Friday, January 23, 2015

Low oil prices may rebound on Western countries as Russia looks east

Op-Ed Global Times

Numerous factors cause oil prices to fluctuate, such as speculation, financial plays, and supply and demand, but this latest swing has political-economic meddling written all over it. The big issue, though, is not so much what is driving oil prices down but about what low oil prices may bring down themselves. The ongoing drop in oil prices by around 60 percent since November and the Organization of the Petroleum Exporting Countries' (OPEC) refusal to cut production to bolster prices is no coincidence. The OPEC's decision, pushed by Saudi Arabia, the world's largest single producer, effectively undermines the re-emergence of the US as a top oil producer through shale and tight oil, which needs high prices to cover higher extraction costs. Yet the US enabled the plunge and pushed it further at the end of 2014 by allowing light crude oil exports.

It is on the geopolitical front that the low oil price deals a short-term blow to the West and Saudi Arabia's oil-producing enemies: Russia, Iran and Venezuela. Russia was a clear target following US and EU financial sanctions over the Ukraine crisis, effectively kicking the Russians when they were already down. For Saudi Arabia as well as the West, it was also meant to send a message to Moscow and Tehran in retaliation for propping up Syrian President Bashar Assad. The big question is whether these geopolitical gambles will not rebound. 

A concern in the short term is that indebted energy companies may cause havoc in the Western financial markets if they default due to a lack of profits. This could have a ripple effect on the global financial system, which has been on the ropes since the last crisis in 2008, compounded by the current eurozone debt crisis, issues around quantitative easing, and a globally sluggish economy. The problem this time around is that Western governments and international financial institutions do not have the money to bail out the financial sector once again.

Neither can OPEC play the low oil price card for too long, as it would otherwise impact negatively on their own economies. For the Gulf Cooperation Council (GCC) countries, the drop in oil prices is projected by the Institute of International Finance to reduce energy export receipts from $743 billion in 2012 to around $410 billion in 2015. 

With most GCC states having budget surpluses they can weather the drop for a while, but will need a return to higher prices to fund infrastructure projects and the financial handouts that keep local populaces amiable. For example, in 2011 during the height of the "Arab Spring," Riyadh doled out $100 billion to its citizens. 

Russia may be a loser in the geopolitical game that is underway. Moscow has the ability to alter the oil price by lowering production but is curbed by financial constraints, as well as not wanting to let OPEC, especially Riyadh, off the hook. But in the long run, the situation will reinforce Russia's already strengthening ties with major oil importers in East Asia, particularly China, and push the diversion of Russian energy exports away from Europe. 

In the nearer term, the reduction in exploration and production in North America due to low oil prices will translate into a diminished supply a year down the road and a return to higher prices, bringing everything back around, to the benefit of oil-dependent economies until tight oil production gets back on track. 

Wednesday, January 14, 2015

Yet to explode – non-proliferation compliance

Money Laundering Bulletin

Quietly ticking in the corner, the control of proliferation finance may not be at the top of every risk register but with international standards in place it cannot be disregarded, says Paul Cochrane.

Despite the huge risks involved in states funding weapons of mass destruction in breach of international non-proliferation rules, this problem has not received the same attention as anti-money laundering (AML) and combating the financing of terrorism (CFT) in compliance regimes. Only over the past two years has world’s senior AML body the Financial Action Task Force (FATF) started to address shortcomings, while the United Nations is moving from a decade of awareness building to pushing implementation.

The 1970 treaty and UN Resolutions

Non-proliferation is underpinned by the international Non-Proliferation Treaty, approved in 1970, which was aimed at preventing the spread of nuclear weapons and to further nuclear disarmament; it has been signed by 190 countries. (1)
Also, this year the UN commemorated 10 years since approving Security Council Resolution (UNSCR) 1540 (2004) on the non-proliferation of nuclear, chemical and biological weapons. The UN highlighted the “dangerous nexus between weapons of mass destruction (WMD) and global terrorism,” and stated it was moving from a decade of awareness-raising to a decade of “full and sustained implementation” of UNSCR 1540. (2) A comprehensive review is due to in 2016.
To date, 172 UN member states have submitted national implementation reports on the resolution to the special UN Committee 1540. However, enforcement has not been up to par: “It is one thing to sign up, another is the difference in practice on the ground, where there has not been much change. The private sector needs clearer guidance,” said Nikos Passas, a professor at the School of Criminology and Criminal Justice, Northeastern University in the USA.

