US embassy cable - 03ANKARA5644

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 005644 
 
SIPDIS 
 
 
NSC FOR MCKIBBEN 
STATE FOR E, EB/IFD/OMA, AND EUR/SCE 
TREASURY FOR OASIA - LEICHTER AND MILLS 
 
 
E.O. 12958: DECL: 09/04/2013 
TAGS: EFIN, ECON, PGOV, TU 
SUBJECT: BANK REGULATOR'S HEADACHES 
 
 
REF: A. A) ANKARA 4470 
     B. B) ANKARA 5075 
     C. C) ANKARA 5551 
 
 
1.  (U) Classified by Economic Counselor Scot Marciel for 
reasons 1.5 (b) and (d). 
 
 
2.   (C) Summary: In a meeting with econoffs September 4, 
embattled BRSA Chairman Engin Akcakoca described GOT 
consideration of legislation that, if enacted in its current 
form, would greatly reduce the independence of regulatory 
bodies such as BRSA. However, Akcakoca predicted that only 
one of the independence-reducing features will actually 
survive.  Separately, a World Bank economist said the IFI,s 
would never accept the draft law as currently drafted. 
 
 
3. (C) On the Imar Bank case, Akcakoca put the total sum of 
questionable accounts at something on the order of TL 6.5 
Quadrillion (USD 4.6 billion). The BRSA had found fewer 
fictitious deposits than initially suspected, and for many 
accounts, they lacked sufficient proof the deposits were 
fictitious.  End Summary. 
 
 
 
 
Possible new Law on Independent Regulatory Bodies: 
--------------------------------------------- ---- 
 
 
4.  (C) In a September 4 meeting with econoffs, BRSA Chairman 
Engin Akcakoca outlined the Government,s new effort to rein 
in the independent regulatory bodies.  Akcakoca opined that 
the Government,s main target is BRSA.  Comment: The Imar 
Bank case has only ratcheted up Governmnent pressure on the 
BRSA, including a meeting with Prime Minister Erdogan in late 
August. End Comment. At the end of the meeting with econoffs, 
Akcakoca joked about how much longer he would need to 
complete his agenda, seeming to imply he was not leaving any 
time soon. 
 
 
5.  (C) Akcakoca explained that he and the other regulatory 
body heads had been convoked to a meeting that morning for a 
consultation on the proposed new law.  Akcakoca characterized 
the meeting as a preliminary consultation to get regulatory 
body heads, views.  According to Akcakoca, the regulatory 
body leaders had a very negative reaction to many of the 
proposed provisions, and the proposed law failed to take into 
account the differences between the functions of the various 
regulatory bodies.  Akcakoca,s personal prediction is that 
several of the provisions will not survive into the final 
version.  These include a requirement that regulatory boards 
get a government agency's (probably the State Planning 
Organization's) approval prior to issuing to decrees, and 
institution of a 60-day waiting period for all board actions 
plus an additional 2 to 3 weeks before the actions would be 
fully effective.  Akacokca pointed out how inappropriate this 
would be for a bank seizure.  Most likely to survive, 
however, is a provision that would allow the Government to 
register in court its opposition to actions taken by 
regulatory bodies, with courts then having the power to rule 
whether the action was appropriate.  Akcakoca said this would 
be a significant, unhealthy change from the current system. 
 
 
6.  (C) Akcakoca did not detect any evidence of GOT 
consultation with the IFI,s on the proposal.  In a separate 
meeting the same day, World Bank economist Jim Parks told 
Econoff the Bank had managed to procure a copy of the draft 
proposal, which he said would be completely unacceptable in 
its current form. 
 
 
 
 
Imar Bank: 
--------- 
 
 
7.  (C) The criminal cases arising from Imar Bank are no 
longer in the BRSA,s hands, according to Akcakoca, having 
been turned over to prosecutors.  The BRSA continues to 
segregate good and bad accounts.  Their latest estimate of 
the total of unreported accounts referred to prosecutors is 
on the order of TL 6.5 Quadrillion (USD 4.6 billion). 
Akcakoca said the size of the deposit base the BRSA would 
have to cover was larger than he had earlier thought for two 
reasons: there were fewer fictitious accounts, and the BRSA 
lacked sufficient proof of fraud to refuse to cover accounts 
that might be fictitious.  The BRSA can, however, decline to 
cover accounts created by monies transferred to Turkey from 
offshore accounts, notably from northern Cyprus.  The cut off 
date for new accounts to benefit from the SDIF (the deposit 
insurance agency under the BRSA umbrella) guarantee probably 
would be the date of the seizure of the Uzan group,s 
electricity companies. Once these companies were seized, the 
markets realized the weakness of the Uzans, financial 
condition. 
 
 
8.  (C) Akcakoca marveled at the extraordinary sophistication 
of the Imar fraud, requiring a cadre of 15-20 highly 
qualified people to administer a complicated software program 
that invisibly erased transactions from bank branches' daily 
logs.  Akcakoca claimed that the BRSA now had a pretty good 
understanding of the liability side of Imar,s balance sheet 
but continued to have problems reassembling the asset side. 
In order to prevent future Imar-type cases, Akcakoca said he 
has established an internal committee to analyze what went 
wrong with BRSA,s surveillance and propose corrective 
actions. 
 
 
9.  (C) The details of how the GOT and BRSA would finance the 
intervention remain to be worked out.  Under new legislation 
the BRSA and Treasury have to jointly propose a financing 
plan to the Council of Ministers. The BRSA has written a 
draft but awaits Treasury,s comments.  According to 
Akcakoca, the IMF has proposed that the deposits would be 
transferred to Ziraat Bank and then financed by government 
bonds provided to Ziraat.  Akcakoca said this approach was 
used in a similar case in the Dominican Republic but in that 
case the authorities had a much better fix on the accounts. 
One issue that needs to be worked out is how much the GOT and 
BRSA might make whole purchasers of government bonds sold by 
Imar.  Though BRSA/SDIF would normally only cover insured 
deposits, there may be a need to cover purchasers in good 
faith of government bonds sold by Imar.  Akcakoca explained 
that a refusal to cover bondholders could affect market 
confidence in government bonds and, potentially, in the 
banking system.  To cover such bondholders would require a 
new law, however. 
 
 
10.  (SBU) On the new law allowing the authorities to seize 
assets of families of owners of failed banks, Akcakoca 
confirmed that it is not retroactive, but the relevant date 
is when depositors are paid, not when the bank was seized or 
when fraud was committed.  Therefore, the assets can be 
blocked now, and once depositors are paid, the SDIF can seize 
and dispose of the assets. 
 
 
11. (C) Akcakoca said the BRSA is being careful to allow 
Uzan-owned companies to continue functioning--within 
guidelines--so as not to destroy their value before SDIF 
sale. 
 
 
 
 
 
 
 
 
 
 
EDELMAN