Viewing cable 06VIENNA515, USG CONCERNS OVER AUSTRIAN BANKING OPERATIONS

This record is a partial extract of the original cable. The full text of the original cable is not available.

S E C R E T SECTION 01 OF 03 VIENNA 000515

SIPDIS

STATE FOR EUR/AGS - WEYGANDT
NSC FOR EUROPEAN DIRECTORATE - WILSON

E.O. 12958: DECL: 02/15/2016
TAGS: PARM PREL EFIN MNUC KCRM KTFN KNNP AU
SUBJECT: USG CONCERNS OVER AUSTRIAN BANKING OPERATIONS

Ref: a) vienna 350 b) vienna 309 c) 05 vienna 1760 d)
05 state 220738

Classified By: Deputy Chief of Mission Scott F. Kilner for reasons 1.4
(b) and (d).

Introduction
------------

¶1. (S/NF) In view of continued Washington questions about
the operations of Raiffeisen Zentralbank (RZB) and Bank
Austria Creditanstalt (BA/CA) in several areas, this cable
attempts to consolidate all the information that this Mission
has regarding allegations and GoA responses. Embassy would
appreciate any additional information Washington agencies may
have regarding these banking concerns. The following message
has been cleared with all relevant agencies at post.


Summary
--------

¶2. (S/NF) The Austrian Ministry of Finance (MoF) told us
February 15 that Bank Austria/Creditanstalt (BA/CA) has
agreed to "stop doing business" with North Korean entities.
An Austrian Financial Market Authority (FMA) official told us
February 14 that the FMA was "uncomfortable" with Raiffeisen
Investment Holding AG's (RIAG) involvement in RosUkrEnergo
(RUE) and RUE's role in the Ukrainian-Russian gas deal.
However, the FMA is satisfied that an internal RIAG due
diligence and an outside due diligence by the U.S. risk
consulting firm Kroll revealed no derogatory information on
RUE's unnamed investors and no links to Russian organized
crime boss Semyon Mogilevich. Both the FMA and MoF
emphasized RIAG's commitment to expand operations in Eastern
Europe, maintaining that western commercial influences in the
region were beneficial to the countries. Embassy's Legatt
Office has been cooperating closely with Austrian law
enforcement authorities since summer 2005 on a multi-country
investigation of Mogilevich's money laundering activities in
the region. End Summary.

¶3. (S/NF) On February 14 and 15, EconUnit Chief followed up
on ref B and C discussions in separate meetings with xxxxx
 from the Financial Market Authority's (FMA) xxxxx of the Ministry of
Finance's Financial Markets Directorate.xxxxx
reviewed the various USG concerns (ref D) in a systemic
manner. Both appreciated the information the USG had shared,
agreed to continue cooperation on a technical level regarding
USG concerns, and acknowledged that there was a political
component associated with these issues.


North Korea
-----------

¶4. (S/NF) xxxxx told us that following a meeting with
Finance Minister Karl-Heinz Grasser the week of February 6,
Erich Hampel, the CEO of BA/CA, agreed to stop BA/CA's
business relations with North Korean entities. xxxxx
speculated that BA/CA probably made the decision to maintain
its good reputation.


¶5. WMD Proliferation Financing Issues
----------------------------------

¶A. (S/NF) USG Concern: Novin Energy Company, a firm
affiliated with Iran's nuclear program, was involved in a
payment from Creditanstalt to Mileace General Trading in May
2004 (ref D).

(S/NF) GOA Response: xxxxx reiterated information
discussed during Treasury U/S Levey's meeting with xxxxx, 
the FMA's Executive Director (ref B). The
Iranian Mission to the International Atomic Energy had opened
a deposit bank account for Novin Energy Company at BA/CA.
According to xxxxx there have been no transactions that
aroused the FMA's suspicion. Periodically, there is a large
transfer to the Iranian National Bank. The FMA identified
only one payment to Mileace General Trading in New York for
an amount "under Euro 100,000."

