Millions in Royal Debt Has Pakistan in Predicament

When a rich Persian Gulf sheik with a bad heart and a reputation for heavy drinking died two years ago, he saddled a state-owned bank in Pakistan with a $227-million debt he had refused to pay for more than two decades.

In a separate case, an Arab princess and the Emirate of Sharjah stiffed the same bank, United Bank Ltd., for $87 million, Pakistani President Pervez Musharraf said in a letter to the ruler of the United Arab Emirates.

As a result, impoverished Pakistan has had to go begging to the wealthy Emirates to cover $314 million in royal debts. Confidential bank and government documents, including Musharraf’s letter, make it clear that the loans are hurting Pakistan’s efforts to sell its fourth-largest bank at a fair price, as part of an economic reform package.

The worlds of international banking and main emirate Abu Dhabi’s royal family are secretive, so many details about the loans and the borrowers are hard to come by. The matter is so sensitive that officials in both countries refuse to speak on the record about it.

But the leaked documents shed some light on difficulties and internal divisions in Pakistan stemming from loans made for “prestigious residential developments” in the late 1970s.

Musharraf, already struggling with Islamic extremism and political opposition, is trying to meet a May 31 deadline to sell United Bank and other state-run companies to gain loans from the International Monetary Fund that Pakistan needs to recover from years of sleaze and turmoil.

However, the leading candidate to buy the bank is from Abu Dhabi’s ruling family--as was the man who never paid the $227 million--raising concerns about a possible conflict of interest.

Sheik Mohammed ibn Khalid al Nuhayyan died about two years ago in his mid-50s. An Emirates banking source said that Mohammed had a reputation as a heavy drinker and a bad risk and that he eventually was blacklisted by his own country’s central bank.

He was the nephew of Sheik Zayed ibn Sultan al Nuhayyan, who has governed the oil-rich Emirates since they gained independence from Britain in 1971. In 1998, the last time that Zayed made it onto Forbes magazine’s list of top 10 billionaires, he ranked seventh, with an estimated worth of $15 billion.

The Nuhayyan family is also associated in banking circles with the Bank of Credit and Commerce International, of which they were the principal shareholders. BCCI laundered millions of dollars for Western intelligence agencies, arms and drug traffickers, and terrorists before collapsing in 1991.

Conflict of Interest Seen

One of Zayed’s cousins, Sheik Nuhayyan Mabarak al Nuhayyan, is chairman of BCCI’s Karachi-based successor, Bank Al Falah, and heads the Abu Dhabi Group that is considered the front-runner among three bidders for United Bank’s $2.7 billion in assets and 1,370 branches. His group is also one of the top two contenders for the state-owned Pakistan Telecommunications Co. Ltd.

A senior United Bank executive, international division chief Aman A. Siddiqui, expressed concern in an Oct. 23 memo about a possible conflict of interest.

Because the Abu Dhabi consortium is headed by a cousin of the Emirates’ ruler, “it is likely they will exert influence against resolution of the matter, as it gives them a huge pricing advantage if the matter remains on hold,” Siddiqui wrote to United Bank President Amar Zafar Khan.

Siddiqui told Khan in a separate memo that an intermediary for the Emirates, former Ambassador to Pakistan Mohammad Atiq al Qamzi, would advise his clients to buy the bank without settling the debts.

Musharraf put his prestige on the line by pleading for a settlement. In a March 2001 letter, he offered prayers for Zayed’s recovery from surgery, and then asked his help in getting the $314 million back.

“Efforts to secure payment of these loans have failed over all these years, primarily due to [the] inability of the bank to secure cooperation from the borrowers and the desire of [United Bank] not to create an embarrassing situation in its host country,” Musharraf wrote.

“However, repayment of the two loans has become highly urgent for Pakistan because they represent a major drain on the bank’s resources and thereby on the vulnerable economy,” he added. If the loans were not repaid, he said, Pakistan would have to delay privatization of the bank or sell it at a big discount.

“The failure to recover the loans would also have an impact on the financial arrangements being currently sought from the International Monetary Fund and the World Bank by Pakistan,” Musharraf wrote.

The Emirates’ ruler did not respond, a serious loss of face for Musharraf. Ibrahim al Abed, an Emirates government spokesman, said the nation considered the debts a personal matter that had nothing to do with the government.

Other Pakistani officials have minimized the dispute or sought to write off the debts.

Finance Minister Shaukat Aziz, a banker with long experience in the Middle East, dismissed suggestions of problems with the bank sale as “a bunch of garbage” and refused to discuss the loan dispute on the record.

