The priority right now for Financial Institutions and Property related industries must be to make sure their KYC and other anti-money laundering controls are as tight as possible.
Read the full introduction to our series of articles on the Middle East conflict .
Early-Stage Uncertainty and Market Sentiment
The current situation in the Gulf can lead to some speculation around the effects this will have on the financial landscape and how we view the risks presented by the events of the past week.
The truth is that in the main it is too early to say. We are in the first rush of events, and it is too easy to make knee jerk assessments as to what it all will mean. A quick resolution may appear to be moving further out of reach with each new attack, but it cannot be ruled out and the landscape after any agreement is not clear. Also, a prolonged crisis cannot allow us to predict with any certainty what will come, as Ukraine has showed us.
However, what we can look to is what sentiment is likely to do and how this could have knock-on effects on our markets.
A Warning Sign: The MBaer Merchant Bank Liquidation
One event in the past week or so that may not have hit the headlines as much as the Gulf is the liquidation proceedings by FINMA against MBaer Merchant Bank in Zurich. This was because of allegations of lax money laundering controls and further that they were actively helping clients from (particularly) Russia, Iran and Venezuela to circumvent sanctions. As a result, the US Treasury initiated proceedings to exclude the bank from the US financial system (the USD economy) which is one of the most extreme sanctions available to them on a foreign bank.
Why does this matter to us?
The attacks on third parties, especially Dubai, have sown doubts in the investment community about what until now was considered a safe-haven for property investment and off-shoring capital. We can see from the press releases and stories being pushed from the area that this is being taken seriously by the relative governments and they are trying to put up a show of business as usual, but this is not being backed up in the social media age with videos of rockets striking and drones around the centre of Dubai. What this risks, is a capital flight from the region.
Shifting Capital Flows Toward Europe and CEE
Traditionally the Gulf States have taken a more relaxed view of where the capital comes from when property and other purchases were made, thus giving (a perhaps unfair) view that you can turn dirty money to clean in the region a lot easier than you could elsewhere. The tightening of rules in London and the other major European areas that previously were the magnets to grey money meant a lot ended up in property in places such as Dubai and Abu Dhabi.
As the uncertainty around these investments rises with each day, it is perhaps inevitable that they will seek safe haven. This will likely mean quite a bit of this money will look to Europe and most likely will try to target areas with less regulation. In the past CEE has had its share of scandals (Baltic States, Moldovan Laundromat etc.) and this combined with the highest rising property prices in Europe will make our area a prime target for this murky money.Flights into the region remain insurable only under strict conditions. Each individual flight requires explicit advance approval from the insurer. Underwriters are assessing each request on a case‑by‑case basis and frequently applying additional premiums. Pre‑existing exclusions for destinations such as Iran, Iraq, Israel, Lebanon, Libya, North Sinai, Syria and Yemen remain fully in force. Insurers are continuously monitoring the situation, policy conditions and market capacities may change with little warning.
The Growing Risk of Illicit Funds Entering the System
Is our system prepared for the influx of capital which on the face of it seems legitimate, but when we dig down it is the property of sanctioned individuals, corrupt officials, criminals and worse? Are our banks more morally upright than MBaer? History suggests this may not be the case.
So, what needs to be done?
The priority right now for Financial Institutions and Property related industries must be to make sure their KYC and other anti-money laundering controls are as tight as possible. As mentioned, the money coming will in the most part be clean, but there is a great danger that there will be a sizable amount of dirty money masquerading as clean in there too. If this is not policed properly then our region risks having a few MBaers of its own.
Brian Alexander
Group Practice Leader Financial Institutions
T +43 664 962 39 17
