Wednesday, April 30, 2014

FATCA – Middle East preparing for Uncle Sam

Forthcoming US rules loom large over Middle Eastern banking sectors

Paul Cochrane - Executive magazine

The four-year build up to the Foreign Account Tax Compliance Act (FATCA) going live is nearly over, with just eight weeks left until financial institutions have to be compliant. But the act, which is intended to rein in tax evasion by United States citizens abroad with accounts above $50,000, involves such a complex reporting and withholding regime that much of the Middle East and North Africa (MENA) will likely not be ready by the July 1 deadline, experts believe.

Such an extraterritorial law puts the onus on foreign financial institutions (FFIs) to act, in essence, as unpaid agents for the US Internal Revenue System (IRS), or face a 30 percent withholding tax on US account holders. Further impetus to comply is the possibility of being cut-off from the US financial system and not being able to deal with FATCA compliant institutions. “If a country is not FATCA compliant it will be financially sanctioned in a new way, ‘the FATCA way’, and the readiness in the MENA is not sufficient in my opinion for a FATCA go-live situation,” said Camille Barkho, chief compliance officer at Lebanon and Gulf Bank.

The potential sanctioning of the Lebanese banking sector is a grave concern in Beirut, given the high degree of the economy’s reliance on banking. Fortunately, Lebanon is ahead of the regional curve in getting to grips with FATCA. “At a FATCA Q&A session at a conference in March, some of the questions asked were very basic. You still hear regional banks asking questions about FATCA that Lebanese banks dealt with two years ago,” added Barkho.

Understanding FATCA at an institutional level has been one of the main stumbling blocks to compliance. The initial FATCA document was over 500 pages long and a further 500 pages have been released since. The starting date for reporting had also been delayed multiple times – the last one gave a further six months, to July this year – which has sent mixed signals as to how serious the deadlines are, while implementation on the US side has been badly handled.

“There are not sufficient IRS platforms to assist FFIs in better understanding the regulations. Recently the IRS released the ‘Temporary and Final Regulations,’ but how to go live with something ‘temporary’? And the W8 form was released in March, and other documents released this month. How can you prepare for an exam if the teacher doesn’t provide enough course material?” said Barkho.

Two options

The biggest stumbling block is the lack of agreement between governments and Washington. To provide information to the IRS, inter governmental agreements (IGAs) are needed, or alternatively central banks can allow FFIs to file directly to the IRS, which is what Lebanon is doing.

Other MENA countries are considering the same reporting mechanism as Beirut. With the exception of Oman and Kuwait, the rest of the Gulf Cooperation Council (GCC) countries have indicated they will opt for an IGA, although with just over two months to go before FATCA goes live time is ticking. “In the UAE an IGA is getting close but institutions are not sure if it will be wrapped up in time,” said Ranjith Kumar, Director at Keypoint, a financial services consulting firm in Bahrain.

Elsewhere in the region it is a similar story, from Turkey to Morocco. “Egypt said it will participate without an IGA. Tunisia and Libya are considering IGAs, but they’ve not progressed significantly,” added Kumar. “Institutions could register directly, but with disclosure of customer information to a government outside their jurisdiction, they are looking to regulators for guidance to decide how to go ahead with disclosure. In Algeria for instance, some of the banks have highlighted that they would get ready but will register for FATCA only after regulatory guidance.”

In Iraq, no IGA has been signed, but the Central Bank of Iraq (CBI) is pushing banks to comply. “There will be a lot of teething problems about disclosure and transparency, and lots of Iraqis are dual nationals so it will have an affect,” said a source at the CBI who requested anonymity.

Curiously Syria, in the midst of a conflict and international sanctions, is considering playing ball with the US. “The central bank has formed a FATCA committee to decide what to do, but I’m not sure if they can sign an IGA due to [US] sanctions,” said Dr Paul Morcos, founder of the Justicia law firm and President of the Banking Commission at the Beirut Bar Association. In Iraq, no IGA has been signed, but the Central Bank of Iraq (CBI) is pushing banks to comply. “There will be a lot of teething problems about disclosure and transparency, and lots of Iraqis are dual nationals so it will have an affect,” said a source at the CBI who requested anonymity.

On a global level, the MENA is not lagging behind. Only 26 countries have signed IGAs, while 19 countries have in the words of the IRS “reached agreements in substance” with the US this year, of which Qatar is the only MENA country listed.

