311 SANCTIONS CASTING A SHADOW ON THE CBS'S FUTURE

C O N F I D E N T I A L SECTION 01 OF 02 DAMASCUS 000173

SIPDIS

SIPDIS

NEA/ELA; NSC FOR MARCHESE; TREASURY FOR LEBENSON/GLASER

E.O. 12958: DECL: 02/14/2017
TAGS: ECON EFIN SANC ETTC PREL KTFN SY
SUBJECT: 311 SANCTIONS CASTING A SHADOW ON THE CBS'S FUTURE

REF: A. 06 DAMASCUS 02063

B. 06 DAMASCUS 05285

C. DAMASCUS 00127

Classified By: Charge d'Affaires Michael Corbin, reasons 1.4 b/d


1. (C) Summary. Financial sanctions under USAPATRIOT Act
Section 311 continue to put pressure on the Commercial Bank
of Syria (CBS) nearly a year after the final ruling was
imposed. Nonetheless, the CBS, up till now, is managing to
maintain its central role in Syria's banking sector. While
some international banks and financial institutions have
terminated their relationships with the CBS, the SARG is
trying to counter sanctions on the CBS by using envoys to
Europe, financial conferences in Syria, and efforts to
influence the local diplomatic corps. Yet, regardless of
the CBS's continued dominance of Syria's banking sector, 311
sanctions have created difficulties for the CBS that could
hasten its demise in the longer term. End Summary.


2. (SBU) OVERVIEW OF 311 SANCTIONS AGAINST THE CBS: The CBS
is the largest of six state-owned banks in Syria with more
than 65 branches. The CBS continues to control more than 80
percent of Syria's banking market, as well as a majority of
the SARG's foreign currency reserves, which total USD 12
billion or more. Since the nationalization of the banking
sector in the 1960's the regime has empowered the CBS to
perform many functions normally executed by a central bank to
help centralize financial authority. The CBS's power also
derives from its role as primary banker for corrupt business
deals that put money in the pockets of regime members -- from
non-performing loans for questionable public enterprises to
kickbacks during the oil-for-food scandal. In March 2006,
the U.S. Department of Treasury issued a final ruling that
imposed a special measure against the CBS pursuant to USA
PATRIOT Act Section 311, and its subsidiary, the Syrian
Lebanese Commercial Bank, as a financial institution of
"primary money laundering concern," due to a reasonable
belief that it had been and may still be exploited by
criminal and terrorist enterprises. Of all the USG sanctions
on it, the SARG has demonstrated the greatest concern about
the Section 311 sanctions. In the first year the sanction
was threatened (2004 - 2005),the SARG expended considerable
energy to avoid its imposition by implementing a number of
requested reforms. The SARG is currently continuing to
campaign on CBS's behalf to limit the impact of the sanction.


3. (C) HOW SANCTIONS HAVE AFFECTED THE CBS: The CBS claims
its profits are growing, but at the same time has publicly
complained that sanctions have impeded its operations. (Note:
Local banking contacts state that the CBS's lack of regard
for internationally accepted banking and accounting standards
brings the bank's profit numbers into question. End Note).
On January 7, 2007, the Chairman of the CBS, Dureid Dergham,
publicly stated that 20 international banks terminated
correspondent accounts with the CBS. Local banking contacts
agree that third-country banks are continuing to terminate
their correspondent relationships with the CBS, and at a rate
higher than what the CBS has publicly admitted.
Additionally, the CBS has historically held significant
portions of its assets in dollar accounts, but as foreign
banks have refused transactions involving dollars with the
CBS, the CBS has been forced to assume the transaction costs
of converting these dollars into other currencies.
Businessmen, especially private importers and foreign
companies, are also deserting the CBS because of its
difficulties with dollar transactions and because private
banks are now offering better, and more timely, services.


