Wednesday, June 21, 2017

Gas and the Gulf crisis: How Qatar could gain the upper hand

Asian markets, military allies and a crucial pipeline all offer Doha leverage against its adversaries amid the current crisis

Middle East Eye

The blockade of Qatar, led by Saudi Arabia and the United Arab Emirates, has already had an economic impact.
Qatar, the world’s second largest producer of helium, has stopped production at its two plants as it cannot export gas by land. Qatar Airways can no longer fly to 18 destinations. Qatari banks are feeling the pinch, particularly the Qatar National Bank (QNB), the region’s largest by assets, and Doha Bank: both have extensive networks across countries which are members of the Gulf Cooperation Council (GCC).
Ratings agency Standard & Poor's (S&P) downgraded Qatar’s credit rating from AA to A- on 8 June. It could put it on credit watch negative, a sign that the crisis could impact investment and economic growth. Moody’s followed suit, placing Qatar’s AA long-term foreign and local currency Issuer Default Ratings (IDRs) on rating watch negative.
Doha is unlikely to buckle soon. It has plenty of financial muscle, not least in its sovereign wealth fund, the Qatar Investment Authority (QIA), which holds an estimated $213.7 billion, according to the Institute of International Finance. The seed capital for that fund comes from Qatar’s oil and gas exports.
Energy receipts account for half of Qatar’s GDP, 85 percent of its export earnings and 70 percent of its government revenue. The crisis may affect the emirate's medium- to long-term energy contracts, as buyers diversify their imports to be less reliant on Qatari gas.

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Monday, May 29, 2017

The 'Pipelineistan' conspiracy: The war in Syria has never been about gas

 The pipeline hypotheses do not stand up to the realities of how energy is transported through the Middle East in the 21st century

Middle East Eye

Six years into a conflict that has killed at least 400,000 people, there is a widely held belief that the bloodshed in Syria is simply another war over Middle Eastern energy resources.
The bloodshed, so the theory goes, is a proxy battle about two proposed pipelines which would run across the country and on to Turkey and Europe.
While neither pipeline has left the drawing board, or indeed was ever realistic, this has not dampened the theory's popularity as a core reason for the Syria conflict.
The first pipeline is allegedly backed by the US and runs from Qatar through Saudi Arabia and Jordan to Syria. The second is a supposedly Russia-backed pipeline that goes from Iran, via Iraq, to Syria.
Syrian President Bashar al-Assad, it is claimed, rejected the Qatari pipeline in 2009, at the request of Moscow, to ensure that European reliance on Russian gas would not be undermined.
As a result, some commentators claim, the US and its European and Gulf allies, including Qatar, decided to orchestrate a rebellion against Assad to ensure that their pipe dreams became a reality rather than the Iranian option. Russia, in turn, backed Syria to ensure its own energy interests prevailed. Iran is also an ally of the current regime in Damascus.
These claims have been promoted in several quarters: the Qatari-based Al Jazeera first floated the concept of a "Pipelineistan war" in 2012.
Even US establishment journal Foreign Affairs and the Guardian newspaper picked up on the theory, which gained further traction in 2016 in an article by Robert Kennedy Jr, and was flagged by, among others, Jill Stein of the Green Party, a former US presidential candidate.
The idea was floated again after the US bombing of Syria in April. This, it was claimed, was further "proof" of Washington's desire to oust Assad and enable Europe to diversify its gas dependency away from Russia.
While the US has been covertly working with Gulf allies against the Assad regime, controlling Syria's energy resources and pipeline networks was not a primary concern. If so, it would be a very low priority for regime change.
Why? Firstly, the timeline is wrong. Covert action against Syria started under the George W Bush administration, in 2005, well before the alleged Qatari offer to Damascus in 2009.
"We can see US action against the Syrian regime well before the notion of this pipeline came into existence," says Justin Dargin, an energy scholar at Oxford University.
Secondly, the pipeline hypotheses do not stand up to the realities of how energy is transported through the Middle East and the obstacles faced by pipeline proposals, many of which fail to come to fruition. Even the Arab Gas Pipeline, whose second phase came online in 2005, has been mired in problems.
Robin Yassin-Kassab, author of Burning Country: Syrians in Revolution and War, says the Pipelineistan theory also ignores how the conflict started and the early months of the revolution.
"Like all conspiracy theories, it thrives on the absence of content and in-depth knowledge of the country," he says.


Monday, April 03, 2017

The Gulf in terrorist finance control

Arab Gulf governments are repeatedly accused of aiding terrorist financing on and, more often, off the record. Calls to get tough on these states have been side-lined by political and economic expediency, while Gulf moves to curb such funding have been lacklustre, with risks in prospect, reports Paul Cochrane, from Beirut.

