BEIRUT
– Arab bankers have had enough of being at the receiving end of US
regulatory diktats. After years of reluctant compliance, they are
finally speaking out. In November, they proposed establishing an Arab
banking lobby to try to have a say in US and international regulations.

Middle
East and North African (MENA) banks have been under the US financial
regulatory spotlight since the Patriot Act was rammed through Congress
in 2001 and the onslaught of the open-ended “War on Terror”.

The MENA financial sector has had to comply with a barrage of US rules and OECD “recommendations” to
be in line with international norms on anti-money laundering (AML) and
countering the financing of terrorism (CFT). Banks have also had to
adhere to economic sanctions against certain countries (Syria, Sudan and
Iran), and screen for thousands of names on regulatory blacklists.

On
top of that, MENA banks, like everywhere else in the world, have had to
adopt, at significant cost (some $8bn worldwide), US legislation like
2014’s Foreign Account Tax Compliance Act (FATCA).
FATCA, which is an attempt to repatriate tax dollars, requires non-US
financial institutions to provide information on US account holders to
the Internal Revenue Service (IRS).

The cost of non-compliance?
Being cut off from correspondent banks in the US, which means being
denied US dollar transactions and access to the international banking
system. That is significant as around 64 percent of all global foreign currency reserves are in US dollars.

‘Who is your financial regulator?’

At
the Union of Arab Bankers’ (UAB) annual conference in Beirut on 24-25
November, the atmosphere was different from previous years.

Gone
was the attitude of resignation, that “we have no choice but to comply”,
and touting to the world that Arab banks are following the rules.
Instead, the mood was one of assessing the collateral damage, with
sessions on “The Impact of the Arab & International Political
Developments on the Arab Banking Sector”, and the “Impact of
International Regulations on the Funding Policies of Arab Banks”.

During
one panel discussion, the MENA head of Reuters’ GRC (Governance, Risk
and Compliance) services, Mohamed Daoud, asked delegates, “Who is your
financial regulator?” One attendee, Osman El Toum El Hassan, General
Manager of Sudan’s El Nilein Bank, stood up and said, “Theoretically the
central bank but in reality the regulator is the devil.”

“The CIA,” another banker shouted out. 

There
were laughs, nods and knowing looks in the audience, aware that their
central banks were not to be as feared as the US Treasury. It was not
what you would usually expect from the conservative banking community.
Again and again, the bankers spoke out about the problem of being at the
receiving end of foreign regulations, de-risking, and that the MENA
region was being unduly singled out.

“Theoretically the central bank but in reality the regulator is the devil.”

One
attendee expressed his dislike of FATCA, saying “we have to be spies
for the US.” Under the act banks have to effectively be agents
of the IRS. It was a point emphasised by Abdullah Al Saudi, CEO of ASA
Consultants. “Arab banks are spies on people with American passports,”
he said in a speech.

The driving force of discontent was the de-risking
going on, with some six MENA banks having lost their correspondent
banking relationships with the US over the past year. The prime reason
is the lack of profitability for US banks. To not get fined
by US regulators, American banks have to carry out strenuous due
diligence and auditing to ensure the Arab bank has done its own
compliance work.

Unless a major Arab bank, such effort is not
financially worth it for the potential risk involved. The irony is that
Arab banks have to abide by domestic US legislation to continue their
own domestic operations, with US correspondent banks even scrutinising
local transactions – which do not leave a country’s jurisdiction – in
the advent of wider money laundering within the Arab bank.

“Arab banks are spies on people with American passports.”

In the case of Lebanon, due to the US’ Hizballah International Financing Prevention Act of 2015 – which intends to “prevent
Hizballah’s global logistics and financial network from operating in
order to curtail funding of its domestic and international activities” –
local banks cannot have accounts for Hezbollah members, even though the
party is a legal entity in Lebanon and has 12 members of parliament.

Lebanese
banks have also been under pressure to not deal with Syrians due to the
2011 sanctions by the US and European Union on Syria, which is a
serious problem for the estimated 1.5 million Syrian refugees in
Lebanon. Due to such regulations, Syrians complain of not having access
to the financial sector; legitimate businesses struggle to make regional
and global transfers; and anyone with the name Mohammad, Ali or Osama
gets extra scrutiny.

