Sponsoring slavery

The need for major reform of the GCC's kafala system

Commentary - Executive magazine

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  Every minute, one person is sold over an international border. Human trafficking is now the fastest growing international crime; it is second in size only to the drug trade and ahead of arms trafficking, according to the United Nations Office on Drugs and Crime (UNODC).
  
  Due to its nature as a hidden crime, there are no precise figures on human trafficking, but profits are estimated to be $32 billion annually — $4 billion from forced economic exploitation and $28 billion from forced sexual exploitation. In terms of trafficked people, some 20.9 million people are victims of forced labor, of which 9.1 million, or 44 percent, are moved either within or outside of their country and therefore likely to be trafficked, according to 2012 data from the International Labor Organization (ILO).
  Shocking though such numbers may seem, they are just the tip of the iceberg. Part of the problem is defining exactly what human trafficking is, while a United Nations resolution was inked in 2003, many countries do not have a precise definition, yet alone laws criminalizing the trade. Getting the legislation right is essential to tackling this crime. Furthermore, there needs to be increased focus on targeting the financial side of what is a low-risk, high-reward activity.
  Only recently has the financial side of human trafficking become a focus, with the intergovernmental Financial Action Task Force issuing a report in 2011 on human trafficking and including it as a predicate offense in its latest anti-money laundering recommendations for countries to adopt. 
  Non-governmental organizations (NGOs) are also increasingly active, such as Finance Against Trafficking, which is soon to release a manual for businesses to identify suspicious financial activity and human trafficking. The delay in taking on human trafficking at the financial level is by and large political. Since September 2001, the major focus by the world’s de facto regulator — the United States — on tackling financial crime (after the drug trade and money laundering) has been countering terrorist financing during the “War on Terror” years. A ‘war on human trafficking’ has not yet started, but the momentum is building. As the focus grows, the Middle East and North Africa will inevitably come under the spotlight, with the Gulf Cooperation Council (GCC) countries in particular. 
  In Lebanon, the parliament, under American pressure, passed an Anti-Trafficking Law (No. 164) in 2011, adding a section to the criminal code prohibiting and punishing all forms of human trafficking; enforcement, however, has been lackluster. The GCC, on the other hand, is lagging seriously behind on the legislative and enforcement side, and a primary reason is the sponsorship or kafala system. Under kafala, foreign laborers have to have a sponsor, who typically charges the worker for the privilege and takes the worker’s passport until he or she is allowed to leave the country. 
  It is a big business, with the ILO estimating there are 15 million guest workers in the GCC. In Kuwait, for example, a sponsor normally charges between $5,260 to $8,770 per worker, depending on the nationality. Sponsor 100 people, and you are making some seriously easy money. According to Jamal Abdul Raheem, founder of the Business Crime Bureau in Kuwait and an outspoken critic of the kafala system, the sponsor is in effect breaking the law by not declaring the source of income, therefore committing a money-laundering crime. 
  The ILO has urged “major reform” of the kafala system and human rights groups have called for GCC states to designate foreign laborers as migrant workers not as guest workers. Changing the designation is important to provide more legal rights for workers. Additionally, while migrant workers are not initially trafficked persons, as they leave countries such as India, Pakistan, Sri Lanka and the Philippines voluntarily, many become trafficked persons by being deceived and exploited by sponsors, which fits into the ILO criteria of forced labor: debt bondage, where a worker is not paid but works to pay off a debt; restriction of movement; and retention of passports or identity documents so a worker cannot leave or prove his or her identity. Tackling this issue is going to be a long and hard process as it goes to the very foundations on which many of the GCC’s skyscrapers and economies are built.  
  As income inequality continues to rise around the world, human trafficking is likely to only grow as an international crime. Getting the financial community on-board to red flag suspicious transactions related to human trafficking is essential to tackle the monetary reward and help curb this nefarious trade. 
  
  
  
  

LEBANON'S OIL AND GAS: Investing the money well

The danger of Lebanese politicians taking a cut is real

Lebanon’s progress to cultivate wealth from its offshore oil and gas resources has left us with more questions than answers. While the country will not extract any resources for at least five years, the agreements being negotiated in the next 12 months will determine whether Lebanon gets a good deal or not.
Over the course of six days, seven leading thinkers will discuss different aspects of the resources — from avoiding environmental destruction to how to spend the new wealth — each with the aim of helping provoke awareness about what is going on in this crucial period.
For Executive's sixth segment, Paul Cochrane analyses how best Lebanon should invest the profits from oil and gas.


If Lebanon manages to tap its offshore hydrocarbon reserves, the multi-billion dollar question is what to do with the revenues. How much is Lebanon looking to gain? Well, David Rowlands, chief executive officer of prospector British Spectrum Geo which has been carrying out seismic surveys on the country’s offshore resources, told The Times on March 4 that the value of Lebanon's oil and gas could be as much as $140 billion. Others have put it at anywhere from $40 billion to over $70 billion – much depends of course on commodity prices. With Lebanon's GDP at $40 billion, and public debt at $58.7 billion, any petrodollars are a major boon for the country's troubled finances.
In the 2010 Offshore Petroleum Resources Law, it is stipulated that Lebanon must form a sovereign wealth fund (SWF) into which the net proceeds of the government’s revenues will be invested. However, the law is deliberately unclear about how the money will be used once it is in the fund – leaving final decisions dependent on later negotiations.
Early last year, Prime Minister Najib Mikati proposed that the SWF should initially be used to reduce the public debt from 135 percent of gross domestic product (GDP) to 60 percent, but it was unclear whether he had government support for the proposal.
Given the government's less than stellar reputation in spending public money, the crony capitalism-style deals with Lebanese banks in financing the country's debt over the decades at highly lucrative interest rates, and the lack of accountability and transparency within the political process, how best to run a SWF?

Ups and downs

The primary rationale behind a SWF is to ensure the revenues generated from natural resources are appropriately utilized for the present and future generations – money put into the fund is invested, profits are generated and returns can be saved or re-invested for the future. Yet there are both positive and negative sides to SWFs.
On the plus side a SWF can handle greater investment risk than the central bank, domestic investment will boost the local economy, and strategic global investments can ensure a degree of economic and political security for a country.
On the negative side, SWFs are notoriously opaque. In the rankings of oil-based SWFs, only Norway scores well in the SWF Institute's Linaburg-Maduell Transparency Index, and notably Norway is the only democracy in the top 10 SWFs by value. As critics have pointed out, SWFs are popular with authoritarian and semi-authoritarian governments because they don't have to be transparent or accountable. Furthermore, oil and gas producing countries do not necessarily become more transparent if they set up a fund, while some energy producers do not have SWFs at all, such as Iraq and Saudi Arabia.
With Lebanon ranked 128 out of 176 countries in Transparency International Corruption Perception Index 2012, with a score of 30 out of 100 (zero means highly corrupt), hopes for transparency in handling hydrocarbon revenues are dim.
The real danger is that becomes a political tool. In Lebanon's political system, whom controls what ministry and handles the finances is hotly disputed, and no parties really trust one another, so the dangers for managing the SWF are clear.
Where will money be invested domestically that does not benefit one political party, movement or region over another? And if the fund invests internationally, where and what to invest in? Say a March 8 government wants to invest in Iran. Would the March 14 movement accept that? Probably not. Imagine then, hypothetically, if March 14 unseated March 8, would investments in Iran then be transferred elsewhere, such as to Saudi Arabia.

