Home Banking & Finance Secrecy Laws – Hush money

Secrecy Laws – Hush money

Accounting for the darker side of deposits in Lebanon

by Executive Staff
Since the country’s early inception in the 1920s banking has played a pivotal role in shaping Lebanon ’s economy. Today, it remains a resilient sector, especially when compared to other industry sectors, which have been plagued with low growth levels. For example, in February 2008, Bank Byblos reported that the country’s bank assets showed a 14.10% year-to-year growth.

During the fifteen years of the 1975 civil war and up until this date, banking secrecy has undoubtedly contributed to the sector’s resilience, said Dr. Paul Morcos, legal consultant at the Bank of Beirut and the Arab Countries (BBAC) and author of the study “The challenges of the Banking Secrecy in Lebanon: A Comparison with Banking and Professional Secrecy in France, Switzerland, Luxembourg and the Middle East”. According to him, during the 1975-90 period the volume of bank deposits increased by 392 times. Morcos also highlighted the importance of banking secrecy in attracting and retaining deposits of foreign, mostly Arab, investors.

“Banking secrecy in Lebanon is defined by the 1956 law, which was amended in 2001,” Morcos explained. Abbas Halabi, former magistrate and vice chairman at BBAC underscored the very limited scope of the earlier law. “Bank secrecy could only be lifted in a few cases with the approval of the depositor or in the case of bankruptcy or illicit enrichment.”

The amendment included (and defined) the concept of money laundering and added other types of illicit enrichment such as drug dealing, terrorist acts, embezzlement of public or private funds or their appropriation by fraudulent means, and counterfeiting activities.

A recent report published by the Special investigation Committee (SIC) of the Lebanese central bank (Banque du Liban – BDL) defines money laundering as “any act committed with the purpose of concealing the real source of illicit funds or giving by any means, a false justification about the said source.”

Other acts also include the transfer or substitution of funds known to be illegal for the purpose of concealing or disguising their source, or helping a person involved in the offence to dodge responsibility, acquiring or holding illicit funds, using or investing such funds in purchasing movable or immovable assets, or in carrying out financial operations, while being aware of the illicit nature of these funds.

Morcos cites numerous cases in which bank secrecy has been abused by unscrupulous individuals, among them the infamous case of the Al-Madina Bank.

According to Halabi, financial institutions subjected to the bank secrecy law are required to monitor their clients’ operations, for example by screening for unusual activity. “They are also subject to regular visits by the SIC whose mandate is to investigate money laundering operations, and to monitor compliance with rules and procedures,” he said.

In Lebanon , the central bank has oversight on debtor accounts and can access creditor accounts as long as the identity of depositor remains hidden. “When accounts opened at banks or financial institutions are suspected to have been used for money laundering purposes, the SIC will investigate the case, the account will be frozen and when foul play is proven banking secrecy will be lifted,” Halabi explained.

Throughout 2007, the BDL investigated 191 cases involving alleged money laundering and the financing of terrorism operations and passed 54 of them on to the prosecuting authorities. The report mentions a few cases as examples, one of which involved the account of a car dealer.

The SIC had received a request of assistance from a foreign financial intelligence unit (FIU) regarding a suspect belonging to a known international organization under investigation for supporting a terrorist group. The foreign criminal investigation had revealed several wire transfers from the suspect’s foreign bank account to a local bank account in Lebanon held by his brother, also suspected of being a member in the organization.

Other cases include fraud schemes involving three Lebanese with dual nationality who forged import invoices and sent them for collection to a local bank, assisted by an accomplice employed at one of the local banks, which tallied up with the transfer of more than $1.3 million to Lebanon .

The report outlines that out of the 54 cases in which bank secrecy was lifted 7 cases were considered to be local while the other 47 cases had foreign origin. In the report, Lebanese customs were the largest source of all cases representing 33.76% of cases received, while commercial banks accounted for 28.63% and the UN for 1.28%.

Most cases received involved cash courier fraud, which constituted 33.76% of the total, while counterfeiting accounted for 14.53%, terrorism for 5.56%, embezzlement of private funds for 3.42% and drugs for 3.42%. Ironically, in a country known for its rampant corruption, embezzlement of public funds constituted only 2.14% of all cases.

How to cleanse the system

Morcos suggested a series of amendments to avoid the exploitation of the banking secrecy framework by criminals. “It is first essential to define the notion of ’client’, which is quite extensive in Lebanon and includes transitory clients.”

He also envisions the creation of a special commission, which would guarantee transparency and accountability and of both senior functionaries and politicians. Other issues he deemed in need of clarification are the opposability of banking secrecy to the penal law, allowing for the misuse of the system by embezzlers vis-à-vis penal courts or defaulting borrowers versus their lenders, bankrupt merchants opposed to creditors in order to traffic their money to other clients benefiting from banking secrecy as well as corrupted politicians opposed to inspection and investigation authorities. “Issuers of checks should also be able to trace their funds when it is endorsed by other benefactors.”

Morcos concluded that the banking secrecy system in Lebanon is still one of most extensive in the world. Its scope exceeds by far the ones practiced in countries such as Switzerland and Luxembourg . Therefore, he said, “a redefinition of the system necessary in order to limit abuses and break a long-maintained taboo.”


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