Last month the United States Treasury Department singled out local company Stars Group Holding for alleged ties to Hezbollah, adding the company, several subsidiaries and associated individuals to its ‘specially designated nationals’ (SDN) list. As part of its accusation, the Office of Foreign Assets Control (OFAC) said that these entities operate as a procurement front, purchasing sophisticated electronics for Hezbollah to use in the ongoing conflict in Syria.
“With disturbing reach far beyond Lebanon, Hezbollah’s extensive procurement networks exploit the international financial system to enhance its military capabilities in Syria and its terrorist activities worldwide,” David Cohen, the Treasury’s undersecretary for terrorism and financial intelligence, said in a statement released on July 10.
Based in Beirut, Stars Group Holding is one of Lebanon’s larger mobile phone distributors with branches in major shopping centers throughout the country. In addition, a number of Stars’ subsidiaries — in Lebanon, China and the United Arab Emirates — were also named by the Treasury Department.
In a press release on July 10, US State Department spokesperson Jen Psaki alleged that Hezbollah “relies heavily on front companies such as Stars Group Holding” while directly fingering the group as a covert purchaser of “sophisticated electronics and other technology from suppliers around the world, including a range of engines, communications, electronics, and navigation equipment” for Hezbollah.
The company disputes these allegations. “We don’t have any connection to Hezbollah, financial or otherwise, we’re just a general company,” explained Ayman Ibrahim, general manager of Unique Stars Mobile Phones, a subsidiary of Stars Group Holding located in Dubai.
Hezbollah’s media office declined to comment when reached by phone.
For Stars Group Holding and the designated affiliates, the accusation may have drastic consequences. “It will make it very difficult for Stars Group Holding. It will affect their ability to operate,” explained Abbe Jolles, a criminal defense and international human rights litigator based in Washington.
This will be accomplished indirectly. “Most companies will stop working with them, and I would not be surprised if local banks stopped dealing with them,” explained Ibrahim Warde, an expert in underground financing at Tufts University.
[pullquote]“Most companies will stop working with them, and I would not be surprised if local banks stopped dealing with them”[/pullquote]
Just how drastic a change this will be for Stars isn’t yet clear, but their access to US financial markets will be completely blocked. How the group will react is still unknown. The company’s president and CEO, Kamel Amhaz, did not respond to interview requests for this article.
Intermediary companies might limit their exposure by cutting ties with the company. “It could affect insurance and transportation,” explains Warde. “Quite simply anyone doing business with them might be sanctioned; they normally will stop doing business right away.”
Long fingers of the US
Being placed on the SDN list blocks designees from the American financial system — the reach of which is far and wide. The US is the world’s dominant financial and payments center, with a huge share of payments and financing routed through the country.
“It’s difficult to stay out of the American financial radar and, consequently, [SDN listing] cuts companies from global financial markets,” explained Warde. Western Europe has typically been very cooperative in complying with American sanctions, said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics and former deputy assistant secretary at the Treasury Department. But “in China or Russia, America’s influence is not so great,” Hufbauer said.
With subsidiaries in Dubai and China, Stars Group Holding may not be completely affected and could actually maintain access to financing. “Those countries where the reach of American law is not quite as significant will benefit,” added Warde.
Lebanese financial institutions
While “these designations do not affect the banking sector at all,” according to Makram Sader, secretary general of the Association of Banks in Lebanon, they are enforced through the country’s banks.
Because of this, the designation of Stars Group Holding raises corollary questions as to whether Lebanese banks are complying with American sanctions. In 2012 Banque du Liban, Lebanon’s central bank, issued Circular 126 to “ask Lebanese banks to respect all sanctions applied by their correspondent banks,” Sader explained.
When banks do not comply with US sanctions, the punishment can be huge. BNP Paribas, a major French bank, admitted guilt in June for evading American sanctions against entities in Iran, Cuba and Sudan. The bank will pay nearly $9 billion in fines to the US government — a judgment that sent a clear message to financial institutions around the world.
[pullquote]OFAC designates entities to the SDN list without a court ruling and it does not publish evidence to justify its decisions[/pullquote]
In mid-July FBME, a Lebanese-owned bank chartered in Tanzania but operating primarily in Cyprus, was accused by the Treasury Department of facilitating financial activity for transnational organized crime and for Hezbollah, receiving the label ‘primary money laundering concern’. Cyprus’ central bank swiftly seized control of the bank’s operations.
In 2011 the Treasury Department designated the Lebanese Canadian Bank also as a ‘primary money laundering concern’. The bank was subsequently shuttered and sold off to a competitor in a deal arranged by BDL. The specter of another such fiasco has put pressure on Lebanon’s banking sector to hew closely to US Treasury rules. “Lebanese banks comply fully with international sanctions, especially US sanctions,” Sader reiterated.
Difficulty of delisting
OFAC designates entities to the SDN list without a court ruling and it does not publish evidence to justify its decisions. “We don’t know what they’re talking about; we’re double checking everything. Where is the proof? Show us the proof,” Stars’ Ibrahim protested.
Stars Group Holding will not receive any proof from OFAC. “The burden is really on the company to prove it is not doing it,” said Hufbauer. OFAC’s standard is a determination that there is ‘a reasonable basis’ to believe activity is occurring that merits sanctions.
“You have to recognize that [the decision to name entities] to the list is based on intelligence that will not be revealed,” Hufbauer added.
According to Erich Ferrari, a Washington based lawyer specialized in OFAC sanctions, to be removed from the SDN list the entity must present its case to OFAC arguing either “that the designation was made by mistake; or that the circumstances underlying the original designation no longer exist and as such the designation should be removed.”
This is a strenuous and expensive process. Disproving an OFAC accusation often requires “terminating business and personal relationships, providing financials to track money flows over a prior period [of] time, and instituting compliance programs for the SDN’s businesses to protect against money laundering and illicit financial activities,” explained Ferrari.
But that is just for sanctions to be reconsidered. OFAC must then review the information and follow up with the designated entity. “They rarely allow in-person meetings,” added Ferrari. Even gaining access to legal representation is an arduous process. According to Jolles, a lawyer can correspond with a SDN, so long as they’re not also on the terrorist watch list. But legal representation requires OFAC authorization “indicating terms under which the lawyer can engage in representation.” The lawyer must also provide quarterly reports of the legal fees paid by the SDN, Jolles says, documenting legal services rendered.
It’s a timely process further compounded by the limited manpower employed at OFAC. “The bureaucracy of OFAC has 300–400 people, which may sound like a lot but they have a lot of backed up cases,” said Hufbauer.
“There are a lot of companies that don’t receive attention because of this bureaucracy, so they must have done something big to draw the attention of OFAC,” claimed Hufbauer.