FATCA: The long arm of Uncle Sam

Executive magazine

America throws its weight around in Lebanon

With the United States’ debt having surpassed 100 percent of gross domestic product, at over $15.7 trillion, the Internal Revenue Service (IRS) has launched an aggressive worldwide campaign to try and curb the deficit by bringing in tax revenues from US citizens abroad.
While the Foreign Account Tax Compliance Act (FATCA) is not to go fully into effect until 2014, it has already caused waves in the international banking community and within Lebanon, as it will require all banks to essentially act as agents of the IRS by listing US citizens holding accounts. In Washington DC, a new building is under construction that will be devoted to handling FATCA files alone, given there are an estimated 117 million Americans abroad — including Green Card holders — and that the IRS assumes it may be able to repatriate upwards of $100 billion in taxes.
“The US is not looking at Lebanon as a place to hide money but rather at Singapore, Lichtenstein and Switzerland,” said Fadi Osseiran, general manager of BlomInvest Bank, in reference to the world’s major tax havens. “We are involved for a stupid reason, as some Lebanese have dual nationality.”
Anecdotal evidence suggests there are an estimated 22,000 people in Lebanon holding US citizenship, although the US embassy declined to confirm this. While FATCA concerns earnings above $100,000, banks will nonetheless have to require customers to declare whether they have a US passport, Green Card or were born in the US. As Lebanon has banking secrecy, a client can refuse to disclose such information. In such a case, the bank will refer the individual to the Central Bank’s Special Investigation Commission.
The risk for banks is that if they do not comply with FATCA they could be designated as non-compliant and international banks, especially in the US and Europe, will refuse to deal with them. To make sure US citizens do not try to evade the upcoming act by transferring funds or changing account holdership to non-US citizens, the IRS can go back several years through accounts. And if someone gives up their citizenship, they will have to pay taxes for five more years.
“The IRS is calculating this kind of evasion, although it is worth little compared to the revenues they’ll have,” said Paul Morcos, founder of the Justicia law firm that provides legal consulting for the banking sector. However, all is not yet clear on full disclosure. “This law will lead to confusion and gray areas, like for example cases where we have a joint account between a Lebanese father and a son who has been naturalized in the US. Does a bank have to report on this or not?” added Morcos.
Who will report to the IRS is a further issue; whether it will be Banque du Liban (BDL), Lebanon’s central bank, or the individual banks is currently being hammered out in a bilateral agreement between Lebanon and the US. “The BDL could be the agent for all Lebanese banks but I don’t know if the IRS will agree,” said Samih Saadeh, managing director of Banque BEMO.
Bankers deny that FATCA will be a nail in the coffin of banking secrecy as it only concerns US citizens, but it could be the beginning of the end of such a service if there are further amendments to FATCA and if Europe and other jurisdictions follow the US lead with an act of their own, similar to how the US’ recent emphasis on enforcing the Foreign Corrupt Practices Act was repeated by the British government with its Bribery Act.
“From my point of view, banking secrecy is less and less important,” said Osseiran. “For me, we don’t need banking secrecy. The only reason to do it is a culture of privacy for customers, but to avoid taxes or launder money, it shouldn’t be the case.”
What is curious about FATCA is that tax evasion is not illegal in Lebanon, meaning that the US as a foreign fiscal authority has gained influence over the country.
“It is extra-territorial, being a law implemented beyond frontiers. We are witnessing the supra-national effect of the law, starting with the US Patriot Act and now FATCA, and I’m afraid of FATCA II and FATCA III,” said  Morcos. “I wonder if FATCA II or III will be more aggressive or much clearer, but I think it will be more extensive and will bring about new practices in the finance and banking industry to enhance monitoring and reporting through foreign channels.”

Arms, drug smuggling and kidnapping combine in the Algerian Sahara

Commercial Crime International (UK's International Chamber of Commerce)

Commercial crime may not be as omnipresent in North Africa as in some other parts of the world, but companies operating in the region still have risks to contend with. Corruption is rife, smuggling across the borders with sub-Saharan countries is a major activity, and terrorist groups such as Al Qaeda in the Islamic Maghreb (AQIM) are in the ascendancy. Kaci Racelma in Algeria and Paul Cochrane in Lebanon take a detailed look at these problems.