Terrorist financing is continuing in the Middle East, highlighted by the devastating attack in Istanbul over the new year. Radical Islamic groups still operate in Iraq and Syria, notably the Islamic State, or ISIL (also known as ISIS), and their source of funding is a contentious issue.
Currently the issue is tied up with the Syria conflict due to the number of armed actors involved. On one side is the Syrian regime, backed by Moscow and Tehran. Iran, being a Shia Muslim republic, supports Hezbollah, the Shia Islamist militant group and political party based in Lebanon, which is deeply involved in the Syrian conflict. On the other side are the rebels, which include radical Sunni Muslim groups such as ISIL, Jabhat al Nusra (renamed Jabhat Fatah al-Sham in July 2016) and Al Qaeda, which are also under international sanctions.

The pro-regime Syria group claims Sunni terrorist organisations are funded by the six Gulf Cooperation Council (GCC), especially Saudi Arabia and Qatar – the other four being Bahrain, Kuwait, Qatar, Oman and the United Arab Emirates (UAE) and their allies, the United States, the UK and Turkey. But the GCC states deny any terrorism funding, although openly supporting rebel groups wanting to oust Syrian President Bashar Assad: so has the US government, which has joined Saudi Arabia in openly support Syrian rebels, along with the UK.

But while Syria and Iran have been labelled ‘state sponsors of terrorism’ by Washington, countries judged by the US Secretary of State to repeatedly support terrorist acts, with the US Senate on 1 December 2016 extending the Iran and Libya Sanctions Act of 1996 (ISLA) for another 10 years, the GCC states have not been rapped over the knuckles by the US or other international bodies over terrorist financing.

In private, however, more forthright opinions have been expressed: “We need to use our diplomatic and more traditional intelligence assets to bring pressure on the governments of Qatar and Saudi Arabia, which are providing clandestine financial and logistic support to ISIL and other radical Sunni groups in the region,” reads a leaked email between Secretary of State Hilary Clinton and John Podesta, a Counselor to President Barack Obama, dated 17 August 2014.

In 2009, another leaked Clinton memo stated: “Donors in Saudi Arabia constitute the most significant source of funding to Sunni terrorist groups worldwide.” It also said that the UAE was “a strategic gap” that terrorists can exploit, Qatar was “the worst in the region” on counterterrorism, and Kuwait “a key transit point”.

The US Treasury has kept quiet on the matter, with the emphasis on individual funders, not GCC governments. “The top US official for terror finance said in 2015 that Arab Gulf monarchies are the largest source of donations to Al Qaeda,” said Dr David Andrew Weinberg, Senior Fellow at the Foundation for Defense of Democracies in Washington DC.

He said the likely reasons were “the high concentration of millionaires and billionaires in that area, and “the intense religious currents in the region. Putting those two together seems a higher risk for terrorist financing incidents”.
This position is echoed by Dr Theodore Karasik, Senior Advisor at Dubai, UAE-based consultancy Gulf State Analytics (GSA). “The (GCC) governments do an excellent job of trying to halt (terrorist financing) activity but because of sympathies and also the inability for 100 percent border control, there are going to be leaks. These gaps need to be filled with more proactive action instead of reaction,” he said.

Meanwhile, the US Department of State’s March 2016 International Narcotics Control Strategy Report (INCSR) cites private individuals and charities as potential terrorist financers. Saudi Arabia, Qatar, Bahrain and Kuwait were all labelled a “Jurisdiction of Concern’, while the UAE was deemed a ‘Jurisdiction of Primary Concern’ and Oman a ‘Monitored Jurisdiction’ (lower risk).

Selective vision

Cynics say the unwillingness to act against the GCC states over terrorist financing is due to political expediency. GCC states, while hosting US and UK military facilities, are not only seen as long-standing allies, there is the allure of petrodollars (revenue from petroleum exports). “An important element of not seeing Gulf leaders put to task is that they are influential... and have a great deal of money,” the FDD’s Dr Weinberg said.

But ignoring GCC activities is counter-productive, David L. Phillips, Director of the Programme on Peace-building and Rights at Columbia University’s Institute for the Study of Human Rights, told MLB: “When you politicise the decision around sanctions you undermine the whole effort against terrorist financing. If it is [GCC] government policy [to support terrorism] then the US needs to react bilaterally,” and individual views also need considering, said Mr Phillips, a former senior adviser to the US State Department in Iraq.

Questions over US support for Syrian rebel groups finally led to a bill, introduced on 29 June 2016, to create the ‘Stop Terrorist Operational Resources and Money Act’ (STORM), aimed at “prohibit(ing) the US government from using American taxpayer dollars to provide funding, weapons, training, and intelligence support to groups like the Levant Front, Fursan al Ha and other allies of Jabhat Fateh al-Sham, al-Qaeda and ISIS, or to countries who are providing direct or indirect support to those same groups,” said the legislative text.