Positive delay

A factor in weak implementation on the financial compliance side is that non-proliferation efforts have been quite successful at the political level: “We've not had a large number of countries adding military capabilities - nuclear, chemical or biological - in the past few decades, and a small expansion of nuclear weapons possessing states, but not a rapid one. Taken in the round, existing legislation has played a role in making sure proliferation has not accelerated,” said Dr Ian Anthony, director of the Stockholm International Peace Research Institute (SIPRI), and head of SIPRI’s European Security Programme.
That said, there were 160 incidents related to nuclear and radiological materials in 2012 alone, according to the International Atomic Energy Agency's (IAEA) incident and trafficking database, while a resolution related to UNSCR 1540 was recently introduced, UNSCR 2118 (27 September 2013), following the use of chemical weapons in Syria. (3)

The risk map

“Geographically, the main nuclear proliferation concerns…are in Asia, mainly in India, Pakistan and North Korea, and the only other one is Israel,” said Dr Anthony.
Indeed, of the 54 states listed on the UNSCR 1540 Committee's website as requesting assistance to implement the resolution, 18 are from the Asia-Pacific region. The other resolutions that relate to UNSCR 1540 concern the Democratic People's Republic of Korea (DPRK) and Iran, which have been subject to Targeted Financial Sanctions (TFS): UNSCRs 1718 (2006), 1874 (2009), 2087 (2013), 2094 (2013), and 1695 (2006) on the DPRK, and UNSCRs 1737 (2006), 1747 (2007), 1803 (2008), and 1929 (2010) on Iran.

Regulatory oversight

Despite the actions by the UN over the past decade, proliferation finance has not garnered the same attention as AML and CFT by regulators and the financial sector. In part this is because oversight has fallen on the UN, and not on specialised bodies better equipped to do evaluations, such as the Financial Action Task Force (FATF). For instance, countries considered prime proliferation risks such as North Korea and Iran have been on FATF watch lists for terrorism financing (TF) but not for proliferation financing (PF).

Recommendation 7 signals change

However, since its recent comprehensive review, FATF has become more proactive on the PF front. It has since 2012), a new Recommendation 7 that requires countries to implement targeted financial sanctions to fight proliferation, and comply with UNSCRs on the prevention, suppression and disruption of WMD and their financing.
“I think proliferation finance (PF) is not totally integrated into the AML world, as we still speak of AML and TF, and not together with PF,” said a member of the secretariat for European FATF-style regional body MONEYVAL: “This is because it is a relatively new topic for the AML world, since 2012, when the FATF Recommendations were revised,” said the official.
Indeed, last year, in May 2013, FATF guidance was updated, regarding “The Implementation of Financial Provisions of United Nations Security Council Resolutions to Counter the Proliferation of Weapons of Mass Destruction”. Meanwhile at the FATF Experts' Meeting on Targeted Financial Sanctions [TFS] in Paris this June (2014) experts indicated there was a need “to improve global compliance with the preventive measures" contained in Recommendation 7.”
The complexities of countering PF were reflected in the fact that during the FATF discussions that lead to Recommendation 7, some delegates resisted a new recommendation, believing PF should be incorporated into Special Recommendation 3, on TFS for terrorist financing, based on UNSCRs 1267 (1999) and 1273 (1999). Assessments under Special Recommendation 3 are very technical, said specialists during these debates, resulting in generally low compliance, and there was concern the same would apply to PF. However, PF's special designation by FATF could be a compliance drawback. “It was decided to have a standalone recommendation, and it really is, as if you look at the Recommendations they all tie into each other, but with PF, it is different,” said the MONEYVAL secretariat member.
Now, it is not really a matter of criminal law, or a terrorism offence; it is purely sanctions requiring financial institutions to freeze assets of persons who are financing WMDs. In fact, there are no references to Recommendation 7 in the others, except for Recommendation 1, which speaks of assessing risks, while the recommendations on investigations only refers to ML and TF. Basically, FATF took measures but maybe didn't go all the way to find the answers [to addressing the issue].”
This is a concern as it could be held to imply that PF is contained within itself, and not applicable to the same mechanisms to prevent and detect ML and TF. Recommendation 10 for instance, on customer due diligence, requires the identification of individuals listed on terrorism finance lists, but does not mention PF.

Data dearth

This has made compliance in the financial sector harder, lacking such lists as well as the data needed to curb PF that differs from CFT. “It is much more difficult to do a risk-based assessment for proliferation related measures than CFT measures, which are largely linked to the identity of people, so provided good information at an institution about the person targeted it allows a system to track and trace them,” said Dr Anthony. “But proliferation is about trying to make a connection between a financial and a commercial transaction, and a bank may have no information about the transaction - what were the items concerned and who was the end user? If you don't have that information a risk assessment is difficult, and to set up internal systems based on risk profiling.”

No single point of reference

Another complicating factor is that standards to counter PF are not uniform. “They are not the same if you look at the UN, the EU [European Union] or the US, and FATF is trying to work with UNSCRs that don't deal with nationally imposed sanctions,” said Mr Passas.
Complying with multiple standards is impacting on implementation. FATF's first mutual evaluation reports (MERs) to include Recommendation 7, on Norway and Spain (October, 2014), resulted in low scores on proliferation financing. A factor was delays in applying targeted financial sanctions, which can be traced back to ongoing debates to write the new FATF standards into the EU’s fourth anti-money laundering directive. 
“When the UN designates a person on a list, the EU takes a while to implement it, so there is a delay in implementation by EU member states, unless a country has domestic legislation in place to implement a UNSCR directly into law, which many don't. This is a significant shortcoming as the (UN) text says 'freeze without delay'. It seems the same issues faced with freezing terrorism financing assets will happen for PF. It is still early days,” said the MONEYVAL member.
The evaluation reports however highlighted other issues with PF compliance - weak policy and operational coordination between export control authorities and AML/CFT authorities on combating proliferation financing.
To Mr Passas, this is one of the challenges of countering proliferation, as it requires a multidisciplinary approach that includes the private and public sectors. “One area where FATF has done good work is bringing together stakeholders of trade, customs, and government. These kind of multidisciplinary approaches are key, but they've not been followed up."
It is at the trade level that dual use goods – items that can be also used for manufacturing WMDs – are not being adequately checked, with the majority of cargo moved internationally not subjected to inspection. In the US for instance, “only 1-3% of containers are being subjected to some kind of non-intrusive scanning to confirm if the contents match the declared cargo manifests,” notes Mr Passas.
Furthermore, trade and service mis-invoicing enables proliferation sanctions to be evaded. “Businesses have to increase trade transparency and accountability. Unless there are efforts to know this, the vulnerability of sanctions and tax evasion and so on is there,” said Mr Passas.

