Wednesday, April 22, 2015

GCC starts tightening its belt on glimmers of future austerity

Middle East Eye
The GCC can weather low oil prices for now, but if this continues in the medium term, wide reforms will become necessary

In economics, markets are considered cyclical. Markets slump and after a period of contraction, rebound, more bullish than before. Gulf Cooperation Council (GCC) countries are banking on such a cycle to keep the status quo.
In the 1980s and 90s, oil prices were low and GCC states were running deficits. Once the oil price started moving upwards to the $100 a barrel territory, surpluses increased and the GCC had the liquidity to embark on vast spending programmes to open up and diversify their economies away from hydrocarbons. The 2000s were a boom period, epitomised in the glitz of Dubai, the skyline of Doha's West Bay, and the global spending spree of the Gulf Sovereign Wealth Funds (SWFs).
The 2008 financial crisis hobbled the boom times, but petrodollars kept these economies buoyant to ride out the crisis better than much of the world. The so-called Arab Spring from 2011 onwards presented a political challenge, but the cash was there.
The 45 percent drop in oil prices over the past twelve months has been a much bigger blow, although only the most optimistic opponent of the GCC order would consider it a nail in the coffin of the Gulf monarchies. The region simply has too much access to capital, and with small local populations – Saudi Arabia aside – able to fund its way out of this downturn in the near term.
Keeping the status quo, however, is proving costly. “It has become quite a bit more expensive to be a state in the region following the Arab uprisings, calculated in the vicinity of 10 to 15 percent more costly following large [government] handouts. It will be hard to roll that back, but eventually that's what will need to happen,” said Martin Hvidt, professor at Zayed University in Dubai.

Monday, April 20, 2015

Mist on the Nile – an Egyptian Record

Money Laundering Bulletin

Political turmoil in Egypt since the uprising that ousted President Hosni Mubarak four years ago has served anti-money laundering as both stimulus – through pursuit of embezzled state funds – and brake with delays in the introduction and implementation of new supervisory standards and good practice. Paul Cochrane reports from Cairo.

Unrest and Context
There were high hopes that Egypt was embarking on a new, clean financial era following mass protests in January 2011 that ousted President Hosni Mubarak. Popular calls for an end to the corruption and cronyism that had characterised Mubarak's 30 year rule appeared to be heeded.
In April 2011, Mubarak along with his sons, Alaa and Gamal, were arrested for misuse of government funds. In July 2011, former interior minister Habib el-Adly was convicted and sentenced to five years for involvement in a no-bid government contract that squandered some US$15 million. Former Prime Minister Ahmed Nazif was arrested for "squandering public funds and profiteering." The foreign accounts of Mubarak and other high-level officials were frozen in Switzerland, Britain, Canada and the European Union (EU), pending investigations.
In the meantime, Egypt went through more political turbulence following the Muslim Brotherhood coming to power in 2012 with Mohamed Morsi elected president. In July 2013, following further mass demonstrations, Morsi was put under house arrest, with the military taking control of the country, formalised with the election of General Abdel Fattah el-Sisi as President in April 2014.

Qualified Progress
Despite the political chaos, Egypt does seem to have made progress in fighting money laundering. The US State Department in its 2014 International Narcotics Control Strategy Report noted that: “In the past two years, the Government of Egypt has shown increased willingness to tackle the issue of money laundering, especially with regard to investigating allegations of illicit gains or corruption of public figures and organisations.”
But this has been far from a spotless record. There have been no anti-money laundering legislative proposals in the past two years. El-Adly and Nazif were both cleared in February (2015). Mubarak's sons, who were convicted for embezzling over US$13.5 million in state assets in May 2014, were released in January under a technicality in Egyptian law as they had served the maximum period of 'preventative detention'. It is a sore point with advocates for greater accountability. They knew how to hide everything,” said a compliance officer at an Egyptian bank who wanted anonymity.
Judicial investigations dealing with frozen assets abroad have not moved forward either. The handling of the looted funds of Mubarak's regime was very badly handled, starting from the Morsi regime and ending with the Sisi regime. They spent a lot of money appointing famous legal firms abroad but without proper documentation or court orders. Counterparts were not able to release or breach banking secrecy,” said Hany Abou-El-Fotouh, president of Alraya Consulting and Training in Cairo.

Corruption costs
Meanwhile, corruption remains a major issue in Egypt. According to an interview with the head of the Central Auditing Organisation aired on Nile News TV in November 2014, financial and administrative corruption is estimated to cost Egypt around USD28 billion a year. Egyptian media reported in January that the country’s Administrative Prosecution Authority investigated 151,000 corruption cases in 2013, an increase of 80,000 cases on 2012, and more than double the cases in 2011.
Which is good news. But while the prosecutor is being more active, this does not always extend to public tenders. We are in a similar situation, in a broad sense, to the South American military dictatorships of the 1980s. Sweeping legal reforms are taking place in secret through a committee made of judges connected to the president. We don't have any judicial oversight of the administrative court, or of public contracts,” said Amr Adly, a nonresident visiting scholar at the Carnegie Middle East Centre, in Cairo.

