Financial system to struggle despite sanctions relief

Amendment to US sanctions against Myanmar aimed at supporting economic growth still leave an array of barriers to trade between the two countries.

by Aye Thidar Kyaw and Steve Gilmore,  MyanmarTimes, Myanmar, May 19

Effective yesterday, the United States removed three state-owned banks from its blacklist of Specially Designated Nationals (SDNs), and added two military-owned lenders to a general licence that allows financial transactions with those banks.

It also extended and expanded a general licence allowing transactions that go through ports and airports owned or connected to SDN individuals or entities.

The moves were part of a reform to the US sanctions program against Myanmar, which critics say has crippled the country’s economy by restricting trade with the world’s largest economy and cutting Myanmar off from the international banking system.

The struggling state-owned banks, which are increasingly surrendering market share to private sector lenders, welcomed the move. Myanma Economic Bank, Myanmar Foreign Trade Bank, and Myanma Investment and Commercial Bank are now sanction-free.

MFTB’s deputy general manager Daw San San Myint said 13 years on the sanctions list had prevented the bank from offering decent services, lost it customers and ended its role as a leading financial institution.

The appearance of the word “Myanmar” in transaction documents alone causes MFTB payment transactions to fail and be returned, she said. MFTB has over 200 correspondent banks, which can perform services on its behalf, but this number often changed due to the sanctions, she said.

MICB deputy general manager U Khin Pe Oo said correspondent banks that have relationships with US financial institutions often put strict requirements on MICB, with some European lenders even refusing to facilitate euro payments.

State-owned bank officials are hoping that the sanctions amendments will ease such barriers, and they will no longer have to resort to alternative currencies or Singaporean correspondent banks to do business.

Improving trade between the US and Myanmar – one of the stated aims of the US reforms – also hinges on making financial transactions between US and Myanmar easier. But there are reasons to doubt that the amendments will do much to help.

“It’s encouraging to see that military-owned banks are starting to be either taken off the SDN list or added to the general licence,” said Eric Rose, lead director at Herzfeld Rubin Meyer and Rose law firm in Yangon.

What is not encouraging is that Myanmar is still not exempt from US Patriot Act rules that require US financial institutions to undertake special due diligence when dealing with a jurisdiction where money laundering is a concern, he added. “This is despite the tremendous progress Myanmar has made according to the Financial Action Task Force.”

That inter-governmental body develops and promotes policies to fight money laundering and terrorist financing across the globe. FATF removed Myanmar from its blacklist, which is reserved for countries making the least progress in combating these issues, in February this year.

Myanmar’s efforts to create a functioning financial intelligence unit, criminalise terrorist financing and freeze terrorist assets helped it move to the grey list, which includes countries that are committed but still have “strategic weakness”, according to FATF.

The country will have a chance to remove itself from this grey list next month, when the FATF plenary will discuss the results of a review of Myanmar’s progress. But while it remains on this list, the FATF will continue to ask other countries to take measures when dealing with Myanmar.

“That fact that Myanmar, together with Laos, Papua New Guinea, Yemen and others, is still one of 11 high-risk ‘monitored jurisdictions’ for money laundering under the FATF is likely to make increasingly risk-averse banks remain wary of transacting with Myanmar,” said Vicky Bowman, director at the Myanmar Centre for Responsible Business.

This is in addition to the SDN list, which still acts as one of the biggest barriers to trade because US firms still find it difficult to be sure exactly who they are dealing with. SDN individuals are widely believed to have become adept at using shell-companies and proxies.

Mr Rose said the US firms selling goods and services inside Myanmar will have to continue to engineer payment offshore, because “there is not even one US bank which will transfer money out of Myanmar, even for documented payments between a US parent and a wholly owned subsidiary”, he said.

This is despite no sanctions against such a transaction. This reluctance leaves US companies wishing to export goods to Myanmar stuck using a time-consuming and expensive system where goods technically change hands in Singapore, which typically requires back-to-back letters of credit and an offshore Singaporean subsidiary, Mr Rose said, adding that only larger firms can afford to use this method.

Myanmar citizens seeking to export goods to the US also still face hurdles. Although some US banks are willing to transfer money to Myanmar, for the same due-diligence-based reasons there are only a handful. And these payments will still be heavily scrutinised and made through ever-more-vigilant corresponding banks in Singapore, Mr Rose said.

