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Cablegate: Bahrain: 2006-2007 Incsr Submission

VZCZCXRO6457
OO RUEHDE RUEHDIR
DE RUEHMK #2003/01 3391112
ZNR UUUUU ZZH
O 051112Z DEC 06
FM AMEMBASSY MANAMA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6119
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE IMMEDIATE

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.


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MANAMA 00002003 005 OF 005


Visit Embassy Manama's Classified Website:
http://www.state.sgov.gov/p/nea/manama/
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