EU Points to Saudi Money-Laundering Issues

Saudi Arabia stiffened financial-crime penalties in 2017

Brussels is having second thoughts about embracing Saudi Arabia’s stature on the global stage, at least as far as the Kingdom’s money laundering protocols are concerned. The European Commission is poised to announce a “black list” of non-compliant countries. Saudi Arabia is prominent on a 16-nation list, which includes countries like Panama and Libya. These banking entrepots are the ugly stepsisters of international finance, according European officials.

Inclusion on the list, when finalized, will force European banks to scrutinize Saudi-based account holders more severely than others. The Financial Times notes, “Banks would be required to act on suspicions by steering clear of dubious transactions and passing any concerns onto the authorities.”

The EU list is a new initiative, running the risk of taking on a name-and-shame quality. As a result, it likely will not have the same teeth globally as the commonly-used Financial Action Task Force (FATF) criteria. But the announcement still stings, as Prince Mohammed struggles to put Saudi Arabia on an even footing with more economically-liberal nations. Apparently, the roll-out of stringent money-laundering penalties in the Kingdom in late 2017 was not enough to placate European officials. Under new Saudi guidelines, those convicted of financial crimes could be given as much as a 15-year prison term and fined almost $2 million.

The real message here may be one related to the October murder of journalist Jamal Khashoggi. These lists, after all, tend to be highly political. Consider this reality check: Russia is likely to be excluded from the European roster, despite using the Estonian Branch of Danske Bank as a full-service financial laundromat over recent years.

We should keep an eye on whether or not Paris-based FATF follows Brussels’ lead. For the record, Saudi Arabia is not categorized by FATF as a “high risk or other monitored jurisdiction.” However, a FATF report issued in September 2018 declared, “The Kingdom of Saudi Arabia is achieving good results in fighting terrorist financing, but needs to focus more on pursuing larger scale money launderers and confiscating their assets.”

Our Vantage Point: To borrow the Swedish expression, Saudi Arabia would like to slide onto the international stage “like a shrimp sandwich.” The Khashoggi murder makes that difficult, at least among Western nations.

Learn more at the Financial Times.

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Image: Saudi riyal is pegged to the US dollar. Credit: Trafawma at Can Stock Photo Inc.

Bitcoin Abets Terrorism. Maybe.

Cryptocurrency market is borderless

Zoobia Shahnaz is a name that you may read about again. In December 2017, she was arrested in New York on a string of terrorist-finance charges. The federal indictment clarifies that she purchased Bitcoin with fraudulently obtained credit cards, wiring the proceeds to ISIS-related groups in Pakistan. The case spotlights a hole in the global financial system that authorities worldwide would like to plug.

Yet identifying a hole in the global financial system is different from uncovering a trend. Objectively, the debate over cryptocurrencies supporting terrorism may be one-sided. Existing evidence is anecdotal; examples are isolated; talk is speculative. Terrorists, awkwardly, already have many well-established channels to fund their work.

The London-based Royal United Services Institute, an established think tank on security affairs, argues against random and arbitrary policy moves. In a March 2017 commentary, it emphasized: “Treating cryptocurrencies as an exceptional threat creates the misleading impression that more conventional financial products are not already equally, or more, vulnerable to terrorist exploitation.”

Some degree of measured response is appropriate. Most early-stage regulations are focused on know-your-client and volume-reporting standards:

United States. Bitcoin exchanges are required to document the beneficial owners of their accounts using new customer due-diligence criteria. We expect to see headlines tied to government enforcement of these rules after the May 2018 deadline. In that context, about 100 firms have now registered with the Treasury Department’s Financial Crimes Enforcement Network as money transmitters.

European Union. Germany and France have called for G-20 involvement in cryptocurrency regulation, placing it on the agenda for the March 2018 meeting of the group’s finance ministers. The approach avoids piecemeal oversight on a nation-by-nation basis, affording consistency in the borderless world of cryptocurrencies. Regardless, the EU will likely adopt a compliance model similar to the United States.

Emerging Markets. Industry news from the United Arab Emirates suggests that commercial banks are delaying some customer-initiated transfers to cryptocurrency exchanges. Malaysia published draft guidelines for the industry in December. Fear of being locked out of US dollar clearing capabilities is likely to drive hardened rules across the developing world.

Regulations are often problematic because most countries do not recognize cryptocurrencies as legal tender. That acknowledgement, at least philosophically, would upend the notion that countries have a sovereign right to control their money supply. Still another issue is that policymakers do not understand the asset class, viewing it with prejudice. Fortunately, recent expansion in the cryptocurrency market is alerting them to positive features of business, such as financial inclusion, despite near-term concerns over price volatility.

There are some nations that may be in a bigger hurry to implement far-reaching rules than others. Indonesia, for instance, has been an outspoken critic of cryptocurrencies. It bans their use by those fintech companies tied to payment systems. One reason is that Bahrul Naim, a Syria-based Indonesian, likely funded terrorist activities in his home country through Bitcoin. He is considered the mastermind behind the January 2016 attack that killed seven in central Jakarta.

Our Vantage Point: Pushing through capricious cryptocurrency regulation may inadvertently squelch the development of the fintech marketplace, while distracting authorities from monitoring more prominent terrorist-finance channels.

Learn more at

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Image: Terrorists use a broad array of financial products to fund their activities. Credit: Ixus at Can Stock Photo Inc.