Military intervention – in the economy
To get the economy back on its feet, the government is trying to attract US$15-20 billion a year in foreign investment, particularly from Gulf allies the United Arab Emirates (UAE) and Saudi Arabia, which have been providing financial aid. The government organised an Egypt Economic Development Conference which was to be held in mid-March (2015) in the Red Sea resort of Sharm el-Sheikh, with some US$12 billion earmarked for infrastructure projects. Many of the major infrastructure projects, however, are expected to be carried out by the military, with its commercial arms estimated (by a leaked US government diplomatic cable) to account anywhere from 5% to 30% percent of the overall economy.(1) “Since the military came to power they are having an expanded economic role, with mega projects financed by the state and executed by the military, driving out the public sector. Emirati (firms) are asking for direct partnership with the military to avoid tenders and inefficient bureaucracy,” added Adly.

Terrorist finance
Despite this torpor over public contracts, the authorities are more active in enforcing the rule of law is in its own domestic CFT (combating the financing of terrorism).
In December 2013, Sisi designated the Muslim Brotherhood – formerly in government - a terrorist organisation. The move was followed by Gulf allies Saudi Arabia in March 2014, and the UAE in November, 2014. Previously, only two other countries had listed the group: Russia in 2003, and Syria in October 2013.
The security forces have detained an estimated 41,000 people on political charges since Morsi's ouster, according to European Parliament figures from January 2015; some 29,000 of that figure were arrested for suspected ties to the Muslim Brotherhood. Prominent members of the Brotherhood have been arrested and had assets seized by the state, including two supermarkets run by businessmen with alleged links to the group. In February, 2015, 169 non-governmental organisations (NGOs) linked to the group were dissolved, with funds and property seized.

Compulsive viewing; inadequate screening
The Central Bank of Egypt (ECB) sends financial institutions blacklisted names and accounts to be blocked that includes the Brotherhood, said the compliance officer. Not all of those arrested for ties to the Brotherhood are being blacklisted. If there's no proof from the ECB, a customer cannot be prohibited. Otherwise, we'd need to sit in front of the TV all day to see who is named [by the authorities to carry out due diligence], which wouldn't work. We don't know if somebody voted for or supports the Brotherhood,” said the compliance officer. Family members of Muslim Brotherhood leaders are “the ABC of politically exposed persons (PEPs),” he added.
The ability of banks to screen blacklisted names and designated individuals by the Egyptian and international authorities is complicated by only 10 out of the country's 40 banks having adequate software, added the compliance officer.
Automated screening systems are not widespread. With the exception of the big banks, most just perform basic checking on either manual lists or databases. This is one big hurdle and challenge for the sector,” said Abou-El-Fotouh. “Very few buy these filters to screen blacklists, so how would they identify a potential Brotherhood leader and associates? They wouldn't be able to identify these persons because of their screening techniques.”
Such shortcomings in screening may be addressed soon. “At the last ECB meeting they said such software may become mandatory, to save banks from United States Office of Foreign Assets Control (OFAC) sanctions,” said the Middle East bank compliance officer.

KYC – an aspiration
The last know-your-customer (KYC) update from the ECB came in 2011. Such compliance is not always up to par. “Mostly HR people are hired for customer service, and they have to do KYC, insisting on filling four or five pages with signatures, but the problem is they don't see what is being done with the form in the back office. If I say my annual income is [Egyptian Pounds] EGP 50,000 [USD6,565], and want to open account with EGP500,000 [US$65,659), is anyone stopping me? No,” said Ahmed Hussein, partner at Developers for Training and Consultancy (DTC), in Cairo.
Complicating overall compliance and regulating the sector is that just 7% of Egyptians are estimated to have a bank account, according to Dubai-based online payment provider PayFort; Egypt's population is 88 million. Furthermore, 80% of GDP is estimated to come from small-and-medium-sized enterprises that are unregulated and part of the informal economy.
Banking culture is not clear to all Egyptians and people like to keep money at home. KYC is new to society; some people are annoyed if you ask them if they are married, have kids, or rent or own a place,” said Hamdy El Sayed, partner at DTC.

Supervision in catch-up
One potential engine of reform is the main financial regulator the Egyptian Financial Supervisory Authority (EFSA) which was established in 1997, and has been active in relation to improving financial control standards, especially at the Egyptian Exchange (the stock exchange). However, the political upheaval has delayed implementation of recent international standards on, for example, corporate governance.
Abou-El-Fotouh is not that impressed though: “The EFSA is far behind international best practices - they have their own local issues, particularly after the revolution.”

FATF scorecard
Egypt was one of the founding members of the regional AML body MENA-FATF, and was last subjected to a FATF Mutual Evaluation Report in 2009. Egypt was deemed ‘compliant’ for five and ‘largely compliant’ for 20 of the 40+9 Special Recommendations; it was ‘partially or non-compliant’ for three of the six core Recommendations, notably regarding regulation, supervision and monitoring of designated non-financial business and professions (DNFBP).
As regards the Special Recommendations, Egypt was deemed partially compliant in implementing UN instruments; criminalising terrorist financing; freezing and confiscating terrorist assets; international cooperation; wire transfer rules; and cash at border declaration and disclosure systems.
The ECB is strong, but they are not as strong as they should be,” said Abou-El-Fotouh. “I severely criticise [the country’s financial intelligence unit – (FIU)] the Egyptian Money Laundering Combating Unit,” he said, as Egypt's Anti-Money Laundering Law and its Amendments No.80 of 2002 stipulates that an FIU should have annual statistics on cases and STRs (suspicious transaction reports) filed by financial institutions, “but until today, 10 years since it started, I haven't seen any.”
According to El Sayed, STRs are only shared with other FIUs. The US State Department (2014) reported that 1,549 STRs were received by the Egyptian Money Laundering Combating Unit, which is part of the central bank, between July 2012 and June 2013. There is no data on prosecutions, while El Sayed said there has been “no public naming and shaming.” The ECB's FIU did not respond to interview requests.
1) According to a leaked US Embassy cable from 2008, the Egyptian government “retains direct economic management of one-third of the Egyptian economy.”