3) UNSCR 2118 obliges states to “inform the Security Council of any violation of UNSCR 1540, including acquisition by non-State actors of chemical weapons, their means of delivery and related materials in order to take necessary measures therefore.”

Patently pending: IP protection in the Middle East and North Africa (MENA)

Fraud Intelligence

The Middle East and North Africa (MENA) region ranks poorly in intellectual property rights protection and enforcement. While some countries, notably in the Gulf, are gradually improving, political and economic uncertainty in the wake of the Arab Spring uprisings is hampering progress in much of the rest of the region. Indeed the unrest has thrown a proverbial spanner in the works when it comes to IP enforcement, with the authorities' effectiveness often undermined, while political transition in countries like Libya and Egypt has meant IPR is far from being a top priority. Furthermore, firms are often reluctant to send investigators into dangerous markets such as Iraq and Syria to assess IP infringements.

Force majeur

Things have gotten harder (since the uprisings). In Egypt, since 2011, some cases take much longer, and with one client, it took a lot of time to close the case as the infringement was taking place in an unstable part of Cairo,” said Ms Roba Hamam, legal consultant at the Saba & Co. IP head office in Beirut, an intellectual property firm which has offices throughout the MENA. “There is a need to investigate possible infringements, but with people being killed on the streets we can't put our staff in danger in some areas of Iraq, Libya and Syria, so in such circumstances IP enforcement is no longer a priority for local authorities. On the other hand, clients have been surprised by the results we got even in conflict areas, such as Iraq.”
She cited a recent case in Libya where a client wanted to investigate a shipment of counterfeit goods that had been offloaded at Tubruq (Tobruk) port in the east of the country, but there was nothing that could be done as the port was in the hands of militias.“Many clients don't follow the news of these local jurisdictions, and when we have a shipment to Libya, we have to explain to them that, say in Tubruq, it is controlled by tribes and militias and the government can't help. To other ports like Tripoli or Benghazi we could do something, so it was of course intended by the counterfeiters to ship to Tubruq,” added Hamam.

Golden opportunities

Conflict areas aside, while IP infringement concerns have warded off some foreign investors and multinational brands from entering the MENA market, the overall economic benefits of being in a USD2.2 trillion market with 355 million people, according to World Bank figures, often outweighs the downsides. This is even more apparent in the USD1.56 trillion Gulf Cooperation Council (GCC) economies, which are considered less risky than the Levant and North Africa, with high purchasing power within the Gulf's burgeoning consumer markets helping negate brands' concerns. Furthermore, there is more law and order in the GCC region (United Arab Emirates – UAE, Saudi Arabia, Kuwait, Qatar, Bahrain and Oman) in general, despite shortcomings in IP enforcement on a global comparative basis.
“Where you look at the overall MENA market, the economic situation is better in some places than others, but everything is interrelated to governance as multinational corporations (MNCs) wouldn't want to invest in a country where the political situation is not stable. In stable places there is obviously more prosperity and chances for profit, so you would think of Dubai immediately and the GCC,” said Hamam. “Some MNCs are sceptical about the market, but the MENA was not heavily invested in until a decade or so ago. Of course illicit products are coming in, there's a lot of infringements as the MENA is a huge market for brand owners and counterfeiters.”

