Foreign banks cashing in on Myanmar’s brief economic liberalisation are facing new compliance headaches after fresh sanctions were imposed on the military junta, with the sector put on notice over further sanctions targeting the country’s energy and commodities sectors.
The US and UK announced co-ordinated sanctions in late March against the military holding companies Myanma Economic Holdings Limited (MEHL) and Myanmar Economic Corporation Limited (MEC), which the two governments said were enmeshed in broad sectors of the economy including mining, trade, banking, logistics, agriculture and manufacturing.
Myanmar’s military seized power in a coup on February 1, claiming irregularities in a January election in which Aung San Suu Kyi’s National League for Democracy secured an overwhelming victory. The military ruled the country between 1962 and 2011, freeing Suu Kyi from 15 years of house arrest in 2010.
International condemnation of the military has grown in the wake of the deaths of more than 500 people during protests against the coup.
“By designating MEC and MEHL, Treasury is targeting the Burmese military’s control of significant segments of the Burmese economy, which is a vital financial lifeline for the military junta,” Andrea Gacki, director of sanctions enforcement unit the Office of Foreign Assets Control (OFAC), said on March 25.
Not only do the sanctions apply to the two designated companies, but also any entity of which they own 50% or more, meaning corporates and banks must untangle which businesses in supply chains or transactions could be ensnared in the crackdown. A 2019 report by the UN Human Rights Council identified 106 businesses owned by MEC and MEHL, and a further 27 “closely affiliated” with the pair.
“These sanctions actions taken by the United States last week, I think, are massive in their scope and impact,” says Ginger Faulk, a partner with law firm Eversheds Sutherland in Washington DC.
“This has heightened sanctions compliance for any dealings with Myanmar because there’s a possible link to one of these military-controlled conglomerates which operate in huge swathes of the Myanmar economy,” the sanctions and trade expert tells GTR.
The 2019 UN report found 14 foreign companies conducting joint ventures with military-owned businesses, and another 44 with “other forms of commercial ties”. The report was commissioned after the military’s campaign against Myanmar’s Rohingya minority in 2016-17, which killed tens of thousands of people and which the UN found could constitute war crimes and crimes against humanity.
“The full scope of MEHL’s and MEC’s operations are notoriously opaque,” says Pichamon Yeophantong, a senior lecturer at the University of New South Wales and expert in foreign direct investment in the Mekong region. “But with due diligence, it is possible for us to identify a good number of entities that will fall under the 50% rule, or at least for banks to minimise the risk of doing business with MEHL or MEC subsidiaries.”
The sprawling enterprises are “firmly embedded” in the economy and act as gatekeepers to foreign firms entering the market, Yeophantong adds.
Some international corporates, including Japanese beermaker Kirin, severed ties with military-owned firms shortly after the February coup. Australian energy giant Woodside has also paused an offshore gas drilling project and South Korean steelmaker POSCO is seeking a buyer for its 70% stake in a joint venture with MEHL, according to Reuters.
Foreign banks in line of danger
Non-US banks could also face enforcement action under Washington’s sanctions regime if they provide “material support” for an entity controlled by the two sanctioned companies, says Faulk. The definition of “material support” is hazy and not defined by OFAC.
“I think that it raises both primary and secondary sanctions risks for international financial institutions,” says Faulk. “Not only do they need to be concerned about possibly violating sanctions if they were to process transactions with one of these Myanmar entities, say in US dollars or through the US financial system, but they also need to be concerned about the risk of secondary sanctions if they are found to have provided material support to one of these entities.”
The military’s political and economic liberalisation, beginning in 2011, triggered a rush of foreign investment into the country, including several foreign banks that were granted licences by the central bank. Provision of trade finance to domestic customers remained prohibited by the regulator, but is allowed for foreign firms.
Australia’s ANZ bank, which says it provides trade finance services through its Myanmar entity, tells GTR it does not “provide banking services to the entities subject to sanctions or provide funding for their projects”.
“Our business in Myanmar is focused on supporting key multinational clients with their local payment and other local banking needs,” the spokesperson adds. “We are concerned by the situation in Myanmar and the escalating violence. Our number one priority continues to be supporting our local team, ensuring their safety and security.”
Justice for Myanmar, a group that lobbies businesses to cut their ties with the military, criticised ANZ for not signing a recent statement condemning the military’s violence against protesters, telling the Sydney Morning Herald the lender must take “concrete steps” to ensure it is not giving financial support to the military.
Japan’s MUFG, which also says it provides trade finance and corporate banking services in Myanmar, did not respond to requests for comment on the latest sanctions.
Finance providers spooked by the US and UK sanctions announcements are likely to be replaced by Chinese and possibly Southeast Asian banks less concerned by sanctions exposure, according to Yeophantong.
“I think there’s a very good chance that Chinese banks will fill that gap,” she says.
Oil and gas next?
The military has said it plans to hold new elections but shows no immediate signs of bowing to anti-coup demonstrators or international pressure, making further sanctions measures likely.
Law firm Allen & Overy said in a client note last week: “It is widely expected that additional sanctions may follow, targeting the military and affiliated businesses.”
Faulk says the Myanmar Oil and Gas Enterprise (MOGE) is likely to be at the top of target lists being drawn up in Washington. The company is a state-owned enterprise but identified by the 2019 UN report as having opaque finances and ties with the military. “It is a revenue generator for the military regime,” Faulk says.
“If there is a company that would be subject to further sanctions, I agree it would be MOGE,” adds Yeophantong. “The reality is that many of the big companies that are influential in Myanmar are either military owned, or state owned, and there’s only really a fine line that separates the two.”