¶B. (S/NF) USG Concern: Since 2001, Creditanstalt xxxxx has facilitated about a
dozen Iranian transactions, mostly nuclear-related (ref D).

(S/NF) GOA Response: xxxxx said the FMA was satisfied,
based on discussions with BA/CA, that xxxxx had not engaged
in any illegal or questionable activity. xxxxx is aware of
the sensitive nature of his position. He has over 10 years
experience in this position and works very closely with the
Austrian Financial Intelligence Unit (FIU), xxxxx stated.
¶C. (S/NF) USG Concern: Syria was preparing to purchase
rocket motors for training aircraft from the Czech supply
company Omnipol. Financing was to be arranged with
Creditanstalt (ref D).

(S/NF) GOA Response: BA/CA has no direct business
relationship with Omnipol. However, Omnipol does have an
account with HVB Czech, a subsidiary of BA/CA. According to
xxxxx HVB Czech needs BA/CA's authorization to transfer
amounts in excess of Euro 500,000. xxxxx maintained that
the only financing Omnipol has had through HVB Czech was for
the Czech Army's purchase of U.S. military equipment.

¶6. Terrorist Financing Issues
--------------------------

¶A. (S/NF) USG Concern: The Palestinian Association of
Austria (PVOE) maintained a Creditanstalt account as of early
¶2003. PVOE -- designated by the U.S. Treasury Department as
a terrorist entity and renamed the Palestinian Humanitarian
Association (PHV) -- collects donations on behalf of
HAMAS-affiliated charities in the Palestinian territories.
PHV's Internet website indicates that the organization
continues to maintain an account at Creditanstalt (ref D).

(S/NF) GOA Response: xxxxx stated that BA/CA had closed
all its PVOE accounts well before the U.S. designated PVOE as
a terrorist entity. xxxxx claimed that the FIU has
conducted two extensive investigations into PHV, which did
not turn up anything suspicious.

¶B. (S/NF) USG Concern: As of late November 2004, xxxxx ,
 a former regime official now on the Iraqi
interim government's "Most Wanted" list, claimed to have
transferred a large sum of unspecified currency from the Arab
Bank in Amman, Jordan, to RZB to finance the Iraq insurgency
(ref D).

(S/NF) GOA Response: xxxxx said that RZB has not
identified any accounts belonging xxxxx following a
thorough search that included numerous transliterations of
xxxxx.

¶C. (S/NF) USG Concern: The Vienna-based NGO Irakhilfswerk
in Osterreich instructs donors to send funds to Creditanstalt
(ref D).

(S/NF) GOA Response: xxxxx characterized Irakhilfswerk's
websites as distasteful, e.g. with gruesome pictures of
wounded or dead U.S. military personnel. Nevertheless,
xxxxx said an extensive investigation by the Austrian
security services (BVT) revealed that Irakhilfswerk does
indeed use collected funds for charitable work in Iraq, e.g.,
purchasing medicines and clothing. xxxxx said the FMA
continued to monitor Irakhilfswerk accounts closely.


¶7. Money Laundering Issues
-----------------------

¶A. (S/NF) USG Concern: Following the recent U.S. sanctions
on Banco Delta Asia (BDA), there are indications that North
Korea moved several million euros from BDA to Creditanstalt
in October 2006 (ref D).

(S/NF) GOA Response: xxxxx restated information in ref C,
stressing that the FMA had no evidence that the BDA had ever
had an account with BA/CA. However, there was one payment
transfer in the amount of Euro 7 million that originated from
a Macao trading company via the Bank of China and Dresdner,
which BA/CA transferred to the Sberbank in Moscow. The FMA
admitted it did not know what the payment was. Other
payments from BA/CA's few North Korean accounts were
typically to international entities active in North Korea,
such as UNICEF, WFP, WHO, and the Swiss Development Agency.
xxxxx emphasized that the FMA exercised additional
surveillance regarding North Korean financial activities
through the Austrian banking system.

