Tuesday February 19, 2019
Tuesday February 19, 2019
Ten years ago, the Middle East was a different place to the one that we see today. You only have to look at a picture of the Dubai skyline in 2008 and compare it to the current one to appreciate the aesthetic changes that have taken place. But it has not only changed aesthetically: the regulatory progress in the region’s financial sector has been equally discernible.
Within the last ten years, the global financial market has seen a huge increase in the number of regulations introduced, the objectives of which were to encourage more transparency and to give accountability to financial institutions. The downside to this growth in regulation is that it has led to more excessive compliance budgets, more fines and more scrutiny.
The Middle East and North Africa (MENA) region has experienced more than its fair share of regulatory progress during the last decade, particularly in the development of anti money laundering (AML) programmes.
The majority of the financial institutions operating in the region have implemented AML and counter financing of terrorism (CFT) solutions, making it much more difficult for criminals and terrorist organisations to move their money around.
Compliance spending has also continued to increase in the region (even when it started to slow down in other parts of the world) yet, despite this ongoing investment, the MENA region still suffers from a global reputation suggesting it is an unfavourable place to do business. So, has the region really made any progress afterall?
One could argue that the region’s reputation is getting worse rather than better. If we look at Transparency International’s Corruption Perceptions Index from 2008, the highest positioned country from the MENA region is Qatar ranked at 28 (from a total of 180).
In 2018, the highest ranked country from the region is the UAE at 23, which is a welcome improvement (see the table below). But the wider picture shows that most countries in the region have a worse ranking in 2018 than in 2008 (highlighted in red), which, given the investment in regulation, suggests a disappointing backwards step.
Part of the problem may simply be down to the geographical location of the region in relation to the ‘home’ of many of the world’s terrorist groups. The perception, perhaps, is that there must be an association of some sort with these organisations by virtue of their proximity, and that this is unlikely to change any time soon.
Another reason could be that the enforcement of AML and CFT programmes are not robust enough. It’s one thing to have the rules in place but it’s quite another to have suitably experienced personnel in place to enforce it.
Let’s take a closer look at two of the countries on this list – one who has made the biggest improvement over the last 10 years, Saudi Arabia, which has climbed 22 places, and the other that has experienced the biggest decline, Bahrain, which has dropped 56 places – and try to identify some of the causes of their respective changes.
In 2010, the Financial Action Task Force (FATF) issued a Mutual Evaluation Report (MER) on Saudi Arabia. The report stated that:
[As regarding] supervision and regulation of financial institutions for AML/CFT purposes, supervisory powers are defined in the AMLS. Supervisory authorities (SAMA and the Capital Market Authority, CMA) have adequate powers to conduct inspections of financial institutions, including onsite inspections. In addition, supervisory authorities have the power to impose limited sanctions against financial institutions. However, some supervisory authorities lack adequate staffing, training, and experience in this field. Concerns exist regarding the adequacy of the supervisory role played in general and in the AML/CFT arena in particular.
Fast-forward to its 2018 MER, which confirms that the Saudi AML/CFT framework has undergone ‘fundamental changes since 2010’. The report went on to say that the country ‘has brought its legal system into line with the up-to-date FATF Recommendations, and has successfully addressed almost all of the deficiencies which were present previously’. In terms of effectiveness, Saudi Arabia achieves substantial results on risk understanding and mitigation, on combating terrorist financing and on supervision.
These points demonstrate significant strides being made by Saudi Arabia to improve its regulatory effectiveness; however, the link they have with terrorism remains problematic. The 2018 report states:
Saudi Arabia faces a high and diverse risk of terrorism financing, linked to terrorism committed both within Saudi Arabia, and to countries experiencing conflicts within the region. The risk of terrorism and terrorist financing within Saudi Arabia is linked to the presence of cells of Al Qaeda, ISIS, affiliates, and other groups.
The 2006 MER of the Kingdom of Bahrain confirms that money laundering is a criminal offence under Decree Law 4/2001, extending to any type of property and applying to persons who commit the predicate offence. The financing of terrorism was not an offence at that time. The country was in the process of drafting a law amending the provisions of DL 4/2001 that, if passed, would create that offence.
However, under the amendment, the terrorist financing offence would not be fully compliant with international standards as it does not criminalise providing funds to a terrorist or terrorist organisation and only criminalises terrorist financing when the terrorist act, for which funds were provided, actually takes place.
If we then move onto 2018, the MER confirms that Bahrain’s terrorism offences include an exemption that is inconsistent with the Terrorist Financing Convention, a United Nations treaty designed to criminalise acts of terrorist financing. This also limits the scope of the terrorist financing predicate offence for money laundering.
In terms of any risk assessment procedures, Bahrain has not fully implemented a risk-based approach to allocating resources and implementing mitigating measures. For example, there are no specific provisions requiring designated non-financial business or professions (DNFBPs) to document their risk assessment or to consider all relevant risk factors while determining the overall level of risk and apply mitigating measures. There are also no requirements for financial institutions to ensure that higher risks identified by Bahrain are incorporated in risk assessments.
There are many other issues identified in Bahrain’s most recent MER, which, when added together, demonstrate very little progress being made in terms of regulatory advancement.
Whilst other jurisdictions across the globe have acted upon and embraced many of the regulatory changes introduced, the MENA region, in general, have not kept up, and for Bahrain, this is reflected in the slide down the CPI table.
The Bahraini authorities are determined to tackle this issue, and I am very proud to say that the International Compliance Association is playing an active role in supporting this by facilitating a number of events and training programmes on core regulatory issues in Bahrain itself.
Our hope is that, in the near future, this hugely important and influential financial region can reach a point where it is able to play its part in actively denying organised criminals and terrorist groups an outlet for their illegal activity.
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