Monday, December 02, 2013

Lebanon striving to adhere to U.S. regulations

The Daily Star

BEIRUT: Over the past decade, the U.S. Treasury’s war on terrorist financing, money laundering and tax evasion has shaken up the global financial regulatory environment, and Lebanon is still feeling the reverberations. This year, the Central Bank issued two circulars that have raised operational costs for banks and foreign exchange dealers: Lenders have been required to have a dedicated compliance unit and exchanges’ operational functions have been curtailed.
The circulars have had a profound affect on financial institutions, but those affected are not so much concerned about falling foul of Lebanon’s laws, but rather fear being on the wrong side of the world’s regulatory policeman: the U.S.
“Lebanese banks are market takers, not makers like the U.S. and Europe, so we have no say in the financial world,” said Camille Barkho, chief compliance officer at the Lebanon and Gulf Bank.
“But something funny is taking place today in some countries who have anti-money laundering and counterterrorist financing rules and regulations – they are strictly applying those rules more because of fear of the U.S. and Europe than complying with local regulators.”
Three factors in particular are forcing Lebanese institutions to play ball with the U.S.
First, with over 70 percent of Lebanon’s bank deposits in U.S. dollars, the lira pegged to the greenback, and a dollarized economy, financial institutions need good relations with the U.S.
Second, the U.S.’ Foreign Account Tax Compliance Act, which is to go into effect in 2014 as part of Washington’s new war on tax evasion, requires financial institutions to report on U.S. clients with accounts of over $50,000.
Third, the U.S. Treasury in 2011 designated the Lebanese Canadian Bank as a “prime money-laundering concern” for its alleged involvement in laundering money on behalf of a drug syndicate in South America as well as acting as a financial conduit for Hezbollah, which led to the reputational ruin of the bank and its demise.
“The matter of LCB had an important impact on the banking sector in Lebanon, and how banks have upgraded their compliance standards,” said Chahdan Jebeyli, Bank Audi’s general manager and group head of legal and compliance, and chair of the Compliance Committee at the Association of Banks in Lebanon.
“We very much rely on our relationship with correspondent banks, as Lebanon has a dollarized economy and is part of the international payment system. Preserving correspondent banking is vital ... to the continuity of banks.”
The LCB case was settled earlier this year through a $102 million settlement in New York, but the financial sector is concerned about any repeat of a bank disappearing from the market.
Many in Lebanon feel the case was unfairly handled by Washington, as in several other cases major international banks accused of money laundering were fined by the U.S. – in the hundreds of millions – but kept on operating.
“ Lebanon paid the price of an alleged money-laundering operation in South America, the U.S., Africa and Europe that only had some connotation to Lebanon; it was not right. To use the financial markets for political goals is dangerous and a way to lose friends,” said a senior BDL source who declined to be identified.
The example made of LCB shows the price of noncompliance with international AML regulations and that the U.S., unlike any other regulator, is willing to fine and even cause the closure of a foreign bank.
As a result, compliance has been pushed to the top of agendas at banks as BDL has moved to address 10 shortcomings in legislation, notably over wording of counterterrorist financing, and listing more predicate offenses.
This has come at the same time as heightened sanctions on Iran and Syria, increasing the regulatory risk environment in which Lebanese banks are operating in, particularly with regard to Syria where the state has six affiliate banks.
“We know the reality of doing business in Lebanon and in the region, that is why our level of prudency is high and corresponds to the level of issues and challenges that exist in the market where we operate,” Jebeyli said.
The U.S. has paid Lebanon particular attention, with American Treasury officials visiting Beirut multiple times over the past two years, more than most other places in the Middle East. During the Union of Arab Bankers conference in Beirut in November, Assistant Secretary for Terrorist Financing at the U.S. Treasury Daniel Glaser had a closed-door meeting with compliance officers at Lebanese banks to hammer home the need to comply with sanctions and regulations.
“ Lebanon is overburdened by requests [from overseas] and, at times, pressure,” said the BDL source. “We comply with all regulations but we already had what was needed, as just a few small glitches had to be ironed out, like foreign exchange dealers, which were not subject to control.”
Two foreign exchange dealers were fingered in the LCB designation. One, Elissa, has been cleared, while the Hasan Ayash Exchange is still appealing in New York. Earlier this year, spillover from the LCB case affected two other bureaus, Rmeiti Exchange and Halawi Exchange, which American official designated as “prime money-laundering concerns” for their alleged involvement with Hezbollah, the first time the Treasury has used Section 311 of the U.S. Patriot Act against a nonbank financial institution.
Foreign exchange bureaus have now been barred from carrying out third-party banking and are subject to stricter controls. Staff must also be versed in compliance and have to regularly attend training sessions. Dealers, like banks, have consequently been scrambling to get compliance up to speed.
“Category A dealers have to abide by much stricter regulations and it has become more costly because of the need to have a compliance officer, more auditing and training,” said Omar Kotob, secretary-general of Foreign Exchange Bureaus in Lebanon.
“We hope to organize a conference soon to boost the sector’s compliance levels before it’s too late. The major point is to have a lot of workshops to address these concerns, as it is an ongoing issue. At some point foreign exchanges are going to have to act as police [in terms of asking clients questions and the origins of transfers], which the banks are already doing.”
Getting the financial sector up to par in terms of compliance is impacting institutions’ operating costs. As elsewhere, there is also a genuine lack of qualified personnel.
“The sector is barely coping with the new regulations and employees are a scarce commodity in the compliance sector, as the AML regime has only been around for about a decade, so the banking sector in the region and rest of the world doesn’t have enough professional expertise,” the BDL source said.
FATCA compliance is another area where the region’s banks are scrabbling to be on top of legislation, thankful that the slated start date for the policy was delayed from July this year to 2014 in order to enable more banks and jurisdictions to be compliant.
“The delay to FATCA’s rollout was excellent. When I meet with foreign banks I am finding that, till today, some have not even heard of it,” Barkho said.
Lebanon, however, has been very active, hosting 24 public presentations on the tax act in the past few years.
“Look at FATCA, Lebanon is the leader in the Arab world, and before the government or any official party required it, banks undertook a path of adopting the FATCA principles, that Lebanese banks should not be a shelter for those that decide to hide money and violate tax rules,” said Jebeyli.
FATCA is a unique law in that it puts the onus on foreign financial institutions to check for any U.S. account holders or else face a 30 percent withholding tax for noncompliance and risk being blacklisted. In essence, the U.S. Treasury has outsourced enforcement to banks, which are having to bear the brunt of implementing FATCA, with some estimates putting the cost as high as $10 per client.
As a result, some Lebanese banks have closed accounts with clients holding U.S. passports after weighing up the costs versus the benefits of retaining the client, while some American passport holders have revoked their citizenship altogether.
“For the first time in history, banks have become officers for the U.S. government, and at a cost,” said Barkho.
Just as with anti-money laundering and counterterrorist financing regulations, Lebanon is more than willing to comply with U.S. regulations to stay on its good side, well aware of the impact of falling foul of Washington.
“The main reason to comply is the power behind FATCA, not about the law or the ethics of tax evasion, as everyone is against that,” Barkho said.
“The only other force that could do this is Europe and maybe China, as there are major commercial relations. If India introduced the same type of law, I’d not comply as there’s no force to compel me to do so.” – With

Friday, November 29, 2013

Middle East Stream:The French-Israeli-Saudi Front against Iran

55 minute show on Etejah TV with presenter Marwa Osman, myself, and Pepe Escobar of Asia Times discussing the P5+1 negotiations on Iran, and France, Israel and Saudi Arabia's moves to scuttle the deal.

