Region’s banks squeezed by compliance costs

Compliance costs for banks in the Middle East are soaring, as a global crackdown on money laundering and higher international capital requirements squeezes their resources, a new report from Thomson Reuters said.

Four out of five financial services companies in the Middle East polled by Thomson Reuters said that they expected compliance costs to rise over the next year.

Two major regulatory changes are leading banks to take on more compliance staff, experts said. A new global standard of risk management, the Basel III accords, requires banks to hold more high-quality capital as a buffer against losses. Greater enforcement of the Anti-Money Laundering Countering the Financing of Terrorism Act (AML-CFT), a US measure to ensure that bank funds do not end up in terrorists’ bank accounts, means that the UAE’s banks must be particularly careful to scrutinise their international payment systems.

“Both are increasing banks’ compliance costs by very large amounts,” said Nasser Saidi, the former Lebanese finance minister and former chief economist at the Dubai International Financial Centre. “The trouble is that banks not only have to invest in resources and the human capital side, which is expensive, but you simply don’t have enough people with the right training in the region.”

Because UAE banks clear large volumes of trades in dollars through New York, they are forced to obey US regulations – meaning that recent changes in America are hitting UAE banks.

The implementation of the US Dodd-Frank Act, a major legislative response to the 2008 subprime mortgage crisis, updates to the Foreign Account Tax Compliance Act, intended to thwart tax avoidance by US citizens abroad, and increasingly aggressive enforcement of the AML-CFT, have all created the need for a greater focus on compliance.

Sanctions on Iran, a historic trading partner of the UAE, have also meant that banks need to attend more closely to their local dealings. Standard Chartered was forced to pay $640 million in fines to US authorities after it was found to have hidden the identities of Iranian customers, in violation of sanctions.

“A bank can become liable if suddenly the justice department determines that you have allowed payments for a non-US company that happens to be on a terrorist list,” said Mr Saidi. “This can be quite expensive.”

A legal precedent was set last September when a jury found Amman-based Arab Bank liable for damages in a New York court for providing financial assistance to Hamas. Damages in the case were unspecified, but with 300 registered plaintiffs, and anti-terrorism laws mandating the tripling of any damages awarded, the potential financial liability could be in the hundreds of millions of dollars. Arab Bank is appealing the verdict.

In the UAE, a tightening of Central Bank rules on lending has further created demand for trained compliance officers. Personal loans and mortgages have both been capped, while new technical measures for balance sheet and treasury management have made compliance officers’ jobs more complicated.

“Stricter lending standards and new regulations in terms of retail loans have been introduced in the UAE,” said Jaap Meijer, an equities analyst at Arqaam Capital in Dubai. “Capital management is now more sophisticated – requiring more frequent updates on liquidity and mismatch positions [differences in the maturities of securities held on a bank’s balance sheet].”

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