Seeking neutrality

Perhaps a better approach would be to give Banque du Liban (BDL) – the country’s central bank – control over the SWF. The BDL has handled foreign reserves well – certainly gold, with Lebanon ranked 19th globally by the World Gold Council (WGC) this year.
But BDL, like all central banks globally, is also not known for its transparency. Additionally, the recent appointment of Ahmad Safa as an Executive Director at the BDL's Banking Control Commission raises concerns, as he was fingered by the United States Treasury for his role in the money laundering scandal that took down Lebanese Canadian Bank in 2011.
Perhaps the best initial strategy would be to pay off the debt, and invest heavily – possibly through public-private partnerships for added transparency – in the country's dilapidated infrastructure and institutions. Only once that money is spent would it be truly worthwhile debating how best to organize and run a SWF, and where it could invest domestically and globally.
Alternatively, another idea would be to pay off some of the debt and then use the SWF to buy more gold, which could be held partly in Beirut and elsewhere. By holding physical gold the country would be on a solid foundation in terms of reserves and, if needed, to go to the markets for financing, while in the local political context this would arguably reduce the chances of misuse of funds.
Furthermore, in a period of quantitative easing with the US Federal Reserve printing money – some $1 trillion is to be added to the Fed's balance sheet per year, according to Forbes – holding gold is a way to hedge against any devaluation in the world's reserve currency, the greenback, which is crucial for Lebanon, given two-thirds of all bank deposits are held in US dollars and the Lira pegged to the dollar.
Additionally, there has been a growing move in recent years by governments (the US excluded) to buy gold as a hedge against inflation and currency devaluation, with official holds surging from $2 trillion in 2000 to $12 trillion in 2012, according to the WGC. Indeed, last year, central bank gold purchases were up 17 percent on 2011, to 534.6 tons, the highest level of buying since 1964. While buying gold would not be a panacea for what to do with hydrocarbon revenues, it should be considered as an option in these trying economic times, certainly to diversify the government's portfolio as well as to prevent political bickering.

Coming of Age

Nonwovens Report International

 

Agriculture accounts for significant nonwovens sales in the Middle East – most products here are currently imported cheaply from China, such as sacks and for sheeting

The Middle Eastern nonwovens sector is starting to grow from its Turkish and Saudi base. Paul Cochrane reports from Beirut

Nonwovens manufacturing has grown fast in the Middle East and North Africa (MENA) region, with most of the major players less than two decades old. With a burgeoning population and strong export potential, MENA production has in general doubled over the past five years, especially in the region’s manufacturing hubs of Saudi Arabia and Turkey, which currently have the strongest nonwovens sectors. But with heightened investment in the sector over the past two years, manufacturers elsewhere are squaring up for an increasingly competitive market as more supply comes online in 2013 and beyond.
Israel – through producers Avgol, Shalag Shamir, Albaad, Spuntech and Hogla Kimberly – is one new pretender. And to a lesser extent Jordan and Tunisia are growing a nonwovens industry, while Egypt is an emerging manufacturing hub. The majority of production in the Arab world and Turkey is currently for hygiene products, attributed to major investment in Reicofil machinery. Meanwhile, lower cost nonwovens are imported cheaply from China.
“The reason is the old story of utilising high-end equipment in the best way, which is for hygiene. If you have that sort of equipment, to make any other material would be like using a Ferrari as a delivery van,” said Richard Gillings, business development manager at Saudi German Company for Nonwoven Products (SGN), which is based in Dammam, on the country’s Gulf coast, near Bahrain. “That is why the major focus is hygiene, and there is some medical. Technical production is very small, as most of that is imported from China. In agriculture, as far as I know, we are the only manufacturer in the Middle East, although 95% of our business is hygiene and the rest agriculture.”
SGN is Saudi Arabia’s first nonwovens manufacturer, established in 1995, and the first spunbond operation in the Middle East, producing polypropylene spunbond and SMS nonwoven fabrics.
Last year, the kingdom accounted for 55% to 60% percent of SGN’s sales, rather than the company looking for more overseas sales.“Saudi Arabia is our biggest market, and there has been lot of investment in diaper lines as there is a high birth rate and overall high disposable income,” said Mr Gillings. The bulk of its exports are to Middle East and Africa (MEA) markets.
SGN is indicative of the overall expansion of the market, recording 10-15% annual growth over the past five years. SGN has two manufacturing facilities, a 30,000 square metre site in Dammam, and a 70,000 sqm site in Rabigh (on the Red Sea coast), having added three lines by 2006, bringing production to 33,000 tonnes per year (tpy). In March, SGN is to start its fourth Reicofil line at its Rabigh site, which has room for three more lines. “It will add another 17-18,000 tpy, with about 50,000 tpy altogether,” added Mr Gillings.
Meanwhile, production in Turkey has also surged to meet domestic and export demand, with production doubling between 2007-2011, according to Serkan Gogus, commercial director of Mogul in Turkey, which primarily produces wet wipes through spunlace brand Aqualace. He said: “The biggest growth is in spunlaid and spunmelt technologies, mainly for hygiene and spunlace for wet wipes.” Recent investments were in spunlace and PET spunbond at its two lines, with the latest opening in 2012. “We’re seeing the strongest growth in Turkey and Saudi Arabia, and there has also been growth in Egypt recently,” he added.
Egypt is a burgeoning market, both in consumption and increasingly for production due to its geographical proximity to MEA markets. France’s Bostik has invested in a new manufacturing plant in Cairo, Bostik Egypt, which opened in April, 2012, exporting to the MEA, and multinational Procter & Gamble (P&G) is building a $176 million diaper factory in the North African country, aiming at the same markets, with 40% to be sold locally. Japan’s Unicharm announced last October that it is also expanding into Saudi Arabia and Egypt as part of a strategy to triple the company’s annual production of diapers and feminine napkins by 2020, with 40% to be manufactured and consumed in MENA and Asia.
“Unicharm entered the market now, so a lot of these companies are growing, and Egypt is a place to grow. I don’t know how the political situation may effect things, but Egypt is still a high potential market and the middle class is there, bigger than before, and demand will grow, such as for diapers,” said Mounir Haddad, managing director at Saudi Advanced Fabrics (SAAF), which produces nappies for P&G distributors in Jeddah, Cairo, Europe and Africa.
The locational move of nonwovens manufacturing towards Egypt and the Red Sea is also aimed at meeting emerging retailer purchasing habits. “The trend is looking for more local supply - Egyptians like supplies from Egypt. There is a move towards that, and we’ve done that by opening factory on the east coast of Saudi Arabia,” said Mr Gillings. “What clients want in general is having their supplier in the same industrial area, and if not a supplier, then suppliers to maintain stock locally to cut down on lead times.”
SAAF is one of Saudi Arabia’s major nonwovens manufacturers alongside SGN and Mada, but exports 90% of its production, which is evenly split between hygiene and medical products. “SAAF is the biggest manufacturer in terms of medical volumes, SGN in hygiene volume, and Mada has started medical production but is still small,” said Mr Haddad of the kingdom’s manufacturers. More than 70% of SAAF’s exports are sent to China, the rest to the United States, Europe, Egypt and Turkey.
SAAF is also upping production, from 25,000 tpy to 40,000 tpy, adding to a Reicofil 3 line, and a Reicofil 4 line installed in 2006, with a third - 6 beam, SSMMMS, 3.2 machine Reicofil 4 - to be operational in September.
However, such investment by nonwovens manufacturers across the MENA region is likely to lead to more supply than demand. “Of course there is growth, but less than capacity. A lot of capacity came on last year and this year, and will create over capacity for the coming two years,” said Mr Haddad. “This is where there will be some conflict, but it won’t last too long as there’s growth in hygiene, especially in Asia and considerable growth in Africa.”
Indeed, despite 112 million people being aged under-30 in the MENA region, sub-Saharan Africa is seen as the next big sales market. “I don’t expect too much growth in the Middle East in terms of consumption but I believe Africa has more growth opportunities as penetration of nonwovens is very low,” said Mr Gogus.
But while Turkish manufacturers are bolstering export potential, consumers and manufacturing customers are suffering because the government in Ankara has decided to protect its nonwovens market, by raising import duties in September 2011. “We were very active in Turkey with a lot of customers, but sales are down 30 to 40% because of the higher tax,” said Mr Haddad.
While a supply and demand gap is expected for the MENA nonwoven hygiene industry in the short term, more local demand is forecast for medical products.
“We expect continual growth as SMS nonwoven is taking the place of Spandex,” said Mr Hadded, who said SMS already had 50%-60% of the European market, while in MENA it is just 20% - so there is “room for growth”. Bolstering demand for medical supplies were Gulf governments requiring hospitals to use disposable materials last year. “It created tenders for nonwovens we’ve never witnessed before,” he added. Such requirements are expected to be rolled out in other countries across the MENA region, he said.


