IN THE FACE OF SECTION 311 SANCTIONS, SYRIA

C O N F I D E N T I A L SECTION 01 OF 03 DAMASCUS 001014 SIPDIS SIPDIS NEA/ELA TREASURY FOR GLASER/SZUBIN/LEBENSON NSC FOR ABRAMS/DORAN/SINGH EB/ESC/TFS FOR SALOOM E.O. 12958: DECL: 02/08/2016 TAGS: ECON EFIN EINV PTER SANC SY SUBJECT: IN THE FACE OF SECTION 311 SANCTIONS, SYRIA FEELING THE SQUEEZE REF: DMS 6224 Classified By: CDA Kathy Johnson-Casares, reasons 1.4 b/d ¶1. (C) Summary: As we move to impose sanctions against the Commercial Bank of Syria (CBS) under USAPATRIOT Act Section 311, it has become increasingly clear that the threat of sanctions succeeded in making it difficult for Syrian public financial institutions to conduct business with foreign banks. Most of the established European banks are decreasing their business with Syria in anticipation of sanctions, and the CBS increasingly is using smaller banks to handle its transactions and foreign reserves. Most contacts state that the SARG's decision to conduct all public transactions in euros is an inadequate defense against sanctions because most European banks do not want to assume the risk of doing business with the CBS in any currency. Contacts do warn, however, that the threat of sanctions also has made it difficult for Syria's private banks to operate, and that imposition of the final rule against the CBS for money laundering under Section 311 may result in further isolating them from European markets. Further, it may actually increase the flow of funds through the informal sector as people choose hawaladars (moneychangers) to circumvent barriers in formal channels. End summary. -------------- European Banks Hedge Their Bets -------------- ¶2. (C) Under the threat of Section 311 sanctions, banking sector contacts suggest that European banks are being much more cautious in their business dealings with Syria to avoid jeopardizing their more lucrative business with US financial institutions. A diplomat at the French Embassy stated that over the past six months, several French companies have complained that French banks are refusing to confirm letters of credit (LC) issued by the CBS. Fabrice Ferandes, an economist at the EC Mission in Damascus, stated that the requirement under 311 for banks that do business with US financial institutions to increase due diligence on transactions involving the CBS has dampened European banks' enthusiasm for maintaining a high profile in Syria or taking on new Syrian business. Although Syria now has six private banks, the CBS still dominates the Syrian market. According to SARG statistics from 2005, the CBS issued $1.5 billion in LCs, and handled $8 billion in deposits, dwarfing Syria's nascent private banking sector, which has a total capitalization of just over $300 million. ¶3. (C) Swiss bank UBS AG's January 22 announcement that it was stopping all present and future business with the CBS has been the most public manifestation of this unease. However, after the Director General of the CBS, Duraid Durgham, publicly refuted the announcement, claiming that the CBS still maintains correspondent relations with the Swiss bank, contacts suggest that the UBS move was more of a hedge than a dramatic new development. A Swiss diplomat stated that UBS has not necessarily changed its official stance, commenting that the Swiss bank had decided to stop doing business with the CBS and Syrian politically exposed persons (PEP) almost two years ago. He further said that he was informed that UBS may have shifted its Syrian accounts to Julius Baer, another large Swiss bank in which UBS is a primary shareholder. He postulated that UBS may not have terminated the relationship with CBS altogether, but instead may have moved its CBS and PEP accounts to Baer, although he emphasized that he does not know the amount or type of business that was transferred. ¶4. (C) However, contacts do say that UBS has become more cautious about engaging in Syrian business, public or private. George Sayegh, General Manager of Bank of Syria and Overseas (BSO),one of six private banks in Syria, informed Post that the UBS agent in Beirut recently refused to take his dollar-denominated transaction, telling Sayegh that he would have to check with the head office for clearance on this and future transactions. The same Swiss diplomat mentioned above stated that the bank's head office recently waited until the last minute to confirm sponsorship of a cultural event presented by the Swiss Embassy and the SARG, DAMASCUS 00001014 002 OF 003 even though it had agreed in principle months in advance. The diplomat stated that it was clear from his correspondence with bank officials that UBS wanted to avoid too close an association with Syria. ¶5. (C) Sayegh stated that other large, well-established European banks are refusing to accept dollar-denominated fund transfers from Syria, or from accounts that BSO holds in other European banks, unless the transfer first runs through New York. Sayegh, whose bank holds 95% of its foreign currency in dollars, said that European bankers have told him that they do not want to assume the risk and cost of delays associated with having to run the dollars through New York themselves. Sayegh said, however, that he still can do business in Europe although the ease of the transactions often depends upon the bank and the country. He said, for example, that London banks tend to refuse his business more often than banks in Paris, Milan or Frankfurt. Nabil Hchaime, General Manager of Bank BEMO Saudi Fransi, the second private bank to open in Syria, admitted that BEMO often uses its parent bank in Lebanon as a bridge to foreign financial