4. (C) CBS RETAINS PLACE IN SARG POWER STRUCTURE: Despite
sanctions, Dergham appears to be holding his own against his
likely competitors, the Minister of Finance, Mohammed
Hussein, and the Governor of the Central Bank, Adib Mayaleh.
Moreover, the CBS is still carrying out the functions it has
performed over the past forty years. For example, there is
no indication that the SARG has shifted large, hard currency
reserves from the CBS to the Central Bank, as was expected.
The CBS also continues to maintain exclusive control of
public sector contracts (ref A). Riad Obegi, Chairman of
Banque Bemo Saudi Fransi, stated that his foreign clients
cannot directly receive funds into their private bank
accounts from Syria's public sector oil company, but instead
are forced to receive these funds through the CBS. Local
banking contacts also state that the CBS has developed

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alternative methods of operation to evade the difficulties
created by the sanctions. This includes reaching out to
smaller European banks still willing to conduct business with
them and the SARG's 2006 decision to switch half of its
foreign currency reserves from USD to Euros. Local banking
contacts report that many European banks have indicated a
willingness to do business with the CBS in Euros, but not in
dollars which need to pass through the U.S. banking system.


5. (C) SARG ATTEMPTS TO MANAGE 311 SANCTIONS: The SARG has
sent Deputy Prime Minister for Economic Affairs, Abdullah
Dardari, and other SARG officials to various European
capitals to encourage European governments and banks to
maintain accounts at the CBS. Dardari and others have also
worked to enlist Europeans' support against the USG
sanctions, which the SARG claims are politically motivated
and responsible for hindering the SARG's economic reform
efforts. The SARG has also engaged the resident diplomatic
community and used SARG-sponsored regional financial
conferences attended by the IMF and other financial
institutions to assert that the USG is wrongly and unfairly
punishing the CBS (ref B). In addition, the SARG has toasted
the results of the recent peer review of Syria's anti-money
laundering systems conducted by the Financial Action Task
Force of the Middle East and North Africa (MENA-FATF),
claiming it proves the sanctions against the CBS for money
laundering are unfounded. The SARG recently announced the
CBS will conduct an audit to prove its financial practices
are sound. The SARG's propaganda appears to be moderately
successful, at least with members of the resident diplomatic
community, who point to the EU Parliament's recently
restarted debate over the EU Association Agreement as a sign
that the EU may be considering breaking with the USG on
linking economic issues to their opposition to objectionable
SARG political policies.


6. (C) 311 SANCTIONS ALSO HAVE A LONGER-TERM EFFECT: Despite
the SARG's best effort at damage control, 311 sanctions are
exploiting some of the CBS's existing vulnerabilities. While
expending significant effort to condemn the 311 sanctions
internationally and develop alternative operating methods,
the CBS has neglected critical internal reforms. The
pressure to streamline overhead costs is growing because of
the CBS's increasing need to compete with the nascent, but
growing private banks (ref C). (Note: The CBS has a ratio of
nearly 70 workers per bank branch, as opposed to a ratio of
20 workers per bank branch in the private sector. End Note).
In late 2006, the Dutch Bank ING even stopped providing
technical assistance to the Ministry of Finance for a banking
reform project due to concerns of involving itself with the
CBS - contributing to the project's delay. Furthermore,
while the SARG is protecting the CBS, the sanctions have also
spurred the SARG to develop alternative financing mechanisms
that could erode the centrality of the anachronistic CBS.
This includes SARG efforts to develop a Syrian stock
exchange, expand its ties to international financial markets,
and build capacity within the increasingly assertive Central
Bank so that it can fulfill the traditional central bank role
of managing monetary policy.


7. (C) Comment: While the CBS has managed to overcome some of
the technical hurdles presented by the 311 sanctions and
maintain its position in Syria's banking sector, the
sanctions are hampering the CBS's operations. The SARG's
vigorous campaign against the 311 sanctions reflects the
value it currently places in the CBS - as a central financing
mechanism for its questionable business ventures - and its
concern that the sanctions are both damaging the CBS and the
"reformist" image the SARG is trying to project externally.
Nevertheless, the sanctions are exacerbating the CBS's
internal vulnerabilities - speeding the trend of Syrian and
foreign investors moving their business to the growing
private banking sector and encouraging the development of
other Syrian financial institutions that can fulfill
functions previously dominated by the CBS. These pressures
are undercutting the CBS's previous monopoly on banking
issues and undermining the CBS's ability to maintain power in
the longer term.
CORBIN