The United States Department of the Treasury’s designation in early February of Lebanese Canadian Bank (LCB) as a “financial institution of prime money laundering concern” hit the bank like a missile strike. And, as so often is the case with American ‘operations’ in the region, the collateral damage was high.
Immediately blacklisted the world over and unable to deal in US dollars, LCB was “crippled,” in the words of a source close to Banque du Liban (BDL), Lebanon’s central bank. The Lebanese banking sector went into damage control mode, concerned it could be part of a wider targeting of the industry, with the designation the worst blow to the sector’s reputation since 2000, when Lebanon was placed on the Non-Cooperative Countries and Territories list of the Financial Action Task Force (FATF), a Paris-based inter-governmental body set up to promote the adoption of anti-money laundering and counter-terrorist financing regulations (it was taken off the list in 2002).
The governor of BDL, Riad Salameh, flew to Washington to discuss the charges, where the US reassured him that the measure was not politically motivated, despite LCB’s alleged connection with Hezbollah, which the US designates as a terrorist organization. Nor, he was told, was it related to the fact that Lebanon’s next government will be led by the Hezbollah-backed March 8 coalition.
“The designation of LCB made people scared,” said the source close to BDL. “The Treasury assured BDL that they didn’t target the Lebanese banking sector and said Lebanon is a friendly nation. The US says it is not a political act but the timing of the designation is a bit precarious. I personally believe politics was involved. [But] I’m not saying the evidence is unfounded — the US has promised to provide information — as there is no smoke without fire.”
Rumors began to circulate that three to four other Lebanese banks were in the sights of the Treasury’s Financial Crimes Enforcement Network (FinCEN). “This is a completely unfounded rumor, and Salameh said this publicly. He told us that during the meeting [in Washington] this was not mentioned,” said Makram Sader, Secretary General of the Association of Banks in Lebanon (ABL). LCB’s designation came as a surprise to the ABL. “It is a specific case but really surprised us as Lebanon is dealing with the world through a large network and with over 250 correspondent banks,” he said.
The designation drove LCB’s reputation into the gutter and stimulated a limited run on the bank by depositors. The designation is just a first step before further action against the bank is taken, with LCB allowed, under US law, 60 days to appeal, which they are doing as the management have denied any wrong doing.
But the damage has already been done; to stave off a crippling run on the bank, LCB had to act fast. “LCB’s shareholders decided to sell, as they couldn’t deal in US dollars, which killed the bank. It wasn’t a decision by the US or BDL,” said the source.
With BDL against the acquisition or merger of any of the top three Alpha banks — Bank Audi, BLOM Bank or Byblos Bank — with LCB, for fear that it would create a ‘super-bank’ and kill competition in the market, four other banks sought LCB assets and liabilities. Société Générale de Banque au Liban (SGBL) made the winning offer and, as Executive went to print, SGBL and LCB representatives were in Paris, along with members of BDL and SGBL’s part shareholder, French bank Société Générale, to hammer out a deal. The consolidation will boost SGBL from the 10th largest bank in Lebanon to fifth.
In the words of US Treasury publication The Federal Register, “FinCEN has reason to believe that LCB has been routinely used by drug traffickers and money launderers operating in various countries in Central and South America, Europe, Africa and the Middle East; that Hezbollah derived financial support from the criminal activities of this network; and that LCB managers are complicit in the network’s money laundering activities.” In the notice, FinCEN lays out a case stating Lebanese-Colombian citizen Ayman Joumaa, who was named a “specially designated narcotics trafficker under the Foreign Narcotics Kingpin Designations Act on January 26, laundered “as much as $200 million a month” from cocaine sales. The proceeds were ‘cleaned’ through foreign exchange houses linked to Lebanon, LCB and its Gambian subsidiary Prime Bank, as well as through Trade Based Money Laundering (TBML) activities involving used car dealers in the US and the trading of consumer goods.
FinCEN then laid out LCB’s connection in rather unclear language and dubious math: “With respect to the exchanges and companies related to Ayman Joumaa, numerous instances indicate that substantial amounts of illicit funds may have passed through LCB. Since January 2006, hundreds of records with a cumulative equivalent value of $66.4 million identified a Lebanese bank that originated the transfer; approximately half of those were originated by LCB, for a cumulative equivalent value of $66.2 million, or 94 percent, thus, indicating that LCB probably is the favored bank for these exchange houses, particularly in the context of illicit banking activity.”FinCEN did not reply to queries by Executive asking how, if $66.4 million is the total and LCB was the origin of half the transfers, this is equal to $66.2 million, or how the latter figure is 94 percent of $66.4 million.
