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

281526Z Jul 03

UNCLAS SECTION 01 OF 02 ANKARA 004770 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR BRYZA 
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO 
USDA FOR FAS FOR EC AND CCC/FSA 
 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV TU
SUBJECT: TURKS SIGN LOI; PROBLEMS WITH TAKEOVER OF 
UZAN-OWNED BANK 
 
 
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 
higher. 
 
 
¶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. 
 
 
 
 
DEUTSCH