“We’re part of the international community,
but we are never asked our opinion, it is imposed on us,” El Hassan
said. “Why is a Sudanese prevented from sending $100 from Saudi Arabia
to his relative in Sudan? I will never support any law that deprives
people of their basic human rights.”

One-size-fits-all policies

As
is often the case with international regulations they are
one-size-fits-all, not taking into consideration local cultures and ways
of doing businesses.

For example, 88 percent of Sudanese do not
have bank accounts, according to El Hassan, as Sudan is a cash-based
society. He said clients do not grasp the concept of money laundering
and are puzzled by Know Your Customer (KYC) questions asking if they are
married, have kids, or rent or own a house when they want to buy a car.

“When
we explain to people what money laundering is, no doubt one out of a
100 will now go and try it,” he said. Over in Egypt, out of 91 million
people, just 7 percent of Egyptians are estimated to have a bank
account.

But despite such realities, there is minimal understanding of the issues on the ground.

“It
is as if the MENA has become an embargoed region and outsiders have
limited dealings with us. It is as if compliance is focused on Arab
countries, and it is chaining the banking sector, not taking into
account local cultures,” said Dr. Ali Hasan Ismail, Governor of the
Central Bank of Iraq, at the UAB conference.

While compliance
experts in the West have stated that AML and CFT regimes need to be
overhauled to be more effective (as Chip Poncy, a former US Treasury
official, said at 2013’s UAB conference), the rules have not changed.
Instead, business has become harder in a region beset with political and
economic turbulence. 

Indeed, the phenomenon of de-risking can undermine development, which is exactly what the MENA region does not need in the current environment. According to a recent report
from the United Nations Economic and Social Commission for Western
Asia, the GDP economic losses from the conflicts in Yemen, Syria and
Libya are around $425bn, while reconstruction costs in the MENA are
estimated at $614bn.

Countering the US’ regulatory strength and
the dollar’s hegemony by having even a small voice in the drafting of US
and international regulations will not be easy. Conflict in the region
is an obvious dampener for cooperation, while massive economic
disparities exist between the hydrocarbon rich Gulf countries and the
Levant and North Africa. The Gulf monarchies themselves do not see
eye-to-eye, and the Arab League kicked Syria out of the organisation in
2011. 

Previous attempts at cooperation have not panned out. In 2008, after 27 years of deliberations, the Gulf Cooperation Council (GCC) Common Market
was announced to much fanfare but has been a damp squib, largely due to
bickering over where a GCC central bank would be located.

‘Utopian thinking’

Moreover, the region cannot resort to using oil as a bargaining chip for a place at the regulatory table, unable to repeat OPEC’s
oil embargo on the West for its support of Israel in the 1973 war. What
the region has is a degree of financial power, with the total assets of
Arab banks estimated at $3.2 trillion, although that figure is less
than the US Federal Reserve’s assets and the combined wealth of the 500
richest people, at $4.5 trillion each respectively.

Such
realities did not prevent conference delegates arguing the need for a
banking lobby to be a part of the decision-making process.

“Instead
of the Arab world being on the receiving end, we must take part,” said
Mohamad Baasiri, Vice Governor of the Central Bank of Lebanon. Amr
Moussa, former Secretary General of the Arab League, proposed that a
lobby should not consist of all 22 countries in the League but select
countries, like Lebanon and Egypt, to be more effective.

But
overall, despite attendees’ anger at their powerlessness in the face of
US and international regulatory diktats, there was a resigned acceptance
of the fact that the kind of unity needed was unlikely to happen. As
one senior member of the Lebanese Central Bank who wished not to be
identified said, the idea was “utopian thinking, it will never happen”.

“Instead of the Arab world being on the receiving end, we must take part”

“We Arabs speak more than we act,” one participant said to claps and attendees saying “true”.

Yet
there was also the macroeconomic view. “Could any country or region
stop FATCA? Even the EU couldn’t,” said El Hadi Chaibainou, General
Manager of the Groupement Professionnel des Banques du Maroc. Neither
could Russia or the world’s rising superpower, China, for that matter.

In
a time-will-tell approach, bankers talked of looking to alternatives to
the US dollar, such as the Chinese RMB, which is growing in status as a global currency reserve.

Nevertheless,
the fact that the idea of an Arab banking lobby was being discussed,
and that the acceptance of US diktats is not what is was just a few
years ago, is telling, especially in a seemingly changing global order
and the question marks raised by the upcoming presidency of Donald
Trump.