Le Liban peut-il finir au ban du système bancaire international ?

Can Lebanon end up being banned from the international banking system?

The crisis that Lebanon has been going through since 2019 has caused probably irreparable damage to a banking sector that had nevertheless survived the civil war (1975-1990).

The sixty or so Lebanese banks that share the market have indeed reduced their service offer, no longer grant loans, limit their customers’ access to their foreign currency deposits, blocked by illegal restrictions put in place from the start of the crisis, and make it difficult to open new accounts. The distinction, validated by the Banque du Liban, between “fresh” dollars (in cash or transferred from abroad) and “Lebanese” dollars (blocked in banks) is one of the most obvious stigmata of this collapse disguised as fleeing before.

Boycotted by a large part of the Lebanese since 2019 and increasingly attacked in court, the banks are now facing a new crucial deadline: the assessment of Lebanon’s degree of compliance with international standards by the Financial Action Task Force (FATF). The entity’s Middle East and North Africa subdivision, Menafatf, visited Lebanon between July 11 and August 5 as part of its periodic mission.

The FATF

Founded in 1989, the FATF brings together 199 member countries and its mission is to define the measures intended to “combat money laundering and the financing of terrorism, as well as the financing of the proliferation of weapons of mass destruction”, according to the terms organisation. “The organization sets up international standards (in these areas), while helping countries to apply them”, sums up Me Chahdan Jebeyli, who works as a legal adviser at Bank Audi.

The FATF thus classifies countries in three lists, depending on their degree of compliance with its recommendations: the list of compliant countries, the gray list (under surveillance) and the black list (at risk and non-cooperative). To date, only two countries fall into the latter category: North Korea and Iran.

The last update of the gray list dates from last June and includes 23 countries, including 7 from the region: Jordan, Morocco, South Sudan, Syria, Turkey, United Arab Emirates and Yemen. Only one European country, Albania, is on this list.

Lebanon before the crisis

Before 2002, Lebanon was placed on a gray list, with a risk of switching to a black list, prompting the deputies the same year to pass Law No. 318 against money laundering, followed by the establishment of the Special Commission of investigation, a body in principle independent but chaired by the governor of the BDL Riad Salamé. The commission can thus lift the banking secrecy in force since 1956 in a number of cases expanded by Law No. 44 of 2015, including corruption, influence peddling, embezzlement, tax evasion and enrichment. illicit.

The vote on this law kept Lebanon on the list of compliant countries in 2017. More recently, “it has been over a year since the BDL has published circulars in order to strengthen the fight against money laundering”, underlines the director of the research department of the Byblos Bank group, Nassib Ghobril. The latest, Circular No. 633 of July 19, imposes a new range of control measures that banks must implement internally in their relations with their customers and the banks with which they work.

During its last assessment, the FATF had placed Lebanon on the list of compliant countries while pointing out certain points for improvement, such as a further expansion of offenses including counterfeiting of products, banditry and illegal trade in stolen products, as well as hostage taking, explains tax lawyer Karim Daher, member of the commission dedicated to the protection of depositors and trained at the Beirut bar. The FATF also asked Lebanon to extend the sentences related to forced labor from 3 to 5 years by 5 to 10 years.

The new assessment was supposed to take place in 2020, but was officially postponed for a year at the request of Lebanon due to the Covid-19 pandemic. A new reprieve was granted in 2021, due to the exceptional circumstances of the country: the crisis but also the management of the damage from the disaster of August 4, 2020. It should be noted that the Palestinian territories that year, and more recently the Arab Emirates united, have also obtained reports of this diagnosis.

In concrete terms, the FATF carries out two assessments. The first, which began in January for Lebanon, consists of a technical review targeting the comprehensiveness and compliance of the country’s laws. The second focuses on their real effectiveness on the ground. “The FATF asks private and public sector actors how they apply the laws. For example, they meet with the judges and ask them how many trials concerning money laundering have been held and how many have received a final decision”, explains Chahdan Jebeyli. Banks, lawyers, notaries, police, army, customs and auditors are also interviewed.

“Good” laws, but…

The meeting with the bar association “went well”, according to Karim Daher, “because they are up to date with international regulations”. However, he specified that the FATF will also meet with law firms that they have previously identified with the assistance of the Special Investigation Commission. It is indeed the latter who plays the role of “project manager in Lebanon”, explains Chahdan Jebeyli, who also indicates that “it is she who informs everyone of the standards to be followed”. The meeting between the FATF commission and the banks was “professional” and “fair”, indicated Chahdan Jebeyli, without providing further details.