Wednesday, April 15, 2015

Peaceful Drones

 MIT Technology Review Pan Arab

 The UAE is encouraging the development of non-militaristic drones. 

Wadi Drone, Martin Slosarik on the right

Drones, or Unmanned Aerial Vehicles (UAVs), have a reputation problem. Media attention has overwhelmingly focused on military use, particularly the United States’ controversial use of UAVs for extra-judicial assassinations, the circumvention of sovereign airspace, and the ‘collateral damage’ of civilians killed in Pakistan, Yemen and elsewhere. Indeed, the mosquito like buzzing of overhead drones is a source of nightmares for some, fearing death from the sky. Surveillance drones are also viewed with suspicion, while the unlicensed use of off-the-shelf UAVs is causing regulatory issues in multiple jurisdictions.
To counter such militaristic and ‘Big Brother’ type uses of UAVs, the United Arab Emirates launched the Drones for Good Award last year to push the development of drones for civil and peaceful purposes. The largest event of its kind globally, the tournament attracted over 800 applications.
In the Middle East, Saudi Arabia topped the list with 18 entries, followed by Egypt with eight entries, while other entries came from Jordan, Lebanon, Qatar, Algeria, Libya, Sudan, and Tunisia.
Some of the more interesting ideas submitted included a drone that can transfer organs for transplant from donor centers to the receiver in the shortest period of time, a drone that can eliminate fog from the atmosphere in an environmental friendly way, and a project that makes detection of land mines efficient and safe.
Awards were given along three categories: Government, National and International. Local telecom provider Etisalat won the Government award with its Network Drone, which can expand GSM network coverage vis UAVs during emergencies and disaster relief.


Inspired from insects

Patrick Thevoz, co-founder and CEO of Flyability in Switzerland, won US$1 million in the International category for Gimball, a lightweight, spherical collision-proof drone for search and rescue. A failing of search and rescue drones, indoor and out, has been censors’ blind spots, leading to crashes or damage to the drone. Gimball can collide with an object and keep on going, enabling the drone to enter restricted areas with numerous obstacles bolstering search and rescue capabilities.
While the US military is researching the use of insects’ exoskeletons for adaption in robots and as body armor, Thevoz utilized millions of years of insect evolution as an inspiration. “Insects don’t have a protective cage, so Gimball is not mimicking how insects fly but how to collide and continue flying without falling,” he said.
Already, Flyability has garnered interest from customers in Europe and the US with an aim to make the drone widely available in 2016. “There are a lot of drones with protective cages, but the separate aspect of the drone and its protection, we’ve not seen that flying anywhere so far (…),” he added.

Testing Wadi Drone

Supporting park rangers

Wadi Drone won the AED 1 million ($272,253) National prize, developed by four students at the New York University in Abu Dhabi, overseen by Matt Karau, a visiting instructor and research associate. The drone is a fixed wing airplane with a 2.5-meter wingspan carrying a small communications payload that retrieves information from ground-based scientific measurement devices including camera traps. Covering Wadi Wurayah National Park in the Emirate of Fujairah, the drone is able to fly for up to 40 kilometers and collects data from 120 camera traps that photograph wild animals, and gathers images of flora and fauna to aid research and monitoring by park rangers and conservationists.
“We sought to design something that respects the sensitivities of the Gulf, so there is no camera on the plane itself – no aerial photography – which rings alarm bells in many parts of the world,” said Karau.

While drones are already used for conservation purposes, there are many gaps in available technology that the team chose to develop. The drone is a Mobile Ubiquitous Land Extension (MULE), which carries a computer onboard to create a data communication link with the remote areas. While the concept of a data MULE is not new, “nobody put a data MULE and conservation together in a specific application,” such as for retrieving photographs in remote locations, said said Martin Slosar“Rangers have to hike three days to get these (camera) SD cards, and in the summer use a helicopter that costs 100,000 AED ($27,000) a day to employ,” he added.
The team’s non-urban setting will help them develop the concept further, as ironically in March 2015, Abu Dhabi banned the sale of recreational drones. New legislation is underway, and drone developers are slated to engage with the government to get the right balance between recreational use and development.

More competitions ahead

The Drones for Good Award has certainly sparked more interest in drone technology and related development. With 2015 designated by the UAE government as an innovation year, the success of the awards gave rise to another upcoming competition, the Artificial Intelligence (AI) & Robotics Award for Good, which was launched in February 2015 with the aim of improving government services for citizens through combining robotics, AI, and technology. The award is to take place at the 2016 Government Summit in Dubai.
As with drones, the competition’s aim is to show that AI and robotics are more than just for militaristic and surveillance purposes as they can be applied real for positive good in society and nature.

Photos courtesy Martin Slosarik

Wednesday, April 08, 2015

Egypt’s Bet on Nanotechnology

MIT Technology Review Pan Arab

Universities in Egypt are investing in nanotechnology to address some of the country’s pressing problems.


