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 US warned of corruption hindering foreign investment in Iraqi Kurdistan  

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US warned of corruption hindering foreign investment in Iraqi Kurdistan  30.8.2011  
By Vladimir van Wilgenburg 

August 30, 2011

AMSTERDAM, the Netherlands, — Recent Wikileaks cables dated from 2007-2009 show that the US believed corruption in Iraq’s Kurdistan region was “pervasive” and widespread, and could hinder foreign investment in the oil-rich area.

Earlier this year Iraqi President Jalal Talabani hosted a lunch for Regional Coordinator and Regional Reconstruction Team (RRT) Officers at his party’s Patriotic Union of Kurdistan (PUK) headquarters in Sulaimaniyah. Kurdistan Regional Government (KRG) US representative Qubad Talabani and former PUK Counter Terrorism Group chief Pavel Talabani, both sons of the president, attended the lunch.

Regional Coordinator James Yellin criticized the KRG for the lack of transparency and prevailing corruption in the meeting.                         
While President Talabani agreed that these concerns hampered investment and promised to form a committee, the RRT concluded after the meeting, that “corruption is pervasive, not only in Sulaimaniyah province, but in the rest of the KRG. We doubt that the PUK will be able to deal effectively with the problem.”

Corruption Could Reduce US Investment

In other meetings, US officials also criticized the Kurdistan government for corruption.

The Department of Commerce held its first trade mission to Iraq in more than 20 years in June 2008. During the mission, which took place in Erbil, US Deputy Secretary of Commerce John Sullivan noted that “the perception of corruption could materially reduce the flow of US-sourced investment into the region,” according to a cable dated July 20, 2008.

At that time then-KRG Deputy Prime Minister Omar Fatah agreed that corruption could reduce investment, and he stressed the “importance that US businessmen see fair systems of awarding government contracts, as well as transparent overall governance based on the rule of law.”

Former KRG Trade Minister Mohammed Raouf, a Kurdistan Islamic Union party leader, agreed that there corruption existed, but indicated it was unlikely that US firms would face corruption-related obstacles in the Kurdistan Region.

He said, “If a powerful, large US company came here, no one would dare ask for a bribe. Let's have just one big US company enter, and we'll see if they have problems. They won’t.”

In 2008, some US officials concluded that “as in the rest of Iraq, the number of corruption cases successfully prosecuted in the Kurdistan Region remains negligible.” The US concluded that there should be more corruption convictions against KRG officials, and a more aggressive enforcement of anti-corruption measures.

Services, Bureaucracy Hinder Foreign Investment

Another cable written in July 2009 by the US embassy in Baghdad shows that foreign direct investment was impeded by an entrenched bureaucracy, lack of infrastructure (electricity, lack of modern roads), lack of banking and insurance services, lack of skilled laborers in Kurdistan, limited consumer market, opaque business practices and cronyism, the KRG’s failure to deliver on its promises, and the lack of a strategic plan to attract foreign investment.

Again the US is highly critical of corruption, and notes that the KRG needs a “transparent system of contracting.” Investors complained to the US that they have to work with Kurdish partners in order to gain business. “Some of these Kurdistani partners ask for exorbitant fees (51% of profit earned) in exchange for their services, which may dissuade small-scale investors,” the RRT mission in Erbil noted.

The RRT’s criticism is partially the result of complaints of American and international businesses in the Kurdistan region. During an US Chamber of Commerce visit to Erbil from February 3-4, 2009, investors complained about routine "facilitation fees".

“One investor described the practice of obliging businesses to allow KRG companies to take equity stakes in companies (usually affiliated with either the Barzani or Talabani clan), as a more sophisticated shakedown,” the cable report mentioned.

Other investors complained to the US Chamber that the KRG’s bureaucracy is inefficient and "never does something the same way twice."

There were wide concerns over the professionalism and independence of the KRG judiciary. The RRT concluded, “that while many private investors feel that the potential rewards to doing business in the KRG are great, the risks associated remained relatively high as well.”

Kurdistan No Gateway to Iraq

The US leaked cables are also highly critical of the KRG’s advertisements that the Kurdistan region is the “gateway to Iraq” and suggests that the Iraqi government resist the KRG’s efforts to attract investment.

“Relatively few instances of companies successfully establishing themselves elsewhere in Iraq based on their start in the KR. In fact, many firms who have chosen to work in the KR have experienced direct and indirect resistance from Iraqi government institutions regarding the commercial engagement strategies in Iraq as a whole.”

Despite of the criticism of the Kurdish economy, the RRT mission still notes that there is a western interest in the Kurdistan market, and that the KRG offers attractive terms for foreign investors. But the RRT suggested that until the KRG addresses its weaknesses, “it is unlikely to attract the level of foreign direct investment that it needs to generate the jobs and economic stability that come from a strong and diversified private sector.”

Assessment of Transparency Campaign

In July 2009, the KRG launched a “strategic good governance and transparency” campaign to fight corruption in its institutions with the support of the international consultancy firm PricewaterhouseCoopers.

“The purpose behind this conference is that the Kurdistan Region wants to tell the whole world that it is combating corruption,” said Nisar Nuri Talabani,
www.ekurd.nethead of the good governance and transparency office, told Rudaw in November 2010.

A leaked cable dated July 22, 2009 showed that the US embassy in Baghdad welcomed the KRG’s initiative but believed eradicating corruption would be challenging.

“In this, as in other areas, the Kurdistan Region is neither waiting for donor assistance nor bemoaning the lack of international support - they have decided to go out and buy their own advice. These are positive steps so far.”

PricewaterhouseCoopers representatives told the US embassy that even though the project was contracted by the KRG, it was similar to a United Nations-anti-corruption project and that it was the first time in the team's experience that a government had self-funded its own UN-like project.

However, the US embassy added, “The painful next steps, including divesting the government of conflict-of-interest business dealings, enforcing new codes of conduct for government officials, and prying the party away from the workings of government will test the commitment of the KRG leadership - whoever it may be.”

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