VZCZCXRO4163
RR RUEHBI
DE RUEHLM #0600/01 1601129
ZNR UUUUU ZZH
R 091129Z JUN 09
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 0095
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHNE/AMEMBASSY NEW DELHI 3113
RUEHKA/AMEMBASSY DHAKA 1733
RUEHIL/AMEMBASSY ISLAMABAD 8745
RUEHKT/AMEMBASSY KATHMANDU 6979
RUEHKP/AMCONSUL KARACHI 2487
RUEHCG/AMCONSUL CHENNAI 9365
RUEHBI/AMCONSUL MUMBAI 6670
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 COLOMBO 000600 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR SCA/INSB AND EEB/IFD/OMA 
STATE PASS USTR FOR ADINA ADLER AND VICKY KADER 
TREASURY FOR SUSAN CHUN 
 
E.O 12958: N/A 
TAGS: ECON EFIN EINV PGOV KMCA CE
SUBJECT: SRI LANKA: OIL HEDGE BACK BEFORE SUPREME COURT 
 
REF: A. WITMER-ADLER-HICKS/HATCHER EMAILS (various) 
¶B. COLOMBO 285 
¶C. 08 COLOMBO 1155 
¶D. 08 COLOMBO 1127 
¶E. 08 COLOMBO 1107 
 
¶1.  (SBU) Summary:  The filing of a new fundamental rights petition 
before the Supreme Court once again calls into question the legality 
of oil hedge contracts between the Ceylon Petroleum Company (CPC) 
and several international and local banks.  The petition asserts, 
among other issues, that CPC did not have the authority to pursue 
hedging contracts, that hedging itself is illegal under Sri Lankan 
law, and that at least one international bank bribed CPC officials 
with foreign trips.   Citi, the only U.S. bank involved, is 
preparing a response to the petition in advance of the July 14 
hearing date.  Citi continues to pursue international arbitration in 
London.  End Summary. 
 
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New Case 
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¶2. (U) Following and further to similar cases last year, on July 14 
the Supreme Court will hear a new fundamental rights petition 
challenging oil hedging contracts that the state-owned enterprise 
Ceylon Petroleum Corporation (CPC) entered into in 2007 and 2008. 
The petition, which was filed by leading public interest 
activist/management consultant Nihal Amerasekara, aims to annul the 
contracts by demonstrating that the CPC did not have the legal 
authority to enter into them.  Amerasekara stated he intends to 
"prevent grave and irreparable loss, damage and detriment being 
caused to the people of the country; the people being the co-owners 
of the Consolidated Fund, including the official foreign exchange 
reserves" by filing the petition. 
 
¶3. (U) This new petition asserts that "a well conceived fraud had 
been committed on the state and the people of Sri Lanka" and asks 
the court to declare the hedging transactions illegal, null and 
void.  It cites the CPC, the Treasury Secretary, Controller of 
Exchange, Attorney General and five banks (Citibank, Standard 
Chartered Bank (SCB), Deutsche Bank, Commercial Bank of Ceylon, and 
Peoples Bank) as respondents.  The petition asked the court to issue 
interim orders preventing the payment of any claims by the 
government or claims being demanded by the banks under the hedge 
agreements, until the final determination of the case.  This initial 
request was not granted on June 1 when the court first reviewed the 
petition and then delayed the hearing of the case until July 14.  As 
requested by the petition, the Supreme Court directed several 
government institutions to investigate the oil hedge agreements and 
take action against wrongdoers.  The government institutions so 
directed by the petition are Controller of Exchange, the Central 
Bank, Bribery Commission, Police Criminal Investigation Department, 
and the Attorney General's Department. 
 
¶4.  (U) The petition argues that claims made by banks precipitated 
Sri Lanka's contingent liabilities and would therefore seriously 
impede negotiation with the IMF or other international financial 
institutions.  It states further that since governments of the 
countries of domain of the foreign banks listed in the petition have 
made available large bailout packages to financial institutions, the 
banks could seek funds from those packages to cover any losses made 
in Sri Lanka. 
 
¶5. (U) Key complaints in the petition: 
 
--The oil hedging agreements "though camouflagedly held out as 
'Petroleum Oil Hedging', in effect has been 'deals' in the nature of 
speculating, gambling, betting or wagering on the movement of 
petroleum oil prices, on 'notional quantities'.."  Such deals are 
unlawful and illegal in Sri Lanka. 
 
--The Chairman of the CPC did not have the statutory power to enter 
into oil hedging agreements. 
 
--There was no relationship between the purchase of oil and entering 
into hedging contracts. Hence linking the two was a misleading sham 
and deception. 
 
COLOMBO 00000600  002 OF 002 
 
 
 
--The concerned banks failed in their fiduciary duty to protect the 
interest of the customer (CPC). 
 
--The hedging agreements were flawed. While the agreements protected 
the banks by limiting their losses through caps when prices rose 
above the strike price (upper collar), there were no reciprocal caps 
on CPC payments to banks when prices fell below the floor price. 
 
--The hedging agreements did not appear to have the official seal of 
the CPC. 
 
--The respondent banks would stand liable for violation of the 
exchange control laws if they have made "back to back agreements" 
with foreign parties or remitted foreign currency under the hedging 
agreements without approval. 
 
--Payment of claims made by foreign banks in the range of $600-$800 
million would erode Sri Lanka's foreign reserves. 
 
¶6.  (SBU) The petition is especially critical of the Standard 
Chartered (SCB) role in the hedging deals.  It alleges that SCB 
induced the CPC and public officers connected to oil hedging to 
enter unsuspectingly into questionable deals.  It further alleges 
that SCB essentially bribed public officers with foreign trips.  The 
petition notes that investigations by law enforcement officers could 
reveal if other respondent banks have also engaged in similar acts. 
 
 
¶7.  (SBU) Following an initial hearing of the case on June 1, the 
Supreme Court agreed to take up the case for review on July 14 and 
ordered the respondents to file objections by July 7.  Citibank 
informed post that it submitted preliminary arguments at the June 1 
hearing and that it is Citi's intention to respond by July 7 and 
attend the July 14 hearing. 
 
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Comment 
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¶8.  (SBU) This is the third public interest petition against the oil 
hedging agreements; two previous petitions were withdrawn when the 
government failed to honor a court ruling to reduce petrol prices. 
Various ministers continue to advise post that the President wants 
to reach an amicable settlement with Citibank, rather than continue 
with international arbitration.  However, to date the GSL has done 
little to demonstrate that it is serious about this; the GSL has not 
responded to repeated Citibank requests for technical details of a 
possible settlement.  Citibank remains willing to work towards a 
negotiated settlement and has proposed several possible settlement 
options; however, it is not willing to agree to any GSL requests 
that would entail significant losses for what it considers to be a 
valid contract.  For the last several months, GSL interlocutors 
indicated a strong desire to await the retirement of the Supreme 
Court Chief Justice before finalizing the terms of any settlement. 
With the installation on June 8 of new Supreme Court Chief Justice 
Ashoka de Silva, the government may now be more ready to strike a 
deal. 
 
MOORE