggest single revenue source for the budget, at around CFA 80 billion (USD 190 million),or 12 percent of national income. Senegal, which is currently running a budget deficit of approximately CFA 150 billion, likely has no near-term prospects for replacing this revenue apart from further appeals to donors. Finance Ministry officials have told us they are not aware of any sound plan by the government to manage a billion dollar windfall and that people close to the deal are not concerned about the inflationary pressure that would likely be spawned by trying to quickly finance new projects or capital spending. In addition, since the windfall would not be counted as income, Senegal's budget deficit would not be improved. ¶11. (C) We obtained a copy of a letter from the head of IMF's review mission to Senegal, Johannes Mueller, to the Minister of Finance (sent with the expectation that it would be forwarded to President Wade),highlighting the IMF's concerns about the lack of transparency and the negative impact on the budget from this deal. The IMF letter also underscores the Fund's worry that the government could not properly plan or evaluate large new projects that might be initiated. ¶12. (S) Madani Tall, the World Bank's Country Director for Senegal told Acting Charge (and USAID Country Director) that he had raised the issue with President Wade. Tall indicated that President Wade was upset by the IMF representative,s May 16 comments in the press about the country,s budget situation (to be reported Septel). However, regarding the selection of Rothschild Bank, Wade stated that is the prerogative of any country and did not view the selection as a contract (which contradicts the fact waiver was required for the selection). Madani Tall also indicated that Wade was aware of donor concerns and reassured him that any sale would be open and transparent (which again contradicts our other information). SAME DEAL, TAKE TWO? -------------- ¶13. (SBU) The respected journal Nouvel Horizon accurately reported on the planned GOS sale of Sonatel shares on May 9. In its May 16 edition, it reported on rumors that the GOS was going to insist that the country's largest public retirement fund, IPRES, also sell its large stake (approximately 16 percent) in Sonatel. The journal reported that Rothschild Bank would again be granted the right to organize the divestiture as a private transaction, and that the goal was again to facilitate money laundering. At this time, we have no further information on this proposal, but if true, the impact could be even more staggering and widespread, given that IPRES is the retirement lifeline for thousands of non-government employees. COMMENT -- THE USG SHOULD RESPOND -------------- ¶14. (S) We cannot refute the government's claim that it has the right to sell its own assets. But it is a difficult case to make fiscally, since Sonatel is the country's best performing company and one of the few stable sources of significant revenue for Senegal's national budget. For the government to do so solely to facilitate corruption and launder money on behalf of Karim Wade and his circle, would be indefensible. Therefore the USG should warn the GOS that should the sale be confirmed as has been outlined by our contacts, at a minimum, the USG should consider doing an out-of-cycle review of Senegal's MCC eligibility, and also DAKAR 00000588 004.2 OF 004 reconsider its support for the county's IMF PSI program. We should communicate very soon these potential consequences to the GOS in the hopes of heading off this train wreck. However, even a greater effort may be required. According to our sources, the people behind this scheme are much more determined to have their money, than to care about "small stuff" like the IMF and MCC. SMITH