Culture and law

Adding to infringements is MENA countries generally being consumer economies rather than manufacturing ones. And there is a degree of cultural ambivalence towards counterfeits and IP theft, compounded by minimal fines and enforcement.
In most of the GCC countries, the Levant and North Africa, I don't see any local regulations that considers IP, and more specifically trademark, infringement as a serious felony but rather a misdemeanour level of crime,” said Mr Munir Suboh, partner, IP at law firm Al Tamimi & Co, in Dubai. “In the UAE, the regulator in trademark law [the UAE economy ministry’s intellectual property protection department] stipulates a penalty cap of [UAE dirham] AED10,000 (USD2,722) and/or imprisonment for up to 12 months, so if you see a business doing millions of dollars in revenue from selling counterfeit or infringing products, they will not be exposed to serious criminal sanctions. Unlike the USA and some other industrial jurisdictions, there is no punitive damages remedy in the region.”
While aspects of IP rights are better enforced in the region, the UAE especially, with copyrights, trademarks and trade dress infringement cases brought before the courts, in patents the MENA is particularly weak in enforcement, in part because of the low number of patents but more so the time it takes to register.
On a global comparative basis, the MENA ranks low in patent filing volumes, and regionally just ahead of Africa, according to the World Intellectual Property Organisation's (WIPO) ‘World Intellectual Property Indicators 2013’, with countries registering 1 to 99 applications in most of the MENA region in 2012, although Algeria, Morocco, Egypt, Kuwait, Qatar, Lebanon and the UAE were in the 100 to 199 applications bracket, and Saudi Arabia and Turkey in the 1,000 to 9,999 bracket, but behind global leaders Japan, China, the USA, Europe and Russia at over 10,000.
“There are a lot of practical obstacles in pursuing patent protection resulted from the delay of granting patent. Generally speaking, there must be patent rights that were recorded and registered properly prior to seeking enforcement procedures,” said Suboh. As the patent application is a lengthy process in most of the MENA, regulators may need to consider providing patent applicants preliminary injunctive relief to legally protect them in the case of patent infringements prior to ratification, he added. 

Local variation

In the GCC, the UAE, Bahrain, Qatar and Oman are members of the WIPO Patent Cooperation Treaty (PCT), which helps patent applicants file multiple patent protection applications. Saudi Arabia joined the PCT in September 2013, although Kuwait is a notable exception in not being part of the PCT or the World Trade Organisation’s (WTO) agreement on trade-related aspects of intellectual property rights (TRIPS). Yet while a GCC Patent Law was established in 1992, and became operational in 1998, committing the six GCC states to enforcing patents, in practice there is no clear regime in place to enforce such patents. As law firm Clyde and Co noted in regard to the GCC Patent Law and Saudi Arabia's PCT membership: “With a more favourable priority period being available through the PCT, and with a question mark over the enforcement of GCC patents, it is expected that rights owners will look increasingly towards filing patent applications direct in Saudi Arabia and other GCC states, rather than using the GCC patent system.”
There is a move to address patent concerns as countries invest more in R&D, especially in the GCC - the UAE and Qatar in particular. Both countries are working to diversify their economies away from hydrocarbons and setting up research facilities, with Doha earmarking 2.8% of government revenue for R&D and establishing facilities such as the Qatar Science and Technology Park. Such developments are expected to push IP enforcement forwards for GCC institutions to better protect themselves in the region and worldwide.
“Countries like the UAE are starting to invest in R&D and building industrial assets, but if this is not backed up with supportive regulations to acquire ownership on such assets and give practical options to enforce such rights, it will get challenging to attract investors to build and develop their IP rights in such markets,” said Suboh.

First signs of change

Progress in tackling IP infringements is being made in certain countries, the Gulf in particular, while Egypt, Israel, Kuwait, Lebanon, and Turkey were placed on the IP ‘watch list’ of the Office of the US Trade Representative (USTR) in its 2013 annual review, and Algeria on its ‘priority watch list’.
Qatar for instance is the only Gulf country that uses Interpol to counter trafficking in illicit goods and to investigate IP infringements, according to a speech by Jean-Michel Louboutin, Interpol's executive director of police services, at a workshop organised by the Interpol regional programme to counter trafficking in illicit goods and intellectual property crimes, staged in Doha during March.
In the UAE, the Federal National Council passed an anti-fraud law in March, 2014 – to go into effect in the next six months – to replace an outdated law from 1979. Notably the law will increase punishment to two years in prison and/or a fine of AED50,000 (USD13,612) to AED250,000 (USD68,063), while those convicted of commercial fraud in food or medical products could face imprisonment and fines of up to AED1 million (USD272,253), a much needed increase from the current AED10,000 (USD2,722). “We hope the new anti-fraud law will set a platform for serious sanctions against infringers of IP rights,” said Suboh.
Public awareness is also growing about the problem, partly because of information campaigns by MNC groups, such as the Brand Owners’ Protection Group (BPG). There have also been discussions about using Islamic jurisprudence to promote the fact that commercial fraud and counterfeiting is un-Islamic and amoral.

A role for religion

“In the recent First IPR Forum held in Dubai [organised in December (2013) by the BPG with the Dubai Economic Council (DEC)], there was a specially dedicated session to discuss what religion says about IP rights and infringement in light of Sharia law,” said Suboh. “There were some discussions to verify the religious grounds of IPR and I believe it’s the time to explore the possibility to issue a fatwa [a religious edict] by scholars of well recognised Islamic centres, such as Azhar [in Egypt], which needs to be widely covered and conveyed by regional media, to discuss violating IP rights and imply that infringement is somewhat equivalent to stealing tangible property.”
As in many other related issues, such as commercial crime, fraud and corruption, the MENA has a long road ahead to improve IP enforcement, and it all hinges on stability and the rule of law. “I think there is a really long way to go, for everything, and it is all related to good governance,” said Hamam.

Power-broking: Iranian sanctions and conflict in the Middle East

Money Laundering Bulletin

Negotiations at the end of November on whether limited relaxation of sanctions on Iran should be extended into 2015 will be coloured not only by evidence of the country’s non-military nuclear intentions but also its role as a potential ally in the fight against Islamic State. Paul Cochrane reports from Beirut on compliance and politics.

