UNCLAS SECTION 01 OF 05 MALABO 000027

SENSITIVE
SIPDIS

KHARTOUM FOR FERNANDEZ; HARARE FOR CHISHOLM; YAOUNDE FOR DATT

E.O. 12958: N/A
TAGS: PREL ECIN ECON EFIN PGOV EPET ENRG KCOR PINR
SOCI, EK
SUBJECT: EQUATORIAL GUINEA RAW, PAPER 4: THE BUSINESS OF CORRUPTION

REF: MALABO 26 AND PREVIOUS


1. (U) Triggered by changes underway in Washington D.C.,
upcoming personnel rotations in Embassy Malabo and animated by
the recent attack on the capital, this is the fourth in a series
of cables intended to update our perspective on Equatorial
Guinea, and to provide a ground-level view of one of the world's
most-isolated and least-understood countries to interested
readers.


2. (SBU) SUMMARY: The low level of institutional development
and peculiar financial management mechanisms may inflate
perceptions of corruption in Equatorial Guinea (EG). Suddenly
rich, the country's over-reliance on now-defunct Riggs bank, a
lack of conflict-of-interest rules and a legacy of moonlighting
further complicate EG's record. While significant concerns over
the level of corruption remain, and as growing oil revenues fuel
the local commercial boom, there are signs EG is moving toward
improving public finance management -- and U.S. engagement is
helping achieve results. End SUMMARY


3. (SBU) As in many other areas, Equatorial Guinea (EG) has a
bad reputation when it comes to transparency and corruption.
Numerous IOs/NGOs rate the country as one of the world's worst
performers. However, these organizations may be working from a
position of bias and with poor information. To our knowledge,
none of them have undertaken recent on-the-ground surveys here.
On the contrary, there are signs the perspective of the problem
in EG may not be in complete alignment with reality. Moreover,
assessments rarely take into full account the country's level of
societal and institutional development.


4. (SBU) Legacy Issues: Part of the problem is the peculiar
nature of the EG social environment. According t

o the former EG
treasurer, who retired in 1993 just before the oil revenues
started to flow, lack of resources in its early days often led
the government to compensate officials with in-kind transfers.
Land, operating licenses and import concessions were common
forms of "payment" to ministers and other ranking officials
during a period when "there was often no money to pay salaries."
The practice began with EG government seizure of "abandoned"
Spanish colonial holdings -- and their subsequent redistribution
to officials as a means of compensation. As testament to the
then-prevailing level of abject poverty, former U.S. Ambassador
to EG Chester Norris (1989-1992) relates having to personally
loan money to President Obiang himself so he could "buy gasoline
to go to local political events." During the period of the
"skinny cows," officials were only expected to be in the office
three days a week. The remainder of the time they worked their
farms or businesses in order to feed their families. During
that period -- when local markets sold onions by the quarter,
tomato paste by the spoonful, and the handful of taxis in
circulation in Malabo required advance booking for use -- many
Equato-Guineans energetically sought to avoid poorly-compensated
government jobs. Some could not; especially those close to the
president. Having himself come to power in a coup (one likely
supported by outside forces) and constantly under threat of
overthrow, he purchased loyalty by any means available.


5. (SBU) Those private entrepreneurs who mocked their poor
public officials now see the tables turned. Once oil money
started to flow in the mid '90s, many officials found themselves
in improved positions. Money and power accumulated within the
government. In addition, the once-meager returns from the
earlier in-kind compensation for officials mushroomed as the
economy expanded at one of the world's fastest rates. For one
example, the single license to import cement into country has
become extremely lucrative (NOTE: this license belongs to
ABAYAK, a company partially owned by the president and first
lady). In another, the only person authorized to provide notary
services in Malabo is now one of the country's wealthiest men.
These legacy privileges have been closely guarded by those
receiving them, but demands from the younger generation and
growing appreciation for competition is leading to gradual
opening. The outgoing, but-still-powerful Minister of National
Security once had the only modern hotel in Malabo. He built it
on land that was part of his "skinny cow" compensation package,
situated along the 4-lane airport highway that was until 2000 a
single, muddy track. His now-aging hotel faces stiff

MALABO 00000027 002 OF 005


competition from newer, more upscale arrivals: a French-owned
"5-star" Sofitel, a Lebanese-run EG government complex, and
(soon) a 300-bed Lebanese-owned Hilton Hotel near the Malabo
airport. Forced to innovate, the former minister has just
opened Malabo's first European-style bakery and associated
ice-cream shop on his premises. Competition works.


6. (SBU) Legal Corruption: Representatives of a foreign,
internationally-recognized law firm working closely with U.S.
oil companies in EG for years tell us they are aware of rumors,
have seen fully exploited "grey areas" but have never
encountered a "smoking gun of outright corruption." They
describe EG's anti-corruption statutes as "even more stringent
than the (U.S.) Foreign Corrupt Practices Act." In practice,
officials caught in the act are more often quietly removed from
office and/or banished to some hinterlands task as penance than
they are prosecuted. We know of not a single court case.