“Corruption is systemic in all of the Maghreb, and that is not likely to change,” said Dr Geoff Porter, a political risk and security consultant specialising in North Africa. “We’ll have to see what happens in Tunisia. It was a cesspool of corruption under the previous government and while the new one seems to have a zero tolerance policy to corruption, it has not been in power long enough to gauge its effectiveness,” said Dr Porter, founder of US-based North Africa Risk Consulting.

Furthermore, the region is in a state of turmoil following the uprisings that overthrew the Tunisian and Libyan regimes in 2011, with an estimated 250 militias still armed in Libya and reports of some 20,000 surface-to-air missiles having gone missing during the conflict.

Dr Porter added that one of the biggest operational costs to international companies that do not have major contracts with governments comes from corruption at the customs level. “One of the over arching problems that affects all of North Africa is corruption within customs and border control. If one enters the civil service in Morocco, Libya or elsewhere, the opportunity for graft is the largest in customs,” said Dr Porter. “Larger scale corruption is at the ports where import permits can be voided.”

Operational risk is also high along the southern borders and in the sub- Saharan nations of Niger and Mali, where kidnappings for ransom have occurred. The most high profile case was in 2010 when seven employees of French nuclear energy companies Vinci and Areva were kidnapped by the AQIM in northern Niger. While three of the hostages have been released, four remain in captivity. With AQIM particularly active in Niger and Mali, “companies should be concerned about this,” said Dr Porter. These problems are also apparent over their northern border with Algeria, where business visitors were alarmed by the kidnapping of a 56-year-old Italian tourist last year. These fears were intensified by a travel warning issued this January by the French government, which told French travellers not to visit southern Algeria. Furthermore, the Algerian government has closed the Tassili mountains to visitors over an increase in the presence of terrorist groups and smugglers following the Libya civil war and unrest in northern Mali.

Algerian security services have devoted resources and launched targeted missions to reduce these threats across the south of their country: road blocks have been reinforced and police assigned to protect travelling foreigners. Even so, the flow of visitors has decreased to a trickle – there have only been 10 European tourists daring to visit southern Algeria since September 2011, said one travel agent in the regional centre of Tamanrasset.

This spike in crime and terrorism has the Algerian government concerned over its impact on money laundering and terrorist financing, especially as police allege a connection between drug traffickers and terrorists involved in the kidnapping of foreign tourists. The Saharan area of Tamanrasset in southern Algeria is considered to be the hub of Algerian money laundering, fuelled by active hawala networks in the city. As part of the fight back, Tamanrasset security services in 2011 arrested 1,367 people, launching 1,027 judicial prosecutions.

Algeria’s intention to cut funding for terrorism dates back to 2005, when the government decided it would tighten rules against dirty money flows in general and terror finance in particular. Since then there has been a steady flow of anti-money laundering regulations introduced. These culminated in an attempt in April 2011 by the authorities to oblige any person or legal entity to justify the origin of any payment of an amount in excess of Algerian dinars DZD100,000 (USD$1,345).

Meanwhile, the overthrow of Muammar Gaddafi’s regime in Libya has undermined security in neighbouring Algeria, Niger, Mali and Chad. It has destabilised the region of Tamanrasset because countless weapons have been transported to northern Mali from the Libyan conflict. Smuggled weapons including assault rifles, machine guns, mortars and rockets have been traded and for organised crime, combining this with drug trafficking has generated much wealth.

Algeria’s fight against these increasingly powerful networks has provoked a significant response: a bomb attack on March 3 targeted the Tamanrasset headquarters of the national gendarmerie. This, Algerian security forces sources said, was considered retaliation to the successful efforts to choke off funding and recruitment to terror groups in the region. Indeed, two multi-national conferences were held in the Algerian capital during 2011, and Algeria has established a committee of staff joint operation command centre in Tamanrasset. This committee of joint military chiefs includes officers from Mali, Mauritania and Niger and they have been charged with clamping down on terrorist recruitment in southern Algeria, and monitoring organised crime groups who funnel potential cadres to terror groups. The Algerian security services have also been particularly active since a regional governor was kidnapped in Illizi in January 16.

