VZCZCXRO2190
PP RUEHLMC RUEHVC
DE RUEHUM #0881/01 3560818
ZNR UUUUU ZZH
P 220818Z DEC 06
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC PRIORITY 0618
INFO RUEHMO/AMEMBASSY MOSCOW 1652
RUEHBJ/AMEMBASSY BEIJING 5339
RUEHUL/AMEMBASSY SEOUL 2565
RUEHKO/AMEMBASSY TOKYO 2320
RUEHOT/AMEMBASSY OTTAWA 0373
RUEHML/AMEMBASSY MANILA 1277
RUEHLO/AMEMBASSY LONDON 0073
RUEHVC/AMCONSUL VANCOUVER 0015
RUEATRS/DEPT OF TREASURY WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0429
RUEKJCS/SECDEF WASHDC

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000881 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, EAP/EX, EB/IFD, EB/ESC/TFS, 
AND CA/EX 
STATE PASS USTR, USTDA, OPIC, AND EXIMBANK 
USDOC FOR FLAVIN AND ITA 
MANILA AND LONDON FOR ADB, EBRD USEDS 
JUSTICE FOR AFMLS, OIA, AND OPDAT 
TREASURY FOR FINCEN AND WORLD BANK,IMF USEDS 
 
E.O. 12958: N/A 
TAGS: EFIN EINV PREL ETRD EMIN ENRG MG
SUBJECT: Shadowy Buyers Near Purchase of Largest Mongolian Bank 
 
Ref: 870 Ulaanbaatar 
 
Sensitive But Unclassified - Not for Internet Distribution. 
Contains proprietary business information. 
 
 
 
¶1. (SBU) SUMMARY AND COMMENT: 
There are major concerns about the impending sale of Trade and 
Development Bank (TDB), Mongolia's largest bank overall and the key 
bank for foreign exchange and foreign transactions, to a shadowy 
100% Mongolian-owned consortium with unknown financing.  The IFC and 
the ADB, which are minority shareholders, plan to sell their shares, 
fearing a risk to their institutional reputations.  The foreign 
management firm currently running TDB in accordance with 
international standards may also leave after the sale.  The central 
bank has the power to halt the transaction but, considering its 
generally poor regulation of other banks, there are serious 
questions about its will to do this or to ensure that after a sale 
TDB would continue to meet international standards.  The embassy 
currently uses TDB for banking transactions, and has expressed 
concerns to the Bank of Mongolia both as a depositor and as an 
observer worried about the potential negative influences of a bad 
sale of Mongolia's largest bank for Mongolia's economic development 
and risks posed to its financial system's stability.  END SUMMARY 
AND COMMENT. 
 
Bank for Sale 
------------- 
 
¶2. (SBU) Trade and Development Bank is the key Mongolian financial 
institution servicing international accounts and transactions, 
holding nearly 70% of Mongolia's dollar and foreign currency 
deposits.  The bank currently nets US$10 million in annual profit, 
which is a 25% return on its US$40 million in shareholder equity. 
TDB is currently owned by a consortium led by U.S.-based metals 
trader Gerald's Metals of Stamford, Connecticut, which owns 64%. 
The Asian Development Bank (ADB) and the International Finance 
Corporation (IFC) each own 7.5%.  The remaining 21% is owned by 
identifiable Mongolian private citizens. 
 
¶3. (SBU) The ADB and IFC only invested in TDB following an extensive 
review process that certified the bank's financial stability and 
commitment to following the best international practices for 
transparency and accountability.  TDB is run for the owners by a 
management team from the Netherlands-based ING Financial 
Institutions.  It was these certifications and management provisions 
that led the United States Disbursing Officer to select TDB to 
handle most of its banking arrangements in Mongolia, including 
disbursement of payrolls and off-site payment for visa processing 
(scheduled start-up, January 2007).  (Note: Embassy has begun to 
examine alternatives to TDB.)  In addition to the US, almost all 
other multilateral donors (ADB, WB, UN, etc.) use TDB for their 
financial transactions.  According to local banking experts, there 
is currently no ready substitute to handle the volume of foreign 
exchange transactions dealt with by TDB.  These experts say that a 
disruption of the bank would be a serious impediment for Mongolia's 
ability to transact normal business. 
 
¶4. (SBU) Gerald's acquired its majority share in a privatization of 
the TDB by the Government of Mongolia (GOM).  The company has always 
stated that, being a metals trader, it had no long-term interest in 
running a bank in Mongolia.  It saw the bank as a stepping stone to 
achieving stability in its metals trading activities, especially in 
acquiring copper concentrate from Mongolia, and would sell its TDB 
stake at the first propitious opportunity.  This opportunity arose 
over the last two months in the form of a 100%-Mongolian-owned 
consortium that seems willing to pay the reported US$70 million 
purchase price for shares of Gerald's and other stakeholders. 
 
Beware of the Buyers 
 
ULAANBAATA 00000881  002 OF 003 
 
 
-------------------- 
 
¶5. (SBU) However, aspects of the deal have raised flags among 
members of the financial community and TDB's minority shareholders. 
First to complain was the American CEO of TDB's chief competitor, 
Khan Bank (KB).  Japanese-owned and American-operated, Khan Bank has 
the largest branch and Mongolian Currency deposit base in Mongolia. 
Khan Bank had hoped to acquire TDB itself, but found itself locked 
out by Gerald's decision to sell to the Mongolian consortium.  Khan 
Bank complained to post about the sale, noting that it could neither 
identify the buyers nor the source of their funds. 
 