7. (SBU) Moreover, one major flaw remains: EG has no law
limiting or even defining conflict of interest. Most ministers
continue to moonlight and conduct businesses that often conflate
their public and private interests. The Minister of Justice has
his own private law firm, in which he maintains an active hand
and open interest -- and which is not illegal under current EG
law. In similar fashion, the Minister of Transportation and
Communications is director of the board and owns shares in the
parastatal airline, not to mention the national telephone
company. The custom of simultaneously maintaining both official
and private activities that became entrenched in the era of
skinny cows has not been altered for the fat ones. There is
public grumbling but little internal pressure to change the
rules. Nonetheless, occasionally lines do get crossed. We
understand the former Minister of Fishing and Environment lost
his job when it was discovered he was occasionally going to
Spain to sign over fishing licenses out of view of the rest of
the government. There were also rumors that corruption led to
the former Prime Minister's ouster (i.e., Ricardo Mangue). High
officials appear to be insulated from prosecution, but
apparently can't expect impunity.


8. (SBU) Family Matters: EG has an extremely tight, intricately
interconnected society (REFTEL). There are no arms-length
transactions here. The traditions of the predominant Fang tribe
prevail, and the bonds of family are as strong as they are in
any other culture. By American standards, these bonds are
exceedingly powerful. Ministers themselves fall victim to these
traditions and appear unable to avoid pressures to intercede in
mundane matters on behalf of even lower-class family members.
Failure to do so can result in loss of influence and
ostracization within the family and clan. During a meeting with
the powerful Minister of Interior in which he was interrupted by
a telephone call, we were surprised to hear him engage in
translation and explanation of a routine administrative document
for an elderly aunt. "She doesn't read well and she speaks poor
Spanish," he apologized. "These family matters must be attended
to here." The tug of family and the opportunity for abuse of
power are clear.


9. (SBU) Among those close to the president, two individuals
are singled out for criticism both here and abroad -- the first
lady, and her son, the "primogeniture" of President Obiang.
"Teodorin" (or "little Theodor") as the son is known, lives the
life of an international playboy and is widely accused of
corruption. His purchase of a $34 million mansion in Malibu,
California once made Forbes magazine and attracted a great deal
of attention. Yet when we probe him on the issue of corruption,
he explains that during the time of the "skinny cows," the
government "granted" him a concession to lumber a large tract of
pristine continental jungle. The company he formed (and which
he still owns, even though he is currently Minister of
Agriculture and Forestry), brought in a Malaysian contractor
with 40 teams of well-equipped lumberjacks who clear-cut,
transported and shipped a wealth of whole logs to Asian markets
-- leaving Teodorin with a large windfall. It also ruffled
enough feathers that a new law was introduced that prohibited
the exportation of whole logs and limiting clear-cutting. In
the meantime, Teodorin continued entrepreneurial activities that
often included purchase of foreign real estate. "I've been very

MALABO 00000027 003 OF 005


lucky in business," he told us, "and I like to live well. My
house in Malibu is now worth twice what I paid for it."


10. (SBU) The origins of his mother's initial grubstake were
based in real estate, and by any measure she has since become a
formidable local real estate baron. As the oil business took
off, anyone with residential properties that supplied the basics
(i.e., running water, electricity) saw demand for their
properties soar. Earlier than most, the first lady identified
and built into EG's sizzling real estate boom, where 100% return
on investments in western-style construction can come within a
single year of completion. Of course, it doesn't hurt with
marketing if you are the first lady, and land for construction
may be easier to come by than for some others. The president
himself acknowledges his "private interests in Equatorial
Guinea," which include support for his wife's real estate
ventures. Once, in a new, stately presidential palace suite,
waving a hand, he told us, "This doesn't belong to me. It
belongs to the people. But I have to take care of my family, so
I maintain private interests on the side."


11. (SBU) Anecdotal Indicators: Given the poor level of
institutional development, the absence of appropriate law and
the whiplash EG has experienced in going from poverty to riches
in such a short period (a decade ago EG was among the very
poorest countries in the world -- it now has one of the highest
per capita incomes of any population), it is appropriate to
focus on the issue of corruption. Yet apart from the obvious
conflicts of interest, the rumors and accusations, there are
some positive signs. Most EG government revenue is generated by
exploitation of the country's growing oil and gas reserves. All
production is currently led by U.S. oil companies extremely
sensitive to the requirements of the U.S. Foreign Corrupt
Practices Act. Thus we have a reasonable level of confidence
regarding the accounting up to the point that royalty payments
enter EG accounts.


12. (SBU) In this area too, there are positive signs. EG is a
member of the 6-nation Central African Franc monetary union. In
the past decade, and in competition with much larger countries
such as Cameroon, Gabon, and Congo, EG's reserves in the
associated Central African Bank went from a rounding error to
over 60% of the sum total. While leaks are likely, a system
hemorrhaging money to corruption is unlikely to have amassed
reserves at such a rapid rate. A recent visitor from the
secretariat of the Extractive Industries Transparency Initiative
(EITI -- for which EG is voluntarily a candidate country) was
"pleasantly surprised" to find EG's accounts to be in such good
order.