Smuggling a major problem

Despite this influx of security services, smuggling has continued apace in the region. In a visit to Tamanrasset in January 2012, the director general of Algeria’s customs organisation Mohamed Abdou Bouderbala said the government would develop new customs control facilities in southern border areas. “With the suitable equipment the Algerian authorities will succeed to keep the pressure on traffickers. These new structures will be equipped with appropriate controls to customs activities and provide good working conditions for customs,” said Bouderbala. He inspected various departments, visiting to the region of Aïn M’guel (130 km from Tamanrasset), the headquarters of the country’s mobile customs brigade (Brigades mobiles des douanes), which patrols the desert zones that serve as an unfenced border between Algeria and its southern neighbours.

Meanwhile, there is widespread concern that the democratic process in Algeria is being subverted by smuggling groups. On March 8, activists of the political party, Democratic National Rally (DNR), surrounded the office of their party in Tamanrasset to protest about its local list of candidates standing for the Algerian parliament. Demonstrators demanded the withdrawal of the names of candidates they claimed were associated with organised crime. “We never accept to be represented in the parliament by people involved in the smuggling and the acquisition of dirty wealth,” one activist told Commercial Crime International.

The Eurozone debt crisis and China

International Link - Hong Kong

The Eurozone debt crisis (EDC) is a tangled web of complexities. How the crisis will unravel may shake the European Union to the core, with the possibilities of two Eurozones developing, even the end of the Euro/EU if the European public have its way, and the spectre of a double dip if there is a run on the $3 trillion in holdings in Eurobanks. Amid such doom and gloom, the EU is seeking inflows from China at the same time the IMF is forecasting China's growth to halve this year, writes Paul Cochrane in Beirut.

The EU-27 is China's biggest trade partner. What happens economically in the EU is clearly of crucial importance to Beijing. Indeed, the IMF lowering its growth forecast for China is an indication that the Eurozone is on shaky ground. It is no surprise therefore that the EU looks to China to aid in resolving the debt crisis by buying up Eurobonds from the PIIGS – Portugal, Italy, Ireland Greece and Spain – and investing in EU economies. That was the aim of the China- EU Summit held in Beijing in February, which drew a degree of press attention but from which nothing substantial was concluded.

"There were a lot of nice words but it was hard to see anything concrete. Europe needs someone to lend that cannot repay the debt, and China is not willing to take on that role," said Michael Pettis, professor of international finance at Beijing University.

There were signs that it would be a PR show to bolster global economic sentiment and placate the markets even before the summit was held, with the China Investment Corporation (CIC) brushing aside a call by German Chancellor Angela Merkel to buy European government debt, saying such investments were "difficult" for long-term investors. On the other hand, the Governor of the People's Bank of China, Zhou Xiaochuan, echoing comments by Premier Wen Jiabao, said: "China will always adhere to the principle of holding assets of EU sovereign debt...We would participate in resolving the euro debt crisis."

Such opposing statements reflects the Catch-22 that China is in – the Eurozone needs to recover for China to export and the economy to remain buoyant, yet sinking money into EU sovereign debt and companies is arguably not the most savvy financial move, particularly as other foreign investors are not willing to make the same gamble.

"At the height of the EDC when (then French president Nicolas) Sarkozy called Beijing, cap in hand, the Chinese were miffed that they were viewed as the the rich patron, so the request got nowhere. In a way the Chinese are between the proverbial rock and a hard place. There is a desire and perceived need to be financially engaged with Europe, and where Europeans are in a situation to buy Chinese made goods, but they are not sure what is happening and how safe their money is," said Jean-Pierre Lehmann, Professor of International Political Economy at the IMD Business School in Switzerland.

Moreover, the EU does not need capital. It is the banks that lent to governments, particularly the PIIGS, that need capital to stay afloat, tied up as they are with debt exposure.

"Europe doesn't need capital. That one of the most capital rich places in the world needs capital from China is silly," said Pettis. "I don't think the EU needs China. It needs someone foolish enough to pay and China is not willing to play that role. It is silly for EU politicians to think of foreign capital as it worsens the trade balance; they don't need liquidity but growth."

Indeed, in August and September, 2011 alone, over $25 billion was withdrawn from emerging market funds to head back to Europe, and a further $85 billion of portfolio inflows went into the Eurozone, with balance of payment statistics showing a large share went to France, according to data from the Bank for International Settlements.
EU companies are seeking to reduce portfolio liabilities and ease cash flow issues as the banks are making life tough for businesses when it comes to stop-gap loans. An example is a French company, which shall go un-named, that manufacturers water purifiers, pumps and the like. It is well established with clients around the EU, as well as in India and China. Manufacturing a needed product, orders keep coming in, but the issue is that past customers - which include public entitites - are not paying up on time. Yet with $500,000 of salaries and overheads to be met every month, will banks step in to keep the company afloat? Very reluctantly, depsite banks pledging to the governments that bailed them out in 2007 and 2008 that viable small and medium sized enterprises (SMEs) would be extended a financial hand.