Photograph by George Haddad

When the price is right

Petroleum Review

Should Middle Eastern oil producers – Saudi Arabia in particular – be price makers rather than takers, confined to influencing prices through OPEC quotas? With OPEC’s contribution to overall oil production dwindling compared to non-OPEC producers’ output, and rising domestic demand in the Arab world, there are strong arguments for price signalling. However, the turmoil in the region means any change in strategy will be difficult to implement, writes Paul Cochrane in Beirut.


At the very tail end of 2012, a delegation from the Shanghai Futures Exchange visited Riyadh to lobby the Saudi Arabian authorities to use the Chinese bourse’s benchmark to sell its crude. The proposal, while unlikely to be accepted, highlighted the direction Saudi and Middle Eastern crude is increasingly heading – eastwards. And unsurprisingly, China wants to make the most of this – countering the dominant global crude benchmarks, London’s Brent and the US Western Texas Intermediate (WTI).
Notably, the news also restated the fact that the Kingdom, despite being one of
the largest oil producers and the world’s swing producer, remains a price taker not maker. OPEC, and Saudi Arabia, its most influential member, use a reference basket of 12 crudes – Arab Light, Saharan Blend, Murban, Basra Light and so on – known as the OPEC Secretariat Crude Oil Basket Daily Price, or OPECDALY.
Over the past year, that basket price has been closer to the Brent price per barrel than WTI, but the real point is that it is a reference price – there is no long-term strategy for oil pricing. Saudi Arabia and other OPEC members can only try to steer prices by ramping up or reducing production through collectively imposed quotas. As a result, barrel prices are driven by the futures markets rather than by producers, and this can – and as we saw in the wake of the financial crisis, does – cause price volatility.
For producers such as the Gulf States, dependent on hydrocarbon revenues to balance the books, being price takers may mean no accusatory fingers pointed at them when prices spike into the triple digits – but volatility can play havoc with their budgets. Currently there is the spectre of downward prices as non-OPEC countries, Russia and the US inparticular, ramp up production – OPEC now accounts for an estimated 40% of global output – while demand is weak due to sluggish economic growth.
‘The biggest thing going on right now is the huge change in expectations of supply and demand. Look at the International Energy Agency (IEA) forecasts before the financial crisis – demand at the end of the decade was to be 8.5mn b/d higher than is now expected,’ says Greg Priddy, Director of Global Oil at consultancy Eurasia Group. Handling such changes is a challenge for any oil producer, but Middle East and North African (MENA) countries need high oil prices to continue for domestic economic and political reasons, as well as to fund some $740bn in energy projects over the next five years, according to Arab Petroleum Investments Corporation. ‘The Saudi government requires $90/b-plus for their budgets and to meet population growth. The next three to five years is fine, but it will become a challenge,’ notes Priddy.

Managing markets

One proposal that is floated every now and again by economists as a solution to better control oil production and prices is for MENA countries, led by Saudi Arabia, to sell oil in the same way government bonds are sold – by auction. Through direct market feedback this would determine production output, and impact on how much needs to be invested in energy projects. Budgets could then be planned more effectively with the break-even oil price in mind, and there would be fewer barrel price fluctuations, which has led to huge budget surpluses due to conservative estimates or fiscal deficits as the price plunges.
‘A market decided by oil ministers doesn’t work. It did when OPEC dominated, but now there’s a lot of competition,’ explains Marcello Colitti, an independent oil consultant based in Rome. ‘The present situation has not been completely digested by oil producers still believing in the possibility of financing continuing as before.’ He advises Riyadh to manage the market rather than make calculations on how much it needs to keep the country going: ‘If they keep doing that, they will have a surprise. So, they should go into the market, sell oil at the price they believe is right, and give everybody the ability to resell it. It will mean the price is a market price. At that point you have a situation where you have the feedback on your production.’
However, if Riyadh became a price maker it could very well signal the end of OPEC, as other members would be forced to go to the market. ‘The OPEC group has become more or less irrelevant, although still relevant to the Asians,’ notes Kate Dourian, Editor of Platts Middle East in Dubai. ‘OPEC could set up a price benchmark reflective of the market, it is not an inconceivable solution, yet at the moment I’m not sure the Saudis want that kind of commitment. But if there is no price band and no production quota, what’s the point of OPEC?’

Make or take time

One reason the Saudis would be hesitant to sell oil directly is to avoid the experience of the 1980s, when OPEC official prices were out of sync with freely- traded crudes and there was surplus capacity. Competition between OPEC members led to price discounting.
However, Saudi Arabia kept to the official price system set in 1974 and had to reduce output, leading to a 70% drop in exports between 1980 and 1986, to 3mn b/d. A short-lived ‘netback pricing’ system also failed, and the debacle ended with the ousting of Saudi Oil Minister Ahmed Zaki Yamani in 1986 and the creation of the OPEC quota system.
‘The Saudis have been price takers not makers following the Yamani experience,’ says Dourian. ‘To be price makers is not an option in their psyche as they’ve been burned so many times and don’t want the responsibility. That is why they pushed for OPEC price targets [in 1986].’
A further factor against going to the markets, or for Riyadh to go on the Shanghai Exchange, is the performance of the Dubai Mercantile Exchange’s (DME) Oman Crude Oil Futures Contract. The region’s sole pricing benchmark has only attracted Dubai and Omani crude, and no other major Gulf producers.
Opened in June 2007, the DME recorded 2mn crude oil futures contracts by March 2011, but then rallied, passing the 3bn barrel mark in May 2012. While prices have largely mirrored Brent, trades pale by comparison and, notably, are primarily in actual physical trades of barrels, of which over 40% is bound for China.
‘If the Saudis do anything, and not anything I’ve been told, there is the potential for them to say: “There are a lot of benchmarks out there, why not use some of this, some of that, and maybe go with one of the exchanges". But to be exposed to a Shanghai Exchange or Dubai? Probably not,’ comments Dourian.
Ultimately, with all that is happening in the Middle East, from a population boom to rising domestic demand – slated to rise 1.8 times from 630mn toe in 2010 to 1,140mn toe in 2035, according to the Institute for Energy Economics, Japan – and political instability, producers do not want to rock the boat.
‘It is politically difficult to change these things, and there is no pressure yet,’ notes Priddy. This extends to energy subsidies, with MENA countries having spent some 210bn on energy and other subsidies in 2011, equivalent to 7% of combined GDP, according to statistics from the London School of Economics.
‘The whole pricing issue is a political hot potato following the Arab Spring, with many governments not willing to cut subsidies,’ concludes Dourian.

'Qatargate' breaks open

Dirty dealings in Doha's winning World Cup bid

Commentary - Executive magazine

When Qatar won the bid to host the 2022 FIFA World Cup back in 2010, football fans around the globe were astounded at the decision. Many were suspicious, given that they could not even place the tiny Gulf peninsula on a map. Few knew Qatar even had a national football team. Moreover, Doha seemed a rather hot location for a summer World Cup. 

Indeed, right from the opening whistle pundits put forth that Qatar bought the bid. Qatar and FIFA have since been trying to make the case that it was merit and not petro-cash that affected the decision. The Qatari diwan and FIFA could not have been happy, then, to see the cover of France Football magazine when it graced stands at the end of January with “Le QATARGATE” emblazoned on the front. What lay inside was a 20-page report laying out how Doha bought the bid and pushing FIFA to remove Qatar as a host.

In what the magazine terms “acts of collusion and corruption,” the exposé shows how Qatar used its generosity to influence members of FIFA’s Executive Committee (EC) to vote in their favor, made donations for youth initiatives through its sports academy Aspire in countries with voters on the EC and provided $1.25 million to “sponsor” the African Confederation congress to win over four Africans on the EC.

