By Tom Arnold and Stanley Carvalho
ABU DHABI (Reuters) - Commercial banks in the Gulf could lose their ability to have dollar trades cleared through the U.S. banking system, increasing risks for them, the United Arab Emirates' central bank governor warned on Monday.
Mubarak Rashid al-Mansouri told a financial conference that U.S. and European banks were continuing to scale back their relationships with Gulf banks because foreign regulators were requiring them to do more due diligence on customers, raising costs for the foreign institutions.
"One large U.S. bank had derisking issues in the region in order to comply with tighter risk controls. As the U.S. dollar remains the dominant international currency, other U.S. banks are following suit," Mansouri said.
"This could leave banks in the region without any U.S. correspondent banking relationships, forcing them to clear their U.S. dollar trade through central banks."
Such an arrangement would increase risks because it would add one more party to the payment process, and it would put an "unreasonable burden" on the Gulf's central banks, Mansouri said.
Senior monetary officials in the Gulf have been publicly complaining for a year about the reluctance of international, particularly U.S., banks to deal with some of their Arab counterparts, and Mansouri's remarks suggested the situation remained serious.
A study by the Arab Monetary Fund, published in September, found foreign banks were shying away for various reasons including concern about violating economic sanctions, the risk of unwittingly being implicated in money laundering and financing of terrorism, and a broadly shrinking appetite for risk.
Mansouri said the Gulf was already complying well with rules against money laundering and terrorist financing, and that UAE authorities were in touch with U.S. authorities and banks to convince them of this.
He said the central bank was also working with the UAE association of banks to assess the level of compliance further, particularly for smaller banks.
Meanwhile, the central bank is scrutinizing money exchange houses and may take some houses' licenses away if they don't comply with rules, Mansouri added.
The UAE central bank revoked the licenses of two money exchange companies in 2013 and another one this year.
(Writing by Andrew Torchia; editing by John Stonestreet)