Similar experiences are occurring throughout the EU, as well as in the US and globally. The result is a vicious circle – another business folds, putting more burden on government revenues, more debt that needs to be written off, and another brake is put on economic recovery. But rather than forcing banks to bolster the economy by aiding businesses, the EU is acquiesing to the banks and big corporations, of which few pay taxes, with 99 of Europe's 100 largest companies, including banks, using offshore subsidiaries and tax havens, which hold the equivalent of over one-third of the world's gross domestic product (GDP) while more than half of world trade passes through these fiscal paradises.

The United States is of course implicated in the EDC. The US Federal Reserve's quantitative easing policy – printing dollars to boost base money supply to get the economy out of recession – has meant, in the words of Jim Rickards in his book, “Currency Wars: The Making of the Next Global Crisis,” that "the Fed has effectively declared currency war on the world." The result is stagflation – stagnant growth and high inflation - and the world going deeper into financial crisis.

"There is definitely a currency war being waged. Everyone is doing the same thing to grab a bigger share of global demand through a trade war," said Pettis. "In the US, we are starting to see debt levels come down. In Europe we are not seeing that, and in China it is going up. We are still not out of the crisis."

Furthermore, financial moves in the US could trigger a double dip that scuppers economic recovery and leads to a new global financial shock. US money market mutual fund holdings of Eurobank assets are estimated at $3 trillion. As they are in extremely short-term liabilities, which are similar to deposits but not insured, any problem with the Eurobanks could cause significant loses to US funds, but unlike in 2007 and 2008, the US government will not step in to guarantee such holdings, as the Dodd-Frank Act disallows such intervention. "The appearance of a problem among eurobanks could bring down that whole market—which is about twice the size of the US sub-prime mortgage market that brought on the global financial crisis last time," wrote Randall Wray in Real-World Economics Review.

The leadership crisis

EU leadership has not risen to the challenge presented by the EDC, and not acted in accordance with the EU's esposed democratic principles, instead dictating to the likes of Greece what they can and cannot do fiscally. For Germany, which is in the driving seat of the Eurozone cargo train, it is the PIIGS that are the pressing problem.

"The problem is no one wants to lend money to the PIIGS. China doesn't have problem buying Eurobonds issued by Germany. What Germany needs is someone to buy Spanish bonds," said Pettis.

It is no surprise therefore that how the EDC is being handled is coming under heavy criticism, and that sentiment among Europeans towards the EU and the Euro is at an all time low, with Eurobarometer surveys showing less than half of those polled support the EU. In Spain, one of the countries hit the worst by the EDC, 62 percent of Spaniards "tend to distrust" the EU, against 30 percent who "tend to trust" it.

"One of the things that very rarely appears in discussions is that the mood in nearly all of Europe is very anti-European. Many are in favour of disengaging from the EU and I am not aware of any country where Euro sentiment is strong. If treaties needed to be ratified and go to referendum, I think they will be strongly rejected," said Lehmann.

Such sentiment has led to a flurry of speculation on the future of the EU and the Euro, from the relatively optimistic, such as "How to Save the Euro" by George Soros in the New York Review of Books, to historian Walter Lacquer's grim forecast in his new book, “After the Fall: The End of the European Dream and the Decline of a Continent. ”

"We are seeing an implosion. Sarkozy and Merkel are calling for a greater degree of unity but pushing it the other way, toward dis-unity. Countries are talking about ending the Schengen Agreement and limiting the movement of people. I cannot think of anything currently holding Europe together," said Lehmann.

There have been suggestions that two Eurozones may develop, a northern, core EU of founding members, and the southern and eastern blocs, although the East is not such a possibility, given German and Austrian financial influence in the Baltics, Czech Republic and Hungary. Such an occurrence would be tantamount to writing off the PIIGS debt, which is being avoided at all costs, as it could signal the demise of the Euro.

