The United States government’s recent designation of Lebanese-Canadian Bank (LCB) as a “prime money laundering concern” crippled the bank, prompting a shotgun marriage merger that will effectively erase LCB from the country’s banking sector. The event has highlighted the shortcomings of the country’s anti-money laundering (AML) and counter-terrorist financing regime, and has been a wake-up call for Lebanese banks to both the ramifications of non-compliance and the long reach of the US Treasury’s Financial Crimes Enforcement Network (FinCEN). It is also almost certainly a warning that Lebanon will be hit where it hurts most if it plays politics against the interests of the world’s largest economy.
When asked about LCB’s merger with Société Générale Banque au Liban (SGBL), Lebanon’s alpha banks refused comment across the board — indeed the topic of money laundering in Lebanon is so sensitive that officials and experts from multiple local and international organizations interviewed for this report would speak only on condition of anonymity.
As rumors circulated that the United States Department of the Treasury could be eyeing three or four more banks over dirty money allegations, the sealed lips of Lebanon’s biggest banks have left important questions unanswered regarding preemptive risk measures, such as scrutinizing bank accounts and transactions, upgrading compliance measures and related software and avoiding high-risk individuals and politically exposed persons (PEPs). But their actions have spoken volumes.
As the first quarter of 2011 came to a close, financial investigative units in Lebanon received a deluge of suspicious transaction reports (STRs) — required notifications filed by banks to the Special Investigation Commission (SIC) within the Banque du Liban (BDL), Lebanon’s central bank — with many regarding transactions that were only faintly suspicious.
“We had an STR on a $300 cash transfer — banks are worried,” said one financial investigator.
Lebanon’s banking sector has long been praised for its conservative nature and its contributions toward stabilizing the country’s economy, but now it is in the limelight for all the wrong reasons. While the storm seems to have subsided, the LCB scandal may well blow the cover of other banks before it blows over. With suspicion of vast amounts of dirty money circulating in Lebanon, the many loopholes through which it enters and the foreign pressures to expose it, the scene is set for an LCB sequel.
Dirty money
LCB’s connections to Lebanese-Colombian drug lord Ayman Joumaa’s shady money transfers, risky liaisons and a mix of inconclusive accusations by the US Treasury helped bring LCB down nearly overnight. But Joumaa is likely far from the only Lebanese bank customer engaged in suspect drug trafficking and money laundering.
While the vast majority of the estimated 8 million Lebanese and their descendants living abroad have exported their mercantile sensibilities to contribute to the economies and societies where they now live — and do so within the legal parameters of those countries — this massive diaspora and its strong family and community ties has also aided in the formation of a number of international networks engaged in illicit business.
Lebanese expats have built large communities abroad, mainly in South America, but also in South and West Africa, Canada, Australia, the United States and Europe; among the small number of more shady expats, law enforcement agencies have documented patterns of organized involvement in black market dealings involving illegal narcotics, ‘blood diamonds’, car-theft mafias and the like.
According to the United Nations Office on Drugs and Crime, in the early 1990s Lebanon gradually transformed itself into a regional hub for cocaine and heroin trafficking. And drug busts over the last few years indicate that the business continues to boom, especially those networks working out of South America.
In October 2008, United States and Colombian investigators dismantled a cocaine-smuggling and money-laundering ring that had been working with a Colombian cartel and a paramilitary group to smuggle cocaine into the US, Europe and the Middle East. In the middle was Lebanese kingpin Chekry Harb, the liaison between South American cocaine traffickers and Middle Eastern “militants”. Some $23 million was seized and 170 arrests were made, while Harb’s drug ring was believed to be laundering millions more monthly through what is called the ‘Black Market Peso Exchange’ using Asian-based financial institutions
In mid-2010, a record drug bust was made at the Port of Beirut when 102 kilograms of pure South American cocaine, worth $10 million, arrived in Lebanon packed under a layer of lead inside machine cylinders. And in September 2010, Lebanese security forces uncovered another network that the Central Office for Drug Control (CODC) called “one of the most important, highly complex networks” smuggling drugs between South America and Lebanon. The CODC confiscated 50 kilograms of cocaine, worth $8 million, of the 255 kilograms that one Venezuelan and four Lebanese had confessed they had planned to smuggle.
