GRZ TURNING THE SCREWS ON ZAMBIAN AIRWAYS

C O N F I D E N T I A L LUSAKA 000246


E.O. 12958: DECL: 04/07/2017
TAGS: PGOV EAIR ZA
SUBJECT: GRZ TURNING THE SCREWS ON ZAMBIAN AIRWAYS

REF: A. LUSAKA 220

B. LUSAKA 73

Classified By: AMB DONALD BOOTH, REASON 1.4 B/D

(C) Summary and Comment. The Zambian Government (GRZ)
constituted an investigations team on February 26 to probe
allegations of theft, fraud, money laundering, and tax
evasion by Zambian Airways (ZA) directors. These directors
include the publisher of the only independent daily paper,
a prosecutor on the corruption task force and a mining
executive (and Humphrey Alumnus) well known to the Embassy.
(Note: American investor Seaboard through its Zambian
subsidiary National Milling, is also part owner of ZA.) The
GRZ has convinced the public that unproven allegations
against ZA directors have merit. However, the complexity of
the corporate structure and the proliferation of "known
unknowns" and "unknown unknowns" mean average Zambians do
not understand how so much money could have been borrowed
and lost. Perhaps the allegations do have merit, but it is
undisputable that making an airline successful,
particularly in a small market like Zambia's, during a time
of high fuel prices is no small feat. The GRZ's highly
principled stance on debt repayment is fraught with
political overtones, given that it does not hold parastals
and other local companies to the same high standards (and
itself enjoyed debt forgiveness under HIPC). The GRZ has
done little to avoid the impression that ZA is being used
to crush President Banda's perceived enemies within the
ruling party as well as his critics outside his party
(including the opposition media). It is also investigating
whether any key persons at the Ministry of Finance and
National Planning (including the former Minister) and at
the Bank of Zambia (up to the Governor) were involved in
allowing and/or supporting the problems at ZA. Or perhaps
they will just be the falls guys. End Summary and Comment.

ZA raises the White Flag


2. (SBU) Zambian Airways CEO Mutembo Nchito, who also
happens to be a prosecutor for the Task Force on
Corruption, announced January 10 that ZA's Board of
Directors had suspended operations citing high operating
costs, particularly of aviation fuel. Communications and
Transport Minister, Dora Siliya, under investigation
herself (Ref A),informed Parliament January 21 that the
airline was USD 29 Million in debt and that the GRZ would
not bail it out. The GRZ subsequently opened an
investigation into whether fraud was committed by ZA or GRZ
officials.

Allegations


3. (SBU) The joint investigations team drawn from the
Zambia Police, Anti-Corruption Commission (ACC),and the
Drug EnforcementCommission (DEC),is probing the following
allegtions:

-- That Nchito used ZA as a vehicle to dfraud and steal
public funds by obtaining a strig of loans worth millions
of dollars from variou financial instiutions without the
intentions ofpaying back;

-- That together with his brother,Nchima, and opposition
newspaper The Post's Manaing Director, Fred Mmembe,
attempted to persuadeDevelopment Bank of Zambia (DBZ),a
governmet supported financial institution, to convert the
debt owed to it by ZA as its share equity without showing
how and what the loans were used for;

-- That former Minister of Finance and National Planning
Ng'andu Magande, and Bank of Zambia (BOZ) Governor Dr.
Caleb Fundanga allowed ZA to accumulate a huge debt, when
the airline's financial records and audit reports clearly
indicated that it was insolvent;

-- That Magande abused the authority of his office by
dissuading and stopping statutory bodies, such as the
Zambia Revenue Authority (ZRA),National Airports
Corporation (NAC),and the National Pensions Scheme
Authority (NAPSA) from collecting their fees, tax
liabilities, and other obligations due from ZA. He is also
accused of rescheduling and deferring debts that ZA owed to
the statutory bodies. Magande is further accused of
attempting to force the Zambia State Insurance Corporation
(ZSIC) to give a loan to ZA amounting to USD 4 million.
ZRA, DBZ, and ZSIC fall under the Finance Ministry, which
Magande headed until President Rupiah Banda dropped him in
November 2008 (after Magande challenged Banda to represent
the party in the October presidential by-election);

-- That Fundanga failed to enforce BOZ's stringent financial
and banking regulations and controls and allowed
irresponsible lending by commercial banks who gave loans to
a bankrupt ZA;

-- That DBZ CEO Dr. Abraham Mweenda obtained pecuniary
advantage when he syndicated a loan facility of USD 5.5
million for ZA. Mweenda is alleged to have syndicated and
guaranteed the loans that ZA obtained with Investrust Bank,
Inter-market Banking Corporation, and DBZ itself;

-- That NAPSA Director General Dr. Aubrey Munyeke Chibumba
invested USD 2 million into ZA;

-- That the Nchito brothers, as ZA directors, had a
conflict of interest because their law firm, MNB and
Associates, is BOZ's external legal representation.

GRZ Motivation


4. (C) The GRZ's motives in pursuing this case so
vigorously have been questioned for several reasons:

-- President Banda and former President Frederick Chiluba
are said to be close. Chiluba is facing criminal charges of
corruption and abuse of office but has been invited to
attend (and has attended) official state functions, a
privilege he was not afforded or did not make use of during
the Mwanawasa administration. A verdict in his case is
expected July 20. His wife, Regina, was recently convicted
and jailed for obtaining stolen goods, which she received
from him when he was president. She is presently out on
bail pending appeal to the High Court.
Mutembo Nchito is the Task Force on Corruption (TFC) prosecutor
for these, and many other, high profile cases.

-- Magande, as noted above, was President Rupiah Banda's
main challenger in last year's party candidate selection.
Some political observers believe that he is being targeted
for political expediency, because if left unchecked, he is
likely to pose a serious challenge to President Banda's
leadership in party elections at next year's MMD National
Convention. Per ref B, Nchito has never denied that Magande
was willing to show leniency toward ZA but claims that
doing so was simply nurturing a Zambian enterprise.

-- Fred Mmembe is the owner of the "The Post" newspaper,
the largest circulated daily newspaper in Zambia, which
supported Magande's quest for MMD party leadership and
which has thrown objectivity to the wind in its vigorous
anti-Banda editorial policy, even before last year's
election. The paper has clearly gotten under Banda's skin,
and he has been trading public barbs with the paper for
months. Mmembe's newspaper's position on Banda may have
been influenced in part by Banda's decision to revoke
Magande's leniency towards ZA.

-- Bank of Zambia Governor Caleb Fundanga has close
connections to former First Lady Maureen Mwanawasa, who
supported Magande's bid to run as the MMD's candidate in
the October 2008 presidential by-election, and there are
indications that Banda would like to replace Fundanga.


BOOTH