AUDIT OF TAJIK NATIONAL BANK REVEALS MAJOR FRAUD; GOVERNMENT

C O N F I D E N T I A L SECTION 01 OF 04 DUSHANBE 000570 SIPDIS STATE DEPARTMENT FOR SCA/CEN E.O. 12958: DECL: 5/12/2019 TAGS: EFIN KCOR EAID EINV PREL PGOV TI SUBJECT: AUDIT OF TAJIK NATIONAL BANK REVEALS MAJOR FRAUD; GOVERNMENT APPEARS UNCONCERNED REF: A. A) 07 DUSHANBE 1753 ¶B. REF: B) DUSHANBE 489 ¶C. REF: C) DUSHANBE 508 ¶D. REF: D) DUSHANBE 514 CLASSIFIED BY: TRACEY A. JACOBSON, AMBASSADOR, EXEC, DOS. REASON: 1.4 (b),(d) ¶1. (C) Summary. The recently-released executive summary of an audit of the National Bank of Tajikistan (NBT) documents fraudulent and other questionable activities. The Bank's chairman personally approved hundreds of millions of dollars in loans and guarantees to entities in which he had a personal financial interest. The Bank made little effort to either track or recoup these loans. Key documents were destroyed, falsified, or never existed in the first place. The degree of malfeasance was so great that auditors Ernst & Young cautioned they could not provide a full and accurate accounting of the NBT's finances. Despite these problems, the International Monetary Fund (IMF) Board approved a new $116 million assistance package for Tajikistan, with the United States casting the lone "no" vote. Tajik government officials were furious at the U.S. vote, which has precipitated in increase in bilateral tension. Meanwhile, the government has made little progress on reforming its financial practices. Indeed, donors are concerned that the ease with which the Tajik government won new IMF loans and other budget support provides little incentive to improve. End summary. National Bank or Bada Bing? -------------- ¶2. (C) The National Bank recently published the executive summary of the Ernst & Young Special Audit of its activities from 2004-2007. It easily could be mistaken for a rejected script for the Sopranos. Though no one was whacked, the auditors' account of fraud and deceit would make Tony Soprano proud. The audit and the public release of its key findings were required by the IMF before resuming lending to the Bank. The IMF ceased all assistance to the NBT in 2008, after the Bank admitted it deliberately failed to disclose over $500 million in unauthorized loans and guarantees for cotton sector investors (ref A). According to the audit, former NBT Chairman (and current Deputy Prime Minister) Murodali Alimardon justified lying to the IMF by saying that if he had told the truth, they would have cut off funding. ¶3. (U) Ernst & Young had two goals: to establish an accurate baseline for the Bank's finances, and to recommend management improvements. The auditors admitted failure on the first count, concluding, "There is no audited, reliable basis for NBT's current balance sheet." They cited the lack of key records, conflicting or fictitious data, and deliberate efforts to interfere with the audit. Many problems were exacerbated by a management structure that allowed the Bank's chairman to run the institution as a personal slush fund. Accordingly, one recommendation was independent oversight of bank activity. ¶4. (SBU) The other major recommendation is that the National Bank should get out of cotton financing. The audit describes a Bank that was a mechanism to channel public funds to private investors with close ties to the government. The NBT provided funding mainly to Kredit Invest (formed in January 2004),which then made loans to individual cotton investors. The auditors found repayment rates on these loans abysmal -- cotton investors still owe Kredit Invest $497 million, or 77% of the money they have borrowed since 2004, and Kredit Invest owes the National Bank $560 million. Neither the NBT nor Kredit Invest trieid to recoup or even track these loans. Kredit Invest did not collect interest, had no provisions for bad debts, and was unconcerned that debtors' collateral was less than 10% of their outstanding debt. Similarly, the NBT's records of outstanding debt are contradictory or missing entirely. ¶5. (U) Ernst & Young noted close ties among lenders and borrowers that created conflicts of interest. NBT Chairman Alimardon had a direct personal stake in Kredit Invest -- which received over $856 million in NBT loans and guarantees over the years -- and other investors. His brother and father ran the cotton investment firm Barakat, a minority shareholder in Kredit Invest that received several million dollars in loans from the company. One of Kredit Invest's other shareholders is "HIMA," the "MA" allegedly referring to Murodali Alimardon. He denied any stake in the firm, however, saying he regularly visited HIMA only to provide "advice and assistance." Other firms receiving Kredit Invest loans also owned shares in it. DUSHANBE 00000570 002 OF 004 