BAHRAIN: 2006-2007 INCSR SUBMISSION

UNCLAS SECTION 01 OF 05 MANAMA 002003 SIPDIS SIPDIS DEPARTMENT FOR INL, EB/ESC/TFS, NEA/ARP AND DS/IP/NEA JUSTICE FOR OIA AND AFMLS TREASURY FOR FINCEN AND OASIA ABU DHABI FOR TREAS/JBEAL E.O. 12958: N/A TAGS: KTFN KCRM EFIN PTER SNAR BA CTR ECTRD REGION SUBJECT: BAHRAIN: 2006-2007 INCSR SUBMISSION REF: STATE 157084 -------------- Introduction -------------- ¶1. Bahrain has one of the most diversified economies in the Gulf Cooperation Council (GCC). In contrast to most of its neighbors, oil accounted for only 11.1 percent of Bahrain's gross domestic product (GDP) in 2005. Bahrain has promoted itself as an international financial center in the Gulf region. It hosts a mix of: 375 diverse financial institutions, including 187 banks, of which 51 are wholesale banks (formerly referred to as off-shore banks or OBUs); 39 investment banks; and 25 commercial banks, of which 17 are foreign-owned. There are 31 representative offices of international banks. In addition there are 21 moneychangers and money brokers, and several other investment institutions, including 85 insurance companies. (Note: Because a given financial institution may be counted under multiple sub-categories, the sum total of sub-categories listed exceeds 375.) The vast network of Bahrain's banking system, along with its geographical location in the Middle East as a transit point along the Gulf and into Southwest Asia, may attract money laundering activities. It is thought that the greatest risk of money laundering stems from questionable foreign proceeds that transit Bahrain. -------------- Anti-Money Laundering Law -------------- ¶2. In January 2001 , the Government of Bahrain (GOB) enacted an anti-money laundering law that criminalizes the laundering of proceeds derived from any predicate offense. The law stipulated punishment of up to seven years in prison, and a fine of up to one million Bahraini dinars ($2.65 million) for convicted launderers and those aiding or abetting them. If organized criminal affiliation, corruption, or disguise of the origin of proceeds is involved, the minimum penalty is a fine of at least 100,000 dinars (approximately $265,000) and a prison term of not less than five years. ¶3. On August 12, 2006, Bahrain passed Law 54/2006, amending the anti-money laundering law. Law 54 criminalizes the undeclared transfer of money across international borders for the purpose of money laundering or in support of terrorism. Anyone convicted under the law of collecting or contributing funds, or otherwise providing financial support to a group or persons who practice terrorist acts, whether inside or outside Bahrain, will be subject to imprisonment for a minimum of ten years in prison up to a maximum of a life sentence. The law also stipulates a fine of between $26,700 and $1.34 million. Law 54 also codified a legal basis for a disclosure system for cash couriers, though supporting regulations must still be enacted. ¶4. A controversial feature of the new law is a revised definition of terrorism that is based on the Organization of the Islamic Conference definition. Article (2) excludes from the definition of terrorism acts of struggle against invasion or foreign aggression, colonization, or foreign supremacy in the interest of freedom and the nation's liberty, according to the principles of international law. ¶5. Under the original anti-money laundering law, the Bahrain Monetary Agency (BMA)),principal financial sector regulator and de-facto central bank, issued regulations requiring financial institutions to file suspicious transaction reports (STRs),to maintain records for a period of five years, and to provide ready access for law enforcement officials to account information. (Note: The BMA was transformed into the Central Bank of Bahrain in September 2006.) Immunity from criminal or civil action is given to those who report suspicious transactions. Even prior to the enactment of the new anti-money laundering law, financial institutions were obligated to report suspicious transactions greater than 6,000 dinars (approximately $15,000) to the BMA. The current requirement for filing STRs stipulates no minimum thresholds and since 2005 the BMA has had a secure online website that banks and other financial institutions can use to file STRs. ¶6. The law also provides for the formation of an interagency committee to oversee Bahrain's anti-money laundering regime. Accordingly, in June 2001, the Policy Committee for the Prohibition and Combating of Money Laundering and Terrorist Financing was established and assigned the responsibility for developing anti-money laundering policies and guidelines. The MANAMA 00002003 002 OF 005 committee, which is under the chairmanship of the Central Bank Deputy Governor, includes members from the Central Bank; the Bahrain Stock Exchange; and the Ministries of Finance and National Economy, Interior, Justice, Commerce, Social Development, and Foreign Affairs. ¶7. In addition, the law provides for the creation of the Anti-Money Laundering Unit (AMLU) as Bahrain's financial intelligence unit (FIU). The AMLU, which is housed in the Ministry of Interior, is empowered to receive reports of money laundering offenses; conduct investigations; implement procedures relating to international cooperation under the provisions of the law; and execute decisions, orders, and decrees issued by the competent courts in offenses related to money laundering. The AMLU became a member of the Egmont Group of FIUs in July 2003. ¶8. The AMLU receives suspicious transaction reports (STRs) from banks and other financial institutions, investment houses, broker/dealers, moneychangers, insurance firms, real estate agents, gold dealers, financial intermediaries, and attorneys. Financial institutions must also file STRs with the Central Bank, which supervises these