At 47 minutes, I turn the discussion around from nuclear weapons in the Middle East to the need to discuss eliminating nuclear weapons globally, and the existential threat to the planet of the radioactive fallout of Fukushima.

Wednesday, November 13, 2013

Bolstering the beer business in Lebanon

The assembly line at the 961 Beer brewery in Mazraat Yachouh, northeast of Beirut. (The Daily Star/Carine Mechref)

The Daily Star

BEIRUT: The beer business is undergoing a renaissance as brewers increasingly take on the market leader Almaza, owned by Dutch conglomerate Heineken International. First came 961 in 2006, the brainchild of Marwan Hajjar of Gravity Brewing, which introduced a greater variety of beer to the market than commercially brewed lager. The success of 961, named after the country’s calling code, prompted Almaza to introduce a malt beer to its portfolio and, last year, Almaza Light.
Now there are upcoming contenders in the market, yet at opposite ends of the spectrum. One is a craft brewery producing on a microscale, while the other is entering the big leagues with a $12 million to $15 million investment in the Bekaa Valley. Both producers want to up the quality of brew on offer as well as the amount of beer being drunk.
“I consider Hajjar a pioneer of brewing in Lebanon; he likes brewing beer and has done so much for craft beer here,” said Emile Strunc, who produces his eponymous beer in Jounieh at what he calls his “nano brewery,” an 18-square-meter room with two 50-liter kettles. “We would both like to see 50 to 100 breweries here for people to discover real beer and move away from the commercial variety.”
Strunc, who produces around 600 liters of beer a month, does not sell his creations at any outlets, but to friends and “friends of friends,” and is more interested in promoting good beer than turning a profit.
“It is not about the business but about sharing the beer,” said Strunc, who works as a negotiating skills consultant and brews in his spare time.
But Strunc’s beer – which includes black ale, Indian Pale Ale (IPA), summer ale, Munchen, Vienna, Kolsch, organic and two wheat beers, Weiss and Dunkelweiss – is growing in popularity and his beer may be gracing the tables of certain restaurants very soon.

Emile Strunc at his nano brewery

“It is reflective of where a certain Lebanese entrepreneurship is heading,” said Michael Karam, a wine writer and business journalist. “There is a big booze movement underway, first picked up by vineyards, then by Strunc, and now J2 vodka has been released in the market, which is distilled in Poland but owned by a Lebanese entrepreneur. So we are seeing a new entrepreneurial furrow being plowed.”
The big investment is by Kassatly Chtaura, a leading drinks manufacturer that is behind Buzz alcohol drinks and, since 2005, the wine Chateau Ka. Through a loan backed by the Central Bank, Kassatly is to invest up to $15 million to produce 20 million liters of beer a year, equivalent to the amount Almaza produces.
“Over the last 12 years we’ve been producing alcopops [Buzz] and non-alcoholic drinks [Freez] and doing well. Since we have the facilities to produce beer and want to expand, we are making this investment,” said Akram Kassatly, president of Kassatly Chtaura. “Half of the brewery is already there – the bottling, packaging and pasteurizing – so all we have to add is an annex for brewing and fermentation.”
A German firm has been contracted to develop the new 2,000-square-meter brewery, and brew masters are to come for six months to a year, with production slated to start in 2014. While the beer has no name yet, Kassatly is aiming at high quality production.
“It will be the same quality as in Germany or Holland. It will be 100 percent malt beer, so no headaches or bloating,” Kassatly said.
But the new brewery may face an uphill battle to get more people drinking beer instead of wine, cocktails and the popular spirits, whisky and vodka. Furthermore, an estimated 70 percent of Almaza is consumed in summer, with the drink considered a thirst quencher.
“I hope and wish this will change, and via advertising, encourage people to drink more in the winter,” Kassatly said.
This will require consumption to seriously balloon from the estimated 5 liters per capita a year currently consumed – low by comparison to Europe’s 75 liters per capita, Cyprus’ 58.1 liters, and the world’s largest consumer, the Czech Republic at 131.7 liters, according to Japan’s Kirin Institute of Food and Lifestyle Report.
Kassatly believes they can shake up the beer business here and bring consumption up to 10 liters per capita, adding that if the beer is not consumed locally, then it can be exported.
“We are not going to have to compete with Almaza, as our presence will make the market grow bigger, and there will be absolutely no risk of selling less. There’s always a place for a new brewery in Lebanon,” Kassatly said. “If capacity doesn’t sell in Lebanon, we will export it, and we will export to wherever Buzz does, with plans for Iraq, Syria eventually, and Africa.”
Strunc has noticed a change in attitude toward beer drinking in the country, and he is winning over converts to the taste of traditional beer.
“People are calling me up to taste the beer, and I’m happy about that as people are switching from industrial beer to something with more flavor,” said Strunc, who is half Lebanese and half Czech.
While getting people to drink more beer is one issue, a connected factor is the price. Almaza currently retails at a lower price than what Kassatly’s beer is expected to sell at, primarily due to the higher quality ingredients.
“Almaza has Heineken behind it, so it could start a price war,” Karam said.
Kassatly however is not concerned.
“Almaza doesn’t really have an interest to compete on price. We are going to do it with a premium product at a slightly higher price,” Kassatly said. “It will take two to three years to get known, so it is a long-term strategy. We are focusing on quality and will see how it develops.”
When it comes to pricing, malt beer costs more to produce, as do craft beers.
“Even with economies of scale, how can you sell a beer at $1 a bottle?” Strunc said. “A craft beer has a minimum cost of $4 a bottle, taking into consideration volume and production. If you brew craft beer at a bigger volume, you can cut the cost a bit but not much if the ingredients are top quality. For instance, I use 200 grams of hops for 50 liters, but industrial beer will use 50 grams for the same amount, and most probably extracts not natural hops, so a big impact on the price. It is the same for yeast, it is expensive.”

Handcrafted Schtrunz beer

Kassatly is certainly not daunted by going head to head with Almaza, having done the same in the country’s burgeoning wine sector.
“When we started the wine business, we were told, you are facing a giant, Ksara, but we are now colleagues, and hope to see the same attitude from Almaza,” Kassatly said.
Kassatly certainly has the right business model and setup to make the beer a success.
“Kassatly has the distribution in place, so hooking up a whole product line to existing production channels, which is very smart. In a few years they will be a serious drinks conglomerate,” Karam said. “They will probably eclipse 961 as they’re big spenders on advertising. It will be interesting to see how the market reacts.”
What may be more of a challenge is to export beer in the current regional environment. For one, a significant export market, Syria, is currently off limits. Second, the rest of the Middle East does not have much of a big beer drinking culture. Third, going by what is happening in other markets, beer drinking has slumped in North America and parts of Europe due to the recession and changing consumer habits in favor of wine and other beverages.
That said, beer consumption in developing markets has increased, as it has in the Middle East, rising 9.9 percent between 2010 and 2011 (the most recent statistics), according to Kirin figures, and as a share of global consumption rising from 0.7 percent in 2010 to 0.8 percent in 2011.
Karam is optimistic about Kassatly’s entrance into the market, given the producer’s success with its wine:
“They got Chateau Ka into [high-end British supermarkets] Waitrose and Marks & Spencers, which considering they started in 2005, is one hell of an achievement.”
A lot of the success of Kassatly, 961 and craft beer in general will of course depend on the economic situation in the country and regionally, which is making any forecasts hard to formulate.
“Will the Syria crisis impact further on Lebanon and affect the private sector’s ability to function more than it is now? And you have to ask whether any Islamic fundamentalism – especially in the Bekaa – is going to affect alcohol production. I think the only thing stopping Lebanon’s entrepreneurial spirit in alcohol or anything else is the threat of conflict,” Karam said.
– with

Wednesday, November 06, 2013

The so-called “Sushi war”

International Link magazine - Hong Kong

Barely a week goes by without news of Sunni-Shia sectarian violence. Shia are beheaded by Sunni extremists in Syria and the videos aired online. Thousands continue to die in Iraq due to sectarian warfare in the aftermath of the US occupation. Terms like the “Shia crescent” are bandied about, while Sunni religious leaders call for a Jihad in Syria. But is this Sunni-Shia sectarianism an ancient rivalry that flares up now and again, as the mainstream narrative makes out? Or are vested interests utilizing this apparent divide for geo-political ends? Paul Cochrane reports from Beirut.

