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 - http://syria.alsafahat.net

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 (www.centralbank.gov.af/pdf/AMLLawEnglish.pdf). 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 www.centralbank.gov.af/pdf/CFTLawEnglish.pdf).
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.”

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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.

Wednesday, February 11, 2015

Brutal IS propaganda video part of wider strategy of cultivated savagery

Viewpoint - The Global Times

"The Management of Savagery: The Most Critical Stage Through Which the Umma will Pass"

The savagery seems not to stop when it comes to Islamic State (IS). The burning to death of the Jordanian air pilot Moath al-Kasasbeh last week was yet another brutal killing by the group, adding to its lengthy tally of beheadings, stonings and executions, be it journalists, soldiers, civilians, or even its own disgruntled members, as the recent killings of three Chinese members for wanting to desert showed.

Such spectacles for public consumption are not going to stop until IS itself is crushed. However, they are not going to stop when getting widespread media coverage that gives IS such sustained air time. But that is what these videos are meant to do.

They are high-quality films, Hollywood-esque in choreography, style and even backdrop. Sickening they are, but certainly slickly done.

In Egypt, and throughout the region, the video showing the burning of al-Kasasbeh went viral on social media. I was shown it within hours of its breaking, and anecdotally, lots of people seem to have watched it and been horrified.

Airing such graphic violence is rare in the West and elsewhere, although Fox News posted the video in full, but Middle Eastern media have never been squeamish about showing such violent imagery, which over the past decade has been used to highlight the actions of the US in Afghanistan and Iraq.

Lately, with the events of the "Arab Spring," gruesome images are frequently coming out of Syria and Iraq showing the actions of IS, al-Nusra Front and other groups. It is a brutality that is morally indefensible yet serves a warped purpose. It is part of a strategy attributed to Abu Bakr Naji's 2004 book, popular with the Jihadi movement, The Management of Savagery: The Most Critical Stage Through Which the Umma will Pass.

In the text, which advocates the creation of an Islamic caliphate, violence is to be utilized between Muslims to create "regions of savagery" that leads locals in areas, in this case controlled by IS, to capitulate to Islamic rule to have order and stability, while drawing in enemies, in this case the Syrian government, and on a wider scale, the US and its regional allies, Jordan and the Gulf states. The brutal videos are an integral part of this strategy, as laid out in the text, as a propaganda tool to spread fear and provoke a reaction.

IS hopes to provoke a response that is intended to go beyond military air strikes, which the book in fact anticipates,  and lead to states committing ground troops for a prolonged war that will create more instability in the region.

The air strikes, underway by the US-led coalition since August last year, have weakened but clearly not "cut the head off the snake." Killing journalists, civilians and Iraqi, Syrian and Lebanese soldiers is one thing; a pilot from the coalition has effectively upped the game. The US has pledged to increase military support to Jordan, which is out for "punishment and revenge."

The US appears unwilling to commit ground troops, with the American public weary after 14 years of the "war on terror," so it is to be left to its regional allies.

The US is unwilling, like Saudi Arabia and others, to support or engage with Syria to eliminate IS, especially in its stronghold of North-East Syria.

Only a concerted, unified effort will tackle IS, but Yemen is in chaos, Lebanon is struggling with the Syrian crisis, Egypt is going through a turbulent transition, Saudi Arabia has a new king, and Libya is mired in conflict.

What would diminish the reach of IS would be if the media ignored or even marginalized such propaganda videos. But as the old newsroom saying goes, "if it bleeds, it leads."

Indeed, to counter IS' "management of savagery" requires good regional and national management and the establishment of alternative forms of order to the tyranny of IS and other militants.

Tuesday, February 10, 2015

Syria, Refugees and Pharmaceuticals: Nobody Wins

Manufacturing Chemist magazine

The war in Syria has not only decimated the country’s healthcare infrastructure, but has also failed to benefit the pharma industry in the neighbouring countries coping with a refugee influx.

