Culling the small fish

Small business owners caught in an international relations dragnet

Reading Time: 5 minutes

As you walk into Hissam Exchange in Hamra the first thing you see is the frame on the wall. Encased behind the glass is a certificate declaring that the business is permitted to trade currencies by the Lebanese government. The family company has been operating in Beirut for nearly a decade, but the room is still barely big enough for four people — working on such a small scale there is little excess.

Yet Hissam’s family business may soon be squeezed out of existence. Under new plans to be introduced by Banque du Liban (BDL), Lebanon’s central bank, even the smallest money changers (classified as Category B) will have to hold at least LL500 million ($330,000) in capital to operate, up from the current LL100 million ($66,000). Larger ones deemed Category A will have to hold LL750 million ($500,000) in capital to continue to operate, up from LL250 million ($166,000). Hissam’s brother Sakar admits that the new rules will almost certainly force them to close down. “If I had $330,000 I would not be here. I would be living up in the mountains with my family,” he jokes.

They will not be the only ones. Mahmoud Halawi, head of the Lebanese Money Changers Association (LMCA), estimates that the new regulations might put up to three quarters of their members out of business. “Out of 400 [licensed] money changers, we estimate that up to 300 could close because of feasibility — there is not enough work in Lebanon for this,” he tells Executive.

Halawi claims that the hike is aimed at forcing out smaller companies, but believes it would hurt the industry as a whole. “Even the remaining changers will not benefit because the big exchangers cannot spread out as much as small ones, so in the end we will not be covering the whole market.”

A conspicuous cull

Hissam Exchange and other legitimate businesses may be the victims of a slew of bad press brought on by a minority of exchanges taking part in money laundering activities that eventually caught the eye of international regulators and tarnished the banking sector’s image. 

The continued concern over the lack of regulation on the influx of currency from Syria was exacerbated in December when the United States Department of the Treasury highlighted the role of money changers in its allegations against the Lebanese Canadian Bank (LCB). The US federal government has now filed a suit in Manhattan Federal Court which seeks $480 million in damages from the now sold out LCB and two Beirut money changing businesses, the Hassan Ayash Exchange Co. and Ellissa Holding.

Paul Morcos, founder of the law firm, Justicia Beirut Consult, and an advisor who works closely with the BDL, is in favor of the overall plans but believes the raising of the capital limit has more to do with improving foreign relations than cracking down on fraud. 

“We are facing demands from the international community to enhance the system. Lately many exchange industries have been mentioned in American reports and that’s why the banking authorities are taking these measures; in order to show they are controlling the exchange,” he says. “The capital increase will massively restrict the establishment of exchange and negatively affect exchange business.”

Halawi has been pleading with the BDL to reconsider their plans, urging them to introduce the rules over a period of time, rather than as an instant hike. “After we discovered what the Bank was planning we sought a meeting with them and after several requests they agreed and we explained the reasons for rejecting this law,” he says. “We are asking them to decrease the capital limit and extend the time period so that the exchangers can take the plans into account and have 10 years to fulfill the requirements.” 

He believes the government’s plans will cause Lebanon’s already large illegal money changing market to grow as exchangers seek to protect their livelihoods. “In Lebanon we estimate that there are more than 2,000 unlicensed traders and they are only going to increase [if the bill is passed].” The BDL did not respond to repeated requests for comment.

Not blind to the problem

There are however legitimate concerns about the industry that are also being addressed. A larger exchange dealer also in Hamra, who did not wish to be named, claimed he was glad the regulations were to be introduced as it could help rebuild the confidence of the international community. “We will survive the raise because we are well run. What really affects us is the situation in Syria and the attitude of foreigners to Lebanon. We have stopped accepting Syrian and Iranian currency already but we need more foreigners coming here and changing money.”

The move is the most recent step in the long process of attempting to rein in money laundering in Lebanon, which began with Law 318 regarding commercial banks in 2001. That law defined what constitutes money laundering in the country and established the Special Investigative Commission (SIC) within the BDL to investigate it. 

In the years since, the exchange industry has grown hugely, with larger changers now offering a diverse range of services including FX Trading and share buying, increasing the pressure to impose further regulations. In addition to a rise in capital, the new rules will force money changers to have at least one compliance officer and invest in anti-fraud software. More significantly still, they will be legally obliged to report suspicious transactions. 

Camille Barkho, manager of Amerab Business Solutions — a firm that provides advice to banks and other financial institutions about how to avoid money laundering — believes the idea that money changers are innocent victims in money laundering is ridiculous: “They know… Once they know [about fraud] they might make suggestions to the customer: ‘I cannot do that, but if you want I have a friend with certain commissions who can do it’.”

He adds that there are real concerns about the lack of control over the industry, but admits minimum captial requirements have little to do with the issue. “Let me give you an example: you can go to an exchange dealer, deposit cash in unlimited amounts, then ask for a transfer for a cheque to another country or another bank without you being identified. This is a very clean tool for money launderers.”

Yet regulating the industry will likely be a difficult business, with all the exchange dealers Executive spoke to expressing concern over the lack of information provided by the government. Halawi confirmed that the LMCA is in consultation with the BDL about establishing joint training to help firms understand the new laws and implement the changes.

Some of the industry appears to have started preparing, and Barkho has noticed an increased concern among Lebanese money changers. He claims that until two months ago Amerab had never received any work from the industry, but now money exchangers have been approaching them two to three times per week as companies struggle to comprehend the new regulations. 

First pennies on the dollar

The international pressure to act is so great that these changes may prove to be the first of many. There has also been chatter in the financial world that the government is planning to table an amendment to strengthen Law 318 later this year, with increased powers for the SIC and tougher penalties for offenders among the possible proposals. Under the current laws the SIC is only allowed to point out where institutions are failing to comply with the legislation but can do little to punish them for doing so. 

Morcos says he believes plans may be afoot to take the regulations beyond money exchangers and into other sectors. “There was a plan to control professional bodies in this regard but there are certain handicaps in trying to control non-financial bodies,” he says. “You have to be delicate not to put any handicaps on their operations, especially in terms of professional secrecy.”

Yet, as ever, there is a big difference between writing laws and implementing them. While the government appears keen to improve the laws on money laundering, whether it has the will or means to effectively enforce them remains in question. 

“We have driving laws but still when you go out and drive in Lebanon it is crazy,” Barkho says. “The Lebanese can have very well written policies on anti-money laundering but if they are not implemented, they are nothing.”

Joe Dyke

Joe has extensive experience covering the Syrian crisis, oil and gas, and Lebanese government and regulatory authorities, among other topics. He was Executive's online editor from 2012 to 2014, and led the Economics & Policy section from 2013 to 2014.