The Act, proposed by Democratic Senator Bob Casey (Penn.), if adopted, could change existing policy. “STORM would basically create new statutory penalties for countries in the gray zone - sins of omission. That might create new incentives in GCC-US relations to address current issues,” said Dr Weinberg.

Independent will

Meanwhile, the GCC states have certainly acted as if they are addressing CFT (combating the financing or terrorism) issues. In November 2014, they adopted the Manama Declaration on CFT, and were part of the 34-state Islamic coalition that signed the Jeddah Communique to fight terrorism – on 11 September 2014. 
But critics say these moves and anti-money laundering (AML) regimes over the past 16 years have not been overly proactive. “I kept pounding the table over a decade ago to pay attention to the Gulf but little traction was taken. Since 2001, the region started to get its act together. The problem is, I have no sympathy any more as the infrastructure is there but what is lacking is enforcement and initiative. If the US or Britain goes to Saudi Arabia or Kuwait and says, ‘look into this’, they will, but will not do so from their own initiative,” said Board Adviser for the FDD’s Center on Sanctions and Illicit Finance ( C SIF), John Cassara.

The Jeddah Communique has also not been well enforced, argue experts: “The Gulf states pledged to combat terrorist financing and repudiate the ideology that underpins violent extremist groups but many have failed to follow up on this. I don’t believe Qatar and Kuwait have convicted anyone on the US on UN designation lists, which seems a clear violation of the Jeddah Communique,” said Weinberg.

GSA’s Dr Karasik points out a different mindset towards enforcing international regulations. “You don’t see it manifested in convictions but in a resignation or early retirement, or some action done on their terms, not dictated by outside,” he said. “Having said that, it does have an impact, as their continued move to compliance and transparency helps Arab states perform their (regulatory) transformation.”
A further challenge is that only three GCC states - Bahrain, the UAE and Saudi Arabia - have issued lists of terrorist organisations, Dr Weinberg said. “That further exacerbates the problem of identifying which groups are OK to be funded out of these jurisdictions.” 

Risk to reputation?

The banking sector has also fallen foul of terrorist financing. Six Arab banks have lost their correspondent (deposit) banking relationships with the US in recent years, the first a Saudi Arabian bank in 2013 the Al Raji Bank. But this is less related to CFT regime concerns and more to do with increased compliance requirements on a range of AML-CFT rules laid down by the Financial Action Task Force (FATF) and the US government.

An Arab Monetary Fund study, published in September 2016, found that foreign banks were de-risking due to (in order of importance): lower overall risk appetite, legal and regulatory changes, lack of profitability in correspondent banking, sovereign credit risk ratings, and concerns about AML and CFT risks in Arab countries.

“Reputational risk was already a concern when foreign investors look at new investment opportunities in the GCC. Because of heightened US requirements for transparency and compliance, this type of action helps to illuminate potential terrorist financing in the region,” said Dr Karasik.

Moreover, given the ongoing good relations between the West and the GCC, there is not, at least yet, any major reputational risk concerns for foreign institutions dealing with the Gulf. “There will be pressure on de-risking but also ongoing pressure to seek money from GCC institutions. After the economic shocks in the US and Europe, and currently the refugee crisis, I don’t think de-risking is necessarily going to happen to the extent it should,” said Weinberg.

The FDD’s Mr Cassara, a former US Treasury special agent, agreed: “Right now I think there is nothing to worry about. Big banks in the region are doing what they need to do to adhere to international norms from FATF and the US. Could I see a shift? Yes. But nobody knows what is going to happen with the new (Donald) Trump administration.”

Photo by Paul Cochrane (Manama, Bahrain) 

Tuesday, March 07, 2017

The Syria selection – sanctions file


The Syria conflict is into its sixth year, as are the multilateral sanctions imposed on the government in Damascus. How effective have the sanctions been, given the Syrian regime’s survival? And where may funds from members of the regime, and those linked to it, have gone? Paul Cochrane, in Beirut, investigates. 

Syria has been sanctioned by the United States, the European Union (EU), and the United Nations (UN) since 2011. Numerous new measures have been applied in the intervening years as the conflict between the regime of President Bashar Assad, the opposition and Islamic State has raged on. More recently, in May 2016, the EU extended restrictive measures against the Syrian regime until 1 June 2017. In October 2016, it added 10 further people to its lists, bringing the total to 217 persons subject to a travel ban and asset freeze. In December 2016, the US Treasury designated a further 18 people and five entities as being covered by its Syrian conflict-associated sanctions, which also blocks “any property or interests in property of the designated persons in the possession or control of US persons or within the United States” and “transactions by US persons involving the designated persons are generally prohibited”. In January (2017), Britain and France were drafting a new UN Security Council Resolution proposing additional sanctions, diplomats in New York have said – these would ban countries from supplying the Syrian government with helicopters and impose financial and travel sanctions on 11 Syrian individuals and 10 entities connected to chemical weapons attacks in Syria.