In certain circles in the Washington beltway, policy makers and 'think tankers' regular use the term “the Sushi war.” This does not refer to disputes over tuna fish quotas in the Pacific Ocean or the eponymous Japanese cuisine, but to the sectarian conflict within Islam, between the Sunnis and the Shiites (or Shia). Such terminology makes light of what is underway in countries with Sunni and Shia populaces, of the mounting death toll, violence and animosity between the two sects, especially in Iraq, Pakistan, Lebanon, Egypt and, more recently, Syria.
But this tongue-in-cheek reference belies a seriousness by trying to make light of what is underway, as if the US does not have a hand in stoking the fires of the so-called “sushi war.” Furthermore, global powers and the establishment like mnemonics and abbreviations, even if not appropriate, like “Af-Pak” for the Afghanistan-Pakistan region - to call a Pakistani a “Paki” is considered a racist slur, as former US President George W. Bush found out when he made a related verbal faux pas in 2002 that soured bilateral tensions.
The US as the world's hegemonic power is involved in sectarianism at the macro level, the regional level and the local level for its own geopolitical ends. Yet it is not acting alone. In the Middle East, there are regional players and intermediaries, such as the pro-West Gulf states like Saudi Arabia and Qatar that are pushing a Sunni agenda, and on the opposite side, the nemesis of the US and the Gulf monarchies, Shia Iran. Then there are the local actors: the sheikhs in the pay of regional powers, media outlets that stoke tensions between sects, and militant groups that carry out attacks.
“Someone is playing with this religion left, right and centre. Sheikhs are on the payroll, like back in the 1960s when they wrote anti-communist speeches until they came out of their turbans,” said Mohammad, an Arab veteran of the Mujahideen against the Soviets in Afghanistan in the 1980s that wanted to remain anonymous. “This sectarianism crosses all the boundaries of logic. It doesn't have any roots for a valid conflict, except for being a divide to provoke people against each other. Most Muslims are standing by and watching what is happening, and wondering what to do with each other.”
But before getting into the situation today, a bit of background history first. 

A bit of history

Factionalism in Islam started in the wake of the death of the Prophet Muhammed in 632 AD, over who was to succeed as the caliph, the leader of this new and ascendant monotheistic religion. The first four caliphs were all companions of the prophet: Abu Bakr, Umar ibn Al Kattab, Uthman ibn Affan and Ali ibn Abi Talib. The majority of Muslims – Sunnis at around 90 percent of the 1.6 billion Muslims worldwide today – consider that the prophet did not designate a successor, but partisans (Shia) of Ali, believe that he was denied his rightful succession as a member of the prophet's family, being the cousin of Muhammed and his son-in-law, having married Fatima. Factionalism came to a head in 680 AD when the son of Ali, Hussain, lead a rebellion in what is now Iraq against the Ummayad caliph Yazid, which was crushed with Hussain's “martyrdom” in Karbala. This event is commemorated every year – Ashoura – and is a central historical narrative in Shia Islam, that of the suffering and martyrdom of Hussain in pursuing the rightful rule of the Prophet's family. Indeed, you rarely find any Shiites named after the first three caliphs.
The rift led to theological differences, the primary one that for the Shia religious leadership is vested in an Imam (leader) that is a descendant of Ali and Hussain. To the Sunnis, religious authority for interpreting Islam is based on the collective judgment of the community – the ulama, traditional religious scholars - and not through the divinely inspired Imam.
While there is clear historical continuity over the past 1,400 years in theological differences, it is hard to find any parallels to the sectarianism of today. “The Sunnism or Shi'ism of one age is quite different from that of another. So we must avoid essentialism,” said Professor Tarif Khalidi, Sheikh Zayed Chair in Islamic and Arabic Studies at the American University of Beirut, and the translator of the Penguin edition of the Qur'an into English. “In origin my theory is that Sunnism was associated with groups who felt that the unity of the community was the highest ethical-political value while Shi`ism believed that the integrity of the ruler was the best guarantee of good government. There are echoes of these two foundational beliefs in today's Sunnism and Shi`ism but they're only echoes.”
While this is a brief summary – as there are many offshoots of Shia Islam as well as theological schools within Sunni Islam – differences within Islam cannot be simplistically compared to that of Christianity, and the rivalry between the Catholic and Protestant churches during the Reformation (which happened in Europe some 1,500 years after the death of Jesus Christ) and ensuing conflicts, such as the 30 Years War. As Khalidi noted: “When approaching this subject we need to rid ourselves of parallels with Protestant/Catholic conflicts in Europe.”
Mainstream accounts that the Sunni-Shia divide has raged since the time of the Prophet Muhammad are also spurious, and labels attached to points in history that were distinctly Shia or Sunni were imposed on the region by Western scholars.
“Though tensions between them were frequent, historically there was more bark than bite, more polemic than pitched battle in their actual relations. There were basically three periods when tensions were high: the 10th century, often called the "Shi`ite interregnum" by Western though not by Muslims historians. This was a century where you had three major Shi`ite centers of power: Fatimid Egypt, Hamdanid Syria and Buyid Iraq and Western Iran. You then have the 11-12 centuries, again called by Western historians the "Sunnite revival" when Turkic Sunnite dynasties (Seljuqs, Zengids, Ayyubids, Mamluks) spread their power over Egypt and Greater Syria. Finally you have the great wars between Shia Safavid Iran versus Sunnite Ottoman power in the 16-17th centuries,” said Khalidi. “In none of these conflicts was the Sunni-Shia divide the decisive factor. Rather it was a geo-political struggle over resources but none of these conflicts involved massive ethnic cleansing or genocide of one party by the other. In the present context of Shia-Sunni tensions, we need to go beyond surface rhetoric and ask what are the real strategic issues involved.”

