Cablegate: Bank Mellat/Feeb Demarch Delivered to Bank Negara

VZCZCXRO3219
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #0752/01 2540945
ZNY SSSSS ZZH
P 110945Z SEP 09
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC PRIORITY 3187
INFO RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY
RHHMUNA/CDR USPACOM HONOLULU HI PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY

S E C R E T SECTION 01 OF 02 KUALA LUMPUR 000752

SENSITIVE
SIPDIS

DEPT FOR T, DEPT FOR ISN, DEPT FOR NEA, DEPT FOR EAP

E.O. 12958: DECL: 11/12/2019
TAGS: EFIN ETTC KNNP IR PINR PTER MY
SUBJECT: BANK MELLAT/FEEB DEMARCH DELIVERED TO BANK NEGARA

REF: A. SECSTATE 90063
B KUALA LUMPUR 739

Classified By: Economic Counselor Matthew J. Matthews, reason 1.4
(b and d).

1. (S) Econcouns delivered ref A demarche on FEEB xxxxxxxxxxxx emphasized
that BN and LOFSA took their supervisory role seriously, and
that Malaysia approved the FEEB license and would allow it to
operate as long as there was no evidence that FEEB was in
contravention of any relevant law and was not sanctioned by
the UN. In an effort to establish that BN did in fact take
its supervisory role seriously, Zamaini had his LOFSA Deputy
Director read the four restrictions which LOFSA placed on the
FEEB license and noted that FEEB had only processed one
transaction in its first six months of operation. Econcouns
reiterated core USG points several times, emphasizing that
FEEB represented substantial reputational risk to Malaysia
and that revocation of the license would be the prudent thing
to do. xxxxxxxxxxxx made it clear that BN did not intend to revoke
FEEB,s license unless the UN decided to sanction FEEB or
proof was provided that activity by FEEB that contravened
Malaysia,s laws. End Summary.

2. (S) Econ Counselor Matthews, accompanied by Econoff and
visiting Embassy Singapore Treasury Attache Seth Bleiweis,
conveyed reftel (a) points and non-paper on First East Export
Bank (FEEB) to Bank Negara (BN) Deputy Governor Zamani, BN
Legal Director Jeremy Lee, Labuan Offshore Financial Services
Authority (LOFSA) Deputy Governor Danial Mah Abdullah, and
others on September 10. This follows on delivery of demarche
and non-paper to the Ministry of Foreign Affairs and PM,s
office on September 4 (Ref B). Econcouns highlighted to
xxxxxxxxxxxx the key points of the non-paper for xxxxxxxxxxxx, noting
specifically the new information on Bank Mellat proliferation
finance activities and warned that if the GOM did not commit
to revoking the FEEB license the U.S. would proceed with
sanctioning FEEB under U.S. law.

3. (S) xxxxxxxxxxxx responded that BN performed significant due
diligence and gave great consideration prior to allowing
LOFSA to issue the FEEB license. To counter possible
proliferation activities, LOFSA issued the FEEB license with
four significant operating conditions, the first conditioned
bank license ever issued in Malaysia, xxxxxxxxxxxx said. LOFSA,s
Abdullah orally read out the conditions which included: FEEB
may not do business with any UN sanctioned entity; FEEB is
required to adhere to all Malaysian anti-money laundering and
anti-terror financing laws; FEEB must comply with all LOFSA
regulations and directives; and FEEB shareholders may not be
sanctioned by the UN. Breach of any of the listed
conditions, he noted, would be cause for immediate license
revocation. Abdullah also said that Bank Melli and Bank
Saderat had previously applied for bank licenses from LOFSA,
but were denied.

4. (S) Lee shared BN concerns that if BN were to revoke the
FEEB license it would trigger law suits against the GOM by
FEEB shareholders. He continued that after repeated BN
requests, the USG has yet to provide any concrete or specific
evidence of FEEB or Bank Mellat wrongdoing that could be used
in court by the GOM to defend a suit against BN for wrongful
action against FEEB. xxxxxxxxxxxx added that U.S. &suspicions8
were not always accurate. Lee also queried on U.S.
designation actions on other Bank Mellat foreign subsidiaries
in Seoul, London, Ankara and other locations and asked why
Malaysia was being singled out for immediate action.
Abdullah noted that BN recently inspected FEEB and found the
bank had consummated only one Euro 400,000 letter of credit
for the import of oil and gas-related equipment from Iran in
its first six months of operation. BN officials argued that
they could supervise a low-activity Bank Mellat subsidiary as
well as those other countries where the US is not preparing
to implement sanctions.

5. (S) Econcouns countered that the U.S. will unilaterally
designate FEEB in order to protect our financial system and
warn other financial institutions away from a bank owned by
what we believe is a provider of financing for proliferation
items. He added that Iran had used its banks, such as
Saderat and Melli, to finance proliferation items from other
important trading partners and those banks are now
sanctioned. Our information indicates Iran is now using
Mellat for the same purpose. FEEB could be next, potentially
causing significant embarrassment to Malaysia. Econcouns
told xxxxxxxxxxxx that the US was offering BN pre-notification and

Kuala lump 00000752 002 of 002

the release of our intelligence as a good faith gesture so
that the GOM could prudently manage the risks to Malaysia,s
financial system and its reputation in the global financial
market by revoking FEEB,s license prior to a proliferation
finance incident.

6. (S) xxxxxxxxxxxx acknowledged the importance of this issue to
the United States, but gave no indication that the GOM would
revoke FEEB,s license. Econcouns nevertheless encouraged
prompt revocation action by BN.

Keith

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