Multilateral talks over Iran's nuclear power programme have partly and temporarily eased certain sanctions against the country. Yet while businesses worldwide are keen to get into the lucrative Iranian market to offer all kinds of good and services, the overarching sanctions regime put in place by the United States, the European Union  (EU) and the United Nations remains in operation.

Review point

Last November, the USA, Britain, Germany, France, Russia and China (the ‘P5+1’ group), and Iran agreed to a Joint Plan of Action (JPOA), which partly relieves US and EU sanctions on Iran to encourage the Islamic Republic to follow certain steps to ensure its nuclear programme is for peaceful purposes - a long-term bone of contention internationally. With the talks ongoing, complicated in part by major security concerns in the Middle East, the JPOA was extended in July for a further four months, until November 24, 2014. 
In essence, the easing of sanctions in five areas – petroleum exports; transactions relating to Iran's automotive industry; the purchase and sale of gold and other precious metals; exports of US-origin parts and services for Iran's civil aviation; and exports of crude oil and petroleum to six countries that were already importing oil – was a carrot to push the negotiations forward, with the Iranian economy seriously suffering from the world's harshest sanctions regime.
“The last several months have been a small trust building measure by the international community, as they knew Iran was suffocating economically and needed to get back on their feet for negotiations,” said MarioAbou Zeid, a research analyst at the Carnegie Middle East Centre in Beirut. “As soon as some of the sanctions were removed, Iran had access to some of the funds they had overseas (USD2.8 billion), and exports and imports increased, which was very important for Iran.”

Military Intervention

In the lead up to the extension, a new challenge emerged in the region: the rise of militant group the Islamic State in Iraq and the Levant (ISIL), also known as the Islamic State, which has taken control of broad swathes of northern Iraq and Syria. The US-led military coalition against ISIL in Iraq, started in August and since expanded, is expected to impact on the Iranian nuclear talks, as Tehran is considered a constructive force in reining in ISIL given its influence in both Iraq and Syria.
“I believe that on 24 November, there will be a renewed (JPOA) deadline, as there's a new threat – ISIL. If it wasn't for ISIL, they would be forced to do an interim deal,” said Abou Zeid. “Iran won't give up this card they have in their hands. They will try to get more sanctions relief in exchange for the ISIL crisis, as all international issues in the region will impact on that.”
Indeed, with the ISIL crisis related to the conflict in Syria – an ally of Iran, and like Tehran supported by Russia and China – the Iranian nuclear issue has become further entangled at the global geopolitical level.
What is clear is that regulators, particularly the US, are taking recent developments seriously. “This is a complex area that is constantly changing due to global tensions in Ukraine, Russia, Iran, Syria and elsewhere, where the penalties for non-compliance are staggering. The record fine of USD8.9 billion against BNP Paribas for US sanctions violations is probably, or should be, causing CEOs of any financial institution sleepless nights and fines this size could be game over,” said Anthony Quinn, founder of Financial Crimes Consulting, in Australia.

US maintains tough line

Notably, the US's Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) of July, 2010, is still in force. Furthermore, 300 US congressmen wrote to the White House in July, (2014), urging President Obama to expand measures against Tehran, demanding the “permanent and verifiable” termination of Iran’s terrorism, ballistic missile programme, and money laundering activities prior to any lifting of sanctions.
Additionally, the US imposed sanctions on over 30 organisations and individuals with ties to Iran in August 2014, including five Iranian banks, one Iranian-owned Russian bank, two airlines, two logistics firms, six vessels, shipping and energy companies, and the Organisation of Defensive Innovation and Research, and the Nuclear Science and Technology Research Institute. 
Such stances are not likely to disappear despite any back-door cooperation between Iran and the US-led coalition on ISIL. “There maybe some easing of tensions as there are greater demons to be fought – ISIL – which may win [Tehran] some points, but on the other hand, some organisations are still trying to get around the sanctions to do business with Iran,” said Joe Bognanno, an AML analyst at Nice Actimize in the US. “Iran also supports terrorism, so it will not be de-listed by the US and others. I don't think sanctions will be significantly eased.”

Land of lost opportunity

Last year's ease in the sanctions has whetted businesses appetite for a new, populous market – Iran has 77 million people and a GDP of USD366 billion in 2013-4, says the World Bank. As a July report from the National Iranian American Council highlighted, the sanctions against Iran have lost American exporters an estimated USD175.3 billion in export opportunities over the past 18 years.
International business delegations have already visited Iran, and firms in the Middle East are eyeing up further relaxation, particularly following the crackdown in trade with Iran by the likes of Turkey and the United Arab Emirates (UAE) in the wake of CISADA; UN Security Council Resolution 1929 (2010) - which included restricted trade with the Iranian financial sector and required UN member states to freeze Iranian assets; and the US's Iran Threat Reduction and Syria Human Rights Act of 2012.