With the conflict in Syria now in its fourth year, the pharmaceutical and healthcare sectors in the country have been decimated. While an estimated nine million people have been displaced, more than three million refugees have fled Syria to neighbouring Turkey, Lebanon, Jordan and Iraq, according to the United Nations High Commissioner for Refugees (UNHCR) office.
But the massive influx of refugees into these countries has yet to translate into higher demand for pharmaceuticals from local manufacturers or importers – even in Lebanon, which has refused to set up camps, preferring refugees to settle within established communities. This is primarily due to aid agencies and governments providing medicine to refugees, with tenders being sourced internationally, alongside requests for donations from pharma manufacturers.
In general, the conflict in Syria is having a negative effect on the region’s pharmaceutical manufacturers and importers alike, compounded by political instability and weak economic growth in Iraq, Yemen, Egypt and Libya. Indeed, according to World Bank figures, the economic effects of the ‘Arab Spring’ revolts on Egypt, Tunisia, Syria, Yemen, Libya, Jordan and Lebanon have caused estimated losses of US$168bn during 2011–2013, equivalent to 19% of these countries’ combined GDP.
‘When looking at [pharma] sales volumes throughout the region, there were different levels of impact on private and government tenders from one country to another. Government ones were the most impacted in areas like oncology and therapies, leading (overall) to a 30–50% drop for us in sales, while with the private sector we have managed to alleviate the damage somewhat, but it is still down by 25–30%,’ said Samer Al-Ansari, Marketing Director for the Middle East and North Africa (MENA) at Hikma, one of the region’s leading pharma-ceutical manufacturers and exporters, based in London and Jordan. ‘In some countries, like Yemen, we lost all government sales in 2013 compared with the previous year.’
Syria was not a major market for regional manufacturers, with local producers having met 90% of local demand prior to the conflict, which started in early 2011. While local production has dropped by up to 70%, according to the World Health Organization (WHO), with pharmaceutical plants damaged or closed, especially in northern Syria, this has not resulted in greater exports for regional producers. This is due to the difficulties of distribution, particularly in areas not under government control, while fluctuations in the Syrian currency complicate payments and financial guarantees, such as letters of credit.
Frequent border closures have also made transit of goods through Syria from Turkey and Lebanon to the rest of the region more complicated, while planes have been re-directed from Syrian airspace, adding on extra transportation time. According to Al-Ansari, it is not easy to deliver anything to Syria and on to Lebanon. The company is facing up to two hours of extra flight time to avoid Syrian territories, he said.
Jordan-based Hikma has faced discrimination in trying to access the Iraqi and Syrian markets due to Jordan’s governmental support of Syrian rebels. ‘The boycotts in Iraq and Syria have put constraints on our business,’ added Al- Ansari.
In Syria’s close neighbour Lebanon, more than a million Syrian refugees have been registered – in a country whose pre-crisis population was 4.5 million. The government has not allowed camps to be set up, so the refugees are dotted around the country. With healthcare predominately private practice in Lebanon, refugees are given assistance by non-governmental organisations (NGOs) and aid agencies. In a survey carried out by Médecins Sans Frontières (MSF) in December 2012, almost 15% of refugees could not afford the fees – up to 25% of the cost, with the rest covered by the UNHCR – while nine out of 10 interviewees said the price of prescription drugs was a barrier to accessing medical care.
Lebanese pharmaceutical producers and manufacturers told Manufacturing Chemist that the influx of refugees has not created extra demand for medicines in the $969m Lebanese market, according to US-based data provider IMS Health and Lebanese Pharmaceutical Importers Association (LPIA) figures.
This is attributed to the aid agencies providing medicines, while pharmacists were not keeping track of sales to Syrians, making it hard statistically to gauge the impact of the refugees.
Armand Phares, President of the LPIA, has asked his members if there had been a rise in sales due to the Syrians, but all distributors consistently told him there had been ‘no impact’.
‘With the population increasing by over a quarter, there should have been an increase in turnover by 10–20%, but there has not been any special demand from the refugees because of the aid agencies, which are providing their own supplies,’ said Phares. ‘Individual sales are not reflected in sales as they cannot be identified,’ he added.
As far as the small local production sector is concerned – which accounts for only 8% of pharmaceutical products sold in the country - Lebanese pharmaceutical producer Pharmaline, part of the Malia Group, stated that there had not been any affect, as did Algorithm, another Lebanese medicine maker. 'There has been no impact on our products, as refugees take donations or buy from dispensaries, and we don't sell to them. There are tenders from the UN, and that is it,' said a Algorithm spokesperson.
That said, there was a rise in pharmaceutical imports in 2013, according to a report by Lebanon-based bank BankMed, stating that ‘mounting cases of Syrian refugees’ infections have increased demand for vaccine imports, where the value rose by 16.9% from $90.5m imported in the first nine months of 2012 to $10.5m in the same period in 2013’. As with other data, the report was not certain that any increases were due to the Syrian refugees. For instance, the value of imported vaccines and toxins rose by 12% in the same period, to $117.6m, which ‘may be attributed to the increased demand on vaccines by Syrian displaced nationals’, stated the report.
There is a similarly negative situation for Jordan’s pharma sector regarding the influx of refugees. While many here are in camps, there are also refugees living within the community, making assessments complex. Indeed, for Lebanon, Turkey, Jordan and Iraq, 65% of Syrian refugees live outside the camps, according to the UNHCR.
In Jordan (pre-crisis population 6.4 million), there are now an estimated 1.2 million refugees, more than 100,000 of whom live in the giant Za’atari camp.