A Year of Seismic Change

Fast forward to the 20th century, and the geopolitical issues at play were securing access to the hydrocarbons and economic markets of the oil-rich Middle East, the Gulf in particular, which were under British tutelage before the US took over the mantle as the global superpower. To understand what is happening in the 21st century, we need to go back some 30 years to 1979.
It was a year of seismic change in the Middle East. The Shah of Iran was overthrown in major demonstrations, leading to the formation of the Islamic Republic of Iran and the start of tensions between the US and Tehran that rage to this day. Yet the US did not label Iran an enemy because it was Shia, but because it was revolutionary and Muslim. The worry was that in losing a pliable ally like the Shah and access to Iran's hydrocarbon wealth, other Muslim majority countries in the Middle East could do the same, and reject US power by going it alone. This sent shivers down the spines of elites in Washington, but also the ruling families in the monarchical Gulf states, which are all Sunni and use religion to legitimise their power base, particularly Saudi Arabia. Notably, Kuwait and Saudi Arabia have Shia minorities, while Bahrain is majority Shia.
“The real issue is ideological warfare and has three different angles. One, Iranian-Arab divisions, and the second is conservative Arab states, mostly monarchies, versus secular nationalists like Iraq and Syria. Thirdly, it is about Islamists and monarchies, who are arguing and fighting for two different forms of sovereignty: one from God, and one from the monarchy, and they try and link (their legitimacy) to God,” said Rami Khouri, Director of the Issam Fares Institute for Public Policy and International Affairs in Beirut.
In late November 1979, some of the Gulf monarchies' fears started to be realized when the Great Mosque of Mecca in Saudi Arabia was seized by hard-line Islamist gunmen bent on overthrowing the Saudi monarchy and introducing a new redeemer – the mahdi – on the day marking 1,400 years of Islam. The siege shook Saudi Arabia's foundations for two weeks, challenged the kingdom's position as the guardian of the two holy cities of Islam, triggered a Shiite uprising in the east of the country, and unleashed forces that led to the rise of Al Qaeda. Then, less than a month after the Saudis' disastrous handling of the siege, the Soviet Union invaded Afghanistan on December 24. This created the spark for a Machiavellian strategy hit upon by the US and Saudi Arabia for the kingdom to export its “bad boys” – the hard-line Sunni Islamists – to take on the Soviets with the Afghan Mujahideen. And we all know where that led – the rise of Sunni Islamic extremism in central Asia and the Middle East, with those returning from Jihad in Afghanistan challenging the regional order and, more recently, reflected in the so-called “Arab Spring,” which some regard as having played into the hands of Islamists, and can be called an “Islamic spring.” But on the other side of the apparent Sunni-Shia divide, Iran in the wake of the Arab uprisings called for an “Islamic awakening” but, note, not a Shia Islamic awakening.
“It was a crucial year, 1979, for Muslims. On the Shia front was Iran's Ayatollah Khomeini, and on the Sunni side Abdullah Azzam, a Jersulamite that went to Lebanon and then to Afghanistan, where he decided the fight against the Soviets was a true Jihad, and that the liberation of Jerusalem (from the Israelis went) through Afghanistan,” said Mohammad. “Then the Sunni world embarked on a project to recruit people in mosques to fight in Afghanistan, on the periphery of the Muslim world. The Shia were also awoken, and given the centre in the Iran-Iraq war and the Lebanese civil war. Later, the two were brought together to meet in the Iraqi arena after the US invasion. But for some reason the world's intelligentsia has not given this any value.”
One reason the mainstream narrative does not focus on these issues is that they present uncomfortable truths. That to ensure oil and capital flowed from the Gulf countries to the West, Britain and the US were willing to work with authoritarian Islamic states like Saudi Arabia, which has spent over $50 billion over the past half century promoting its version of conservative Islam around the world, according to Mark Curtis, author of “Secret Affairs: Britain's Collusion with Radical Islam.”
Equally, Britain and the US worked with radical Islamist groups when it suited them, such as during the Cold War to counter communism, pan-Arabism and nationalist sentiments in the Middle East, as Curtis shows in his book. Furthermore, the West's political-economic alignment with Sunni monarchies, and that collusion with radical Islamists were primarily Sunni, gives rise to the idea that the West is more pro-Sunni than pro-Shia despite the prevalence of Islamophobia in the West today.
This is the thing about political Islam, especially Sunni political Islam, that they are more than happy to take weapons, financial support and logistical support from the US when it serves their ends, and when they want to go to the next step, they have no ethical ties to that alliance and dump the US,” said Stephen Sheehi, Associate Professor of Arabic and Arab Culture at the University of South Carolina, and author of “Islamophobia: The Ideological Campaign Against Muslims.”
As for the Iran-Iraq war, the first Gulf War, that raged between 1980-88, claimed over 1 million lives and caused economic losses of over $500 billion, it was actively pushed by the US, Israel and the Gulf states – the latter and the US being major financiers of Saddam Hussein's regime – to counter the fledgling Islamic Republic and thwart Iran from spreading its revolutionary Islamic message, while at the same time weakening two of the most potentially powerful states in the Middle East.
The war, like the West and the Gulf backing the Mujahideen in Afghanistan, was to have long-term ramifications. One in positioning Iran as a major threat, reflected in ongoing concerns about Tehran's alleged nuclear weapons programme, which has been warned about as far back as 1984, and its support for “terrorist organizations” such as the Shiite militia Hizbullah in Lebanon, which was established in the early 1980s with Iranian assistance in response to the Israeli invasion of Lebanon in 1982. Secondly, the First Gulf War laid the groundwork for the eventual overthrow of Saddam Hussein when the US invaded Iraq in 2003. And it was the invasion of Iraq that in many ways sparked the violent sectarianism afoot today.
“People never talked of such sectarianism before. In the 1960s, never did I use the word Shiite,” said Khouri. “The reason why there is not a real region wide Sunni-Shia war is because such sectarianism never surfaced until seven to eight years ago, until after the Iraq invasion.”

Opening Pandora's Box

Iraq was nominally secular under the ruling Baath party, but after the invasion the US drew up a new constitution based along sectarian lines, dividing the country up between the Shia in the south, the Sunnis in the centre, and the Kurds in the autonomous north, while at the same time the US funded a Shia police commando force that fuelled a sectarian war in the country that at its height was causing 3,000 deaths a month. On the other side, Sunni fighters flowed into Iraq to fight the Americans, with Saudi Arabia adopting a similar tactic as during the 1980s in Afghanistan: allowing Islamist fighters to go to Iraq instead of causing problems at home.
“It was a situation that was partly instigated by the deliberate spread of activities by Al Qaeda and the like in Iraq by targeting Shiites. The other part of it was revenge by the Shia after the overthrow of Saddam Hussein, as he was so brutal against his people, and this created fears among Sunnis and exacerbated the divide,” said Khouri.
Further fuel was poured on the fire a year after the invasion when Jordan's pro-Western King Abdullah made a controversial speech warning of a "Shia crescent" that went from Damascus to Tehran via Baghdad. Yet ironically, the government in Baghdad is close to the US but also to Tehran, and in many ways, the invasion of Iraq played into the Iranian's hands. As Khouri noted, “the talk of a Shiite crescent is not about being worried about Shiites but about Iran. They (the Gulf states) can't talk of a Shiite crescent when they have Shia populaces of their own.”
This fear of Iran has led Middle East states, primarily in the Gulf, to buy $92 billion of arms from the US between 2008-2011. But it is not just arms-for-oil at the crux of US-Gulf relations. The Gulf countries are major players on the ground in “the Sushi war,” such as backing Islamic rebels during the Libyan conflict and currently in Syria – Qatar has provided an estimated $3 billion to the rebels according to the Financial Times.
“The Gulf countries have their own internal rivalries, but are smart enough to put rivalries aside and channel common interests in managing the “Arab Spring” and the “Arab Street.” The Gulf countries are critical in negotiating between the top global layer, the US, and the local layer. They are the intermediary,” said Sheehi.
As for the conflict in Syria, it is now being increasingly portrayed as a sectarian war, with Sunni Islamic rebels fighting the regime of President Bashar Assad, who is an Alawite, an offshoot sect of Shiism. In June, the now ousted Egyptian President Mohamed Morsi said the Assad regime was a “Shia oppressor of Sunnis,” while Egyptian preachers Mohamed Hassan and Mohamed Abd al-Maqsud called for a Jihad in Syria and Shiites to be banned from Egypt.
However, Syria is a nominally secular state, and pro-government support within the country derives not only from Alawites, but also Christians and Sunnis. Furthermore, there is little basis for the argument that the Alawites are Shiite and therefore siding with Iran for religious reasons. As is the case with the US stance on Iran, it is not about Iran being Shiite, or Syria Alawite, that the two countries – and their support for Hizbullah – is being portrayed as part of the “Sushi war.” Instead it is that Iran, Syria and Hizbullah form an “axis of resistance” against the US-led world order. Indeed, Russia and China's support for Syria and Iran is not because Syria's government is headed by an Alawite and Iran is Shia, but about geopolitics.
“Power is an important rubric we often ignore, for “great powers” to maintain their influence. So if you can break this Iran-Hizbullah-Syria axis, it enhances your power, although it might not necessarily on the ground,” said Sheehi.
Utilizing sectarianism to achieve that old adage of “divide and rule” is therefore one of the US' and it allies tools to achieve geopolitical ends, turning what was not a major issue – certainly in terms of violence – between Sunnis and Shia into a deadly issue in many mixed Muslim counties.
“Deep down it is not a war to death, but there is now mass fear and hysteria, so (a sectarian conflict) is not completely fantasized,” said Khouri.

