The Ugly Death of an Empire

Kalkali El-Hadi tells the story of the fall of Algeria's largest private bank, and the corporate shell game that hid the truth of its shaky finances from its investors, regulators and its customers. In the end, it was all too good to be true.


The Ugly Death of an Empire
By Kalkali El-Hadi

In early 2007, Algeria opened its "trial of the century," a three-month spectacle that followed the biggest financial corruption scandal in the history of the country: the stunning collapse of Khalifa Bank, the country's largest private bank.

The trial was the result of a three-year investigation that ensnared 4,000 people. Eventually 118 people, including executives, were arrested, but the man at the top, Abdelmoumen Rafik El Khalifa, was not one of them. He fled to Britain in 2003 when the scandal broke. The Algerian court tried him in absentia, along with 103 others. Khalifa and dozens of others were convicted. Khalifa was sentenced to life in prison and in late 2007 was awaiting extradition to Algeria.

The Khalifa trial came at a time when President Abdelaziz Bouteflika was trying to crack down on corruption. A tough law enacted in February 2006 provides that anyone charged with corruption, regardless of their official rank, would lose the traditional immunity from prosecution enjoyed by public officials.

Despite such measures, corruption remains a basic part of life for Algerians. Financial corruption remains almost daily front-page news in the Algerian press, dealing blows to the government efforts. Among the scandals:

* The Agricultural and Rural Development Bank (BADR — Banque de l'Agriculture et du Développement Rural), a state bank that reaches into many sectors of Algeria's economy, misappropriated more than two billion dinars (US$30 million) in a series of banking scams.
* In the wilaya (province) of El Tarf, a financial scandal ended with El Tarf's governor, Djillali Arar, in prison.

These affairs had so shaken the Algerian society that corruption had become the key domestic issue. But none of the scandals — indeed, no corruption scandal since the country's independence in 1962 — was as big as the Khalifa affair.

The trial opened on Jan. 7, 2007, in a court in Blida, 30 miles west of Algiers. The 104 defendants were accused of more than 30 serious charges, among them theft, fraud, forging official and bank documents, bribery and abuse of power. However, the star defendant, the Khalifa business empire's founder Abdelmoumen Rafik Khalifa, was in Britain, jailed on immigration and money laundering charges. An extradition agreement between the two countries was worked out just too late for Khalifa to be sent back to face justice in Algeria. Six other key defendants were also tried in absentia, after they fled to various European countries.

Khalifa, 40, is the son of a Cabinet minister in the administration of Algeria's first president, Ahmed Ben Bella. Rafik Khalifa worked as a small-time chemist in Cheraga district before rapidly and mysteriously ascending to lead an empire of 10 companies. Between 1998 and 2003, Khalifa's companies hired some 20,000 employees; the collapsed Khalifa Bank - the only Khalifa unit charged with wrongdoing — had 7,000 workers. It was a meteoric rise, and in hindsight, it was too good to be true.

The scandal began in 2003 with the arrest of three Khalifa Bank executives who were allegedly trying to smuggle two million euros (US$2.9 million) in a suitcase through Houari Boumediene Airport in Algiers. By June 2003, Khalifa Bank, the largest in Algeria, was bankrupt.

The collapse of Khalifa tore a hole in the public treasury. Hundred of thousands of Algerians lost their Khalifa accounts — accounts which were offering interest rates of up to 17 percent before the bank's seemingly inevitable collapse. The government has insured the accounts, but only up to 9,200 euro (US$13,495). The majority of Khalifa Bank accounts were held by public institutions and state-owned companies. Thus the financial collapse reached not only Khalifa Bank customers, but all Algerian taxpayers.

The money is believed to have been siphoned from the Khalifa Bank accounts to fund the crumbling Khalifa business empire, which a leaked French intellegence report estimated was losing 500 million euro (US$733 million) a year. After suspicious Algerian regulators restricted money transfers from Khalifa Bank, Khalifa executives were left with less reliable methods of illegally moving money to their European subsidiaries, setting the stage for the dramatic airport arrest.

In April 2003, the authorities began their investigation. Of the 4,000 people who were investigated in some way, only 104 were officially charged. Two of those defendants — Abdelwaheb Keramane, former governor of Khalifa Bank, and his brother, Abdenour Keramane, former Algerian Industry minister — refused to stand before the court in the trial, saying the charges against them were politically motivated.

Even the lesser defendants in the case had relatively high profiles. Among them were executives of state-owned real estate agencies, general and national secretaries in the Algerian general labor union, officials from the national welfare office, employment-benefit and national-security organizations and celebrities from the arts and sports worlds.

The testimony was star-studded, with a parade of previous and acting ministers in the Algerian government called to the stand. The most prominent witnesses were Mourad Meddilsi, former Financial minister and the acting Foreign Affairs minister and Karim Djoudi, acting Financial minister. Two high-power witnesses who were called by the court but did not testify were former Housing Minister Abdelmadjid Taboune and Aboudoujora Sultani, leader of the political party Movement of Society for Peace.

After more than three months of very complicated proceedings, the court issued a sentence of life in prison for Khalifa and sentences ranging from one year to 20 years for others.

Afterward, the court was criticized for neglecting to charge enough of the key players in the construction of Khalifa's financial empire — dubbed the "big fish" by the Algerian press. Among those critics was Algerian lawyer Saad Djebbar. "It is certain that big fishes escaped the net of Algerian justice," he said. "Consequently, these sentences aren't the end in this affair. Other prominent people were behind Khalifa's cartoon empire, among them generals in the intelligence community."

