BEIRUT: Over the past decade, the U.S. Treasury’s war on terrorist financing, money laundering and tax evasion has shaken up the global financial regulatory environment, and Lebanon is still feeling the reverberations. This year, the Central Bank issued two circulars that have raised operational costs for banks and foreign exchange dealers: Lenders have been required to have a dedicated compliance unit and exchanges’ operational functions have been curtailed.
The circulars have had a profound affect on financial institutions, but those affected are not so much concerned about falling foul of Lebanon’s laws, but rather fear being on the wrong side of the world’s regulatory policeman: the U.S.
“Lebanese banks are market takers, not makers like the U.S. and Europe, so we have no say in the financial world,” said Camille Barkho, chief compliance officer at the Lebanon and Gulf Bank.
“But something funny is taking place today in some countries who have anti-money laundering and counterterrorist financing rules and regulations – they are strictly applying those rules more because of fear of the U.S. and Europe than complying with local regulators.”
Three factors in particular are forcing Lebanese institutions to play ball with the U.S.
First, with over 70 percent of Lebanon’s bank deposits in U.S. dollars, the lira pegged to the greenback, and a dollarized economy, financial institutions need good relations with the U.S.
Second, the U.S.’ Foreign Account Tax Compliance Act, which is to go into effect in 2014 as part of Washington’s new war on tax evasion, requires financial institutions to report on U.S. clients with accounts of over $50,000.
Third, the U.S. Treasury in 2011 designated the Lebanese Canadian Bank as a “prime money-laundering concern” for its alleged involvement in laundering money on behalf of a drug syndicate in South America as well as acting as a financial conduit for Hezbollah, which led to the reputational ruin of the bank and its demise.
“The matter of LCB had an important impact on the banking sector in Lebanon, and how banks have upgraded their compliance standards,” said Chahdan Jebeyli, Bank Audi’s general manager and group head of legal and compliance, and chair of the Compliance Committee at the Association of Banks in Lebanon.
“We very much rely on our relationship with correspondent banks, as Lebanon has a dollarized economy and is part of the international payment system. Preserving correspondent banking is vital ... to the continuity of banks.”
The LCB case was settled earlier this year through a $102 million settlement in New York, but the financial sector is concerned about any repeat of a bank disappearing from the market.
Many in Lebanon feel the case was unfairly handled by Washington, as in several other cases major international banks accused of money laundering were fined by the U.S. – in the hundreds of millions – but kept on operating.
“Lebanon paid the price of an alleged money-laundering operation in South America, the U.S., Africa and Europe that only had some connotation to Lebanon; it was not right. To use the financial markets for political goals is dangerous and a way to lose friends,” said a senior BDL source who declined to be identified.
The example made of LCB shows the price of noncompliance with international AML regulations and that the U.S., unlike any other regulator, is willing to fine and even cause the closure of a foreign bank.
As a result, compliance has been pushed to the top of agendas at banks as BDL has moved to address 10 shortcomings in legislation, notably over wording of counterterrorist financing, and listing more predicate offenses.
This has come at the same time as heightened sanctions on Iran and Syria, increasing the regulatory risk environment in which Lebanese banks are operating in, particularly with regard to Syria where the state has six affiliate banks.
“We know the reality of doing business in Lebanon and in the region, that is why our level of prudency is high and corresponds to the level of issues and challenges that exist in the market where we operate,” Jebeyli said.
The U.S. has paid Lebanon particular attention, with American Treasury officials visiting Beirut multiple times over the past two years, more than most other places in the Middle East. During the Union of Arab Bankers conference in Beirut in November, Assistant Secretary for Terrorist Financing at the U.S. Treasury Daniel Glaser had a closed-door meeting with compliance officers at Lebanese banks to hammer home the need to comply with sanctions and regulations.
“Lebanon is overburdened by requests [from overseas] and, at times, pressure,” said the BDL source. “We comply with all regulations but we already had what was needed, as just a few small glitches had to be ironed out, like foreign exchange dealers, which were not subject to control.”
Two foreign exchange dealers were fingered in the LCB designation. Both Elissa and the Hasan Ayash Exchange have been cleared. Earlier this year, spillover from the LCB case affected two other bureaus, Rmeiti Exchange and Halawi Exchange, which American official designated as “prime money-laundering concerns” for their alleged involvement with Hezbollah, the first time the Treasury has used Section 311 of the U.S. Patriot Act against a nonbank financial institution.
Foreign exchange bureaus have now been barred from carrying out third-party banking and are subject to stricter controls. Staff must also be versed in compliance and have to regularly attend training sessions. Dealers, like banks, have consequently been scrambling to get compliance up to speed.
“Category A dealers have to abide by much stricter regulations and it has become more costly because of the need to have a compliance officer, more auditing and training,” said Omar Kotob, secretary-general of Foreign Exchange Bureaus in Lebanon.
“We hope to organize a conference soon to boost the sector’s compliance levels before it’s too late. The major point is to have a lot of workshops to address these concerns, as it is an ongoing issue. At some point foreign exchanges are going to have to act as police [in terms of asking clients questions and the origins of transfers], which the banks are already doing.”
Getting the financial sector up to par in terms of compliance is impacting institutions’ operating costs. As elsewhere, there is also a genuine lack of qualified personnel.
“The sector is barely coping with the new regulations and employees are a scarce commodity in the compliance sector, as the AML regime has only been around for about a decade, so the banking sector in the region and rest of the world doesn’t have enough professional expertise,” the BDL source said.
FATCA compliance is another area where the region’s banks are scrabbling to be on top of legislation, thankful that the slated start date for the policy was delayed from July this year to 2014 in order to enable more banks and jurisdictions to be compliant.
“The delay to FATCA’s rollout was excellent. When I meet with foreign banks I am finding that, till today, some have not even heard of it,” Barkho said.
Lebanon, however, has been very active, hosting 24 public presentations on the tax act in the past few years.
“Look at FATCA, Lebanon is the leader in the Arab world, and before the government or any official party required it, banks undertook a path of adopting the FATCA principles, that Lebanese banks should not be a shelter for those that decide to hide money and violate tax rules,” said Jebeyli.
FATCA is a unique law in that it puts the onus on foreign financial institutions to check for any U.S. account holders or else face a 30 percent withholding tax for noncompliance and risk being blacklisted. In essence, the U.S. Treasury has outsourced enforcement to banks, which are having to bear the brunt of implementing FATCA, with some estimates putting the cost as high as $10 per client.
As a result, some Lebanese banks have closed accounts with clients holding U.S. passports after weighing up the costs versus the benefits of retaining the client, while some American passport holders have revoked their citizenship altogether.
“For the first time in history, banks have become officers for the U.S. government, and at a cost,” said Barkho.
Just as with anti-money laundering and counterterrorist financing regulations, Lebanon is more than willing to comply with U.S. regulations to stay on its good side, well aware of the impact of falling foul of Washington.
“The main reason to comply is the power behind FATCA, not about the law or the ethics of tax evasion, as everyone is against that,” Barkho said.
“The only other force that could do this is Europe and maybe China, as there are major commercial relations. If India introduced the same type of law, I’d not comply as there’s no force to compel me to do so.” – With internationalnewsservices.com