institutions in order to avoid the problems that BSO described. Hchaime stated that the bank has run transactions through BEMO in Lebanon at the request of his Syrian customers. -------------- Switch to Euros- Too Little, Too Late -------------- ¶6. (C) In order to avoid problems of moving dollars in the international financial system, the SARG announced in February that it would conduct all future public entity transactions in euros instead of dollars. Contacts in the private banking and financial sector were immediately dismissive of the announcement, and scoffed that switching to euros would not protect the Syrian economy or banking system, but instead further complicate SARG transactions. Dr. Aymen Midani, an independent Syrian economist, stated that even if future contracts and payments are denominated in euros, the dollar remains the Syrian economy's main point of reference. The SARG still receives significant numbers of dollars from the sale of commodities like cotton and oil that are priced in dollars on the world market. Other contacts contend that Syria still holds the majority of its reserves in dollars, and that a previous plan to convert to a basket of currencies has not been implemented. Therefore, contacts say, the SARG first will have to buy euros with its accumulated dollars, taking on an additional exchange risk while at the same time not avoiding a dollar transaction. ¶7. (C) Contacts suggest that the CBS could have trouble establishing correspondent relationships with foreign banks, even using euros. Hchaime claimed that BEMO's European headquarters has refused to handle Syrian public accounts, and that other established European banks are following suit. As a result, the SARG increasingly is conducting its transactions and placing its reserves with less established, higher risk banks in secondary markets. Highlighting this trend, Hchaime related how an official with the Central Bank recently requested that BEMO disburse $1 million in euros to pay the first capital installment for three newly licensed cement factories. Though Hchaime agreed, the official initially was unable to provide Hchaime with the name of a correspondent bank to which BEMO should transfer the funds. The official called back three hours later, Hchaime claimed, requesting that BEMO transfer the Euros to a small Italian bank in Rome that Hchaime had not heard of previously and declined to name. -------------- Possible Implications of 311 -------------- ¶8. (C) Contacts have alluded to two potential negative outcomes from the imposition of Section 311 sanctions. One, Syria's private banks, like the state-owned CBS, may be forced to switch their business from the old, established banks in Europe to less reliable ones if US action motivates European banks to decrease their Syrian business further. DAMASCUS 00001014 003 OF 003 Sayegh pointed out that he plans to turn east toward Gulf banks if Section 311 sanctions further degrade his bank's access to the European market. Like BSO, the SARG reportedly feels it has other options as well. In addition to potential financial partners in the Gulf, the recent announcement that Iran and Syria plan to develop a joint public sector bank to finance investment in Syria may indicate a first step in this trend away from Western financial institutions. ¶9. (C) Two, the imposition of 311 may drive financial transactions underground, reversing a gradual trend toward the formal sector that started with the establishment of private banks at the end of 2003. Sayegh stated that Iraqi banks, for instance, are having difficulty paying Syrian traders for exports because US financial institutions are refusing to transfer funds to Syria. Sayegh commented that more and more business deals between Syria and Iraq are being conducted in cash, and that he has heard of attempts to smuggle large sums of cash money across the border to finance legitimate trade deals. ¶10. (C) Mazen Tabaa, the agent for Western Union in Syria, complained that the threat of 311 sanctions so far has made his business unprofitable. He stated that the Western Union regional headquarters in Dubai is not allowing him to access the company's fund transfer software for fear of OFAC action, and he spends more on faxes and paperwork than he earns in fees. He added that he has witnessed an increase in business for the unregulated hawaladars in Syria, as bankers and traders seek alternative ways to move money. He alleged that the black market moneychanger and hawaladar Sahloul, aka abu Shafiq, who is the preferred moneychanger for regime insiders, is one of the primary beneficiaries of this trend (ref). Tabaa claims that Sahloul, as a sub-agent for Western Union in Jordan, is in effect &smuggling8 business out of Syria by taking fund transfer requests in Damascus and disbursing funds from Amman. ¶11. (C) Comment: Post expects that the imposition of Section 311 sanctions will strengthen the trends mentioned above: (1) the continued disengagement of European banks from Syria; and (2) an increase in transactions through the informal financial sector as formal channels are restricted. However, it is unlikely that these developments will cause the SARG to reevaluate its present course. The SARG's recent adoption of the euro for public sector transactions was widely perceived as more of a political jab at the US than an economic act. Therefore, the SARG likely will view the imposition of Section 311 sanctions at this time as a further hardening of the US position, especially given the SARG's perception that it made a good faith effort to meet our 16 demands and avoid sanctions. JOHNSON-CASARES