US embassy cable - 03KATHMANDU1370

C O N F I D E N T I A L SECTION 01 OF 02 KATHMANDU 001370 
 
SIPDIS 
 
STATE FOR SA/INS, SA/RA 
DEPT PLEASE PASS TO USAID FOR SA/ANE 
LONDON FOR POL/GURNEY, NSC FOR MILLARD 
 
E.O. 12958: DECL: 07/21/2013 
TAGS: KCOR, EAID, PGOV, NP, Government of Nepal (GON) 
SUBJECT: NEPAL: ANTI-CORRUPTION AGENCY IN TROUBLE IN FIGHT 
AGAINST BIG BUSINESS 
 
REF: KATHMANDU 1221 
 
Classified By: Ambassador Michael E. Malinowski for reasons 1.5 (b,d). 
 
1. (C) Summary.  The head of Nepal's anti-corruption agency, 
CIAA Commissioner Surya Nath Upadhyaya, met with the 
Ambassador on July 18 to discuss the agency's investigation 
into allegations of corruption within Nepal's two 
government-owned banks.  The cases involve at least five of 
the country's largest business houses and many high-level 
bank officials.  As a result, the CIAA is coming under 
increasing pressure from the political elite, banking and 
business sectors and the media not to prosecute these cases. 
Commissioner Upadhyaya appealed to the Embassy, and the donor 
community at large, for its public support of the CIAA's 
efforts.  Post plans to provide behind-the-scenes advocacy 
for this vanguard organization active in promoting government 
transparency.  End Summary. 
 
2. (C) On July 18, Ambassador Malinowski met with head 
Commissioner Surya Nath Upadhyaya of the Commission to 
Investigate Abuses of Authority (CIAA).  USAID Country 
Director and PolOff also attended the meeting.  Commissioner 
Upadhyaya explained that he had requested the meeting not 
only to provide the Ambassador with an update on the CIAA's 
pending cases, but also to seek the Embassy's moral and 
financial support, particularly in the CIAA's investigation 
and prosecution of bank cases (versus property cases) 
involving some of Nepal's most influential families. 
 
3. (C) Nepal Bank Limited (NBL) and Rastriya Banya Bank 
(RBB), both government-owned banks, dominate the banking 
sector in Nepal; approximately 60 percent of loans and 70 
percent of deposits nation-wide reside in these two banks. 
Due to lack of sufficient capital, two years ago both banks 
stopped issuing new loans.  After pressure from the World 
Bank, in 2001 the Government of Nepal agreed to privatize the 
banking industry, and subsequently foreign consultants were 
brought in to restructure NBL and RBB.  In early 2003, the 
foreign consultants brought to the CIAA's attention evidence 
of corruption in the handling of bank loans to private 
entities.  At least five of Nepal's 25 big business houses 
have been implicated in these allegations, said Upadhyaya. 
 
4. (C) After six months of work, Upadhyaya confided, the CIAA 
has been able to complete investigations into several bank 
cases and has found clear evidence of corruption.  The basis 
for the original loan awards was "shaky," he said.  Moreover, 
Upadhyaya stated that the loans were extended again and again 
so that the original loan amount was doubled and "nothing was 
ever repaid."  He specifically mentioned the case involving 
the Amatya family, who own and operate the five-star Fulbari 
Hotel in Pokhara, 180 kilometers west of Kathmandu.  Nepal 
Bank Limited had awarded the original loan for the 
construction and initial operation of the Fulbari Hotel. 
After unsuccesful attempts by NBL to extract payments from 
the Amatya family for the loan, the bank sought to go after 
the family's other assets.  However, the other assets are 
protected through incorporation elsewhere, Upadhyaya said. 
After evaluating the hotel's assets using standards 
formulated by the Asia Development Bank, Upadhyaya explained, 
a clear case of bad investment, misrepresentation and fraud 
was discovered.  Moreover, he said, there is evidence that 
bank officials involved in granting the loans knew that the 
loans would not be repayed.  Upadhyaya also suggested that 
money for the Fulbari hotel was siphoned off for use in other 
projects not covered by the loan. 
 
5. (C) Because these bank cases involve Nepal's most 
influential families, the CIAA is under pressure from some 
political influentials, the banking and business sectors and 
the media not to prosecute.  Upadhyaya reported that in early 
July, the Federation of Nepal Chambers of Commerce and 
Industry (FNCCI) staged a demonstration of at least fifty 
people in front of the CIAA building to protest the CIAA's 
involvement in reviewing and investigating loans.  The media 
also have been at the forefront; Upadhyaya expressed his 
suspicions that several recent articles in the Telegraph and 
People's Review suggesting that the CIAA should not be 
involved in bank cases had been paid for and planted by some 
of the wealthy families implicated in the cases.  Upadhyaya 
also indicated that some of the defendents in these cases 
were at various times the Ministers under whom he used to 
work. 
 
6. (C) The Commissioner concluded the meeting with an appeal 
to the Ambassador for his public support of the CIAA's role 
in prosecuting bank cases.  Upadhyaya said that without the 
support of the international community, the CIAA "alone could 
not make a difference."  He even suggested that he had been 
subject to threats, saying "I'm ready to risk my life, but 
without your help, I won't get anywhere."  Upadhyaya also 
requested U.S. assistance in training CIAA prosecutors in 
investigation techniques as well as the provision of 
equipment, such a lie detectors. 
 
7. (C) Comment.  The CIAA has taken an increasingly tough 
stance on prosecuting high-level corruption cases. 
Commissioner Upadhyaya is a strong leader and has taken an 
impartial and professional approach in the investigation and 
prosecution of corruption.  However, Nepal's highly 
politicized and partisan civil society, combined with ongoing 
political instability, has significantly challenged the 
CIAA's effectiveness.  All the large business houses are 
involved directly in politics and well-connected within the 
political class.  Likewise, local publishing houses are 
subject to the political persuasion of their owners.  To 
counter this pressure, Post believes CIAA needs increased 
international support.  Post plans to provide 
behind-the-scenes advocacy as well as a coordinating role in 
pushing for more plublic support of the CIAA by the 
diplomatic and INGO community in Nepal.  End Comment. 
MALINOWSKI