“If I was an investor it would not impact the way I would approach [Myanmar’s] economy,” said Erin Murphy, founder of Myanmar-focused Inle Advisory Group, of the sanction reforms. “Large parts of it are still off-limits because of due diligence and reporting requirements.”

One benefit is that the sanction amendments will make it easier for US entities to work with the Yangon Stock Exchange, said Ms Bowman.

The removal of MEB from the SDN list means that the Yangon Stock Exchange is no longer a sanctioned entity. As MEB owns 51pc of the YSX, the bourse was automatically affected by the sanctions on MEB, US officials clarified last year.

A sanction-free stock exchange avoids potential issues when the YSX finally opens to US and other foreign investors. That requires the passage of a new Myanmar Companies Act, which is expected to go before parliament this year.

“If MEB was still on the sanctions list and the YSX became open to foreigners we’re not sure if US investors would [have been] allowed access,” said Kensuke Yazu, Myanmar representative for the Japan Exchange Group, which co-owns the bourse.

That is no longer an issue for the YSX, but because the exchange remains open only to domestic investors the immediate impact of sanctions being lifted was minimal, he said. The news was unlikely to have an effect on companies listed on the exchange, which is still in its infancy, he added.

First Myanmar Investment is the only company on the exchange, but it will be joined by Myanmar Thilawa SEZ Public, which lists tomorrow. FMI’s share price was unchanged at K25,000 yesterday, K2000 below the price at which it listed in late March.

Sanction watchers puzzled by Asia World SDN additions

The changes to US sanctions against Myanmar have been interpreted as a reward for the country’s democratic transition, but for tycoon Steven Law, who saw six of his companies added to the blacklist, the news was not so good.

Asia World Group, Mr Law’s main conglomerate, was already on the United States list of Specially Designated Nationals, and has continued to expand despite being blacklisted.

The firm operates one of the country’s main ports, as well as international airport terminals in Yangon and Nay Pyi Taw.

The six Asia World-linked companies added to the US blacklist on May 17 are Asia Mega Link Co, Asia Mega Link Services Co, Pioneer Aerodrome Services Co, Green Asia Services Co, Global World Insurance Co, and Shwe Nar Wah Co.

Sanctions experts were puzzled, however, as to why another six Asia World companies were added to the list, at a time when the US is more generally easing sanctions against Myanmar.

An Asia World spokesperson declined to answer questions yesterday.

As US firms and individuals are already barred from doing business with entities connected to Mr Law or the Asia World Group, the addition of the six entites to the SDN list is of little consequence, said Eric Rose, lead director at Herzfeld Rubin Meyer and Rose law firm in Yangon.

If US firms had done business with any of the six companies and had failed to note through due diligence operations their connection to an SDN, they were guilty of gross stupidity, he added.

Peter Kucik, a sanctions expert at Inle Advisory Group and former senior sanctions adviser at the US Treasury’s Office of Foreign Assets Control (OFAC), was also puzzled by the move.

“There are dozens of companies that are similarly situated – blocked by the 50 percent rule [because they are] owned by other individuals or entities or military holding companies [but are not explicitly included on the SDN list],” he said.

Mr Kucik is concerned that rather than making it clear which businesses are off limits and which not, the unexplained addition of the six firms might give less-sophisticated sanctions watchers the impression that Asia World-linked firms that are not included on the SDN list are acceptable business partners.

Senior US officials declined to comment on why the six firms had been added, or why Mr Law in particular had been targeted.

“If he [Steven Law] or any SDN would like, they can try to demonstrate a change in behaviour and OFAC will carefully consider [the change],” a senior US administration official said.

Three of the six firms added are also covered by the extension and expansion of General Licence 20, which permits trade-related transactions involving entities or individuals subject to sanctions.

Green Asia Port Terminal, which opened in July last year in the Thilawa special economic zone near Yangon, was built by Green Asia Services under a build-operate-transfer agreement.

Pioneer Aerodrome Services operates Nay Pyi Taw International Airport and Shwe Nar Wah developed the Hteedan Port Terminal in Yangon under a build-operate-transfer agreement with military-owned Myanmar Economic Coroporation.

Trade that passes through these ports and airports, providing it does not violate laws or US sanctions in other ways, will be covered by the general licences.

– Steve Gilmore

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