Top targets

Initial sanctions, imposed by the USA, EU and UN on Syrian interests, targeted members of the government, state-owned institutions, the military, and individuals and businesses connected to the regime, restricting their access to foreign banks and curbing their use of the SWIFT network.

“The Syria programme has been fairly successful in putting economic pressure on Assad’s government. Its macroeconomic indicators have taken a nose dive,” said Eric Lorber, a lawyer at the Financial Integrity Network in Washington D.C., who advises financial institutions on regulations administered by the US Office of Foreign Assets Control (OFAC).

Indeed, in early 2016, the International Monetary Fund (IMF) estimated that Syria had US$1 billion in foreign currency holdings, and the World Bank estimated some US$700 million. “The finance minister, appointed in July, confirmed the World Bank figure. Whatever it is, that’s a figure from a year ago, and down from US$20 billion in 2010,” said Jihad Yazigi, editor of financial publication, the Syria Report.

Bankers’ response

Private banks in Syria have also been impacted, with some closing down early on in the conflict, while others have changed names and management over concerns about being too associated with Syria. Correspondent banking relationships have also been lost. “Most European banks refuse correspondent banking as they think it’s too risky or the clients are too risky,” added Yazigi.

The main change in new EU sanctions designations has been adding more government officials, largely due to a changing roster in top jobs, like the July 2016 appointment of Central Bank governor Duraid Durgham and finance minister Maamoun Hamdan, appointed the same month. But unlike earlier lists, the US has also added focus on the private sector. “I was surprised as it is not the usual list you see of generals, colonels and government ministers. This time around OFAC was using good intelligence and due diligence as to who these people are, and what has happened in (Syria’s) political-economy over the past two years,” said Rashad Al Kattan, a security risk analyst, and a fellow with the Centre for Syrian Studies at the University of St. Andrews, Scotland.

Flight risk

Among the private companies sanctioned is Cham Wings, a private Syrian airline that was used as a national carrier for the January peace talks in Astana, Kazakhstan as state-run Syrian Air is down to just three planes. “Many analysts think the airline is not owned by the Shammout Group but is actually a front for Rami Makhlouf,” the maternal cousin of Bashar Assad, noted Kattan. Makhlouf is considered Syria’s wealthiest businessman. He was sanctioned by OFAC in 2008.

Adib Muhanna, the former head of Cham Holding, in which Makhlouf has a confirmed stake, has also sanctioned by the US Treasury (December, 2016) for “having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of, Rami Makhluf (sic)”; it is thought that he had conducted real estate transactions on Makhlouf’s behalf. Two security firms – Al Hisn Firm for Security Protection and Guard Services (Al-Hisn) and Al-Qasiun Security Services LLC (Al-Qasiun) - established after a legislative change in Syria in 2013 to allow private security companies - have also been designated by the US Treasury for links to Makhlouf. Another declared reason was that these companies had been facilitating the oil trade between Damascus and areas under the control of the Islamic State of Iraq and the Levant (ISIL).

Russian influence

The Syrian government and its supports have only been able to withstand such tough sanctions due to credit lines and support from allies Russia and Iran. “Before Russian (military) intervention (in September 2015), Moscow’s main role was providing a life line, such as military supplies and weapons, but also deposits of central bank capital into the Russian banking system and the utilisation of secondary Russian banks that don’t have the same exposure (as larger Russian banks) to facilitate capital transfers,” said Andrew Bowen, a researcher for geopolitical consultancy Wikistrat.

In December 2012, Syrian state press reported that the country’s central bank had opened Euro and Rouble accounts with state-linked banks VTB, VEB, and Gazprombank. While VTB and VEB have issued statements denying handling Syrian cash, in October 2016, a leaked document indicated money had gone to VTB. “Wikileaks dumped all these documents on the Assad regime but left out one, the central bank depositing 2 billion euro in VTB,” added Bowen.

While Russia is subject to its own EU and US sanctions, it has been able to circumvent them, he noted, notably on behalf of Syria. “It has become more complex with Russia having sanctions, but Cyprus plays a crucial role in the transfer of illicit capital through Western banks, and a key transit point for transfers from Russia to Syria,” said Bowen.

Outflow destinations

Moreover, according to Kattan, Russian ally Belarus is suspected of having “substantial” amounts of Syrian money. As is Dubai. “There is some decent money going there, and I wouldn’t be surprised if Latin America is being used. If you look geo-strategically at who is voting at the UN for Syria, it is Cuba, Venezuela and others, and (Lebanon’s) Hizbullah (which is involved in the Syrian conflict) has good links in Latin America,” he said.
Swiss leaks

Other major financial players have also been implicated in efforts by Syrian government figures to sidestep sanctions. The Swiss Leaks, based on the inner workings of HSBC’s Swiss private banking arm, and combed through by the International Consortium of Investigative Journalists, indicated Rami Makhlouf to be the beneficial owner of multiple accounts.