As the world's second reserve currency, at 26.6 percent, this is unlikely in the near future, if at all. But with European banks likely to offload 3.5 trillion euros of assets to meet tight new capital rules, few saviours are in sight. Even the IMF has stated that the Eurozone needs to increase the size of its permanent rescue fund, the European Stability Mechanism that is set to go into operation in July, from Euro 500 billion to Euro 1 trillion, a stance which Beijing supports.

The dragon in Europe?

So, is it prudent for China to try and help disentangle the debt web, or will it get stuck in it? Last year, China's foreign direct investment into the EU surged by 95 percent on 2010, but was still just $4.3 billion, according to Ministry of Commerce data. By contrast, last year, in terms of actually utilized value of foreign capital investment in China, European countries ranked seventh to tenth respectively, with the UK the top EU investor ($1.61 billion), followed by Germany ($1.136 billion), France ($802 million), and the Netherlands ($767 million).

What is important to note is that Chinese companies' forays oversees have not always proved too stellar. According to data complied by the Heritage Foundation in the US, China's failed foreign forays totalled $32.8 billion in 2011. From 2005 to the middle of 2011, "China has seen 70 business deals each worth $100 million or more partly or completely fall through, with an aggregate value of $165 billion, such as by Chinalco, CNOOC, CDB, and Huawei," stated the foundation's report. Such failings, said Lehmann, "are partly due to insufficient understanding of the softer side of overseas investment, as human skills are not so good."

There have however been some success stories, such as the China Ocean Shipping Company (Cosco), which has operated two terminals in Greece since 2009, and bolstered exports to China by 50 percent. In February, car manufacturer Great Wall Motors opened an assembly line in Bulgaria, enabling the company to qualify for a "Made in Europe" label, a move that other Chinese manufacturers may follow.

When it comes to sovereign debt, China is hesitant to mix up its current foreign reserve spread, which is primarily in US dollars, at 60 percent, versus 26 percent in Euros, according to IMF and Woodsford data. But perhaps more crucially, appetite in China for investment in the EU seems elusive. "Clearly what we've seen is public opinion counts more and more in China. And opinion raises questions when so much money goes abroad as Chinese think they need the money at home to develop the country," said Lehmann.

Internal issues will also dictate any readiness to invest abroad if the Chinese economy contacts this year. "I think this will be devastating, and that is the political risk," added Lehmann.

Global instability is a further reason why the BRICs (Brazil, Russia, India, China) are not getting ensnared in the EDC web. The surge in outflows of capital from China is equally indicative of the degree of confidence in the Chinese economy and policies, evidenced by the inflows of capital to Hong Kong and the buying up of real estate, as well as further afield to onshore and offshore financial havens.

"The rich Chinese are placing more and more money out of China, and very significant sums, in real estate and tax havens. What is very interesting is that this is the kind of data that should be looked at as it reflects confidence of the people in economic prospects," said Lehmann.

While China is economically interdependent with the EU, any major financial forays into the Eurozone outside of the more stable economies – and those are export driven – may prove disingenous if not painful in the short to medium term. As for sinking money into Eurobonds connected to the PIIGS, China is likely to get stuck in the sticky EDC web.

Image from www.hungarianambiance.com

China is facing an energy and foreign policy crisis in Sudan

International Link - Hong Kong

China is facing an energy and foreign policy crisis in Sudan. The recently independent Republic of South Sudan halted oil production and exports in late January over a transit pricing dispute with the North, disrupting some 5 percent of China's oil imports. While Beijing has been acting as a mediator behind the scenes, South Sudan has accused Chinese companies of stealing oil, and the recent kidnapping of 29 Chinese workers has shown the limits of China's leverage. Paul Cochrane in Beirut reports.

China had been onto a "good thing" in Sudan until this past year. While a challenging environment to operate in, Chinese oil companies had the Sudanese market in the bag, exporting 70 percent of all oil exports and facing minimal international competition due to the international sanctions on the Khartoum government.

China's position as the dominant foreign player in Sudan started to be chipped away at last July when the South broke with the North, forming the Republic of South Sudan. Seeing the potential to access Sudan's primary oil production area, with the south accounting for 75 percent of the unified country's 500,000 barrels of oil a day, Washington DC lifted sanctions on the new country in December.