Monday, November 04, 2013

The delay to FATCA’s roll out

Thomson Reuters

On 12 July 2013, the Internal Revenue Service (IRS) and the Treasury Department delayed certain provisions. While the announcement of a further delay was met with relief, it has also sent mixed signals to the financial services industry about how ready they should be with their FATCA compliance program by July 2014.
On 22 October 2013, they released a notice giving Foreign Financial institutions (FFIs) further guidance to implement their FATCA compliance program. 

The notice highlights details of the negotiated bilateral agreements, adds new rules and it includes a draft agreement for institutions to sign if they want to avoid penalties. While this notice serves as a next step in implementing a FATCA compliance program, it is only relevant to those institutions operating in model 2 Intergovernmental Agreements (IGA's) jurisdictions. Institutions not operating in Model 1 or Model 2 jurisdictions will need to comply with the final regulations released in January 2013. 

Our white paper 'The delay to FATCA's roll out' is a global examination of how the financial services industry is preparing for FATCA compliance, how well they understand the FATCA legislation and the impact it will have on the organization’s operations.

To download the paper:

Wednesday, October 30, 2013

Financial conflict – Syria looks to Russia and Iran

Money Laundering Bulletin

Syria, mired in bloody civil war, is also fighting multilateral sanctions. Although notionally cut off from the international banking system, Damascus is evading the restrictions through use of Russian banks and receiving assistance from Iran, reports Paul Cochrane from Beirut. Neighbouring Lebanon is caught in the crossfire, despite not serving the Syrian regime as a major conduit for flight capital.

In 2011, as the Syrian government cracked down on protesters, the United States, followed by the European Union (EU), the United Nations and the Arab League imposed economic and financial sanctions on the regime of President Bashar al-Assad. Key members of the government, state-owned institutions, and connected businessmen and companies were also designated, including the Central Bank of Syria and the country’s largest deposit-taking institution, the state-owned Commercial Bank of Syria.

All transactions in US dollars were curbed, along with the use of the SWIFT system, and state banks’ accounts outside Syria were frozen. In December 2012, the EU Council of Ministers banned new correspondent banking relations between Syrian financial institutions and EU banks.

The sanctions, in addition to the loss of crucial oil export revenues with Europe, hit the Syrian government hard but did not deal a crippling blow. The Syrian economy had only been liberalising since the beginning of the century - private banks entered the country after 2004 - and the state was still a major economic player. When hostilities broke out, the private bank sector had some US$11 billion in deposits, and the whole banking sector USD29.8 billion, according to Syrian Central Bank (SCB) figures, a blip on the global level, and significantly lower than neighbouring Lebanon’s banks’ US$131 billion in deposits.

Nevertheless, March 2011 saw the start of significant account withdrawals - estimated at US$2.5 billion in the first year of the conflict, according to Bank Audi figures. As hostilities dragged on, more money was taken out with Lebanese media reporting Russia as the destination. But “the well-to-do already had accounts in Europe, it is the smaller guys who have cash and don’t have accounts,” according to Abdul Hafiz Mansour, secretary of the Special Investigation Commission, Lebanon’s financial intelligence unit (FIU). While Lebanon was flagged as a destination for Syrian flight capital, officials and bankers insist that the country – which was partly occupied by Syria for 30 years, until 2005 - is not a home for Syrian regime money. The data appears to support their case, with no abnormal rise in deposits at Lebanese banks since 2011. “The regulations and prudential supervision do not make it easy for money to be placed in the system in Lebanon. It could be easier to do so elsewhere,” said Mansour. Another Lebanon official noted that across the Levant and west Asia, “from Afghanistan to Turkey, it is a very porous region” for banking, adding that it can be straightforward to deposit funds in a Pakistani, Iraqi or Afghan institution, with few questions asked.

Yet, Syrian money is clearly entering Lebanon via refugees, migrant workers and businesses transferring cash. Refugee numbers reached 914,000 this year, according to the World Bank, and are forecast to rise to 1.6 million next year – a particular problem given Lebanon’s population is less than 5 million. The influx caused Beirut to advise the US Treasury that it would allow accounts to be opened by non-sanctioned Syrians and these would be monitored for abnormal activity.

When the [US] Executive Order was put in place the reality on the ground was different and you didn’t have [a] large number of refugees in Lebanon,” said Chahdan Jebeyli, general manager and head of legal and compliance at Bank Audi, who also chairs the compliance committee of the Association of Banks in Lebanon: “I personally expect more relaxation, not of the rules, but the way the rules are applied to those that have ceased activities in Syria and are engaged elsewhere, including Lebanon.”

Not all Lebanese banks are accepting Syrian deposits, however, with some unofficially but commonly recognised as anti-Syrian for political reasons. Indeed, Syrians know which to deal with and, if refused, Lebanese friends and relatives will often hold deposits on their behalf.

The Syrian Pound (SYP) can also be exchanged within Lebanon, albeit at fluctuating rates due to the currency’s depreciation; it stood at SYP46 to the US dollar in early 2011 but is over SYP200 today. Asked about the rate to the US dollar, a dealer in Beirut said: “Between SYP210 and SYP230, but it is changing by the second.”

Meanwhile, with blocks on SWIFT and transactions in dollars there has been rising use of ‘hawala’, despite a ban on the alternative remittance system in both Lebanon and Syria. A war economy and rapidly depreciating currency mean that, increasingly, trade deals and pricing are carried out in greenbacks, and to a lesser extent in Euros, Emirati Dirhams and Saudi Arabian Riyals. In response, the Syrian central bank banned both trading and pricing in US dollars in August. “The SCB also limited the ceiling of dollars sold to individuals, from US$1,000 to US$500 a month, and clamped down on the black market. This is how it has managed to keep the exchange rate at SYP200 for the past two months,” said Jihad Yazigi, editor of financial publication, The Syria Report.

With the government haemorrhaging money to pay for the conflict and keep subsidies as well as state-sector salaries going, foreign reserves have dwindled from US$18 billion (source: SCB) when the conflict started. To offset a looming cash-flow problem, Damascus approached its only ally in the Middle East, Iran, for financial assistance this year, opening credit lines of US$7.6 billion.