Grounds for cautious optimism

“The ease in sanctions was not as significant as many would have liked. More importantly is the potential for greater relaxation if things move further, which is what is keeping spirits high,” said Ghanem Nuseibeh, founder of political risk analyst group Cornerstone Global Associates, in Dubai, the UAE. “Qualitatively, people are seeing more potential business, although whether this has resulted in more traffic is too early to say. People that take more risks are looking for loopholes, but ostensibly they are exploiting those that were used earlier.”
One of the most significant easing of sanctions in relation to AML under the JPOA was for gold. Turkey had been a major conduit, as was Dubai, for gold sales with Iran, until US pressure reduced the trade in early 2013. Following the JPOA, the gold trade is presumed to have been resumed, albeit there are no reports or data available, primarily because there are no official checks on gold purchases in Turkey, while in Dubai ounces of gold are available from vending machines.
“Gold was definitely a key thing (in the JPOA), as it is obvious that people in the regime benefited from that relaxation and in a way, one of the supposed loopholes to move money around. Given Dubai's position on the gold front, I think it's one of the main beneficiaries,” said Nuseibeh.
The JPOA’s easing of sanctions does not seem to have caused any concerns in the compliance world.
“I've not heard from any compliance officers that they need more clarity, but as regulatory scrutiny increases, they have to do a better job to not violate sanctions, either intentionally by subsidiaries, or not knowing because of a previous inability to detect that in the analysis process. So they are not asking for greater clarity, just to be internally more prudent,” said Bognanno.

Not only but also

Sanctions have been the main focus of international regulators and for compliance officers to not fall foul of the law, as evidenced by high profile fines by the US against financial institutions in the past few years. Sanctions aside, Iran has major deficiencies in its AML and CTF (combatting the financing of terrorism) regime. Not being a member of the Financial Action Task Force (FATF), or any other regional body, Iran is not subjected to regular mutual evaluation reports (MERs). Such deficiencies were highlighted in the Basel Institute on Governance's Basel AML Index 2014, with Iran identified out of 162 countries as the highest risk country in money laundering and terrorism financing.
“You would imagine (Iran's ranking is) mostly due to sanctions, but basically there's a lack of data available for Iran. We do not consider the influence of political sanctions in the ratings, such as UN sanctions lists or FATF,” said Selvan Lehmann, project manager of the Basel AML Index. “Our indicators are not factually based on how much money laundering is going on, but how vulnerable it is, and that is what we stress. Iran seems overall to be performing badly in corruption risk, financial standards, and public transparency, and there is a lack of data and regulations.”
Lehmann added that suspicious transaction reports (STRs) are not available in Iran, and its financial intelligence unit (IRIFIU) is not properly assessed. “Our rankings consider other indicators, such as the US State Department's international narcotics control strategy report: money laundering and financial crimes, which reports that Iran is considered a jurisdiction of money laundering concern. This is partly as it is a financial centre in the region, which plays a role in Iran being at the top of the rankings.”
Of further concern is that neighbouring countries Iraq and Afghanistan are among the top 10 highest risk jurisdictions in the index, with Iraq having failed a FATF MER last year, and Afghanistan, ranked number two in the index, faced being on a FATF blacklist this year until it passed AML laws in June.

Growth Amid Turmoil: Middle East Cosmetics Market

The cosmetics market in the Middle East continues to defy the region’s instability with manufacturers taking advantage of the opportunities provided by Africa, reports Paul Cochrane

Soap, Perfumery and Cosmetics magazine -

The Middle East cosmetics market is weathering the region’s current political and economic instability. While the markets in the Levant are experiencing tough times, Gulf sales continue to grow. Retailers and manufacturers are also offsetting the losses incurred in depressed and unstable countries by exporting to burgeoning African markets.
Beauty and personal care product sales in the Middle East and Africa (MEA) were  US$24bn in 2013, according to market analysts Euromonitor International, with Middle Eastern growth driven by strong sales in the United Arab Emirates (UAE) and the other Gulf Cooperation Council (GCC) countries of Qatar, Bahrain, Kuwait, Oman and Saudi Arabia. Topping beauty and personal care sales in the MEA region in 2013 were fragrances, accounting for 19% ($4.6bn) of the total, followed by hair care items with a 17% share ($4.1bn) in sales. Colour cosmetics and skin care each accounted for 13% of sales, at $3.1bn respectively, according to Euromonitor.


“The entire GCC is doing really well in terms of sales. Some markets are better than others, such as the UAE and Qatar, and while Bahrain was affected [by the 2011 protests], sales have now returned. Kuwait is a slightly slower market but there’s some progress,” says Abdulla Ajmal, General Manager of Ajmal Perfumes, based in the UAE’s Dubai, which produces and exports its own line of fragrances.

