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C O N F I D E N T I A L SECTION 01 OF 02 DAMASCUS 000173 
 
SIPDIS 
 
SIPDIS 
 
NEA/ELA; NSC FOR MARCHESE; TREASURY FOR LEBENSON/GLASER 
 
E.O. 12958: DECL: 02/14/2017 
TAGS: ECON EFIN SANC ETTC PREL KTFN SY
SUBJECT: 311 SANCTIONS CASTING A SHADOW ON THE CBS'S FUTURE 
 
REF: A. 06 DAMASCUS 02063 
     ¶B. 06 DAMASCUS 05285 
     ¶C. DAMASCUS 00127 
 
Classified By: Charge d'Affaires Michael Corbin, reasons 1.4 b/d 
 
¶1. (C) Summary. Financial sanctions under USAPATRIOT Act 
Section 311 continue to put pressure on the Commercial Bank 
of Syria (CBS) nearly a year after the final ruling was 
imposed.  Nonetheless, the CBS, up till now, is managing to 
maintain its central role in Syria's banking sector.  While 
some international banks and financial institutions have 
terminated their relationships with the CBS, the SARG is 
trying to counter sanctions on the CBS by using envoys to 
Europe, financial conferences in Syria, and efforts to 
influence the local diplomatic corps.    Yet, regardless of 
the CBS's continued dominance of Syria's banking sector, 311 
sanctions have created difficulties for the CBS that could 
hasten its demise in the longer term. End Summary. 
 
¶2. (SBU) OVERVIEW OF 311 SANCTIONS AGAINST THE CBS: The CBS 
is the largest of six state-owned banks in Syria with more 
than 65 branches.  The CBS continues to control more than 80 
percent of Syria's banking market, as well as a majority of 
the SARG's foreign currency reserves, which total USD 12 
billion or more.  Since the nationalization of the banking 
sector in the 1960's the regime has empowered the CBS to 
perform many functions normally executed by a central bank to 
help centralize financial authority.  The CBS's power also 
derives from its role as primary banker for corrupt business 
deals that put money in the pockets of regime members -- from 
non-performing loans for questionable public enterprises to 
kickbacks during the oil-for-food scandal.  In March 2006, 
the U.S. Department of Treasury issued a final ruling that 
imposed a special measure against the CBS pursuant to USA 
PATRIOT Act Section 311, and its subsidiary, the Syrian 
Lebanese Commercial Bank, as a financial institution of 
"primary money laundering concern," due to a reasonable 
belief that it had been and may still be exploited by 
criminal and terrorist enterprises.  Of all the USG sanctions 
on it, the SARG has demonstrated the greatest concern about 
the Section 311 sanctions.  In the first year the sanction 
was threatened (2004 - 2005), the SARG expended considerable 
energy to avoid its imposition by implementing a number of 
requested reforms.  The SARG is currently continuing to 
campaign on CBS's behalf to limit the impact of the sanction. 
 
¶3. (C) HOW SANCTIONS HAVE AFFECTED THE CBS:  The CBS claims 
its profits are growing, but at the same time has publicly 
complained that sanctions have impeded its operations. (Note: 
Local banking contacts state that the CBS's lack of regard 
for internationally accepted banking and accounting standards 
brings the bank's profit numbers into question. End Note). 
On January 7, 2007, the Chairman of the CBS, Dureid Dergham, 
publicly stated that 20 international banks terminated 
correspondent accounts with the CBS.  Local banking contacts 
agree that third-country banks are continuing to terminate 
their correspondent relationships with the CBS, and at a rate 
higher than what the CBS has publicly admitted. 
Additionally, the CBS has historically held significant 
portions of its assets in dollar accounts, but as foreign 
banks have refused transactions involving dollars with the 
CBS, the CBS has been forced to assume the transaction costs 
of converting these dollars into other currencies. 
Businessmen, especially private importers and foreign 
companies, are also deserting the CBS because of its 
difficulties with dollar transactions and because private 
banks are now offering better, and more timely, services. 
 
