Category Archives: GCC

GCC Nations Ascend to US FATCA

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The last two months have seen the three Gulf Cooperation Council (GCC) countries of the United Arab Emirates (UAE), Qatar, and Kuwait go into force based on agreements in principle to an Intergovernmental Agreement (IGA) with the United States Department of the Treasury regarding the US Foreign Account Tax Compliance Act (FATCA). This dovetails a number of similar agreements the United States has entered into with other countries in its attempt to counter US taxpayers maintaining secret, unreported financial assets overseas.

FATCA What is FATCA? 

Although the United States has maintained the Foreign Bank Account Report (commonly referred to as the “FBAR”) for many years, it is now requiring foreign financial institutions (“FFIs”) provide reporting to the Department of the Treasury on accounts maintained on the FFIs’ books belonging to US taxpayers (or accounts in which the taxpayers have an interest).  To motivate compliance with the FATCA, Treasury has announced that it will impose significant withholding on non-complying FFI’s banking activities in the United States.  FFIs that do not comply with FATCA can face 30% withholding on US-sourced payments.

How is FATCA being Enforced by and through Non-US States?

The US Treasury has entered into agreements with a number of foreign countries such as Switzerland, Canada, Japan, Mexico, Spain and the United Kingdom.  By executing an IGA with the United States, the foreign state agrees to require its financial institutions to report specified financial accounts involving (through whole or partial ownership) US taxpayers to the US Treasury.

How does this Impact GCC Financial Institutions? 

The United States’s agreements with Qatar took effect in April, and more recently in the case of Kuwait (May 1) and the UAE (May 23).  The agreements between the United States and the UAE, Qatar and Kuwait are based on the “Model 1” IGAs (notably, there are two types of Model IGAs). The Model 1 allows for an upward reporting requirement from the FFI to the partner country (say, the UAE central government), which will then report the relevant financial information to the US Department of the Treasury’s Internal Revenue Service (IRS).

The large number of foreign nationals living in or otherwise having financial accounts in the Persian Gulf make FATCA compliance a pressing need, particularly given that many of these people have U.S. citizenship or permanent residency status.  GCC-based FFIs (which include investment funds) should take care to know the full scope of their responsibilities under FATCA, which can be very nuanced.  Given the wide variety of banks in the region and the fact that many of them have subsidiaries overseas, understanding the breadth of their compliance obligations is critical.  Although Qatar, Kuwait and UAE have “agreed in substance” on the IGAs for FATCA, there are still unilateral requirements by the actual FFI.  First and foremost, they should be registered with the Treasury Department and obtain what is called a Global Intermediary Identification Number (GIIN). This entails coordination with any affiliate, parent, subsidiary or otherwise related financial institution as there are various subcategories of registration under FATCA. Furthermore, FFIs should naturally ensure compliance with reporting requirements.

Overall, FATCA represents the United States’ attempt to crack down on tax non-compliance and any benefits by hiding money offshore. Although there is already the FBAR/FinCen 114 forms, the FATCA pushes the burden on foreign financial institutions to help the US government identify US taxpayers who maintain certain foreign financial assets.  Given the steep financial penalties for non-compliance by the United States (not to mention potential penalties by their own countries), foreign financial institutions should ensure compliance and diligence in meeting the requirements placed on them under this very nascent law .

US Compliance in the UAE: Update from Dubai

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I just returned from a business trip to Qatar and the United Arab Emirates (UAE), which shed a great bit of light on compliance trends in the Gulf Cooperation Council (GCC) region, particularly the UAE.  In conversations with numerous experts across different points in the compliance spectrum, the takeaway was that there is an evident trend of increased attention and care towards US (and increasingly regional/domestic) compliance directives. These indeed appear to be setting the tone of financial institutions in the Gulf region.  This of course begs the question of where do they stand vis-a-vis compliance?

Foreign Account Tax Compliance Act (FATCA)

FATCA is the word on the street. There is increased interest and awareness of this law in the Middle East North Africa (MENA) region, but particularly in the Gulf.  For those who don’t recall,

Compliance in the Gulf

FATCA (largely codified in Chapter 26 of the Code of Federal Regulations) is the new U.S. regulation which requires foreign banks to report accounts they maintain for U.S. taxpayers to the U.S. Internal Revenue Service (IRS), America’s federal taxation authority.  Banks that do not comply with FATCA regulations can run the risk of substantial (up to 30%) withholding on certain payments.  Given the high number of US taxpayers maintaining accounts in the Gulf (due to residence, convenience, or whatever other reason), this is quite significant.  There do not appear to be any banks refusing to take US taxpayers as a result, although this decision has been reportedly taken by some banks in Switzerland, for example.

