Financial conflict – Syria looks to Russia and Iran

Money Laundering Bulletin

http://www.moneylaunderingbulletin.com/sanctions/financial-conflict--syria-looks-to-russia-and-iran-93281.htm

 

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 MoneyLaunderingBulletin.com

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Lebanon exposed to telecoms security risks by lack of legislation

 The Daily Star - with internationalnewsservices.com

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 – gov.lb – 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.

 http://dailystar.com.lb/Business/Lebanon/2013/Oct-28/235949-lebanon-exposed-to-telecoms-security-risks-by-lack-of-legislation.ashx#ixzz2j0HVoXb4

Photo credit - (The Daily Star/Mohammad Azakir)

Enhanced Due Diligence to Curb Insurance Fraud

Thomson Reuters

You can download a pdf of the paper here:
https://smartsales.thomsonreuters.com/exLink.asp?39869280OQ12G93I277494216

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.

Lebanon’s car sector: the downward shift

By Paul Cochrane
The Daily Star

BEIRUT: Going by overall figures of new cars sold, the automotive sector is doing surprisingly well in the current economic environment, up 4.33 percent in the first eight months of the year on 2012, and in comparative terms, above the GDP forecast of 1.6 percent for 2013. Furthermore, the figures are up on last year’s August results, which grew by 7.6 percent on 2011, and the 2.1 percent growth reported in the same period in 2010. But the sector is far from being in good health and bucking the downward trend in much of the rest of the economy.
Lump new car sales with the larger used car market, which accounts for around 60 percent of total sales, and overall sales are down 7 percent on last year, according to the Automobile Importers Association.
Yet while a drop in second-hand car sales is a boon to dealerships – and an environmental plus when it comes to the country’s carbon emissions, with fewer fuel-inefficient clunkers on the roads – the market has gone through a radical change in recent years that can be summed up in one word: downsizing.
“The market has shifted over the past five years, from the C segment to the smaller A and B segments,” said Nabil Bazerji, managing director of G.A Bazerji & Sons, distributor of Suzuki, Lancia and Maserati. “Before people bought a used BMW 3 Series, now it is a Kia Picanto as maintenance and fuel costs are lower.”
Prior to 2009, the lion’s share of car sales, at some 65 percent, were in the $22,000 to $90,000 price range. In the used car market, around 70 percent of sales were BMW and Mercedes, reflecting the widespread desire to own a luxury German car, even if several years old with 100,000 km on the clock.
However, the economic realities of inflation, higher fuel costs and lower purchasing power has led to 91 percent of the 24,008 new units sold until August being small cars, with price tags of around $10,000 to $12,000. Luxury car sales now account for just 2 percent of the market.
This trend is not likely to change any time soon.
“The A and B categories already dominate the market, and this trend will continue as consumers are increasingly seeking fuel efficient vehicles because purchasing power is shrinking,” said Farid Homsi, general manager of IMPEX, distributor for GM, Chevrolet and Cadillac.
The brands that have reported the strongest sales are Korean through their price competitive A and B segment models, up 9.52 percent on last year, with 11,181 units sold. Kia and Hyundai are into their fourth-consecutive year as the top two brands after knocking Nissan from the top spot. The Japanese brand is feeling the impact of the economic slowdown, with sales slumping 18.28 percent on last year despite an aggressive marketing campaign.
“The Europeans had their decade [as the top sellers], the Americans had theirs, as did the Japanese, now it is Korea’s turn,” said Rachid Rasamny, sales and marketing manager at Century Motor Co., distributor for Hyundai.
Cumulatively, the 28 European brands have dropped 2.13 percent on last year, the seven U.S. brands are down 5.26 percent, and the 10 Japanese brands just in the black, at 0.21 percent. There are exceptions, with Infiniti selling well, up 100 percent, Volvo up 51.2 percent, and Mitsubishi up 134.91 percent. Infiniti has introduced smaller engines, which is keeping sales strong, while Mitsubishi has introduced a compact model.
In the European non-luxury segment, it is the low-cost Dacia that is reporting the strongest sales through its Logan model, which sells for upward of $10,000. Among the American brands, only Ford is on the up, attributable to the brand having re-entered the market this past year.
As such figures show, sales are far from being evenly spread, and net profits are generally down across the board.
“The cake is getting smaller and there are more people who want to eat from it. I don’t see brands vanishing from the market but definitely some brands are having a tough time,” Homsi said.
