Lebanon moves forward in times of global uncertainty
Souraya Machnouk
Abou Jaoude & Associates Law Firm
Beirut
Souraya Machnouk (Bio)
"When the going gets tough, the tough get going" best describes the exemplary immunity of Lebanon's banking system to the global financial crisis. Acute activity slowdown in regional and global markets was met with increasing FDI (foreign direct investment) inflows to Lebanon equivalent to 12.6% of GDP in 2010, the highest in the Arab World for the second consecutive year. Lebanese banks have maintained high liquidity levels.
The rigorous financial policies, regulations and supervision of the Central Bank of Lebanon (BDL) have proven efficient in shielding Lebanese banks from any major exposure to structured financial instruments, the eye of the storm of the recent financial crisis.
Building on Decision 7776 of 2001, BDL continues to pass measures strictly regulating the banks' lending and investments. A recent example is BDL Decision 10482 of July 22 2010 which limits, with some exceptions, a bank's operations for its own account on structured products issued in Lebanon in any currency to products that offer an unconditional capital guarantee and provided their aggregate nominal value remains below 25% of the bank's Tier 1 capital.
New capital markets law
On August 4 2011, the Lebanese Parliament finally enacted the long-awaited Capital Markets Law that sets the legal organizational framework of the Lebanese financial markets in line with international norms.
It provides for the formation of the National Council for Financial Markets as a "watchdog" entrusted with a mission of organising, regulating and controlling the capital markets and its participants. The Council will be headed by the BDL Governor and will consist of seven members, five of whom are appointed from the private sector. The Council's functions are similar to those of the SEC with a considerable autonomy in setting its policies. A new law ratified on the same date explicitly bans insider trading.
Will the passing of this important law be the gateway to the renaissance of the capital markets in Lebanon? Only time will tell.
Banking secrecy and AML regulations
Banking secrecy, a principle inherent to the country's history, is governed by the provisions of the Law of 1956. This Law binds all financial entities regulated by BDL to absolute secrecy with respect to their clients' personal and account related information and provides that banking secrecy can only be lifted in very limited circumstances.
Despite increasing regulations aimed at combating money laundering, banking secrecy remains the core principle of the banking system and plays a key role in attracting funds to Lebanon.
In 2001, the Lebanese legislature enacted a comprehensive Anti-Money Laundering Law, which reconciles the principles of banking secrecy with the need to comply with international AML standards. The AML Law provides for the establishment of a Special Investigation Commission (SIC) whose mandate includes investigating suspected money-laundering offences and deciding to lift the banking secrecy.
Following its Decision 7818 of 2001 dealing with AML implementation procedures and in line with global trends, BDL Decision 10622 of December 30 2010 explicitly adds "terrorism financing" to the list of offences constituting money laundering.
More recently, BDL Decision 10725 of May 21 2011 imposes "caution" measures on banks in their operations with money dealers. In the same context, BDL issued a set of decisions in May 2011 instating stringent new requirements on money dealers in Lebanon in order to deter their usage for money laundering and terrorism financing.
Banks corporate governance
A recent development is BDL Decision 10708 of April 21 2011 that sets out new measures related to corporate governance applicable to Lebanese banks.
The decision mandates banks to comply with existing and future international recommendations and best practices issued by the Basel Committee.
It further requires from banks to prepare a detailed corporate governance manual that includes, inter alia, the standards used to determine the remunerations and appraise the performance of board members and upper management in terms of their abiding by corporate governance procedures.
Fiduciary agreements
Law 520 of 1996 introduced the "Fiducie" as the civil law version of the Anglo-Saxon trust institution. Recent reliance by innovative legal practitioners, combined with the banking secrecy, revived fiduciary agreements as an efficient tool for eligible banks and financial institutions to be used in portfolio management, corporate and project finance transactions and Islamic banking operations.
Real estate
The active real estate sector, very popular with investors, has grown to become one of the success stories of the Lebanese economy. Although prices have been appreciating at double-digit rates on average over the past few years, the sector, emanating from a very low base, is not believed to have undergone a price bubble but rather has brought the Lebanese market more in line with regional averages. Foreigners may freely own property in Lebanon up to 3,000 sqm and subject to prior license beyond such limit. As an alternative to the license, foreign investors are efficiently relying on hybrid financial instruments securing their economic rights in lieu of direct ownership. With a limited timeframe to complete construction works, "Buy, Build and Sell" is the motto reflecting the legislative intent behind Decree 11614 of 1969 to favour development-aimed investments over speculation in real estate.
Foreign investment incentives
In addition to a solid financial sector, Lebanon is endowed with several investment-enabling strengths: a free market; a highly dollarised economy; absence of controls on the movement of capital and foreign exchange; a highly educated and multilingual workforce; and limited restrictions on foreign investment.
Lebanon's corporate laws provide for different forms of corporate vehicles to accommodate the type and market of a business. The most commonly used form is the joint stock company with limited liability (SAL), taxed at a rate of 15% on profits and 10% on dividend distribution. The holding and offshore companies, also SAL companies, are investment-friendly structures exempt from income tax on profits and dividend distribution tax.
Great expectations
Public-private partnerships (PPP) have emerged as the substitute solution to privatisation for the power and telecommunications sectors, with a pro-PPP policy at official level and a draft law being finalised. Another draft law on the Organisation of Electronic Transactions is currently being revised and is expected to be re-submitted to the parliament's vote in the short term. Lebanese parliamentary commissions continue to work on a draft law aimed at modernising the Lebanese Code of Commerce in general and the chapter on companies in particular.
The ratification of these laws will significantly impact the country's legal environment and confirm the role of Lebanon as a regional and international business platform; a great country to live, work and invest.