 A silicon wafer in the clean room

A khamseen engulfs Cairo; dust is everywhere, coating all surfaces and there is grit in one’s teeth. It is not an ideal day to visit a ‘clean room’ where technology is used at the nanoscale. Nano means one-billionth, so a nano-meter is one-billionth of a meter, or 1/1,000th the thickness of a human hair. At that scale, dust particles are huge. But safely zipped up in an all-in-one protective suit and the air-filtration system pumping away, the environment can live up to its name.
The 150 square meter clean room at Zewail City of Science and Technology in 6th of October City, outside of Cairo, is the largest in Egypt and aims to take nanotechnology development to the next level. The American University of Cairo (AUC) is equally at the frontiers of nanotech, but does not have the same facilities – just 20 square meters compared to Zewail’s three rooms, including a wet area. Zewail City, brainchild of the 1999 Nobel Laureate in Chemistry, Ahmed Zewail, aims to address some of the core challenges scientific research and development faces in Egypt. The country is not short of brains, but access to funds, equipment and cooperation with industry has been lacking.
It is still early days, said Professor Sherif Sedky, Academic President of Zewail City and Director of the Center for Nanotechnology, with expectations for greater application of nano devices and smart nano gels, for example, in the next two years. Zewail City is tapping into the local talent available by actively cooperating with other education institutions. Professors from AUC, like Sedky and Dr Nageh Allam, assistant professor of physics at AUC, are pushing such developments.

Addressing pressing problems

The dust storm ranging outside is thematically appropriate. Some of the nanotech research underway at Egyptian institutions is aimed at tackling climate change and other pressing problems such as water and energy. For instance, Allam, who also teaches at Zewail City, is working at the micro and nano level on desalinization to address the issue of water scarcity. “We have the Mediterranean and Red seas, so the aim is to make nano materials hold the salt from sea water to give fresh water,” he said. Through a grant from Qatar Foundation, a further project is to convert carbon dioxide in the presence of sunlight into natural gas. Related research is to produce natural gas from agricultural or kitchen waste, which, as Allam notes, in a country with 88 million people and counting, there is not a shortage of.

Despite the challenges

However, Allam is facing obstacles in his research. While facilities have improved, with Zewail’s clean room being utilized by Egyptian researchers, they pale in comparison to those elsewhere in the globally burgeoning nanotech field. MIT’s lab for instance supports 2,000 researchers, while other institutions have clean rooms of over 1,000 sq.m, several times larger than Zewail’s and 20 times larger than AUC’s.
“For Egypt the huge problem is funding, and secondly, there are no companies to supply us with chemicals or the small factories to make specialized items,” said Allam. “It may take eight months for a delivery, during which time someone else may have published (relating to my research). When I am at MIT, if I order in the morning it is on my desk that day.”
Despite such challenges, cutting-edge research is underway in Egypt. Dr Wael Mamdouh, assistant professor at the Nanotechnology Graduate Program at AUC, specializes in molecular systems at the nano scale. After groundbreaking work and numerous publications at European institutions, he returned to Cairo to shift the scope of his research in line with the needs of applied science in Egypt and the region. One such area is bacterial infections, a particularly common problem at local healthcare facilities.
To develop affordable solutions, Mamdouh and his team – including undergraduates – are researching natural properties for use in nano-fibers for dressings, such as the insulin in honey, herbs and shrimps. “We are investigating how to design novel techniques from these materials and analyze their properties to come up with prototypes that could solve some bio-medical problems with cancer, especially breast cancer, and bacterial infections,” said Mamdouh. “It is really promising to transfer material to nano materials as the properties change significantly.” Broken down at the nano level, the compounds from these natural extracts create a synergistic effect. “It is amazing to see. Insulin has no anti-bacterial products, but at the nano scale it does,” he said.
One student already has a provisional US patent relating to the electro-spinning of polysaccharide nano fibers, and others filed this year for anti-bacterial coatings and wound dressings. Through an electro-spinner, the anti-bacterial properties in the nano-fiber increase tremendously, making it close to an antibiotic. “It is the first time in Egypt, maybe even in the region, that an undergraduate is developing anti-bacterial coatings and wound dressings by electro-spinning,” said Mamdouh.

Yellow lighting protects photosensitive research materials at Zewail’s wet room in the clean room

Nano in physics

The uses of nano particles in biomedical research extends from the external to the internal. Dr Mohamed Swillam, assistant professor of physics at AUC, is focused on nano-photonics or optics. This is a new field in physics, at the nano-scale, that integrates nanotechnology with light. In previous research, for which Swillam won the Best Publication in Physical Science award from Misr El-Kheir Foundation in 2013, he proposed an ultrafast method to control and manipulate a laser beam on a nanoscale. His research has application in nanolithography, whereby tiny electronic devices control and manipulate nanoparticles to deliver drugs within the human body. “It can move a drug from one location to the other using light, like a nano-optical tweezer,” he said.

Further nano developments

Far removed from the human body, Dr Hanadi Salem, Professor in Materials Science and Director of the Nanotechnology Program at AUC, is researching severe plastic deformations to take bulk materials and reduce them to the nano level. One project involving applied nanotech is to produce components of superior mechanical properties and with optimum resistance, such as self-lubricating solids and high-wear resistance materials. Such development can be used to produce gears for machines with high wear resistance, and carbon nanotubes for metal-based break pads for vehicles. Last year, Salem’s team tested a self-lubricating solid in Germany that they had produced. “We had excellent performance, with very low wear rates. It has the capability to be commercialized,” she said.
A further area under research is thermomechanical treatment associated with intense plastic deformation related to steel rebar – the steel rods commonly used to reinforce concrete in buildings. By restructuring low carbon steel it produces equal strength and toughness as conventional steel but at a lower cost and with similar properties. Salem and students have managed to refine the structure from two microns to one micron using thermo-mechanical treatment. The second stage is to take it to the nano-scale, for which Salem has applied for grants and is seeking collaboration with the steel industry.

