Financial-Crime Worries Rise in the Middle East
10 Apr 2020

Exclusion from international financial markets is the greatest fear for any bank. In the Middle East it is a daily concern, as instances of compliance failures continue to make headlines.

Last year, a group of US citizens sued 11 Lebanese banks for aiding Hezbollah, despite its terrorist classification by the US government. One of these banks was forced to close a few months later.

In 2018, the United Arab Emirates’ largest private bank, Mashreq Bank, had to pay a $40 million fine for violating the US Bank Secrecy Act and anti-money-laundering laws. According to a survey of 488 Middle Eastern lenders by the Union of Arab Banks (UAB), uncertainty around US sanctions is the biggest short-term compliance concern.

These actions are the latest wrinkle in a years-old crisis that never really went away. Four years ago, the Middle East was on the verge of de-risking. A study by the International Monetary Fund, World Bank and Arab Monetary Fund found that 40% of Arab banks were experiencing “a significant decline” in the scale of their correspondent banking relationships.

Over 160 accounts had been terminated in just a year, mostly with European partners and US. Although no data has been published since, the region remains in distress.

“Things are getting even more complicated,” says Ali Awdeh, head of research at the UAB. “Correspondent banks in the US, in particular, have increased their requirements. And although huge efforts have been done by MENA banks—including investment in AML/CFT [countering financing of terrorism], new technology and staff training—the relationship is not improving.”

Compliance is at the heart of the matter. While Arab banks try to follow international standards, global policymakers continue to raise the bar, making it difficult for MENA institutions to catch up. In 2019 alone, Thomson Reuters reports that over 220 international regulatory changes occurred every day, amounting to 80,000 updates that year.

“The past decade witnessed increased regulatory expectations for banks to monitor against a wider set of financial crimes, coupled with intensified enforcement and reputation loss for violations,” says Michael Matossian, executive vice president and chief compliance officer at Jordan’s Arab Bank.

Reputational damage is the biggest fear associated with compliance failure. To make sure they keep their hands clean, Middle East banks often prefer to cut ties with certain clients. In Lebanon, for example, most lenders refuse to open accounts for Syrian nationals, for fear they might be associated with sanctioned individuals or entities. In a survey last year on financial-crime compliance in MENA conducted by Refinitiv, 72% of respondents said they would rather avoid risk than manage it. In the long run, however, such precautionary strategies amount to financial exclusion and could have a negative impact on MENA economies.

Banking on Technology

As it is elsewhere, digital disruption is driving change in how MENA financial institutions comply with regulations. Banks are increasingly investing in new technologies and expect to continue doing so in coming years. The Refinitiv survey found that 25% of banks have more than doubled their investment in technology against financial crime in just the past two years.

“Part of it is chasing fashion,” says Rupert Brown, former chief architect in the CTO group at UBS and founder of Evidology Systems, a London-based regtech that matches regulatory law with IT and processes. “I don’t think blockchain or artificial intelligence, for example, will make compliance any better, because they do not offer enough context to make a judgement. But as oil revenues decline, some banks won’t be able to afford the next new toy, and thus they will have the same lack-of-investment problem we are facing in the West.”

The cost of compliance is a growing concern, making financial institutions cautious to invest in the right tech, for fear it could become obsolete or add an unnecessary layer of complexity. Lenders will either seek guidance from the regulator or go to clearly identified market leaders to minimize risk.

“Technological advancements can also present new challenges and risks that need to be effectively mitigated,” says Matossian. “For example, the convergence of cyber and financial crimes worldwide has become a major challenge. Banks need to maintain the appropriate balance between embracing innovation and effectively protecting against financial crime.”

One area where technology can help improve compliance and oversight is in the automation of time-consuming tasks, such as false-positives reviews and trade finance, which can allow employees to refocus on more analytical and investigative missions. However, innovation and technology require new skill sets not only in the IT department but among employees at all levels. While most banks have training programs in place, a third of MENA’s financial institutions say that driving internal behavioral change is their biggest compliance management challenge.

By Chloe Domat, Global Finance, 9 April 2020

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