¶4. (C) CBS RETAINS PLACE IN SARG POWER STRUCTURE: Despite 
sanctions, Dergham appears to be holding his own against his 
likely competitors, the Minister of Finance, Mohammed 
Hussein, and the Governor of the Central Bank, Adib Mayaleh. 
Moreover, the CBS is still carrying out the functions it has 
performed over the past forty years.  For example, there is 
no indication that the SARG has shifted large, hard currency 
reserves from the CBS to the Central Bank, as was expected. 
The CBS also continues to maintain exclusive control of 
public sector contracts (ref A).  Riad Obegi, Chairman of 
Banque Bemo Saudi Fransi, stated that his foreign clients 
cannot directly receive funds into their private bank 
accounts from Syria's public sector oil company, but instead 
are forced to receive these funds through the CBS.  Local 
banking contacts also state that the CBS has developed 
 
DAMASCUS 00000173  002 OF 002 
 
 
alternative methods of operation to evade the difficulties 
created by the sanctions.  This includes reaching out to 
smaller European banks still willing to conduct business with 
them and the SARG's 2006 decision to switch half of its 
foreign currency reserves from USD to Euros.  Local banking 
contacts report that many European banks have indicated a 
willingness to do business with the CBS in Euros, but not in 
dollars which need to pass through the U.S. banking system. 
 
¶5. (C) SARG ATTEMPTS TO MANAGE 311 SANCTIONS:  The SARG has 
sent Deputy Prime Minister for Economic Affairs, Abdullah 
Dardari, and other SARG officials to various European 
capitals to encourage European governments and banks to 
maintain accounts at the CBS.  Dardari and others have also 
worked to enlist Europeans' support against the USG 
sanctions, which the SARG claims are politically motivated 
and responsible for hindering the SARG's economic reform 
efforts.  The SARG has also engaged the resident diplomatic 
community and used SARG-sponsored regional financial 
conferences attended by the IMF and other financial 
institutions to assert that the USG is wrongly and unfairly 
punishing the CBS (ref B).  In addition, the SARG has toasted 
the results of the recent peer review of Syria's anti-money 
laundering systems conducted by the Financial Action Task 
Force of the Middle East and North Africa (MENA-FATF), 
claiming it proves the sanctions against the CBS for money 
laundering are unfounded.  The SARG recently announced the 
CBS will conduct an audit to prove its financial practices 
are sound.  The SARG's propaganda appears to be moderately 
successful, at least with members of the resident diplomatic 
community, who point to the EU Parliament's recently 
restarted debate over the EU Association Agreement as a sign 
that the EU may be considering breaking with the USG on 
linking economic issues to their opposition to objectionable 
SARG political policies. 
 
¶6. (C) 311 SANCTIONS ALSO HAVE A LONGER-TERM EFFECT: Despite 
the SARG's best effort at damage control, 311 sanctions are 
exploiting some of the CBS's existing vulnerabilities.  While 
expending significant effort to condemn the 311 sanctions 
internationally and develop alternative operating methods, 
the CBS has neglected critical internal reforms.  The 
pressure to streamline overhead costs is growing because of 
the CBS's increasing need to compete with the nascent, but 
growing private banks (ref C).  (Note: The CBS has a ratio of 
nearly 70 workers per bank branch, as opposed to a ratio of 
20 workers per bank branch in the private sector. End Note). 
In late 2006, the Dutch Bank ING even stopped providing 
technical assistance to the Ministry of Finance for a banking 
reform project due to concerns of involving itself with the 
CBS - contributing to the project's delay.  Furthermore, 
while the SARG is protecting the CBS, the sanctions have also 
spurred the SARG to develop alternative financing mechanisms 
that could erode the centrality of the anachronistic CBS. 
This includes SARG efforts to develop a Syrian stock 
exchange, expand its ties to international financial markets, 
and build capacity within the increasingly assertive Central 
Bank so that it can fulfill the traditional central bank role 
of managing monetary policy. 
 
¶7. (C) Comment: While the CBS has managed to overcome some of 
the technical hurdles presented by the 311 sanctions and 
maintain its position in Syria's banking sector, the 
sanctions are hampering the CBS's operations.  The SARG's 
vigorous campaign against the 311 sanctions reflects the 
value it currently places in the CBS - as a central financing 
mechanism for its questionable business ventures - and its 
concern that the sanctions are both damaging the CBS and the 
"reformist" image the SARG is trying to project externally. 
Nevertheless, the sanctions are exacerbating the CBS's 
internal vulnerabilities - speeding the trend of Syrian and 
foreign investors moving their business to the growing 
private banking sector and encouraging the development of 
other Syrian financial institutions that can fulfill 
functions previously dominated by the CBS.  These pressures 
are undercutting the CBS's previous monopoly on banking 
issues and undermining the CBS's ability to maintain power in 
the longer term. 
CORBIN