* Dubai attracting money fleeing from elsewhere in region
* UAE bank deposits rising sharply
* But cost of complying with sanctions rising
* So some banks turning away deposits in advance
* Some Americans, not just Middle East customers affected
By David French
DUBAI, Feb 13 When global banking giant HSBC
said last week that it was closing the accounts of some
Middle Eastern customers with links to nations targeted by
sanctions, it underlined the growing weight of geopolitics on
consumer banking in Dubai.
The emirate is known as a freewheeling business centre which
attracts money from all over the world. Deposits at banks in the
United Arab Emirates jumped 11 percent from the end of 2011 to
1.18 trillion dirhams ($322 billion) last November; some of that
increase was capital fleeing to Dubai from unrest elsewhere in
the Arab world.
In theory, as long as money does not have criminal links or
belong to people or companies directly targeted by international
sanctions, banks should be able to accept it. But in practice,
the costs of checking that rules are obeyed has become so high
that banks are turning down some deposits in advance.
Not only customers from the Middle East but also some U.S.
citizens are being affected by this concern, because of
Washington's campaign against tax evasion, bankers in Dubai
said. They declined to be named because of the commercial and
political sensitivity of the subject.
While banking centres around the world are grappling with
increased regulation, Dubai is particularly sensitive to the
issue because it is the Middle East's top banking centre and
geographically close to major countries targeted by sanctions.
The costs of regulatory compliance could slow Dubai's
banking growth and, in some cases, see money leave main street
banks and flow through other financial firms such as small-scale
"Banks choose who they want to deal with and, for some
nationalities, the cost is going up," said Khalid Howladar, vice
president and senior credit officer for financial institutions
at credit rating agency Moody's Investors Service.
"So some are doing a cost-benefit analysis about who they do
Iranian citizens have been hit hardest by the more
forbidding environment because of U.S. financial sanctions over
Iran's disputed nuclear programme.
The sanctions mean a wide range of banks around the world
could be cut off from the U.S. financial system if they do
business with Iran. Around the end of 2011, Washington used the
threat to pressure Dubai-based Noor Islamic Bank, which it
accused of being the conduit for the proceeds of Iranian oil
sales, to cut its Iran ties.
The incident helped to explain why banks in the UAE have
become reluctant to do any transaction involving Iran, even for
legitimate trade allowed under the sanctions, or to open new
accounts for Iranian citizens, bankers said.
This has been a major inconvenience to the UAE's Iranian
community, which mostly lives in Dubai. It is one of the
country's largest expatriate communities, accounting for an
estimated 400,000 of the UAE's 8.3 million people.
Some Iranian money has gone into the informal financial
system; a network of "hawala" currency traders, operating from
offices in Dubai's old city, handles money transfers between the
UAE and Iran after banks stopped doing so.
More recently, Syrian citizens have found it harder to open
bank accounts in Dubai, bankers said. HSBC said Syria was on the
list of countries for which it was closing some accounts; it
stressed that the list did not include any country in which HSBC
operated a branch network.
International financial sanctions against Syria over its
civil war target only a small number of companies and
individuals linked to the regime of President Bashar al-Assad.
But banks fear being caught up in lawsuits down the road if
they misidentify their Syrian customers and inadvertently handle
money that is later shown to be illicit.
The heightened cost of screening these customers means the
most efficient course may be for banks not to take Syrian money,
even if in some cases that could mean turning away legitimate
depositors and innocent refugees from the civil war.
"I sense there's a lot of sympathy in this country with the
plight of fellow Arabs in other parts of the Middle East, but as
a bank, your licence depends on compliance with the rules," said
the head of consumer banking at a UAE bank.
HSBC said its stricter policy on Middle Eastern accounts
would apply only to people who were not Advance or Premier class
customers. Those high-end accounts, which require a minimum
monthly salary of 15,000 dirhams ($4,100) or the maintenance of
100,000 dirhams in the account, provide HSBC with enough revenue
to justify the additional compliance costs, analysts believe.
"We must apply enhanced oversight on any customer with
connections to sanctioned countries. Where we are unable to
maintain sufficiently detailed information about such a customer
through a relationship managed account, we are having to
discontinue that relationship," HSBC said in a statement.
HSBC was fined $1.9 billion in December - the largest such
punishment ever imposed on a bank - after a scathing report by
U.S. lawmakers accused the bank of lax controls relating to cash
coming from Mexican drug cartels and countries under U.S.
sanctions including Iran and Syria.
Americans are in some cases also finding it harder to deal
with UAE banks because of growing pressure from U.S. regulators
to clamp down on tax evasion, bankers said.
Investigations into Americans using financial institutions
to dodge U.S. taxes led to probes of a number of Swiss banks,
including Credit Suisse and Julius Baer.
Initially, UAE banks gained some benefit from this as
nervous depositors moved cash out of European centres such as
Switzerland to other jurisdictions including Dubai, said a
private banker based in the UAE.
But on the whole, U.S. regulation is causing problems for
UAE banks as it is raising the cost of providing services to
Americans. Under rules announced last month, the U.S. Treasury's
Foreign Account Tax Compliance Act requires foreign financial
institutions with $50,000 of any American taxpayer's assets to
report the holdings to the Internal Revenue Service.
Banks failing to comply, even inadvertently, could
effectively be shut out of the U.S. market - a prospect that UAE
banks, which are increasingly operating outside their home
market, cannot accept.
"I don't like to have U.S. citizens on my book because I
don't want to have to disclose anything to the IRS - I don't
like breaking the confidentiality of my clients," said a
UAE-based private banker.
A wealth manager in the UAE agreed that U.S. regulation
posed a major obstacle to local banks taking on foreign clients.
"While the likes of Citi or HSBC have widespread presence in
the U.S., and so have to comply with disclosure requirements
regardless, it's a massive and very costly process for local
banks, especially if they only have a handful of American
customers who don't deposit much," he said.
(Additional Reporting by Yeganeh Torbati; Editing by Andrew