VZCZCXYZ0011
OO RUEHWEB

DE RUEHLM #0676/01 1300817
ZNR UUUUU ZZH
O 100817Z MAY 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6001
INFO RUEHKA/AMEMBASSY DHAKA PRIORITY 0084
RUEHIL/AMEMBASSY ISLAMABAD PRIORITY 7065
RUEHKT/AMEMBASSY KATHMANDU PRIORITY 5152
RUEHLO/AMEMBASSY LONDON PRIORITY 3726
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 0936
RUEHGO/AMEMBASSY RANGOON PRIORITY 0962
RUCNDT/USMISSION USUN NEW YORK PRIORITY 0575
RUEKJCS/SECDEF WASHDC PRIORITY
RHEFDIA/DIA WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS COLOMBO 000676 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/INS, EEB/ESC/TFS, ISN/CPI A RUGGIERO, AND 
NEA/IR S MISKO 
 
E.O. 12958: N/A 
TAGS: EFIN ETRD KNNP PARM IR CE
SUBJECT: UNSCR 1747: SRI LANKA CITES ASIAN CLEARING UNION 
AS BASIS FOR DELAY IN ACTION AGAINST BANK SEPAH LINKS 
 
REF: A. SECSTATE 60238 
     ¶B. COLOMBO 515 
     ¶C. SECSTATE 40440 
     ¶D. COLOMBO 250 
 
¶1. (SBU) Summary: Sri Lanka has not yet taken any action to 
sever the correspondent bank relationship between the 
state-owned Bank of Ceylon and Bank Sepah of Iran, as 
required by UNSCR 1747.  Central Bank officials say that Sri 
Lanka's membership with Iran in the eight-country Asian 
Clearing Union banking group has prevented Sri Lanka from 
acting.  Sri Lanka will decide how to proceed following the 
May 15 annual meeting of Asian Clearing Union members in 
Dhaka.  Iran is Sri Lanka's sixth largest trading partner and 
supplies half of Sri Lanka's crude oil, so Sri Lanka will 
want to avoid offending Iran if possible.  End summary. 
 
EVER HEARD OF THE ASIAN CLEARING UNION? 
--------------------------------------- 
 
¶2. (SBU) Sri Lanka Central Bank Deputy Governor Ranee 
Jayamaha called in Econoff April 30 to follow up on Sri 
Lanka's response to ref C demarche.  Jayamaha, joined by Sri 
Lanka Financial Intelligence Unit (FIU) director Karunaratne 
and other Central Bank officials, stated that Sri Lanka's 
membership in a body called the Asian Clearing Union had 
prevented the Bank from severing the correspondent 
relationship between the state-owned Bank of Ceylon and Bank 
Sepah.  Jayamaha explained that the Asian Clearing Union 
obligated its eight members (Bangladesh, Bhutan, India, Iran, 
Myanmar, Nepal, Pakistan, and Sri Lanka) to maintain 
correspondent bank relationships with one another.  Jayamaha 
said that Sri Lanka understood that UNSCR was binding on UN 
member states, but that Sri Lanka was reluctant to sever the 
Bank of Ceylon-Bank Sepah relationship without a decision 
from the Asian Clearing Union on how members should proceed. 
She noted that the annual meeting of the Asian Clearing Union 
Board of Directors, composed of the members' central bank 
governors, would be May 15 in Dhaka and that Sri Lanka 
Central Bank Governor Nivard Cabraal would attend. 
 
LEGACY OF EXCHANGE CONTROL ERA 
------------------------------ 
 
¶3. (SBU) Jayamaha described the Asian Clearing Union, created 
in 1975 with a secretariat in Tehran, as a legacy of the era 
when South Asian countries were "pioneers of exchange 
controls."  To control outflows of hard currencies, members 
prevented their banks from participating in electronic cross 
border settlement systems.  Instead, they used "archaic" 
foreign exchange transaction settlement procedures that 
involved the various member banks carrying floats of each 
other's currencies and manually settling accounts every two 
months.  As a result, she added, severing the correspondent 
bank relationships would be complicated -- another reason Sri 
Lanka preferred to defer action on the Bank Sepah connections 
until it got guidance from the Asian Clearing Union board. 
 
¶4. (SBU) Econoff reiterated the points from his original 
demarche (ref B) -- that UNSCR 1747 required Sri Lanka to 
freeze any accounts related to Bank Sepah and that, for the 
freeze to have its desired effect, Sri Lanka must act 
quickly.  Jayamaha was unresponsive to Econoff's inquiries 
about the volume of transactions between the Bank of Ceylon 
and Bank Sepah or the extent to which Sri Lanka's trade with 
Iran (mainly sale of tea and purchases of oil) involved 
transactions through Bank Sepah.  Econoff also reminded the 
Deputy Governor that UNSCR 1747 set a date of May 24 for 
governments to report to the Sanctions Committee on actions 
they had taken to comply with the resolution.  Jayamaha noted 
the date and said she would update Econoff on Sri Lanka's 
plans following the May 15 Asian Clearing Union meeting. 
 
COMMENT: IRAN WIELDS TRADE AND OIL CLOUT 
---------------------------------------- 
 
¶5. (SBU) Iran is Sri Lanka's 6th largest trading partner, 
with total 2006 exports to Iran worth $83 million and imports 
 
of $759 million.  Sri Lanka in 2006 bought from Iran half of 
its total two million metric tons of crude oil imports. 
Iranian officials have visited Sri Lanka recently to promise 
greater trade, investment, and even development aid (ref D). 
Sri Lanka will want to avoid souring this relationship if 
possible, so its application of UNSCR 1747 requirements is 
likely to be limited and slow.  Post would welcome 
information on how other Asian Clearing Union members are 
applying UNSCR 1747. 
 
BLAKE