THE ECO BANK AND IRAN

C O N F I D E N T I A L SECTION 01 OF 02 ISTANBUL 000146 SIPDIS SIPDIS LONDON FOR GAYLE; BERLIN FOR PAETZOLD; BAKU FOR HAUGEN; DUBAI FOR IRPO E.O. 12958: DECL: 03/24/2018 TAGS: PREL ECON EFIN ETRD OIC TU IR SUBJECT: THE ECO BANK AND IRAN REF: (A) 2007 ISTANBUL 1052 (B) ISTANBUL 85 (C) ANKARA 379 (D) STATE 29398 Classified By: Consul General Sharon Wiener; reason 1.5.(d) ¶1. (C) Summary: Economic Cooperation Organization (ECO) bank officials told us March 20 that the ECO bank, established by Iran, Turkey, and Pakistan under ECO auspices, has 480 million dollars (300 million SDR) in funds, seeks to fund projects in ECO countries that promote intra-ECO trade and development, makes investment decisions based only on financial criteria, and will avoid investments that pose "reputational risk" including deals involving entities named in Chapter VII UNSCRs. These officials, who direct the bank's "policy and strategy" office, underscored how important it is to the bank to be seen as a serious and credible lender, on par with the Asian Development Bank, rather than a political tool of ECO member state governments. They admitted the bank's funds were a "drop in the bucket" compared to members, development needs, enough only to support about 10 major development projects (one for each member state). Comment: We will monitor ECO bank's future lending decisions for any evidence of undue Iranian government influence. End Summary. ¶2. (SBU) Consulate Istanbul officers met March 20 with ECO Trade and Development bank officers Fazli Sak and Azhar Rauf, the director and deputy director respectively of ECO bank's "policy and strategy" office, to discuss the bank's policies and objectives and share USG concerns about Iran's financial sector. ¶3. (SBU) Our interlocutors explained that the ECO bank was formally established by the three founding members of the ECO -- Turkey, Iran, and Pakistan -- in 1995, though it had been in discussion for decades. It only started formal financial operations in the first quarter of FY 2008 after a lengthy period of organization, accreditation, and seeking capital from member states. The bank is headquartered in Istanbul and led by a Turkish director, Murat Ulus, while ECO's Ambassador-level "Council of Permanent Representatives", as well as its cultural bureau, are in Tehran. ECO's ten member states -- Turkey, Iran, Pakistan, Afghanistan, Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan -- have all agreed to provide 30 million "SDR" (special drawing rights, a currency basket currently valued at 1 USD = .61 SDR) in five annual installments, giving the bank 300 SDR/490 million USD in capital available for lending. ¶4. (SBU) Concerned about reputational risk: Sak told us that "like any international development bank," ECO bank wishes to maintain the highest possible credit rating and is acutely aware of the need to protect the bank's reputation. Indeed, both officers reinforced that the bank will only make loans and investments based on strictly financial criteria. Our interlocutors insisted that bank is not/not intended to serve as a vehicle for ECO member states to fund pet projects in their countries. Indeed, Rauf argued that member states themselves would object to the bank lending to questionable entities or making imprudent investments. Sak added that because the bank has access only to 300 million SDR, which he agreed was "a drop in the bucket" compared to the development needs of ECO member states, ECO bank must be extremely cautious in selecting projects to finance. Sak believed the bank would only be able to fund a total of up to 10 projects of any economic significance (Comment: enough for one project in each member state.) ¶5. (SBU) ECO bank and other IFOs: Our contacts said the ECO bank has had little or no formal contacts with the "D8" group of developing countries (ref B),even though the D8 Secretariat is also headquartered in Istanbul and shares SIPDIS overlapping membership (specifically Iran, Turkey, and Pakistan) and objectives (promoting trade and development among its member states). The ECO bank is more interested in building links and eventually partnering with the Asian Development Bank and the IMF's International Finance Corporation (IFC),as well as the Black Sea Trade and Development Bank (BSTDB),based in Thessaloniki, on which Sak said the organization of the ECO bank was modeled. ¶6. (SBU) Exercise vigilance on Iran: We cautioned about the risks of doing business with Iran (drawing from refs C and D) and urged the bank officers to ensure that ECO bank complies fully with UNSCR obligations with regard to ECO member state Iran, specifically the Chapter VII sanctions against Iranian entities, including Bank Sepah, as well as UNSCR 1803's call for enhanced vigilance over any financial transactions with ISTANBUL 00000146 002 OF 002 Iranian Banks, particularly Banks Melli and Saderat. We queried whether ECO Bank was aware of the October 2007 and February 2008 FATF advisories that highlighted the threat posed by Iran to the international financial system. Rauf affirmed that ECO Bank was aware of the advisory (though only Turkey among ECO members is also a FATF member),and that ECO's charter forbids any association or entities considered to be engaged in money laundering, fraud, or other criminal activity. We noted that the ECO bank's website (www.etdb.org) made no mention of the FATF advisory regarding Iran and urged that ECO bank publicly affirm its commitment to abide by the FATF advisory. ¶7. (SBU) Rauf added that bank's charter also dictates that the bank may not finance any activities listed on its "negative list of products" including weapons, alcohol, gambling, tobacco, narcotics, hazardous materials, or any other activity that "contravenes any applicable laws or international conventions." Before any ECO bank transaction is approved, audit experts review the transaction against this list. Subsequent to our meeting, Sak confirmed to us that the ECO bank agrees that the entities and activities named UNSC resolutions 1737, 1747, and 1803 fall under this prohibition. ¶8. (C) Comment: Sak and Rauf underscored several times that the ECO bank's financial decision-making is independent of ECO member state political influence, and is committed in its charter not to invest in activities or entities that could pose reputational risk to the bank. That said, given that ECO bank's management includes an Iranian Vice President (Abolghassem Erfan, a long-term Iranian Central Bank official),and in light of the Iranian regime's interest in using regional multilateral organizations to advance its national interests and mitigate against its international isolation (ref B),we intend to stay in contact with ECO bank officials and monitor ECO bank's future lending practices and decisions for any evidence of undue Iranian government influence. End comment. WIENER