1. (SBU) Summary: During a bilateral meeting held June 25
on the margins of the International Arab Banking Summit in
Montreal, A/S Anthony Wayne and Ahmed Mohamed Ali al-Khawi,
Chairman of the Yemen Banking Association (YBA), discussed
the fight against terrorist financing and Yemen's economic
situation, with a focus on the need to strengthen Yemen's
commercial court system. End summary.

USG Action


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2. (U) Action requests for Mr. Al-Khawi are in para 4 on
creating a facility for sharing information on bank clients,
and para 9 on ways to support reform of the commercial court
system under the Middle East Partnership Initiative (MEPI).

Procedures to Counter Terrorist Financing are in Place


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3. (U) A/S Wayne commended Yemen on its help thus far in the
war on terrorism and asked how the new procedures to combat
terrorist financing are working. Al-Khawi responded that the
restrictions on transfers were initially difficult but now
are going well. He confirmed that Yemeni bank implementation
of "know-your-customer" efforts is proceeding fairly well.
Banks are very pleased with the system, as it is helping them
to avoid many bad debts. However, many of Yemen's banks are
not well versed in how to implement this and other elements
of the new anti-money laundering law, and their personnel
will need assistance.



4. (U) Al-Khawi said the YBA and the Central Bank are
thinking of creating an information sharing facility for
banks, as some of the smaller banks have difficulty
collecting information. Although there is overall support
for the idea, a few banks are reluctant to share customer
information. A/S Wayne asked if Yemen has a financial
intelligence unit, and said he thought the USG could provide
guidance on establishing information sharing procedures to
facilitate know-your-customer efforts. Perhaps Yemen's
banks could link into a regional information-sharing
arrangement? Al-Khawi said the YBA is planning to introduce
checks and rial-denominated credit cards, initiatives that
will also support know-your-customer initiatives.

Anti-Money Laundering Law being Implemented


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5. (U) When asked about other aspects of the banks' ability
to implement the new anti-money laundering regime, al-Khawi
noted that the Union of Arab Banks is conducting courses on
implementing the law. A/S Wayne reiterated the USG's desire
to be helpful, saying it is important that both sides
understand the difference in procedures and noting that he
encourages USG officials to visit Yemen. Al-Khawi thought
that would be useful.

Financial Intermediation Still Weak


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6. (U) A/S Wayne asked about the availability of capital,
especially for small and medium firms. Al-Khawi acknowledged
the problem, but said the World Bank has been supporting
establishment of an institution making loans to SMEs for the
past 6 years, and it is doing very well.

No Increase in Informal Transfers


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7. (U) There are hawalas in Yemen, but use of the system is
not growing. It peaked before the first Gulf War, and most
transfers now come through banks. Most Yemeni workers that
repatriated in the early 1990s have not returned to jobs
abroad.



8. (U) Al-Khawi said Yemen's economy is improving slowly.
The Yemeni rial is strong and there is no deficit in the ROYG
balance sheet. Yemen has 16 banks, three of which (including
Saba) are Islamic.

Commercial Court Reform is Essential


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9. (SBU) When asked how the USG could be helpful, al-Khawi
stressed the urgent need for experts in Arab law to assist in
reforming the commercial courts. A visiting Sudanese expert
was effective for several years, but the system reverted when
he left. Since then, Yemen has endured four years of failed
efforts to reform the courts. Resistance to improving the
commercial court system is probably due to corruption, and
change will require political commitment from the top. The
uncertain legal system means banks try to minimize risk by
lending only to large, well-known clients. A/S Wayne
mentioned the possibility of a program run by the Commerce
department, using Arab-American experts, that has been
successful in Algeria, Egypt and Tunisia. The program could
be included as part of the Middle East Partnership Initiative.

Financial Infrastructure still Shaky


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10. (SBU) Al-Khawi identified the lack of a land title system
as a major obstacle to investment. Yemenis abroad have
funds, but hesitate to invest. On a related topic, long-time
efforts to introduce a financial market (stock exchange) are
stalled and even he, as head of the technical committee to
establish the market, does not know why the ROYG has stopped
the initiative cold. Some say it is too early to establish a
stock exchange in Yemen, but he does not know the source of
the sudden high-level opposition.

Bio
---


11. (U) Al-Khawi was head of the Yemen Bank for
Reconstruction and Development and is now one of its
advisors. His English is fluent but restrained, and he
weighs his words.



12. (U) A/S Wayne cleared this cable.


CELLUCCI