US embassy cable - 03ANKARA6377

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 006377 
 
SIPDIS 
 
 
STATE FOR E, EB/IFD, AND EUR/SE 
TREASURY FOR OASIA - JLEICHTER AND MMILLS 
NSC FOR MCKIBBEN AND BRYZA 
BUDAPEST FOR WILLIAM SUDMANN 
 
 
E.O. 12958: DECL: 10/09/2008 
TAGS: EFIN, PGOV, TU 
SUBJECT: IMAR BANK UPDATE: IS IT FAIR TO BLAME BRSA? 
 
REF: A. ANKARA 4832 
     B. ANKARA 5075 
     C. ANKARA 5644 
     D. ANKARA 6199 
 
 
Classified by Economic Counselor Scot Marciel for reasons 1.5 
(b) and (d). 
 
 
 1. (C) Summary: Post's banking contacts tend to defend BRSA, 
despite its failure to detect Imar Bank's problems.  The 
bankers believe BRSA either could not have acted earlier due 
to the Uzans' power or could not detect the fraud becaus of 
its sophistication.  One former bank inspector at the Central 
Bank, however, believes good inspection techniques should 
have uncovered problems.  Some well-placed sources believe 
organizational weaknesses at BRSA may have played a role. 
End Summary. 
 
 
2. (Sbu) It is now clear that the Imar Bank case, both in 
quality and quantity, represents a massive failure of the 
Turkish bank regulatory and law enforcement systems.  The 
cost of honoring the deposit guarantee to the Turkish 
Treasury is now estimated at USD 5.2 billion, or close to 3 
percent of GDP.  There may be other costs: there are press 
reports today of Imar owing TL 813 trillion in taxes which, 
with interest and penalties now amount to TL 6.5 quadrillion 
(USD 4.6 billion). Though the cost of honoring the deposit 
guarantee will be financed by issuance of new government debt 
rather than taken as an immediate hit to the budget, the 
Turkish state can ill afford this large addition to its debt 
burden.  Qualitatively, the Imar Bank case is dramatic 
because BRSA so blatantly failed to catch the fraud until a 
very late stage, and because the Uzans were widely considered 
to be unethical for many years.  The blue chip business 
organization, TUSIAD, for example, had never allowed the 
Uzans to join.  Imar Bank is often on the front pages, and a 
series of investigations have begun: the criminal prosecution 
of Imar Bank managers and owners, parliamentary 
investigations, and an internal BRSA study of what went wrong 
and how to avoid such lapses in the future.  It is striking, 
however, that a failure of this magnitude has not resulted in 
a greater outcry both to assign responsibility and to reform 
the system.  Financial markets, for example, seem to have 
shrugged off the Imar Bank case, moving blithely forward 
despite revelations about the cost to the state. 
 
 
3. (C) In part, the absence of a more intense uproar may be 
attributable to widespread resignation over corruption 
issues, but may have something to do with there being plenty 
of blame to spread around.  The BRSA was only created two 
years ago, and before that bank supervision was weakened by 
political influence over the non-independent bank regulators 
at the Central Bank and Treasury.  Neither of these agencies, 
nor the Capital Markets Board, nor the Telecom regulatory 
authority took meaningful action against the Uzans until late 
spring of 2003, though Capital Markets Board President Dogan 
Cansizlar insists he sent 70-plus Uzan-related files to the 
public prosecutor's office in the past few years.  Still, 
having had the authority for two years now, and having 
recently given Imar a clean bill of health, a central 
question remains how fair it is to blame the BRSA for failing 
to spot fraud at Imar Bank. 
 