¶6. (SBU) Post then went to other shareholders and sources to confirm 
the sale and its nature. IFC declined to respond to post inquiries 
about its response to the sale, only confirming that a sale was 
occurring and that IFC had concerns about it.  The ADB was more 
forthcoming about its concerns.  The ADB shareholder representative 
confirmed that the bank is being purchased by a consortium led by 
Capitron Bank and Ulaanbaatar Bank.  A single press account of the 
sale also identified these institutions as the prime buyers. 
(Comment:  In post's view, both banks are poorly run with real 
default loans which are believed to be extremely high.  An MP with 
an unsavory reputation is believed to be the real major owner of 
Capitron -- a belief lent substantial credence by the MP's reported 
beating last year of a senior civil servant who is a small 
shareholder in Capitron, after the official declined to sell the MP 
his shares.)  In addition to these two banks, the ADB and other 
sources confirmed that a separate block of shares, some 8% held by a 
Mongolian citizen, had been sold to a woman whose identity no one 
could conclusively affirm.  Overall, neither post nor other credible 
local sources has been able to identify the purchasers with any 
certainty. 
 
¶7. (SBU) The European Bank of Reconstruction and Development 
representative (EBRD) voiced extreme concern about the lack of 
transparency in all aspects of the sale.  The EBRD representative 
told emboff that he had gone to both the IFC and ADB with a proposal 
that the EBRD buy Gerald's shares outright and run the bank with the 
two multilaterals.  However, both organizations nixed the idea 
because, according to the EBRD, they wanted out of an arrangement 
that no longer suited them. 
 
¶8. (SBU) A TDB executive told post he had been kept in the dark by 
Gerald's about the specifics of the deal until last week.  The 
executive revealed that the two banks will be minority shareholders 
and that the bulk of the shares will be purchased by a private 
Mongolian citizen, whose identity he declined to reveal until the 
deal was formally signed and approved by all shareholders at a 
meeting to be held on December 28, 2006. 
 
¶9. (SBU) The executive related that the CEO of one of buying banks 
had asked him to stay on.  The CEO asserted that the new owners 
wanted to continue to run TBD as Gerald's had, adhering to the best 
international financial and reporting practices.  ADB confirms that 
the buyers -- through Gerald's -- had expressed the same desire to 
the ADB, asking ADB to identify a Western management team once ING's 
contract to run TDB expires.  The TDB executive expressed 
reservations about these sentiments, noting that neither Capitron 
nor UB City Bank are currently following these practices, and that 
the private buyer has no apparent experience running a bank. 
 
¶10. (SBU) The TDB executive noted that both the IFC and the ADB had 
the right to stop the sale if they had reservations of the quality 
of the buyers, and asserted that therefore the two institutions must 
have been satisfied with their bona fides.  By contrast, the ADB 
representative noted to commoff that continued association with such 
murky dealmakers could harm ADB's reputation, and thus that it is 
better to take the money and depart. 
 
¶11. (SBU) The TDB executive asked how the buyers might address 
concerns that the USG had about the new ownership.  Commoff noted 
 
ULAANBAATA 00000881  003 OF 003 
 
 
that much of the problem had originated from the combined failure of 
Gerald's and the buyers to reach out to their customers in the media 
and more personally to explain the nature of the sale.  The focus on 
secrecy had created an unhealthy atmosphere of doubt about the real 
intentions of both buyer and seller, which undercut statements that 
the new owners wished to continue running the bank according to best 
practices.  Good faith gestures of openness to customers, among 
which TDB numbers the USG, might lessen our deep concern. 
 
The Position of the Bank of Mongolia on the Sale 
--------------------------------------------- --- 
 
¶12. (SBU) On December 20, DCM and Senior Commercial Assistant 
discussed the proposed sale of TDB with Mongolia (BOM) Head of 
Supervision Ganbaatar, the country's banking regulator.  Emboffs 
asked about BOM's plans to supervise what promises to be the largest 
commercial transaction in Mongolia's modern history.  Post raised 
two concerns:  the identity of the buyers and their source of 
funding remains unclear; and the commitment of the buyers to follow 
best international best practices is unknown. 
 
¶13. (SBU) Ganbaatar acknowledged the validity of these concerns and 
said that the BOM has been in un-official contact with the sellers 
and buyers.  However, the official said, BOM had not begun its 
formal review and would not do so until TDB officially requested 
such a review of the in-coming owners' bona fides.  Once the 
official request was made, the official stated, Mongolian banking 
law requires each buyer to prove his fitness to run any bank.  This 
requires divulging sources of financing, criminal records, banking 
experience, etc.  BOM's supervision department would lead the 
review, but would draw heavily on the resources of the newly created 
Financial Investigative Unit (FIU). (Note: The FIU was created as 
part of the recently passed anti-money laundering law.  However, 
although it has a new director, the agency has no staff to conduct 
any reviews at this point and there remains no date for when the FIU 
will become fully operational.) 
 
¶14. (SBU) Ganbaatar stated explicitly that BOM could ban the sale of 
TDB to shareholders it found unsuitable, but acknowledged that, over 
the last six years, BOM has not disciplined any bank for malfeasance 
or non-compliance with the banking laws and regulations, even in the 
face of clear evidence of such abuses.  Emboffs noted that the bank 
had a new governor and regulatory team that might take a different 
tack than the regime of ex-BOM governor Chuluunbat, and that the TDB 
transaction would prove an interesting test of BOM's commitment to a 
well-run banking system committed to best practices.  The BOM 
official agreed that the size, scope, and importance of TDB made 
their coming assessment of the buyers an important milestone for 
their agency. 
 
Minton