The lack of IGAs is raising question marks. “I don’t know how they will be able to go live on July 1, with so few IGAs signed. I am not saying they should delay again, but is the market ready? Where’s Russia? Where’s China, Europe and Australia?” asked Barkho.

Three areas of impact

The lack of assistance from the IRS is a major gripe of financial institutions, especially as implementing FATCA requires major initial investment within an institution, estimated at $25,000 for smaller institutions, to $100,000 to $500,000 for most institutions and $1 million for larger firms. While a boon for the financial consultancy and IT industry, it is an extra cost that institutions would rather not have. As such, FATCA may well have a knock-on effect on banks to cut costs elsewhere. “International challenges can lead to the restructuring of the banking sector. So FATCA poses a question – will we have to restructure the banking sector here?” said Morcos.

More pressing in the immediate term is the issue of privacy and the safety of American citizens. “One thing the Treasury has not thought about is how do you protect US citizens? In a country like Lebanon, with Hezbollah and other US designated terrorist organizations, banks will identify US citizens, which could put them at risk,” said the BDL source.

Dual citizenship is a related concern, as in many MENA countries it is not allowed. “It will be a challenge as some citizens are known to have US citizenship, but now they have to explicitly declare if they have US citizenship or not,” said Kumar. “How institutions use the information once clients waive their right of confidentiality could be an area of concern for customers.”
The regional and global impact of FATCA has also not been addressed. With so few IGAs signed and banks not ready or willing to file directly to the IRS, will they be cut off from the US financial system? There is the assumption that the IRS will have to be pragmatic in the first year to prevent major reporting issues. Indeed, the IRS reported 2.7 million filing errors – out of 60.5 million tax returns – in the US in 2011. “Imagine the number of errors by FFIs reporting to the IRS? Even the most compliant banks will have high levels of errors,” said Barkho.

How will banks implement the withholding of tax, and how will compliant FFIs deal with non-compliant FFIs? Answers are also not clear.

While FATCA is likely to go ahead, it is not a 100 percent given, with members of the Republican National Committee voicing concerns recently, and the possibility of the Democrats losing the Senate to the Republicans in the fall. More questions about the viability of FATCA will no doubt arise, such as the returns versus the outlays. Indeed, in the IRS’ 2013 Annual Report to Congress, it notes that the Congressional Joint Committee on Taxation estimates that FATCA “will generate additional tax revenue of approximately $8.7 billion over the next 10 years,” while private sector implementation costs could “equal or exceed” the amount FATCA may raise.

Further questions may arise if there is a dawning realization about negative economic impacts on the US itself. “What happens when we start shorting payments on our Treasury bonds (TBs) by 30 percent? A sovereign holder is not subject to withholding, but for a private institution, what if the interest payment is done through SWIFT to a commercial bank that has not signed an IGA? Treasury will take the interest,” said Jim Jatras, Manager of, which is lobbying against the law in Washington. “This is the kind of thing that could promote dumping TBs, and affect interest rates and the dollar as a global currency, which are issues nobody has thought out.”


Monday, April 28, 2014

Better late than out - Turkey tackles terrorist finance

Money Laundering Bulletin

Financial Action Task Force patience was running on empty when Ankara finally passed terrorist financing legislation. One crisis averted, perhaps, but Paul Cochrane, in Beirut, finds that other deficiencies persist.

Since 2007, Turkey has been on the receiving end of repeated warnings from the Financial Action Task Force (FATF) to improve its regime to combat the financing of terror. While a anti-terrorism bill has now been passed, shortcomings still remain and new risks have emerged in Turkey's difficult neighbourhood. Ongoing political wrangling and a corruption scandal present further challenges, including the independence of the judiciary.

It was in February 2009 that the AML/CTF standard-setter gave Ankara to pass new laws on terrorist financing. This did not happen and in October 2012, Turkey was told it had three months to comply with the Recommendations on terror finance or face suspension from FATF. Specifically, Turkey is required to establish a “legal framework for identifying and freezing terrorist assets" meeting its guidance, notably Recommendation 6, and its Interpretive Note 6 on freezing, “without delay and without prior notice, the funds of other assets of designated person and entities.”

Not before time
In February 2013, at the eleventh hour, Ankara passed a domestically-controversial bill under which any individual or entity financially aiding terrorists, even if the money is not “used for an illegal activity,” faces five to 10 years in prison. The law authorizes the Finance Ministry’s Financial Crimes Investigation Board (MASAK) to freeze the assets of those involved in terrorist financing in Turkey or abroad without the need to first obtain a judicial ruling. 
I think the FATF observation was valid, as we didn't have the legal framework to confiscate or freeze assets on international watch lists or the red flag mechanism for suspicious transaction reports (STRs),” said Atilla Yesilada, an Istanbul-based analyst at Global Source Partners Inc. “The final warning of FATF has strengthened the legislative framework but it is very clear that Turkey doesn't have a very tight supervision on AML and on CTF. We live in a country where impunity exists.”

