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Central Bank bolsters money exchange regulations

Banks street in Beirut, Wednesday, Sept. 25, 2013. (The Daily Star/Mohammad Azakir)

BEIRUT: In yet another step to keep Lebanon’s money exchange businesses under its control, the Lebanese Central Bank has forbidden small money changers from performing cash transfers under the informal Hawala system.

“Exchange institutions of Category A shall be the only institutions entitled to perform Hawala cash transfers, whether for their own account or on behalf of a third party,” Central Bank Governor Riad Salameh said in Intermediate Decision No. 11544 dated Sept. 20 and published on the Central Bank’s website Tuesday

“Therefore, while performing Hawala transactions, these institutions [Category A] are prohibited from carrying out any of the banking transactions specified in the Code of Money and Credit, particularly from receiving deposits,” Article 1 of the decision said.

The Hawala system is an alternative remittance channel that exists outside of banking systems and is heavily based on trust between networks of dealers. Interpol defines it as “money transfer without money movement.”

For example, a dealer based in Saudi Arabia will ask a Lebanon-based trader to give a third person a $5,000 sum and, later in time, a transaction will happen in the opposite direction. The two dealers will settle the difference in payments through a one-time bank transfer or in instances by cash.

The Central Bank also said it was restricting the amounts Category A money changers could transfer under the system.

“The value of an incoming or outgoing Hawala transaction must not exceed $20,000 or its equivalent in any other currency, provided the total amount of Hawala transactions in a single year does not exceed, at any time, tenfold the capital of the exchange institution.”

Over the past two years, the Central Bank has stepped up efforts to better regulate the sector after several Lebanese money changers were named by the United States in cases related to money laundering and illicit funds.

In April, the U.S. Treasury Department named two Lebanese exchange houses, Kassem Rmeiti & Co. For Exchange and Halawi Exchange Co., foreign financial institutions of primary money-laundering concern.

Owner of Halawi Exchange – and vice head of the Lebanese Money Changers Association – Mahmoud Halawi told The Daily Star that the decree by the Central Bank effectively translates earlier instructions given to money changers into action.

“Of course [the measure by Central Bank] comes in response to pressure by the U.S,” he said. “Any cash transaction is considered suspicious by U.S. authorities. ... Of course money exchange houses will comply with any Central Bank decision.”

Halawi, who earlier this year appointed a U.S. based law firm to clear the name of his company, said his legal representative was in constant communication with the U.S. Treasury.

“So far there is no legal action initiated by any side ... but if things demand taking action we will consider that,” he said. “The accusations against us are completely false.”

While it does not qualify as legal action, the listing of Halawi and Rmeiti effectively bars these institutions from using the U.S. financial system.

In December 2011, U.S. authorities sought a massive $480 million in penalties from the now-defunct Lebanese Canadian Bank and two Beirut-based money exchange houses, – the Hassan Ayash Exchange Company and Ellissa Holding – in addition to 30 U.S. auto dealers.

Following the case, the Central Bank moved to hike minimum capital required for Category A money changers to LL750 million, up by LL250 million from their previous levels. The capital of Category B money changers was raised to LL500 million, an increase of LL400 million.

In June this year, the Beirut-based Lebanese Canadian Bank agreed to pay $102 million to settle the case, but it was not clear if the two money changers were part of the settlement.

Industry sources told The Daily Star that most money changers’ bank accounts had been closed by Lebanese commercial banks.

In its latest decision, the Central Bank has effectively restricted these institutions from using the Lebanese banking system when dealing with Hawala transfers.

“When receiving from their correspondents’ cash transfer orders pursuant to the Hawala system, exchange institutions are prohibited from paying the amount of these transfers through a swap operation, by checks or bank transfers to the account of the Hawala’s beneficiary,” the statement said.

It added that, in accordance with Lebanese Law No. 347 that regulates the profession, money changers would be restricted from any other activity besides exchanging currency.

“These institutions are also prohibited from performing transactions that do not fall within the scope of the exchange business, such as commercial financing, lending and the management of funds, among others. These institutions must open a sub-account allocated to clearing transactions performed with correspondents abroad as a result of Hawala transactions.”

Money changers will have until March 2014 to comply with the provisions of the new decision.

 
A version of this article appeared in the print edition of The Daily Star on September 26, 2013, on page 5.

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