Ultimately, there are a lot of rumours as to where the cash has gone. “A significant amount of money likely made its way from Syria to Lebanon, and also to a number of more opaque jurisdictions like Panama and the Caribbean, but there seems to be limited concrete information,” said Lorber.

Difficult neighbours

Lebanese banks have been under particular pressure over Syria given longstanding bilateral ties, and Lebanese banks operating five of Syria’s 14 private banks. In Lebanon, banks have been actively de-risking Syria-linked clients and have made it difficult for Syrians to open bank accounts, despite no regulations prohibiting this. “They have been under pressure in general, and especially after the Hizbullah International Financing Prevention Act of 2015, as Lebanese banks are the biggest, and most significant, operators in Syria,” said Kattan. The law says the US shall impose sanctions on financial institutions shown to be facilitating Hizbullah payments.

Iran and Iraq

Iran has provided both military and financial support to Syria. Indeed, Syrian Prime Minister Imad Khamis said in January that only Iran has provided economic aid to the country. His remarks followed Tehran providing a new credit facility of US$1 billion to Damascus in January (2017), while several agreements were signed to transfer Syrian owned phosphate mines and a maritime port to Iranian companies, and a mobile phone licence to the Revolutionary Guards, according to Yazigi.

Iraq, sandwiched between Syria and Iran, has also been a conduit for Syrian capital. A joint Iraqi-Syrian trade bank was proposed at a January (2017) meeting of the Chamber of Commerce in Damascus, according to Kattan. An Iranian-Syrian bank had been mulled back in 2010 (as reported in MLB in October 2010, see Iran-Syra: a banking axis), but did not materialise. “With Iraq, it might be more doable as banks in Iraq are very politicised. There is a lot of movement between Iraq and Syria, and that is moving towards economic cooperation. This might be an effort led by Iran, for the Iraqi and Syrian governments to work together,” said Kattan.

Back to Moscow

Any such financial institutions may have to cope with even more sanctions. With Russia already under new sanctions, new legislation has been proposed in the US Congress to punish the country for its military activity in Syria and Ukraine, as well as to counter Russia’s alleged cyber activities. The Counteracting Russian Hostilities Act of 2017, has bipartisan support, despite President Donald Trump’s desire for better relations with Russia, and includes new primary and secondary sanctions, for instance authorising sanctions on defence companies providing arms to Russia for use in Syria, and prohibit both US and foreign companies from doing business with those entities.

“If passed, which is a big question, I think it will be very effective. The Act will put pressure on Russia but I question whether it will stop Russia’s military involvement in Syria. Moscow is determined to ensure Assad’s survival, so the economic pain would have to be pretty extreme,” said Lorber.

The last section of the bill provides for a joint task force of the Justice Department, OFAC, and Financial Intelligence Unit FinCEN to investigate money laundering activities, organised crime, and sanctions evasion in Russia. “If the task force is set up, I would expect that, during the investigations, they would find significant illicit connections between Russia and Syria,” added Lorber. 

Photo by Paul Cochrane

Wednesday, March 01, 2017

Middle East – de-risking, collateral damage (Video)

Money Laundering Bulletin

De-risking by US and European financial institutions is putting immense pressure on Arab banks in the Middle East, especially in the dollarized economies, as they seek to preserve their correspondent relationships. In September 2016, the Arab Monetary Fund reported survey findings that around 40% of banks in the region had seen a “significant decline in the scale and breadth” of these relationships between 2012 and 2015. Paul Cochrane in Beirut talks to local professionals about the impact and consequences for AML.

- To watch the video go to:

Wednesday, January 25, 2017

Fuse paper – terrorist finance tracking in Europe

Money Laundering Bulletin

The pendulum of public sentiment swinging from concern for data privacy to security suggests now may be opportune for Europe to embark on a Terrorist Finance Tracking System (TFTS), says Paul Cochrane, whether independent or additive to the US Terrorist Finance Tracking Programme (TFTP).

Concerns about the US-EU Terrorist Financing Tracking Programme (TFTP) have abated, notably regarding oversight and data-sharing issues. But the issue remains controversial, with a potential EU version of the system still being debated within the EU executive, the European Commission, whether to be standalone or complementary to the USA-promoted TFTP. Meanwhile, with Britain voting to leave the EU, renegotiations may have to take place whatever is decided by the remaining members of the EU.

