US embassy cable - 04KUWAIT480

C O N F I D E N T I A L SECTION 01 OF 02 KUWAIT 000480 
 
SIPDIS 
 
STATE FOR EB/ESC/TFS FOR GGLASS AND NROTHSTEIN 
STATE FOR S/CT FOR SFOX; IO/PHO FOR APEREZ 
NSC FOR GPETERS; TREASURY FOR GENERAL COUNSEL DAUFHAUSER 
TREASURY FOR OFAC DIRECTOR RNEWCOMB; TREASURY FOR JZARATE 
TREASURY TASK FORCE ON TERRORIST FINANCING 
PARIS FOR PETER KUJAWINSKI AND UZRA ZEYA 
TUNIS FOR NATALIE BROWN 
 
E.O. 12958: DECL: 02/04/2014 
TAGS: EFIN, ECON, ETTC, PTER, PREL, KU, IZ 
SUBJECT: (C) OFAC MEETS WITH CENTRAL BANK: KUWAIT TO 
TRANSFER IRAQI FUNDS 
 
REF: A.) 03 KUWAIT 5001 B.) 03 KUWAIT 5188 C.) 03 
     KUWAIT 5537 
 
Classified By: CDA Frank C. Urbancic for reasons 1.4 (b) and (d) 
 
1. (C) Summary: Office of Foreign Assets Control (OFAC) 
Director Richard Newcomb met with Central Bank of Kuwait 
(CBK) Governor Shaykh Salem Al-Sabah on January 19, 2004 to 
discuss issues outstanding from OFAC's October 2003 visit to 
Kuwait. Shaykh Salem verified that the CBK will give 
instructions to transfer the $85 million in frozen Iraqi 
funds that the Commercial Bank of Kuwait is currently holding 
in the Bahamas to the Development Fund for Iraq (DFI) within 
one week,s time (Ref C).  OFAC also discussed with CBK 
financial transactions by Lajnat Al-Dawa Al-Islamiya (LDI) 
that utilized multiple spellings, perhaps intentionally 
bypassing the bank transaction filters. Shaykh Salem 
confirmed that the CBK would act to plug a loophole that 
currently allows originators and recipients of money 
transfers to bypass bank filtering controls by using 
different spellings of transliterated names. Shaykh Salem 
pledged to investigate if the misspellings were intentional, 
and if so, what parties were responsible.  Shaykh Salem also 
agreed to cooperate with an OFAC request for detailed 
information on specific fund transfers made by or to LDI from 
January 9, 2003 ) February 19, 2003, the period after LDI 
had been designated as a terrorist supporter by the USG but 
prior to the UN designation.  He also agreed to search for 
records of transactions by the Social Reform Society (SRS) 
from February 20, 2003 ) April 16, 2003, the period during 
which SRS started funding LDI beneficiaries.  CBK agreed in 
principle to provide the transaction information to LDI and 
SRS at its discretion. End Summary. 
 
KUWAIT TO TRANSFER FROZEN IRAQI FUNDS 
 
2. (C) A delegation from OFAC headed by Director Richard 
Newcomb met with Central Bank of Kuwait Governor Salem 
Al-Sabah on January 19.  Noting Kuwait's leadership in the 
Gulf region, Newcomb asked Shaykh Salem when Kuwait would 
transfer the $85 million in frozen Iraqi funds held by the 
Commercial Bank of Kuwait in the Bahamas (Refs A,B and C). 
Shaykh Salem said the GOK had had "legal questions" about 
ownership and transfer of the funds, however those questions 
had recently been resolved and CBK was now ready to move 
forward.  He said the CBK would instruct the Commercial Bank 
of Kuwait to transfer the funds the following week. (Note: As 
of mid-February, the funds have not yet been transferred. 
End Note.) 
 
CBK TO PROVIDE TRANSACTION INFORMATION 
 
3. (C) Responding to questions on changes in Kuwaiti banking 
laws, Shaykh Salem confirmed that the CBK's mandate had been 
expanded to cover Islamic banking institutions, including 
Kuwait's only existing Islamic bank, Kuwait Finance House 
(KFH).  Under the new regulations, KFH is entitled to a 
three-year grace period before falling under CBK regulatory 
authority.  Nevertheless, Shaykh Salem said he expects KFH to 
officially recognize CBK's regulatory authority in March or 
April 2004. 
 
4. (C) Once KFH is under CBK's regulatory authority, Shaykh 
Salem said, the Central Bank would have access to all KFH 
records, retroactively.  He agreed to have the Central Bank 
search its own and KFH records for evidence of transactions 
made by or to LDI from January 9, 2003 ) February 19, 2003, 
the period after LDI had been designated as a terrorist 
supporter by USG but prior to the UN designation. He also 
agreed to search for records of transactions by the Social 
Reform Society (SRS) from February 20, 2003 ) April 16, 
2003, the period during which SRS started funding LDI 
beneficiaries. Newcomb explained that the USG was not at 
liberty to provide such records to LDI and SRS directly. 
(Note: USG release of the information without the proprietary 
holder,s permission could result in violating Bank Secrecy 
provisions.  End Note.) Therefore, Newcomb suggested that CBK 
could provide such transaction information to LDI and SRS. 
CBK agreed that it would provide the transaction information 
to LDI and SRS at its own discretion. 
 
DELIBERATE MISSPELLING? 
 
5. (C) Newcomb noted that there were more than thirty 
spelling variations of LDI's name in transaction data 
provided to CBK. Of the transactions that took place after 
LDI's designation by either the US or the UN as a terrorism 
supporter, ten different spelling variations of LDI's name 
were used.  Newcomb noted that filters used by a US bank, 
designed to block financial transfers to and from 
'designated' organizations, had failed to block 26 of the 27 
transactions, and asked whether the misspellings may have 
been deliberate on the part of LDI, SRS or KFH. 
 
6. (C) Shaykh Salem agreed that the misspellings were a 
problem, and said the CBK would have to look into its current 
procedures for fund transfers.  He proposed that the CBK 
should issue new regulations requiring civil ID numbers and 
official passport spellings of anyone attempting to transfer 
funds through the CBK or any of the banks it regulates, 
enabling it to uniquely identify originators and flag blocked 
parties.  "We should have an agreed upon policy to control 
this," he added. "We have to close this loophole." Shaykh 
Salem pledged to investigate how the misspellings occurred, 
who is responsible, and whether it was inadvertent ) given 
various transliterations tellers may have made from the 
Arabic ) or was intentional on the part of one or another of 
the parties involved. 
 
BUREAUCRACY ULTIMATELY RESPONSIBLE FOR TRANSFERS 
 
7. (C)  Shaykh Salem and CBK staff members explained why LDI 
accounts were not frozen until 4-6 weeks after the USG 
designation by noting that the Ministry of Foreign Affairs 
(MFA) must issue instructions to the CBK before it can freeze 
assets of persons designated by the USG or under the relevant 
UNSCRs.  In the case of LDI, they said, the MFA had dropped 
the ball and took approximately one to one and a half months 
to transmit these instructions to the CBK after the US 
designated LDI on January 9, 2003.  During that time, KFH 
approached CBK for instruction on how to handle LDI accounts; 
CBK informed KFH that no action need be taken until ordered 
by MFA. 
 
8. (U) This message has been cleared in MemCon format by OFAC 
Director Newcomb. 
URBANCIC