Still to do
Indeed, despite the new CTF law, a FATF public statement, issued in February, 2014, stated, “certain concerns remain, and Turkey should take further steps to implement an adequate legal framework for identifying and freezing terrorist assets” under United Nations Security Council Resolutions (UNSCRs) 1267 and 1373.

Such shortcomings places Turkey alongside Yemen, Algeria and Syria in the Middle East and North Africa (MENA) in having what FATF terms “strategic AML and CTF deficiencies.” As such, Turkey is lagging behind many of its MENA peers. 
On a comparative level, Turkey needs to update its regime to be in line with the rest of the region,” said Hossam M. Abd El-Rahman, Chairman and Managing Director of Allied Compliance Consultants in Dubai, which specializes in financial crime, consultancy and training in the MENA. “Turkey is falling behind in Recommendation 6, proper risk management, Recommendation 7, regarding financing of proliferation, and in others, such as Recommendations 11 and 12, on measures to be taken to prevent ML and TF. There are a lot of deficiencies, and all these gaps need to be filled up quickly.”

Taxing questions

A further issue to be addressed are the tax amnesties Ankara introduced to repatriate capital. In 2008 and 2009, tax amnesties attracted some US$27 billion in assets, according to government statistics. In 2013, a third amnesty was introduced, with Ankara wanting to attract US$130 billion in untaxed assets kept offshore by Turkish taxpayers. Controversially, the Finance Ministry stated there would be no tax investigation or retroactive tax assessments, although criminal investigations could be launched if there is suspicion of ML. 

“This wealth amnesty has completely undermined the system,” said Yesilada. “Part of the money brought in as being of “Turkish origin” may actually be borrowed or given to them by non-Turkish entities or cartels with no questions asked, and laundered in Turkey. These amnesties ask no questions and you just have to show a certificate of deposit that the money belongs to you, which is easy to get. It is a disgrace not to find out the source of that money, as there's no idea of its nature.”

Trouble at the top
Compounding regulatory and enforcement issues is the ongoing political wrangling between the ruling AKP party of Prime Minister Recep Erdogan, which has faced mass demonstrations over the past year, and the opposition. In December (2013), allegations of corruption among Erdogan's circle emerged following a police investigation, including a scandal that his son, Bilal, met with Saudi Arabian businessman Yasin Al-Qadi, whom the United States blacklisted via its Office of Foreign Assets Control (OFAC) as a "specially designated global terrorist," freezing his assets on 12 October 2001.  

Another high-profile case involves Iranian-Turkish national Reza Zerrab, who is alleged in another police investigation to have launder billions of dollars for Iranian businessmen in a “oil for gold deal,” with commissions paid out to the Economy Minister (an alleged US$49 million), the CEO of the partly state-owned bank Halbank (US$7.7 million), and people close to the AKP. Zerrab was arrested in December 2013, and faces money laundering, corruption and fraud charges. 

Political push and pull

Depending on how these cases turn out (and the government has made allegations that they are politically motivated), they could put pressure on Turkey's financial and business world to clean up its AML act. Abd El-Rahman said: “The corruption case will seriously affect the banks, and companies will have to do a lot of effort to boost compliance.”  

But political plays are in motion that could mean the opposite. The Speaker of Parliament, Cemil Cicek, for instance, said in January that there is no independent judicial review in Turkey, while a bill is being debated that would restructure the Supreme Board of Judges and Prosecutors (HSYK).
However, Professor Recep Pekdemir, a faculty member of the Istanbul Business School at Istanbul University, believes this issue will be sorted out. “The judiciary issue will be stabilised soon, it's only a fight between politicians. If the country is stabilised there can be more control over illicit activities, but right now the government is focused on internal matters rather than external matters,” he said.