Photos by Paul Cochrane

Tuesday, March 17, 2015

Islamic State – a model of modern terrorist financing

Money Laundering Bulletin (published January 2015)

 A screen grab showing where ISIL is operating in Iraq and Syria.
Image from -

The most sophisticated terrorist force yet seen, Islamic State has built a varied funding infrastructure that is set to take easily as long to disable as its military assets. Paul Cochrane, based in Beirut, goes in search of the IS backers.

Iraq and Syria are major hot spots in the fight against terrorism financing. Numerous militant Islamist groups are in operation, most notably the Islamic State (IS), with revenues derived from multiple sources, including extortion, seizures of grain, sales of oil, private donations and charities.
While an international campaign is underway to remove such groups and funding from the financial system, within the Middle East there is a consensus amongst governments that more needs to be done to curb the movement of funds.
The rise of the Islamic State of Iraq and the Levant (ISIL) - an earlier name - replaced by Islamic State in June, has put terrorist financing firmly back on the global political agenda. The militant organisation had been growing in strength in Iraq and in neighbouring Syria since the uprising against the regime of President Bashar Assad became increasingly violent from 2011 onwards.
In early 2014, ISIL caused shock-waves around the world when it took the Iraqi city of Mosul, consolidating gains made in broad swathes of northern Iraq and northeastern Syria. Working with former members of Iraq's Baathist party, ex-soldiers and foreign fighters, ISIL is "the best-funded terrorist organization we've confronted," said David Cohen, undersecretary for terrorism and financial intelligence at the US department of the treasury, to the press in April, 2014.
As a result, financial controls have been imposed in parallel with the military action launched in August (2014) by a US-led coalition, with the US Joint Chiefs of Staff chairman General Martin Dempsey estimating in November it will last for "up to four years."

UN Resolve, US realism

Military action was accompanied by the United Nations Security Council passing Resolution 2170 (August 2014) "to suppress the flow of foreign fighters, financing and other support to Islamist extremist groups in Iraq and Syria." It noted that the asset freeze, travel ban and arms embargo requirements in paragraph 1 of Security Council Resolution 2161 (2014) apply to IS, the Al Nusra Front (ANF) - another jihadist group, "and all other individuals, groups, undertakings, and entities associated with Al-Qaida." Six individuals were named in the annex subject to travel restrictions, asset freezes and other measures targeted at Al-Qaida affiliates (IS leader Abu Bakr Al-Baghdadi was not among them, having been listed in 2011).
In October, global AML agency the Financial Action Task Force (FATF) issued a statement on combating the financing of terrorism CFT, which included an announcement that its officials had "decided to look at the source and methods of funding for ISIL." (1)
The ongoing air campaign has so far not crippled IS, while efforts to curb financing have proven elusive. As Cohen said: "We have no silver bullet, no secret weapon to empty ISIL's coffers overnight."

Multiple sources

Part of the problem is that IS, along with other organisations, has avoided using the conventional financial system due to heightened scrutiny and regulations, while aiming for operational independence through not relying on donors. "ISIL doesn't need private donor support as it is annoying to have ideological requests and meetings, so if they don't need it, why want it?" said Elizabeth Dickinson, Middle East editor at Monitor Global Outlook, and author of Brookings paper "Playing with Fire: Why Private Gulf Financing for Syria's Extremist Rebels Risks Igniting Sectarian Conflict at Home".

Oil, grain, people

According to the US Treasury, IS is generating revenues of around USD1 million-a-day from sales of oil from wells it controls in Syria and Iraq, and extortion, smuggling, taxing locals and transport routes, as well as using kidnapping-for-ransom (KFR). "Apart from state sponsorship, KFR is today's greatest source of terrorist funding and the most challenging terrorist financing threat," said Cohen.
IS is also generating operating revenues from the sale of stolen grain. In November, Iraq's agriculture minister said in a statement that IS had stolen over 1 million tonnes of wheat and barley in Nineveh Province and smuggled it to Syria, while in August, IS seized 40,000 to 50,000 tonnes of wheat. ISIL is believed to control a third of Iraq's wheat production area and nearly 40% of its barley production.

The offence budget

A seizure of data in Iraq in June 2014, indicated the group has US$875 million at its disposal, and when including other assets such as stolen antiquities, heavy armour and the like, assets of up to US$2 billion.
According to press reports, IS seized half a billion dollars from the Central Bank of Iraq branch in Mosul, although Ahmed Salah Hashim, Associate Professor at the military studies program at the Rajaratnam School of International Studies in Singapore, questions this amount, saying it is unlikely the bank would have held such money in reserve, especially given the high levels of corruption in the country.
Ultimately, IS and other militant groups' finances are not clear. "There is a big black hole in understanding the financing of these groups as there is so little information out there," said Hashim.

