Changes from abroad

Executive talks compliance with SIC head

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“Part II of this legislation is coming”, US House of Representatives Foreign Affairs Committee Chairman Ed Royce said in his opening statement at a committee hearing entitled “Attacking Hezbollah’s Financial Network: Policy Options.” The United States alleges the Party of God is a global crime syndicate and has designated Hezbollah as a terrorist organization. The hearing, held June 8, comes on the heels of Lebanese media speculation that the United States was already drafting new legislation intended to strangle Hezbollah’s finances, rumors local government and banking officials downplayed Executive reported in the June print issue.

According to its annual report, Lebanon’s financial intelligence unit, the Special Investigation Commission (SIC) at the central bank, received 470 cases related to money laundering or terrorism financing in 2016. This was only a small uptick in referred cases from 2015, despite Lebanese banks’ compliance last year with the United States’ Hezbollah International Financing Prevention Act (HIFPA) and new local regulations.

Local media outlets have been reporting since mid-April that the United States was close to expanding its legislative efforts to target Hezbollah’s finances, a rumor that the Secretary General of the SIC, Abdul Hafiz Mansour, says has been blown out of proportion. But while new legislation or amendments to HIFPA remain at the draft stage, media speculation alone has caused a spike of uncertainty and forced a rush to Washington by Lebanese officials in an effort to water down any expansion of regulations.

In an interview with Executive, Mansour dispelled rumors of new legislation and discussed compliance with international anti-money laundering standards, correspondent relations between local banks and their American partners, and the possibility for consolidation in the Lebanese banking sector due to the ever-rising costs of compliance.

E   There is much speculation in the Lebanese press about new legislation in the United States targeting Hezbollah’s finances. Executive reached out to spokespeople at the Treasury Department, the House Committee on Foreign Affairs, and the US Embassy in Lebanon … silence. This appears to be news that came exclusively from Lebanese sources. What insight can you share — is the United States drafting a new law, or is this an issue that has been blown out of proportion?

There were two teams that went to the United States recently: the Association of Lebanese Banks and the parliamentarians. Both arrived at the same point — there was nothing new. [On May 23] MP Yassin Jaber told al-Joumhouria that there was no new legislation, neither final nor at a serious stage of drafting. Mainly, the media was [reporting] the news as if it were a fact that the United States was expanding the radius of its sanctions, or targeting individuals or parties, while actually there was nothing.

We’re of the opinion that this doesn’t need to be addressed, as there is still nothing concrete, and until there is, I don’t think we should encourage the rumors that are circulating.

E   In an interview last year, you told Executive that Lebanon’s banks met anti-money laundering and counter-terrorism financing requirements. This includes the international standards set by the Financial Action Task Force (FATF) and the United States’ HIFPA. Has anything changed on that legal front?

Nothing has changed. Actually no new regulations, neither nationally nor internationally, have come into the picture this year. We’re continuing with the same regulations in force and doing the normal procedures to make sure all financial institutions are implementing the Lebanese regulations that were issued and complying with international standards to protect the interests of all.

We’re always following up on any new developments and requirements, and we’re passing the necessary regulations and enforcing them as needed. We believe we’re doing all it takes to be in compliance to protect the Lebanese banking sector, Lebanese individuals, and [the] national interest at large. This has been the stated policy all along, and I think that nobody contests that  the country’s interests come first. All our efforts and compliance enforcement fall under this banner.

[pullquote] Mansour dispelled rumors of new US anti-Hezbollah legislation [/pullquote]

E   There is a central bank regulation requiring each branch of a commercial bank to have a compliance officer. Are banks fully in compliance by hiring specifically for that role or are they assigning those duties to another employee?

The regulation doesn’t go to that extent. The banks either appoint someone from within the branch to do the job or they assign a new person or staff member to perform the duties. But this is a very advanced kind of arrangement that we have imposed, and it’s a very important step to make sure that with the clients there is always someone watching and making sure the procedures are applied. Of course, there are other layers within the banks, such as the central compliance office and internal audit, as well as external audit and the SIC, that all have different procedures of ensuring compliance. I think our system is quite rigorous in this regard.