"There is an eagerness (by the South) to attract Western oil companies for a host of reasons; not just because of the close relations between Beijing an Khartoum, but also more concretely to improve recovery rates which are by and large below international standards," said Jean-Baptiste Gallopin, a South Sudan Analyst at risk consultancy Control Risks in London. "South Sudanese officials continue to harbour mistrust towards Asian national oil companies because they suspect them of having tried to maximize production before independence at the expense of long-term yields. They also accuse existing investors of having neglected investment in recent years."

While such factors pose a potential threat to Chinese oil companies continued presence in the medium to long term, a more immediate crisis was brewing that threatened 5 percent of China's oil imports.

Following the 2005 peace accord that ended Africa's longest running civil war, Sudan's oil revenues were to be divided fifty-fifty between north and south. Independence ended this agreement, but with the South landlocked and the pipeline, refineries and export capabilities all in the North, Khartoum had the upper hand in its demands for transit fees and some $15 billion in compensation for the loss of oil revenues.

The north turned the screws on Juba, the capital of the South, confiscating oil worth more than $815 million over a two month period from December, 2011, and in January charged $22.8 a barrel in transit fees then raised it to $36, while Juba wanted to pay the international norm of a $1 or less a barrel. The excessively high fees forced Juba's hand, making a radical decision to halt oil production and exports on January 25.

"It was both surprising and unsurprising that South Sudan has gone so far to dig its heels in. They are really damaging themselves more than anything else, as 98% of foreign revenues come from oil production. At most they have three months of hard currency left and are in desperate need of revenues," said Marc Mercer, an East Africa specialist at risk consultancy Eurasia Group in London. "It all says to me they are doing this on principle as they're sick of the north (being involved in its affairs), and took this drastic action no matter what the consequences, which has annoyed Chinese oil companies and others."

Beijing the mediator

China has been a long time ally of the Sudanese President Omar al-Bashir, who is wanted by the International Criminal Court of Justice for war crimes and genocide in Darfur in Western Sudan. During the civil war, Beijing sided with Khartoum and Chinese companies have invested billions of dollars in Sudan while being instrumental in rolling out infrastructure in the country, some of which have been politically controversial, notably in the Nuba mountains.

The North-South stand off has put Beijing in a tight corner, wanting to placate Bashir on the one hand while needing Juba to re-start oil production and exports on the other. As Stephen Dhieu Dau, South Sudan's petroleum minister, remarked to the press: "They want to be close to us and close to Khartoum. But Jesus said you cannot serve two masters. They have to make a choice. They have to be honest and say who is right."

Indeed, Beijing is not overly trusted by the South, with Juba sending mixed signals, initially that they were willing to leave the past behind them and work with China, then in mid-February accused Chinese firms of playing a role in aiding Khartoum seize its oil. Juba was careful however not to name any of the firms, but given the Chinese National Petroleum Company's 41 percent stake in the Chinese- Malaysian oil consortium Petrodar, the move can be read as a veiled attack on the Chinese government.

"Our relations with China are beginning but they are of course having difficulties now because of the role of some Chinese companies or individuals covering up some of this stealing," said South Sudanese negotiator Pagan Amum to the press in Juba. He added that oil firms operating in the oil rich Unity state that straddles the border had helped to block exports of the entire output in December and in January. "They are stealing and robbing our oil," Amum said. "We will make them pay the cost or else they are out of the country."

A week after Amum's statement, the south expelled the president of Petrodar, Liu Yingcai. The company has asked for the decision to be overturned – to no avail – and while Beijing did not respond to the accusations directly, China reiterated its commitment to dialogue, sending in early March Zhong Jianhua, Special Representative of the Chinese Government on African Affairs to the two Sudans. Asked by a CCTV reporter whether China was "playing a kind of embarrassing role between South Sudan and Sudan," Jianhua replied "That's not true. China is always helping to reduce the tension. I think we are full of confidence to do something together with the international world and other countries here."

But Beijing's behind the scenes negotiating power has not born fruit, despite a reported development aid and low- interest credit package to the South worth up to $10 billion. Instead Beijing has, by and large, left the more publicized negotiations to the African Union.

"Everyone recognizes China has a unique position given leverage with Khartoum and has a keen interest to see oil production resume in South Sudan, where it has completely shut down. But the Chinese have not been very successful," said Eric Reeves, a Sudan researcher and analyst at Smith College in the US.