Patterns of giving

While private donations are not considered to account for a major slice of IS, ANF and other groups' finances, funding has nonetheless trickled in from sympathisers. Cohen singled out Arab Gulf states, Kuwait and Qatar in particular, where fundraisers are "soliciting donations to fund extremist insurgents, not to meet legitimate humanitarian needs."
Dickinson said Cohen's speech highlighted two points. One is that it takes time for designations to come into force. "The second point is that when I talk to Treasury folks, these public statements are indicative that progress behind the scenes is not fast enough. It is only really when conversations don't make progress that the Treasury makes such a statement," she said.
Kuwait was considered an epicentre of funding, with Arabic daily Al Hayat reporting that in 2013 alone "Kuwaitis supported the Syrian revolution with approximately USD$100 million."
But as ISIL became increasingly powerful and a force to be reckoned with, Gulf states have started clamping down on fundraising, and in November, Bahrain hosted an international summit, the Manama Meeting on Combating the Financing of Terrorism.
Since her investigation into fundraising in Kuwait in 2013, Dickinson said there has been significant change in the country. "Before it was a public phenomenon, with posters naming fund-raisers. All of that has stopped because of government pressure. A key point I made was that funding spiked in 2012 and since then is going down, for one because many people have become disillusioned with the conflict. Now you are left with core funders, including ones that are sanctioned, and they're nervous about their predicament in Kuwait as the government has started taking away nationality from prominent (political) critics and fear the same could happen to them," she told the Money Laundering Bulletin.
Qatar, on the other hand, has made less progress than Kuwait and Saudi Arabia, with the latter banning unauthorised fundraising campaigns for Syria. Hashim said there was "a bit of ambiguity" as to whether the Qatari government was involved in financing ISIL and ANF, with the country having openly backed the rebel groups in Syria from the get-go.
"Qatar didn't have networks in Syria when it was building up the opposition, so instead worked through a strange web of middle men, and funneled money through them to brigades on the ground. It operated similarly to private donors, but some (of the funds) were coming from the government," said Dickinson.
Since Kuwait started cracking down, networks have moved to the Qatari capital, Doha, to solicit donations. "People designated by the Treasury are still operating with complete immunity in Doha," she added.
Turkey is another area of concern, with Ankara having allowed the flow of funds and weapons across its border with Syria to aid rebels groups. While there have been allegations of Turkish government support for IS and ANF, there has been no firm proof, and analysts suggest that funding is coming from Turkish Islamists, just as in the Gulf countries.

Beyond words

While Middle East and North African (MENA) countries have pledged to improve compliance and CFT enforcement, a senior compliance officer at a regional bank that wanted anonymity said they have not cleaned up their act as stated in public. A key reason for this, he said, was that MENA countries do not have a unified view on the definition of terrorism.
Compliance has also been lacklustre in certain jurisdictions, Turkey in particular, which has been under the FATF spotlight for the past few years, only in early 2014 implementing CFT legislation. Furthermore, FATF, following its October plenary, considers Iraq, Syria, and Kuwait jurisdictions with strategic AML/CFT deficiencies.
Non-profit organisations (NPOs) are another area that is being exploited to fund terrorist organisations in Iraq and Syria. This is an area of particular concern as compliance with FATF's Recommendation 8 on NPOs is low worldwide. "The problem has been implementation on the ground by various governments. A lot of jurisdictions have not gotten regulatory capacity and tools up-to-speed," said Ian Lye, former Head of Terrorism and Insurgency Research at Thomson Reuters, (now working at JP Morgan Singapore.)
NPO compliance in the MENA is particularly low. "All NPOs are high risk entities that can easily hide sources and destinations of funds. Moreover, many are controlled by well-known entities or religious bodies. Steps should be taken towards regulating these entities in the MENA," said the compliance officer.
Adding to concern is that aid workers may be radicalised and return to their home countries. "Indonesian charities send food, supplies and money to Sunni fighters as relief aid, but to the consternation of Jakarta these aid workers morph into Jihadis," said Hashim.

Saturday, February 28, 2015

Legacy Issues - Afghanistan, AML and CFT

Money Laundering Bulletin (published 20 January 2015)

(Photo by Todd Huffman - Wiki Commons)

British forces have already left Afghanistan and the US plans withdrawal of all combat troops by the end of 2016. President Ashraf Ghani must now divide his time between working to preserve security against the threat of Taliban resurgence and delivering on promised structural reform: the heroin trade and endemic corruption will be fixtures on his agenda but he might not have expected that AML compliance in the shape of local banks’ response to a massive fraud dating back to 2010 would also be a priority. Paul Cochrane reports.

A new chapter

Afghanistan is undergoing a transition of sorts. A new president has taken office who is keen to curb corruption and bolster business, while US-led forces are slated to be reduced, albeit a full withdrawal is not happening as expected. Meanwhile, Kabul managed to not be blacklisted by the Financial Action Task Force (FATF) in 2014, although major challenges remain in the war-torn country and the country remains on FATF’s watch list.
It has been over 13 years since the United States led a coalition to overthrow the former Taliban government and ouster Al-Qaeda militants in Afghanistan following the September 11, 2001 terrorist attacks. Afghanistan has been at the forefront of the US-led “global war on terror” ever since, being under international sanctions in relation to the Taliban, Al-Qaeda and a plethora of other terrorist groups, and the focus of counter-insurgency (COIN) policies, including combating the financing of terrorism (CFT).
The US and its allies having spent more than US$1 trillion pacifying and developing the country, deploying one million soldiers and civilians in the process. Washington has announced that US troops will depart by the end of 2016, ushering in a new era for Afghanistan after 35 years of conflict and foreign intervention. However, while US troops are to be scaled down and cut in half by the end of this year, in November, 2014, the Afghan parliament has approved a US troop presence “through 2024 and beyond.”
The Afghan economy will remain dependent on development aid – US$16 billion was pledged through to 2015 at a 2012 Tokyo Conference on Afghan aid. International non-governmental organisations (NGOs) will continue to operate in the country and related military expenditure and assistance from the US will flow, helping balance the books in Kabul, with government revenues for 2014 projected at US$2.5 billion compared to expenditures of US$7.5 billion. Additionally, any ongoing presence of American troops might well scupper domestic efforts to bring the Taliban to the table to hash out a political solution that has so far evaded COIN strategies; such talks are strongly opposed by Washington.
Afghanistan is ranked second in the Global Terrorism Index 2014, with 1,148 incidents in 2013, and the Taliban responsible for 75% of terrorism fatalities. The index noted that “terrorism is increasing in Afghanistan, with 10 percent more terrorist attacks and 13 percent more fatalities in 2013 than 2012.”

