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Cablegate: Commerce Depsec Sullivan Pushes Krg to Boost Transparency,

VZCZCXRO1784
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #2258/01 2021335
ZNR UUUUU ZZH
P 201335Z JUL 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 8399
RUCPDC/USDOC WASHDC
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 03 BAGHDAD 002258

SENSITIVE
SIPDIS

USDOC for Deputy Secretary of Commerce
USDOC for 4530/ITA/MAC/IIRTF/Shamrock-Mann
USODC for 4520/ITA/MAC/ME/KReichelt/CLoustaunau
USDOC for 3131/ITA/USFCS/RD/ANESA/GLoose

E.O. 12958: N/A
TAGS: BEXP EINV EFIN ECON TU IZ
SUBJECT: Commerce DepSec Sullivan Pushes KRG to Boost Transparency,
Combat Corruption

This is a Kurdistan Regional Reconstruction Team (RRT) cable.

Summary
-------

1. (SBU) Deputy Secretary of Commerce John Sullivan led the first
Department of Commerce (DOC) sponsored trade mission to visit Iraq
in more than 20 years June 22-25 in Erbil. Accompanying D/S
Sullivan were representatives from nine U.S. companies who sought to
explore profitable business opportunities in the Kurdistan Region
and in greater Iraq. A separate delegation of 14 U.S. companies
visited Erbil concurrently with the DOC trade delegation, in a trip
organized by the U.S. Chamber of Commerce in Washington. During
discussions with the Kurdistan Regional Government's (KRG) Deputy
Prime Minister, the Chairman of the KRG's Board of Investment, and
the KRG Ministers of Trade, Agriculture and Planning, D/S Sullivan
stressed the importance of transparency in the formulation and
execution of government budgets, as well as the necessity for KRG
senior officials to combat corruption in both the public and private
sectors. D/S Sullivan noted that the Kurdistan Region's strong
natural and human resources should be "more than sufficient" to
attract significant investment from the U.S. and other countries,
and he pledged to educate U.S. businesses about the opportunities
available in the Kurdistan Region. He stated, however, that the
perception of corruption could materially reduce the flow of
U.S.-sourced investment into the region. D/S Sullivan's message
reinforced the USG's broader anti-corruption initiative and was
especially timely, given the likelihood of substantial medium-term
increases in oil-related revenues and business activity in the
Kurdistan Region (see septel for further information on other
aspects of the trade mission). END SUMMARY.

D/S Sullivan Delivers Strong,
Consistent Message on Corruption
---------------------------------

2. (SBU) During his meeting with KRG Deputy Prime Minister (DPM)
Omar Fatah on June 23 in Erbil, D/S Sullivan discussed the corrosive
effects of corruption upon the ability of nations and regions to
attract foreign direct investment. He noted that the perception of
corruption among KRG officials could materially reduce the flow of
U.S.-sourced investment into the region, and he stressed the
"importance that U.S. businessmen see fair systems of awarding
government contracts, as well as transparent overall governance
based on the rule of law." The DPM said the KRG recently created a
committee to investigate allegations of official corruption and is
"against corruption in all its forms." He noted that the KRG has
possibly created a "misperception of corruption" through its efforts
to help foreign investors find local partners and facilitate foreign
direct investment. Fatah said the KRG is increasingly encouraging
foreign investors to find their own local partners, and he welcomed
the trade mission as a step in that direction.

3. (SBU) Fatah emphasized that "the U.S. military and people are
liked, respected and considered as liberators in the Kurdistan
Region." He also described the Kurdistan Region's "good security
situation that is better than in the rest of Iraq." D/S Sullivan
agreed with these points, and he also noted that the Kurdistan
Region's strong natural and human resources should be "more than
sufficient" to attract significant investment from the U.S. and
other countries. He said the U.S. Department of Commerce would
continue to educate American businesses about the opportunities
available in the Kurdistan Region.

4. (SBU) During subsequent meetings with other senior government
officials (i.e. the KRG ministers of planning, agriculture, and
trade, as well as the Chairman of the KRG Board of Investment), D/S
Sullivan repeated his message on corruption. He was joined during
his private meetings with these KRG officials by Ambassador Charles
Ries, Minister for Economic Affairs and Coordinator for Economic
Transition in Iraq. D/S Sullivan's KRG interlocutors stressed their
firm opposition to corruption, as well as their individual and
collective commitments to ensuring transparency in the KRG's
budgeting, government procurement, and corporate oversight
processes.