Office of Foreign Assets Control (OFAC) and Anti-Money Laundering (AML)

Eyes are indeed on Iran and Syria, particularly the former. While many are awaiting any deal between the P5+1 negotiations involving Iran’s nuclear program, compliance with OFAC is of significant concern.  Formal banking with Iran is almost non-existent and banks are vigilant, having received a directive from the UAE Central Bank.  What was quite impressed was the depth of knowledge regarding OFAC and US regulations, though this is arguably not at the level of what US banks know, naturally.  (Interestingly, one compliance person from a large European bank told me something to the effect of “in a few years we’ll all be doing RMB transactions, so these things won’t really be important”!)

In Summary

The bottom line is that US compliance is a critical step that is only starting to be fully appreciated in the MENA region. With Dubai’s increasing role as a banking center, the need to have robust compliance practices in place will only be more heightened.  This is accentuated by the Emirate’s geographic positioning in a generally troubled region and close to high exposure points.  Indeed the reputation of turning a blind eye to financial crimes is arguably becoming more obsolete.

Given the trends in the United States’ regulatory landscape and the increasing extraterritorial reach of its laws, GCC banks are well-suited to adopt rigorous compliance programs that are mindful not only of sanctioned countries, but sanctioned entities, and of cognizant of the use of front companies and individuals. This means more Know Your Customer (KYC), heightened screening, better documentation and reporting, and expanded training to lower levels of bank management, particularly the “frontline” in the retail banking sector.  Over time, a financial institution in the Gulf may find itself more needing of programs that are more closely aligned to those found in their US counterparts.

 

 

The GCC Health Care Boom: What to Expect

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Last week I attended a lunch sponsored by the US-UAE Business Council in honor of Mr. Mahmood  Al-Ansari, Executive Director of the health care division of Mubadala, the major investing arm of the Abu Dhabi  government.  Given my own recent work in the area of GCC health care projects, I felt it would be useful to highlight some key points about this area of growing interest.

For those of you that keep up with business developments in the Persian Gulf region, health care is hot.  It makes sense – the Gulf states are now leveraging decades of heavy investments in infrastructure, hospitality, and real estate into creating health networks that serve not only domestic needs, but those of the greater region, from Africa to the Central Asian States to India.  This holds particularly true as the Gulf Cooperation Council (GCC) focuses on increasing health care tourism (the Dubai Health Care City announced  issued a health care tourism guide in June). One estimate in Arabian Business late last year estimated the market could be worth $44 billion by 2015.

For those in the health care industry, entering the market may seem like a no-brainer.  The prospects are undoubtedly attractive.  Before you begin your rush to the region, however, it would be good to keep some key strategies in mind.

1. Complying with Import Requirements

I have addressed local laws more broadly in the next paragraph, but import requirements are a critical concern for entities that intend to import medical devices into the GCC for their facilities.  Getting equipment in is a critical part of establishing a health care facility especially given the technology-intensive nature of the business these days.  The same goes if you intend to export medicines and supplies into the region.

2. Ensuring You Satisfy Local Laws

Health care tends to be very regulated in many jurisdictions and there are key issues you need to consider.  Particular attention must be paid to issues such as building codes, health standards, etc.  All these can add to costs and increase wait times for approvals.

3. Safeguarding Your Territory

Companies in the region tend to act very strategically, but remember, there is a lot of redundancy in many key sectors of the market. A one-of-a-kind facility in Abu Dhabi or Dubai could easily become replicated in more than one other place in the nearby vicinity. In a region where intra-regional travel is easy and commonplace, you must take great care that your exclusivity and territory are contractually well-protected.  If you are using a technology that is unique to the region, you may want to secure comprehensive territorial rights from the foreign manufacturer.

4. Protecting Yourself from Your Personnel

While the situation may have improved markedly in recent years, skilled health care human resources are not as readily available in the Gulf as they may be in the U.S., Canada, or Europe. As with anywhere else, it is important to ensure that you can attract and keep top talent. However, in this cash-rich region with a near insatiable demand for talent, you must also be careful not to train your competition.

5. Ink a Solid Agreement with a Reputable Local Partner. In some cases a local partner is not necessary, but oftentimes in the GCC it is a must. It is imperative that you pick the right partner. Risk can be reduced by due  diligence beforehand. There are services that provide business intelligence on players in the local markets.  Local or foreign, you want to make sure you have a solid contract with the partner (as well as any vendors, naturally). This can be required by local law but even if it is not, your agreement should envision and plan for key contingencies to help avoid potential financial and reputation loss later.