13. (SBU) Riggs Rigged: The 2005 collapse of venerable Riggs
Bank in Washington D.C. continues to hang over EG like a cloud.
At the time of the Senate/OCC investigations, EG was discovered
to have the largest cumulative balance in the bank. Yet study
of the record shows the bank itself to have been at fault with
regard to its reporting responsibilities, while the accounts
associated with EG can be reasonably explained. Based on our
conversations here, Equatoguineans readily accepted Riggs'
advice regarding accounts and accounting -- assuming the bank
was "acting properly." As the increasing flow of
dollar-denominated oil revenues built up, and attractive
interest income streams ensued (which was not always the case
with EG funds held in the BEAC -- the Central African central
bank), individuals associated with the EG government began to
open private accounts. Both the amounts in the government
accounts and those in individual accounts are easily in line
with amounts generated respectively by oil revenues and private
activities of those concerned. Recognizing the crippling human
capacity challenges in the country and the need for western
(particularly U.S.) education, the EG government even worked
with the bank to set up accounts for two separate scholarship
funds, which the bank (poorly) administered. EG leaders were
"surprised" to learn U.S. government investigators took a dim
view of this arrangement.


14. (SBU) As a country, EG has poor level of appreciation for
international best practices in accounting. From the EG
perspective, the country relied on Riggs for good advice, which

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it did not receive. EG continues to struggle with very meager
institutional development in the area of public finance and
financial management. One element scrutinized by U.S.
investigators of the Riggs affair was the peculiar signatory
authority utilized on EG accounts. Long after closure of its
Riggs accounts, President Obiang is still proud to say he is
paymaster for the EG government. He continues to personally
maintain control of the checkbook, "because I've learned I can't
trust anyone else." Countersigned checks are his way of
ensuring money goes where intended. He has been attacked by
some for exerting this level of control, but given what we know
about the current low level of institutional development and
lack of capacity, it may be more prudent than immediately
apparent. There are very large numbers of public projects
underway and the president is famous for making surprise
personal appearances to spot-check for progress, conformity and
quality. The tactic is reported to keep contractors on their
toes. Nevertheless, it is in these downstream, public
expenditures that we lose visibility and in which the greatest
opportunities for corruption persist. Rumors abound of
influence buying, bid rigging and kickbacks. Without developed
institutional oversight and internal controls, one person can't
supervise everything, but woes betide those who are caught in
the act.


15. (SBU) Progress: There are two bright spots and a promising
glimmer regarding improvement in EG's management of public
finances, all of which have significant USG angles. One is the
unique "Social Development Fund" (SDF) whereby EG ministries are
learning to manage project development, planning and execution
in ways that are consistent with international best practices.
SDF is fully funded by the EG government, and involves direct
payment to USAID for 3 years and about $15 million worth of
technical assistance to establish mechanisms and procedures for
social projects that range from health to education. An
overarching goal is to set in motion institutional development
leading to a government-wide system that meets international
standards. After fits and starts, the Fund has moved into the
execution phase of initial round of projects, with dozens more
in development and new ministries coming onboard.


16. (SBU) Another promising sign is EG's determination to
become a member of the Extractive Industries Transparency
Initiative (EITI), an international effort supported by former
British PM Tony Blair and Transparency International's Peter
Eigen. Encouraged by the embassy, EG has mounted a serious,
voluntary effort to obtain candidate status and move toward full
membership. In another demonstration of the capacity challenges
confronting the country, the key stumbling block is not
accounting and transparency so much as a very low level of
development of the country's nascent civil society -- a key
"watch-dog" component of the EITI process. With a 200 million
euro project underway, the EU is engaged in helping civil
society grow to fill this gap.


17. (SBU) Finally, we have been told by the Minister of Finance
that EG will pursue a request for USG assistance (specifically
Treasury Department official technical assistance) in
professionalizing his ministry, and which the government of EG
will partially or fully fund. His letter making this request
has been drafted and is "awaiting the council of ministers
approval," expected soon.


18. (SBU) Conclusion: While we make no claim of having
undertaken an exhaustive study of corruption in EG, we find
local nuance and "ground truth" to be at odds with
often-exaggerated claims made by the international press and
even by NGO's that focus on this issue set. Flush with oil
money, the value of corrupt actions is probably growing.
However, anecdotal evidence suggests the incidence of corruption
is declining. Businessmen describe EG as a "good place to work,
but a hard place to do business." I.e., while it is relatively
safe and secure, many of the actors who populate the country are
working the angles for their own personal and family benefit.
The FCPA and resulting performance of U.S. oil companies has
helped secure a reputation for Americans of being honest and
straight, which helps keep the worst of the crooks at bay.
Other international players may have less integrity. The good

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reputation we enjoy attracts EG leaders who want to see the
business and legal environment improve. Here too, additional
U.S. assistance can help, as the results above show.
SMITH