(C) OFAC MEETS WITH CENTRAL BANK: KUWAIT TO

C O N F I D E N T I A L SECTION 01 OF 02 KUWAIT 000480 SIPDIS STATE FOR EB/ESC/TFS FOR GGLASS AND NROTHSTEIN STATE FOR S/CT FOR SFOX; IO/PHO FOR APEREZ NSC FOR GPETERS; TREASURY FOR GENERAL COUNSEL DAUFHAUSER TREASURY FOR OFAC DIRECTOR RNEWCOMB; TREASURY FOR JZARATE TREASURY TASK FORCE ON TERRORIST FINANCING PARIS FOR PETER KUJAWINSKI AND UZRA ZEYA TUNIS FOR NATALIE BROWN E.O. 12958: DECL: 02/04/2014 TAGS: EFIN ECON ETTC PTER PREL KU IZ SUBJECT: (C) OFAC MEETS WITH CENTRAL BANK: KUWAIT TO TRANSFER IRAQI FUNDS REF: A.) 03 KUWAIT 5001 B.) 03 KUWAIT 5188 C.) 03 KUWAIT 5537 Classified By: CDA Frank C. Urbancic for reasons 1.4 (b) and (d) ¶1. (C) Summary: Office of Foreign Assets Control (OFAC) Director Richard Newcomb met with Central Bank of Kuwait (CBK) Governor Shaykh Salem Al-Sabah on January 19, 2004 to discuss issues outstanding from OFAC's October 2003 visit to Kuwait. Shaykh Salem verified that the CBK will give instructions to transfer the $85 million in frozen Iraqi funds that the Commercial Bank of Kuwait is currently holding in the Bahamas to the Development Fund for Iraq (DFI) within one week,s time (Ref C). OFAC also discussed with CBK financial transactions by Lajnat Al-Dawa Al-Islamiya (LDI) that utilized multiple spellings, perhaps intentionally bypassing the bank transaction filters. Shaykh Salem confirmed that the CBK would act to plug a loophole that currently allows originators and recipients of money transfers to bypass bank filtering controls by using different spellings of transliterated names. Shaykh Salem pledged to investigate if the misspellings were intentional, and if so, what parties were responsible. Shaykh Salem also agreed to cooperate with an OFAC request for detailed information on specific fund transfers made by or to LDI from January 9, 2003 ) February 19, 2003, the period after LDI had been designated as a terrorist supporter by the USG but prior to the UN designation. He also agreed to search for records of transactions by the Social Reform Society (SRS) from February 20, 2003 ) April 16, 2003, the period during which SRS started funding LDI beneficiaries. CBK agreed in principle to provide the transaction information to LDI and SRS at its discretion. End Summary. KUWAIT TO TRANSFER FROZEN IRAQI FUNDS ¶2. (C) A delegation from OFAC headed by Director Richard Newcomb met with Central Bank of Kuwait Governor Salem Al-Sabah on January 19. Noting Kuwait's leadership in the Gulf region, Newcomb asked Shaykh Salem when Kuwait would transfer the $85 million in frozen Iraqi funds held by the Commercial Bank of Kuwait in the Bahamas (Refs A,B and C). Shaykh Salem said the GOK had had "legal questions" about ownership and transfer of the funds, however those questions had recently been resolved and CBK was now ready to move forward. He said the CBK would instruct the Commercial Bank of Kuwait to transfer the funds the following week. (Note: As of mid-February, the funds have not yet been transferred. End Note.) CBK TO PROVIDE TRANSACTION INFORMATION ¶3. (C) Responding to questions on changes in Kuwaiti banking laws, Shaykh Salem confirmed that the CBK's mandate had been expanded to cover Islamic banking institutions, including Kuwait's only existing Islamic bank, Kuwait Finance House (KFH). Under the new regulations, KFH is entitled to a three-year grace period before falling under CBK regulatory authority. Nevertheless, Shaykh Salem said he expects KFH to officially recognize CBK's regulatory authority in March or April 2004. ¶4. (C) Once KFH is under CBK's regulatory authority, Shaykh Salem said, the Central Bank would have access to all KFH records, retroactively. He agreed to have the Central Bank search its own and KFH records for evidence of transactions made by or to LDI from January 9, 2003 ) February 19, 2003, the period after LDI had been designated as a terrorist supporter by USG but prior to the UN designation. He also agreed to search for records of transactions by the Social Reform Society (SRS) from February 20, 2003 ) April 16, 2003, the period during which SRS started funding LDI beneficiaries. Newcomb explained that the USG was not at liberty to provide such records to LDI and SRS directly. (Note: USG release of the information without the proprietary holder,s permission could result in violating Bank Secrecy provisions. End Note.) Therefore, Newcomb suggested that CBK could provide such transaction information to LDI and SRS. CBK agreed that it would provide the transaction information to LDI and SRS at its own discretion. DELIBERATE MISSPELLING? ¶5. (C) Newcomb noted that there were more than thirty spelling variations of LDI's name in transaction data provided to CBK. Of the transactions that took place after LDI's designation by either the US or the UN as a terrorism supporter, ten different spelling variations of LDI's name were used. Newcomb noted that filters used by a US bank, designed to block financial transfers to and from 'designated' organizations, had failed to block 26 of the 27 transactions, and asked whether the misspellings may have been deliberate on the part of LDI, SRS or KFH. ¶6. (C) Shaykh Salem agreed that the misspellings were a problem, and said the CBK would have to look into its current procedures for fund transfers. He proposed that the CBK should issue new regulations requiring civil ID numbers and official passport spellings of anyone attempting to transfer funds through the CBK or any of the banks it regulates, enabling it to uniquely identify originators and flag blocked parties. "We should have an agreed upon policy to control this," he added. "We have to close this loophole." Shaykh Salem pledged to investigate how the misspellings occurred, who is responsible, and whether it was inadvertent ) given various transliterations tellers may have made from the Arabic ) or was intentional on the part of one or another of the parties involved. BUREAUCRACY ULTIMATELY RESPONSIBLE FOR TRANSFERS ¶7. (C) Shaykh Salem and CBK staff members explained why LDI accounts were not frozen until 4-6 weeks after the USG designation by noting that the Ministry of Foreign Affairs (MFA) must issue instructions to the CBK before it can freeze assets of persons designated by the USG or under the relevant UNSCRs. In the case of LDI, they said, the MFA had dropped the ball and took approximately one to one and a half months to transmit these instructions to the CBK after the US designated LDI on January 9, 2003. During that time, KFH approached CBK for instruction on how to handle LDI accounts; CBK informed KFH that no action need be taken until ordered by MFA. ¶8. (U) This message has been cleared in MemCon format by OFAC Director Newcomb. URBANCIC