The TFTP caused a lot of controversy when it was exposed by the media in 2006. The programme, secretly enacted post September 11 2001, provides data to the US through an agreement with the Brussels-based Society for Worldwide Interbank Financial Telecommunication (SWIFT). In 2010, the European Union (EU) legitimised the agreement. It was slated for renegotiation in 2015, but the EU did not amend the treaty, meaning it has remained unchanged since 2010, prolonging the agreement for another year.

Analysts attribute the acceptance of the TFTP to the concerns of EU authorities mainly being addressed, with oversight of data and information transfers to US intelligence now handled by Europol, which had not been the case prior to 2010. The issue also dropped off the media radar, despite the ongoing surveillance and data privacy concerns raised by US whistleblower Edward Snowden.
“The rhetoric in the media, especially back at the time (in 2006 to 2010), was quite emotive, but a middle ground seems to have been reached and accepted,” said Tom Keatinge, Director of the Centre for Financial Crime and Security Studies at RUSI in London.

Europol, the EU’s enforcement agency, and the US have been more forthcoming in releasing information about intelligence leads stemming from the TFTP, claiming more than 22,000 leads have been provided since 2010, while 15,572 leads (out of the total) were from 2015 to April 2016. (1)

Further driving acceptance – and reducing the pressure to renegotiate the TFTP treaty - has been a renewed push to develop a European equivalent to the TFTP, the EU Terrorist Financing Tracking System (TFTS). The system was initially proposed in 2011, but was dismissed by the EU Commission, and again in 2013, as not being cost effective, with set-up costs for a hybrid-model EU-TFTP projected at €33 million to €47 million (US$36.9 million to US$52.6 million), and annual operating costs ranging from €7 million to €11 million (US$7.8 million to US$12.3 million). (2)

In 2011, the conclusion was it was very expensive and not really needed, but five years down the road things have changed,” said Dr. Michelle Frasher, an independent research scholar who recently published a paper with the SWIFT Institute on Transatlantic AML/CTF and Data Privacy Law.(3)

The shift in mindset may be attributed to the recent terrorist attacks in France and Belgium and concerns about foreign terrorist fighters returning to the EU from Syria. One issue is that the TFTP has not been effective in gathering intelligence in Europe as the Single European Payments Area (SEPA) system was not included in the TFTP (which is still the case); as of February 2016, all EU member states have to carry out credit transfers and direct debits in Euro through SEPA transactions, even those that have not officially adopted the Euro as a currency, while as of end October 2016, all non-EU SEPA countries will have to comply – this includes four European Free Trade Agreement (EFTA) member states – Iceland, Liechtenstein, Norway and Switzerland – as well as minnows Monaco and San Marino.
“It is estimated that only two percent of all SEPA data transactions goes through SWIFT, as SEPA data goes through different channels,” said Dr Mara Wesseling, a Research Associate at the Centre de Sociologie des Organisations at Sciences-Po, Paris. She added that some EU authorities wanted SEPA within the TFTP, but this was dismissed due to data protection issues.

“With the changing security situation in EU there is more appetite for SEPA data and to make a similar programme to the TFTP. The mindset has changed a lot. It’s not that data protection is not a priority in general. It is rather that the rationales of ‘data protection by keeping EU data on EU soil’ and ‘limiting the total amount of data that is gathered and shared’ don’t seem to be top priorities now compared to 2010 and 2013,” she explained.

The EU had earlier insisted on keeping data within the EU to abide by data protection laws. Changing that within the TFTP would have required renegotiating the treaty. The current thinking is to not have a standalone TFTS but to complement the existing TFTP treaty, which would increase the amount of data provided even if that means more people are subjected to surveillance as a result.

Originally when the TFTS was brought up it was looked at as an alternative to the TFTP but is now viewed as complementary in particular covering the gap created by the arrival of SEPA. Members states seem happier with that,” said Keatinge.

According to a EU Commission note, the EU TFTS will be “complementary to the current EU-US TFTP Agreement,” and is “to be completed by the end of 2016”. Analysts, however, expect it will take much longer to implement, also hinging on the implementation of the Fourth EU ML/TF Directive.(4)

“TFTS was only a matter of time, and with the terrorist events in Europe this has pushed the political will along,” said Frasher. “We need to have better European and TransAtlantic coordination, as there is a massive gap there due to SEPA data not being included. They are now trying to figure out how to make it happen, which involves many countries, law enforcement, and the privacy aspects as any system must conform to EU technology and privacy regulations.”

But while the focus is on a complementary system, other alternatives are being considered to better connect data within institutions, both public and private, in the EU.

“There is an idea to upgrade the competencies of financial intelligence units (FIUs). Another is a central register to make visible all the different bank accounts one person holds to make it easier to link data to each other, and visualize networks. It is still not sure a TFTS should be created,” said Wesseling.

Such an alternative system would require greater public-private sector cooperation – between intelligence agencies, regulators and financial institutions – to provide better data on terrorist financing and financial crime. This is being spearheaded to a degree by the Fourth EU ML/TF Directive (MLD4), which includes data protection measures.