On top of that, millions of dollars were offered to reinvigorate Argentinian football to gain a vote, and famous footballers were paid millions to sing Qatar’s praises to the press. 

Some of the most revealing news focused on France itself. France Football reported that in November 2010, then President Nicolas Sarkozy organized a dinner for Qatar’s crown prince, Union of European Football Associations’ President Michel Platini and a member of an investment fund that owned struggling football team Paris Saint Germain (PSG). Possibly coincidental, but certainly eyebrow raising, Platini voted for Qatar at the FIFA bid just weeks later. In 2011, Qatar’s sovereign wealth fund, Qatar Holding, bought a stake in PSG and the remainder in 2012. PSG has since spent more than $250 million acquiring high profile players, including David Beckham with a $1 million per month contract. Added to this, Qatar set up French TV channel beIN Sport and spent $200 million for the rights to broadcast French football until 2016. 

But what does France Football’s expose mean? An investigation has now been started that could strip Doha of the 2022 tournament, which would then be given to the runner up, the United States. There is widespread conjecture that this will not happen though, as it would be exceedingly damaging to FIFA — potentially opening investigations into the transparency of Russia’s bid for the 2018 cup — and would be a crippling blow to Qatar’s image, not to mention its budget plans with a staggering $65 billion to be spent hosting the cup. 

Also, Qatar is pushing for the scheduling of the event to be switched from the sweltering summer to winter time instead. This will face fierce opposition from European football leagues, with whose seasons this would coincide (although perhaps not the French). 

What is very clear is that Qatar is never going to shake off the notion that its petrodollars bought the 2022 World Cup. But whatever happens over the scheduling, and if Qatar actually remains as host, Doha will have to make damn sure it pulls off a spectacular event, which right now is looking a bit wobbly given the infrastructure needed — metros, train lines, thousands of hotel rooms — and that the technology for the much touted air conditioned stadiums has not even been tested yet. 

In the meantime, another “Qatargate” is in the offing: how did the gulf monarchy manage to become an “associate member” in the International Organization of the Francophonie (IOF) last October without going through the observer stage, having less than 1 percent of its population speaking French, and being a British colony until 1971? Curiously, Qatar appears to have intensely lobbied African countries to support its membership in the IOF.

Whitepaper: Impact of FATCA and FATF revised recommendations in the Middle East

Thompson Reuters - February 2013

A pdf version can be downloaded here -

http://info.fatca.thomsonreuters.com/FATFFATCAWP

Tax evasion is as widespread as tax avoidance in the Middle East. It is also not illegal in certain countries while others have zero tax regimes. When the OECD’s Financial Action Task Force (FATF) revised its 40 recommendations on combating money laundering and terrorist financing in 2012, adding serious tax crimes to the list of predicate offences, it was duly noted by the region’s authorities even if legislation did not change. But what has made Middle Eastern regulators and bankers really sit up and take notice when it comes to tax crime legislation are the looming deadlines to comply with the U.S.’ Foreign Account Tax Compliance Act (FATCA).
It is not publicly known how many Americans there are in the Middle East and North Africa (MENA) region. Or how many people in the region were born in the United States, have Green Cards, relatives in the U.S., U.S. telephone numbers or ZIP codes. Estimates indicate there are 40,000 to 50,000 American citizens in the United Arab Emirates, and 20,000 to 30,000 Americans in Lebanon, mostly dual citizens.
While reliable statistics would be useful, it will be up to MENA financial institutions to find out if clients may be liable for paying U.S. taxes. That could affect tens of thousands of people across the MENA region, or potentially hundreds of thousands. For foreign financial institutions (FFIs) to comply with FATCA it will certainly mean enhanced due diligence on thousands of account holders to find out about any connections to the U.S. Enacted in 2010, FATCA is essentially an expanded version of the U.S.’ Foreign Bank and Financial Accounts form, or FBAR, the ‘TD F90-22’ form must be completed by Americans with an aggregate of $10,000 or more in a foreign bank account at any time of a tax year. FATCA asks for similar information to FBAR but is focused on accounts above $50,000. The big difference is that unlike FBAR, which relies on individuals filing, FATCA uniquely requires FFIs to identify and report any American account holders to the Internal Revenue Service (IRS). As of 1 January, 2014, FATCA rules will impose a 30 percent withholding tax on certain payments of U.S. income to a FFI unless the institution reports specific information about U.S. Account holders. This has far reaching worldwide impact, as it applies directly to withholding agents, FFIs and non-foreign financial institutions (NFFEs).

Notably, FBAR was used by the U.S. Treasury to identify money laundering and terrorist financing under the Banking Secrecy Act, and the information was not passed on to the IRS. The motivation for FATCA is for the IRS to repatriate billions of dollars held outside the U.S. by American account holders that are evading tax. The U.S. has been cracking down on banks that have allowed Americans to evade the IRS, fining Swiss bank UBS $780 million in 2009, while in January 2012, Switzerland’s oldest bank, Wegelin, was fined $57.8 million for helping over 100 Americans evade tax on $1.2 billion in secret offshore accounts, and has since folded.

“FATCA is similar to FBAR except for one form, so it hasn’t increased the tax liabilities of American tax payers but provided increased control as there was no means to check or confirm tax declarations,” said Chahdan Jebyli, General Manager, Group Head of Legal and Compliance at Bank Audi in Lebanon. “The U.S. acquired very relevant experience from the UBS case on how taxpayers manage their tax obligations,” he added.

Middle Eastern FFIs are gearing up to be in compliance with FATCA, only too well aware that the region is in the eye of the storm when it comes to the U.S.-led fight on anti- money laundering (AML) and counter-terrorist financing (CTF), in addition to the economic sanctions slapped on Iran and Syria. What happened to the Lebanese Canadian Bank (LCB) is a case in point, which was labelled a “financial institution of prime money laundering concern” for carrying out transactions with U.S. designated terrorist organization Hezbollah and drug dealers by the U.S. Treasury’s Office of Foreign Assets Control (OFAC) in February 2011. 

The fallout resulted in LCB going under and a reevaluation of AML practices in Lebanon, one of the Middle East’s leading banking hubs with over 60 banks and $144 billion in cumulative assets as of 2012. Indeed, the LCB case followed by the U.S. sanctions on Syria has made Lebanese banks “paranoid” about falling foul of U.S. regulations, according to a senior source at the central bank, Banque du Liban (BDL). 

With two thirds of the money in Lebanon in dollars, 85 percent of loans in dollars and significant amounts of the banks’ money in U.S. bank accounts, Lebanon is a “dollar economy and has no choice” but to abide by the regulations, said Jebyli. Lebanese banks also have subsidiaries around the Middle East and Africa. “Countries, particularly Lebanon, cannot afford to swim against the international current, or want to for that matter,” added Jebyli.

Reporting issues

Over the past year MENA financial institutions have been scrambling to get themselves prepared for FATCA, with numerous conferences and summits held to discuss the best ways to be in compliance and how to report to the IRS, whether through an inter-governmental agreement (IGA) or FFI agreements directly with the IRS.

“Every bank that says it is committed to following international best practice has to automatically say, I’ll comply – it is a question of principles. We settled by applying the regulations and being committed to transparency,” said Jebyli. “The question is, what is the best way to implement FATCA? And it is very much a question of details.”

The region’s institutions have been struggling with the details as much as anywhere in the world, primarily due to the regulations not finalized until 17 January, 2013. This prompted the IRS in October 2012, to extend the deadlines for complying with certain FATCA deadlines by six to 12 months. (The certification process for new customers was January 1, 2013, now January 1, 2014; the certification process for existing customers that are intermediates was extended from the end of 2013 to June 30, 2014; the certification process for all other existing customers from December 31, 2014 to December 31, 2015; high value accounts (over $1 million) by 31 December 2014 or one year after FFI Effective Date; and controlled foreign corporations (CFCs) agreements with the IRS from July 1, 2013 to January 1, 2014.)