Questionable Finances -------------- ¶6. (U) Though Ernst & Young explicitly stated they were not engaged to do a forensic audit to determine where specific wrongdoing occurred, the information they came across provides ample fodder for such an investigation: -- NBT loans for cotton sector development found their way into many unrelated undertakings, including a hotel, a construction company, and a sock factory. $235,000 was provided to a Mr. Sultonov to renovate his teahouse in Istaravshan. The auditors noted drily that, "This appears an unusually high amount for the renovation of a teahouse in Tajikistan." -- Loans to Kredit Invest and others were hidden as "cash in transit," "cash withdrawn from circulation," or simply recorded as remaining on the NBT's balance sheet. -- Kredit Invest provided $34 million to debtors to pay back earlier loans to Kredit Invest. -- The NBT's normal auditor, PricewaterhouseCoopers, declined to sign the Bank's 2006 and 2007 financial statements, due to unresolved problems. Ernst & Young note that during an annual audit, the National Bank appeared to temporarily transfer cash from its debtors to its own accounts to inflate its cash balances. ¶7. (U) Despite NBT pledges to fully support the audit process, Ernst & Young faced significant and repeated difficulties getting reliable information. In many cases, the Bank deliberately tried to deceive the auditors: paperwork disappeared, records were burned, documents were backdated, and data was invented. Examples: -- The single notebook said to accurately list all of the NBT's loans to Kredit Invest reportedly was destroyed. Bank officials said they had kept hand-written records of NBT's true reserve levels -- since their official submissions to the IMF were fictitious -- but that they had destroyed these records because "they were now obsolete." -- NBT employees took seven weeks to provide information about domestic cotton sector guarantees. -- Bank officials gave the auditors an alleged 2006 spreadsheet to monitor pledges and loans; the computer file showed it had been created a few days before. ¶8. (U) Auditors faced similar difficulties getting accurate information from cotton investors: -- At one firm, auditors noticed original, stamped financial records, were being burned in the parking lot. They were told the documents had been used as toilet paper and did not inquire further. -- At another firm, auditors were (apparently accidentally) provided a computer file about direct loans from NBT and Kredit Invest. Employees then appealed to the audit team to "help us out" by not using the file. -- At another firm, documents were removed from the auditors' workspace while they were on break. The firm's management subsequently provided an adulterated replacement but refused to return the originals. Show Me the Money... If You Can -------------- ¶9. (U) Given such problems, Ernst & Young cautioned their audit was neither complete nor adequate to establish the NBT's current balance sheet. They were able to ascertain that the NBT had underreported its loans and commitments to the IMF by approximately $556 million, including: (a) $72.0 million in foreign guarantees that had been provided for Kredit Invest and others to secure lines of credit, (b) $241.2 million in foreign pledges on behalf of Kredit Invest, (c) $8.8 million in domestic guarantees to Tajprom Bank, and (d) $234.0 million in direct loans to Kredit Invest. Ernst & Young state that they had evidence that the latter figure was likely too low. See the DUSHANBE 00000570 003 OF 004 final paragraph for selected audit figures. Despite Audit, IMF Full Steam Ahead on New Lending -------------- -------------- ¶10. (U) In light of the audit, the U.S. government recommended that the IMF require stricter conditions before providing further loans to the Tajik government, but the IMF board voted 23-1 to approve a 3-year, $116 million Poverty Relief and Growth Facility, $70 million of which is to be disbursed this year. ¶11. (C) The European missions in Dushanbe have told us they were not entirely pleased with their governments' decisions to approve the IMF loan, and several praised our no vote. In a recent meeting with Ambassador, they lamented that lending decisions are taken by their finance ministries and do not necessarily take into account political realities. The Swiss noted that by supporting the government despite the lack of reform, donors are starting to lose credibility among the local population. The German Ambassador has an instruction from Berlin to make a demarche on the audit. And the French described the government as a teenager who gets his pocket money even when he behaves badly, and thus has no incentive to change. European heads of mission agreed to work more closely here in Dushanbe