However, demand in the region’s largest market, Saudi Arabia, has slowed – particularly for perfumes – because of the kingdom’s recent nationalisation policy, which gives preference to local instead of expatriate workers. This has led to the expulsion of thousands of expatriate workers, including thousands of Yemenis that had worked as perfume sellers.
Furthermore, the holy city of Mecca, which attracts millions of Muslim pilgrims every year, is currently undergoing major urban re-development. “There has been a big lull in Saudi Arabia as the Yemenis dominated trading but had to close shop, and in Mecca there are not as many pilgrims because of the construction, so the buying numbers are down, which has had an impact on business. Ramadan [the month-long Muslim fast that ended in late July] sales have been pretty decent and made up for it, and I hope that this momentum continues,” says Ajmal.
The North African market, he adds, is “almost at a standstill”, due to ongoing instability in Egypt, Libya and Tunisia, while only low-cost cosmetics in general are still selling well. The Iraqi market has also experienced a downturn in 2014 due to political instability and the rise of the extremist group Islamic State (IS), while the conflict in Syria has negatively affected the Lebanese and Jordanian cosmetics markets, both domestically and in terms of exports.
Syria had been a growing cosmetics market, but since its uprising began in 2011 manufacturing has dwindled due to a lack of raw materials, attacks on facilities and the difficulties of distribution. Some Syrian manufacturers have outsourced production to neighbouring Lebanon, while Turkish cosmetics exports to Syria have increased to offset the drop in domestic production – growing from $4m in 2012 to $9m last year, according to the Istanbul Chemicals and Chemical Products Exporters’ Association (IKMIB). Exports from Turkey to Iraq have also increased, going from $150m in 2011 to $180m in 2013, said  the IKMIB.
While distribution, storage and collecting payments are challenges in the Syrian and Iraqi markets, Lebanese cosmetics brands such as Cosmaline are also still being exported there to retain a brand presence, looking to calmer times in future.
“We either have to ship to Iraq or go [by land] through Syria and Jordan to Iraq, so we can’t always access the market. We have teams working on an hourly basis to find ways to transport products, as shampoos are bulky items to fly. If you reach that point, margins are compromised,” says Joanne Chehab, General Manager of Ch. Sarraf & Co, part of the Malia Group, which makes Cosmaline, and distributes for Japan’s Shiseido Co Ltd and German hair care brand Wella.
“Recently, for instance, we had the green light for 12 trucks to go to Iraq with Cosmaline products and we have a team monitoring the trucks via GPS as insurance companies won’t insure you in the case of theft. The kind of challenges we are experiencing today affect turnover, but we don’t want to stop exports; it is about being creative,” says Chehab.


Sales in Lebanon have flagged because of the economic downturn and the loss of tourists because of the nearby Syrian war, evident in the lead up to the summer season. “Spring was good for sales, beyond the budgeted target – but since May, the market has slowed as some retailers have reduced their stocks,” says Chehab. “The absence of tourists hurts a lot, as the purchasing power of foreigners is very important; while a Lebanese client buys two or three items, a Saudi or Kuwaiti buys ten to 15 pieces, so their basket is much bigger,” she adds.
However, the domestic Lebanese penchant for beauty products has kept sales buoyant, with manufacturers increasingly focusing on domestic customers to make up for tighter margins. “Sales haven’t changed a lot. Even though the Lebanese are more financially squeezed, people still want to look good. This is the difference between Lebanon and other markets,” says Fadi Sawaya, CEO of the Beirut based Sawaya Group, which distributes cosmetics brands throughout the Middle East.
Nonetheless, manufacturers are having to work hard to retain sales and increase footfall at retail outlets. Key to bolstering sales in Lebanon are hairdressers and salons. “Fashion is at the heart of cosmetics here and the main influence comes from hairdressers who are involved in fashion shows – when it comes to the newest brands, they are beacons for the latest trends that the retail market will follow,” says Georges Ghosn, Business Manager at Ch. Sarraf & Co. “We create activities for hairdressers – such as taking them to London – and provide a lot of giveaways.” Manufacturers are also advertising more and increasing their social marketing activity, he says.
Other tactics are being used. Sarraf (operating under the Cosmaline brand), for instance, in collaboration with US-based Procter & Gamble (P&G), have launched an online portal that provides advice via a consultant on hair treatment, styling products and tutorials to the Arab speaking world. “It is not about selling products online, but interesting the consumer [into buying products offline],” says Chehab. Lebanon is an ideal hub for such an online platform, as the Lebanese are considered trendsetters in the region. Sawaya, however, believes that the country does not get the attention it deserves from international brands, which have become more focused on the Gulf markets. “I think more international retailers will come to Lebanon and I hope that more brand decision makers understand the reality of Lebanon; that it is more than just a market of four million people. Despite all the problems we have, Lebanon is a fashion and beauty dealership for the region,” says Sawaya.


With the downturn in the Levant, North Africa and Iraq, Middle East manufacturers and distributors are turning to new markets to bolster sales. “We used to focus on the Middle East, but are now increasingly open to new markets in east and west Africa, where there are a lot of Lebanese traders. It is a natural transition, as many African buyers go to Dubai, which is a platform for cosmetics. Beirut is also a platform, so if you have both, you can cover the Middle East, Africa as well as central Asia,” says Sawaya. “North Africa is going to be a big market, but not yet because of the problems there.”
Manufacturers in Jordan are similarly focusing on export markets due to sluggish domestic sales. “It is going to be a tough year ahead as the market is being increasingly squeezed due to the loss of the Iraqi and Syrian markets. What is selling is basic cosmetics, not branded items,” says Ifani Igboanugo, owner of Ransel  Industries in Jordan, which primarily exports to Nigeria.


