33915 6/6/2005 10:15 05BUCHAREST1313 Embassy Bucharest CONFIDENTIAL 04BUCHAREST9613 This record is a partial extract of the original cable. The full text of the original cable is not available. C O N F I D E N T I A L SECTION 01 OF 03 BUCHAREST 001313
DEPT FOR EUR/NCE - WSILKWORTH AND JMESSENGER, EB/IFD TREASURY FOR STUART JUSTICE FOR OIA, AFMLS, NDDS
E.O. 12958: DECL: 06/06/2015 TAGS: ECON, ENRG, EPET, ETRD, SENV, SOCI, KCRM, KFRD, PGOV, PHUM, CASC, RO, biographic information, corruption SUBJECT: CHAIRMAN OF ROMPETROL OFFICIALLY INDICTED; BUSINESS SECTOR SHAKEN
REF: 04 BUCHAREST 9613
1. (U) SUMMARY: One of Romania's most important companies, Rompetrol, was shaken by the recent arrest and temporary detention of its high-profile CEO on a variety of economic charges. The case has important ramifications for rule of law and the investigation of corruption here. The organized business community, U.S. Embassy, and European Commission Delegation warned of serious consequences unless justice is delivered expeditiously, transparently and in full accordance with the law. Rompetrol is 20% owned by an American Citizen who is also under investigation. END SUMMARY.
Chairman of Rompetrol Arrested, Detained
2. (U) During the evening of Thursday, May 27, Dinu Patriciu, Chairman and main shareholder of the Rompetrol Group, was taken into custody by the Romanian General Prosecutor's Office and detained during a marathon "hearing" which lasted approximately 32 hours. Patriciu, a National Liberal Party (PNL) member with close ties to Prime Minister Tariceanu, is 80% owner of Rompetrol Group. The remaining 20% is owned by an American citizen, Phil Stephenson, the company's Deputy CEO. The General Prosecutor's Office is investigating Rompetrol and members of its management group for alleged tax violations and improper behavior related to the privatization of the refinery SC Rompetrol Rafinare SA (Petromedia) by the Rompetrol Group in 2001.
3. (U) Prosecutors allege that the Rompetrol Group committed economic crimes by failing to fulfill its contract obligation to make a USDOL 15 million investment in Petromedia as required by the privatization contact. They further charge that as a result of an audit control made in 2003 by the Constanta office of the Financial Guard, they found financial transactions not registered in Petromedia's books. These transactions reportedly resulted in a decrease in taxes and fees payable to the state of an estimated USDOL 10 million. The Prosecutor's Office is also investigating the way in which monetary transfers occurred among the several companies which are members of Rompetrol Group, alleging fiscal fraud and money laundering.
Prosecutors' Conduct Raises Human Rights Concerns
4. (U) At the end of the hearing at approximately 4:00 A.M. on Saturday, May 28, Patriciu's attorney claimed prosecutors had "trashed" his client's defense rights and that his arrest and detention were an abuse by the General Prosecutor's Office. Breaches of the European Convention for the Protection of Human Rights and Fundamental Freedom were alleged. This includes the principle that detention of persons should only occur as an exception, not as a rule, and that a defendant's right to be immediately informed of charges and presumption of innocence were denied. The American Chamber of Commerce in Romania issued a press release noting continuing judicial reform in Romania must assure the objective and impartial treatment of foreign and local investors. (NOTE: AmCit and Deputy CEO of Rompetrol Philip Stephenson is a member of the Board of Directors of the AmCham. END NOTE.) The Human Rights Association - Helsinki Committee (APADOR-CH) was more adamant, demanding the immediate resignation of Romanian General Prosecutor Ilie Botos and of investigators involved in the detention of Patriciu and other known high profile suspects under investigation for their "lack of professionalism." The NGO characterized the detention of Patriciu for over 24 hours as a significant deprivation of liberty. The Association of Romanian Magistrates (AMR) requested the Supreme Council of Magistrates (CSM) to review whether prosecutors observed relevant criminal procedures or not.
5. (C) For the company this case is a damaging exercise. Share values fell by about 40 percent, even though they have bumped up somewhat from that low point. However, management rightly fears that continued prosecution (or conviction, of course) could cause the collapse of the company. It has current plans to expand operations to Kazakhstan and Russia as it shores up firm sources of crude for its refinery. Lending necessary for that expansion is, naturally, now in jeopardy. More essential to survival though are the short-term credits used by the company to finance crude purchases for its refining operations. The credit agreements are apparently renewable unless there is a "material change in the company's circumstances." According to the American Deputy CEO, the arrest of management board members would probably be regarded as such "material change" which could then cause business operations to grind to a halt. Importantly, this crisis for Rompetrol could have a broader political and economic impact. The company contributes about 7% of total revenues collected by the state budget, while also representing about 2 1/2% of total GDP.
