Bahrain’s Justice Ministry has issued new guidelines for countering money laundering, financial crime and terrorism financing. The guidelines aim to ensure that Bahrain maintains international standards in countering these challenges, while assisting those operating in the financial and commercial sectors in remaining vigilant for these threats. A particular challenge has been ensuring compliance in cases where funds have arrived from states with significantly lower standards of regulation, or where money-laundering and funds linked to terrorism are known to be an issue. Those handling such funds are expected to conduct due diligence processes on risk-based criteria.
In autumn 2018, the Financial Action Task Force (FATF) published an extensive report analyzing action by Bahrain to address money laundering and terrorism financing. While the report noted that measures to address these issues needed to be further strengthened, FATF concluded that “domestic coordination and information exchange at the operational level is “strong and proactive”. FATF assessed that Bahrain had a “moderate” and “still evolving” level of understanding about the risks faced from money laundering and terrorist financing (ML/TF).
Money Laundering investigations
Bahrain’s Financial Intelligence Directorate (FID) was assessed by FATF to be “well integrated” through electronic systems and direct communication channels with other agencies. There is “strong and effective” cooperation between the FID and other law enforcement authorities.
Bahrain has a “sound legal framework” for the investigation of money laundering and Bahrain’s financial and judicial authorities have recently pursued a number of complex money laundering investigations. A wide range of sanctions have been imposed for ML offences. Of the 34 individuals convicted of ML between 2012 and 2017, the average sanction applied was four years imprisonment, with the highest fine exceeding $500,000.
Financial institutions were found to have a good understanding of money laundering risks, although sometimes understanding was weaker on terrorism financing issues. However, understanding of these issues in non-financial sectors “needs improvements,” with due diligence of customers in these sectors found to be “less robust.” The verification of beneficial ownership was assessed as needing improvement in both financial and non-financial sectors.
Bahrain’s financial sector
FATF’s report commended Bahrain’s importance as a regional financial centre and trading hub, with a “well-developed financial sector” and liberal business environment: Bahrain “enjoys a strong, diverse, and competitive economy which promotes business growth”. Oil comprises 75.6% of Bahrain’s budget revenues and 20% of GDP. However, the financial services sector accounted for 16.5% of GDP in 2016 and constitutes the largest non-oil component of Bahrain’s GDP, while being the Kingdom’s largest employer. Bahrain’s financial sector includes 29 retail banks and 76 wholesale banks. Fourteen of these retail banks are locally incorporated while fifteen are branches of foreign banks.
The presence of 26 Islamic banks (retail and wholesale) affords Bahrain the largest concentration of Islamic finance institutions in the Middle East. Islamic banking sector assets rose from $1.9bn in 2000 to $25.7bn by 2016, with total banking sector assets amounting to $192.7bn.
Money laundering risks
Local authorities report that the most common financial criminal convictions have been for matters such as domestic fraud and criminal breach of trust. Recent designations of certain zones where non-Bahrainis are permitted to purchase real estate has led to a significant influx of new buyers, including expatriates and non-residents. Dealers in precious metals and stones were also assessed to pose a potential laundering risk.
Oversight of investments, individuals or commercial entities from high-risk regions of the world was also judged to be a key challenge; with Bahraini financial institutions sometimes struggling to accurately assess risk levels for engaging with potential customers and counter-parties from these states. It was noted that Bahrain had severed relations with a neighbouring state judged to be the highest threat for challenges of financial crime and terrorism funding – namely, Iran.
Terrorism financing & money laundering for Iran-sponsored militancy
Bahrain has experienced terrorists attacks in recent years, particularly by militants sponsored and trained by Iran. There was a succession of bombing attacks against the security forces among other targets, leading to the deaths of around 23 policemen. After 2014, ISIS threatened to target Shia mosques in Bahrain as part of a campaign of attacks against GCC states.
Shipments of smuggled weapons have been impounded which were linked back to Iran. Seizures of munitions imported from abroad between 2015 and 2017 included firearms, C4 explosives and even the equipment required for manufacturing sophisticated EFPs (explosively formed penetrators), of the kind used to attack US troops in Iraq. However, overall volumes of foreign financing for domestic radical groups is understood to be relatively small. In the past, action was taken against Sunni groups raising money for Syria, when there was a suspicion that these funds risked being channelled towards extremist groups.
Future Bank was set up in Bahrain in 2004 as part of a joint venture involving two prominent Iranian banks, Bank Melli and Bank Saderat. The bank was later blacklisted by US and British officials, before being shut down definitively by the Bahraini authorities in 2015, accusing it of being a “trojan horse” for terrorism funding. The bank was found to have concealed at least $7 billion of transactions between 2004 and 2015.
The FATF report found that Bahraini officials were aware of the need to address terrorist financing. However, within financial institutions, employees tended to be relatively more confident about addressing money laundering challenges; compared to “less robust” action against terrorism funding risks. The ability to address such risks in non-financial sectors tended to be weaker still.
Commercial & financial transparency
Bahrain’s ‘Sijilat’ system for the registration of commercial entities was commended by FATF as “robust” and “helpful”. The registry includes information on authorised signatories, boards of directors and shareholders who own more than 5% of the company’s shares, along with beneficiaries. However, some concerns were noted about the accuracy of beneficial ownership information.
Bahrain is ranked at seventeenth position on the 2018 Financial Secrecy Index (FSI). The two other leading regional banking centres of Dubai and Lebanon were rated at 11th and 9th places respectively. Bahrain was given a relatively high financial secrecy score of almost 78 out of 100. Bahrain can be expected to significantly improve its banking secrecy rating in coming years, having signed up to the OECD common reporting standard on tax affairs in 2017.
This OECD reporting standard obliges financial institutions in Bahrain to automatically abide by international standards in sharing financial data, particularly in relation to tax affairs. It remains to be seen how far Bahrain’s implementation of these measures will go in addressing the FSI’s criticisms of banking secrecy related to disclosure of data, anti-money laundering and tax regulation.
Corruption and financial mismanagement
Annual reports assessing instances of reported corruption and inefficient use of public funds have been gaining increased public attention, with the full audit report and conclusions being published through the media. Officials accused of criminality have been referred to the judiciary, with aspects of these reports reviewed and acted on by Parliament. In 2013, the Crown Prince established a committee of investigation to oversee the cases highlighted by these annual reports by the National Audit Bureau (now the National Audit Office).
The sharp reduction in oil revenues between 2014 and 2017 led to substantive budget cuts of most ministries, with attention closely focused on wasteful spending. For example; guidelines were introduced limiting numbers of those who could travel on official delegations, with subsequent annual audit reports drawing public attention to cases where various departments had failed to spend prudently. The National Institute for Human Rights was one of the institutions which faced criticism for expenditure on overseas travel.