The market for the health care business in the MENA region is naturally very bright and promising.  However, it is not without its challenges. Accordingly, it is critical that opportunities be assessed well and that planning be thorough.

Will Sanctions Cost You Your Bank Account?

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An increasing issue I am seeing with Iranian-American clients is banks in the United States closing their bank accounts. Why? Reasons can vary, but perhaps the sanctions and anti-money laundering (AML) regulations have a role in this. Indeed from national banks to small banks, we have seen a number of people receive notice from their bank that their account will be shut down.  Believe it or not, OFAC regulations on Iran, Cuba, Syria, and other countries could have a role here.  Clearly it does not happen for everybody, but it does happen.  In the past, the fear was mainly that your bank may reject an innocuous incoming wire coming into your account. That concern is still very, very real, but fear not, there are ways to help reduce the risk of account closure happening to you.

Why is my bank closing my account?

There can be a number of reasons here, but we’re only going to focus on the sanctions issues. Due to many regulations aimed at preventing money laundering and sanctions violations, many banks appear to be taking increasingly conservative positions and more carefully scrutinizing account activity. Each bank has its own criteria as to what constitutes “high risk” in a given bank account and discretion over what accounts they will close.  Reasons can vary – too many foreign wires coming into your account (for example, from Kuwait, Hong Kong, Dubai, etc.) or perhaps transactions that are not consistent with your financial profile (say receiving $200,000 in cash over 5 months when your annual salary is $120,000).

It’s obviously not per se illegal to receive a lot of money in your bank account or receive money from overseas, but don’t forget that the private sector has often taken a much more conservative position that what may be required by the applicable sanctions regulations and laws (I once had a case where a client’s bank in the US had no issue with a licensed transfer, but the same bank’s UAE subsidiary did!).  This means a lot of legitimate activities can face issues. You should really put yourself in the bank’s position – they have responsibilities and they don’t know you that well. So that inheritance from Iran or that gift mom and dad are sending you could look like money laundering to somebody else’s eyes. Why have you (an engineer in Orange County, for example) been receiving wires from Kuwait, Hong Kong, and Turkey in recent months?

How can I prevent a closure from happening?

Each bank has its own standards and criteria in determining what accounts to close and there’s no straight formula. However, there are things one can do to make sure the funds don’t cause problems (don’t forget, another possibility is your bank holding your funds and/or sending the money back to the currency exchange or “sarraf” that sent the funds!).

1. Communicating with the bank.  I often tell clients that it’s safe to say that their branch managers generally don’t make the calls on their account. It’s necessary to talk to the higher ups.  I have found many bank officials to be very accommodating and friendly after a conversation and/or correspondence with them explaining the outstanding logistics issues.  In fact, even I have been presently surprised at the willingness of a number of them to handle legitimate transactions once the conversation or correspondence exchange occurs.

2. Giving your bank written assurances. Preparing affidavits and other supporting documents (depending on the situation) are steps I generally take to help our clients from facing problems. “Papering the transaction” is a way to show the bank that the transaction is authorized, as sometimes an OFAC license might not be enough.

3. If necessary, get a license! It’s amazing how many people muster the bravado to engage in transactions in Iran that require OFAC licenses, well, without a license. Then they try to send the funds. Be they profits from a family business you have had no role in, or the proceeds of a house you sold in Iran, some transactions definitely need license.  I will note, however, that not all transactions need a license. You should make sure of the status of your transaction – is it generally licensed or does it require specific authorization? An OFAC license can help move things quicker (and help you in a potential enforcement issue – remember, rejected funds result in reports to OFAC, which can then follow-up with you through an Administrative Subpoena).

4. Use the OFAC License Number!  As specific licenses issued by OFAC often tend to state, you should use the OFAC License number in the payment description. This will help the bank see that the incoming transfer is licensed, likely helping reduce potential red flags.  Even when a transaction does not need an OFAC license (as not all transfers do) it is still important to make sure you have crossed all your t’s and dotted all your i’s.

Naturally, these are just some of the steps that can be done. You still have the natural requirements that you ensure that no Specially Designated Nationals (SDNs) are involved in the transfer and that the funds from Iran are processed through a non-U.S., non-Iranian bank in a third country.  While there is no guaranteed way to prevent problems, the above steps could potentially help you a great bit.