Heading north, car theft rings in Canada have also found their way to Lebanon. According to the Insurance Bureau of Canada (IBC), Lebanon is among the top 10 destinations for stolen Canadian cars, by way of containerized vehicles that usually make their way through Genoa, Italy to Eastern Mediterranean ports, including Beirut. In February 2009, Hanna Tanios and Ayyad Tirani, two Lebanese residing in Canada, faced charges of fraudulent concealment and possession of stolen property, namely cars. The vehicles were being cut in half and shipped via the port of Montreal to Lebanon where they were reassembled or sold for parts.
And then there is the Ivory Coast, which fosters one of the most notorious industries that Lebanese expats have engaged in: ‘conflict’ or ‘blood’ diamonds. In 2009, the Kimberly Process Certification Scheme (KPCS), the international regulatory body specific to the trade, recognized the Lebanon-Guinea Axis as an emerging diamond laundering route. In almost three years, leading up to 2009, Guinea had reported a 600 percent increase in diamond production and went from providing zero to 85 percent of Lebanon’s diamond imports. Although attributed to the discovery of new mines within the country, Guinea’s production pump was also connected to conflict diamonds coming from the northern Ivory Coast. As 2008 came to an end, 73 percent of Guinea’s total diamond exports were heading to Lebanon.
Lebanon’s irregular trade statistics, mentioned in a 2009 report by the United States Geological Survey (USGS), also raised some eyebrows; though it has no diamond mines, in 2009 Lebanon somehow managed to export 386,000 carats more in gem-quality diamonds than it had imported, while recording a trade deficit on industrial diamonds, which are worth 10 percent of the value of their gem-quality cousins. According to Partnership Africa Canada’s “Diamonds and Human Security Annual Review 2009,” “some 250,000 more carats leave [Lebanon] as gem-quality diamonds than arrive — worth 36 times their import value.” The discrepancies in numbers led the KPCS to investigate possible tax evasion, with Lebanon accused of importing gem-quality diamonds from Guinea as industrial diamonds, as the latter are taxed at a lower rate relative to their value.
“There is a large spectrum of criminal activities that involve some Lebanese abroad. But smuggling coffee from Colombia or counterfeit products from China is overlooked in Lebanon, which begs the question, what is dirty money?” asked one economist at a global banking watchdog organization who was not authorized to speak to the press.
But, according to the “International Narcotics Control Strategy Report” (INCSR) published in March 2011 by the US Department of State, these small-time illicit businesses in Lebanon are not the primary sources of funds laundered through the formal banking system.
“Laundered criminal proceeds come primarily from organized crime [networks],” the report says, not from smaller black market dealers.
However, a 2009 mutual evaluation report carried out by the Middle East and North Africa Financial Action Task Force (MENA-FATF) — the regional arm of the global Financial Action Task Force, an organization dedicated to stemming money laundering and terrorism financing — noted that drug trafficking in Lebanon “is limited to 150 dealers, [with] the average value of the business of each ranging between $4 million to $5 million.” That means a possible $600 million to $750 million may be entering the Lebanese economy each year, and potentially through the banking system.
The loopholes
According to the World Bank, some $8.2 billion in remittances found its way back to Lebanon in 2010, and this, according to the INCS report, poses significant potential for money laundering and ‘terrorism’ financing (as classified by the US), given the involvement of Lebanese networks abroad in underground finance and trade-based money laundering.
But, according to the global banking expert, the ambiguity in classifying transfers makes it hard to spot the shady ones. “The numbers are seemingly transparent, but they are hardly indicative,” he says. For one, remittances are not categorized; there is no distinction between capital, income transfers and money that goes straight into households. The inability to sift through this money makes it difficult to spot potential abuses.
There is also the issue of ‘fiscal residence’; Many expats use the fact that their fiscal residence is not in Lebanon to avoid reporting the source of their funding, meaning the Lebanese government is unable to trace money back to its source.
However, when it comes to capturing financial flows, there are certain unimplemented mechanisms in Lebanon that would provide the opportunity for greater scrutiny and oversight.
While financial institutions’ reports are major indicators of these flows, there is a shortage of economic, business, household and investment surveys indicating how much one earns on a monthly or yearly basis and the nature of those earnings. These surveys can catch inconsistencies in numbers once compared to those of financial institutions.
