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Cablegate: Bahrain: 2004-05 Incsr Part Ii

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 MANAMA 001893

SIPDIS

STATE FOR INL, NEA/ARPI
JUSTICE FOR OIA AND AFMLS
TREASURY FOR FINCEN

E.O. 12958: N/A
TAGS: KTFN KCRM PTER SNAR EFIN BA
SUBJECT: BAHRAIN: 2004-05 INCSR PART II

REF: STATE 254401

1. Please see text of updated 2004-05 International
Narcotics Control Strategy Report Part II, para 2. Post
notes that the Bahrain Monetary Agency, on behalf of the GOB,
has responded to a separate and independent inquiry from
FINCEN to update the report, and will respond directly to
FINCEN through its own channels. Please review post's input
in light of that separate report. This update was also
e-mailed directly to INL:Edward Rindler.

2. Begin text of 2004-05 INCSR Part II:

Bahrain

Bahrain has one of the most diversified economies in the Gulf
Cooperation Council (GCC). Unlike its neighbors, oil accounts
for only 25 percent of Bahrain's gross domestic product
(GDP). Bahrain has promoted itself as an international
financial center in the Gulf region. It hosts a mix of 367
diverse financial institutions, including 187 banks of which
51 are offshore banking units (OBUs), 37 investment banks,
and 25 commercial banks, of which 17 are foreign owned. In
addition, there are 29 representative offices of
international banks, 21 money changers and money brokers, and
several other investment institutions, including 84 insurance
companies. The vast network of its 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.

In January 2001, the Government of Bahrain (GOB) enacted a
new anti-money laundering law that criminalizes the
laundering of proceeds derived from any predicate offense.
The law stipulates punishment of up to seven years in prison,
and a fine of up to one million 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.

Following enactment of the law, the Bahrain Monetary Agency
(BMA), as the principal regulator, 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 to account
information to law enforcement officials. Immunity from
criminal or civil action is given to those who report
suspicious transactions. 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 has no minimum threshold.
Additionally, in early 2005 the BMA is preparing to roll out
a secure on-line website that banks and financial
institutions will use to report STRs.

The law also provides for the formation of an interagency
committee to oversee Bahrain's anti-money laundering regime.
Accordingly, in June 2001, the National Anti-Money Laundering
Policy Committee was established and assigned the
responsibility for developing anti-money laundering policies
and guidelines. The committee, which is under the
chairmanship of the Undersecretary of Finance and National
Economy, includes members from the BMA, the Bahrain Stock
Exchange, and the Ministries of Finance and National Economy,
Interior, Justice, Commerce, Labor and Social Affairs, and
Foreign Affairs. The law further provides additional powers
of confiscation and allows for better international
cooperation.

The law also provides for the creation of a financial
intelligence unit (FIU), known as the Anti-Money Laundering
Unit (AMLU), which is housed in the Ministry of Interior.
AMLU 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.
Bahrain's AMLU was granted membership into the Egmont Group
of FIUs in July 2003.

The AMLU receives suspicious transaction reports (STRs) from
banks and other financial institutions, investment houses,
broker/dealers, money changers, insurance firms, real estate
agents, gold dealers, financial intermediaries, and
attorneys. Financial institutions must also file STRs with
the BMA, which supervises these institutions. The AMLU and
the BMA's Compliance Unit analyze the STRs and work together
on identifying weaknesses or criminal activity, but the AMLU
must conduct the actual investigation and forward cases of
money-laundering and terrorism financing to the public
prosecutor.

There are 51 BMA-licensed offshore banking units (OBUs) that
are branches of international commercial banks. OBUs are
prohibited from accepting deposits from citizens and
residents of Bahrain, and from undertaking transactions in
Bahraini dinars (with certain exemptions, such as dealings
with other banks and government agencies). In all other
respects, OBUs 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.

Bahrain law permits the formation of offshore resident
companies and offshore nonresident companies that are formed
as international business companies (IBCs). Resident
companies must have an office in Bahrain, a minimum capital
of $54,000, and a license from the BMA to conduct financial
activities. All IBCs that conduct insurance-related business
in Bahrain are subject to supervision of the BMA.

In November 2001, Bahrain signed the UN International
Convention for the Suppression of the Financing of Terrorism.
The Bahraini Parliament ratified the Convention in December
2003 and issued implementing regulations in June 2004. The
BMA in January 2002 issued a circular implementing the FATF
Eight Special Recommendations on Terrorist Financing as part
of the BMA's AML regulations, and subsequently froze two
accounts designated by the UN 1267 Sanctions Committee and
one account listed under U.S. Executive Order 13224. The BMA
is drafting the circular to implement the newest FATF special
recommendation #9 on cash couriers - a final ruling should be
out in early 2005.

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, under penalty of legal
sanctions. In addition, all BMA 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
BMA's money laundering regulations, as well as the exact
amount of transfers.

Decree No. 21 of 1989 governs the licensing of nonprofit
organizations. The Ministry of Labor and Social Affairs
(MLSA) is responsible for licensing and supervising charity
organizations in Bahrain. As part of its efforts to
strengthen the regulatory environment and fight potential
terrorist financing, MLSA issued a ministerial order in
February 2004 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. The new regulations require
organizations to keep records of sources and uses of
financial resources, organizational structure, and
membership. Charitable societies are required to deposit
their funds with banks located in Bahrain and may only have
one account in one bank. Banks must report to the BMA any
transaction by a charitable institution that exceeds 20,000
dinars. MLSA has the right to inspect records of the
societies to insure their compliance with the law.

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 28 Islamic banks and
financial institutions. Given the large share of such
institutions in Bahrain's banking community, the BMA is
working to create 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 BMA 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.
In November 2004 Bahrain hosted the inaugural meeting of the
Middle East and North Africa Financial Action Task Force
(MENA FATF). Bahrain worked hard over the last few years to
start this body and to host it in Manama. There was an
initial planning meeting in January 2004 in Manama and the
FATF unanimously endorsed the MENA FATF proposal in July
2004. Bahrain's leadership was instrumental in the
establishment of this regional body.
Bahrain has demonstrated a commitment to put in place a
strong anti-money laundering regime and is determined to
engage its large financial sector in this effort. The
government should follow through by aggressively enforcing
the law and developing and prosecuting anti-money laundering
cases. Its officials have attended and should continue to
attend orientation and training sessions in Bahrain and
international locations. The AMLU should continue with its
efforts to gain the necessary expertise in tracking
suspicious transactions and in investigating and initiating
investigations in money laundering offenses.

End text.


MONROE

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