Yes, You Can Still Transfer Funds From Iran

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The recent news on increased sanctions on Iran has stirred concern among many that transferring funds out of Iran is no longer permitted.  This is not true.  Although the Iranian government has itself placed certain limits on foreign exchange trading, transfers for specifically or generally licensed activities are still permitted, subject to certain conditions.

How does this work? President Obama Issued an Executive Order (13599) in early February which effectively called for the blocking of any funds coming into US jurisdiction in which Iranian financial institutions have an interest. Remember, blocking is different from rejection – blocking is when the entity (such as the bank) coming into control of the funds effectively freezes the money and places it in an interest-bearing account (which you cannot access until the block is removed), whereas rejecting is when the money is sent back to the sender.

Does this mean that all types of family gifts, inheritances, and sale proceeds of real estate holdings in Iran will be blocked? No.  Along with Executive Order 13599 came General License B, which preserves a previously existing exception in the Iranian Transactions Regulations (ITR).  General License B states that US banks can still process authorized funds such as family remittances, to and from Iran.  This is of course conditioned upon the the funds being processed through a third country (e.g., Turkey, Kuwait, or UAE) bank subject to certain other restrictions.

What has become increasingly important is that individuals conducting banking activities with foreign countries need to be exceptionally careful that their bank in the US knows what is going on. There are several ways to help reduce the risk of your bank mistakenly rejecting the funds or closing your account altogether (a phenomenon I’m seeing increasingly).

U.S. State Department Imposes More CISADA Sanctions

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The U.S. State Department last week announced a new round of sanctions on entities allegedly aiding Iran’s energy sector.  The announcement on May 26 subjected the following seven entities to sanctions under the Iran Sanctions Act (ISA), as amended by the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 (“CISADA”)

  1. Associate Shipbroking (Monac0)
  2. Ofer Brothers Group (Israel)
  3. Petroleos de Venezuela (PDVSA) (Venezuela)
  4. Petrochemical Company International (Jersey)
  5. Royal Oyster Group (UAE)
  6. Speedy Ship (aka Sepahan International Oil Company) (UAE)
  7. Tanker Pacific (Singapore)
Among the more interesting entities are Petroleos de Venezuela (PDVSA), which is Venezuela’s state oil company (and owner of the Citgo gas station chain in the United States) and Ofer Brothers Group, an Israeli concern that has allegedly done other trade with Iran in recent years as well.
The companies named in the directive are for violations of provisions in the ISA prohibiting assistance to Iran’s energy sector beyond certain thresholds, including the sale of refined petroleum.   Some have been accused of hiding their transactions with Iran in an attempt to evade sanctions.
This current round of sanctions is surely to cause concern for many middle tier and smaller companies as it shows that the United States is not simply targeting the major oil giants, a number of which avoided any sanctioning under the ISA by implementing the CISADA “Special Rule,” enabling them to forgo investigation in exchange for a vow to wrap up and business in Iran.  Again, the message sent by State is arguably that it is not just looking at the oil majors but other smaller entities as well.  This is particularly critical to those third country companies that have tried to profit from the recent withdrawal of major giants from Iran’s market.

Increase in MENA Mergers & Acquisitions

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Alas, a posting about something other than sanctions!  This week’s entry will focus on transactional matters concerning the Middle East and North Africa (MENA).   Arabian Business magazine’s website recently posted an article discussing a tremendous jump in MENA region mergers and acquisitions in 2010 over 2009 according to international consultancy Ernst & Young.  This is certainly good news for business in the region.  According to the article, most transactions were in Egypt, Jordan, and Saudi Arabia.

For all the fanfare, there are concerns that 2011 may not be as much of a continuation of this trajectory as planned. The political events in the Middle East have put some business activity on hold.  One of the victims of this may be the now-cancelled proposal by Etisalat (the UAE’s top telecommunications provider) to acquire 46% of  Kuwait’s Zain telecommunications company, what would have been a $12 billion transaction.

Political issues aside, the downturn in the Persian Gulf states following the global financial crisis may provide great opportunities for companies willing to invest in the region.  Jurisdictions such as Dubai have proven time and again to be stable havens for MENA (and other) capital in times of political strife elsewhere.  With the events going on around the region, we may yet see a rise in inbound GCC investment, a primary driver for statistics such as MENA region M&A.  The question remains, however, how the current economic and political climate will affect acquisitions outside MENA by MENA-based players.  Investors in the region may in fact see that there could be compelling motivations to invest their money at home.