Complicating the balancing of dealerships’ books is that the average return on a sale is 7 percent, which is equivalent to $700 on a category A model, making the automotive business a volume game with smaller margins.
“To compensate we need to sell bigger volumes but the problem is that not all of us can, and with three brands dominating sales, it is dangerous for the industry,” Bazerji said.
Kia, Hyundai and Nissan account for 59.89 percent of sales, while the two Korean players have 46.5 percent market share, at 26.75 percent and 19.7 percent respectively. In the A segment, the Koreans also dominate, with the Hyundai i10 accounting for 40 percent of sales and the Kia Picanto 50 percent, according to Rasamny.
Other distributors are scrambling for what is left. For Chevrolet, the fifth biggest brand by sales in the country, sales are down by 19.41 percent on last year, while 60 percent of sales are in Category A (the Spark) and B (Aveo and Sonic) segments.
“It is true that you have three market leaders today, but competition for fourth to seventh ranking is getting stronger,” Homsi said.
Such competition is focused around the longer-established brands selling more compact vehicles at typically higher prices than the current top three by emphasizing quality, safety and after sales to a squeezed middle class.
“Customer service experience is the key factor that sets the dealer apart from competition. Statistics show that 46 percent of satisfied customers will definitely repurchase a vehicle of the same brand,” Homsi said.
Yet while the sector has been shaken up by a downward shift and the rise of the Korean brands, the situation in the market is not so different from others around the world that are still in the grips of recession and austerity measures.
“It is comparable to the U.S. manufacturers downsizing in the wake of the 2008 financial crisis; they understood that cars that are five meters long with V-8 engines are not for daily use,” Bazerji said.
In Europe, car registration is near a 20 year low, but just as Lebanese are opting for smaller models, Europeans, who have long favored compact models, are also downsizing from the C segment by buying small SUV crossovers, with sales up 88 percent over the past year, according to industry publication I.H.S. Automotive.
“We have clients that come into the showroom who own V-6 or V-8 engine cars but want to downsize to four cylinders. They are not low income earners, but realize they are spending way too much on fuel,” Rasamny said.
With the demand for smaller cars in vogue globally, this has prompted manufacturers to focus on the compact segments by introducing more choice, with Hyundai, for example, to introduce the Grand i10.
“The size is between the i10 and i20, so the A and B segment, and caters to a price segment that we didn’t offer before, at around $12,000 to $17,000,” Rasamny said.
To adapt to the ongoing downward shift in the overall market, some leading dealerships have acquired the import licenses for up-and-coming Chinese brands. Rymco, which has the Nissan dealership, has a 50 percent stake in Chery; NATCO, which has the Kia brand, launched BYD in the market this year; and last June, Rasamny Automotive Industries, which has the Hyundai dealership, launched Geely.
“Dealers had to do this strategically, and to get another brand is not much cost, just another showroom, as the whole back office is already there,” Rasamny said.
The Chinese brands are spicing up competition even further in the sector, with sales up 66.31 percent on last year, and rising nearly a percentage point to 2 percent of the market. Chery had growth of 138.1 percent and Geely, which bought out Volvo in 2010, was up 88.11 percent.
The rise in sales of newcomer Chinese brands further reflects the low purchasing power in the country, with their offerings the cheapest on the road and strong results in the small categories, with 58 percent of Geely’s sales in the A segment.
“People even need help in the $10,000 range as they have limited income,” said Imad Ghorra, general manager at Geely. “Many deals are not done as clients can’t pay the down-payment of $1,000 to $1,500. That shows the income of clients here, so even if the car is 20 percent cheaper than other brands, every dollar counts.”
Holding back the potential of the Chinese brands is that banks are not yet extending loan facilities, a factor that bolstered the overall sector when loans became more readily available, with sales surging from 19,100 in 2004 to reach a benchmark of 35,400 in 2008.
If the banks do extend financing, it may usher in a decade of strong Chinese brand sales, and even more competition for the rest of the sector.
“The future is for more Chinese cars, and we will be among the top players in Lebanon some time in the next few years. I can foresee Geely sales really flying,” Ghorra said. – with internationalnewsservices.com