“The final regulations have provided some much needed clarity, and FFIs can progress confidently in establishing processes for new customer onboarding and the review of existing accounts, and in providing self- certification documentation tools to establish their customers’ tax residency,” said Laurence Kiddle, Commercial Director, FATCA, at Thomson Reuters. “At the same time there remains some areas of uncertainty – in which jurisdictions will enter into IGAs, for example, and looking into the future, to withholding on pass-thru payments and gross proceeds. But there is enough now known to get moving.”

The delays have enabled financial institutions to get more clarity on FATCA guidelines. “As the deadlines are extended it’s a good time for banks to step back and look at what the regulations are all about and the implications attached to that. Because of the evolving nature of FATCA there are definitely some areas that are challenging. For instance, gaining an understanding of the FATCA Foreign Entity classification such as participating FFI, non-participating FFI, deemed compliant FFI, and exempt FFI,” said Kauzal Rizvi, Director, Risk Consulting and Head of Department, Forensic Services at KPMG in Dubai (* caveat).“Certain guidelines require more clarification, and some countries and financial institutions are seeking it. Financial institutions need to be proactive, and engage with regulators.”

The issue is particularly pressing as to whether governments sign an IGA (Model 2) which would mean central banks would report on behalf of financial institutions to the IRS, or if it is left to the FFIs (Model 1). Either way requires a different model for reporting to the IRS on an annual basis.
The U.S. Treasury stated in November 2012, it has engaged with 50 jurisdictions to conclude and explore options on IGAs, and so far has signed bilateral agreements with the UK, Denmark, Mexico and Ireland. In the same month, the U.S. Treasury published the Model Intergovernmental Agreement for Cooperation to Facilitate the Implementation of FATCA (Model 2).

“What is the better model? It depends, the IGA model may reduce the cost element and amount of work required by institutions, and ultimately the relevant government authority would be responsible for compliance rather than individual institutions. To my understanding this seems more logical,” said Rizvi. “If more countries adopt the model of inter-governmental agreements I think it will extend to others as well, while some may wait to see what is more productive and beneficial.”

The final regulations provide more clarity on the registration process, with a registration portal to be accessible as of 15 July, 2013. The portal will allow FFIs to complete and maintain their chapter 4 registrations, agreements and certifications, including for selected group members. Model 1 FFI’s that registered are deemed-compliant FFIs. Under the IGA Model 2, ‘Reporting FI’ may register so long as the jurisdictions is on an IRS published list treated as having an IFA in effect even if the ratification has not been completed. The IRS intends to issue a Global Intermediary Identification Number (GIIN) to FFIs whose registration is approved; GIINs are to be signed no later than 15 October, 2013, according to the IRS.

On the U.S. Treasury’s list only two Middle Eastern countries were involved in negotiations, Israel for an IGA, and “exploring options” with Lebanon. In December 2012, Lebanon opted for the FFI agreement.

Elsewhere in the region reporting is still being decided, and there does not appear to be any resistance to comply with FATCA, unlike certain jurisdictions such as Hong Kong which have voiced concerns. “There is some speculation that the Gulf Cooperation Council (GCC) as a whole may look to do something multilaterally with the U.S.,” said Kiddle.

A U.S. Treasury backed FATCA symposium hosted in January by the Qatar Central Bank (QCB) for Gulf officials and financial institutions was intended to provide further information on the act and IGAs. The opening speech by the QCB governor, Sheikh Abdullah bin Saoud al-Thani, touched on the UK having signed an IGA, indicated that Qatar and other GCC countries are likely to go along with FATCA for reputational risk reasons, and ended by saying there is still a way to go to address legislative issues. Qatar itself will have to work out reporting and oversight as the country has two financial regulators – the QCB and the Qatar Financial Centre Regulatory Authority (QFCRA) – that oversee financial institutions conducting domestic business.

Lifting secrecy

Lebanon opted for FFI reporting for a number of reasons, most notably due to its banking secrecy laws and that since 2008 Beirut has been an offshore center. Lebanon’s decision may be repeated by other MENA countries that have offshore and tax free zones, while how it has handled banking secrecy in relation to FATCA will be multilaterally noted given Beirut’s role as a regional legal service provider.

“Banking secrecy presented some problems in how to handle clients, as FFIs have to report to a foreign jurisdiction, so a client could sue the bank for illegal disclosure,” said Paul Morcos, founder of law firm Justicia Beirut Consult and an adviser to Lebanese banks. “Contracts have had to be changed at banks to include an acknowledgement from the client that he accepts and recognizes FATCA regulations. It is a way to lift banking secrecy, otherwise banks will have to close the account.”

Finding out whether a client is liable to pay U.S. taxes is a prerequisite before signing a FATCA acknowledgement that could lift an account’s secrecy status. FATCA has adopted a drag net type of approach to determine any connection to the U.S. that could lead to being a tax payer – if a client is a citizen, was born in the U.S., has a Green Card, has a relative in the U.S., a U.S. phone number or ZIP code. With the first certification process deadline in 2014 requiring due diligence to be carried out on new customers, banks have to consider how to ascertain this information and what forms to use. “Banks need to look at the questions they ask - do you ask for ‘nationality’ or in the plural? If the client doesn’t declare at least you have asked the question. Whether that is regarded as an acceptable level of due diligence or not is something else, but on a $1 million account it becomes very relevant,” said Kiddle.

With Know Your customer (KYC) forms already in place for AML and CTF purposes, banks are now drawing up similar forms specific to FATCA. “It could be the same type of form as a KYC but split in two: those concerned with paying tax in the U.S. and those not concerned. Or make two separate forms. I’d opt for the double form and we are seeing banks go for this one,” said Morcos.

What will prove most cumbersome for FFIs financially and in terms of human resources is the requirement to screen intermediaries and old clients, which means thousands of accounts. “There is a big debate on the remediation exercise – how to remediate those accounts which were opened say 10 years back? This is a challenging area as has cost and resource implications,” said Rizvi.

Indeed, the incremental cost for FFIs to implement FATCA, are staggering. The European Banking Federation (EBF) and Institute of International Bankers (IIB) informed the U.S. Treasury that large institutions estimated “on a conservative basis that they will incur an incremental cost, on average, of $10 to properly identify and document each existing account for which they do not have documentation establishing non-U.S. Status.” With millions of clients, larger institutions could have incremental costs as high as $250 million. The EBF and IIB estimated the overall incremental cost to the industry of identifying and documenting existing accounts “will run at least several billion dollars.”

Getting reporting right is therefore a major concern, although complicated by the lack of clarity on certain aspects of FATCA. This extends to drawing up FATCA KYCs, to paperwork and hiring sufficient human resources. “FFIs may find staffing up difficult as there are no real FATCA experts, in the sense that no-one has been there and done it yet,” said Kiddle. “What we do know, is that FATCA is probably not the end-game; other jurisdictions will follow with similar legislation. Institutions have to do future policing – for example implementing a flexible technology framework - as they don’t want to go back and do this again, so should do the known knowns and anticipate the known unknowns.”

FATCA over FATF

Morcos calls FATCA “an extra-territorial and supra-national law,” and by complying banks are “doing the IRS a favor – for free.” However, FATCA is being taken more seriously regionally than FATF’s revised recommendations to list serious tax crimes as predicate offences. “Everyone is declaring to the IRS as they are afraid. There is a psychological impact in addition to the material impact,” said Morcos. “The IRS has earned billions of dollars already because of the psychological impact.”

Morcos added that Gulf and Arab investors in the U.S. are worried about their investments and looking to pull out, especially if American citizens or Green Card holders. Furthermore, account holders in the MENA are already looking at ways to evade FATCA and find exceptions to the regulations, whereas the same cannot be said of evading the local tax-man. “Middle Eastern banks learned and applied AML regulations 10 years ago, but now the fight against money laundering has been extended and the banks given a new role: to fight tax evasion, for the U.S. Government specifically,” said Morcos. “Banks have a role to play in fighting tax evasion but it is not on the agenda.”