¶B. (S/NF) USG Concern: U.S.-indicted crime boss Semyon
Mogilevich probably uses RZB and its subsidiary Raiffeisen
Investment Holding AG (RIAG) as a front to provide legitimacy
to the gas company that we suspect he controls, RosUkrEnergo
(RUE). RUE makes direct payments of $360,000 annually to
each of two RIAG executives in "consulting fees." We assess
that the payments probably are bribes for RIAG to maintain
the front for Mogilevich (ref D).

(S/NF) GOA Response: xxxxx acknowledged that the
non-transparency surrounding the gas deal had become a major
political issue in Ukraine and Russia. The FMA is
"uncomfortable" that an Austrian bank is in the middle of the
controversy. The FMA, xxxxx continued, had had "intense
discussions" with RZB/RIAG, but could not uncover any legal
improprieties. RIAG also conducted a strenuous due diligence
review of the unnamed RUE investors. Neither RIAG's internal
due diligence nor an independent due diligence by the U.S.
risk consulting firm Kroll had revealed derogatory
information or links to criminal activity, including to
Seymon Mogilevich (ref A). Regarding the RUE payments of
$360,000 to RIAG executives, xxxxx maintained that the
payments, in the names of the four RIAG executives on the RUE
Coordination Committee, went directly into a RIAG account, to
which none of the executives had access. RZB General Legal
Counsel told xxxxx January 30 that the Kroll Report found "no
link between the undisclosed investors and Mogilevich."
(Note: Embassy is working with RIAG to obtain a copy of the
Kroll report. End Note.) xxxxx speculated that RIAG's
primary objective is to prepare RUE for a January 2007 IPO on
the FTSE.

(S/NF) Embassy Note and Comment: Embassy's Legatt Office has
been cooperating closely with Austrian law enforcement
authorities since summer 2005 on a multi-country
investigation of Mogilevich's money laundering activities in
the region. Embassy suggests that Washington agencies
carefully consider this on-going investigation in regard to
further intervention with various GoA entities on
Mogilevich's links to RUE. End Embassy Comment.

¶C. (S/NF) USG Concern: RIAG holds a 61% stake in Priorbank,
Belarus' largest foreign-owned bank. Priorbank maintains
close ties to the Lukaschenko regime (ref D).

(S/NF) GOA Response: xxxxx noted that
Raiffeisen had been active in Eastern European markets, some
less democratic than others, for many years. Raiffeisen
believed that western commercial engagement, rather than
isolation, had had positive effects in undemocratic countries
(ref A). He noted that EBRD is a 13.5% shareholder in
Priorbank. xxxxx noted that there were no international
financial or trade sanctions against Belarus or senior
Belarussian officials.


¶8. Suspicious Activity Reports
---------------------------

¶A. (S/NF) USG Concern: U.S. banks reported 75 and 217
suspicious activity reports (SARs) since the late 1990s
involving BA/CA and RZB, respectively. Some transactions
involve shell companies used by criminal groups (ref D).

(S/NF) GOA Response: xxxxx said the Austrian FIU did not
believe that the quantity of SARs filed since the late 1990s
was especially high, especially for BA/CA. xxxxx said RZB
believes the overwhelming majority of its SARs stem from its
major U.S. dollar clearing operations throughout Eastern and
Central Europe. xxxxx added that the FMA had met with the
CEOs of BA/CA and RZB to heighten the banks' awareness of USG
concerns.


Statistics on BA/CA and RZB
---------------------------

¶9. (U) Bank Austria Creditanstalt (BA/CA) maintains 1,521
offices and branches, including 1,121 in Central and Eastern
Europe, South East Europe, and the CIS countries. In 2004,
its balance sheet assets totalled 146,516 million Euros. It
has 31,300 employees, of whom 21,100 are in Central and
Eastern Europe, South East Europe and the CIS.

¶10. (U) Raiffaisen Zentralbank (RZB) has 987 offices,
including 970 in Central and Eastern Europe, South East
Europe and the CIS. It had balance sheet assets of 67,946
million Euros in 2004. It employs 27,200, of whom 24,500 are
in Central and Eastern Europe, Southeast Europe and the CIS.
McCaw