institutions. Non-financial institutions are required under a Ministry of Industry and Commerce (MOIC) directive to also file STRs with that ministry. The Central Bank analyzes the STRs, of which it receives copies, as part of its scrutiny of compliance by financial institutions with anti-money laundering and combating terrorist financing (AML/CFT) regulations, but it does not independently investigate the STRs (responsibility for investigation rests with the AMLU). The Central Bank may assist the AMLU with its investigations, where special banking expertise is required. ¶9. The Central Bank of Bahrain is the regulator for other non-banking financial institutions including insurance companies, exchange houses, and capital markets. The Central Bank inspected four insurance companies in 2005 and had conducted six more inspections by November 2006. More insurance industry inspections are scheduled for 2007. Anti-money laundering regulations for investment firms and securities brokers were revised in April 2006. ¶10. In November 2007, the MOIC published new anti-money laundering guidelines, which govern designated non-financial businesses and professions (DNFBPs). The MOIC has also announced an increased focus on enforcement, noting some 300 visits to DNFBPs in 2005, including car dealers, jewelers, real estate agencies, etc. By November 2006, the MOIC had conducted an additional 274 enforcement follow-up visits. A total of 140 of these have been assigned an MOIC compliance officer as a result. The MOIC has also increased its inspection team staff from four to seven. ¶11. The MOIC system of requiring dual STR reporting to both it and the AMLU mirrors the Central Bank's system. Good cooperation exists between MOIC, Central Bank, and AMLU, with all three agencies describing the double filing of STRs as a backup system. The AMLU and Central Bank's compliance staff analyze the STRs and work together on identifying weaknesses or criminal activity, but it is the AMLU that must conduct the actual investigation and forward cases of money laundering and terrorist financing to the Office of Public Prosecutor. From January through November 2006, the AMLU has received and investigated 118 STRs, 26 of which have been forwarded to the courts for prosecution. The GOB completed its first successful money laundering prosecution in May ¶2006. The prosecutions resulted in the convictions of two ex-pat felons with sentences of one and three years and fines of $380 and $1900 respectively. ¶12. Bahrain is moving ahead with plans to establish a special court to try financial crimes, and judges are undergoing special training to handle such crimes. Six Bahraini judges will join a group of twelve Jordanian judges on loan to the Ministry of Justice to serve on the court, which is expected to begin hearing cases in May 2007. -------------- Offshore Institutions -------------- ¶13. There are 51 Central Bank-licensed wholesale Banks (formerly referred to as offshore banking units (OBUs)) that are branches of international commercial banks. The license that changed OBUs to wholesale banks allows wholesale banks to accept deposits from citizens and residents of Bahrain, and undertake transactions in Bahraini dinars (with certain MANAMA 00002003 003 OF 005 exemptions, such as dealings with other banks and government agencies). In all other respects, wholesale banks are regulated and supervised in the same way as the domestic banking sector. They are subject to the same regulations, on-site examination procedures, and external audit and regulatory reporting obligations. ¶14. However, Bahrain's Commercial Companies Law (Legislative Decree 21 of 2001) does not permit the registration of offshore companies or international business companies (IBCs). All companies must be resident and maintain their headquarters and operations in Bahrain. Capital requirements vary, depending on the legal form of company, but in all cases the amount of capital required must be sufficient for the nature of the activity to be undertaken. In the case of financial services companies licensed by Central Bank, various minimum and risk-based capital requirements are also applied (in addition to a variety of other prudential requirements),in line with international standards of Basel Committee's "Core Principles for Effective Banking Supervision." -------------- International Conventions and Laws -------------- ¶15. In March 2004, Bahrain issued a Legislative Decree ratifying the Convention against Transnational Organized Crime. In June 2004, Bahrain published two Legislative Decrees ratifying the UN International Convention for the Suppression of the Financing of Terrorism, and the UN International Convention for the Suppression of Terrorist Bombings. In January 2002, the BMA issued a circular implementing the Financial Action Task Force (FATF) Special Eight Recommendations on Terrorist Financing as part of the Central Bank's AML regulations, and subsequently froze two accounts designated by the UNSCR 1267 Sanctions Committee and one account listed under U.S. Executive Order 13224. -------------- Money Changers/Exchange Houses -------------- ¶16. BMA Circular BC/1/2002 states that money changers may not transfer funds for customers in another country by any means other than Bahrain's banking system. In addition, all Central Bank licensees are required to include details of the originator's information with all outbound transfers. With respect to incoming transfers, licensees are required to maintain records of all originator information and to carefully scrutinize inward transfers that do not contain the originator's information, as they are presumed to be suspicious transactions. Licensees that suspect, or have reasonable grounds to suspect, that funds are linked or related to suspicious activities-including terrorist financing-are required to