Syria may have just US$3-US$4billion left in the central bank and would rather not spend it, so they need the help from the Iranians. But there is really an absence of any data. The last time the SCB made any announcements about reserves was in May 2011,” Yazigi observed.

As to where the Syrian government funds and those of regime members have headed, fingers are pointing at Russia as a prime candidate. In September, four American senators called on the US Treasury to cut off three Russian banks from the US financial system as they were “undermining sanctions” by “aiding Assad”. The senators accused Vnesheconombank (VEB) of facilitating Syrian payments for Russian missile systems; Gazprombank for processing crude oil payments; and VTB (75%-stated owned) for hosting President Assad’s personal accounts.

VTB and VEB issued statements denying involvement with Syrian government accounts. “Historically, VEB acts on behalf of the government in terms of servicing the foreign debt of Russia, including settlements with Syria. Our bank does not have any other business with the Central Bank of Syria, its government, or government-controlled organisations. All the activities carried out by VEB are strictly in accordance with the sanctions adopted by the EU and the UN on the Syrian Republic,” VEB told state news agency RIA Novosti. Such protestations from Moscow contrast with comments from the Syrian government. At the end of 2011, the Central Bank of Syria governor Adib Mayaleh said that his institution had opened accounts at Russian banks. “There is around USD2 billion of Syrian foreign reserves in Russia. Mayaleh was open about that, that they had opened accounts,” said Yazigi.

In December 2012, Syrian state press reported that the bank had opened Euro and Rouble accounts with VTB, VEB, and Gazprombank, and issued guidelines to Syrian banks on how to deal with the Russian institutions. Earlier in the year, in June, the finance ministry stated that Syrian banknotes would be printed in Moscow, following the ban on currency printing in Europe, where, previously, it had used Austrian and Belgian printers. 

Photo via

Copyright Informa Group

Monday, October 28, 2013

Lebanon exposed to telecoms security risks by lack of legislation

 The Daily Star - with

BEIRUT: The sheer scope of the United States’ telecommunications surveillance is a hot topic, with recent revelations showing the U.S. was snooping on 35 world leaders and is bulk spying on millions of people around the planet. Yet while the European Union is updating its data protection legislation in the wake of the revelations from the documents leaked by former National Security Agency contractor Edward Snowden, Lebanon is exposed at the internal and external level.
It is an issue for citizens and businesses alike, with no law yet enacted for electronic commerce, e-transactions, cybercrimes such as phishing (stealing of data, account information and money from, say, an online bank account) or data security.
“On the legal side I don’t think we are protected at all,” said Gabriel Deek, vice president of the Internet Society of Lebanon.
One of the pillars of the economy, the banking and financial sector, is also exposed.
“We assume there is banking security, but that doesn’t equal to data security today. For instance, a few months ago a list of 8,000 people’s credit card numbers on a Lebanese internet provider were put on the net,” said Cyrus Salesse, CEO of Krypton Security, an information security consultancy with offices in Beirut. “At one financial institution, a Chinese hacker was sitting inside their system for a year. Most entities in the Middle East don’t know about hacker attacks until it’s too late.”
Financial institutions have yet to adopt the Payment Card Industry Data Security (PCI) Standard that is being utilized worldwide, which enhances payment-card data security at institutions and service providers that deal with client data. While the Central Bank of Jordan has given a deadline to banks to be PCI certified, Lebanon’s central bank, Banque du Liban, has not done so.
“The BDL hasn’t picked up on that and seems to be playing a weaker role in this security environment,” Salesse said. “The infrastructure of Lebanese online banking security is – I want to say old – but it is inadequate. It is an affordability issue, as many banks use homemade software, so to adopt newer, more secure software needs total business re-engineering.”
But according to Salam Yamout, the government’s national e-strategy coordinator, the BDL is working on certain projects, including an e-payment gateway and clearing transactions in real time.
“Security is at the top of their list,” Yamout said.
In the meantime, at the national level, legislation is coming up short.
“You have civil and commercial rights, but against financial institutions? Standards are very low when it comes to transactions with credit cards inside Lebanon, or the technical criteria to allow authentication of commercial factors,” said Riad Bahsoun, chairman of the Policy and Regulatory Committee at the International Telecommunication Council for Lebanon.
What is holding back data security, and the potential for e-commerce to take off, is legislation. Back in 1996, a law was proposed to allow e-signatures, but this was deemed not encompassing enough, and an e-commerce law was proposed in 2004. The draft law was rejected twice as it was considered too draconian by the private sector.
“I worked to lobby against it as it was a bad law,” Deek said.
In 2011, the office of Prime Minister Najib Mikati took control of the draft law, and for the first time in the country’s history, the private sector was involved in the committee.
“I believe we’ve done the right thing, to go back and simplify it, and have freedom of expression on the Internet,” Yamout said. “This legislation is crucial to the e-ecosystem as it covers all aspects of the e-economy: banking, service providers [not telecoms but hosting], data storage and protection, and cybercrime.”
But while the law was passed at the ministerial level, it has not been ratified by the Parliament.
“Anything involving more than one ministry requires cooperation, and that is why it was slow [to be implemented],” Yamout said. “The digital economy, IT and telecom is not a priority given the tough constraints of politics and security in the country. It’s like a house burning down – do you put the fire out, or save the furniture first?”
Even if the law is passed – which could be years away as there is a caretaker government currently in place – e-commerce faces an uphill battle for greater adoption in the country.
“When it comes to e-commerce, there is no trust in credit cards and online transactions,” said Salim Tannous, cluster director at the Beirut Creative Cluster. “Another problem is control, the gatekeepers – the customs – which are not facilitating e-commerce. It is about controlling the ins and outs, especially of books and media. If you only allow a few suppliers, it is easier to control them, and hurt them if they are not compliant. By resisting change, it protects the old guard – government officials, customs and traditional suppliers. We need a solution that bypasses the old system that takes a cut.”
What concerns the private sector is that whenever the law is passed, it will have become outdated compared to other jurisdictions, which could lead to another round of debate and the potential for redrafting. Already the law is not seen as encompassing enough.
“The law will not solve whatever issues are related to industrial espionage or financial transaction traffic,” Deek said.
When it comes to external surveillance, the public and private sectors are fully aware that Lebanon is exposed to some of the highest rates of surveillance in the world. The country is being spied on by Israel, Jordan, NATO, the NSA, and via the British signals intelligence base in Cyprus, which is partly funded by the NSA.
With bureaucracy in general not automated, and government websites information orientated, the more archaic method of data gathering means there is not much chance of any mass data leaks or electronic data for external agencies to spy on.
“Some ministers don’t even have official email addresses – – but use their own email, so that is not safe, meaning Hotmail has access to a government official,” Tannous said.
Domestically, there is no specific legislation in place to ensure privacy. But this principle is mentioned in the Constitution through adherence to the Universal Declaration of Human Rights, which states the right to privacy in communications. Law 140 (1999), enacted in 2009, protects the right to privacy in telecommunications.
“It is unconstitutional to eavesdrop on people. There is no specific code, but a general text that protects privacy and personal information, which is the penal code of 1943. Also there is no text regarding e-records as the Constitution was issued in 1923 and amended in 1990,” said Paul Morcos, founder of the Justicia law firm. “The penal code includes text concerning privacy and correspondence that might be applicable to other communication means, but as Law 140 is enacted, it is more specific than the penal code. That said, we need a complete reform of the criminal code.”
The exception to Law 140 is the intelligence agencies in order to gather information aimed at combating terrorism, organized crime and crimes against the security of the state. The issue though is that while agencies must get juridical authorization and give the reason for monitoring, the type of communication to be monitored (email, telephone), the region and a time period, there is no effective governmental oversight.
“We don’t have the slightest guarantee our privacy is not violated,” Bahsoun said.
Law 140 has been controversial, and it is still provoking debate as to which ministry should be in charge.
“From a legal point of view, this Law 140 about interception is badly drafted. Besides, the decision to host it in the Telecoms Ministry makes sense, but the request that the data transmission is sent to the Minister of Telecommunications, and up to him to implement it is ridiculous. It should be with the Interior Ministry or the Defense Ministry, and be under control of the Council of Ministers with direct reporting procedures,” Bahsoun said.
There was a Defense Ministry-Telecoms Ministry liaison team to oversee interception that was headed up by six officials, but it was disbanded.
“I worked with them, and recommended to the president and the prime minister this team should be expanded to 50 people, at least, and have autonomy,” Bahsoun said.
“There is a lot of work to do to have security, but the government canceled the liaison team, which shows that behind the scenes there are forces that want data manipulation.”
The country does not have the financial or technical capabilities for total spectrum surveillance of telecommunications on par with, say the NSA, but the intelligence agencies are not without capabilities.
Furthermore, intelligence agencies activities are being widened, with a cyberunit at the Information Branch and interception able to be carried out by Military Intelligence, while the former head of the latter, Abbas Ibrahim, is now the head of General Security and is reorganizing its capabilities.
“The Information Branch has the software to intercept [smart phone communication application] WhatsApp, the metadata and data. It is given by certain countries, such as Germany,” Bahsoun said.
Getting legislation in place that protects citizens, businesses and consumers is going to take time, and the debate will continue in Lebanon as in the rest of the world about data protection.
“The balance of power concerns me. The question is, how do you make justice prevail? We are still fighting for the freedom of the Internet and we want no restrictions,” Deek said.