Botos Publicly and Privately Defends Conduct
6. (C) In to criticism from these and other sectors, General Chief Prosecutor Botos publicly voiced his outrage at the NGOs' demand that he resign, claiming that the prosecutors investigating Rompetrol and its competitor RAFO (reftel) worked correctly and observed legal procedures. He alleged that the NGOs requesting his resignation do not represent civil society in Romania and that he would continue his fight against organized crime and corruption. Furthermore, he stated such demands amounted to a gross interference with the judiciary and the "politicization" of cases such as Rompetrol and RAFO. He claimed to have personally verified the prosecutor's steps and the measures they took were correct and according to law.
7. (C) Post has a fair degree of confidence in Botos. He repeated his contention that he had a real case against Rompetrol in a frank discussion with the Embassy's DOJ legal advisor several days ago, alleging that he had documentary proof to back up a number of fraud charges -- moving the case away from the mere misinterpretation of tax liabilities. We also note that the supervisory prosecutor in the case is someone whom we have partly trained and slated for an International Visitor's Grant next year. In other words, the prosecution team might not be up to U.S. standards, but they have been exposed to our methodologies. In addition, Botos claimed that evidence developed against Rompetrol had involved work by Financial Investigatory Unit of the National Bank, the Financial Guard, and the anti-Money Laundering authority, implying that this was no politically motivated fishing expedition.
Embassy Demands Fair and Objective Investigation
--------------------------------------------- --- 8. (SBU) Noting that the investigation of Rompetrol has been on going for a considerable period of time, Post issued a press release upon being informed of Patriciu's questioning that reminded the GOR that the American Government strongly believes in the transparency of the judicial process and called upon the government to be fair and objective. The Embassy further warned that if the investigation proved to be anything other than legitimate, it would severely damage Romania's business climate. Similarly, the European Commission Delegation stated in a press release that it expects criminal cases to be conducted in compliance with rule of law, in compliance with the rights and procedural guarantees of persons. Since the initial Embassy release, the same points have been made by Embassy staff to Chief Prosecutor Botos, Prime Minister Tariceanu's Economic Advisor and President Basescu himself.
Complexities Abound in Petromedia Case
9. (C) The charges so far made against Rompetrol basically can be reduced to three categories: fraud, money laundering and tax evasion. A number of them strike us as typical of disputes arising out of the privatization confusions of the past decade and a half. A number are quite complex. For example, for the sake of illustration, we note that part of the case rests with the recouping of liabilities due to the Romanian state after Petromedia's privatization. In the 1980s, the GOR concluded an agreement with the Libyan National Oil Company for shared exploration and exploitation of Libyan oil fields. In 1992, the GOR, owner of Petromedia at the time, sold the rights to a Spanish company for $85 million, payable in 10 annual installments. The Spanish company had not made any payments on the debt when Petromedia was privatized. Subsequently, Rompetrol was able to collect an estimated USDOL 35 million on the debt, which tax inspectors claim should have reverted to the state budget. The General Prosecutor's Office investigators also maintain that the USD 15 million capital increase originating with the recouping of the Spanish debt was not paid for out of the buyer's own resources, but from state funds.
10. (C) Dinu Patriciu was questioned again Friday, June 3, but permitted to return home. There had been apprehension in the Rompetrol camp that the prosecutors would seek to hold him for 30 days so as to prevent him from destroying evidence or tampering with witness recollections. (Comment: Letting him go home was probably a smart move on the part of the government, as it removes most of the angst about tampering with his human rights. End Comment). Also noteworthy was the fact that the hearing of AmCit Phil Stephenson, scheduled for tomorrow, June 7, has been postponed indefinitely.
11. (C) We do not want to discourage the GOR from taking action against "big fish" -- hence the need to tread carefully with this. Moreover, there may indeed be liabilities or unpleasant conclusions under some unturned Rompetrol rocks. Nonetheless, there is no need for this to resemble a show trial like that of Yukos in Moscow, a point we have made forcefully with the GOR. Where does Basescu stand in all this? He and Patriciu have some antagonism between them. Patriciu flirted with the PSD before the last election, making him less of a political stalwart than he might be in Basescu's eyes. Basescu is probably not too displeased to see a potential rival humbled -- or to see a counterpoise to prosecutions of PSD barons or PSD-linked businessmen. It makes the process look more credible. That point was made by Chief Prosecutor Botos as well. But what will be the cost? We believe Basescu is smart enough not to want to damage the Romanian economy, hinder FDI flows or create a roadblock to January 2007 EU accession. However, at the moment, all three are in some jeopardy. Accordingly, we look for him to try to rein in Prosecutor General Botos -- dropping the allegedly abusive court treatment, but keeping the case alive. End Comment.
12. (U) Amembassy Bucharest's reporting telegrams are available on the Bucharest SIPRNet website: www.state.sgov.gov/p/eur/bucharest DELARE