Syria - unknown quantity
Externally, Ankara is having to deal with the changing political environment in the Middle East: the West's relations are warming with sanctioned Iran while the conflict in neighbouring Syria has seen hundreds of thousands of refugees flooded into the country since 2011. There are also allegations of Turkey supporting Islamic rebel movements in Syria.
“Ankara denies it but everyone knows that Ankara is sending arms and money to the Syrian Islamic Front and Jabhat Al Nusra, and there are millions of Syrian refugees in the country; who they are and what they are living on no one knows,” said Yesilada. “There may be blow back for Turkey, and Syrian groups are allied with (the blacklisted terrorist group) Kurdistan Workers' Party (PKK), which is bad news. How can smuggling be stopped?”

Turkey has many challenges ahead to bolster its AML regime in addition to curbing the country's role as a trans-shipment hub for drugs, human trafficking and smuggling. “Turkey has many neighbouring countries which have been having troubles with not only terrorism but also human trafficking, illicit crime and money laundering. As Turkey is uniquely positioned on two continents, it is difficult to solve such issues,” said Pekdemir.

Thursday, April 10, 2014

Home far off for flood of Syrian refugees

The Global Times
Op-Ed -
By Paul Cochrane

The Middle East is experiencing its worst refugee crisis since 1948 when the state of Israel was created, which led to the expulsion and dispossession of some 3.2 million Palestinians throughout the region. 

Recently the UN registered the millionth Syrian refugee in Lebanon. Every minute another refugee is registered, yet the number of Syrians in Lebanon is way higher than officially acknowledged, given the porous borders and the tens of thousands of Syrians that were already working in the country and could not go back.

The exodus of Syrians since the conflict broke out three years ago means roughly one in four people in Lebanon are now Syrian.

They are everywhere, from mountain villages to makeshift tents in the Bekaa Valley, to extended families sharing a single room in Beirut.

Lebanon is bearing the brunt of the refugee crisis, but there are a further 1.5 million refugees in Jordan, Turkey and Iraq's Kurdistan region, and 6 million internally displaced within Syria.

In addition to Syrian refugees, there are 500,000 Palestinian refugees that have been in Syria since 1948, and are being forced to become strangers in another land once again.

The same is true for Iraqis that fled to Syria following the US-led invasion in 2003, with the number of refugees reaching 1.2 million by 2007, and as of 2013, had dropped to 480,000 refugees, according to the UN High Commissioner for Refugees (UNHCR). Iraqi refugees are stuck between a rock and a hard place, with Syria a war zone and Iraq beset by terrorism and violence.

As for Lebanon, there are 280,000 Palestinian refugees living in 12 camps. Lebanon has become a home for the dispossessed, and it is taking its toll, with an estimated $7.5 billion in cumulative economic losses due to the Syrian conflict and mounting socioeconomic instability.

Lebanon is unwilling to allow refugee camps for the Syrians, unlike Jordan and Turkey, as it does not want a repeat of the Palestinian camps that have been here since 1948.

The Lebanese authorities are concerned that Syrians will settle in camps and not return home, even if the conflict ends.

This stance is driven by fear, and it overlooks the fact that Palestinian refugees cannot return home even if they wanted to, whereas at some point, Syrians will be able to. It's when they can go home that's the question, not whether.

More to the point, with Syrians dotted throughout the country, it is proving a logistical nightmare to get aid to refugees; aid that is needed to help alleviate the refugees' plight, while also lessening the socioeconomic impact on Lebanese society.

Refugee camps should be strongly considered as part of the solution, as the Lebanese government will have to adopt a more pragmatic approach to deal with a crisis that is expected to only worsen.

Some 30 percent of the UNHCR staff are now focused on Syria. But that is not enough, especially when pledged donor funds are not honored, nor are all the aid organizations and NGOs working to address the burgeoning humanitarian crisis.

The UNHCR is already making plans to handle potentially up to 2.5 million Syrian refugees in Lebanon.

"We need to know how to react if there is a further inflow of people if the situation in Syria deteriorates further, and what to do if the situation in Lebanon deteriorates," said Shaden Khallaf at the UNHCR in Beirut.

The situation is deteriorating in both countries, especially Syria, and the only real solution is an end to the conflict. But multilateral talks in Geneva have not proved successful, and the conflict has become a proxy war between global and regional players.

Conflicts with major external actors tend to last longer as they provide the materiel to keep the war going, while making it harder to get around the negotiation table.

Add in multiple internal actors, and an end to hostilities seems far off. In Syria's case, there are estimated to be as many as 1,000 armed opposition groups comprising some 100,000 fighters.

While a third round of talks in Geneva are planned, the region is bracing itself for whatever comes next.

And that means somehow dealing effectively with the multiple waves of refugees, Palestinian, Iraqi and Syrian, who seem a long way from returning home