Cablegate: Turks Sign Loi; Problems with Takeover Of

This record is a partial extract of the original cable. The full text of the original cable is not available.

281526Z Jul 03





E.O. 12958: N/A

REF: A. (A) ANKARA 4666
B. (B) ANKARA 4386

1. (SBU) Summary: Turkish authorities signed the Letter of
Intent (LOI) late July 25, paving the way for the IMF Board
to complete the 5th Review as early as August 1. Agreement
on the LOI came after GOT officials agreed to seek
Parliamentary approval of revised motor vehicle tax
legislation this week. Parliament is scheduled to consider
this legislation, along with the last pending bill on social
security institutions, on July 29. Meanwhile, bank
regulatory authorities have uncovered what they believe is
systemic double-accounting at the Uzan-owned Imar Bank.
Experts are still poring through records, but say the bank's
deposit liabilities are several times greater than the $800
million Imar Bank officially reported ($5 billion, per the
press). Some portion of the larger amount consists of
fraudulent accounts or offshore accounts that were
transferred onshore during or after regulators took over the
bank, but authorities believe the GOT will have to assume
liability for significantly more than the $800 million
originally reported. Bank regulators have referred the case
for criminal investigation, but are concerned that the
problems surrounding the takeover could undermine their
credibility and possibly affect public confidence in the
banking sector. End Summary.

2. (SBU) IMF ResRep reported to us late July 25 that State
Minister Babacan and Central Bank Governor Serdengecti had
signed a Letter of Intent (LOI), paving the way for an IMF
Board review as early as August 1. The signing took place
after a frantic, 24-hour effort to fill the budget hole
created by the Constitutional Court's July 24 annulment of a
motor vehicle surtax (ref A). According to ResRep and Finance
Ministry officials, GOT authorities agreed to resubmit the
motor vehicle surtax legislation, slightly revised to address
the court's concerns, to Parliament on July 28-29.
Parliament is expected to consider this legislation, along
with the last remaining social security bill to strengthen
the social security institutions, on July 29. IMF and World
Bank officials also confirmed to us that the GOT had
consulted with them in preparing amendments to the Public
Procurement Law, and they were satisfied with the results.

3. (SBU) Banking Regulation and Supervision Agency (BRSA)
Vice President Ercan Turkan (strictly protect) told us July
28 that the BRSA's takeover of Imar Bank, owned by the
notorious Uzan family, had turned into a "huge mess."
Turkan confirmed earlier BRSA statements (ref B) that, unlike
in previous cases, regulators had decided to liquidate the
bank and take responsibility only for deposit liabilities.
According to official Imar Bank reports to the BRSA, those
deposit liabilities totaled $800 million. However, the BRSA
has subsequently gained partial access to Imar Bank records
-- though only with great difficulty and after much delay --
and has learned that deposit liabilities are significantly

4. (SBU) Ercan explained that auditors and experts have
uncovered what they believe is systemic double-accounting
through which the bank appears to have hidden hundreds of
millions, if not billions, of dollars in deposits. Initial
indications are that total deposit liabilities are in the
billions (Ercan did not confirm press reports that the amount
is $5 billion, but other BRSA officials have said total
liabilities are "several times greater" than the $800 million
officially reported). Some amount of the difference appears
to consist of deposits that were legitimately made but not
reported to BRSA (or the Finance Ministry or Central Bank).
Another part appears to be fraudulent accounts and offshore
accounts transferred onshore just before, during, and
immediately after the bank's takeover. Some of the hidden
accounts are old, while others appeared on July 3 (the date
of the management takeover) or even later. BRSA auditors are
working day and night to go through the accounts to try to
separate and define them. Ercan suggested that the BRSA
would have to take responsibility for the "legitimately-made"
deposits, or risk undermining public confidence in its
deposit guarantee, and agreed that the total amount of
liabilities the agency would have to take on could be "in the
billions of dollars" (though certainly less than the $5
billion headline figure). The BRSA will not cover fraudulent
accounts or offshore accounts transferred onshore.

5. (SBU) Ercan said that the bank owners appear to be
guilty of fraud, tax evasion, and violation of banking laws
as well as Central Bank regulations (governing reserve
requirements). BRSA has already frozen the Uzan's assets in
Turkey, while also referring the case to the police and
Interior Ministry for possible criminal prosecution. Bank
regulators will also try to liquidate the bank's assets,
which consist mostly of lending to the Uzan Group companies.
Given that this appears to have been a "well organized crime"
and that the Uzan Group has top-notch lawyers, BRSA is
seeking the help of Interior Ministry and other government
legal experts to go after the assets. Ercan acknowledged,
however, that this will be a long process. Regulators also
have seized management control of Adabank, the Uzan family's
second, smaller bank. (Note: The Uzan's had hoped to cement
their purchase of state-owned Petkim via a letter of credit
from Adabank, which now seems unlikely, to say the least.
End note)

6. (SBU) The BRSA's immediate concern, in addition to
determining the precise amount of deposit liabilities it
needs to cover, is to ensure the problems surrounding the
handling of Imar Bank do not undermine public confidence in
the agency or the banking system. Ercan said that the Uzans
are arguing publicly that the BRSA, together with independent
auditors, had conducted a three-stage audit of Imar Bank in
2002 and pronounced it solvent and healthy (after a $340
million capital injection from the Group). Moreover, they
say, the Bank has regularly reported its desposit liabilities
to the BRSA, so how can it now say it is surprised by the
amount? Ercan admitted there is a problem, as the BRSA did
pronounce Imar Bank fit in 2002. The explanation, he said,
is that -- to find this kind of intentional, well organized
fraud -- BRSA auditors would have to have had on-site access
to all of Imar Bank's 169 branches. However, with only 80
auditors on its staff, there was no way it could do this.
Ercan added that the Uzan's second claim -- that they have
reported the full amount of Imar Bank deposits to BRSA all
along -- is a flat-out lie. Still, if depositors begin to
question the BRSA's competence or honesty, or to wonder what
other hidden problems plague the banking system, there could
be a decline in confidence and possibly even a run on some
small banks. Ercan hastened to add that, so far, BRSA has
seen no evidence of such a bank run.

7. (SBU) IMF ResRep told us late today that he would meet
with BRSA staff July 29 to discuss the Imar Bank case and
next steps. He noted that, at this point, no one knows how
much of the hidden deposits actually will end up in the
government's hands. Whatever the size of the problem, Fund
staff will advise BRSA to transfer legitimate Imar Bank
deposits to another, sound bank, and to have Treasury issue
bonds to the bank equal to the new liabilities. Such an
approach minimizes the fiscal and monetary impact of the
problem, though it does add to the Treasury's net liabilities
and budgetary expenditures, in the form of increased interest
payments. He agreed that the question of how the BRSA's
three-stage audit process in 2002 could have missed this
enormous financial hole is extremely serious, and one the
Fund will certainly take up. He does not, however, expect
this issue to delay the 5th Review.


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