Bank secrecy and money laundering

Lebanon and its financial system are under close scrutiny from international agencies, the United States and the European Union. New rules put in place to regulate the movement of money in to and out of the financial system have tightened the screws on anyone thinking of filtering their ill gotten gains through local banks and financial institutions, or to use the local financial system as a conduit for funneling funds to terrorist organizations. Since the case of the Lebanese Canadian Bank (LCB) first made headlines, local banks and their umbrella organization the Association of Banks in Lebanon (ABL), have been frantically shoring up their defenses and internal procedures to comply with international requirements in an effort to allay concerns of international organizations and the world,  in particular the US and the EU. But is this enough to ensure overwhelming and voluntary compliance from local financial institutions, or will we see another LCB-like case emerge before long?

 

UNLUCKY GEOGRAPHICALLY

We are unlucky in that we live in a bad neighborhood and we have to remain vigilant and watch our every step. Lebanon’s proximity to Syria and the fact that local banks have Syrian subsidiaries exposes the local banking system to possible breaches of international sanctions placed on the Syrian financial system and certain members of the Syrian regime, even if unintended. This explains the undue attention given to the local banking system by US officials in early to mid 2012. The fact that Hezbollah, a major party represented in Parliament and Cabinet, is closely aligned with the Iranian regime, a regime that is also subject to sanctions, means local banks have to be doubly vigilant. Banking secrecy makes total transparency unachievable. Although the Special Investigative Commission (SIC), established under the anti money laundering law of 2001, has the power to lift banking secrecy in cases of suspicious transactions and suspected illicit operations, detection of such cases and disclosure is still heavily reliant on the vigilance and good will of banks and financial institutions in the system and the oversight of the ABL.

AN IMPERFECT SYSTEM

The existing system of detecting and reporting suspicious transactions will continue to work as long as banks want it to work, said Badri Meouchi, executive director of the Lebanese Institute of Directors (LID), and former executive director of the Lebanese Transparency Association (LTA). “A system that relies on individuals has enormous weaknesses, as it depends on the good will of banks and individuals in the system,” said Meouchi. The LID is an NGO that aims to develop, engage, and enable leaders, board members, and senior managers to apply best practices in governance, transparency, accountability, and integrity by delivering professional training. Meouchi said the system for detecting and reporting suspicious transactions works but can work better if a mechanism is put in place. He said every system has loopholes and the Lebanese love to exploit them. One example of a gapping loophole is the campaign finance regulation which limits how much each candidate can spend on their election campaigns, but there are ways around any regulation. “If a candidate is a patron of a civil society organization this would allow him to use that organization to spend on his campaign without limit,” said Meouchi. In banks, the authority to clear or not to clear transactions rests with the chairman of the board or the CEO, usually one person assumes both roles in Lebanon. The Central Bank Governor in 2011 described the case of the Lebanese Canadian Bank and an isolated and individual case and that generalizations must not be drawn from it. But, the LCB case was nonetheless a wake up call for all the banks.

 

REPUTATION IS EVERYTHING

Local banks and the ABL are keen on implementing anti money laundering and anti tax evasion regulations to satisfy international requirements in order to safeguard the sector’s reputation. Yahya Hakim, board member of the Lebanese Transparency Association (LTA) and former advisor to the Central Bank Governor, said that US authorities could take measures that would be detrimental to the monetary health of the local economy. “The Central Bank through its instructions to local banks and the ABL are keen not to anger the US authorities. But in a country where banking secrecy law entitles banks not to reveal the source of money, the system can’t be airtight,” said Hakim. But local banks have so far been eager to tow the line. It was only in 2002, thanks in large part to the efforts of the SIC and the Central Bank, that Lebanon was removed from the Financial Action Task Force’s (FATF’s) Non-Cooperative Countries or Territories (NCCT) list, often referred to as the FATF blacklist. “The ABL and banks are keen on maintaining the reputation of the banking system. They have a gentleman’s agreement not to let infiltrators through, such as black listed institutions and parties, they have a vested interest to keep the system as safe as possible, as the repercussions of not doing so could be very serious and very dangerous,” he said.

 

BANKS’ OBLIGATION

When operating internationally banks have to comply with international rules and regulations. In fact one could argue that international regulations have been more effective in forcing compliance as the stakes are a lot higher. Banks’ primary obligation is ‘Know Your Customer’ (KYC). The local regulator in Central Bank basic circular 126/2012 also requires banks to be fully conversant of the laws, regulations, sanctions and restrictions put in place by the governments of their correspondent banks in order to abide by them. Ignorance is no defense. In addition, the SIC is authorized by Law 318 (also dubbed the anti money laundering and combating terrorism financing (AML/CFT) law) to look into any account and answer requests from external sovereign authorities on suspected tax evaders sheltering behind Lebanon’s bank secrecy law. Lebanon has decided to comply with a new standard set by the Organization for Economic Cooperation and Development (OECD) on the exchange of information on tax evasion. If a country does not have laws and regulations in place that permit it to exchange tax information, the OECD could place such a country on its ‘grey’ or ‘black’ list, which would make doing business internationally very difficult for its banks. Hakim said that local banks are primarily concerned with maintaining the system as clean and as difficult to penetrate as possible. The banking system is a major and vital economic sector with deposits in the sector estimated at between $120 billion and $130 billion.

 

A DROP IN THE BUCKET

While the goal behind combating money laundering and terrorist financing is to make it very difficult and costly for law breakers to exploit the system, it won’t put an end to these practices. “The US knows very well that Lebanon in not a big player as far as money laundering is concerned. When compared to Singapore, Cyprus, Israel, and Hong Kong, we are a drop in the bucket,” Hakim said. He pointed to the case of Dubai where suspected money laundering activity is rife due to a substantial “sympathetic population” of wealthy and powerful locals who are of Iranian descent. The emirate is also closer to Iran and trade between the two communities has historically been strong. Hakim, who has worked extensively with numerous local government ministries and the UNDP, was also privy to the LTA’s unsuccessful attempts to make Lebanese banks more transparent. “We always tried to have a more transparent system in the banking sector but we failed… we have to take their word for it,” he said. Possible punitive action taken by the US or international bodies against Lebanon would destabilize the currency and the national economy and will end up destabilizing the country politically, Hakim said. “Lebanon is on the radar because of Syria and Hezbollah, but the question here is how much the US is willing to threaten the stability of Lebanon. This is why both the Bush and Obama administrations used a ‘gloved fist’ approach and did not pressure us beyond a certain point, the last thing they want in the region is another country destabilized. It’s neither in the US nor the EU interest to blow this pressure cooker.” This posture was exemplified by US and European reticence to back an opposition move to topple the government of Prime Minister Najib Mikati, stability, it seems, is the overriding concern.