Thursday, September 18, 2008
Anti-Money Laundering and Counter Terrorist Financing in the Middle East
Since 9/11 the issue of combating money laundering and terrorist financing has taken on greater importance for the banking and financial sectors, forcing institutions to shake up their administrative divisions to comply with regulations as well as apply initiatives like ‘know-your-customer’ at the branch level. It’s been a costly and time consuming process, but with the Middle East and North Africa (MENA) region a focus of international anti money laundering (AML) and counter terrorism financing (CTF) initiatives, central banks and financial institutions were left with little choice.
The USA’s Patriot Act has been the main driver, sections 311 and 314 in particular, calling for ‘Special measures for jurisdictions, financial institutions, or international transactions of primary money laundering concern,’ and in Section 314, ‘Cooperative efforts to deter money laundering.’ The seriousness of these requirements cannot be downplayed.
Unless MENA banks comply, they will be unable to have a representative bank or depository in the US, and other day-to-day operations, such as letters of credit, face heightened suspicion if not downright refusal. Furthermore, failure to comply with the Patriot Act and the OECD’s Financial Action Task Force’s 40 Recommendations on money laundering (ML) plus 9 Special Recommendations on terrorist financing (TF) can blacklist a country and its banks, as the Commercial Bank of Syria and Iranian banks currently face. Additionally, the consequences of non-compliance are not just operation- and reputation-related but also financial, with Arab Bank fined $24 million in 2005 by US banking regulators for failing to implement AML controls at its New York branch.
The costs of implementing AML and CTF compliance certainly outweigh the risks, but are nonetheless costing institutions a pretty penny, whether installing new software, employing and training staff, or building up a compliance division. Middle Eastern banks are cagey about releasing such figures, but for an idea of the costs involved, a Pricewaterhouse Coopers report in Australia estimated the cost of AML/CTF compliance for a financial institution at $48 million to $96 million.
A recent survey by KPMG found that from around the globe, the regions that recorded the highest increase in costs of AML compliance were, “unsurprisingly,” North America and the Middle East/Africa. “This reflects the significant legal and regulatory changes in the US, and the wider impact of the extra-territorial provision of US law around the world,” the report noted. Middle East-Africa banks average percentage increase in AML investment between 2001-2004 was 68%, and between 2004-2007 an estimated 70%.
In terms of cost, topping the list was enhanced transaction monitoring, greater provision of training, sanctions compliance, remediation of ‘know your customer’ documentation, and transaction ‘look-back’ reviews.
Need for more regulation
The region has been fairly successful in curbing money laundering and terrorist financing, at least according to official accounts, with the Middle East North Africa-Financial Action Task Force (MENA-FATF), a regional body based in Bahrain, claiming a 90% decline since the body was set up in late 2004.
But tackling ML and TF is a slippery business, as heads of financial intelligence units and compliance officers unabashedly make clear. Indeed, ML and TF is considered to occur more in major financial centers, such as London and Frankfurt, where there is greater safety in numbers, than in the smaller and more risk associated markets of parts of the Middle East.
The countries in the MENA region that have warranted censure, Iran and Syria, are arguably lower in the money laundering stakes than the likes of Dubai, and in terms of terrorist financing, Saudi Arabia.
But the matter is politically tinged (see Islamic Banks and TF article, page xx), as a private sector dialogue with the US government attended by all the region’s major banks in Cairo a few years ago highlighted when there was a heated discussion about what constitutes a terrorist group. The 5% that were in disagreement concerned Hamas and Hizbullah, two groups at the top of US concerns with TF that also enjoy popular support around the Middle East, including Saudi Arabia, a known financial backer of Hamas.
Politics aside, banks are making noticeable progress in tackling ML and TF, but there is still reluctance amongst Middle Eastern banks to voluntarily adopt higher AML standards in line with global policies as it would put them at a competitive disadvantage. This was reflected in the declining importance senior management placed on AML issues in the KPMG survey, with 88% of respondents in 2004 citing AML as a high profile issue, but by 2007 only 54%.
There is optimism however, with 84% of respondents from banks in the UAE expressing the view that AML regulations should be increased. Indeed, although MENA-FATF has been carrying out country evaluations, to improve AML and CTF in the region commercial and retail banks need to be encouraged to do more, for their reputation as much as curbing money laundering and terrorist financing.
Photo by Paul Cochrane