Is America on the Cusp of an Infrastructure Plan?

Highway projects linger for months

The White House appears to be making a major shift in its infrastructure approach, somewhat unexpectedly. Rather than roll out infrastructure improvements through public-private partnerships, the president seems prepared to think in terms of outright fiscal expenditure. Details remain sketchy.

That tone should satisfy key Democrats who have been critical of over-emphasizing private-sector cash because of concerns over the widespread impact of user fees. Never mind the fact that some major states would balk at any infrastructure-related federal matching requirements. New Jersey and Illinois, for instance, have some of the lowest state credit ratings in the country.

At its core, infrastructure is a bipartisan issue. Insiders are hopeful that common ground can be found this year for a package that may total at least $200 billion in federal funds. The amount could be much larger by the time Congress repackages any White House proposal. But can the federal government afford such investment? Some economists argue that the just-passed tax bill already causes undue budget pressure over the years ahead.

There are also latent concerns about over-stimulating the economy. With a solid growth trajectory now in place, do policymakers run the risk of cyclical overheating if they dump too much money into the economy too fast? Any plan would presumably have to pace infrastructure outlays over time. Some analysts argue that the government may want to withhold certain investment as an antidote to potentially-weak economic activity in the future.

A brewing issue is one of perception. The Trump administration, which has only offered sweeping generalizations about how it defines infrastructure, is likely to be thinking in terms of outsized greenfield projects. But the real need may be maintaining and improving existing structures, given the age of the nation’s roads and bridges, among other elements of the infrastructure mix. Repairing and managing what we have may be much cheaper and more effective than new construction.

Regardless of what a bipartisan agreement looks like, we should brace for the overt politicalization of any infrastructure bill. Comments by President Trump in January 2018 at the American Farm Bureau Annual Convention in Nashville are a prelude to future rhetoric. He claimed, “We are proposing infrastructure reforms to ensure that our rural communities have access to the best roadways, railways, and waterways anywhere in the world. And that’s what’s happening. We’re going to be spending the necessary funds, and we’re going to get you taken care of. It’s about time.”

Our Vantage Point: Infrastructure may be a bipartisan issue, but we will see months of political wrangling on Capital Hill. The shift away from outsized private-sector funding acknowledges the low-return nature of many infrastructure projects.

Learn more at PBS.

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Unauthorized use and/or duplication of any material on this site without written permission is prohibited.

Image: In America, tight budgets can limit states’ ability to maintain and improve existing infrastructure assets. Credit: Dbvirago at Can Stock Photo Inc.

Cybersecurity is the New Deal Metric

Pacemaker business in the US is regulated by the Food and Drug Administration

The intersection between cybersecurity and medical technology is the pacemaker, at least this week. The Food and Drug Administration has forced NYSE-traded Abbott Laboratories to recall some 465,000 pacemakers due to software vulnerabilities. It seems that the black hat across town could actually change a heartbeat. The news is not a windfall for hospitals; a programming patch can be installed wirelessly at a cardiologist’s office. But the headline emphasizes a new area of technology-based business risks. Abbott just acquired its pacemaker business from St. Jude Medical for some $25 billion. The liability could be extreme in the case of hacked pacemakers, never mind the direct and indirect costs of the outsized, if not embarrassing recall. Board members and shareholders alike may be asking uncomfortable questions about what the firm discovered—or chose to ignore—in conducting due diligence on the transaction. Perhaps Abbott should have paid closer attention to its white-hat allies. The health-care giant responded obliquely this week by asserting, “We are resolving all old St. Jude medical issues.”

Our Vantage Point: Due diligence once centered on governance and profit analysis. Executives ignored cybersecurity, in part because they did not understand it. They now do so at their peril.

Learn more at the Chicago Tribune.

© 2017 Cranganore Inc. All rights reserved.

Image: Three companies—Abbott, Boston Scientific, and Medtronic—control the US market for pacemakers. Credit: Khuruzero at Can Stock Photo Inc.

Tech Metals Ignite Mining Industry

Salar de Uyuni is the largest salt flat in the world

There may not be enough tech metals worldwide to meet soaring demand. In most cases, mobile phones and solar panels are produced with lithium or indium. Other essential metals for tech-related industries include cobalt and lanthanum; the list is perplexing. The problem is that most of these resources do not trade freely in liquid markets. Rather, they are controlled narrowly by government or commercial interests. Even China—a dominant player in this corner of the commodities business—has resorted to deep-sea mining to meet demand. Does that mean investors should jump at the next neodymium deal? There is merit to diversification. Tech-metal opportunities are red-hot at this time, but tech manufacturers are looking hard at production alternatives. And supply metrics can change abruptly. Consider that aluminum was more valuable than gold throughout the 1800s. Then prices collapsed, as supply soared, when aluminum foil came into common use.

Our Vantage Point: Tech-metal deals should be viewed as high-risk opportunities. Apparently-generous returns could evaporate quickly, as advances in manufacturing up-end demand.

Learn more at the Financial Times.

Note: We use the term “tech metals” generally. It includes so-called rare-earth metals, such as neodymium, as well as those metals that are by-products of base-metal production, such as cobalt.

© 2017 Cranganore Inc. All rights reserved.

Image: Lithium does not occur freely in nature, but is commonly extracted from brine. Shown here is Salar de Uyuni in Bolivia. Credit: Cristiborda at Can Stock Photo Inc.