The rise in refugees and the negative impact on the Jordanian economy has, similar to in Lebanon, not resulted in extra sales, with aid agencies not sourcing most tenders locally.
‘There were some small tenders, with lower prices, but there have not been the tenders to the degree that you would expect. With more than one million refugees, which represents one fourth of the population, we are not feeling that demand in the market has increased, and that is clearly demonstrated in total sales. What is surprising is that the total Jordan market is stagnant, and as the market leader we feel that. The impact of refugees has not helped because sales are through third parties and with low prices,’ said Al-Ansari.
While aid agencies are providing medicines, they have also reached out to manufacturers for donations. ‘Most companies now give donations, and Hikma is with all [its] medicines: cardiovascular, respiratory, antibiotics, and specialised treatments, like our oncology line, plus injectables,’ added Al-Ansari.
Turkey, by contrast, is a much more populous country (75 million) and hence better able to cope with the refugee influx. According to the UNHCR, as of October, there are an estimated 1.5 million refugees in the country, with around 220,000 in camps. Alongside aid agencies, the Turkish government is footing the bill for medicine through its Social Security Institution (Sosyal Güvenlik Kurumu), which is the main health system financier and principle purchaser of healthcare services. In January 2013, a Cabinet decree allowed Syrians to be treated free of charge at public hospitals, and in October, identity cards were issued to Syrians to access government services.
The Turkish pharmaceutical market, worth $6.92bn, grew by 0.6% in unit sales and by 0.4% in value terms in 2013 on the previous year, while per capita drug spending declined by 1% to $105.2, according to IMS Health.
As in Jordan and Lebanon, there are no statistics on whether demand has risen for medicines because of the influx of Syrians. ‘There is demand from that side, although there are not any numbers,’ said Turgut Tokgöz, Secretary General of the Pharmaceutical Manufacturers Association of Turkey (IEIS). ‘Domestic sales are big enough that we would recognise a surge in terms of volume per capita just based on demand from refugees. But the government covers quite a bit of the cost of pharmaceutical expenses.’
Ankara has allocated extra funding to meet the healthcare needs of Syrian refugees. ‘Some 80% of local consumption is met by Turkish producers,’ added Tokgöz.
As elsewhere, manufacturers are being called on for donations, and have had minimal tenders from aid agencies. ‘We have had regular calls from the Turkish authorities to donate drugs, and we actively call on our members to do so. We have also been approached by some international organisations to build a network between us and members to supply some medicines, such as basic pharmaceuticals, which they are having a hard time accessing,’ added Tokgöz.
While the domestic market has not been significantly affected by the refugees, exports have risen, in part due to regional instability, he said: up by 18.2% in 2013 on 2012, according to the Turkish Statistical Institute (TUIK – TurkStat), to $818m.
‘The conflict in the area has had an impact for some time. Iraq and Iran are our number one and two export markets, but I don’t know for Syria. We have had some complaints about parallel trade given the low price of many goods in Turkey, which might be traded around the border areas of Syria and Iraq where prices may be higher,’ said Tokgöz.
Ultimately, the impact of the Syrian refugees on the MENA pharmaceutical sector might be better assessed in the near future once data is collected. In the meantime, aid agencies continue to request more funds to cater to the needs of the refugees, with the UNHCR estimating that $384.4m is required for healthcare as part of its $3.74bn 2014 regional response plan.

Friday, January 23, 2015

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

Op-Ed Global Times

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

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

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

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

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

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

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

Wednesday, January 14, 2015

Yet to explode – non-proliferation compliance

Money Laundering Bulletin

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

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

The 1970 treaty and UN Resolutions

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

Positive delay

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

The risk map

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

Regulatory oversight

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

Recommendation 7 signals change

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

Data dearth

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

No single point of reference

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

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

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

Fraud Intelligence

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

Force majeur

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

Golden opportunities

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

Culture and law

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

Local variation

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

First signs of change

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

A role for religion

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

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

Money Laundering Bulletin


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

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

Review point

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

Military Intervention

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

US maintains tough line

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

Land of lost opportunity

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

Grounds for cautious optimism

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

Not only but also

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