Photo credit - (The Daily Star/Mohammad Azakir)

Thursday, October 10, 2013

Enhanced Due Diligence to Curb Insurance Fraud

Thomson Reuters

You can download a pdf of the paper here:

The Association of British Insurers (ABI) estimates that 15 fraudulent insurance claims are exposed every hour of every day in the United Kingdom. In 2011, insurers uncovered 139,000 fraudulent claims worth an estimated $1.5 billion. But despite such success in detection – up 7 percent on the previous year - and the sector investing some $300 million annually to prevent fraud, an estimated $3 billion in insurance fraud goes undetected.
That is just in the UK. In India insurance fraud is estimated at $5.63 bn a year, in New Zealand anywhere between $1.6 bn to $6.49 bn, in Germany $5 bn, in Australia $1.94 bn, and in the United States upwards of $80 bn to $100 bn. Add on undetected fraud losses and the figures run into further billions. It would not be sensational to estimate that thousands of cases of insurance fraud are happening every hour of every day across the globe. 

While insurers will investigate and uncover a good percentage of fraudulent cases, many will go undetected, costing the sector and customers additional expense and higher premiums. Indeed, in the US, insurance fraud is now considered to be the second largest economic crime after tax evasion, according to the National Insurance Crime Bureau (NICB).
Mature financial markets are more exposed to risks in general, and insurance is no exception. Insurance fraud figures are highest in the areas with higher insurance penetration, reflected in the global market breakdown, with Europe accounting for 35.9 percent of the global insurance market in 2011, North America 28.9 percent, and Asia 28.2 percent, according to Swiss Re in 2012. The Middle East and Central Asia by comparison accounts for 0.9 percent of global share, Africa 1.5 percent and Latin America 3.4 percent.
However, while emerging markets in general have lower insurance penetration rates – in the Middle East for instance it is 1.55 percent compared to the global average of 6.6 percent – insurance fraud is considered to be equally on the rise. Insurance fraud is not a country or region specific phenomenon, it is truly global and projected to rise.

The up-tick

Insurance fraud is arguably as old as the sector itself, and its pervasiveness has increased over the years, as have techniques and sophistication. The US-based Coalition Against Insurance Fraud (CAIF) defines fraud as “a deliberate deception perpetrated against or by an insurance company or agent for the purpose of financial gain.”
However, Leonard Brimson, EMEA Regional Head of Global Investigative Services at insurer AIG, urges caution in using the term too loosely. “When we talk about fraud it can be a dangerous word to use, as unless someone has been tried and convicted, it is only suspicious activity. The terminology is important,” he said.
What has caused an up-tick in insurance fraud – and suspected insurance fraud - in recent years is the increased focus by regulators on the banking sector to curb financial crimes, notably money laundering, and this has correspondingly driven fraudsters towards the insurance sector.
“The rise in insurance fraud is fuelled by the tightening of bank regulations, which has made it tougher for fraudsters to get money from banks. Criminals do not change jobs, they look for organisational weaknesses and exploit them,” said Anne Green, Head of Fraud for Underwriting, Pricing and Product at Aviva in the UK.
But the rise in insurance fraud is not solely down to organized criminals and “professional” fraudsters. It is prevalent at a nationwide, cross-the-spectrum level, and is likely to be attributed to the ongoing ramifications of the 2008 financial crisis and austerity measures, certainly in Europe.
For example, in the UK-based Insurance Fraud Investigators Group’s (IFIG) ‘Insurance Fraud 2012’ report, “the evidence suggests that the recession is already driving an increase in opportunistic claims from policyholders, with 85 percent of respondents reporting an increase in inflated or exaggerated claims [in 2012] and 76 percent reporting an increase in completely bogus claims. ”
In three surveys carried out by IFIG in 2009, 2010 and 2012, the top concern of respondents was that the “recession was fueling fraud,” with another top answer: “increased fraud at policy inception.” A further top concern for insurers was having adequate resources to tackle fraud. Indicative of this was that “70 percent of companies have moved fraud up the agenda in the last year and 74.5 percent have increased investment in fraud detection.”
As Green observed: “The insurance industry needs to take a strong stance against fraud, looking across the life cycle of the relationship with the customer, from the point at which the policy is sold right through to the claims process.”

Global spread

The concerns highlighted by the IFIG are being reflected by insurers, associations and financial bodies around the world. “The trend (of insurance fraud) is certainly upwards, and I deal with 48 countries,” said Brimson.
“If you compare one country with another, some policies are more prone to fraud, and in countries where insurance is less prevalent, it is typically life insurance fraud. We see a huge difference in value and volumes on a country basis. Most crimes that are common tend to be perpetuated that have been successful in the past. If we see something in one country that is profitable for fraudsters, we will see that happening in a neighbouring country and then spread across the continent.”
Evident of this is the rise in general claims and life insurance fraud in emerging markets. Indian insurance companies lost $5.63 bn to fraud in 2011, equivalent to an estimated 9 percent of the total insurance industry, according to a 2012 study by Indiaforensic.
The life insurance segment accounted for as much as 86 percent of the fraud and the remainder in the general insurance sector, with life insurance fraud more than doubling over the past five years and general insurance fraud surging by 70 percent, according to figures by India’s Insurance Regulatory and Development Authority (IRDA).
According to Vietnam’s Insurance Management and Supervision Department, between 2007 and 2011 over 44,700 cases of insurance fraud were reported worth $19.7 million, with the lion’s share being life insurance cases at 40,700.
In the Middle East, insurance fraud could be as high as 30 to 40 percent of all claims, while estimated at $1.5 billion a year, and has been exacerbated by recent regional unrest and political transformation. “There is a noticeable increase in the claims trend in our region. We are seeing more and more incidents relating to fraudulent claims recently and are becoming more cautious about each and every claim,” said Ronald Chidiac, general manager of the Arab Reinsurance Company in Lebanon. “Fraud
has taken on many new faces from the usual suspects. This is clearly noted in life and medical insurance where fraud exists from the initial stages of delivering the data, to managing the portfolio and the claims. The parties involved are not dealing properly with the mitigation of risk and are not getting involved in the analysis required to catch these fraudulent claims, relying on a third party to compensate them for their losses.” 