file suspicious transaction reports (STRs). Licensees must maintain records of the identity of their customers in accordance with the Central Bank's anti-money laundering regulations, as well as the exact amount of transfers. During 2004, the BMA consulted with the industry on changes to its existing AML/CFT regulations, to reflect revisions by the FATF to its Forty plus Nine Recommendations. Revised and updated BMA regulations were issued in mid- 2005. -------------- Charitable Organizations -------------- ¶17. Legislative Decree No. 21 of 1989 governs the licensing of non-profit organizations. The Ministry of Social Development (MSD) is responsible for licensing and supervising charitable organizations in Bahrain. In February 2004, as part of its efforts to strengthen the regulatory environment and fight potential terrorist financing, MSD issued a Ministerial Order regulating the collection of donated funds through charities and their eventual distribution, to help confirm the charities' humanitarian objectives. The regulations are aimed at tracking money that is entering and leaving the country. These regulations require organizations to keep records of sources and uses of financial resources, organizational structure, and membership. Charitable societies are also required to deposit their funds with banks located in Bahrain and may have only one account in one bank. The MSD has the right to inspect records of the societies to insure their compliance with the laws. Banks must report to the Central Bank any transaction MANAMA 00002003 004 OF 005 by a charitable institution that exceeds 3,000 Bahraini dinars (roughly $8,000). MSD has the right to inspect records of the societies to insure their compliance with the law. -------------- Islamic Financing -------------- ¶18. Bahrain is a leading Islamic finance center in the region. The sector has grown considerably since the licensing of the first Islamic bank in 1979. Bahrain has 32 Islamic banks and financial institutions. Given the large share of such institutions in Bahrain's banking community, the Central Bank has developed an appropriate framework for regulating and supervising the Islamic banking sector, applying regulations and supervision as it does with respect to conventional banks. In March 2002, the Central Bank introduced a comprehensive set of regulations for Islamic banks called the Prudential Information and Regulatory Framework for Islamic Banks (PIRI). The framework was designed to monitor certain banking aspects, such as capital requirements, governance, control systems, and regulatory reporting. -------------- MENAFATF -------------- ¶19. In November 2004, Bahrain hosted the inaugural meeting of the Middle East and North Africa Financial Action Task Force (MENAFATF),which decided to place its Secretariat in Bahrain's capital city of Manama. An initial planning meeting was held in Manama in January 2004, and the FATF unanimously endorsed the MENAFATF proposal in July 2004. Bahrain's leadership was instrumental in establishing and hosting this entity. As a FATF-styled regional body, it promotes best practices on AML/CFT issues, conducts mutual evaluations of its members against the FATF standards, and works with its members to comply with international standards and measures. The creation of the MENAFATF is critical for pushing the region to improve the transparency and regulatory frameworks of their financial sectors. The selection of Bahrain to host the Secretariat of MENAFATF further demonstrates its commitment to combat financial crimes. ¶20. In September 2006, Law 64/2006 replaced the BMA (de-facto central bank) with the Central Bank of Bahrain (CBB). Law 64 consolidated several laws that had previously governed the various segments of the financial services industry. Under the law, the CBB enjoys reinforced operational independence and enhanced enforcement powers. Part 9 of the law, for example, outlines investigational and administrative proceedings at the CBB's disposal to ensure compliance of rules and regulations by licensees. The CBB's compliance arm was upgraded from a unit to a directorate. Pursuant to a May 2005 Financial Sector Assessment Program (FSAP) finding, the CBB increased its compliance staff size from 6 to 7 and projects an increase to 9 by the start of 2007. ¶21. In October 2006, the Policy Committee for the Prohibition and Combating of Money Laundering and Terrorist Financing introduced new anti-terror finance policies and regulations, which were presented to MENAFATF in Al 'Ain, UAE in November ¶2006. The Committee also announced the formation of two sub-committees, the U.N. Sub-Committee will head a new inter-agency framework for disseminating and reviewing international financial crimes designations, and the Legal Sub-Committee will coordinate the drafting of any future financial crimes legislation. ¶22. At its November 13-15 meeting, the MENAFATF commended Bahrain for its achievements in the area of AML/CFT and praised the government for its commitment to implement the FATF recommendations. ¶23. Bahrain has demonstrated a commitment to establish a strong anti-money laundering and terrorist financing system and appears determined to engage its large financial sector in this effort. The Anti-Money Laundering Unit should maintain its efforts to obtain and solidify the necessary expertise in tracking suspicious transactions and in initiating and pursuing investigations in anti-money laundering and counterterrorist financing cases. The Ministry of Social Development should expand and provide training for its staff with NGO/charities oversight responsibilities. ********************************************* ******** MANAMA 00002003 005 OF 005 Visit Embassy Manama's Classified Website: http://www.state.sgov.gov/p/nea/manama/ ********************************************* ******** MONROE