Interpreting the New US Sanctions on Iran

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President Obama signed into effect the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 on July 1.  Just when you thought the United States had exhausted all its recourse against the Islamic Republic of Iran (due to very comprehensive, existing sanctions), a new legal framework has been implemented that makes full use of the U.S.’ economic prowess and influence over third countries.  I was quoted on this law in the Financial Times on July 14, 2010.  Click here for a link to the article.  The Los Angeles Times has also quoted me – click here.

How Does the Bill Affect Iran?

As mentioned above, the United States maintains comprehensive unilateral sanctions on Iran, preventing U.S. persons (as defined in the applicable regulations) from engaging in transactions for the provision of most goods and services to Iran.  As the United States has fewer levers to pull given the breadth of the current sanctions, Congress did the next best (and possibly better) thing – implementing sanctions on third country entities that assist or do business with Iran in key sectors, such as the country’s nuclear, finance, and energy sectors, not to mention the Islamic Revolutionary Guards Corps (IRGC) and related entities.

What’s Covered?

The new bill covers a range of entities and activities. Additionally, it requires that the administration periodically collect data on Iranian business done by G20 nations.  Notably, human rights play a key role as well – with the placement of sanctions on individuals responsible for human rights violations in Iran following that country’s June 2009 presidential elections.

A summary I wrote on the new law is available on the Iranian-American Bar Association (IABA) website.  Click here.

Setting a Standard in Sharia Finance

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The ArabianBusiness.com website featured an article on Friday stating that Gulf Cooperation Council (GCC) states may move towards a single Sharia-compliant standard for Islamic financings.  This follows another article earlier this month in the New York Times about the rising demand

Dubai International Financial Centre

DIFC - Dubai

and short supply of Sharia Finance Scholars.  This short supply has in some respects led to some consolidation in the Sharia finance sector – by having the same scholars sit on multiple boards, one group is having substantially large influence in determining the industry’s direction.  This helps in turn create a de facto standard for Sharia compliance.

The Sharia finance industry has two primary regulatory authorities at present – the Bahrain-based Accounting and Auditing Association for Islamic Financial Institutions (AAOIFI) and the Kuala Lumpur-based Islamic Financial Standards Board (IFSB) both of which have issued certain standards on Shariah finance.  IFSB is considered by some to be more the liberal standard-bearer and the two organizations have in some way helped bifurcate the industry into a MENA sector and a Southeast Asian Sector.  That said, both of these organizations’ rulings and policy guidelines are non-binding and voluntary.

The challenge of a broad set of Sharia standards becomes more problematic when taking into consideration the introduction of Sharia finance in non-Islamic jurisdictions such as the United States, the UK and France.  The UK Financial Services Authority (FSA) has taken certain initiatives, as have other governments. However, the legal structures in these nations mean that Sharia finance will need to conform to local laws – something that may cause deviation with a standard set in say, the GCC.

Taking the above into consideration, given the high concentration of capital in the GCC, the consolidation of GCC standards in Sharia finance can be a crucial step towards creating a global standard for the industry (a standard that can perhaps be modified slightly to comply with the laws of other jurisdictions as well).  This will help the industry grow in the region first, and that in turn will create competition – perhaps creating a situation where investment entities will have to come up with attractive, high-return Sharia-compliant vehicles to compete.

Shutting off Iran from the International Downstream Oil Market

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This week saw several important developments with respect to Iran’s relations with the international oil and gas market.  Following a long history of US sanctions, including the 1996 Iran-Libya Sanctions Act, the OFAC sanctions, as well as the more recent blacklisting of certain Iranian banks, large multinationals are increasingly being encouraged to leave Iran.  This initially started with international financial instutions and increasing disinterest on the part of the major oil companies in doing business in Iran.  The problem is now deepening.

It was reported this week that Russia’s Lukoil would no longer be selling gas to Iran.   Another report stated India’s Reliance would be abandoning a contract to import Iranian oil.  Reliance had earlier stated that it would no longer sell Iran refined gas.

Reports have abounded that the Iranian government is increasingly stockpiling gasoline in the event of increased sanctions.  Interestingly, this problem is concurrent with the regime’s plan to remove subsidies on key commodities such as gasoline.  Given Iran’s limited refining capacity, increased sanctions and the lack of subsidies could arguably force Iran’s economy to grind to an effective halt.  Another critical issue is that Iran is desperately in need of international investment and technology in its current oil fields and its refining capacity cannot even meet local needs.

As a follow-up, reades may find this article useful as it outlines parties in Iran’s crude oil export business.