Opium and economic dependency

The opium trade is also set to continue, going by recent trends. Despite the US having spent more than US$7.5 billion over the past decade to eradicate the trade, opium poppy cultivation rose 7% between 2013 and 2014, according to a report by the United Nations Office on Drugs and Crime (UNODC). With Afghanistan accounting for 90% of the world's heroin supply, the trade is estimated to be one-fifth as large as the country's legitimate gross domestic product (GDP), making it a US$8 billion-a-year business.
After a four month delay due to issues of electoral fraud, President Ashraf Ghani was inaugurated in September 2014, replacing long-time leader Hamid Karzai. Ghani, a former professor, World Bank official and Afghan minister, ran on a platform to introduce the rule of law, good governance and eliminate corruption, as well as create an accountable judicial system and a viable economy.
Ghani has arguably got off to a good start, signing a bilateral security agreement (BSA) with the US, which is slated to bolster foreign investment, while making unscheduled visits to police stations, hospitals and prisons to check on staff attendance.

Bank fraud revisited

The most attention-grabbing move was a decision to retry figures involved in the Kabul Bank scandal, which rocked the country in 2010 with almost US$1 billion embezzled from the institution via a Ponzi-type scheme. While 21 people were convicted in March, 2013, only a few offenders were jailed and the sentences were considered light. In November, 2014, the court tripled the sentence of former chairman Shekhan Farnood and former CEO Khalilullah Ferozi from an initial five years to 15 years – five years for money laundering and 10 years for embezzlement.
After announcing the re-trial, Ghani's public “approval rating was 84 percent,” said Sanzar Kakar, Chairman of Afghanistan Holding Group (AHG), which provides professional business services, including accounting, auditing and taxation. “There is a huge amount of hope with the new administration, and a lot of good things have already been done.”
However, missing from the latest trial was the brother of the former president, Mahmood Karzai – who had borrowed US$22 million from the bank - and Haseem Fahim, the brother of former Vice President Marshall Muhammad Qasim Fahim, who died of a heart attack last March.
The collapse of Kabul Bank affected over a million depositors, and had a negative impact on the country's 17 banks, driving away potential clients. “It had a big impact on the perception of the banking industry, nobody can deny it,” said Hedayatullah Yahya, CEO of Afghan United Bank. Less than 5 percent of Afghanistan's 27 million people are banked, according to the IFC.

Compliance blocks business

The scandal has certainly made it hard to launder money through Afghan banks, but they have become so wary of falling foul of the Attorney General's office and customer identification checks are now such that it has impeded their general operations. “The scandal has caused banks to be quick to find an excuse for anything – not the original passport, or if the signature doesn't exactly match. They are afraid of scrutiny,” said Kakar.
If a bank account is not used for two months, a letter is required from the finance ministry to re-open the account, “which is nearly impossible,” said Kakar, while heightened international scrutiny is affecting financial transfers. “Banks have struggled with procedures and some still have a lot of trouble as they can't receive funds,” he added.

Brinkmanship with FATF

Further impacting the financial sector and the economy at large was FATF's decision to put Afghanistan on a watch-list in 2012, following a Mutual Evaluation Report (2011) for failing to meet its standards. Pressure came to a head in early 2014, with FATF threatening to place Afghanistan on its “high-risk and non-cooperative jurisdictions” list in June if it did not address deficiencies.
With the country undergoing political transition, the outgoing president Karzai having refused to sign the BSA, and growing international pressure on the few international banks with a local presence, there was serious concern that Afghanistan would be blacklisted unless FATF extended the deadline.
A decision in the balance, there was major flight of capital, which has not abated. “It was a nightmare scenario that took its toll, having a big negative impact on business. Wealthy people by the droves are going to Dubai and investing there rather than here. More and more people are saying, can you pay me outside of Afghanistan?” said Kakar.
With the country at risk of political and economic collapse if it was cut off from the international financial system, Kabul eventually enacted AML and CFT legislation in June 2014, and FATF held off black-listing the country at its October plenary.
Both laws follow FATF recommendations and methodology. With regard to AML, the statute replaced legislation from 1963 on proceeds of crime and is called 'Amendments to the anti-money laundering and the proceeds of crime' law (see ( Its purpose is to “protect and promote the financial integrity of Afghanistan” and “fight against use of financial institutions and designated non-financial businesses and professions … for money laundering, proceeds of crime, the proliferation of weapons of mass destruction and the financing of terrorism.” Another new law, No. 839 on Combating the Financing of Terrorism is designed to implement the UN International Convention for the Suppression of Financing of Terrorism (1999) and successor conventions; prevent the provision of funds or property for terrorist acts, terrorist organisations, or terrorist/s; and implement UN Security Council resolutions on combating financing of terrorism and the financing of proliferation of weapons of mass destruction (see
In reality the politics were able to go through, and at the eleventh hour the Afghan government scrambled to get something [for FATF], but if you look at the details I don't think Afghanistan should have qualified from a technical perspective,” said Kakar.
Indeed, at the October plenary, FATF kept Afghanistan on its list of jurisdictions with strategic AML/CFT deficiencies. FATF has also called on Kabul to improve enforcement and implementation, criminalise money laundering and terrorist financing, and to establish a financial intelligence unit (FIU).
In the 2014 Basel AML Index, released by the Switzerland-based Basel Institute on Governance, Afghanistan was ranked second worldwide as a jurisdiction of high risk. “The index shows a lack of infrastructure and enforcement capacities, and in the proxy indicators shows the weaknesses and the challenges it faces, which is more than legislative, it is enforcement,” said Selvan Lehmann, project manager of the Basel AML Index.
The country is also struggling with rampant corruption, a large informal economy, narcotics, and terrorism. The UNODC reported that from 2009 to 2013, total corruption costs increased by some 40% to US$3.9 billion, with more than half of Afghan citizens paying a bribe for a public service. “We are in one of the worst situated countries worldwide, we are next to Iran, in a recession, and trade and corruption are problems,” said Yahya.
While Afghanistan has managed to stave off joining global AML pariah states like North Korea, the Kabul Bank scandal and enhanced domestic banking scrutiny has instead reinforced the informal banking sector, with the few Afghans that used banks withdrawing salaries to stash at home, and using alternative remittance systems like hawala instead of the formal financial sector.
“From the point of view of the legitimate economy, it is a big hassle having to go through additional hoops but for the illegitimate economy it is bad news as it is harder to launder money unless you have an active business licence, and hard to transfer money over USD10,000 without the right paper work,” said Kakar. “Yet while Afghanistan has cleaned up its act quite a bit, there comes a point where, if you stop all transactions due to AML concerns, people find another route, so the banking sector becomes irrelevant. There needs to be a balance, as many Afghans felt there was too much freedom prior to the Kabul Bank scandal - with the oversight not there and corruption - but now the pendulum has swung too far in the other direction as banking has become too difficult.”

