Southeast Asia from Scott Circle: Financial Regulations Hobble U.S. Companies in Myanmar Even after U.S. Sanctions Lifted

Financial Regulations Hobble U.S. Companies in Myanmar Even after U.S. Sanctions Lifted

By Murray Hiebert, Senior Adviser and Deputy Director (@MurrayHiebert1), Southeast Asia Program (@SoutheastAsiaDC), CSIS

Last September 14, while Myanmar’s de facto leader Aung San Suu Kyi was visiting Washington, President Barack Obama announced with considerable hoopla that the United States was lifting its remaining sanctions on Myanmar. Today, nearly nine months later, American companies trying to operate in Myanmar are still hobbled by sections 311 and 312 of the USA Patriot Act, which deal with money laundering and terrorist financing and impose stringent due diligence requirements.

These regulations mean that “no U.S. banking institution will provide trade financing in Myanmar, finance direct investment in the country, or help U.S. investors repatriate their profits,” says Eric Rose, the lead director for Herzfeld Rubin Meyer & Rose Law Firm, whose lawyers have provided legal services in Myanmar for three decades. The same applies to foreign banks that have operations in the United States.

Any major purchases by Myanmar such as Boeing airplanes or GE jet engines need to be booked through Singapore or other regional banks. Forcing Myanmar’s international banking transactions to take place offshore adds costs to transactions in a country where operating costs are already high.

Last October, the U.S. Treasury Department temporarily exempted Myanmar from section 311, but the country is still kept on a short list of countries that are subject to enhanced due diligence enforcement of section 312. The only other countries on the list are Cuba, Iran, and North Korea.  

These two sections impose rigorous due diligence requirements and are intended primarily to apply to countries that do not participate in international counter-money-laundering information sharing arrangements or allow bank account holders to bar financial institutions from cooperating with international attempts to obtain bank account information as part of an official investigation. 

These regulations continue to apply to banks operating in Myanmar even though formal sanctions against the country have been lifted and it was removed from the lists of the Financial Action Task Force, an intergovernment body that seeks to combat money laundering and terrorist financing, in February 2016. That step was taken three months after the country had surprising free elections that put opposition leader Aung San Suu Kyi’s National League for Democracy in power.

The Treasury Department has provided technical advisers and is working with Myanmar’s central bank and intelligence authorities to help them detect and block laundered drug money from entering the banking system. “We’re making progress, but there are a few remaining issues,” a Treasury official said. 

One immediate concern seems to be the country’s so-called “hundi” system, an informal money exchange first developed in India in which an agent can be paid in one country or place and another agent in a distant location can pay a third party to move money around in places like Myanmar where banking systems are weak. Because it allows transactions where modern banks are not active, the hundi system raises concerns that it can be used to move money, including for money laundering purposes.

Since Washington began easing sanctions against Myanmar in 2011, about 60 U.S. companies have set up offices in Myanmar, but few besides Coca-Cola have invested significant amounts. A recent survey conducted by the fledgling American Chamber of Commerce in Yangon found that most U.S. companies were reluctant to invest in Myanmar because U.S. banks refused to conduct financial transactions with local banks thanks to the remaining restrictions. Total U.S. investment in Myanmar is still less than $500 million, ranking the United States 14th among Myanmar’s global investors.

Aung San Suu Kyi and her government were hoping that U.S. investors would come to tap into the country’s 51-million-person market, its vast largely unexploited mineral wealth, relatively cheap labor, and large swaths of fertile agricultural land when the sanctions were removed.  But they have been disappointed at how little U.S. investment and trade has come in the intervening months. 

For U.S. companies, financial restrictions are a factor for their wait-and-see attitude but only one of a litany of concerns. Many companies have been waiting for clarification and implementation of the government’s economic reforms and investment policies.  The country is still so “immature,” said an official of a U.S. engineering and construction firm involved in oil and gas projects in different tough places around the world that came to explore operating in Myanmar.  

Roads in many places are “nonexistent” and the regulation situation is “difficult,” the business executive said.  “The banking problems are only one of many factors” that prompted the company not to jump into the market.  But regulations like sections 311 and 312 “make U.S. companies much less competitive” in the Myanmar market, he said. 

The restrictions of the Patriot Act have a chilling effect on U.S. exports to a country that is friendly to the United States and whose consumers love American products. To lift the restrictions would require President Donald Trump to notify Congress that the Treasury Department was permanently ending implementation of these regulations against Myanmar, which would allow it to be treated on a level playing field with its neighbors in Southeast Asia. 

There is talk in the administration about inviting Aung San Suu Kyi to Washington for a meeting with Trump when she attends the United Nations General Assembly in September. That would provide a good opportunity for the administration to remove Myanmar from the short list of countries still living under sections 311 and 312 and allow U.S. companies to participate more fully in Myanmar’s economic development. 

Murray Hiebert is senior adviser and deputy director of the CSIS Southeast Asia Program.