Regardless of what system the EU opts for, Britain will have to implement the TFTS or its equivalent, and then renegotiate its position towards the TFTP following the Brexit vote, assuming the TFTS is set up before the UK exits the EU. “It is presumed the UK will continue with the programme, but formally there would need to be a new treaty, to have a US-UK TFTP,” said Wesseling.

Britain would also have to ensure a continuing working relationship with Europol. “One risk the UK faces when it’s outside the EU is that as the EU tries to make cross-border information sharing easier, the UK may no longer be part of that loop, particularly if it does not maintain equivalent status with the EU on data protection,” said Keatinge. 


  1. An EU Terrorist Finance Tracking System, Mara Wesseling, RUSI Centre for Financial Crime and Security Studies -
  3. The EU Commission was slated to provide an update on the TFTS in December 2016.

(Image from

Tuesday, December 06, 2016

Arab bankers: US financial rules turn us into 'spies for the CIA'

Middle East Eye

Arab bankers say they have to comply with overly stringent 'War on Terror' regulations

(L-R) Mohamed Baasiri, Vice Governor of the Central Bank of Lebanon, Amr Moussa, former Secretary General of the Arab League, and Saad Azhari, Chairman BLOM Bank at a session at the Union of Arab Bankers conference (MEE/Paul Cochrane)

BEIRUT - Arab bankers have had enough of being at the receiving end of US regulatory diktats. After years of reluctant compliance, they are finally speaking out. In November, they proposed establishing an Arab banking lobby to try to have a say in US and international regulations.
Middle East and North African (MENA) banks have been under the US financial regulatory spotlight since the Patriot Act was rammed through Congress in 2001 and the onslaught of the open-ended "War on Terror".
The MENA financial sector has had to comply with a barrage of US rules and OECD "recommendations" to be in line with international norms on anti-money laundering (AML) and countering the financing of terrorism (CFT). Banks have also had to adhere to economic sanctions against certain countries (Syria, Sudan and Iran), and screen for thousands of names on regulatory blacklists.
On top of that, MENA banks, like everywhere else in the world, have had to adopt, at significant cost (some $8bn worldwide), US legislation like 2014’s Foreign Account Tax Compliance Act (FATCA). FATCA is an attempt to repatriate tax dollars and requires non-US financial institutions to provide information on US account holders to the Internal Revenue Service (IRS).
The cost of non-compliance? Being cut off from correspondent banks in the US, which means being denied US dollar transactions and access to the international banking system. That is significant as around 64 percent of all global foreign currency reserves are in US dollars.

'The regulator is the devil'


At the Union of Arab Bankers’ (UAB) annual conference in Beirut on 24-25 November, the atmosphere was different from previous years.
Gone was the attitude of resignation, that "we have no choice but to comply," and touting to the world that Arab banks are following the rules. Instead, the mood was one of assessing the collateral damage, with sessions on "The Impact of the Arab & International Political Developments on the Arab Banking Sector," and the "Impact of International Regulations on the Funding Policies of Arab Banks".
During one panel discussion, the MENA head of Reuters’ governance, risk and compliance services, Mohamed Daoud, asked delegates: "Who is your financial regulator?" One attendee, Osman El Toum El Hassan, general manager of Sudan’s El Nilein Bank, stood up and said, "Theoretically the central bank but in reality the regulator is the devil."
"The CIA," another banker shouted out.
There were laughs, nods and knowing looks in the audience, aware that their central banks were not to be as feared as the US Treasury. It was not what you would usually expect from the conservative banking community. Again and again, the bankers spoke out about the problem of being at the receiving end of foreign regulations, de-risking, and that the MENA region was being unduly singled out.
One attendee expressed his dislike of FATCA, saying: "We have to be spies for the US". Under the act banks have to effectively be agents of the IRS. It was a point emphasised by Abdullah al-Saudi, CEO of ASA Consultants. "Arab banks are spies on people with American passports," he said in a speech.
The driving force of discontent was the de-risking going on, with some six MENA banks having lost their correspondent banking relationships with the US over the past year. The prime reason is the lack of profitability for US banks. To not get fined by US regulators, American banks have to carry out strenuous due diligence and auditing to ensure the Arab bank has done its own compliance work.
Unless a major Arab bank, such effort is not financially worth it for the potential risk involved. The irony is that Arab banks have to abide by domestic US legislation to continue their own domestic operations, with US correspondent banks even scrutinising local transactions – which do not leave a country’s jurisdiction – in the advent of wider money laundering within the Arab bank.
In the case of Lebanon, due to the US’s Hezbollah International Financing Prevention Act of 2015 - which intends to "prevent Hezbollah's global logistics and financial network from operating in order to curtail funding of its domestic and international activities" - local banks cannot have accounts for Hezbollah members, even though the party is a legal entity in Lebanon and has 12 members of parliament.
Lebanese banks have also been under pressure to not deal with Syrians due to the 2011 sanctions by the US and European Union on Syria, which is a serious problem for the estimated 1.5 million Syrian refugees in Lebanon. Due to such regulations, Syrians complain of not having access to the financial sector. Legitimate businesses struggle to make regional and global transfers, and anyone with the name Mohammad, Ali or Osama gets extra scrutiny.
"We’re part of the international community, but we are never asked our opinion, it is imposed on us," El Hassan said. "Why is a Sudanese prevented from sending $100 from Saudi Arabia to his relative in Sudan? I will never support any law that deprives people of their basic human rights."

