Lebanese banks comply with US Hezbollah Act

Getting the facts straight from Chahdan Jebeyli

The introduction to this interview has been updated in response to the June 12 bombing of the Blom Bank headquarter branch in the Verdun district of Beirut. The original introduction began by noting the ire of Hezbollah party leaders in their reaction to the central bank’s early May decision (circular 137) ordering local banks to comply with a United States law aiming to isolate Hezbollah from the global financial system. The ire conveyed was that of political rhetoric and its acknowledgement is in no way an accusation of complicity at any level for the June 12 bombing. The views expressed in the interview, conducted in late May, also made no accusations of wrongdoing of any sort by Hezbollah in regards to American allegations or, to be clear, the recent targeting of Blom Bank. To better understand the nuances of compliance regulations at the technical level, Executive asked Chahdan Jebeyli, chair of the compliance committee at the Association of Lebanese Banks (ABL), who also doubles as head of compliance at Bank Audi, of the implications to banking of the US law, of institutional investments in compliance infrastructures and on the importance of maintaining partnerships with correspondent banks – those banks that facilitate a local bank’s transactions in the former’s jurisdiction.

E   Lebanon as we know it cannot exist without the banks, and the banks effectively cannot operate without connections to correspondent banks worldwide. In this sense, do you see compliance with the US law as a choice or as a must?

We, as Audi and we as banks, have committed to following international standards. We are living in a dollarized economy – the bulk of our transactions are in US dollars and cleared through the United States. When a transaction crosses a border and [is transacted in] the US, we become subject to their laws. This is the reality because the dollar is a key currency and because transactions in the world are in US dollars and they touch US correspondent banks. So because we are keen to maintain a position as a sophisticated and fair player in the global financial market, we respect the applicable laws. The key applicable laws, because of these reasons, are US laws – we are not talking about politics, this is a business and legal reality.

E   When you speak with other compliance executives at committee meetings of the ABL, is there concern in applying circular 137 or concern that there’s an impending disaster on the way akin to the forced closure of the Lebanese Canadian Bank in 2011?

Yes there are some questions and requests for clarification of some aspects of the implementation and because of the importance of the law and its implications, yes there is an increased focus on the subject – not at the level of the compliance officer but at the level of the banks’ management. This is a very important piece of legislation in the US with an important impact on us and on our customers and we care to preserve our image with the rest of the world and we care about protecting our customers without compromising our obligation to comply with the laws [and] do it in a way that is systematic with our local rules.

E   You word it as increased focus but does that mean executives in the banking community are worried?

No, I’m not losing sleep over this. I’m paying attention to the issue, of course. It is an important subject because we’re in the business of managing risk and when you have an item with such importance and implication for the bank and to the clients of the bank, of course we give it more attention than other things. I’m not trying to minimize the [issue] but I’m saying it is important to the US, it’s important to us, and it’s important to our clients.

E   The rules that the US Treasury Department published to implement its law say it is looking at major transactions and that the Americans are not targeting Lebanon’s economy or the banking sector. But at the same time when the Treasury sanctions an individual or entity they do not provide the evidence justifying their action. You don’t necessarily know why the Americans say this entity is bad but that one isn’t.

To me, I think we don’t need to know the why. I follow the law, the official process. I read the Simpson designation which said they had reason to believe that Lebanese Canadian Bank was a primary money laundering concern. To me, I would differentiate between the fact (and I don’t know exactly the facts) and the lesson you learn out of stuff like this. In the Lebanese Canadian Bank case they raised two issues: one being management complicity – and of course I’m not saying there was management complicity – but in terms of what I need to pay attention to as a prudent banker; and then they spoke of insufficient controls.

And you always ask yourself whether you have sufficient control, and I think our response to all of this is to continue to strengthen our compliance program, that we continue to give assurances to ourselves – our boards, our management, to our shareholders, our employees – that we are managing our compliance program efficiently and prudently so we can continue to maintain partnership with our correspondent bank. Not only do I need to pay attention to my standards but to comply with the standards of the correspondent bank. That means a successful continuation of correspondent banking relationships, which in turn means that we’ll continue to exist and prosper and continue to support our clients in their dealings with the world.

E   KYC (know your client) due diligence might be especially important to the correspondent banks in New York. Have those institutions reached out or been in contact for reassurance that Lebanon has the compliance structure in place and that all applicable rules and legislation are implemented?

They are dealing with our client, who they don’t know, and they rely on us to make sure that the transaction passing through their channel is in compliance with our rules and with their own. That’s why our central bank issued circular 126 [in 2012] which says that we need to respect the foreign laws of the countries where we do business or have transactions. And actually circular 137 refers to [circular 126]. So it means that if I’m doing business with a European client, I have to clear with a European bank paying attention to European laws. If I’m doing a business transaction in dollars, because those clear through the US, they touch the US and become, consequently, subject to US laws and I have to comply with and observe those laws.

E   In terms of opportunity cost, the individuals or entities that may come into contact with, may be linked to or may be directly connected to Hezbollah, might be blocked from accessing whatever banking service, product or financing. In aggregate, can this segment of the economy be quantified to say that this amount of business cannot be facilitated by our banks because the risk is too great?

I don’t have a view on the quantity [or] on quantification of income. All I can tell you is that we apply the law to the extent that is needed for the purpose of meeting our commitment to ourselves, our shareholders, our regulators, and to the global community.

E   Central bank rules and the anti-money laundering legislation passed by the parliament, as well as the latest circular, have added additional layers of compliance reporting requirements. Do you see the cost of compliance becoming prohibitive for Lebanese banks?

If it is a cost that is required by legislation and it’s a cost that you need to invest in for the purpose of continuing business successfully, or if you want to invest in systems for the purpose of improving your control environment, you must do this. With the investment in compliance, in human resources or otherwise, we’ll continue to make money. The challenge, however, is not to make money but to make durable income – income that you make and keep and don’t pay back as a matter of penalties or litigation. It is a cost and a necessary investment that we need to engage, and have, for the purpose of our continuity.

E   For Bank Audi, as Lebanon’s largest bank, these kind of costs can be absorbed. But are there concerns, maybe from a smaller bank, that might say ‘listen we can’t do it on our own, the investment threshold is simply too high’?

Yes, it’s manageable [for Bank Audi]. But providing compliance services is just not doable. This is a commitment of the management of each bank, and also there are regulations that prohibit banks from outsourcing main functions. There are discussions on the increasing costs of compliance, not just in Lebanon but across the world. Of course it is a bigger challenge for smaller banks than for bigger banks but it seems that the situation is still manageable. You cannot really compromise on [compliance] requirements for the purpose of saving money because you may end up paying a more expensive price. Compliance failure, if it is serious enough, could affect the franchise – it depends on the situation. That’s why this is essential spending, this is money well spent.

E   Can you point out how much investment this has required?

There has been an important cost increase but we never question if we should or should not spend. We spend as much as we need for the purpose of continuing to preserve our standing as a compliant banking industry. In compliance there are two risks. There is the risk of making a mistake and there is the other risk in missing legitimate opportunities because of being too conservative or because of insufficient knowledge. I don’t have exact numbers to give you, but is [investment in compliance] significant? I think so, and necessary.

Jeremy Arbid

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

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