E   Last year, when the United States implemented its HIFPA legislation, there was a wave of de-risking, with local banks closing accounts. Is there a concern today, with rumors of new American legislation, that there might be more de-risking?

The central bank has a regulation that requires banks to notify the SIC before closing an account along with the justifying reasons. We want to make sure that an action taken by a bank is proper and ensures the rights of its customers. I’m not worried that this is happening because if so [we would’ve heard about it]. We didn’t receive an exceptionally large number of [notifications of] accounts to be closed for whatever reason. It’s just business as usual. There is conscientiousness from everybody because of the rumors, but it has not culminated in to something like de-risking actions.

[pullquote] We believe we’re doing all it takes to be in compliance to protect the Lebanese banking sector, Lebanese individuals, and the national interest at large [/pullquote]

E   Last fall, the International Monetary Fund (IMF) published a survey of banks in the region. With regards to the closure of correspondent relations with American or European banks, the primary reason given was that there was a lack of profitability.

Yes, this was the principal cause, not de-risking Lebanon because of HIFPA. But de-risking is taking place in many areas of the world because of low compliance practices, weak regulations [and] weak jurisdictions that don’t have the right rules, regulations, and enforcement in place. Correspondent banks don’t like to expose themselves, so they de-risk countries, clients or classes of clients. This isn’t something limited to Lebanon.

So, when the IMF is referring to this practice, yes it’s an observed practice in many countries, and some of the reasons could be economic. Other reasons could be for compliance purposes, [whereby] the correspondent banks are visiting their corresponding banks in the countries in which they operate, and they are doing their own due diligence, examination and assessment of the compliance with anti-money laundering and counter-terrorism financing regimes in a certain jurisdiction. And, if they are not satisfied, they might consider it as a source of trouble and would start pulling out, or de-risking such businesses from their portfolios.

E   Do you foresee this becoming an issue for the smaller banks in Lebanon?

For economic reasons maybe, but smaller banks that are keen on maintaining a relationship might ask their correspondent banks why they want to stop the relationship. However good the procedures in the country and at the bank, sometimes a relationship cannot be maintained because of low profitability. These smaller banks – -— because they are keen on having direct correspondence banking relationships — are negotiating with [correspondent] banks to determine the minimum fees they need to generate from an account in order to maintain the relationship. Some are negotiating and paying that minimum to maintain the relationship, this happened last year and in the years before. But, for those smaller banks that do not want to do that either, they’ll solve their transactions through the bigger banks.

E   So small local banks can work through larger ones?

Yes, they can always do that, but then the large banks will be required to perform the due diligence, otherwise it would amount to nesting of a noncompliant relationship — a small bank would open an account with a larger bank, and the latter would be processing the transaction. The correspondent bank wouldn’t know that the transactions are for a third-party bank. It’s the responsibility of the larger local bank to do the due diligence and make sure the transactions are complying as if they are its own transactions and perform enhanced diligence to make sure everything falls into place.

[pullquote] The smaller banks may find it advantageous sometimes to merge with one another [/pullquote]

E   Have the investments in IT solutions and Human Resources that were required in order to satisfy compliance requirements created pressure?

Banks need to have the necessary IT systems and procedures, and they need to have qualified staff to do the job. So yes, this definitely is an added cost that wasn’t part of the formula before.

E   Lower profitability in correspondent relations, combined with higher costs of compliance – do you think that might encourage consolidation?

There are merits to consolidation and that’s an added reason to consolidate. The smaller banks may find it advantageous sometimes to merge with one another, and the compliance requirements are an added reason. Because compliance is not a small cost of operation in any bank. You can see that the compliance function — the compliance staff and officers — at some of the larger banks, four or five years back, numbered less than 10, and now it has multiplied, perhaps many fold; that suggests to you the costs associated with compliance. The smaller banks, because there is a minimum of what needs to be done, may find the cost disadvantageous, but they can’t avoid it. So, that’s another reason that could push them to consolidate.

Jeremy Arbid

Jeremy is Executive's former economics and policy editor.