Myanmar’s first modern stock exchange risks falling under sanctions by the US Treasury when it eventually launches this year.
The Yangon Stock Exchange is not designated specifically by the Department of Treasury’s Office of Foreign Assets Control (OFAC).
However US officials have clarified that under US law it would be automatically sanctioned, as it is 51 percent owned by Myanma Economic Bank (MEB), a state entity under US sanctions.
Entities owned 50pc or more by one or more blocked persons on the US Specially Designated National (SDN) List are subject to US sanctions, said a US embassy spokesperson.
“The 50pc rule applies regardless of whether OFAC has listed such entities.”
People close to the situation say the potentially damaging, but probably not crippling, results of the already delayed exchange opening under US sanctions may not have been directly intended by Washington.
But the legal complications illustrate how the complex US sanctions system can result in unintended consequences.
In February 2013, OFAC issued a general licence allowing US citizens to conduct most transactions, including opening and maintaining accounts and conducting other financial services with four major financial institutions, including MEB.
However, this does not authorise any new investment in or with the four banks, without a separate authorisation.
The US embassy spokesperson said that due to restrictions under the Trade Secrets Act, he was unable to comment on whether Yangon Stock Exchange (YSX) has sought or been granted a licence authorising transactions otherwise prohibited by US sanctions.
Elizabeth Bourassa, spokesperson for terrorism and financial intelligence at the US Department of the Treasury, said that OFAC cannot discuss any possible engagement with specific private entities.
Japan Exchange Group, the operator of Tokyo Stock Exchange and Daiwa Securities Group, will own a 49pc stake in YSX, which is due to open in December. The two Japanese companies signed an agreement with MEB on December 23 last year.
The agreement is the result of discussions since May 29, 2012, when a memorandum of understanding was signed. The partners have set up a joint venture company called Yangon Stock Exchange Joint Venture Limited, with K32 billion (US$24.9 million) initial capital.
A Daiwa spokesperson based in Tokyo said he was unable to comment on the intention or plans of the company’s partner, the Myanmar government, or local companies.
MEB officials did not respond to phone calls, and U Maung Maung Thein, chair of the Securities Exchange Commission of Myanmar, could not be reached for comment.
After awarding provisional underwriter licences to eight companies last week, he flew to the US for 10 days, according to his assistant.
U Aung Htun, managing director of Myanmar Investments, which applied for a YSX underwriting licence, said that if the exchange was affected by sanctions it would be a misguided application of policy.
“A functioning stock exchange is vital for the development of the economy and will in fact promote transparency. I would therefore expect an exemption to be granted,” he said.
If an exemption is not granted, local banks will still be able to deal with the YSX, as non-US persons are not subject to US sanctions regulations, said a Myanmar focused consultant who did not want to be named, due to relationships with businesses potentially involved in the exchange.
“However, this at minimum complicates due diligence and compliance,” the consultant said. “As we’re seeing with the Asia World Port Terminal [AWPT], even non-US banks are concerned about conducting transactions involving sanctioned entities.”
The US Treasury Department is looking into the use of AWPT, after receiving a joint letter from two US banking associations, warning that US sanctions on the port’s terminals and jetties could spur a de-facto trade embargo on Myanmar, as reported by The Myanmar Times.
As far as Daiwa is concerned, at the very least it now owns almost half of a sanctioned entity, said the Myanmar focused consultant.
“As a purely technical matter, Daiwa could in the abstract potentially be sanctioned itself, but it would be very hard to imagine that in practice – sanctioning the YSX is likely not the intent of US policy,” the consultant said.
“There are far more egregious examples of companies that have flaunted sanctions even where there are US policy concerns.”
Source: Myanmar Times
NB: Take note that Myanmar has been taken off the US Sanction List by President Obama’s Executive Order signed on 7th October 2016. See US terminated remaining sanctions against Myanmar on 7 Oct 2016.