Carlos Abou Jaoude, Souraya Machnouk and El Sayegh of Abou Jaoude & Associates in Beirut look at the last 12 months in Lebanon

Increasing AML Regulations and the Conservation of Banking Secrecy

The World Bank indicated in its July 2016 report that the Lebanese banking sector, the most important pillar of the Lebanese economy, remains liquid, profitable and well regulated; banks are well capitalized and resilient owing to prudent investments and conservative regulations by the Central Bank of Lebanon (BDL).

In fact, the BDL continues to act as the watchdog of the Lebanese banking sector, and as such, was able to pressure the Lebanese parliament to enact several laws despite the prolonged domestic political deadlock.

In November 2015, the Lebanese Parliament ratified a number of draft laws that strengthen the country’s anti-money laundering framework in accordance with international criteria, including a law that expands the definition of anti-money laundering to include additional financial crimes, such as the violation of intellectual property, as well as the applicability scope to include new professional sectors such as public notaries and lawyers. It also approved a draft law that regulates the transfer of funds across borders, which requires incoming visitors to disclose the amount of cash of up to $15,000 or their equivalent in other currencies at border entry points, thereby facilitating the deposit of these amounts at financial institutions in Lebanon. Further, it ratified the draft law on the exchange of tax information, which is part of the Organization for Economic Cooperation and Development’s (OECD) framework to combat tax evasion. The Parliament also approved Lebanon’s adherence to the United Nation’s 1999 International Convention for the Suppression of the Financing of Terrorism.

In May 2016, the BDL issued a decision implementing the Hizballah International Financing Prevention Act issued by the US Senate and House of Representative in Congress on December 18, 2015, and the Hizballah Financial Sanctions Regulations of April 11, 2016, issued by the US Department of the Treasury – Office of Foreign Assets Control. The Act’s main objectives are to prevent Hizballah’s global logistics and financial network from operating in order to curtail funding of its domestic and international activities, and to utilize all available diplomatic, legislative and executive avenues to combat the global criminal activities of Hizballah.

In the context of its continuous AML efforts, the BDL issued a circular on February 2016 which prohibits banks, financial institutions, and money dealers in Lebanon from dealing with entities that have bearer shares in their capital.

To ensure further compliance with the OECD AML standards, the BDL also issued in March 2016 a circular prohibiting banks and institutions that issue credit and charge cards from issuing and promoting prepaid cards. The ban of prepaid cards is due, in part, to the fact that it is not possible to identify the end user of these cards.

Despite the increasing international and domestic regulations aimed at combating money laundering, banking secrecy remains a principle inherent to Lebanon’s history and financial system and plays a key role in attracting funds to the country. Conserving this principle has proven to be a real challenge with the rise of AML regulations, especially that all financial entities regulated by the BDL are bound to absolute secrecy with respect to their clients’ personal and account related information. This secrecy may only be lifted in very limited circumstances.

The Special Investigation Commission (SIC) was established as an independent legal entity under the Anti-Money Laundering Law 318 of 2001 (the “AML Law”) to investigate suspected money-laundering offences, monitor compliance with the rules and procedures of the AML Law and decide to lift the banking secrecy. The SIC declared in a recent report that it has received 432 suspected cases in 2015. Out of these suspected cases, a total of 331 cases (76.6%) were referred from local sources and 101 cases (23.4%) were referred from abroad. The SIC referred to judicial authorities a total of 157 suspected cases of money laundering, out of which 97 cases are still pending, while the remaining did not fall within the framework of the AML Law. As a result, authorities lifted the banking secrecy in 2015 on 28 cases suspected of money laundering.

Pushing the Transparency and Accessibility of Financial Markets

The BDL issued a circular in February 2015 setting the guidelines about how banks and financial institutions communicate the specifics of products and services to their clients. The circular stipulates that banks and financial institutions operating in Lebanon should inform their clients, raise their awareness and clarify their rights about the products and services that clients are interested in purchasing. Key information should be provided to customers about the characteristics of the products and services, their risks and benefits, as well as the calculation of fees, commissions and interest rates, all the while taking into consideration the customers’ financial literacy.

Similarly, the recently-active Capital Markets Authority (CMA) has been endeavouring towards promoting and developing the Lebanese Capital Markets and protecting investors, through issuing regulations that are in line with international best practices, and proper control and audit of all institutions that deal with financial instruments. The CMA has been pushing for the transformation of the state-owned Beirut Stock Exchange (BSE) into a private joint-stock company.

Following its evaluation of the BSE’s openness to foreign ownership, ease of capital flows, efficiency of the operational framework, and stability of the institutional framework, the global portfolio analytics and indices provider MSCI Barra qualified Lebanon as a frontier market. While the assessment noted that the BSE has no limits to foreign ownership and no restrictions on capital inflows and outflows, the market entry framework and all market infrastructure indicators were considered to need several improvements – a compelling case for the privatization of the BSE.

Relying on Law no. 161 dated August 2011 that regulates capital markets in Lebanon, in September 2015, the Ministry of Finance formally requested the Lebanese Cabinet to approve a plan to convert the BSE into a joint-stock company. Law no. 161 stipulates that the government should convert the BSE into a joint-stock company within one year after the establishment of the CMA –a deadline well overdue.

Establishing an Attractive Tech Startup Ecosystem

A noteworthy development for startup funding was the BDL circular 331 of August 2014 allowing banks to invest in Lebanese startups with up to 75 percent of the investment guaranteed. By virtue of this circular, banks operating in Lebanon can have access to interest-free facilities from the BDL over a maximum period of seven years to invest in the capital of start-up companies, incubators, accelerators and venture capital firms provided these companies are part of the knowledge economy sector, support socio-economic development, create jobs, and enhance intellectual capital.

The decision potentially made available US$ 400 million in the enterprise market assuming all banks invest 3% of their capital. In April 2016, the BDL issued a circular increasing the total amount of money that banks and financial institutions can invest to 4% of the banks’ capital.

Some banks invested directly in startups, while others have been pooling capital into recently launched venture capital funds for potential startup investment.

 

Carlos Abou Jaoude
Managing Partner
Abou Jaoude & Associates
Beirut

Souraya Machnouk
Partner
Abou Jaoude & Associates
Beirut

El Sayegh
Attorney
Abou Jaoude & Associates
Beirut