and with their capitals to develop a more consistent message. ¶12. (C) The first $40 million tranche of IMF lending was delivered to the National Bank on May 7. IMF Deputy Division Chief for the Middle East and Central Asia Axel Schimmelpfennig told Ambassador that there is some conditionality built into the next tranche. The IMF will send a mission to Dushanbe in June to assess progress on benchmarks, and will convoke a board meeting in October before disbursing the next $30 million tranche. The Tajik government will have to show progress on the audit's recommendations, including adopting new National Bank legislation and a road map on cotton debt resolution. Ambassador noted our concern that the Tajik government's record on adopting resolutions is better than on implementing them. Denial Also a River in Dushanbe -------------- ¶13. (C) Tajik government officials appear to be going through all five stages of grief (with the possible exception of acceptance) since the U.S. no vote at the IMF. Their first and most consistent response has been denial. President Rahmon laughed at our initial mention of the audit and said the cotton debt was the donors' problem to resolve (ref B). He did not take long to get to the anger stage, however. When World Bank Vice President Shigeo Katsu raised the audit with Rahmon On May 8, the President said "one Embassy has decided to make this a political issue, and that is unacceptable," according to a diplomatic source. When Katsu said donors were very interested in how the country responded to the audit, Rahmon said, "The donors are only interested in who is going to jail." Foreign Minister Zarifi expressed his displeasure to the Ambassador in a tirade that included not only the IMF vote, but a host of bilateral irritants, including embassy property, hiring, and reporting (refs C and D). ¶14. (C) While anger is still prevalent, some officials have moved to bargaining. In recent meetings we have been reminded that the United States is in danger of "losing" Tajikistan to the Russians and Chinese (ref C). If we showed a little more understanding, we would find Tajikistan a much more willing partner. The fourth stage, depression, has emerged in the context of the global financial crisis: Both Zarifi and Presidential Economic Policy Advisor Matlubkhon Davlatov asked how we could possibly deny poor Tajikistan the funding it desperately needed in this crucial time (ref C). ¶15. (C) While acceptance seems distant, there are some positive signs. In a recent meeting with Econoff, Deputy Director of the National Bank Jamshed Yusupov said the Bank was implementing several reforms recommended in the audit, including appointing an independent board with an outside member and enacting new legislation with more financials controls. Yusupov apparently was eager to be seen as cooperative, calling the Embassy later to make sure we had all of the information we needed, and urging us to contact him at any time with more questions. Even Zarifi tried on a more conciliatory stance, extravagantly opening a DUSHANBE 00000570 004 OF 004 bottle of champagne with Ambassador to celebrate the signing of a new INL assistance package. ¶16. (C) Comment: There is a fundamental disconnect between how we and the Tajiks view the audit. In the zero-sum game of Central Asian politics, the Tajiks see our vote as unprovoked aggression, rather than a logical response to a serious problem. Accordingly, their response -- whether excoriating or cajoling -- has focused on the bilateral relationship rather than our specific concerns. Although in private meetings some officials have made vague promises of reform, the government has said little in public, and appears to be waiting for attention to turn elsewhere. Considering that the IMF Board voted overwhelmingly to approve the recent loan despite an audit full of reasons not to, their strategy may be sound. We will have more opportunities to engage on this topic this week, including an all day meeting on May 13 between donors and Tajik government representatives including the Minister of Economy and the National Bank Chairman. End comment. ¶17. (U) Audit at a glance: - Total unreported NBT loans and guarantees: $556.0 million Includes: $72.0 million in foreign guarantees $241.2 million in foreign pledges for Kredit Invest $8.8 million in domestic guarantees $234.0 million in loans to Kredit Invest - Total loans from NBT to Kredit Invest since 2004: $856 million. Unpaid balance: $295.3 million Interest: $46.4 million Debts NBT settled on KI's behalf: $218.2 million Total debt outstanding from KI to NBT: $559.9 million - Total funding from Kredit Invest to cotton sector since January 19, 2004: $768.6 million. Amount repaid: $184.5 million (24%) Outstanding balance: $584.1 million JACOBSON