With the BDL still to carry out an internal investigation, as it does not yet have the full American report, the details are still vague regarding the accusations of LCB’s possible money laundering activity or knowingly acting as a financial conduit for Hezbollah. The language within the designation (“may have”, “believed to be” or “probably”) is an indication of its ambiguity.
The bank has also been suspected through what is legally referred to as “guilt by association,” with LCB managers accused of having ties with Iranian officials through Hezbollah’s Tehran-based envoy Abdallah Safieddine. The bank is also implicated via a Lebanese shareholder in LCB subsidiary Prime Bank who is “known to be a supporter of Hezbollah.”An indication of the political motivations of the designation is the discrepancy between the punishments of LCB and Jordan-based Arab Bank, which was forced to pay $24 million in 2005 for allegedly inadequate controls against money laundering at its New York branch. “Why wasn’t LCB fined? They wanted the bank closed. It’s a wake up call for the Lebanese banking sector and the threat posed by Hezbollah,” said a senior compliance officer (CO) at a Lebanese bank who requested anonymity. “The US has the power to sanction a bank anytime and put anyone away. We’re helpless here and need to be very careful to protect the banking sector. I’d give up a suspicious customer, even if it lost millions to protect the bank.”
LCB is not the only financial institution to have been shaken by FinCEN’s designation; all Lebanese banks and foreign exchange houses’ relations with the US have been affected.
“The effect from American banks was bad, by two banks in particular; we were not allowed to send from a Lebanese exchange house to an exchange house anywhere via the US. They don’t want any payments from banks related to the exchange dealers. It has created panic and is putting exchange dealers out of business,” said the CO. “The US banks also don’t want us to deal with used car dealers. But they cannot penalize other banks for what happened or consider all transfers as suspicious,” the CO added. “Deal with us or not, period. The banking sector is not loose and American banks shouldn’t be scared of Lebanese banks; banks are cooperating and closing accounts with exchange dealers, even good exchange dealers.”
The FinCEN links LCB and Joumaa to foreign exchange dealers in Lebanon. But those interviewed denied involvement. “We don’t know Joumaa. We’re a Category A listed exchange company and don’t know him,” said a manager of Hassan Ayash Exchange in Beirut. “This designation against us is not right, from A to Z. I will of course appeal with a lawyer and provide all the documentation and transfer records.” Another exchange manager noted: “Hezbollah doesn’t need the money; it gets it from Iran. So why would they use my exchange? And if I have to close my company [because of the designation], Hezbollah will not look after me.”
Joumaa is also linked to Elissa Holding, based in downtown Beirut, which owns Phenicia Shipping, the Elissa Exchange bureau in Sarafand, near Saida and companies in the Republic of Congo and Benin. The Elissa Holding manager, who was not at the holding’s office on a visit by Executive, did not answer further calls. The US also labeled Caesar’s Park Hotel in Beirut, next door to Hassan Ayash Exchange, as a meeting point for money launderers and a front company.
Jalal Joumaa, general manager of Caesar’s Park Hotel, declined to comment on the issue or on whether he would appeal. The exchange houses, Elissa Holding and the hotel are still operating, with no apparent action taken against them by the Lebanese authorities.
Upgrading the law
Ayman Joumaa was publicly designated as a drug kingpin in late January, two weeks before LCB was labeled a prime money laundering concern; this ought to have set off warning bells at LCB’s compliance department, at exchange houses and with Lebanese regulators. If the FinCEN report is to be believed and Joumaa has links to LCB that stretch back to 2006, what it would suggest is that there are certain weaknesses in Lebanon’s anti-money laundering (AML) regime.
The BDL has said that, in line with recent US requests and following a mutual evaluation of the country’s AML regulations in 2009 by FATF’s regional body, MENA-FATF, it will upgrade procedures. Current proposed laws include cross-border cash regulations, declarations and disclosures, and the addition of another 10 predicate offenses to the current seven.
“The procedures also have to be more explicit on terrorist financing, as according to MENA-FATF they are not clear,” said the source close to BDL.
Lebanon is also being pushed to ratify the United Nation’s International Convention for the Suppression of the Financing of Terrorism (1999). That it has not shows there “is no political commitment, and this sheds doubt on how committed the government is to the whole process,” said the source.
The ABL, however, said it has been in favor of signing the convention since 2000. “Reputational risk is important to us and we will double and review the procedures, as the authorities are doing. And we will try to push and accelerate the introduction of new laws and regulations to fill all the gaps,” said Sader.
The designation of LCB has certainly been a wake-up call for Lebanese banks and how the sector is regulated. “Banks have learned a lesson, for example closing exchange bureaus because they believe, [as do I], that it has a lot of risk,” said the source. As to LCB’s guilt and whether the designation was a carefully timed political move, only time will tell. According to Sader, “LCB’s appeal could take months or years.”