©2015 Informa UK PLC. All Rights Reserved

Friday, February 27, 2015

HSBC revelations expose politicized nature of global bank regulation

Op-Ed, Global Times

Illustration: Liu Rui/GT

The scandal around banking giant HSBC's Swiss subsidiary being a conduit for tax evaders has opened a can of worms in London. It is not just the media revelations that the bank profited from doing business with tax evaders, dictators and criminals for decades. It is also that the tax evaders - prominent businessmen and the like - were major donors to political parties. It has added further pressure on a sector that is far from popular with the public due to the government bailouts of major banks in 2008 at the same time as tough austerity measures were introduced.

The scandal further highlights the less than level playing field of financial compliance. Over the past 15 years, the US, Britain and the OECD's Financial Action Task Force (FATF) have forced jurisdictions around the world to pass regulations to improve anti-money laundering (AML) and countering the financing of terrorism (CFT) laws. However, the HSBC case and others in recent years have poked holes in the arguments of jurisdictions dictating to others what they need to do.

Indeed, you cannot require other countries to improve their regulations and oversight if you are not squeaky clean yourself. The balance of power though is clearly in the favor of the major financial hubs of the world, which, for now, are in the West and its sphere of influence.

The jurisdiction all countries are wary of is the US Treasury. It has teeth and has been dishing out fines in recent years to financial institutions not in compliance. Take the case of Lloyds Bank, fined $350 million for flouting sanctions on Sudan and Iran. HSBC is again a case in point, fined $1.92 billion in 2012 for deficiencies in its AML regime.

Banks in other jurisdictions are not so lucky however. In 2011, the Lebanese Canadian Bank disappeared from the face of the earth for being, in the words of the US Treasury, a bank of "prime money laundering concern" for connections to the Lebanese militant group Hezbollah. The bank didn't have a chance to pay a fine. It is evidence of the politics at play in AML and CFT, and where the financial power lies.

The US' Foreign Account Tax Compliance Act (FATCA) is a further example. Implemented last year, it requires all financial institutions (FIs) to report to Washington any American account holders in order to collect tax outside of the US. To implement FATCA, it is estimated to cost FIs around $8 billion - roughly the same amount the US will collect in tax revenues from the Act over 10 years. Yet it is a bill FIs will have to foot to act as tax enforcers for the US, or face being blocked from the US market.

The elephant in the room is that the biggest tax havens on the planet, and where the most money laundering and financial crime occurs are where most capital is transacted - New York, London and Switzerland. London handles a staggering 11 percent of the world's banking. The state of Delaware is a major hub for tax evaders due to its low corporate governance requirements, as is Wyoming. The British Channel Islands and other dodgy tax havens are home to trillions of dollars in illicit and black money.

On top of it all, the major financial centers only get middling scores in the Basel AML Index Country Risk Ranking 2014, the criteria based on adherence to standards and risk categories such as financial regulations, public transparency, corruption and rule of law. The US for instance is ranked 110 out of 203 jurisdictions, Britain 135 and Switzerland 96.

For legislation to truly work and for jurisdictions to willingly, rather than coercively, implement such regulations, the world's financial centers need to be clean. A good push would be for political financial support from tax evaders to immediately stop, followed by more stringent adherence to the rules at home as well as at foreign subsidiaries. Indeed, it was not the Swiss or British regulators that exposed the malpractice and dubious financial ethics of HSBC. It was whistle-blowers and investigative journalism.

Such exposures are good news though. It will force the financial sector to be more ethical, and to realize they are under greater public scrutiny. And it will push institutions, regulators, and politicians to practice what they preach.