 
Bankers defend BRSA: 
------------------- 
 
 
4. (C) In a series of meetings with econoffs in recent weeks, 
banking contacts have tended to defend BRSA, though admitting 
the Imar Bank case is a major failure.  One theme is that 
despite BRSA's failure to catch fraud at Imar Bank in time, 
the case needs to be weighed against the BRSA's broader track 
record in cleaning up the banking sector.  The 
Secretary-General of the Bankers' Association, Ekrem Keskin, 
 
SIPDIS 
said he was a defender of BRSA despite Imar Bank.  He 
recalled the bad old days before BRSA when politicians 
meddled in bank regulatory decisions, in one case awarding a 
banking licence to a businessman who applied to set up a bank 
because banks had denied him credit.  Sinan Gumusdis of JP 
Morgan/Chase, said BRSA was "set up" on Imar:  "It's one 
thing to take over banks with weak balance sheets but another 
to take over a fraudulent operation, especially one with 
political support." 
 
 
5. (C) Gumusdis' comment echoes BRSA Chairman Akcakoca's 
claims to econoffs, included in the BRSA's report to 
prosecutors, about the elaborate computer systems designed to 
hide the true accounts.  These computer systems allegedly 
made Imar Bank's problems invisible to bank inspectors. 
BRSA's inspectors apparently had too narrow a focus, 
concentrating on traditional prudential issues such as 
capital adequacy, credit quality, asset-liability mismatches 
and foreign exchange exposure rather than searching for 
fraud.  Some bankers have also alleged that before AK came to 
power in November, 2002, the politicans in power were 
unwilling or unable to go after the Uzans who had constructed 
a powerful network of influence.  By this analysis, even 
though technically independent, BRSA could not have taken 
forceful action against the Uzans since the GOT would not 
have backed BRSA up. 
 
 
Former Bank Inspector Implies BRSA Should Have Known: 
--------------------------------------------- ------- 
 
 
6. (C) On the other hand, Hakki Arslan, General Manager of 
the Central Bank's Banking Department and a former bank 
inspector, implied to econoffs that the BRSA on-site 
inspectors should have been able to detect the fraud, no 
matter how sophisticated the fraudulent systems.  Had the 
inspectors simultaneously monitored accounts and activities 
at branches and the head office, they should have been able 
to detect the discrepancies between actual and reported 
deposits. 
 
 
Alleged Organizational Weaknesses at BRSA: 
----------------------------------------- 
 
 
7. (C) BRSA has reportedly finished a draft of its internal 
study of what wrong.  Contrary to press reports, Vice 
President Teoman Kernan told econoff that BRSA management is 
still working on the final version to be presented to the 
government.  One current of thought is that organizational 
weaknesses and bureaucratic rivalries within BRSA may have 
contributed to its inability to detect the Imar problem. 
BRSA Vice President Fikret Sevinc chaired a committee that 
wrote a report on BRSA organizational issues in June, 2002. 
The report recommended that on-site and off-site inspectors 
be grouped to cover a given set of banks, in order to improve 
horizontal communication and pool knowledge on particular 
banks.  The report also recommended mandatory frequent 
reports on each bank.  Sevinc claims these changes were 
supported both by the World Bank and by U.S. Treasury 
technical advisors. 
 
 
8. (C) Sevinc recently confided to econoffs that, although 
BRSA management acknowledged the need for these changes at 
the time, it failed to implement them.  According to Sevinc, 
better communication between off-site and on-site inspectors 
might have helped with Imar Bank.  The Bankers' Association's 
Keskin had a similar, if less critical view, explaining that 
the Sworn Auditors (on-site inspectors) have traditionally 
had bureaucratic frictions with the rest of BRSA.  Keskin 
also felt that the appointment of people without sufficient 
banking expertise to senior positions at BRSA, particularly 
in the early days of the regulator's existence, had been a 
problem. 
 
 
GOT weighs Financing Plan: 
------------------------- 
 
 
9. (Sbu) The BRSA has proposed a financing structure, 
reportedly involving transfer of the deposits to state-owned 
Ziraat Bank, with Turkish Treasury financing the transfer 
with new government securities. The proposal currently lies 
with Turkish Treasury and has reportedly met with IMF 
acceptance.  Today's press reports that Minister Babacan 
expects the GOT to announce the plan in a week or two, saying 
that the 300,000 accounts at Imar were being pored over 
one-by-one. 
 
 
EDELMAN