Indeed, China is also in a relatively unique position as the only major global power actively engaged in the Sudan crisis. For despite South Sudan locking in its oil, the stand- off has not received attention from the international media or by multi-national bodies it arguably should have. This can be attributed to Sudan having less significance for the West due to no commercial interests or reliance on oil exports from the East African country, to the focus by the West on the instability in Syria and the Middle East.

Kidnapping

An earlier incident highlighted the kind of problems Beijing faces when Chinese companies operate in unstable countries and get dragged into political disputes. Just four days after Juba cut off oil exports, 29 Chinese road workers in the South Kordofan state were kidnapped by the Sudan People's Liberation Movement (SPLA).

"I don't think the kidnapping will deter further Chinese investments in Sudan. Chinese state-owned companies are closely aligned with the interests of the Chinese state and Chinese investments in Sudan remain largely driven by strategic imperatives rather than by short- term commercial benefits. But from a foreign policy angle, the kidnapping and controversy over oil revenues has forced China to take a proactive approach in its managing its presence in Sudan," said Gallopin. "The Chinese government has been involved in mediating the dispute behind the scenes for a while, but it has recently been forced to take a more public role. So far, the lack of an agreement between the two Sudans shows it has had little affect, which highlights the limits of China's leverage."

Indeed, while the workers were later released, it was to the International Red Cross rather than to the Beijing's ally, the North Sudanese. "If a message was to be sent it was that the SPLA can strike very powerfully and seize Chinese workers so everyone can see Khartoum cannot release them," said Reeves.

Notably, the road the Chinese workers were building was part of a larger network to encircle the SPLA's stronghold in the Nuba mountains. "The SPLA North is a potent force there, so Khartoum started this encirclement of creating a road around the mountains with only one exit route, to the South, which is blocked by an artillery battalion, meaning there is no entry or exit. The idea is to starve the people of Nuba to death and that such massive collateral damage should grab some international attention, and Chinese attention," said Reeves. "All humanitarian aid has been shut off since June 5, 2011, and there are as many as 400,000 people still trapped."

A slippery slope?

The North-South dispute, analysts believe, will not be resolved anytime soon, meaning Beijing will have little choice but to be remain involved, even if just to get the oil flowing again. But the situation within Sudan could pose further foreign policy problems.

The UN's Food and Agricultural Organization (FAO) have warned that with harvests failing in Sudan's contested border area a famine is likely, while the security issue is getting worse, whether in Darfur or along the Southern border. Meanwhile in the North there is rampant inflation, economic problems and signs of popular unrest, suggesting that the "Arab Spring" that has swept much of North Africa and the Middle East could happen in Sudan.

"Sudan has the same demographics as "Arab Spring" countries, a lot of young people, high unemployment and few opportunities," said Reeves. "What we are seeing in Sudan is just as bad as what we see happening in Syria right now; in many ways it is worse. It may not be a military defeat that brings the regime in Khartoum down but economic collapse."

And while analysts believe that the SPLA will not make a habit of kidnapping Chinese workers it cannot be ruled out, having been the third case in Sudan since 2004, and reflecting a similar trend that has happened elsewhere, such as in Pakistan where several Chinese workers were killed by Islamic militants in 2006 and 2007.

"The Pakistan and Sudan situations change the framework for Chinese foreign policy in a way, in how they deal with these countries, such as investments," said Mercer. "China can't continue operating as they have and not weigh in. Sudan is a prime example to change their framework and step up to the plate as they stand to lose quite a lot."

Indeed, China will not want a repeat of its experience in Libya last year. Like in Sudan, China was the biggest foreign contractor in Libya, with $18.8 billion worth of contracts, and had close ties with the Gaddafi regime.

Following the outbreak of civil war, 35,000 Chinese workers had to be evacuated and despite Beijing sending overtures to the Libyan rebels, the rebels threatened a commercial boycott after releasing documents they claim showed Chinese defence companies had discussed supplying Gaddafi with weapons. Those multi-billion dollar contracts in Libya are now in jeopardy. However the situation plays out in the two Sudans, Beijing will have to play its cards carefully, with an estimated 15,000 Chinese in Sudan and the oil concessions of significant economic as well as energy importance.

