Up to standard

Lebanese banks now comply with international anti-money laundering standards

Head of Lebanon's Special Investigation Commission, Abdul Hafez Mansour | Greg DeMarque

With the mid-April implementation of the Hezbollah International Financing Prevention Act (HIFPA), signed into United States law in December 2015, Executive inquires whether Lebanese financial institutions face an increased level of American scrutiny. The new law places liability on any financial institution, not just Lebanese banks, if they were to knowingly facilitate financial transactions connected to Hezbollah. In the lead up to HIFPA’s ratification and immediately after, Lebanese banks took notice. De-risking ensued, accounts were closed and, according to local media reports, the opening of new accounts were denied for some politically exposed persons.

In the month preceding the law’s ratification, in mid-November, Lebanon was in danger of being cut off from the international financial system due to out of date anti-money laundering rules. After many months of complacency, and despite urging from Banque du Liban (BDL), Lebanon’s central bank, Lebanese politicians rushed to Parliament to pass anti-money laundering (AML) and counter terrorism financing (CTF) legislation to comply with international standards.

Within this context, Executive was in search of answers as to the impact of HIFPA, though the Americans have yet to write its implementation rules, and as to how Lebanon is complying with AML/CTF standards. Executive posed these questions to Abdul Hafez Mansour, head of the central bank’s Special Investigation Commission – the responsible authority for investigating suspicious financial transactions. To the latter the response is one of confidence – Lebanon has put in place the necessary compliance measures to shield its financial system. But to the former, in the face of American pressure, uncertainty persists as to the consequences for local banks should the Americans accuse them of servicing accounts linked to Hezbollah – the outcome of which will be answerable only through testing actual conflict scenarios, as Executive has previously reported.

E   Since the closure of the Lebanese Canadian Bank (LCB) in 2011, the United States Treasury has only targeted Lebanese nationals, not institutions, with financial sanctions. But, last year, the Treasury sanctioned two individuals for their connections to local banks. Is there again a growing concern of alleged money laundering through Lebanese financial institutions?

No, we don’t have this feeling. After the LCB case, banks heightened their awareness to the risks – whether they are local or international [banks], it is now much clearer. When I compare what [Lebanon’s] banks are doing, I think we’re doing well by regional and international standards. Our set of laws and regulations are pretty much complete now. The new laws and regulations passed last November complete our legislative [framework], and on the regulatory front the central bank has issued the necessary regulations. So what we need from the regulatory and legislative perspectives we [have], it’s quite complete and is one of the best set of [rules] in the region. I would say the situation is quite acceptable – is it perfect? No, we’re never perfect.

E   In early November, before the AML laws were passed, you said that the Financial Action Task Force (FATF) – the body coordinating standards on anti money laundering and counter terrorism financing – would not hesitate to blacklist Lebanon if its legal framework were not amended.

Yes, there was a list of 23 countries already shortlisted – they were about to go out with a report and a shortlist of the countries that are not compliant or have fundamental problems with their regulations.

E   So with those laws passed and with the rules from the central bank regulating cash transfers and requiring banks to have compliance officers, Lebanon has addressed its weaknesses and alleviated the concerns of FATF?

Essentially yes. FATF was doing a fact finding initiative on countries’ compliance with the regulations that are needed to fight terrorism. Many countries in the world, including countries in the region, did not have the chance to elaborate on existing legislations and we argued that FATF should not apply double standards – [Lebanon was one] of the countries that made the point that other countries had the chance to explain their situation, which really helped them to not be on the shortlist. So on that basis countries were given until February to have a look at the report’s findings and to come forward with comments, which [Lebanon] did. In the timeframe running from October to November we managed to have the legislation passed – [the laws] were already ready but the legislative process is quite slow in this country.

E   Were the laws ratified because of lobbying by the central bank?

Absolutely – it was public lobbying. We were out in front of the media – the governor of the central bank, myself, the bankers’ association – we were all working to raise the awareness of the possible risks of Lebanon being blacklisted and the need to comply with international standards. That helped to a good extent in putting the necessary momentum for these laws to be issued.

E   How did it go at FATF’s February plenary meeting?

It went pretty well. The new laws were reviewed and Lebanon was found to be in compliance and that there was no further action to be taken in this regard.

E   That is essentially what BDL governor Riad Salameh announced after the meeting: that the FATF asserted Lebanon was in full compliance with international standards to curb money laundering and terrorism financing, and that no further follow-up was necessary. But a FATF spokesperson told Executive following the February meeting that the FATF’s official stance was that Lebanon was not discussed and therefore the FATF could not say what Lebanon’s status is in terms of compliance. Can you clarify?

Possibly because you did not ask the right question. I said there was a special initiative that all the countries were subject to, which is on the terrorist financing legislation – it’s not a comprehensive set of reviews. This is too technical, in a short amount of time I cannot explain, but countries are subject to what they call mutual evaluation reviews – a mutual evaluation is a kind of exercise carried out periodically every four to five years.

E   Can you explain how the FATF writes the standards for anti money laundering (AML) and counter terrorism financing (CTF)?

The standards that FATF issues on AML and CTF are labeled as recommendations for countries to comply with. Countries that do not comply could be subject to public listing. This short listing is a very influential tool. A public listing of a weak system on AML would probably lead to the cutting off of [the country’s] financial system from the rest of the world. This is how it works – there are standards that are issued by the FATF, who also reviews the extent of compliance with these standards, and countries that are not compliant – there are varying degrees of compliance – could reach the status of being publicly listed as a non-compliant country or a country with substantial weaknesses in its regulations. And the international financial community would take that into consideration when dealing with a country – they could opt to not deal with the banking sector of the specific country that was labeled a weak country when it comes to the AML / CFT regulations.

E   Just to be clear, what FATF is doing in setting the standards for compliance is completely different than what the Americans are doing with their financial sanctions.

Absolutely, the FATF is a different setup. We have to distinguish between the FATF’s work and the United States’ work. The United States passes designations and enforces its own laws and regulations on US soil but sometimes these laws have long arms and are far-reaching.

E   Many officials in Lebanon seem to be very concerned by the coming implementation of the Hezbollah International Financing Prevention Act signed into US law in December 2015. Why are government and banking officials so worried?

This is a US law that [might] affect nationals in this country and now we are in a position to see what measures will be taken as a result of this law. It’s a matter of concern to them because if Lebanese banks and the banking sector want to remain part of the international financial system they need to play by the rules of the game. So if a law is passed in the United States that would prohibit US banks from dealing directly or indirectly in certain types of transactions, or with certain individuals, then Lebanese banks cannot deal with such individuals – otherwise they will expose their correspondents, themselves and the sector to the measures that may be taken. This is pretty clear. Banks have to KYC – know your client. So the correspondent banks in the United States, which deal with a large number of banks all over the world, have to know exactly how their clients, i.e. banks, in Lebanon and elsewhere operate – and what degree of compliance is observed, what is the professionalism of their compliance officers – in order to feel comfortable dealing with them. This is a connected kind of system and in this respect you have to understand this kind of relationship in order to stay in business and stay connected: first as a bank to your correspondent and second as a country to the community worldwide. A Lebanese bank should not operate as a front. When they deal recklessly with clients not observing international regulations then this is, in a way, almost fronting. And they’re saying ‘no we’re dealing with normal clients’, when in fact they’re not – this is the general case all over the world. Lebanese banks or banks anywhere in the world could be, if they don’t apply the appropriate compliance measures, in effect, covering for illegitimate clients.

Jeremy Arbid

Jeremy is Executive's in house energy and public policy analyst.

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