Aziz took charge of Citibank’s corporate banking operations in the Middle East, Africa and Central and Eastern Europe in early 1992 and visited the Emirates that March to seek ways to increase business.

Seven years later, a U.S. Senate committee reported that Citibank had failed to stop money laundering by clients that included high-profile politicians such as Asif Ali Zardari, husband of former Pakistani Prime Minister Benazir Bhutto. Zardari allegedly used Citibank accounts, including one in the Emirate of Dubai, to hide kickbacks that Pakistani authorities said he had received from foreign companies.

John Reed, then-chairman of Citigroup Inc., the parent of Citibank, acknowledged that there had been problems and said he had appointed Aziz in May 1997 to clean them up. Aziz was still head of Citibank’s global private banking division when he joined Musharraf’s government in 1999, after the general seized power.

The Senate committee held hearings that year and criticized Citibank for abuses that occurred after Aziz took charge of global private banking, such as allowing the president of Gabon, Omar Bongo, and sons of the late Gen. Sani Abacha, who was then Nigeria’s leader, to move suspicious funds.

“Citibank argues that was then and this is now, and that the operation of the private bank has changed considerably in the last few years,” Sen. Carl Levin (D-Mich.) told the committee Nov. 10, 1999. “But the actions with respect to Mr. Bongo and the Abacha sons occurred in 1998, and it was just last year when the Federal Reserve told Citibank board members that the private bank had ‘significant weaknesses in internal controls that expose Citibank to excessive legal and reputational risk.’ ”

Loans Set at $57 Million

Aziz said in an interview that he knew little about United Bank’s Nuhayyan loan, even though minutes of a Sept. 6, 2001, meeting in the finance minister’s office indicated that he wanted the bank to write off the debts. Eleven senior government and United Bank officials attended the meeting, which was requested by Khan, the bank president.

Khan circulated a summary of issues concerning the privatization and set the value of the unpaid Emirates royal loans at less than $57 million, the minutes said. There is no reference to the much larger figure Musharraf cited in March 2001.

Siddiqui’s memo to Khan referred to “a huge remission” on the debts offered by a previous United Bank president, undercutting the larger claim.

The bank sued in 1994 to collect the debts, but the case is still stuck in an Emirates court, according to the Oct. 23 memo, in which Siddiqui also described meetings with Qamzi, the Emirates emissary. Siddiqui wrote that even Qamzi questioned the debt remission “when clearly the bank had a strong case in support of its claim.”

“I emphasized that this is a government-owned bank, and this money belongs to the poor people of Pakistan, and it was therefore not appropriate for us to sit in judgment with respect to an unfavorable settlement,” he said.

Aziz, the finance minister, suggested writing off the debts as “a normal business loss,” according to minutes of the Sept. 6 meeting. Khan said the loans could be transferred to a state-run Corporate and Industrial Reconstruction Corp., created to help make banks more attractive to buyers by clearing bad loans from the books.

Khalid Siraj, a senior advisor to the finance minister, said the corporation was not supposed to take on foreign debts because of possible jurisdictional disputes, according to the minutes. But on April 17, the government announced the transfer of Middle East loans with “a net book value” of more than $58 million to the reconstruction corporation. It did not specify whether the Emirates loans were included.

The move was described as one of several taken to improve United Bank’s valuation and “provide a level playing field to all the bidders.”

The Abu Dhabi Group’s bid for United Bank is drawing added scrutiny because Bank Al Falah emerged from the ruins of BCCI. The chairman of Bank Al Falah, Nuhayyan Mabarak, is also the Emirates’ minister of higher education and scientific research.

A local banker described the Oxford-educated sheik as “a blue-chip businessman” with an excellent record. But the Nuhayyan family still is known for its role in the collapse of BCCI a decade ago, when the Bank of England uncovered fraud of more than $1 billion.

The royal family provided most of the capital when BCCI opened in the early 1970s, with Pakistanis serving as the principal managers. In 1990, just before BCCI collapsed, the Nuhayyans and other Abu Dhabi officials owned 77% of it.

In a 1992 report to the Senate Foreign Relations Committee, Sen. John F. Kerry (D-Mass.) and then-Sen. Hank Brown (R-Colo.) showed links between BCCI and the CIA, including aid to Afghan guerrillas fighting Soviet troops in the 1980s. Osama bin Laden also had money in BCCI, Kerry has said amid new calls for measures against international money laundering after the Sept. 11 terrorist attacks.