Dubai has become a particularly important  hub for cosmetics and re-exports due to its location and the variety of cosmetics on offer. “Consumption within the GCC is one thing, which is increasing at moderate levels, estimated at 5% a year, but it is the export markets [and related distribution] that are very strong. In a region where there are crises, when one market closes or becomes harder to reach, another one opens and that rotation keeps business alive and [is] why markets haven’t shut down,” says Michael Dehn, Group Exhibitions Director for EPOC Messe Frankfurt, which organises the annual Beautyworld Middle East exhibition in Dubai.
African manufacturers and retailers are also increasingly sourcing from Dubai, as products not available in China or Europe can be found in the UAE.
“There is a strong connection,” adds Dehn. Indicative of this is that Dubai’s foreign trade in perfumes and cosmetics rose 9% in 2013 on the previous year, reaching Emirati dirham AED18bn ($4.90bn), with imports of AED11bn ($2.90bn), exports of AED2bn ($544.50m) and re-exports of AED5bn ($1.30bn), according to Dubai Customs data.
The Gulf has become a particular focus for international and regional cosmetics firms because of the high purchasing power and diverse mix of its consumers, among them tourists and expatriate workers, as well as the popularity of fragrances.
According to Euromonitor, the UAE had the highest per capita spending on beauty and personal care products in the MEA region in 2013. Meanwhile, consumers in Saudi Arabia spent $34.40 per capita on premium fragrances in 2012 (a figure estimated to rise to $49.10 by 2017) and $21.30 in the UAE in 2012 (which  is expected to reach $25.50  in 2017).
Interest in the market was reflected in the rise in exhibitors at Beautyworld Middle East 2014, up 24% on last year, and with trade buyers up 11%, coming from more than 120 countries.
“Even in my wildest dreams, I didn’t expect another tremendous year. Last year, we broke 1,000 exhibitors and this year, 1,354. This confirms that the focus of the cosmetics industry is shifting to the Middle East,” says Dehn.
The biggest growth was in perfumes, with international firms keen to expand in the Gulf region but also there to tap the latest scent trends and products emerging from the Middle East. “This is unusual at exhibitions, as usually it is the other way around, with international companies bringing trends. But especially in perfumes, it is a reverse trend,” says Dehn of the Middle East producers innovating with ingredients and completed perfumes.
“More manufacturing, even the design and conceptualisation of perfumes, is done here now,” he adds.
Oriental perfumes have become increasingly popular globally, especially agarwood- (or oud) and musk-based scents, with international brands such as Tom Ford, Van Cleef & Arpels and Yves Saint Laurent (YSL) releasing their own perfumes.
“On a larger scale, oud has become a lot more prominent, but the downside is the majority of these [international] brands don’t use oud; it is just for marketing purposes,” says Ajmal. “On the positive side, there is more exposure to oud and this is opening a new genre for us. This will not necessary be oud, but more spicy and woody scents.” His company brings out ten to 12 new perfumes every year and 20% of fragrances are now fusions of styles. “It is about giving a little twist; a western perspective on what an oud fragrance should be like,” adds Ajmal.
Indeed, there is a growing focus on exporting oriental perfumes. “The woody flavours are not as popular in Europe due to their very heavy scent, but when you speak to manufacturers outside the Middle East, Russians are a big target group, where there is a strong trend for it and producers are trying to find ways to target the Japanese market in particular, as it is a highly refined one,” says Dehn.


Oriental fragrances are also crossing over into personal care products, with shampoos now featuring musk and amber scents, according to Ghosn. Indeed, the trend for sourcing from the Middle East is going beyond perfumes. Beautyworld Middle East is considering bringing companies supplying manufacturing equipment to its exhibition as creams, dermatological products and cosmetics are increasingly being made in the region. “We noticed  that this area is growing for machinery, packaging and raw materials, which is interesting as in many other industries, products are mainly imported – but that  is clearly changing and improving,” says Dehn.
Sawaya has followed this trend by launching his own brand of make-up products, ProVoc, which is distributed around the world and includes innovative, hygienically disposable products for use in salons. “The Middle East was considered a place of consumption, not a place for manufacturing cosmetics that might be competitive with elsewhere,” he says.
However, to appeal to the Middle Eastern market, Sawaya launched his products in western countries such as France and the US, as products are then typically better accepted in the region, while boosting the chances of major pharmacy chains and retailers stocking them. “It is a strategy, to be successful outside and then come back,” says Sawaya.
This is particularly important as sales of cosmetics are increasingly made through larger retailers rather than smaller outlets and the overall market in the Middle East is becoming more structured.
“In skin care, for the big brands, the  majority of sales are in the supermarkets, but not more specialised cosmetics related to skin care and make-up as these require advice [and] so [are] sold at pharmacies  and outlets,” says Sawaya. “There are higher sales in pharmacies for certain products  of the same brand and when there is a beauty advisor, sales are even better,” he says. This extends to fragrances, with  beauty specialist retailers accounting  for 47.7% of sales in the MEA according to Euromonitor.