Lebanon first fell into the crosshairs of the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) in 2011. Pressure from OFAC — effectively the world’s anti-money laundering (AML) and counterterrorist financing (CTF) enforcer — saw one Lebanese bank go under for money laundering charges in the first quarter of 2011, and by the second quarter, Lebanese banks were having to deal with US-imposed sanctions on Syria. The heat did not let up in 2012, with the banking sector continuing to deal with the aftershocks and new regulations.
The first shoe fell in February 2011, when OFAC labelled the Lebanese Canadian Bank (LCB) a “financial institution of prime money laundering concern” over transactions involving Hezbollah and drug dealers, with LCB’s assets later taken over by Société Générale de Banque au Liban. The US move was a harsh wake up call for the banks, with due diligence quickly becoming a top priority, while the Treasury pushed Banque du Liban (BDL), Lebanon’s central bank, to address AML and CTF shortcomings. BDL has stepped up to the plate, issuing circulars regulating foreign exchange bureaus – which were a link in the chain in the LCB case – limiting bureaus to one major bank account, and not allowing transfers to third parties.
The major move this year was issuing Circular 126 on May 24, requiring banks and financial institutions to “implement strictly” AML and CTF regulations. The circular extends to the US sanctions on Syria as well as Iran, with the financial sector having to be in “conformity with the laws, regulations, procedures, sanctions and restrictions adopted by international legal organizations or by the sovereign authorities in the correspondents’ home countries.” This means that banks are not allowed to have any dealings with, for instance, Syrian individuals and entities sanctioned by the US and European Union, while Syrians are not allowed to open accounts (those opened prior to the 2011 sanctions are still operational).
This circular has placed banks in a tricky position, especially the seven Lebanese banks with operations in Syria, and particularly those with sanctioned individuals that are shareholders. As Executive revealed in June, Rami Makhlouf, a cousin of President Bashar al-Assad, has a 4.9 percent stake in Bank Byblos Syria, and Ahmad al-Kuzbari, the former chairman of Makhlouf venture Cham Holding, is a shareholder in Banque Libano-Française’s Bank Al Sharq. While the banks are not in breach of the sanctions, as these are legal shareholders in a Syrian registered bank not operating beyond its borders, the banks are walking a fine line regarding reputational risk.
These recent regulations — in addition to OFAC sanctioning two Lebanon-based charities “controlled by Hamas” in October — have, in the words of a senior BDL source, “made the banks paranoid and they are missing out on a lot of opportunities as a result.”
Although it is not clear where Syrian cash is going, Turkey, the United Arab Emirates, Jordan and Egypt appear to be major beneficiaries, yet none seem to be getting the same attention as Beirut is from the US or the media. Indeed, in November the Financial Action Task Force (FATF), the international policy-making body, gave Turkey four months to clean up its AML system.
A question then is why should Lebanese banks be so paranoid and rigidly follow OFAC’s diktats? The answer is surprisingly straightforward, and follows the investigative practice of “follow the money” — Lebanon’s fiscal tie to the US. Two thirds of the money in Lebanon is in US dollars, 85 percent of loans are in dollars and significant amounts of the banks’ money, in dollars, is sitting in New York bank accounts. As the BDL source put it, “by default Lebanese banks are part of the US banking system. Therefore our banks must comply with US regulations.”
Lebanon really has no choice in these matters, unless it wants to decouple from the greenback and de-dollarize the economy, something that is not impossible, but is certainly problematic, and it is definitely not the right time when banks’ bottom lines are under pressure and the Lebanese economy itself is flat-lining, with the source saying BDL is internally forecasting zero to 1 percent growth.
So, tied to the US Lebanon will remain. It is a good thing then that BDL and the US Treasury get along “beautifully”, as the BDL source put it.
Paul Cochrane is the Middle East correspondent for International News Services