MENA regulators have been slow to implement FATF ‘s revised recommendations on tax evasion. In Lebanon for instance the law has been drafted but not yet enacted by parliament. Other jurisdictions are facing set-backs to implementing an effective AML and CTF regime yet alone adopting the revised recommendations, whether due to governments being in transition following the Arab uprisings over the past two years or internal turmoil, while Syria and Iran’s central banks are under international sanctions. FATF has concerns with several MENA jurisdictions over strategic AML/CTF deficiencies, such as Iran, Syria, Yemen and Turkey, and others with lesser strategic AML/CTF deficiencies such as Algeria and Kuwait. Last year Iraq failed a Mutual Evaluation Report by FATF’s regional body, MENA-FATF. “A number of MENA countries have struggled with applying previous recommendations, and I think certain countries will not have enough support or services. We have to be mindful of the fact that most countries are members of MENA-FATF, so will be applying previous recommendations and will receive more clarity on the new ones,” said Rizvi. “There is a will at the top level – except countries with issues going on – to comply with all these requirements. But some countries will struggle from an implementation point of view; there are certain challenges for sure.”

Tax crimes and other predicate offences should be more seriously implemented. Global Financial Integrity (GFI) research published in December 2012, showed that outwards flows of illicit capital from the MENA had increased 26.32 percent from 2001 to 2010, and accounted for 10.28 percent of the $5.86 trillion the developing world lost in illicit outflows over the decade. Trade mispricing accounted for 80.1 percent of cumulative illicit outflows over the decade, while in the MENA it was 37 percent, the remainder attributed to corruption, bribery and kickbacks. One solution GFI put forward was to “harmonize predicate offenses under AML laws across all FATF cooperating countries” and “strongly enforce” regulations.

* - Note - “Kauzal Rizvi is a Director in Forensic practice of KPMG in UAE. Views expressed herein are those of Kauzal Rizvi and not necessarily those of KPMG. Due to the complex nature of the topic, professional advice must be sought in the context of specifics of each case.”

Beijing's Saudi gamble

Shanghai Futures Exchange looks to change global oil and gas pricing

Commentary - Executive magazine, February 2013

 

It is one of those economic oddities that Saudi Arabia, regularly the world’s top oil producer, does not set the price for the oil it sells. While potentially wielding great influence over global supplies of oil through ramping up or decreasing production, the kingdom limits itself to operating within the Organization of Petroleum Exporting Countries’ (OPEC) quota system; Saudi Arabia is a price taker, not maker, using OPEC’s Secretariat Crude Oil Basket Daily Price — a reference basket weighing crude from all 12 OPEC member countries — and a market-related base price to sell its oil.

So when a delegation from the Shanghai Futures Exchange (SFE) showed up in Riyadh over the new year to petition the Saudis to sell their crude via the Chinese marketplace, it came as a bit of a surprise. The kingdom has long indicated it is in no mood to directly market its oil, let alone through one single market. 

What the SFE’s initiative showed, and here is where there is no surprise, is China’s increasing importance on the global oil markets. Indeed, it is the number two consumer of crude at 11.4 percent of global consumption, according to British Petroleum figures. But just as Riyadh has little direct say on market prices, neither does Beijing, which is frustrating the rising superpower as it is forced to make purchases through the dominant futures markets — Brent in London and West Texas Intermediate (WTI) in New York ­— to offset spikes in domestic demand not covered by long-term contracts with producer countries. 

The Shanghai benchmark, which is slated to start this year, could give the Chinese pricing influence in the oil futures markets. However, Saudi Arabia would be key to making the SFE a success, not only because of its contribution to China’s imports, but as the dominant member of OPEC. 

If Riyadh were on board, other Middle East and North African (MENA) oil producers would presumably follow, and with the International Energy Agency (IEA) forecasting that within a decade 90 percent of the region’s oil will be destined for Asia, the SFE could dislodge the global prominence of Brent and WTI.  

With China being Saudi Arabia’s third largest petrochemicals customer after the United States and Japan, forward-thinking policy makers in Riyadh were undoubtedly weighing the merits of the Shanghai option. The two countries’ state-owned oil companies are also in a $10 billion joint venture to build a 400,000 barrels-per-day refinery on the kingdom’s Red Sea coast. 

The gambit was certainly a clever move by Beijing to try and tie-up the Saudis, but given Riyadh’s past tumultuous experiences with oil pricing policies, Saudi Arabia is not likely to be easily shanghaied. 

Options that are worth considering by Riyadh would be exposure to multiple futures markets, or directly selling Saudi oil, like a government bond, through auction. Deciding on either of these options may prove inevitable as non-OPEC production ramps up — and at cheaper prices — while OPEC output has already dropped to 40 percent of global production. 

Riyadh, though, has not even opted to sell on the Middle East’s sole pricing benchmark, the Dubai Mercantile Exchange (DME), which in 2007 set up the Oman Crude Oil Futures Contract to market Dubai and Omani oil. An estimated 40 percent of the DME’s contracts are bound for China. 

With China and other Asian economies demanding increasing amounts of oil, and demand dropping elsewhere, the Saudis will be keen to keep Beijing happy, but will almost certainly carefully sidestep the Shanghai proposal, at least for the time being. 

Currently neither the kingdom nor anywhere else in the Middle East and North Africa is in the mood for any further radical changes, be it oil pricing or the socio-political status quo. Messing with oil prices that could affect revenues is not on the table — even if going directly to the markets could be a boon in the long run. 

For now it is business as usual and stability is the name of the game. Chinese brokers, however, will be banking on the rising global clout of Asian consumers for the SFE to secure a spot in the futures markets.

Paint market knocked by ongoing dispruption of Arab spring

Polymer Paint Colour Journal, January 2013

Over the past two years, the disturbances in the Middle East and North Africa (MENA) have had a negative impact on the construction and paint sectors, as Paul Cochrane in Beirut reports 

 

The uprisings in the Middle East and North Africa (MENA) over the past two years have had a negative impact on the construction and paint sectors, throwing a proverbial spanner in the works when the region was striving to come out of recession. Only the more affluent Gulf Cooperation Council (GCC) countries are witnessing more steady demand, but numerous projects are still on hold due to regional instability.

“Just when you thought there was liberation, instability started creeping in all over again,” said Sunil Gurdur, General Manager of Al Gurg Leigh Paints in the United Arab Emirates (UAE), which manufacturers its own brand, Oasis, and under licence from ICI/Akzo Nobel Coatings. “I feel that the recession is not over, we are still in the throws of it, and any upward movement is due to a fallout from the Arab Spring, such as Dubai benefiting in a warped way (such as from capital and businessmen fleeing to the Emirate from conflict zones). But we can't really say there is a maintainable growth track as demand is sporadic and erratic. It is different to find a pattern.”

Bassem Bizri, general manager of Chemipaint, which has facilities in the UAE and Lebanon, has also noted a similar trend. “In the UAE, the Arab Spring has really affected sales. We didn't think it would, especially (the only rich emirate of) Abu Dhabi, but it has been more affected by the Arab Spring than the international financial crisis,” he said.

Part of the Gulf states' response to the uprisings has been to invest heavily in infrastructure and related projects to create jobs and bolster economic growth. As of August, 2012, the value of construction projects in the GCC was estimated at USD$1.68 trillion, according to online project tracker BNC Network. However, nearly 43 percent of the total projects, or USD$723.61 billion, are on hold, according to the report.

“There are new tenders but nowhere near the amount of projects it was hoped would happen,” said Bizri. With the region in the midst of political and economic uncertainty, governments, real estate developers – private as well as those connected to the state – and consumers are, in the words of Bizri, “sitting on their wallets to see what happens.” Indeed, according to the IMF, real GDP growth in the MENA is likely to slow to about 1.25 percent in 2012 and rebound moderately in 2013.