Biweekly Update

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The Philippine Supreme Court on July 4 upheld President Rodrigo Duterte’s declaration of martial law for the southern island of Mindanao. Eleven of 15 justices ruled to dismiss challenges to the martial law declaration, which Duterte made for 60 days beginning on May 23. The Philippine Congress is discussing an extension of martial law in Mindanao, with the Senate and Philippine military pushing back against the Speaker of the House of Representatives’ July 9 proposal that martial law be extended for the remainder of Duterte’s term in office. 

Philippines holds joint naval patrols with the United States and Indonesia 
The Philippine Navy and U.S. Navy on July 1 conducted a joint patrol, with the littoral combat ship USS Coronado and the frigate BRP Ramon Alcaraz patrolling the Sulu Sea in the southern Philippines. The Philippine Navy joined the Indonesian Navy on July 4 for a joint patrol of the Celebes Sea, also in the southern Philippines, which was the third regional patrol in a month. The Philippines, Indonesia, and Malaysia on June 19 began a trilateral maritime patrol program to monitor terrorist and criminal activities in the Sulu and Celebes seas.

China provides military aid to Philippines 
The Chinese government on June 28 provided the Philippines with around 3,000 rifles and 6 million rounds of ammunition worth approximately $7.3 million in a ceremony at Clark Air Base. The ceremony was attended by Chinese ambassador to the Philippines Zhao Jianhua and Philippine president Rodrigo Duterte, who personally inspected the gifted small arms. The rifles were primarily Chinese copies of the U.S. military’s M4 carbine, along with less than a hundred longer-range marksman rifles. 

Indonesia looks to China as replacement for Japan-backed rail project 
Coordinating Minister for Maritime Affairs Luhut Pandjaitan on July 6 announced that Indonesia may consider Chinese funding for the Jakarta-Surabaya rail project currently backed by Japan. Pandjaitan said that plans to upgrade the existing rail line may not be sufficient to support faster trains and that building a new track may be necessary, which would greatly increase the cost of the $7.7 billion project. Pandjaitan would not guarantee that Japan would remain involved if the project costs increased and said Indonesia would consider the country with the cheapest funding offer to minimize the burden for the state.

Cambodia deports 74 Chinese nationals accused of extortion 
Cambodia on July 6 deported 74 Chinese nationals sought by Beijing on charges of Internet and telephone extortion. Cambodian police arrested the suspects at China’s request and turned them over to Chinese police at the Phnom Penh airport for transport to China. Reporters were not allowed access to the suspects before they were removed from Cambodia, and it was unclear whether the suspects had been allowed to dispute the accusations against them or challenge their deportation. 

Thailand delays new foreign labor law 
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Malaysia cracks down on illegal foreign workers 
Malaysia’s immigration department on July 1 began a crackdown on illegal foreign workers following a June 30 deadline for employers to register their undocumented workers with the government and obtain an enforcement card, or E-card, for them. The crackdown began with raids on a foreign worker dormitory in Kapar, Selangor, and a construction site in Ipoh, Perak. Malaysian officials said that only about 155,000 out of the estimated 600,000 illegal foreign workers in Malaysia had been registered with the government by the June 30 deadline.

Malaysia to reorganize police counterterrorism bodies 
Malaysian deputy prime minister Ahmad Zahid Hamidi on July 7 said that the Royal Malaysian Police (RMP) needed a second deputy inspector-general position devoted to fighting terrorism. Zahid said the new deputy would lead a new police Counter-Terrorism Department that would take over the duties currently fulfilled by the counterterrorism division of the RMP’s Special Branch. Zahid said the government would wait until after a meeting of the police commission to announce the new position. Current Special Branch chief Fuzi Harun will likely fill the new deputy inspector-general spot, according to the New Straits Times. 

Singapore’s GIC downgrades expectations in annual report 
Singaporean sovereign wealth fund GIC on July 10 warned that a period of lower returns is to be expected over the next decade due to high valuations across asset classes and modest economic growth. GIC’s chief executive officer, Lim Chow Kiat, said in an interview that GIC was cautious about future performance even as other investors have taken on greater risk as a result of “very accommodative” monetary policies by central banks. GIC said that current low market volatility was out of sync with increasing uncertainty—including the U.S. election results and the U.K.’s decision to leave the European Union—and that current valuations seem overly optimistic about future earnings.

Myanmar journalists arrested for covering ethnic armed groups 
The Myanmar military arrested three journalists on June 26 for covering a drug-burning ceremony organized by the Ta’ang National Liberation Army in northern Shan State. The journalists were charged with violating the colonial-era Unlawful Associations Act and potentially face up to three years in prison. A presidential spokesperson on June 28 said members of the media are required to inform security forces before reporting in conflict zones and that journalists had no special right to violate the law. State Counselor Aung Sang Suu Kyi on July 6 said that the arrests should not be viewed as a problem between the media and military, but as a question of whether existing laws are just and democratic.

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