One-size-fits-all policies


As is often the case with international regulations, they are one-size-fits-all, not taking into consideration local cultures and ways of doing businesses.
For example, 88 percent of Sudanese do not have bank accounts, according to El Hassan, as Sudan is a cash-based society. He said clients do not grasp the concept of money laundering and are puzzled by Know Your Customer (KYC) questions asking if they are married, have kids, or rent or own a house when they want to buy a car.
"When we explain to people what money laundering is, no doubt one out of a 100 will now go and try it," he said. Over in Egypt, out of 91 million people, just 7 percent of Egyptians are estimated to have a bank account.
But despite such realities, there is minimal understanding of the issues on the ground.
"It is as if the MENA has become an embargoed region and outsiders have limited dealings with us. It is as if compliance is focused on Arab countries, and it is chaining the banking sector, not taking into account local cultures," said Dr Ali Hasan Ismail, governor of the Central Bank of Iraq, at the UAB conference.

De-risking undermines development


While compliance experts in the West have stated that AML and CFT regimes need to be overhauled to be more effective (as Chip Poncy, a former US Treasury official, said at 2013’s UAB conference), the rules have not changed. Instead, business has become harder in a region beset with political and economic turbulence.
Indeed, the phenomenon of de-risking can undermine development, which is exactly what the MENA region does not need in the current environment. According to a recent report from the United Nations Economic and Social Commission for Western Asia, the GDP economic losses from the conflicts in Yemen, Syria and Libya are around $425bn, while reconstruction costs in the MENA are estimated at $614bn.
Countering the US’s regulatory strength and the dollar’s hegemony by having even a small voice in the drafting of US and international regulations will not be easy. Conflict in the region is an obvious dampener for cooperation, while massive economic disparities exist between the hydrocarbon rich Gulf countries and the Levant and North Africa. The Gulf monarchies themselves do not see eye-to-eye, and the Arab League kicked Syria out of the organisation in 2011.
Previous attempts at cooperation have not panned out. In 2008, after 27 years of deliberations, the Gulf Cooperation Council (GCC) Common Market was announced to much fanfare but has been a damp squib, largely due to bickering over where a GCC central bank would be located.

'Utopian thinking'


Moreover, the region cannot resort to using oil as a bargaining chip for a place at the regulatory table, unable to repeat OPEC's oil embargo on the West for its support of Israel in the 1973 war.
What the region has is a degree of financial power, with the total assets of Arab banks estimated at $3.2 trillion, although that figure is less than the US Federal Reserve’s assets and the combined wealth of the 500 richest people, at $4.5 trillion each respectively.
Such realities did not prevent conference delegates arguing the need for a banking lobby to be a part of the decision-making process.
"Instead of the Arab world being on the receiving end, we must take part," said Mohamad Baasiri, Vice Governor of the Central Bank of Lebanon. Amr Moussa, former secretary general of the Arab League, proposed that a lobby should not consist of all 22 countries in the League but select countries, like Lebanon and Egypt, to be more effective.
But overall, despite attendees’ anger at their powerlessness in the face of US and international regulatory diktats, there was a resigned acceptance of the fact that the kind of unity needed was unlikely to happen. As one senior member of the Lebanese Central Bank who wished not to be identified said, the idea was "utopian thinking, it will never happen".
"We Arabs speak more than we act," one participant said to claps and attendees saying "true".

Alternatives to the US dollar


Yet there was also the macroeconomic view. "Could any country or region stop FATCA? Even the EU couldn’t," said El Hadi Chaibainou, general manager of the Groupement Professionnel des Banques du Maroc. Neither could Russia or the world’s rising superpower, China, for that matter.
In a time-will-tell approach, bankers talked of looking to alternatives to the US dollar, such as the Chinese RMB, which is growing in status as a global currency reserve.
Nevertheless, the fact that the idea of an Arab banking lobby was being discussed, and that the acceptance of US diktats is not what is was just a few years ago, is telling, especially in a seemingly changing global order and the question marks raised by the upcoming presidency of Donald Trump.