US embassy cable - 04MANAMA402

C O N F I D E N T I A L MANAMA 000402 
 
SIPDIS 
 
E.O. 12958: DECL: 03/24/2014 
TAGS: BA, EFIN, IZ, PREL 
SUBJECT: BAHRAIN NOT TRANSFERRING OLD IRAQI ACCOUNT FUNDS 
TO U.N.'S DFI - AT LEAST, NOT YET 
 
REF: A) MANAMA 187 B) STATE 61794 C) FORD-HEFFERNAN 
 
     EMAILS 3/16 AND 3/17 
 
Classified By: Robert S. Ford, reason 1.5 B AND D. 
 
1.  (C)  Bahrain will not promptly transfer approximately USD 
47 million in funds from old Iraqi-owned bank deposits to the 
United Nations Development Fund for Iraq (DFI), Finance 
Minister Saif told Charge on March 20.  Charge had urged Saif 
that the issue had been outstanding since the summer of 2003. 
 He noted that previously Saif had informed us that the funds 
would be transferred.  The Bahraini Government's credibility 
would suffer just as the American and Bahraini governments 
are trying to finish negotiations on a free-trade agreement, 
Charge warned. 
 
2.  (C)  Saif understood the argument, but said transferring 
the funds would be difficult legally.  He said that the two 
Bahraini banks (Gulf International Bank (GIB) and Arab 
Banking Corporation) which had held the deposits had had 
large, uncollectible claims against the Iraqi Government. 
These two banks years ago had laid claim to the Iraqi 
deposits to off-set losses on the loans they had extended to 
the Iraqi government.  Charge reminded Saif that per UNSCR 
661 of August 1990, the GoB was to have frozen all Iraqi 
funds in Bahrain.  Saif did not dispute this.  He observed, 
however, that the fate of the Iraqi deposits was now a quote 
legal issue unquote in Bahrain.  As such, the Finance 
Ministry had asked the Bahrain Monetary Agency (the BMA - 
Bahrain's central bank) for a complete study and report. 
 
3.  (C)  BMA Governor Sheikh Ahmed had told Charge on March 
16 that transferring the funds was not a simple matter. 
Bahraini banks had already counted these deposits against 
larger losses stemming from bad loans made to Iraq. 
Transferring the assets now would, he said, require the two 
Bahraini banks to revise their balance sheets and ultimately 
their shareholders' profits and capital. 
 
4.  (C)  Deputy Bahraini Finance Minister and Gulf 
International Bank board member Sheikh Ibrahim al-Khalifa 
asserted to Charge over dinner March 20 that the banks had 
taken the offsets in 1992 or 1993.  Charge observed that the 
Bahrain banks' action apparently came after UNSCR 661, but 
Ibrahim claimed not to know about that resolution. 
 
5.  (C) Charge followed up on March 24 with the BMA Governor 
who said that lawyers from the BMA and the two banks will 
meet next week. He underlined that UNSCRs have legal 
precedence in Bahrain; the GoB will meet its obligations, he 
stressed.  Charge noted that the USG perceives that 
obligation to be the transfer of the assets.  Sheikh Ahmed 
reiterated that Bahrain would meet its obligations, but the 
first step was having the central bank's legal team meet with 
the banks to determine what exactly was done to the banks' 
accounts. 
 
6.  (C)  Comment:  The Deputy Finance Minister confided that 
in view of the banks' actions from more than ten years ago, 
aides to Saif in Bahrain's Finance Ministry had cautioned 
Saif not to pledge that Bahrain would transfer the funds as 
he did to us (ref A).  Saif did not want a confrontation with 
the USG then and he assured CDA that he does not now.  The 
Central Bank Governor made the same affirmation. 
Protestations of goodwill aside, we do not expect quick 
resolution of this now old issue.  It is not clear to us yet 
what kind of Iraqi loan-loss provisions the banks made in the 
early 1990s and what the exact legal status of the disputed 
accounts at the Bahraini banks now is.  Above all, we don't 
yet sense here a willingness at the Finance Ministry or the 
BMA to compel the two banks to go to their shareholders (Gulf 
state governments mostly) and tell them they will have to 
absorb a USD 47 million loss.  It would be easier for the 
Bahrainis, we think, if we had an authoritative 
interpretation of what UNSCR 661 required exactly of the 
Bahraini Government with respect to Iraqi bank accounts at 
GIB and Arab Banking Corporation back in 1991.  End Comment. 
FORD