Monday, June 23, 2014

US has left region wracked by sectarian splits 

Illustration: Liu Rui/GT

Earlier in the year, I was a guest on an Iraqi TV channel to discuss the advances that the Islamic State in Iraq and Syria (ISIS) has made in Iraq.

In January, the group of hard-line Sunni Islamists had taken the city of Fallujah and were gaining in strength in Anbar province. The weakness of the Iraqi army was apparent, as was the leadership of Prime Minister Nouri al-Maliki in its failure to stop the advance of this Al Qaeda-esque group.

While the ISIS advance made news in the Arab world, the world's media lens was focused elsewhere, on the conflict in neighboring Syria, but it was obvious that ISIS posed a clear and present danger to Iraq's stability.

This was all discussed on the program, but the channel's Shia Muslim leanings and Iranian backing made it hard to address the malign role of Maliki and the US backing of Shia groups. The region's media is now just as sectarian as its politics.

The world started to take notice recently that the conflict in Iraq did not end when the US left, and that the Pandora's box the US had opened when it invaded in 2003 has not been firmly closed.

Some 1,000 ISIS fighters overran two Iraqi army divisions of 30,000 soldiers in Mosul, the country's second largest city, and have made further territorial gains.

This mess falls squarely in the court of the US and Britain, which beat the drums for war against the Saddam Hussein regime, ostensibly over weapons of mass destruction but also touting the spurious claim that Iraq was connected to Al Qaeda and therefore linked to the September 11 attacks.

There was no Al Qaeda or militant Islamic extremism in Iraq prior to 2003, but the overthrow of Hussein, the deliberate disintegration of the Iraqi army by the US, the use of sectarian death squads to further divide and rule, and a new constitution drafted under US auspices that shifted the sectarian balance away from the Sunnis, provided the fuel for a fire that is still burning.

Under a resurgent Shia government, which has led the country since 2005, the Sunnis felt marginalized and unrepresented, resulting in resentment.

This explains why ISIS has support in areas it occupies, not overly because people support the group's aims of an Islamic state, but to counter Shiite dominance and the failure of imposed federalism.

The US war on terror has created more terror, and in the broken and destroyed Iraq that Washington left behind, has created fertile territory for extremism and violence to flourish.

Counter-terrorism can only work if it addresses core grievances and issues, both political and economic.

But while the US war on Iraq cost anywhere from $800 billion to $3 trillion, depending on the estimates, just $60 billion was spent on reconstruction and aid.

Iraq is struggling to get back on its feet economically, with the second National Development Plan for 2013-17 requiring $357 billion to improve critical infrastructure.

ISIS' advance will scupper such plans, and the Maliki government is under tremendous pressure. There are only hard choices left.

Maliki will have to create alliances with nationalist Sunnis to regain the north. The Iraqi army did not retake Fallujah earlier in the year, as tribal leaders convinced Maliki to not destroy the city.

While critics opposed this move, it could have further sidelined already disgruntled Sunnis. They face the same quandary now, if the Iraqi army brutally retakes Mosul and other ISIS-held areas.

Only through addressing core sectarian gripes and through a collaborative military made up of different sects can Baghdad avoid being seen as overly pro-Shia and ready to crush the Sunnis.

If that does not happen, fuel will be added to the fire of a sectarian war in the Middle East that is bubbling dangerously close to boiling point.

Friday, June 13, 2014

Flawed narratives cloud truth of Syrian vote

Illustration: Liu Rui/GT
By Paul Cochrane
Global Times Published: 2014-6-12

There were huge traffic jams in and around Beirut recently as tens of thousands of Syrians went to their embassy to vote in the presidential elections.

Such a turnout, with the elections extended for an extra day, confounded many observers, particularly in the anti-Syrian regime camp. How could people vote for a president, Bashar al-Assad, during a conflict that has killed over 160,000 people, and a man that has ruled Syria since 2000, and his father before him since 1971?

People must have been intimidated and forced to do so, fearing for their lives if they did not vote, went some accusations in the press. Others stated that people were paid to turn up.

That an estimated 10 million Syrians voted in Lebanon, Jordan and Syria appeared antithetical to the anti-Assad narrative in the mainstream media since the uprising started in 2011; the narrative that Syrians were overwhelmingly against dictatorship and were fighting for freedom and democracy.

As is so often the case, such observation and analysis overlooks the fact that the price of achieving such goals comes at a high cost for people and the country. Stability and security are preferable to chaos.

Indeed, Syrians had looked on with horror at what happened in Iraq following the US-led invasion in 2003, and how the country splintered apart amid brutal sectarian warfare and terrorist attacks.

Syrians also looked at neighboring Lebanon, from which Syria withdrew in 2005 after a 29-year military presence, and did not want the Lebanese-style "democracy" of corrupt political dynasties and sectarian parties either.

