* Compliance costs hurt regional banks
* Mideast, Africa lenders cannot match larger banks
* Western lenders also shunning some regional banks
By David French
DUBAI, Dec 25 While it may be the most common
given name in the world, the global banking system seemingly
can't cope with Mohammed and its various different spellings.
When it comes to false positives - where a person or
transaction is incorrectly flagged for contravening sanctions -
the total at Middle Eastern banks is around twice that of many
international lenders because of the high use of names like
this, said John Garrett, chief compliance officer at National
Bank of Abu Dhabi.
Rectifying these mistakes costs banks and their customers
both time and money and highlights the rapidly increasing
compliance costs which lenders in the Middle East and Africa
must deal with.
Compliance teams face an increasing array of rules, both due
to failings exposed by the financial crisis and as banks work
with more partners around the world than ever before.
JP Morgan Chase is due to spend an extra $1 billion
on controls this year and had added 4,000 compliance staff since
2012, CEO Jamie Dimon said in September.
Such figures are far beyond anything banks in Africa and the
Middle East can comprehend, let alone apply themselves.
Bank of Sharjah, an Abu Dhabi-listed lender with a
market value of $1.01 billion, is more than doubling its
compliance team in the next 12 months - to 10 people from four
currently - its chief executive, Varouj Nerguizian, said. It is
also spending millions of dollars on new software, he added.
Converging factors should be proving a boon for Middle
Eastern and African banks.
More trade involves emerging markets, providing more
business opportunities - such south-south trade is forecast by
Standard Chartered to represent 40 percent of global trade by
2030. And international banks are pulling out of servicing some
markets as the cost of ensuring compliance is too high.
Barclays' decision in June to stop dealing with remittances
to Somalia, the country's biggest foreign currency stream, left
those who used this service seeking other avenues.
But Western lenders now also avoid doing business with some
Middle East and African banks because such institutions cannot
meet compliance standards demanded outside their local markets.
"The truth of the matter is, on the ground, a lot of these
institutions really don't have the basic infrastructures to be
able to comply," Gordon Acha, head of financial institutions
Africa for Citigroup, said. He has rejected working with
some lenders on the continent, fearing their poor compliance
systems will result in the American bank being fined.
The need to be spending significant sums on compliance
creates resentment among banks in the Middle East and Africa.
"We don't like FATCA and we don't want it, but we don't have
a choice," Abdulaziz al-Ghurair, chairman of lobby group the UAE
Banks Federation and chief executive of Dubai lender Mashreq
, said, referring to the Foreign Account Tax Compliance
Act, which forces banks to disclose assets held by citizens of
the United States overseas.
It would cost UAE banks not less than 100 million dirhams
($27 million) to get the right systems and infrastructure in
place to deal with FATCA, Ghurair added.
THE HUMAN COST
It isn't just the monetary outlay which is prohibitive, but
the difficulty in recruiting and retaining compliance staff.
Much was made of the difficulties the new oversight body at
the European Central Bank would have hiring 770 supervisors in
the 12 months prior to launch, and the wider impact on national
regulators and the private sector.
This escalator effect sees talent hoovered up at the top,
leaving smaller lenders in less glamorous locations struggling.
The high turnover of compliance staff has also raised
questions over whether all the new rules can be effectively
implemented, even in developed markets.
Rising demand for skilled employees means a lot of staff are
new and inexperienced, said Sam Moss, director of investor
relations at FirstRand. The second-largest bank by
market value in South Africa has 112 full-time and 57 part-time
compliance staff out of around 34,000 employees.
There are also other complications that international
lenders wouldn't have to think about in their home markets.
Local policies which encourage positive discrimination in
recruitment place restrictions on the potential hiring pool,
said one source at a southern African bank who declined to be
named due to the sensitivity of his remarks.
For example, South Africa's Black Empowerment Act sets out
quotas for the hiring of black locals, while Saudi Arabia's
Nitaqat policy gives targets for local citizens to be employed
in different industries, including financial services.
For local and global names alike, there is also the fact
that rules governing compliance are not universal, with
sometimes conflicting standards in different jurisdictions.
While the United States classifies Hezbollah as a terrorist
group, a status which triggers financial sanctions, until July
the European Union did not - meaning banks were under no
obligation to act in Europe but, if they operated in both
jurisdictions, risked incurring the wrath of U.S regulators if
they did not.
The penalties for banks violating the rules, especially
those imposed by the United States, are more severe than ever.
HSBC Holdings was fined $1.92 billion by a U.S.
court last year for lax controls, while Noor Islamic Bank
embarrassed Dubai - a traditional U.S. ally - in 2011 when the
state-owned bank was found to be handling billions of dollars of
Iranian oil revenues.
The biggest change is that enforcement action is now coming
from the U.S. Department of Justice and not just banking
regulators, said Bill Fox, global financial crimes compliance
senior executive at Bank of America-Merrill Lynch.
"Four or five years ago, that would have been a truly
extraordinary situation, while today it's almost expected that
not only will regulators take action but possibly prosecutors
too," he said of the quasi-criminal situation this now creates.
Such powers extend beyond U.S. borders because of the threat
to exclude an institution from being able to administer
transactions in U.S. dollars - known as dollar clearing.
This necessity to comply with U.S. regulations not only
heaps further costs on Middle Eastern and African banks but
risks changing the nature of compliance from ensuring the health
of the banking system to a focus on avoiding blame.
"If something happens, the main challenge is to prove to the
Americans and the West - or those that are in charge - that you
have been playing it properly. So if something goes wrong
despite all your efforts, you wouldn't be blamed," said Bank of
$1 = 3.6731 UAE dirhams)