Syria is continuing to focus on attracting foreign investment as it seeks to be reintegrated into the global financial system, but the country’s damaged banking sector poses a challenge for US regulators in terms of money-laundering and terrorism-financing concerns.
A Syrian delegation visited Washington this month to make its case to US and other potential foreign investors. Syrian Economy Minister Mohammed Al Shaar said the country could benefit from the American financial system and that Damascus was willing to co-operate with regulators on banking compliance.
“Definitely, that’s number one,” he told The National on the sidelines of the International Monetary Fund and World Bank annual meetings.
Speaking at a public panel earlier, Mr Al Shaar acknowledged that, after being cut off from the global financial system due to Assad-era sanctions, the transitional government lacks the technical know-how to reintegrate.
“The conundrum with Syria is that it has been cut off from the wider financial system for 14-plus years,” said Stephen J Fallon, founder of DBM Consulting and a former European government adviser. "No one really knows what's happened inside the central bank.
“No one knows what's up, down, left or right. And before you can start trying to revitalise the economy, you need to take stock, do a baseline assessment of where the Syrian Central Bank stands.”
Remains a mystery
Syria’s banking sector underwent a near-total collapse after the outbreak of civil war in 2011. Punishing sanctions, de-risking, the severing of ties with international banks and a decline in economic activity left it devastated.
A report by the US State Department in March found that Syria was still blighted by significant money-laundering risks, citing ongoing conflict, territorial influence of terrorist groups and other non-state actors, the absence of an official banking sector and significant economic decline. While money laundering is criminalised in Syria, the US State Department said elements of former president Bashar Al Assad's regime and affiliated groups remained involved in this and other illegal activities.
DBM Consulting
The extensive use of cash, the reliance on hawala networks and the potential use of cryptocurrency also complicate regulatory efforts.
Corruption and a liquidity crisis also evaporated confidence in the banking sector while Syria remained isolated from the rest of the financial world.
Even as the transitional government led by president Ahmad Al Shara is optimistic that all sanctions on Syria will soon be lifted, the country's banking sector remains a mystery due to a lack of transparency and due diligence, said Vittorio Serracapriola, lead analyst of sanctions at Karam Shaar, a consulting company focused on Syrian business.
“They're a bit more like black boxes,” he said, referring to the fact that since the banking sector's been disconnected for so long, there is no clarity about what it's like today.
Mr Serracapriola believes most of the focus on Syria's reconnection will remain on private-sector banks, with questions lingering over board members, whether they are currently sanctioned and whether the banks are respecting certain financial criteria.
“But still, given that the Commercial Bank [of Syria] is the largest public sector bank, the focus is also there,” he said.
The Commercial Bank of Syria and the Central Bank of Syria could not be reached for comment.
Meanwhile, Syria remains on the Financial Action Task Force's (FATF) grey list because of its weak measures to combat money laundering and the financing of terrorism.
Syrian Finance Minister Yisr Barnieh said Damascus would be removed from the list “very soon”, The National previously reported. The FATF had been unable to conduct an on-site visit to confirm whether Damascus's attempts at implementing its required reforms have begun, it said in February 2023. Syria chose to deter reporting on its progress earlier this year, the FATF said in June.
“Channels and communication being open not only depends on the Syrian central bank and Syrian government, who's shown to be willing to do so, but also on the receiving end, which is the Mena FATF body,” Mr Serracapriola said.
Political and technical will
Most US sanctions have been lifted on Damascus since President Donald Trump said in his Riyadh speech in May that he would lift them to give Syria “a chance at greatness”. Meanwhile, the Senate voted to lift the Assad-era Caesar Act through a defence policy bill before the government shutdown stalled progress.
“These are very positive signals from the Senate, but recent and proposed sanctions relief needs to translate into action by private-sector actors to have meaningful impact,” said Alex Zerden, a former Treasury official.
When asked by The National what Syria is doing to ensure compliance, Mr Barnieh said Damascus was working with the Treasury Department and the IMF on a strategy that would “ensure that we have highest integrity in our financial sector, financial systems”. He did not provide details on what this strategy is.
Unlike in the past when US regulators such as the Treasury Department – through the Office of Foreign Assets Control (Ofac) – or the Federal Reserve Board in Washington or Federal Reserve Bank of New York, engaged with other jurisdictions in the Middle East, such as Iraq and Afghanistan, America had no presence in Syria when rebel forces led by Mr Al Shara blitzed through Damascus to topple the Assad regime last December.
There is also little connectivity between the central bank in Damascus and US financial institutions, including the New York Fed. Businesses that would be subject to Ofac reporting are also limited in that there are few Syrian assets in the US that are reportable.
That differentiates the challenge from that of Libya, where the Treasury froze $30 billion in government assets in 2011 following unilateral sanctions against then-leader Muammar Qaddafi and his family.
Through its regulators, the US also uses its conditional access to the dollar to push for domestic reforms, such as with Libya. The Libyan Central Bank said recently that it co-operates with the Treasury and Fed in combating financial corruption, enforcing compliance standards and holding violators accountable.
With the US still having no presence in Syria, the Treasury could send personnel to the country to be the face of American capability.
“Are they going to use the Office of Technical Assistance to embed in government agencies?” Mr Zerden said, referring to the bureau that assists finance ministries and central banks from developing countries to manage their public finances and protect their financial sectors.
Syrian Central Bank Governor Abdul Hushrieh told Saudi news outlet Al-Ikhbariya that the Syrian delegation attended about 60 meetings during the IMF and World Bank gatherings, that included engagements with the Fed and the Treasury Department.
The Federal Reserve Board and Federal Reserve Bank of New York said they do not acknowledge or discuss individual account holders. The Treasury Department did not respond to The National's request for comment.
Europe and the Gulf
Much of Syria's public-facing pitches for investment have been made to the US, which analysts say is politically important to demonstrate investor confidence. However, there is much greater economic connectivity between Europe and Syria, due to closer proximity and sizeable populations of Syrian diaspora across the continent.
Mr Fallon said that, months after the UK and Europe announced a road map for the removal of sanctions, the full effects are yet to be felt.
“All of the forces that have been mobilised to scare companies and other countries from going into a country like Syria. You now need to help them feel safe, to go back in and to compliantly re-risk,” he said.
“You've pushed them out. You've de-risked. You've encouraged them to decouple. Now you need to lean on them to go back in.”
Syrian officials have also stressed the importance of reintegration with Turkey and the Gulf states, who have played a central role in making landmark investment deals in recent months. As part of a roadshow in the coming weeks, Mr Al Shara is expected to attend the Future Investment Initiative conference in Riyadh this week.
“For legal as well as practical economic reasons, I think the United States is the lagging indicator, not the leading indicator here,” Mr Zerden said. “Financial activity in particular is likely to pick up first from the Gulf, Turkey and Europe.”