While demand for specialized and intumscent paint is holding up due to new energy projects underway in the oil rich region and the continuous need for maintenance – Saudi Arabia's national oil company Aramco spends some $26.6 million a year on specialized paints – it is demand for decorative paints that has taken a beating due to the slowdown in residential real estate projects.

“When it comes to decorative paint, all companies are fighting for smaller slices of the pie,” said Gurdur. “The volumes are still largely there, but what has happened is that prices have been reduced to be more competitive – and contractors are asking for the same prices quoted in contracts in 2008 - so while this has generated more volume, it doesn't signify growth.”

Elsewhere in the region, countries are either struggling with the aftermath of the uprisings, like Libya, Tunisia and Egypt, or are being affected by the ongoing conflict in Syria, like Jordan and Lebanon. Egypt for instance is a big paint market, for not only domestic sales but also for export to North Africa and the rest of the continent. However, ongoing instability is affecting sales. “It is a supposed to be a good market, but the situation in Egypt is not good; hotels are empty, tourism is down, and the financial situation is drastic,” said Bizri. That said, projects are underway, with some USD$1.6 billion allocated by the Egyptian government in the 2011-2012 budget for the National Social Housing Project.

“Syria was a good customer but because of the revolution business has stopped, as it has in Yemen, where we used to supply huge quantities,” said Abdullah Maghrabi, business development engineer at Al Jazeera Paints in Saudi Arabia. “I think the uprisings have stopped a lot of business in some countries, although it has expanded in others.”

Indeed, the Saudi market, which accounts for 63 percent of the Middle East's (including Israel) 1.8 million tonne paint market in 2011, according to UK-based researchers IRL, is one of the few booming markets, primarily due to a USD$131 billion government stimulus package, with half focused on housing to cater to a population growing at 2 percent per year and expected to reach 30 million by 2013. Kuwait's NBK Capital estimates show Saudi Arabia awarded construction contracts worth USD$89 billion from July last year until June 2012.

“Saudi Arabia is booming, and between every project there is another project,” said Maghrabi. “It is the number one market, and even if all companies are operating with full capacity they can't meet demand.”

Al Jazeera produces some 240,000 tonnes per year and has cornered nearly a quarter of the kingdom's market. Sales of decorative paints reached USD$186.6 million last year, according to Maghrabi, and the company's revenue forecasts for 2012 exceed 2011. To meet surging demand in the kingdom, Al Jazeera is expanding its capacity to 800,000 tonnes per year.

Other companies are expanding to meet projected growth in the near future, and for an anticipated surge in demand once the situation in post-uprising countries settles down and reconstruction begins. Norway's Jotun paint for instance is to invest USD$136 million over the next three years to upgrade plants and build new production facilities in the Middle East.

The development of the sector is equally occurring through the establishment of a Colour Academy in Beirut through a partnership between Lebanon's ALLCHEM, Sweden's Natural Colour System (NCS) and America's Xrite. “The MENA paint sector is following Europe, so a hub to educate people about colour and paint for the region was needed. Why education? The need for higher education to improve the sector, more value added and better production as well as sales,” said Hadia Minkara, general manager of ALLCHEM. “We chose Beirut as Lebanon is a hub for the whole region, whereas being based in say the UAE would be more focused on the Gulf market.”

Copyright - www.coatingsgroup.com

Tony Salamé: Beirut's resilient fashion entrepreneur

Visitors magazine - Global Blue, Autumn 2012

Up Close with Tony Salamé

 By Paul Cochrane

Tony Salamé could be considered the stereotypical Lebanese entrepreneur: suave, cosmopolitan and with the ability to thrive in unstable environments. Such attributes have made the Lebanese renowned for their mercantile acumen throughout the world, and produced a list of high flying businessmen, from the world's richest man, the Mexican of Lebanese descent Carlos Slim, to the CEO of Nissan-Renault, Carlos Ghosn. Even Lebanon's prime minister, Najib Mikati, is a billionaire through his international telecoms operations and stake in fashion brand Façonnable.

What sets Salamé apart from his contemporaries is that he did not go abroad to seek his fortune but defied the odds in making his retail business Aïshti a multi-million dollar success in post-civil war Lebanon. Salamé's entrepreneurial ascent is not quite your 'American Dream' rags-to-riches story though, yet has all the magic ingredients: hard work, spotting potential, and being in the right place at the right time.

Salamé's first venture into retail certainly started out humbly enough. “I always liked retail. Even at university (studying law) I was travelling and importing goods, and then selling them to friends,” he says. “Later, when I was on holiday, I brought items from Italy to Lebanon. At the beginning I went to stores and bought during sales.”

With $5,000 in his pocket, Salamé opened his first store in 1989, in a warehouse stocking clothes from the previous season. “Lebanese customers were always eager to have the latest fashions, so after six months I went into the same business model as a store, with regular seasons and brands.”

The turning point for Salamé also came that year, when Lebanon was coming out of 15 years of civil war and the Lebanese  Pound had seriously devalued. “I went to a fair in Italy, and a lot of Lebanese didn't show up to pick up their goods so I bought them, and that is how I got hold of exclusive brands.”

This signalled the birth of Aïshti (“I love” in Japanese) and Salamé was able to ride the crest of the wave of the re-construction of Beirut after the civil war, when the Lebanese capital started to regain its position as the fashion hub of the Middle East, where trends set in Beirut spread throughout the region.

Over the next decade Salamé secured contracts to distribute luxury designer brands. Yet they were not easy deals to strike, entrusting a young man – Salamé is now just 45 – to represent world famous brands in a country known for conflict rather than luxurious living.

“I think if a CEO wants to do something he has to be persistent. Anyone can do things to create change but it needs persistence, and Beirut is a difficult place to do business,” he says. “To convince a brand to come here takes years. But those that didn't come regret not coming before, with one principal (of a fashion house) saying he lost 20 years of his life by not being in Beirut earlier.”

Aïshti certainly put Beirut on the map as a fashion destination when it opened its flagship department store in the re-developed downtown in 1999. This was accompanied by opening monobrand stores, with Aïshti today having over 150 brands and 40 mono brand stores that read like an A-Z of the hottest names in fashion: from Gucci to Fendi, Roberto Cavalli to Burberry, Dolce & Gabbana to Jimmy Choo, Marc Jacobs to Dior, and Cartier to Ermenegildo Zegna to name a few. "We turned downtown into a district for shopping and a cultural scene rarely visualized in the Middle East,” he says.

However, Salamé will not take sole credit for Aïshti turning Beirut's image around. “It is perhaps not our merit alone, as customers have pushed us to be on top of what is going on and to meet their demands. Lebanese women are very stylish, and Gulf and European women that come here want to dress like them too, so that is an advantage,” he says. “When principles come to Beirut, such as from Prada, they are impressed by the choice of our clients and can't believe what is here in Beirut and the way people dress.”

Salamé recognized early on that Aïshti needed strong brand name recognition and and also needed to appeal to the right clientele. In 2001, he set up Aïshti magazine (now called A) as a promotional vehicle for its brands and as a way to publicize a luxurious lifestyle, with articles ranging from fashion to architecture, food and health, to art and travel. Originally distributed free to clients in Lebanon and throughout the region, the bi-monthly magazine currently has a circulation of 20,000 and is sold on newsstands.

“I didn't want to go into marketing or magazines, but we couldn't find the right medium or the right quality for communications,” says Salamé. “This is why we only have billboards within Beirut and not all over the country; we are selective.”

Salamé has applied the selective mantra to the Aïshti stores themselves; there are only three in the country. But rather than be overly niche, Aïshti introduced a new store concept, Aïzone, directed at a younger clientele, and brought out a sister publication, Gossïp, which is distributed free of charge at Aïzone stores. With nine outlets in Lebanon, the concept has changed the makeup of Aïshti’s buyers, with around half of clients in 2005 foreigners, primarily from the affluent Gulf countries. Today, the Lebanese stores account for 84 percent of Aïshti's annual revenues of $205 million, the remainder from Aïshti and Aizone stores in Jordan, Dubai and Kuwait. “The Lebanese account for around 70 percent of sales. That share grew due to Aizone and a bigger selection,” says Salamé.