“How can the Central Bank do cross-checking if there is nothing to cross-check with?” the banking expert asked. The National Statistics Office, the severely neglected data collection wing of the government, has been too poorly funded to conduct large-scale fieldwork that can produce reliable figures.
Additionally, inconsistent reporting and inadequate enforcement of tax declarations by individuals and companies makes assessing income levels and possible suspicious transactions harder to spot. The issue is further compounded by Lebanon being primarily a cash-based society with a minimal paper trail, whether for tax and income declarations or for the authorities to monitor for suspicious transactions.
The shortcomings of such oversight at the governmental and fiscal level have knock-on complications for compliance units at banks in carrying out customer due diligence, more commonly known as ‘know your customer’ (KYC), procedures, where compliance officers (COs) are required to know the customer’s background, their profession, income and business dealings.
For instance, KYC can involve unannounced visits to a business to confirm that the declared business is what it claims to be, and whether it is generating the amounts coming in and out of the client’s account, but such investigations are few and far between in Lebanon. Complicating matters are the often very personal relations at the branch level between banker and client, where clients see it as an intrusion for the bank to probe into a customer’s life.
“Banks here are wary, and although interested in curbing money laundering, they need to do more [to improve] compliance, training and implement policies,” said a source close to the BDL.
These efforts are being undermined, however, by the lack of authority COs have within the management structure of financial institutions.
“If you took a survey of banks’ compliance and asked about the independence of the CO vis-a-vis management, the powers they have, their background [and] professional experience, and their salaries compared to other officers in the bank, it would come up short,” the source said.
A CO at a major Lebanese bank considered the compliance departments’ lack of authority a major obstacle to curbing money laundering and protecting the bank.
“One of the weaknesses we have here is that Lebanese banks are family businesses, so they can do anything they want,” said the CO. “COs should work more closely with the SIC without going directly to the chairman of the bank… Compliance should have the veto over whether to take on a client; otherwise what’s the point if the CO can’t say no?”
Easily secret
One concern specific to cash flows is the shortage of cross-border checks. According to a FinCEN report, cross-border currency reporting in Lebanon is requested of those carrying into the country more than $10,000 in cash, but currently is not enforced by law. This creates a significant cash-smuggling vulnerability. The SIC is working to draft laws to mandate cross-border checks but for now it goes largely unregulated. There is also no oversight of the buying and selling in precious metals, with ounces and kilos of gold and silver able to be bought over the counter, in cash, without any identification or paperwork required.
Another issue, once a forte for Lebanese banks, is banking secrecy. “There have been concessions with regard to banking secrecy; when transfers are fishy, banks are required by [AML Law 32] to lift secrecy,” said one financial investigator. But the global banking expert noted that banking secrecy itself is not the issue.
“The problem is that [secrecy] comes as a free gift for all,” he explains. In Lebanon, there are no disincentives for hiding records. In Switzerland, on the other hand, there are two strings of depositors: those who have banking secrecy and those who do not. The latter pay progressive taxation on revenues of deposits based on brackets; as their deposits reach higher brackets, they pay higher taxes. The former, on the other hand, are automatically subject to the tax rate corresponding to the highest bracket.
“Basically, if you want banking secrecy you pay for it,” he said. This taxation system does not spare banks from money launderers, but it is a form of insurance for the banks.
Banking secrecy does not mean that there is no oversight, however, as the SIC can request that it be lifted in the case of suspicious accounts. Indeed, the SIC lifted bank secrecy on 23 cases in 2010, which were then passed on to the General Prosecutor.
Money launderers in Lebanon are also protected by a lack of investigative work into their past. Only once banks notice irregular patterns in transfers and flows do they file an STR, after which the individual is looked into; the US State Department’s narcotics report notes an over-reliance on STRs to initiate investigations rather than an emphasis on predicate offenses that could involve money laundering. Notably, last year there was an uptick in the reporting of suspicious transactions, with the SIC receiving 245 cases — 160 from local sources and 85 from foreign — up from 2009’s 202 cases, of which 127 were from local sources. Lebanese banks, however, have only recently upgraded their IT systems to include money laundering detection software, as well as subscribing to databases that list high and heightened risk individuals and entities.