5. (SBU) KRG Minister of Trade Mohammed Raouf, a leader in the
Kurdistan Islamic Union party, admitted that corruption was present
all over Iraq, and that the appointments of senior KRG officials
based on political connections only made it worse. Raouf reiterated
the KRG's commitment to fight corruption, but he found it unlikely
that U.S. firms would face corruption-related obstacles in the
Kurdistan Region. He said, "If a powerful, large U.S. company came
here, no one would dare ask for a bribe. Let's have just one big
U.S. company enter, and we'll see if they have problems. They

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won't." D/S Sullivan described bidding transparency and the absence
of corruption as crucial aspects of any U.S. businessperson's
analysis of whether to invest in a particular foreign country or
region. Citing the U.S. Department of Justice's (DOJ) rigorous
enforcement of the Foreign Corrupt Practices Act, he said, "U.S.
businesses will only invest in the Kurdistan Region if they are
convinced they will not face DOJ legal scrutiny regarding such
investments."

KRG Ministers Describe
Investment Priorities and Concerns
-----------------------------------

6. (SBU) The Chairman of the KRG's Board of Investment, Herish
Muharram, described financial sector investment opportunities and
said attracting foreign investments in the underdeveloped banking
and insurance sectors remains a high priority. Muharram noted the
propensity of Kurdish individuals to avoid banks, given past bank
failures in the region, and he described most banks' reluctance to
actively solicit private and corporate customers who are unknown to
them. He said, "We're trying to build a bridge of trust between the
banks and their customers." He cited the 18 percent rate of
interest on bank deposits with the Central Bank of Iraq as both a
disincentive to lending and an impediment to modernization of the
banking sector. Muharram said the KRG is considering minority
investments of "maybe 20 percent" with foreign bank and insurance
companies seeking to establish branches in the Kurdistan Region, as
a means to jump start foreign investment. He described a recent KRG
initiative to attract investment from Iraqis who fled Iraq into
neighboring countries. Muharram also noted that the KRG is creating
special identification cards for Arab businesspeople from other
parts of Iraq that will "ease their passage through all [KRG]
checkpoints."

7. (SBU) The KRG Minister of Agriculture, Abdulaziz Tayeb, described
the "decline in all agricultural sectors" in the Kurdistan Region
over the past 20 years, as a result of Saddam Hussein's "destruction
of villages and infrastructure that converted [Kurdish Iraqis] from
producers to consumers." He said the region's farmers "have
problems bringing production to market." Tayeb listed cold storage,
canning factories, dairy production centers, and improvements in
transportation infrastructure as the KRG's highest investment
priorities for the agricultural sector. D/S Sullivan noted that
many U.S. companies have the products and expertise necessary to
assist in these areas. Tayeb responded, "The [KRG] prime minister
has issued an order to all ministries to give U.S. companies
preferred access to business opportunities in the Kurdistan
Region."

8. (SBU) KRG Minister of Planning Shwani told D/S Sullivan and
Ambassador Ries that he expects Iraq's forthcoming budget
supplemental amount to total approximately $8 billion. From the
KRG's expected $1.3 billion (i.e. 17 percent) share of that amount,
Shwani said the KRG has allocated $300 million for electricity
infrastructure and $200 million for water projects, with the
remainder to be disbursed to the three Kurdish governorates for
"capital investment projects involving provision of basic services."


Comment
--------

9. (SBU) Given their focus on increasing U.S. business activity and
investment in the Kurdistan Region, KRG officials eagerly welcomed
the DOC trade mission. The KRG expects substantial medium-term
increases in the region's oil-related revenues and foreign business
activities -- including significant investments from U.S. companies.
These factors increased the importance of D/S Sullivan's clear and
timely message to KRG officials regarding corruption. As in the
rest of Iraq, the number of corruption cases successfully prosecuted
in the Kurdistan Region remains negligible. The statutory and
regulatory provisions intended to control corruption will require
substantial revision to be effective. Tighter statutes and
regulations must then be followed by much more aggressive
enforcement actions. Despite public and private protestations by
KRG officials against corruption, the KRG's financial inflows and
outflows remain opaque, KRG officials are not required to publicly
declare their assets or sources of income, and RRTOffs are aware of
no corruption convictions against KRG officials during at least the
past year. The KRG also lags the central government in developing
initiatives to combat corruption. RRT Erbil and Embassy Baghdad
will follow up with the KRG to pursue more vigorous action from the
KRG PM's anti-corruption committee and support other such
initiatives.


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