Fraud across all classes

The scale of insurance fraud cases can be massive. In March, 2013, federal investigators in North Carolina, USA, uncovered the country’s largest ever insurance fraud crop scheme, which involved 41 people, including insurance agents, claims adjusters, brokers and farmers, and could have cost a government-backed crop insurance programme some $100 million. Such a scheme can be described as “hard” fraud: deliberately faked claims or of the more complex variety, involving several parties, such as insurance agents, witnesses and “professional enablers” like lawyers and doctors.
But the vast majority of fraud can be termed “soft”, such as exaggerating the value of a legitimate claim and providing false information to pay lower insurance premium prices. Indeed, in the UK and the US, motor, personal injury and property insurance have experienced the greatest rise in fraudulent activities. That said, there has been a notable rise in the UK in bogus claims over the past few years, and in the US medical insurance fraud is still the biggest form of fraud, estimated at over $60 billion a year.
“Some areas of insurance fraud are growing more exponentially than others. The growth in bodily injuries has been quite dramatic and is a major concern for the industry. There are a few reasons for that, such as compensation culture increasing and higher value pay outs, even for minor injuries. It is not just the volume of the suspicious activity, it is the value as well, as it seems to be linked,” said Brimson.
With insurance fraud on the rise and diversifying as the industry offers more products and, in cases, better pay outs, there is a heightened need for carrying out due diligence to reduce the risk of fraudulent claims and losses within the sector from the outset, be they from inside a company or from policy holders.

The need for enhanced due diligence

Within a month of signing up to an anti-fraud database, British insurer Ageas had identified two large fraud rings with over 100 people involved; one ring affected 26 other insurers.
Technology is playing an increasing role in curbing fraud, from anti-fraud and identity software to databases that list sanctioned individuals, listed terrorists and criminals, to carry out enhanced due diligence (EDD).
“Technology and computer infrastructure is critical. It allows us to put together bodies of data, sometimes obscure, quickly. There have also been huge strides in recent years in predictive analytical possibilities, which allows us to spot anomalies very quickly,” said Brimson.
A risk-based approach to taking on clients requires investigating who a person or company legitimately is, and assessing what risks are involved with doing a transaction.
Enhanced due diligence goes further than basic due diligence in investigating an entity more thoroughly, such as looking into an entity’s background, finding out the actual ownership structure of an organization and those linked to it – such as politically exposed persons (PEPs) or sanctioned individuals that carry with them heightened risk – and looking into businesses with which an entity works, including government ties. EDD, also known as special due diligence, is typically carried out as a one off investigation, but can be followed up with ongoing due diligence to ensure a client will not pose potential risk down the road.
“Carrying out EDD when a policy is taken out means the insurer has a better understanding of the risk it takes on,” said Green. “In addition, it can protect the innocent customer by tackling organised crimes such as ghost broking or ‘crash for cash’ scams as well as helping customers understand the importance of honesty, not just when they take out a policy but also if they need to make a claim. Ghost Broking is a common trend and is made easier in the absence of EDD.”
In the general absence of specific due diligence activities available to the financial and banking sector such as Know Your Customer (KYC) forms to carry out compliance– the feeling in the insurance sector is largely that it would be too invasive and customers would balk at the idea of disclosing extra information – EDD through investigations and utilizing appropriate software gains further credence. “Would people sign up to greater scrutiny within our industry? I doubt it very much. I don’t see any will of the client to provide that kind of data, unless it was mandatory. There is a need to be careful in not going too far, and close off people to insurance,” said Brimson. 

Not a panacea

Adopting anti-fraud and risk intelligence software cannot be viewed as a panacea for doing effective due diligence. Indeed, when it comes to technology, not all companies are utilising it effectively, as the US-based Coalition Against Insurance Fraud found in a study published in 2012 to better understand insurer adoption and use of technology in America.
The study found that while nearly 90 percent of insurers surveyed used anti-fraud technology, most only used basic tools such as automated red flags, claims scoring and link analysis. Less than half of insurers surveyed used predictive modeling, text mining, geographic data mapping and other advanced analytics, while only about 14 percent used any automated tools to detect underwriting or point-of-sale fraud.
There is also the danger of technology being viewed as a solution to fraud and due diligence, and that human input is not required to the same degree as before. Indeed, in emerging markets there is a need for improvement in tackling fraud beyond just adopting anti-fraud and other technologies to get appropriate EDD.
“It is not an issue of software, it is an issue of culture first. Companies are looking at technology to automate the business processes and not analyse anymore,” said Chidiac. “It is not about simply installing a software for risk management, it is about the culture of dealing with fraud, as basic due diligence doesn’t even exist in much of the Middle East. Few companies have proper internal audits or due diligence.”
As Chidiac observed, a culture of compliance is prevalent among multinational insurance firms and bigger players, yet often comes up short in smaller and medium sized firms, especially in emerging markets. Developing such a compliance culture in-house is essential to curbing fraud from the get-go, which requires not only employing the right people, but making sure training is up to par, and there is regular training and development of staff. If the human element is not up to scratch, then technology cannot compensate for such shortcomings.
Software that features global watch lists of sanctioned individuals, PEPs, designated terrorists and so on, also need to be used judiciously.
That said, there are a handful of risk intelligence databases worldwide that assist companies in their compliance obligations with anti- corruption legislation like the US Foreign Corrupt Practices Act (FCPA), as well as anti-money laundering and counter terrorist financing regulations. To increase the accuracy of results, it’s a good idea to choose high quality, well structured risk intelligence that offers an EDD component. Enhanced due diligence should include details like the company’s shareholders and litigation history, as well as background information on management, decision makers, potential conflicts of interest, and potential political and criminal ties.
Indeed, not using databases or checking watch lists in addition to not doing due diligence can pose easily avoided risks for insurers. “It is amazing how few professionals care about the insurer’s ability to assess the risk and apply due diligence in their everyday functions,” said Chidiac. “For instance, despite some sanctions imposed in the region (such as on Syria), we still find risk carriers giving support to some of these sanctioned insurers and clients.”
On top of introducing a culture of due diligence and compliance at insurance companies, dedicated teams need to carry on from where EDD left off. “EDD will not cover opportunistic fraud, people taking advantage of a situation to exaggerate a claim, to cover excesses or make a profit from a risk event. Nor will it combat third party fraud. However, it should be noted that EDD is not the only tool employed to help tackle fraud,” said Green.
Indeed, the human element needs to be retained in addition to technology to counter fraud. “A large part of the solution needs to be hand in glove with people as well,” said Brimson. “To me, I think fraud and counter fraud will always be a people business, as people commit fraud for different reasons.”
The global struggle against insurance fraud will clearly continue, and prevention will have a measure of success or failure in different markets and regions, depending in part on their adoption of EDD. While regions like the Middle East have a way to go, and the Asia markets are in general bringing systems up to speed to tackle rising fraud, more advanced insurance markets are moving ahead.
“Detection of fraud is moving in the right direction, the focus on being reactive and having counter fraud measures at the claims stage has moved on and now includes more upfront EDD and prevention methods when a policy is taken out,” said Green.