Protecting the integrity of Banks

Lebanon has retained its banking secrecy laws whilst adopting new measures to fight money laundering

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The UN investigation into the assassination of former premier Rafik Hariri has impacted the financial scene. The work of German prosecutor Detlev Mehlis and his team to uncover suspects behind the murder created a stir when a request for banking secrecy laws to be lifted from the accounts of certain individuals key to the enquiry was leaked to the press and found to contain the name of Elias Murr who was not considered a suspect.

Banking industry members said they were dismayed at the negative publicity created by the “propaganda” surrounding the leak and the erroneous inclusion of Murr’s name. “Every day banks get letters about suspicious transactions but they deal with them with discretion. This brouhaha about the investigation into those bank accounts is bad,” said one manager.

Other experts have pointed out that, in any case, a request for information on accounts and financial transactions of any suspect would have to be investigated under clearly defined procedures before banking secrecy could legally be lifted from an account.

Fuelling speculation

Some media pundits took the incident as an excuse to regurgitate speculation over hidden agendas behind the UN investigation. Having apologized to Murr, Mehlis will have bigger fish to fry, but the controversy over the request has served to highlight once again the importance of banking secrecy to Lebanon. As such, it is actually a reminder that this country has nothing to be afraid of when it comes to discussing the matters of security of transfers, data protection, and combating money laundering.

This can be best illustrated by the work and international involvement of the country’s financial intelligence unit charged with fighting abuses of the financial system through organized crime, corrupt officials, terrorists, and crooks. This Special Investigation Commission (SIC) under the chairmanship of central bank governor Riad Salameh hosted in September, a meeting of the recently formed Middle East and North Africa Financial Action Task Force (MENA FATF), during which new important measures for the regional fight against money laundering were adopted. In its Beirut meeting, MENA FATF (an affiliate body of the original FATF founded by the G-7 nations in 1989) passed resolutions that install greater supervision of the Middle East’s hawala system of funds movement, cash couriers, and charitable organizations from the perspective of Anti-Money-Laundering (AML) measures, said SIC secretary, Mohammed Baasiri.

Working groups for training and mutual evaluation also produced important papers, including a regional schedule for mutual evaluations among the participating countries under which Lebanon will be inspected in 2007, “because we are going in alphabetical order,” said Baasiri who also currently heads MENA FATF.

These measures and new initiatives will have no detrimental effects on banking secrecy and financial markets in Lebanon, Baasiri told Executive. “Banking secrecy is intact,” he said, noting that by law he could not provide any information on the financial investigation aspects of the inquiry into the Hariri assassination suspects. Instead, he emphasized that stricter money laundering procedures have helped the country gain international recognition in addition to keeping foreign deposits in the banking system. “After Lebanon was taken off the list, it has witnessed a remarkable increase in deposits. I can also tell you that Lebanon enjoys an excellent reputation in terms of fighting money laundering and terrorism finance,” he said.

As for the efficiency of the SIC on the ground, the commission last year received 199 individual cases based on local suspicious transaction reports and inquiries from abroad. Of this initial count, the SIC passed on 71 cases to the relevant authorities for further measures. With 46 cases still pending, 82 were not passed on, said the SIC’s annual report, presumably because they were unsubstantiated. The total number of reported suspicious incidents last year was down from 2003, when 272 cases had been brought to the commission’s attention.

Anonymous cases described in the report as examples for money laundering typologies uncovered in Lebanon were small size by comparison to such investigations in international financial centers, confirming Baasiri’s contention that the Middle East plays no significant part in the problematic area of money laundering. However, 20 of last year’s 199 cases in Lebanon were related to terrorism and terrorism finance suspicions, and five to embezzlement of public funds, while almost half of the cases were not classified. Of the terrorism cases, 17 involving 47 suspects were based on requests from the UN or the US.

Another aspect of the SIC’s work in Lebanon is the supervision of alignment with AML standards through financial market participants. Undertaken by the commission’s compliance unit, this unit’s work contributed in 2004 to an intensification of the guidelines for requirements for external audits of banks and financial institutions in producing their AML reports. The unit inspected 24 banks, 24 financial institutions, and 24 insurance companies as well as 43 money dealers as to their compliance and issued several reprimands to firms that failed to follow through on corrective measures.

Those that complied

Due to the composition of the country’s financial sector and operator numbers in the different categories, compliance supervision was highest for finance firms (83%), followed by banks and insurers (38 and 44%, respectively) and lastly, money dealers (11%). Behind such dry numbers, what the work of the Mehlis investigation, the SIC and financial intelligence units elsewhere underlines is that money in the 21st century’s global economy is more than ever the track to follow when chasing the bad and the ugly. And pausing for a moment of pondering the flipside of this coin, it is also an important track in pushing for the best.

Since the early 1990s until the dot com crash, discussions on the future of economics abounded with ideas about the abstraction of money through modern payment systems. Some of the more extreme concepts proposed that “virtual money” would soon rule the internet-based economy. Lately, virtual money has found its home, not in online purchases but as a part of the online games experience.

But it is in the real world where money becomes more and more an abstract expression of trust. Safeguarding the numbers that reflect our economic achievements, is a job that requires the skills and integrity of governments and central banks.

This is the funny thing about dealing with money today: all those numbers that define the financial world represent value without allowing a single touch. If money is the tangible physical means that binds the economy into a coherent system, electronic money is this system’s metaphysics. As this invisible force has assumed more and more of the functions that make the system work, the mission of managing money becomes inseparable from the tasks of weeding out the bad and strengthening the good.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years. Send mail