At the same time, relatives of the defendants expressed their disappointment in the sentences and in the lack of transparency of the trial, drawing a parallel to the trial of deposed Iraqi President Saddam Hussein. "Our relatives were tried quickly and in a less-than-open way. We don't know about the progress of the trial. In this way, ours will go... as was done for President Saddam." One of the defense attorneys criticized the court for breaking judicial procedure laws by opening the case in the Blida court and by limiting the window for appeal to three months.

The Khalifa trial became known as the "trial of the century" in Algeria. Considering the results, it has been a real test for the Algerian justice system and the rule of law, as well as a revealing look at the corruption reform begun four years ago.

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Internet Censorship: A Comparative Study

Using data from the Global Integrity Index, we put a U.S. court's recent order to block access to anti-corruption site Wikileaks.org into context. In summary: The Wikileaks.org shutdown is unheard of in the West, and has only been seen in a handful of the most repressive regimes. Good thing it doesn't work very well.

Starting in 2007, Global Integrity added specific questions about Internet censorship to the Integrity Indicators, which are a set of 304 questions addressing the practice of anti-corruption in national governments. We have always held that a free and critical media is an essential component of good governance; adding an analysis of Internet censorship was an overdue refinement.

We asked our local research teams to investigate two questions:

1. Are Internet users prevented from reaching political material on the Internet?
2. Are content creators prevented from posting political material to the Internet?

The results of this work are generally encouraging. In examining a diverse group of 50 countries, a majority earn a full score on both counts. Freedom of speech is a widely held right. Moreover, Internet censorship is difficult and is often ineffective in suppressing political activity. Most governments, aside from targeted libel restrictions, don't bother regulating online political speech at all.

The Many Flavors of Internet Censorship

A few countries, however, are deeply committed to trying to make censorship work. On this list in 2007 are Algeria, China, Egypt, Kazakhstan, Russia and Thailand. Each has it's own flavor to the repression of online speech -- Internet censorship is still in an experimentation phase, and even the most aggressive approaches don't seem to work very well.

• Algeria has no firewalls or filters, but outlaws hosting content critical of the government, and monitors chat rooms for political speech. [source]
  
  
• China is home to 1.3 billion people and has a highly scalable technological approach based on extensive content filters known satirically as the Great Firewall of China. China is also uses technology to discourage content creation, deploying cute animated police characters (pictured above) to remind Internet users they are being watched. [source]
  
  
• Egypt has limited technical means to discourage content creation, so it relies on an old-fashioned technique -- harassment, beatings and arrests. Hala Al-Masry used to publish in a blog entitled "Cops Without Boundaries" until the government harassed her, "unknown people" beat her father, and she and her husband were arrested and signed a commitment to shut down the blog. Similar techniques have shut down websites of opposition parties. [source]
  
  
• Kazakhstan has little Internet capacity. The government uses this to mask censorship -- rather than block sites, it slows them down, frustrating the users of political content into looking elsewhere. The KNB (formerly the KGB) has a special program called Bolat, which slows down, but does not stop, access to sites of terrorist organizations. Popular opinion holds that it is used to slow opposition party sites as well. [source]
  
  
• Russia has a mixed bag of state persecution and neglect, allowing a rare opening for free expression in a country with highly restricted media. However, the sophistication of the attacks that do occur is frightening, with hackers singling out individual online targets. For instance, the website of Ekho Moskvy, a liberal Moscow radio station critical of the Kremlin, was brought down by a DDoS attack last year. [source]
  
  
• Thailand's military junta moved aggressively to shut down message boards and the formerly-ruling party Thai Rak Thai website after taking over the country in 2006. But the junta's censorship cops work to keep the thinnest appearance of tolerance -- message boards were allowed to reopen under the condition that they did not "provoke any misunderstandings." Message received. [source]
  

So how does the United States fit into this picture?

The court order that muzzled Wikileaks.org (covered here) was prompted not by the government but by a bank registered in the Cayman Islands. The bank used American courts and a compliant domain registrar to scrub the wikileaks.org URL from the Internet. It is extremely unlikely that this decision will stand up in an appeals court, but the larger point is that there is no reason this case should even be fought. Wikileaks should not need a legal team to explain to the courts that the First Amendment requires freedom of speech.

The whole event seems to encapsulate the constant criticism of governance in the United States: that the government has been captured by corporate interests, and that the world-leading rule of law and technocratic mechanisms in place can be hijacked to serve as tools for narrow, wealthy interests.

Online Censorship: Sounds good, but it never works.

While there is much diversity in the style of Internet censorship among the world's worst offenders, one common thread unites them: Internet censorship doesn't work. Cut off one site, and a thousand more pop up. In China, censorship online is sparking criticism that off-line censorship has rarely seen.

So Wikileaks.org went offline, but Wikileaks mirror sites hosted overseas hold the same content, and the original site is still up and running from Sweden (http://88.80.13.160) without its easier-to-type URL. As it turns out, shutting down Wikileaks-the-website has focused our attention on Wikileaks-the-idea, which is spreading at the speed of light.

UPDATE: for more reading on anti-corruption, governance and censorship, try the Global Integrity Report. For more on online censorship, try the Electronic Frontier Foundation or the Open Net Initiative.

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