Currently, Aïshti has 900 employees, with 26,000 square meters of retail space in Lebanon, in addition to restaurants, cafes and spas, and some 6,000 square meters in Jordan, Dubai and Kuwait. 

While a move into Jordan and the Gulf countries was essentially a “no-brainer,” to go to customers themselves rather than relying on them to fly to Beirut to shop at Aïshti, Salamé has pondered markets further afield.

“I went to India and planned to open there, but the taxes were incredibly high, especially inter-state taxes, and rent was astonishingly high – till now all big brands are losing money (in the Indian market),” he says. In Salamé's opinion, the Western markets are saturated, and it is emerging markets that hold promise. Unsurprisingly, China is likely to be the next market for Aïzone. “I want to see it as a concept that can be expanded,” says Salamé.

Neighbouring Syria was another market that Aïshti had entered, but has closed operations due to the conflict. “You have to wait for opportunities. In Syria we were planning to open a boutique hotel at an old convent, it was a perfect site but we have pulled out,” he says. “Any opportunity to express the Aïshti lifestyle I would do it. We are opening six more stores in Beirut and introducing new brands such as Brooks Brothers.”

Somewhat exceptionally for Lebanon, Salamé has his eye on the long-term rather than the more common business model of fast returns on investment due to the precariousness of the economy and the country's turbulent political situation. “In Beirut I've learned to be resilient and to work long-term as there are always ups and downs, for they come every five years. We have to be tolerant and accepting of all the problems on the human being level. But despite all the problems here, it is still amazing the energy when compared to other markets, which are depressed.”

With the long-term in mind, Salamé commissioned renowned Iraqi architect Zaha Hadid to design the 20,000 square meter Beirut Souks Department store, which is slated to open in the next three years. At the same time, Salamé is investing $50 million in Aïshti Seaside and the art foundation, which will have 17,000 square meters of retail space and a dedicated 3,000 square meters for the Aïshti Foundation, which is to promote art in Lebanon and house a portion of Salamé's private art collection of over 1,000 pieces. “I was running out of space - I could show different parts of the collection for the first four to five years of the Foundation,” he says.

To Salamé, there is a clear relationship between art, fashion and music, and he recently started to exhibit art works at Aïshti stores. “There was something missing in the stores, so we hung art pieces to give the interiors an extra edge and something new for the customer to see,” he says.

The Foundation will take the blend of fashion and art further. “It is a club to help people culturally and beyond Aïshti as a fashion destination, not as a hard sell but to give back to people.” If all goes well, Salamé expects the additional retail space to generate $500 million in revenues in Lebanon within the next five years. “We will have to work hard as the investment is huge,” he says.

Fact box

Age: 45

Family: Wife and three children (two sons and a daughter, aged 12, 10 and 9)

Do you remember your first foreign customer? Yes, and they are still loyal to Aïshti .

How do you like to be treated when travelling? I like to feel at home at a hotel.

How do you like to be treated when shopping? I used to go to lots of retail places, but now I don't. I go to design stores, shows, galleries and museums.

Favorite city to go for vacation? I love New York, but it is a mix of business and pleasure. Italy is my second country and I love Amalfi.

Favorite city for shopping purposes? Milan as shopping is concentrated on two to three streets and I live right by them.

Favourite designer? I can't say which as I know many of them and I like them all.  My favorite architect is Zaha Hadid.

What is most important for you when you are staying at a hotel? Quality of the pillows and the beds. I don't sleep that much, so room service is important as if I wake at 4am I need good service.

What thing do you always buy when traveling abroad? Watches.

What do you do in your spare time? I collect art.

Who has been an inspiration to you? My wife Elham, the late and great retailer Marvin Traub, who headed Bloomingdale's, and also Domenico De Sole, the president of Gucci.

Photography by George Haddad - www.georgehaddad.co

The dollar's the boss

Lebanese banks still beholden to the US Treasury

Commentary - Executive magazine, end of year issue 2012

 

Christine Lagarde, head of the IMF, with Riad Salemeh, Governor of the Lebanese Central Bank

Lebanon first fell into the crosshairs of the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) in 2011. Pressure from OFAC — effectively the world’s anti-money laundering (AML) and counterterrorist financing (CTF) enforcer — saw one Lebanese bank go under for money laundering charges in the first quarter of 2011, and by the second quarter, Lebanese banks were having to deal with US-imposed sanctions on Syria. The heat did not let up in 2012, with the banking sector continuing to deal with the aftershocks and new regulations.

The first shoe fell in February 2011, when OFAC labelled the Lebanese Canadian Bank (LCB) a “financial institution of prime money laundering concern” over transactions involving Hezbollah and drug dealers, with LCB’s assets later taken over by Société Générale de Banque au Liban. The US move was a harsh wake up call for the banks, with due diligence quickly becoming a top priority, while the Treasury pushed Banque du Liban (BDL), Lebanon’s central bank, to address AML and CTF shortcomings. BDL has stepped up to the plate, issuing circulars regulating foreign exchange bureaus – which were a link in the chain in the LCB case – limiting bureaus to one major bank account, and not allowing transfers to third parties.

The major move this year was issuing Circular 126 on May 24, requiring banks and financial institutions to “implement strictly” AML and CTF regulations. The circular extends to the US sanctions on Syria as well as Iran, with the financial sector having to be in “conformity with the laws, regulations, procedures, sanctions and restrictions adopted by international legal organizations or by the sovereign authorities in the correspondents’ home countries.” This means that banks are not allowed to have any dealings with, for instance, Syrian individuals and entities sanctioned by the US and European Union, while Syrians are not allowed to open accounts (those opened prior to the 2011 sanctions are still operational).

This circular has placed banks in a tricky position, especially the seven Lebanese banks with operations in Syria, and particularly those with sanctioned individuals that are shareholders. As Executive revealed in June, Rami Makhlouf, a cousin of President Bashar al-Assad, has a 4.9 percent stake in Bank Byblos Syria, and Ahmad al-Kuzbari, the former chairman of Makhlouf venture Cham Holding, is a shareholder in Banque Libano-Française’s Bank Al Sharq. While the banks are not in breach of the sanctions, as these are legal shareholders in a Syrian registered bank not operating beyond its borders, the banks are walking a fine line regarding reputational risk.

These recent regulations — in addition to OFAC sanctioning two Lebanon-based charities “controlled by Hamas” in October — have, in the words of a senior BDL source, “made the banks paranoid and they are missing out on a lot of opportunities as a result.”

Although it is not clear where Syrian cash is going, Turkey, the United Arab Emirates, Jordan and Egypt appear to be major beneficiaries, yet none seem to be getting the same attention as Beirut is from the US or the media. Indeed, in November the Financial Action Task Force (FATF), the international policy-making body, gave Turkey four months to clean up its AML system.

 A question then is why should Lebanese banks be so paranoid and rigidly follow OFAC’s diktats? The answer is surprisingly straightforward, and follows the investigative practice of “follow the money” — Lebanon’s fiscal tie to the US. Two thirds of the money in Lebanon is in US dollars, 85 percent of loans are in dollars and significant amounts of the banks’ money, in dollars, is sitting in New York bank accounts. As the BDL source put it, “by default Lebanese banks are part of the US banking system. Therefore our banks must comply with US regulations.”

Lebanon really has no choice in these matters, unless it wants to decouple from the greenback and de-dollarize the economy, something that is not impossible, but is certainly problematic, and it is definitely not the right time when banks’ bottom lines are under pressure and the Lebanese economy itself is flat-lining, with the source saying BDL is internally forecasting zero to 1 percent growth. 

So, tied to the US Lebanon will remain. It is a good thing then that BDL and the US Treasury get along “beautifully”, as the BDL source put it.