With Ayman Joumaa’s network linked to exchange houses in Lebanon, it was the amount of funds allegedly able to flow through them that was of concern. Effectively the exchanges were acting as banks. “Exchanges shouldn’t do parallel banking,” said the CO. “Only recently did they start doing third party (transactions), and they shouldn’t. They should let banks handle wire transfers.”
There are 383 exchange companies in Lebanon, 13 percent of which fall under “category A”, enabling them to trade in higher denominations and to carry out electronic transfers. The SIC is aware of the risks posed by exchange dealers; nearly half of the 154 on-sight examinations carried out in 2010 focused on money dealers.
But additional threats continue to surface. New payment methods (NPM) are providing money launderers with additional means to do their work. In its 2010 “Money Laundering Using New Payment Methods” report, the FATF highlighted the particular dangers of prepaid cards. These plastic cards, which are provided both by banks and private operators, allow customers to bypass credit checks and other forms of financial scrutiny. Some can be used in multiple countries.
“These high limit prepaid cards are like a mobile, transferable, untraceable, anonymous bank account,” the banking expert said. They allow virtually anybody to place money on a card, with little to no background check, and to do with it as they please, including in some cases using it outside of the country, as well as allowing others to access it. The latest BDL figures show a 7.1 percent increase in the number of prepaid and charge cards in Lebanon since 2009.
Dangerous bedfellows
With Washington keen to crack down on banks dealing with designated terrorist organizations and countries under US and international sanctions, Lebanese banks are exposed — like LCB was — to risk when dealing in financial transactions with America’s enemies: notably Hezbollah, Iran and Syria.
With the US intent on freezing transactions that go via or into the US from such parties, Lebanese banks, subsidiaries and affiliates face hazards. For example, the state-owned Commercial Bank of Syria (CBS) is on the US blacklist, a potential concern for Lebanese banks dealing with CBS; risks also exist for Lebanese banks simply operating in Syria, as well as Lebanese interacting with Iranian banks, such as Saderat and Melli. Bank Saderat, which was blacklisted by the US Treasury for providing funds for Hezbollah and Hamas, has branches in Lebanon.
Such risk exposure is not to be taken lightly — LCB executives can surely attest to the potential repercussions. In the case of British bank LloydsTSB, it was fined $350 million by a New York court in 2009 for transferring funds in a manner that contravened US sanctions, on behalf of clients in Sudan and Iran, including for Bank Saderat.
“The US Treasury can do anything they want. We’re helpless here and need to be very careful. Everyday banks, even US banks, get fined,” said the CO. “The SIC should do the same and give fines,” he added.
The politics
Evidence from the investigation justifying LCB’s designation as a primary money laundering concern has yet to materialize, let alone justify the hasty arrangements made between BDL and the US treasury. “So far, we have not found the links they are talking about, whether about the bank itself or about Joumaa,” one investigator close to the case told Executive.
US reports on money laundering in Lebanon mostly focus on drug trafficking and conflict diamond trade involving Lebanese abroad, often heightening concerns on illicit proceeds financing terrorism. As far as the US government is concerned, any money wired to Hezbollah supporters in Lebanon falls under the umbrella of terrorism financing, as was the case when Lebanese kingpin Chekry Harb’s cocaine ring was believed to be bankrolling Hezbollah. So seems to be the case with nearly every exposed drug trafficking ring the Lebanese have been involved with.
This poses a dilemma for Lebanese banks, as Hezbollah, despite the controversy, is recognized as a legitimate political party and resistance force by the Lebanese government. The US has denied any political agenda in the decision to designate LCB. The fact that it was announced exactly one month following the dissolution of the cabinet and the appointment of Hezbollah-backed prime minister-designate Najib Miqati, however, is seen by many of those who spoke with Executive as a clear message to Lebanon.
Given the apparent vulnerabilities of Lebanese banks, and the paltry standard for evidence the US Treasury showed it required to bring the hammer down on LCB, should the US decide to scrutinize more of Lebanon’s banks in the months to come there would almost certainly be more institutional casualties.
On the other hand, according to the global banking expert, “If no other banks are targeted, it means that LCB’s was a warning. No more, no less.”