But Karim Daher believes that it will be difficult for Lebanon to stay in the category of countries that have nothing to reproach themselves for. “We are not well off, but I hope they will take into consideration the exceptional circumstances the country is experiencing. Same story from Chahdan Jebeyli, who specifies that “Lebanon has good laws but its real challenge lies rather in their application. It is in this area that Lebanon must make more efforts”.

In terms of results, three are possible: either Lebanon is maintained on the list of compliant countries; either it is placed on the gray list with the label of cooperative country, the FATF then providing it with a list of commitments to be respected, with a calendar of dates not to be exceeded; or he finds himself on this same gray list but cataloged as non-cooperative and therefore presenting a risk of eventually switching to the blacklist.

But, even if Lebanon is downgraded, the consequences should not be catastrophic for the moment. “If Lebanon fails this examination, that does not mean that the correspondent banks will automatically stop dealing with Lebanese banks, but it sends a very bad signal”, explains Karim Daher, who specifies that the FATF should provide its assessment. final at the end of this year. Chahdan Jebeyli considers that the fact that correspondent banks continue to work with Lebanese institutions means that they accept the level of application of international standards of their local counterparts.

The results

It should be noted, however, that four major correspondent banks have already stopped working with the BDL last year and that, for example, the number of correspondent banks of BLOM Bank has increased from 40 in 2018, before the crisis, to 32 in 2021, or even from 21 to 18 for SGBL over the same period. According to Nassib Ghobril however, it is not the correspondent banks that have stopped working with Lebanese banks but rather some of the latter that have closed some of their accounts abroad due to maintenance costs. He also reminds that several countries which are on the gray list have relations with their correspondent banks. “We have to do everything not to be there, but we’ll see,” he concludes.

The economist also specifies that the correspondent banks take into account the sovereign rating of the country. Before 2019, the main American rating agencies assigned a B- to the country, “which was already not famous”. But “with the default (of payment on its foreign currency debt in March 2020), Lebanon is automatically marginalized from the international commercial banking system”, he summarizes, recalling that the correspondent banks are already asking for 100% guarantee. in cash when opening a letter of credit for a merchant.

Punishments

In addition to their possible downgrading by the FATF, if banking institutions do not modify the application of laws related to the fight against money laundering and the financing of terrorism, they could run the risk of being hit by US sanctions. This situation would cause the loss of their American correspondent banks, as the United States Undersecretary of the Treasury for Terrorism and Financial Intelligence, Brian Nelson, had indicated in mid-December 2021 to the Banking Association.

He then urged the banks to take more measures to combat the use of the Lebanese banking system by Hezbollah and called for a stronger fight against corruption, in particular by identifying politically exposed persons (PEPs), while recalling the Jammal Trust Bank sanctions episode in August 2019. Neither the US Embassy nor the US Treasury responded to our interview requests.

Another possible consequence: the fact that the central banks of the 24 countries where Lebanese brands still operate are pushing them towards the exit. It should be noted, however, that the measures taken since 2019 by the Cypriot central bank to indirectly push Lebanese agencies operating on the island to pack their bags – by imposing discouraging measures on them in terms of building up liquidity reserves – have no connection with a potential downgrade of Lebanon by the FATF.

Nassib Ghobril recalls that the few Lebanese banking establishments present in Cyprus had set up branches there, whose deposits and assets depended on the Lebanese bank in the country. The fact that Cyprus is slowly recovering from an economic crisis that has changed its banking landscape and the fact that Lebanese banks are not reimbursing deposits may have prompted the Cypriot central bank to take this decision. The subsidiaries, which have a more independent structure but whose shareholding can be held in majority by the Lebanese establishment, have not been worried.

Another banking source adds that this risk could however arise in Iraq, where the Lebanese banks have in majority branches and not subsidiaries. Indeed, out of the 10 brands present, only three will in principle continue the adventure, for reasons similar to those of Cyprus.

Finally, last December, several banking sources told L’Orient-Le Jour that due to increased risks, and therefore higher compliance costs, several banks, in particular European ones, preferred to close the accounts of their tax resident clients. Lebanese.

Can Lebanon meet the standards?

“A year ago, it was legitimate to ask whether Lebanese banks are meeting international standards, but now, with the crisis worsening, the question is: can they? asks this same source, referring in particular to the harmonized banking standards defined by the Basel III agreements, more particularly the capital and solvency ratios to know if they are solid. However, if they are not enough, they run the risk of being excluded from the SWIFT interbank network. “But this will be done on a case-by-case basis,” she specifies, depending on the strength and capacity of each bank to deal with crises.

The crisis that Lebanon has been going through since 2019 has caused probably irreparable damage to a banking sector that had nevertheless survived the civil war (1975-1990). The sixty Lebanese banks that share the market have indeed reduced their service offer , no longer grant loans, limit their customers’ access to their foreign currency deposits, blocked by…

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