US embassy cable - 04MANAMA1893

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