SRI LANKA: OIL HEDGE BACK BEFORE SUPREME COURT

UNCLAS SECTION 01 OF 02 COLOMBO 000600 SENSITIVE SIPDIS STATE FOR SCA/INSB AND EEB/IFD/OMA STATE PASS USTR FOR ADINA ADLER AND VICKY KADER TREASURY FOR SUSAN CHUN E.O 12958: N/A TAGS: ECON EFIN EINV PGOV KMCA CE SUBJECT: SRI LANKA: OIL HEDGE BACK BEFORE SUPREME COURT REF: A. WITMER-ADLER-HICKS/HATCHER EMAILS (various) ¶B. COLOMBO 285 ¶C. 08 COLOMBO 1155 ¶D. 08 COLOMBO 1127 ¶E. 08 COLOMBO 1107 ¶1. (SBU) Summary: The filing of a new fundamental rights petition before the Supreme Court once again calls into question the legality of oil hedge contracts between the Ceylon Petroleum Company (CPC) and several international and local banks. The petition asserts, among other issues, that CPC did not have the authority to pursue hedging contracts, that hedging itself is illegal under Sri Lankan law, and that at least one international bank bribed CPC officials with foreign trips. Citi, the only U.S. bank involved, is preparing a response to the petition in advance of the July 14 hearing date. Citi continues to pursue international arbitration in London. End Summary. -------------- New Case -------------- ¶2. (U) Following and further to similar cases last year, on July 14 the Supreme Court will hear a new fundamental rights petition challenging oil hedging contracts that the state-owned enterprise Ceylon Petroleum Corporation (CPC) entered into in 2007 and 2008. The petition, which was filed by leading public interest activist/management consultant Nihal Amerasekara, aims to annul the contracts by demonstrating that the CPC did not have the legal authority to enter into them. Amerasekara stated he intends to "prevent grave and irreparable loss, damage and detriment being caused to the people of the country; the people being the co-owners of the Consolidated Fund, including the official foreign exchange reserves" by filing the petition. ¶3. (U) This new petition asserts that "a well conceived fraud had been committed on the state and the people of Sri Lanka" and asks the court to declare the hedging transactions illegal, null and void. It cites the CPC, the Treasury Secretary, Controller of Exchange, Attorney General and five banks (Citibank, Standard Chartered Bank (SCB),Deutsche Bank, Commercial Bank of Ceylon, and Peoples Bank) as respondents. The petition asked the court to issue interim orders preventing the payment of any claims by the government or claims being demanded by the banks under the hedge agreements, until the final determination of the case. This initial request was not granted on June 1 when the court first reviewed the petition and then delayed the hearing of the case until July 14. As requested by the petition, the Supreme Court directed several government institutions to investigate the oil hedge agreements and take action against wrongdoers. The government institutions so directed by the petition are Controller of Exchange, the Central Bank, Bribery Commission, Police Criminal Investigation Department, and the Attorney General's Department. ¶4. (U) The petition argues that claims made by banks precipitated Sri Lanka's contingent liabilities and would therefore seriously impede negotiation with the IMF or other international financial institutions. It states further that since governments of the countries of domain of the foreign banks listed in the petition have made available large bailout packages to financial institutions, the banks could seek funds from those packages to cover any losses made in Sri Lanka. ¶5. (U) Key complaints in the petition: --The oil hedging agreements "though camouflagedly held out as 'Petroleum Oil Hedging', in effect has been 'deals' in the nature of speculating, gambling, betting or wagering on the movement of petroleum oil prices, on 'notional quantities'.." Such deals are unlawful and illegal in Sri Lanka. --The Chairman of the CPC did not have the statutory power to enter into oil hedging agreements. --There was no relationship between the purchase of oil and entering into hedging contracts. Hence linking the two was a misleading sham and deception. COLOMBO 00000600 002 OF 002 --The concerned banks failed in their fiduciary duty to protect the interest of the customer (CPC). --The hedging agreements were flawed. While the agreements protected the banks by limiting their losses through caps when prices rose above the strike price (upper collar),there were no reciprocal caps on CPC payments to banks when prices fell below the floor price. --The hedging agreements did not appear to have the official seal of the CPC. --The respondent banks would stand liable for violation of the exchange control laws if they have made "back to back agreements" with foreign parties or remitted foreign currency under the hedging agreements without approval. --Payment of claims made by foreign banks in the range of $600-$800 million would erode Sri Lanka's foreign reserves. ¶6. (SBU) The petition is especially critical of the Standard Chartered (SCB) role in the hedging deals. It alleges that SCB induced the CPC and public officers connected to oil hedging to enter unsuspectingly into questionable deals. It further alleges that SCB essentially bribed public officers with foreign trips. The petition notes that investigations by law enforcement officers could reveal if other respondent banks have also engaged in similar acts. ¶7. (SBU) Following an initial hearing of the case on June 1, the Supreme Court agreed to take up the case for review on July 14 and ordered the respondents to file objections by July 7. Citibank informed post that it submitted preliminary arguments at the June 1 hearing and that it is Citi's intention to respond by July 7 and attend the July 14 hearing. -------------- Comment -------------- ¶8. (SBU) This is the third public interest petition against the oil hedging agreements; two previous petitions were withdrawn when the government failed to honor a court ruling to reduce petrol prices. Various ministers continue to advise post that the President wants to reach an amicable settlement with Citibank, rather than continue with international arbitration. However, to date the GSL has done little to demonstrate that it is serious about this; the GSL has not responded to repeated Citibank requests for technical details of a possible settlement. Citibank remains willing to work towards a negotiated settlement and has proposed several possible settlement options; however, it is not willing to agree to any GSL requests that would entail significant losses for what it considers to be a valid contract. For the last several months, GSL interlocutors indicated a strong desire to await the retirement of the Supreme Court Chief Justice before finalizing the terms of any settlement. With the installation on June 8 of new Supreme Court Chief Justice Ashoka de Silva, the government may now be more ready to strike a deal. MOORE