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C O N F I D E N T I A L SECTION 01 OF 03 DAMASCUS 001014 
 
SIPDIS 
 
SIPDIS 
 
NEA/ELA 
TREASURY FOR GLASER/SZUBIN/LEBENSON 
NSC FOR ABRAMS/DORAN/SINGH 
EB/ESC/TFS FOR SALOOM 
 
E.O. 12958: DECL: 02/08/2016 
TAGS: ECON EFIN EINV PTER SANC SY
SUBJECT: IN THE FACE OF SECTION 311 SANCTIONS, SYRIA 
FEELING THE SQUEEZE 
 
REF: DMS 6224 
 
Classified By: CDA Kathy Johnson-Casares, reasons 1.4 b/d 
 
¶1. (C) Summary: As we move to impose sanctions against the 
Commercial Bank of Syria (CBS) under USAPATRIOT Act Section 
311, it has become increasingly clear that the threat of 
sanctions succeeded in making it difficult for Syrian public 
financial institutions to conduct business with foreign 
banks.  Most of the established European banks are decreasing 
their business with Syria in anticipation of sanctions, and 
the CBS increasingly is using smaller banks to handle its 
transactions and foreign reserves.  Most contacts state that 
the SARG's decision to conduct all public transactions in 
euros is an inadequate defense against sanctions because most 
European banks do not want to assume the risk of doing 
business with the CBS in any currency.  Contacts do warn, 
however, that the threat of sanctions also has made it 
difficult for Syria's private banks to operate, and that 
imposition of the final rule against the CBS for money 
laundering under Section 311 may result in further isolating 
them from European markets.  Further, it may actually 
increase the flow of funds through the informal sector as 
people choose hawaladars (moneychangers) to circumvent 
barriers in formal channels.  End summary. 
 
------------------------------- 
European Banks Hedge Their Bets 
------------------------------- 
 
¶2. (C) Under the threat of Section 311 sanctions, banking 
sector contacts suggest that European banks are being much 
more cautious in their business dealings with Syria to avoid 
jeopardizing their more lucrative business with US financial 
institutions.  A diplomat at the French Embassy stated that 
over the past six months, several French companies have 
complained that French banks are refusing to confirm letters 
of credit (LC) issued by the CBS.  Fabrice Ferandes, an 
economist at the EC Mission in Damascus, stated that the 
requirement under 311 for banks that do business with US 
financial institutions to increase due diligence on 
transactions involving the CBS has dampened European banks' 
enthusiasm for maintaining a high profile in Syria or taking 
on new Syrian business.  Although Syria now has six private 
banks, the CBS still dominates the Syrian market.  According 
to SARG statistics from 2005, the CBS issued $1.5 billion in 
LCs, and handled $8 billion in deposits, dwarfing Syria's 
nascent private banking sector, which has a total 
capitalization of just over $300 million. 
 
¶3. (C) Swiss bank UBS AG's January 22 announcement that it 
was stopping all present and future business with the CBS has 
been the most public manifestation of this unease.  However, 
after the Director General of the CBS, Duraid Durgham, 
publicly refuted the announcement, claiming that the CBS 
still maintains correspondent relations with the Swiss bank, 
contacts suggest that the UBS move was more of a hedge than a 
dramatic new development.  A Swiss diplomat stated that UBS 
has not necessarily changed its official stance, commenting 
that the Swiss bank had decided to stop doing business with 
the CBS and Syrian politically exposed persons (PEP) almost 
two years ago.  He further said that he was informed that UBS 
may have shifted its Syrian accounts to Julius Baer, another 
large Swiss bank in which UBS is a primary shareholder.  He 
postulated that UBS may not have terminated the relationship 
with CBS altogether, but instead may have moved its CBS and 
PEP accounts to Baer, although he emphasized that he does not 
know the amount or type of business that was transferred. 
 
¶4. (C) However, contacts do say that UBS has become more 
cautious about engaging in Syrian business, public or 
private.  George Sayegh, General Manager of Bank of Syria and 
Overseas (BSO), one of six private banks in Syria, informed 
Post that the UBS agent in Beirut recently refused to take 
his dollar-denominated transaction, telling Sayegh that he 
would have to check with the head office for clearance on 
this and future transactions.  The same Swiss diplomat 
mentioned above stated that the bank's head office recently 
waited until the last minute to confirm sponsorship of a 
cultural event presented by the Swiss Embassy and the SARG, 
 
DAMASCUS 00001014  002 OF 003 
 
 
even though it had agreed in principle months in advance. 
The diplomat stated that it was clear from his correspondence 
with bank officials that UBS wanted to avoid too close an 
association with Syria. 
 
¶5. (C) Sayegh stated that other large, well-established 
European banks are refusing to accept dollar-denominated fund 
transfers from Syria, or from accounts that BSO holds in 
other European banks, unless the transfer first runs through 
New York.  Sayegh, whose bank holds 95% of its foreign 
currency in dollars, said that European bankers have told him 
that they do not want to assume the risk and cost of delays 
associated with having to run the dollars through New York 
themselves.  Sayegh said, however, that he still can do 
business in Europe although the ease of the transactions 
often depends upon the bank and the country.  He said, for 
example, that London banks tend to refuse his business more 
often than banks in Paris, Milan or Frankfurt.  Nabil 
Hchaime, General Manager of Bank BEMO Saudi Fransi, the 
second private bank to open in Syria, admitted that BEMO 
often uses its parent bank in Lebanon as a bridge to foreign 
financial institutions in order to avoid the problems that 
BSO described.  Hchaime stated that the bank has run 
transactions through BEMO in Lebanon at the request of his 
Syrian customers. 
 
