VZCZCXRO1875
PP RUEHDBU
DE RUEHYE #1342/01 2701251
ZNY CCCCC ZZH
P 271251Z SEP 06
FM AMEMBASSY YEREVAN
TO RUEHC/SECSTATE WASHDC PRIORITY 4015
RUEHLMC/MILLENNIUM CHALLENGE CORP PRIORITY
INFO RUCNCIS/CIS COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 1118
RUEHTC/AMEMBASSY THE HAGUE 0123

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 001342 
 
SIPDIS 
 
SIPDIS 
 
ANKARA FOR FCS 
 
E.O. 12958: DECL: 09/27/2016 
TAGS: PGOV ECON EFIN ETRD EINV KTFN MCC AM
SUBJECT: BANK CONTENDING FOR MCC BUSINESS SUBJECT OF 
MALFEASANCE INVESTIGATION 
 
YEREVAN 00001342  001.2 OF 002 
 
 
Classified By: CDA A.F.Godfrey for Reason 1.4 (b, d) 
 
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SUMMARY 
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¶1. (C) Armenian regulators and the IMF have both flagged 
concerns about possible wrongdoing and suspicious 
transactions at Converse Bank, a major local bank, which we 
understand is a short-listed candidate to handle MCC 
transactions.  The Central Bank of Armenia's (CBA) financial 
intelligence chief told us there was ongoing regulatory 
action against Converse Bank for money laundering, 
embezzlement and other crimes, but that there is tough 
resistance within the government to an investigation.  Some 
weeks ago, the IMF told us that they suspect -- based on 
their analysis of financial reports -- that Converse Bank has 
been involved in money laundering.  Concern over Converse 
Bank was also raised twice by the Minister of Finance and 
Economy at recent meetings of the MCA-Armenia Governing 
Council, which is now evaluating which of the shortlisted 
banks will manage the MCC "Permitted Bank Account."  We 
understand that the Governing Council is sufficiently 
concerned that it has tabled further consideration of this 
matter.  END SUMMARY 
 
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IMF SHARES CONCERNS ABOUT CONVERSE BANK 
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¶2. (C) In one of his last meetings with us before leaving the 
 Country a few weeks ago, departing IMF Resident 
Representative Jimmy McHugh  (please protect) told econoff 
that IMF data suggested that  there was a problem with 
malfeasance at Converse Bank.   Specifically, IMF's analysis 
of Converse Bank's regular  data filings imply the existence 
of transactions that were  not properly reported and of 
excessively high reported interest rates  for certain bank 
accounts.  Award-winning Converse Bank is one of the leading 
banks in Armenia.  The bank was founded in 1993 and was 
listed by Global Finance as one of the "Best Emerging Market 
Banks" in 2005.  It also won the Financial Times 
Corporation's award for Bank of the Year in Armenia in 2004 
and 2005.  The bank has 15 branches and is estimated to have 
66,000 customers.  According to McHugh, the bank was involved 
in laundering assets from Russia and certain members of the 
board might also have been embezzling funds.  McHugh said 
that the Central Bank of Armenia (CBA) had been guilty of 
"regulatory forbearance," aware  of the situation but failing 
to act. 
 
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CBA REQUESTS THAT MCC NOT SELECT CONVERSE BANK 
--------------------------------------------- -- 
 
¶3. (C) On September 22, econoff raised the issue with the 
acting head of the CBA's Financial Intelligence Unit Nerses 
Yeritsyan, who said that things at Converse were "under 
control" and that  the case had been referred to the 
Prosecutor General's  Office.  He said that members of the 
Converse Bank board were suspected of tipping off customers 
who were under investigation for money laundering and other 
crimes, and that the CBA -- in its role as banking regulator 
-- would require Converse to shake up its top management in 
the near future. 
 
¶4. (C) In a subsequent meeting September 26, Yeritsyan told 
econoff he had heard that Converse Bank was under 
consideration for the MCC program.  He asked emphatically 
that Converse not be approved.  He said that MCC approval at 
this stage would seriously undermine the CBA's efforts to 
combat money laundering.  Yeritsyan said that the CBA had 
been working on the case against Converse for some time and 
that the Converse  leadership had recently agreed, in 
negotiations with the regulator, to sell off the healthy 
(i.e. believed to be clean) portion of its operations 
excluding all off-shore accounts.  Given the bank's large 
market share, the CBA did not want to close the bank 
entirely.  Information about the off-shore accounts and other 
suspicious transactions has already been sent to the 
Prosecutor General. The CBA hopes to see significant 
convictions of some politically powerful individuals for 
misdeeds at Converse.  Converse Bank's owner, however, is now 
backing away from its agreed remedy proposal with the CBA, 
brandishing MCC's consideration of Converse as "evidence" 
that its misdeeds were exaggerated. 
 
 
YEREVAN 00001342  002.2 OF 002 
 
 
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CBA OUT ON A LIMB 
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¶5. (C) Yeritsyan said that the CBA Chairman and he had put 
themselves out on a limb when they began pursuing this case 
against Converse.  He said that Converse had political allies 
and that he and the Chairman had taken a political risk 
(though he disputed the persistent rumor we hear that the 
bank is in-part owned by the President's son).  Yeritsyan 
even suggested that he and the CBA Chairman could lose their 
jobs if the case against Converse did not move forward. 
 
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SAY NO, BUT NICELY 
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¶6. (C) Yeritsyan said, repeatedly, that it was critical that 
MCC not accept Converse as its bank.  He also said, however, 
that it was important that any refusal not undermine the 
on-going investigation.  Econoff explained that there was a 
"no-objection" option and that MCC could object to the bank 
but that she, econoff, was not sure if MCC would have to 
explain the grounds for the objection.   Yeritsyan said that 
another option is that CBA can ask the Armenian Prime 
Minister to object (as is his right) to the selection of 
Converse as MCC's bank in Armenia.  Yeritsyan asked for 
reassurances that if the Prime Minister did object, the USG 
and MCC would essentially back up the decision by not 
complaining about the Prime Minister's decision or, 
preferably, saying no to Converse  as well. 
 
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MCA-ARMENIA RECOGNIZES CONCERN ABOUT CONVERSE BANK 
--------------------------------------------- ----- 
 
¶7.  (C) Converse Bank was short-listed by the Millennium 
Challenge Account - Armenia (MCA) as one of the possible 
banks to be used to manage MCC accounts.  At a September 27 
meeting of the MCA Governing Council, Converse was presented 
as a leading candidate.  In a signal that the Central Bank's 
investigation is gaining traction and is getting support from 
senior government officials, the Governing Council (which is 
chaired by Prime Minister Markarian) tabled the decision to 
select MCA's bank and asked the Working Group to review its 
recommendation in light of the new concerns, which were 
raised by the Minister of Finance and Economy. 
 
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COMMENT 
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¶7. (C) Both Yeritsyan and McHugh are long-term, 
highly-regarded Embassy contacts.  While we have not seen any 
evidence to support their allegations, we believe they are 
credible.  We do not think Yeritsyan exaggerates his concern 
that losing this fight could seriously damage the credibility 
of the fledgling Financial Intelligence Unit, and undermine 
its developing ability to become an effective counter to 
financial crimes.  Judging from the initial reaction of the 
MCA governing council, it seems that the FIU is getting some 
senior support.  There appear to be sufficiently serious 
questions about the integrity and reputation of Converse Bank 
to suggest that selecting it to process MCC transactions 
would be ill-advised. 
GODFREY