One would imagine — and indeed expect — that SMEs in the Middle East are caught up in the maelstrom of international KYC (know-your-customer) and AML (anti-money laundering) requirements. And they are struggling to meet and fulfil demanding new regulations.
The reality in the Middle East is quite different and SMES have so far fared a lot better than their counterparts in other parts. However, this is purely because financial institutions in the Middle East are not yet in a position to go the extreme lengths in their quest for KYC as their western counterparts have been able to.
KYC/AML requirements affect entities in their trading and financial interactions with other nations and with each other. The Middle East apart from being integrated with the rest of the world through a preponderance of imports in overall trade flows is also closely integrated as a trading bloc with Africa, India and the CIS.
The oil trade flows one-way — oil is exported by governments or multinationals partnering producers, and buyers being largely government entities. These transactions therefore are beyond the pale of usual KYC/AML requirements.
However, imports into the Middle East and exports from the larger MENA region certainly affect GCC countries. Dubai specifically, has historically served as a trading entrepot.
One can see compliance officers fret in other parts of the world when one asks the question as to how trade is conducted between countries that are not blessed with developed financial institutions and frameworks. The issue gets even more interesting, to say the least.
Underdeveloped or even primitive banking systems, stringent capital controls, poor regulatory frameworks coupled with an old-fashioned and a largely relationship-based trading culture make for a curious picture. Given the above, traders have resorted to settling payments using exchange houses, “havala” operators, cash-carrying couriers and so on.
So we have as part of our picture dozens of countries on the “radar” of regulators all over the world and unorthodox settlement channels on the other.
Trading, an integral part of and significant contributor to the economies in the Middle East, is dominated by SMEs. As in other parts of the world, international KYC/AML requirements are implemented and enforced by financial institutions, largely banks and, to a lesser extent, exchange houses.
Given the inextricable linkages between frontier emerging markets and unorthodox, but essential, settlement mechanisms, it is a monumental task confronting Middle Eastern financial institutions, in their efforts in coming up to speed with regard to “international” KYC/AML requirements.
The pressure from international, particularly US regulators is high. Practical difficulties also abound — the sheer size of trading volumes and their systemic importance to local economies and therefore their financial systems, makes it well nigh impossible to rapidly raise the bar on KYC/AML standards in Asia and the Middle East.
In short, Middle Eastern financial institutions will find it difficult to satisfy Western standards of KYC/AML requirements because it is simply not possible to raise the bar any faster, without severely crippling economic activity of SMEs and of financial institutions.
Global powers are obviously well aware of the peculiarities of the Middle East and appear to have understood the necessity of slow reform on this front. There really is no choice.
As a result, KYC/AML requirements have not really been an onerous item on the agendas of SMEs in the region.
However, the noose will doubtless tighten over time. The pace of change will not be the same in all countries — this is bound to increase the pain and cost for SMEs in the more developed countries in the region, which will obviously move along faster in the pace of reform on the KYC/AML front.
— The writer is the head of Vianta Advisors.