------------------------------------- 
Switch to Euros- Too Little, Too Late 
------------------------------------- 
 
¶6. (C) In order to avoid problems of moving dollars in the 
international financial system, the SARG announced in 
February that it would conduct all future public entity 
transactions in euros instead of dollars.  Contacts in the 
private banking and financial sector were immediately 
dismissive of the announcement, and scoffed that switching to 
euros would not protect the Syrian economy or banking system, 
but instead further complicate SARG transactions.  Dr. Aymen 
Midani, an independent Syrian economist, stated that even if 
future contracts and payments are denominated in euros, the 
dollar remains the Syrian economy's main point of reference. 
The SARG still receives significant numbers of dollars from 
the sale of commodities like cotton and oil that are priced 
in dollars on the world market.  Other contacts contend that 
Syria still holds the majority of its reserves in dollars, 
and that a previous plan to convert to a basket of currencies 
has not been implemented.  Therefore, contacts say, the SARG 
first will have to buy euros with its accumulated dollars, 
taking on an additional exchange risk while at the same time 
not avoiding a dollar transaction. 
 
¶7. (C) Contacts suggest that the CBS could have trouble 
establishing correspondent relationships with foreign banks, 
even using euros.  Hchaime claimed that BEMO's European 
headquarters has refused to handle Syrian public accounts, 
and that other established European banks are following suit. 
 As a result, the SARG increasingly is conducting its 
transactions and placing its reserves with less established, 
higher risk banks in secondary markets.  Highlighting this 
trend, Hchaime related how an official with the Central Bank 
recently requested that BEMO disburse $1 million in euros to 
pay the first capital installment for three newly licensed 
cement factories.  Though Hchaime agreed, the official 
initially was unable to provide Hchaime with the name of a 
correspondent bank to which BEMO should transfer the funds. 
The official called back three hours later, Hchaime claimed, 
requesting that BEMO transfer the Euros to a small Italian 
bank in Rome that Hchaime had not heard of previously and 
declined to name. 
 
----------------------------- 
Possible Implications of 311 
----------------------------- 
 
¶8. (C) Contacts have alluded to two potential negative 
outcomes from the imposition of Section 311 sanctions.  One, 
Syria's private banks, like the state-owned CBS, may be 
forced to switch their business from the old, established 
banks in Europe to less reliable ones if US action motivates 
European banks to decrease their Syrian business further. 
 
DAMASCUS 00001014  003 OF 003 
 
 
Sayegh pointed out that he plans to turn east toward Gulf 
banks if Section 311 sanctions further degrade his bank's 
access to the European market.  Like BSO, the SARG reportedly 
feels it has other options as well.  In addition to potential 
financial partners in the Gulf, the recent announcement that 
Iran and Syria plan to develop a joint public sector bank to 
finance investment in Syria may indicate a first step in this 
trend away from Western financial institutions. 
 
¶9. (C) Two, the imposition of 311 may drive financial 
transactions underground, reversing a gradual trend toward 
the formal sector that started with the establishment of 
private banks at the end of 2003.  Sayegh stated that Iraqi 
banks, for instance, are having difficulty paying Syrian 
traders for exports because US financial institutions are 
refusing to transfer funds to Syria.  Sayegh commented that 
more and more business deals between Syria and Iraq are being 
conducted in cash, and that he has heard of attempts to 
smuggle large sums of cash money across the border to finance 
legitimate trade deals. 
 
¶10. (C) Mazen Tabaa, the agent for Western Union in Syria, 
complained that the threat of 311 sanctions so far has made 
his business unprofitable.  He stated that the Western Union 
regional headquarters in Dubai is not allowing him to access 
the company's fund transfer software for fear of OFAC action, 
and he spends more on faxes and paperwork than he earns in 
fees.  He added that he has witnessed an increase in business 
for the unregulated hawaladars in Syria, as bankers and 
traders seek alternative ways to move money.  He alleged that 
the black market moneychanger and hawaladar Sahloul, aka abu 
Shafiq, who is the preferred moneychanger for regime 
insiders, is one of the primary beneficiaries of this trend 
(ref).  Tabaa claims that Sahloul, as a sub-agent for Western 
Union in Jordan, is in effect &smuggling8 business out of 
Syria by taking fund transfer requests in Damascus and 
disbursing funds from Amman. 
 
¶11. (C) Comment: Post expects that the imposition of Section 
311 sanctions will strengthen the trends mentioned above: (1) 
the continued disengagement of European banks from Syria; and 
(2) an increase in transactions through the informal 
financial sector as formal channels are restricted.  However, 
it is unlikely that these developments will cause the SARG to 
reevaluate its present course.  The SARG's recent adoption of 
the euro for public sector transactions was widely perceived 
as more of a political jab at the US than an economic act. 
Therefore, the SARG likely will view the imposition of 
Section 311 sanctions at this time as a further hardening of 
the US position, especially given the SARG's perception that 
it made a good faith effort to meet our 16 demands and avoid 
sanctions. 
JOHNSON-CASARES