Today’s challenges in compliance
“Those who were killed two blocks away from here, from the FED, do not care about privacy!”, this is how the General Council and Executive Vice President, Mr. Tomas Baxter, emphasized on the challenge of achieving effective compliance, which is as important as many other standards in the banking industry, at the opening ceremony of the US MENA dialogue organized by the United Arab Banksheld at the Federal Reserve Bank of NY, in 2006, related to banking secrecy and how deeply the issue was tackled.
In October 2017, when we attended and lectured during the same annual occasion, those challenges changed: it is true that the Banking Secrecy Lawaims at increasing the confidence in the Lebanese banking sector and encouraging the flow of foreign funds; however, it is no morea privilege for banks to enjoy, as they are subject to abide by the Anti-Money Laundering Law.
In addition, banking secrecy is not static.As per the Law, the Special Investigation Commission –Lebanon’s FIU that is – has the power to lift banking secrecy in case of illicit deposits or when accounts of suspected people involved in money laundering and terrorism financing are identified.
On the other hand, as some regimes in the regional counties might perceive Lebanon as a potential financial access point in the global system,the Lebanese financial institutions remain always alert to this threat, through applying sound and rigid KYCs measures that identify sanctions evasion schemes, or cases where layers are created for the purpose of hiding the ultimate beneficial owners as seen in Trusts.
In its circular number 126, the Lebanese Central Bankassured that it also “requires banks to be fully informed about the laws and regulations that govern correspondent banks abroad, and to transact business in accordance with such laws, regulations, and procedures adopted by international legal organizations or by the sovereign authorities in the correspondents’ home countries.”
The Central Bank, in conjunction with the Association of Banks and the Union of Arab Banks, is continuously focusing on the appropriate processes to assert that local banks are compliant with the international standards and to maintain Lebanon’s standing asa safely sound and attractive banking location in an environment that is frequently witnessing evolving regulatory local and international reforms.
In 2015, the Lebanese Parliament promulgated several laws to enhance the AML/CFT regime in Lebanon, including the new AML/CFT law, the law for declaring the cross border transportation of money, and the law on the exchange of tax information. The Central Bank of Lebanon and the SIC have also issued several circulars on the topic.
Following all these procedures – and maybe many others to come – the Financial Action Task Force (FATF) announced, in early 2016, that Lebanon meets all the necessary conditions for fighting money laundering.
Lebanese banks constantly update their AML techniques and at the same time commit to remain current on any developed schemes which provide the appropriate tools and resources that help detect and prevent trade-based money laundering being – as it is well known – one of the most – if not the most – sophisticated methods to clean money generated from criminal activities – keeping that these are among the hardest to detect.
Lebanon, being a highly dollarized economy, isvery influenced by the US legislations and sanctions programs. The Central Bank of Lebanon and the Lebanese banks, collectively, aim at not failing tocomply with the regulatory requirements.
However, despite the fact that the US concernsare duly understood and highly taken into consideration, it is however preferable for blacklisting local banks to be communicated and coordinated with the local Regulators prior to taking any regulatory actions.
On the other hand, it is worth underlining some important constraints, which should be taken into consideration (since, despite all the procedures Lebanon is taking to fight money laundering and terrorist financing, and its abiding by the international regulatory requirements they complicate – if not obstruct – the banking transactions that, in turn, negativelyaffect the Lebanese economy).
First: The External Pressures Exerted on the Lebanese Banking Sector and the US Sanctions
Unfortunately, the Lebanese banking sector is highly affected by the bordering political tension exerted by the surrounding regional countries, in addition to the prevailing economic instability.
Moreover, in December 2015, President Obama signed the Hezbollah International Financing Prevention Act of 2015 (HIFPA) that seeks to drastically cut back Hezbollah’s ability to conduct business and utilize the international banking system, besides having now a draft bill seeking to increase sanctions on Hezbollah, its funders, supporters, related institutions and allies.
This Act pressures the Lebanese banks as the law throws responsibility on them for not deliberately facilitating and carrying out financial transactions for Hezbollah.
In addition, the recent moves to expand the sanctions on Hezbollah have increased the fear that any related regulatory pressure imposed by President Trump’s Cabinet would cause further damage to the banking sector especially if correspondent banks decide not to carry out business transactions with the Lebanese banks if classified as risky.
The U.S. government assured that it is Hezbollah who is being targeted, and not the Lebanese banks or Lebanon will relieve banks from their concerns.
The Lebanese financial sector needs, in this manner, to be extremely cautious as far as deposits and loans are concerned; additional strictness in applying KYC and Enhanced Due Diligence procedures will be continuously required. That it without taking into consideration the difficulties accompanied with the implementation process as Hezbollah plays a significant role in Lebanon, given its medical, educational and social institutions that spread amongst the Shiite community, also the complexities of identifying relatives and associates besides the political supporters.
The Lebanese Banks would neither want to risk nor to jeopardize their business relationships with their US correspondents; lately, they are bearing the burden of increased queries and investigations due to HIFPA.
In addition, the extent of information shared by the US Financial Intelligence with Lebanese counterparts is not clear so far.
Second: The Syrian Refugees issue
The official Syrian refugee population in Lebanon, according to the U.N. refugee agency, UNHCR, reached over 1.1 million in 2017. Set aside the social responsibility, unemployment ratein Lebanon is massively increasing as Syrian refugees are competing with the Lebanese laborers through carrying out non-skilled labor at significantly lower wages, which in turn is making job creation a rigorous problem on the economy.
Third, which is the most important to consider,is ISIS
Counter-ISIS financing is a new challenge that both the Lebanese and the international banking sectors are equally encountering. The Lebanese financial sectors, collectively, are creating multiple lines of defense that aim at forbidding ISIS from having access to their products and services. This is achieved by including as main pillars in their compliance programs not only the local AML requirements but also the international standards set by FATF, Basel Committee, Wolfsberg Group and many others international organizations such as the World Bank and the International Monetary Fund (IMF).
While applying an effective AML/CFT regime, still, the Arab and Lebanese Banks are facing major challenges especially that,according to U.S. government information, as of December 31, 2014, and until this year, at least 30,000 foreign jihadists from more than 90 countries have left their home countries to travel to Syria and Iraq to join ISIS.
Along with all political and economic issues the banking sector has been facing, the rise of new technologies has caused the emergence of new problems related to cyber security. In this regard, and due to the fact that all new transactions and databases are managed and saved in virtual electronic spaces, hackers are creating programs that causes a threat to the safety of all accounts, sorted information and activities.
In fact, and as of the beginning of 2016, more than 4000 ransom ware attacks have been occurring everyday along with many successful cyber-attacks on clients’ accounts and databases.
Taking all this into account and considering all the givens in Lebanon and the surrounding region, the United States would play an important role in the area by being more aware and attentive of the geographic battlefield against ISIS that is being undergone at the Lebanese-Syrian cross borders as well for other terrorist groups.
However, the questions that still needs to be answered in order for the USA to give an effective contribution in the AML/CFT regime are on one hand the radical measures that the USA could take to curb ISIS’ and other terrorist groups’ lines of “business and auto financing sources”, and on the other handthe readiness of the USA to providethe Lebanese authorities with ISIS black lists knowing that the US security agencies now probably possess the names of foreign fighters.