The Assad government naturally capitalized on such sentiments and made it part of their narrative of the conflict, that terrorist insurgents, primarily Sunni extremists, were bent on destroying the country and were aided externally by the Persian Gulf states of Saudi Arabia, Qatar and Kuwait, alongside the West. It is a narrative that has clearly worked, with 88.7 percent of people voting for Assad and a 73.4 percent voter turnout.

That the election was not overly transparent, that millions were not able to vote in or outside of the country - such as in opposition-held areas - and that no members of the opposition itself were on the ballot naturally raises questions about its credibility. Yet at the same time, those criticizing the Syrian elections as a farce were not as quick to say the same about Egypt's presidential elections that happened at the same time, with Abdel Fattah al-Sisi getting 96.7 percent of the vote while only 47.5 percent reportedly voted.

Indeed, in Egypt, voting was extended for an extra day not because of overwhelming turnout, but because not enough people had voted. But Egypt is pro-West and pro-Gulf whereas Syria is not, so the narrative has to be different.

Yet this is not to imply that there is no strong opposition to Assad. There is, whether from Islamic groups or others, while many Syrians do not feel represented by the divided opposition itself.

Syrians did protest against the "blood elections." A recent poll by the Arab Center for Research and Policy Studies found that 78 percent of Syrian respondents inside and outside of refugee camps viewed the presidential elections as illegitimate, and 64 percent held the opinion that the ideal solution to the crisis would be through a change in the current regime.

So what next, now that Assad is in for a third term as president? The regime has clearly been given a popularity boost from the public, and will go on to try to cement that position. Damascus has political and military support from Iran, and at the international level from Russia and China.

Getting to that stage will be the big challenge. In the meantime, the conflict is set to get even more polarized. Government forces will try to retake opposition controlled areas, primarily in the north and east.

Conversely, there is a renewed push by the rebels from the southern front in Jordan with the backing of US, British and Gulf intelligence agencies, and also from the Turkish border, with the aforementioned agencies along with the Turks meeting in late May to shift the balance of power in favor of the rebels. US President Barack Obama has called on Congress for a $5 billion Counterterrorism Partnership Fund "to train, build capacity, and facilitate partner countries on the front lines," which includes the Syria conflict.

The US and Europe have made it clear that Assad has to go, and have denounced the election. The scene is set for the three-year-old conflict to rage on, eerily reminiscent of the situation in Iraq a decade after the overthrow of Saddam Hussein.

Wednesday, June 04, 2014

Lebanon’s financial sector braces for FATCA

Executive magazine

The Lebanese Canadian Bank fiasco is fresh on the minds of Lebanese bankers racing to fully comply with FATCA.

The countdown is on, with just a month to go before the United States’ Foreign Account Tax Compliance Act (FATCA) goes live on July 1. Aimed at curbing tax evasion by American citizens, an estimated 26,000 foreign financial institutions (FFIs) around the world will have to be FATCA compliant or be shut out of the US financial system. As a result, FFIs — primarily banks — are scrambling to be ready to report to central banks or directly to the US’s International Revenue Service (IRS), depending on governmental agreements.

In the MENA region, Lebanon is considered by local bankers to be ahead of the pack, followed by Jordan, Saudi Arabia and other Gulf countries. “We’re really well prepared to meet FATCA, and I think with all modesty, the most prepared in the MENA today, because we started at the beginning — some three years ago — and have carried out intensive training,” said Makram Sader, secretary general of the Association of Banks in Lebanon (ABL). “But very few FFIs will be on time in MENA.”

The Lebanese banking sector has been preparing for FATCA like the teacher’s pet not because it is a major advocate of reining in tax havens — Lebanese law explicitly allows companies set up with offshore tax status — or greater taxation transparency and new tax laws in the country. Rather, the sector is exceedingly wary of international regulators, specifically of falling foul of the US Treasury. This is due to Lebanon’s immense exposure to American leverage: some 70 percent of local deposits are held in US dollars; banks need to keep good relations with correspondent banks in the US and elsewhere; and no one wants a repeat of the 2011 Lebanese Canadian Bank fiasco, when the bank was accused by the US of money laundering and subsequently closed its doors. 

“Banks want to avoid the danger of having another [Lebanese Canadian Bank] right now, as it would affect the sector as a whole, so all banks are being careful that FATCA will be properly applied,” said Malek Costa, head of compliance at BLOM Bank. “In substance, the threat is to be cut off from the US financial system.”

Compliance has become a major concern for the sector, pushed by the central bank, Banque du Liban (BDL), which issued two circulars — 126 and 128 — in 2012 and 2013 for banks to abide by international regulations and establish compliance departments, respectively. Indeed, compliance with anti-money laundering and counterterrorism financing regulations — with FATCA the latest such addition — is being taken so seriously that Sader conceded that he has spent about 20 percent of his time over the past two years on compliance issues alone. 

That said, Sader claimed Lebanon is well positioned to capitalize on providing financial services related to FATCA. “Maybe we can prepare other MENA countries to implement FATCA by exporting that skill. For example, we are supporting the Association of Iraqi Banks, as there are 11 Lebanese banks there, by educating our bank partners and supporting the Central Bank of Iraq,” he said.