Photograph by Jihad Samhat

Running the Gauntlet: Lebanese banks' reputational risk in Syria

Executive magazine

Syrian affiliates of Lebanese banks complicate compliance

 

Syria and Lebanon naturally have shared business interests, but in an era of American and European sanctions against the Syrian regime and individuals associated with it, Lebanese businesses have been forced to try and insulate themselves from risk.
The banks are no different. Byblos Bank, for instance, had the name of Rami Makhlouf — the billionaire Syrian businessman and cousin of Syrian President Bashar al-Assad currently under United States and European Union sanctions — removed from the public listing of shareholders in its Syrian affiliate, Bank Byblos Syria. The UK-based Bankers’ Almanac — effectively the shareholder listing of banks globally — “were asked on January 9 by [Byblos Bank’s] relationship manager to change the ownership details to their current listing,” a spokesperson wrote in an email to Executive.
Alain Wanna, head of Group Financial Markets Division at Byblos, confirmed that Makhlouf did hold a 4.9 percent stake and that the bank had recently tried to evict him as a shareholder, but Makhlouf had refused.
Morthada al-Dandashi, who owns 2.85 percent of Bank Byblos Syria, may be a further reputational risk for Byblos. Although not sanctioned, a leaked 2008 US Embassy cable reported that Dandashi managed “Makhlouf’s ‘parallel’ financial activities in Syria,” and Makhlouf “paid Dandashi $2 million ‘ante’ to become a partner in Cham Holding, and deposited significant sums under Dandashi’s name in the Damascus branch of the Lebanese Byblos Bank.”
It appears though, that Byblos is in a bind. “Shareholders have the right to freely buy and sell shares as long as they own no more than 5 percent of the Bank’s total shares,” said Wanna. “Thus, Byblos Bank Syria has no legal authority to approve or disapprove the entry or exit of any shareholder.”
He added that while Makhlouf had been a founding shareholder in Bank Byblos Syria, he had reduced his stake and after three years Byblos was not required to list him. “Makhlouf is not represented on the board of directors, he has no executive function, is a passive shareholder and may be in other banks,” said Wanna.
Banque Libano-Française (BLF) is in a similar predicament with its Syria arm, Bank Al Sharq, which, like Bank Byblos Syria, trades on the Damascus Securities Exchange. Among its shareholders is Ahmad Nabil Mohammad Rafic al-Kuzbari, who was placed under US sanctions last year for his position as the former chairman of Cham Holding, which Makhlouf founded.
“Like many other Syrian investors, Kuzbari holds shares in Bank Al Sharq that represent 1.5 percent of the capital of the bank,” wrote a BLF spokesperson in an email. “He is not a member of the board of directors, neither [is he] represented on the board of directors nor is he involved in management. Consequently, we are confident that his shareholding does not represent a reputational risk for the bank.”
Under US law Americans are banned from financial dealings with sanctioned individuals or entities. Interestingly, the International Finance Corporation (IFC), the private investment arm of the World Bank — itself 51 percent funded by the US Treasury — also owns a stake in Byblos Bank, at 8.36 percent.
When asked about being jointly invested with a sanctioned individual, an IFC spokesperson wrote in an email that: “Our investment is at Byblos-Lebanon level, while Makhlouf is a minority shareholder in Byblos-Syria, which is a different entity registered under the Syrian banking law and subject to supervision by the Syrian Central Bank.”
This separation is dubious, given that Lebanese banks and their Syrian arms are consolidated and that the group gains from the profits made in Syria.
The US Treasury’s Office of Foreign Assets Control (OFAC), responsible for enforcing sanctions, has been “repeatedly engaged with the Lebanese banking sector to stress the importance that it not become an outlet for the Syrian regime and its proxies to evade sanctions,” in the words of a spokesman.
Lebanese banks categorically deny Syrian money is moving through Lebanon, and while anecdotal evidence suggests banks are generally denying new accounts to Syrians, financial sources point out that this can, and is being, circumvented by Lebanese individuals acting on behalf of Syrians. Indeed, the leaked 2008 US embassy cable noted Makhlouf has accounts in Lebanon under different names.
Also, a US Treasury official visiting Beirut stated banks have to refuse banking relationships not only with OFAC sanctioned individuals, but also family members and affiliates.
“How can a Lebanese bank know those surrounding an OFAC-listed individual to avoid them? It is really weird and beyond banks’ capacity,” said Paul Morcos, founder of the Justicia law firm that provides legal consulting for the banking sector. “Legally, it is a grey area, and it is as if bankers are no longer responsible for best efforts but have to achieve the best results.