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

The crisis that Lebanon has been going through since 2019 has probably caused 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 in fact reduced their offer of services, no longer grant loans, restrict their customers’ access to foreign currency deposits, blocked by the illegal restrictions put in place since the beginning of the crisis , and they 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 (stuck in banks) is one of the most evident stigmata of this collapse disguised as an escape before.

Boycotted by most Lebanese since 2019 and increasingly attacked in court, banks now face a crucial new deadline: the Financial Action Task Force (FATF) assessment of Lebanon’s compliance with international standards. The subdivision of the Middle East and North Africa entity, 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 measures to “combat money laundering and terrorist financing, as well as financing the proliferation of weapons of mass destruction”, in the terms of the organization. “The organization sets international standards (in these areas), helping countries to apply them,” sums up Me Chahdan Jebeyli, who works as a legal advisor at Bank Audi.

The FATF then classifies countries into three lists, according to their degree of adherence to 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 back to 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 included in a gray list, with the risk of going to a black list, prompting the deputies the same year to approve the law n. 318 against money laundering, followed by the establishment of the Special Commission of Inquiry, a body in principle independent but chaired by the governor of the BDL Riad Salamé. The commission can thus revoke the banking secrecy in force since 1956 in a series of cases extended by law no. 44 of 2015, including corruption, influence trafficking, embezzlement, tax evasion and illicit enrichment.

The approval of this law allowed Lebanon to remain on the list of compliant countries in 2017. More recently, “it has been more than a year since the Bdl published circulars to strengthen the fight against money laundering”, the director points out. of the research department of the Byblos Bank group, Nassib Ghobril. The last, Circular no. 633 of July 19, imposes a new series of control measures that banks must implement internally in relations with their customers and the banks with which they operate.

During its last assessment, the FATF had included Lebanon in the list of compliant countries, highlighting some points for improvement, such as further expansion of crimes including counterfeiting of products, banditry and illegal trade in stolen products, as well as the taking of hostages, explains the tax lawyer Karim Daher, a member of the commission dedicated to the protection of depositors and trained in the Beirut Bar Association. The FATF also asked Lebanon to extend the penalties related to forced labor from 3 to 5 years from 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 truce was granted in 2021, due to the country’s exceptional circumstances: the crisis but also the damage management of the 4 August 2020 disaster. It should be noted that the Palestinian territories that year, and more recently the United Arab Emirates, they also got reports of this diagnosis.

Specifically, the FATF carries out two assessments. The first, which began in January for Lebanon, consists of a technical review aimed at completing and respecting the laws of the country. The second focuses on their real effectiveness in the field. “The FATF asks public and private sector actors how they apply the laws. For example, they meet with the judges and ask them how many money laundering trials have been carried out and how many have received a final decision, ”explains Chahdan Jebeyli. Banks, lawyers, notaries, police, army, customs and auditors are also interviewed.

Read “good”, but …

The meeting with the Bar Association “went well”, according to Karim Daher, “because I am in step with international regulations”. However, he specified that the FATF will also meet law firms that they have previously identified with the assistance of the Special Investigation Commission. It is 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”, said Chahdan Jebeyli, without giving further details.

But Karim Daher believes it will be difficult for Lebanon to remain in the category of countries that have nothing to blame. “We are not well, but I hope they take into consideration the exceptional circumstances that the country is experiencing. Same story of Chahdan Jebeyli, who states that “Lebanon has good laws but its real challenge lies rather in their application. It is in this field that Lebanon must commit itself more ”.

In terms of results, three are possible: o Lebanon is kept in the list of compliant countries; o the FATF is included in the gray list with the label of cooperative country and then provides it with a list of commitments to be respected, with a calendar of dates not to be exceeded; or it finds itself in this same gray list but classified as non-cooperative and therefore presents the risk of eventually passing to the black list.

But, even if Lebanon is downgraded, the consequences are not expected to be catastrophic for the time being. “If Lebanon fails this test, it does not mean that 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 final assessment at the end of this year. Chahdan Jebeyli believes that the fact that correspondent banks continue to cooperate 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 large correspondent banks already stopped cooperating with BDL last year and that, for example, the number of correspondent banks of BLOM Bank went from 40 in 2018, before the crisis, to 32 in 2018. 2021, or even from 21 to 18 for SGBL in the same period. According to Nassib Ghobril, however, it is not correspondent banks that have stopped cooperating with Lebanese banks, but some of the latter have closed some accounts abroad for maintenance costs. He also points out that several countries that are on the gray list have relationships with their correspondent banks. “We have to do everything to not be there, but we’ll see,” he concludes.

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

Punishments

In addition to their possible downgrading by the FATF, if banking institutions do not change their enforcement of anti-money laundering and terrorist financing laws, they could run the risk of being hit by US sanctions. This situation would result in the loss of their American correspondent banks, as the United States Undersecretary of the Treasury for Terrorism and Financial Intelligence, Brian Nelson, told the Banking Association in mid-December 2021.

He then urged banks to take more measures to combat Hezbollah’s use of the Lebanese banking system and called for a stronger fight against corruption, in particular by identifying politically exposed persons (PEPs), recalling the sanctions episode of the Jammal Trust Bank 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 in which the Lebanese brands still operate are pushing them towards the exit. It should be noted, however, that the measures adopted since 2019 by the Cypriot central bank to indirectly push the Lebanese agencies operating on the island to pack their bags – imposing discouraging measures on them in terms of building up liquidity reserves – have no connection with a potential downgrading of Lebanon by the FATF.

Nassib Ghobril recalls that the few Lebanese banking institutions present in Cyprus had opened 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 repaying deposits may have prompted the Cypriot central bank to make this decision. The subsidiaries, which have a more independent structure but whose shareholding may be mostly owned by the Lebanese establishment, did not worry.

Another banking source adds that this risk could arise in Iraq, however, where Lebanese banks have majority branches and no branches. Indeed, 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, especially European ones, preferred to close their customers’ accounts. fiscally Lebanese residents.

Can Lebanon Meet the Standards?

“A year ago it was legitimate to ask whether Lebanese banks respected international standards, but now, as the crisis worsens, the question is: can they? asks the same source, referring in particular to the harmonized banking standards defined by the Basel III agreements, in particular to the capital and solvency ratios to find out 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,” he explains, depending on the strength and ability of each bank to cope with crises.

The crisis that Lebanon has been going through since 2019 has probably caused irreparable damage to a banking sector that had nevertheless survived the civil war (1975-1990): the sixty Lebanese banks that share the market have in fact reduced their offer of services, they no longer grant loans, they restrict their clients’ access to their foreign currency deposits, blocked by …

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