Legal issues

However, that the banking sector has prepared for FATCA so early can be read as a further indication of the country’s inability to defy US demands. Indeed, as one compliance officer put it off the record, “It is ridiculous that it takes a foreigner to come here and say you have to apply regulations, and we do it, but not because we are afraid of the Lebanese regulator.” 

FATCA has been a problematic law to apply globally, with governments having to amend domestic legislation — in Lebanon’s case to allow for US clients to waive banking secrecy. Moreover, the act was met with political resistance and a lackluster uptake by many jurisdictions, so much so that the IRS had to delay FATCA’s rollout multiple times. Adding to the law’s problems, none of the rising BRICs (Brazil, Russia, India or China) have signed up yet. However, there has been a flurry of jurisdictions signing intergovernmental agreements (IGAs) with the US just in the past few months as the IRS went on a global push, fearing that FATCA’s effectiveness could be undermined before it even started.

Another potential reason for the push was to end the current period in which Americans can renounce their citizenship without paying back taxes. “There are around 3,000 renunciations a year of US citizenship and there is growing interest, but they don’t say if it’s because of FATCA or a travel risk element, but certainly FATCA has an impact because of the complexity of banking in this world,” claimed Armand Arton, president and CEO of global financial advisory business Arton Capital.

Loss of business?

BDL opted to not go for an IGA with Washington but rather for banks to report directly to the IRS, concerned that if it signed an IGA there would be the remote possibility of the US freezing BDL money in the event of non-compliance. “It was a political reason, to not be an agent of the IRS,” said a senior source at BDL speaking on the condition of anonymity.

Yet while many jurisdictions have not yet signed up to FATCA, and some are unlikely to at all — Russia is a prime example — and certain MENA countries lag behind, the Lebanese banks are more than ready. “We are working as if FATCA already exists,” said Abdul Razzak Achour, chair and general manager of Fenicia Bank. “We are contacting all FFIs that we do business with and checking if [they are] FATCA compliant; if not, we will act accordingly.”

But herein lies the primary problem with the law. How will FATCA compliant Lebanese banks deal with what the IRS calls “recalcitrant” FFIs? And does the sector stand to lose business by not dealing with non-participating FFIs in say West Africa, Algeria or China? No one interviewed by Executive could give a clear answer.

“I’m not sure if we’ll lose business. Even the worst country in Africa has clean businesses and wants to do business with good banks,” said Sader. “Yet in terms of business, [Lebanese banks are] in 30 different countries, and maybe five, six or seven countries will not comply [with FATCA].”

Practical short game, long term worries

Joseph El Fadl, a managing partner at Deloitte, which was contracted to draw up a FATCA implementation manual for the ABL, believes the IRS will initially be pragmatic once FATCA goes live. “The IRS acknowledges it’s not going to be a piece of cake and indicates it is not going to be difficult with FFIs in the early stages,” he said. “We’ve seen that international banks want compliant FFIs, but what will be the reaction? We may have two layers, big banks refraining from doing business with non-participating FFIs, and medium banks applying withholding tax, but we don’t know yet.”

Initially, FATCA will be implemented in two phases. “The first is to screen all existing accounts with a threshold of over $1 million, so not a big task [in Lebanon] as that’s not more than 2 to 4 percent of customer deposits. Then it will move to thresholds of $50,000 and above, and about documentation and questions, with a short list of who could fall under FATCA,” said El Fadl.
This second stage will prove the most trying, as banks will have to sift through all bank accounts for possible US indicia — citizenship, residency, addresses, etc. — with Sader estimating there could be as many as three million accounts to go through.

Elsewhere in the region this may be more challenging. For example, Syria is requiring banks to be FATCA compliant, including Lebanese banks operating in the country. “There’s a large number of displaced Syrians, so it will be a challenge as a number of clients are outside the country, and there may be a mismatch between addresses on record and current addresses because of the security situation,” said Chahdan Jebeyli, who wears several hats as chief legal and compliance officer at Bank Audi, chairman of the ABL’s anti-money laundering committee, and the Union of Arab Banks’ head of compliance.

If clients are not cooperative, banks will have to decide whether to close an account or withhold 30 percent of interest returns in tax, as stipulated by FATCA. “The main issue banks will face is confronting pre-existing customers to make them fill out the necessary documents,” said Costa. “For example, if a client having US indicia showing in the core banking system or customer file says, ‘No, I am not a US citizen,’ we’ll say, ‘Prove it within 90 days or we’ll close the account, or withhold.’”

What is expected is that the financial sector will essentially police itself by dealing with only compliant FFIs. “You will see banks across the world asking other banks if [they are] FATCA compliant, asking about the Global Intermediary Identification Number [GIIN — to be registered with the IRS] and it will be a main factor in evaluating the continuing relationship,” said Jebeyli. “I don’t believe any Lebanese bank will not be compliant, and if there are mistakes, it will be in the details not the general direction.”