* Banks isolated because of inadequate money laundering laws
* Firms having trouble paying for imports
* Afghanistan threatened with blacklisting next month (Adds detail on money laundering law)
By Jessica Donati
KABUL, May 22 (Reuters) - Chinese banks have halted dollar transactions with most Afghan commercial banks, the central bank governor said on Thursday, making it difficult for businesses to pay for imports from one of Afghanistan’s biggest trading partners.
“China is a major country that was handling those bank transfers, and now they have told the banks they can’t do it,” governor Noorullah Delawari told Reuters.
The impact on business had been felt immediately, he said.
Despite intense pressure from Western backers, Afghanistan has so far failed to pass laws meeting global standards against money laundering and terrorist financing.
That has prompted banks from various countries to halt trade with its commercial banks.
The Chinese move was part of a trend that was making it increasingly difficult for the banks to execute international transactions, Delawari said.
“Some of our banks cannot do any direct transactions” because their correspondent banks in the United States, Europe, Germany or Turkey had halted dealings, he said. “Now even transferring money to China to import goods has been affected.”
The Afghan government’s failure to pass key measures means that it could in June be blacklisted by the Financial Action Task Force (FATF), an international body that sets standards on how countries combat money laundering.
Banks have been struggling since FATF threatened Afganistan with the punishment early this year.
“That has been affecting our banks’ ability to transfer money for anything,” Delawari said, describing for example how students abroad were unable to receive money from their parents.
Chinese banks and officials were not immediately available for comment.
Time is running out before the FATF decision in June. The draft legislation recently submitted to parliament, in its current form, will not save Afghanistan from the blacklist even if it is passed in time.
The governor said this was because certain provisions included in the central bank’s original draft had been removed without its knowledge by the Ministry of Justice.
“They made some changes to the law without discussing it with us,” Delawari said.
The governor said emergency meetings were being held with members of parliament and other officials to get the provisions written back into the draft before it was passed to the upper house for approval.
It was unclear why the law had been changed without the bank’s knowledge.
“Frankly, no one wants to talk about it. Very sensitive issue,” said a financial sector official, speaking on the condition of anonymity because he is not authorised to talk to the media.
The impact of being added to the blacklist would be “devastating”, he added.
In the meantime, the central bank is hoping to convince FATF to delay its decision because Afghanistan’s presidential elections are under way.
Afghans will head to the polls on June 14 for a second round of voting after no candidate won an absolute majority in the first round on April 5.
“It would be unfair to have the new government deal with the major problems caused by the blacklist. So we are hoping this process will be extended,” Delawari said, adding that this was a long shot.
“The blacklist will cause serious problems that would affect our banks’ ability to transfer money in and out of the country. We want to avoid that.” (Reporting by Jessica Donati, Editing by Maria Golovnina and Mark Trevelyan)