2004-05 INCSR SUBMISSION FOR OMAN

UNCLAS SECTION 01 OF 03 MUSCAT 002192

SIPDIS

DEPT FOR INL, NEA/RA, NEA/ARPI, AND DS/IP/NEA
JUSTICE FOR OIA AND AFMLS
TREASURY FOR FINCEN AND OASIA
ISLAMABAD FOR DEA

E.O. 12958: N/A
TAGS: KTFN KCRM PTER SNAR EFIN MU
SUBJECT: 2004-05 INCSR SUBMISSION FOR OMAN

REF: A. SECSTATE 254401


B. MUSCAT 1196

C. MUSCAT 500


1. Oman is not a regional or offshore financial center and
does not have a significant money laundering problem. Its
small banking sector is supervised by the Central Bank of
Oman (CBO),which has the authority to suspend or reorganize
a bank's operations. In 2004, Oman had a total of 17 banks
with 353 branches. The banking system consisted of five
local commercial banks with 304 Omani and 11 foreign
branches, three local specialized banks with 26 local
branches, and nine foreign incorporated banks with 23
branches in the country. Smuggling trade goods across Oman's
long borders and coastline is becoming an increasing concern.
Oman may also be vulnerable to instances of trade-based money
laundering and customs fraud as well as unregulated lending
schemes that fall outside government purview.

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Legislation and Enforcement
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2. In March 2002, Royal Decree No. 34/2002 was issued
promulgating "The Law of Money Laundering." This new law
strengthened the existing money laundering regulations by
detailing bank responsibilities, widening the definition of
money laundering to include funds obtained through any
criminal means, and providing for the seizure of assets and
other penalties. The new law applies to other types of
non-bank financial institutions as well. In a 2003 report,
Omani officials stated that "the legal freezing measures
designated by the Money-Laundering Act are applied to both
residents and non-residents holding funds, financial assets,
or other economic resources in the Sultanate of Oman if they
are linked to terrorist-related activities." In addition to
an interagency committee for Anti-Money Laundering, the
Sultanate has established a senior-level National Committee
for Combating Terrorist Finance.


3. Royal Decree 72/2004 of July 7, 2004 promulgated the
implementing regulations for the Law of Money Laundering (ref
B). These regulations include, inter alia, the following
provisions:

-- a requirement that financial institutions "take steps to
obtain information on customers who open accounts in an
indirect way" and "keep electronic data on e-transactions."
-- guidelines in the area of profiling, requiring
institutions to "check and double-check" certain classes of
transactions (e.g., "customers getting loans from foreign
institutions" and the "keeping of accounts that do not match
the business nature."
-- requirements for government authorities to investigate all
"suspicious dealings" using internal and external reporting
mechanisms.
-- authorization for the attorney general to freeze disputed
assets upon the request of investigators.
-- protection of "secret" information.
-- an extensive training program, with introductory courses
supplemented by instruction in international best practices
and effective investigation techniques.
-- definition of the organizational structure of the National
Committee for Combating Money Laundering.
-- cooperation with international organizations and
information exchange with other countries, including
collaboration on extradition issues.


4. The Royal Oman Police (ROP),in coordination with the CBO,
is responsible for investigating money laundering activities.
Banks are required to know their customers and report all
suspicious transactions. Compliance personnel are now
present in all banks. Oman established a Financial
Intelligence Unit (FIU) in 2002 to review suspicious
transactions and help coordinate resulting investigations.
As of the end of 2004, there had been no arrests under the
new law. No formal mechanism exists for information sharing
among the GCC Central Banks or FIUs, although a banking
supervision committee within the GCC does issue broad
guidelines for financial institution oversight.

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Charitable Organizations
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5. Oman regulates charitable organizations under the
Non-Governmental Organizations Act promulgated
pursuant to Royal Decree 14/2000. Under this act, the
Minister of Social Development is responsible for approving
and monitoring all charitable contributions and fundraising
activities. There is a government-registered charity (the
Oman Charitable Organization, or OCO),and all citizens and
entities are encouraged to use this official channel for
donations. The Ministry of Social Development recently
registered a charity fund run by a prominent local
businessman.


6. At various times, charitable donations have been collected
through individual accounts in local banks and sent abroad by
individuals to support the Palestinian Intifada and for the
building of schools or mosques in Africa and South Asia. The
local Shia minority is believed to transfer money to support
their religious imams, mainly in Iraq and Iran. Apart from
monthly remittances by expatriate laborers, local Indian
businessmen have also been reported to channel funds in
support of Hindu religious groups. In all of these cases,
the CBO possesses the authority and ability to check on these
accounts as all banks and moneychangers have the obligation
to report on transactions as noted above.

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Informal Lending Societies
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7. Informal lending societies reportedly have emerged in
recent years as a popular alternative to formal banking in
Oman. These societies provide interest free loans as a means
for young Omanis to purchase homes and cars or service bank
debts. The societies became the target of three separate
warnings from the Ministry of Social Development calling on
Omanis to avoid these unregulated and unregistered financial
entities. Nevertheless, many Omanis flocked to these
societies in solidarity with members of their tribes and in
protest against double-digit interest rates being charged by
commercial banks. Later, as membership numbered in the
thousands, serious problems emerged as several founding
members absconded with funds from their societies.
Suspicious members withdrew from the schemes, causing the
collapse of many societies.


8. Reports of excess liquidity in the Omani financial system
and the demonstrated popularity of informal societies lend
credence to the view that hundreds of thousands if not
millions of dollars are circulating outside the formal
financial system and its strict regulations, auditing
requirements, and accountability to the CBO. In addition,
some informal societies reportedly are run by Islamic groups,
ostensibly with ties to the Ministry of Awqaf and Religious
Affairs, who make trips to various destinations abroad.
Transactions in these societies are made in cash, and the
societies are not registered with any government agency or
institution. While such practices constitute only a fraction
of overall financial transactions in Oman, they merit greater
scrutiny on the part of ROP and CBO authorities.

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International Accords
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9. Oman is a party to the 1988 UN Drug Convention, and is a
member of the Gulf Cooperation Council (GCC),which itself is
a member of the Financial Action Task Force (FATF). Oman
supported the creation of a regional FATF-style body in
Bahrain, and sent top government officials to the MENA FATF
inauguration in November 2004. Although not yet a party to
the 1999 International Convention for the Suppression of the
Financing of Terrorism, Omani officials insist that Oman will
soon accede (ref C).


10. Oman has responded to terrorist asset freeze lists from
the UN 1267 Committee by distributing the lists to all banks
and other financial institutions in the country for checking
against their accounts. Thus far, the Government has reported
negative results.

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Comment
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11. Overall, Oman maintains a strong and effective regulatory
regime with respect to its formal financial institutions.
Oman should continue to implement its anti-money laundering
program, specifically dedicating adequate resources to its
FIU and training criminal investigators to initiate money
laundering investigations from the field. Oman also should
become more aware of the dangers of alternative remittance
systems and unregulated lending societies to launder money
and sidestep formal government oversight of financial
transactions. Applying the careful lessons learned in its
tight regulation of the formal sector, Oman must now
recognize that informal money transfer and cash-based lending
societies represent vulnerabilities that must be addressed.
BALTIMORE