Lebanon Report: Banking and Securities Vs. AML/CFT
Reviewed/edited by Bachir El Nakib, Senior Consultant, Compliance Alert LLC
Thanks to Lebanon Central Bank “Banque Du Liban(BDL)”, today, the Lebanese economy rely on its stable and developed banking and financial sector, which is monitored by both the:
v The Banque du Liban (the BDL) and
v The Capital Markets Authority (the CMA).
Lebanon is one of the few regional countries with a relatively stable banking and financial sector that is still financing the government through purchases of treasury bills. This stability is in large part due to the cautious and wise management of the BDL’s Governor policy. The CMA seems to be continuing in the footsteps of the BDL in this respect. Despite the global financial crisis in 2009, and the regional political crises that led to further economic uncertainty and instability, the Lebanese economy demonstrated remarkable resilience to the crisis.
The Banque du Liban
The BDL was established in 1963 by the Code of Money and Credit and started operating on April 1, 1964. It is a legal public entity that enjoys financial and administrative autonomy from the government. The BDL is entrusted with the general mission of safeguarding the national currency to ensure a basis for sustained social and economic growth. This mission consists, inter alia, in safeguarding the soundness of the banking sector, the development of money and financial markets, and the development and regulation of the clearing and settlement operations relative to different financial and payment instruments and marketable bonds.
Conferring with the Association of Banks (whose membership consists of all Lebanon's banks), the BDL issues circulars and decisions that govern, notably, banks and financial institutions. The BDL also ensures that the regulations of the banking sector are continuously updated to reflect international and national developments and regularly issues circulars and decisions in this respect.
The Capital Markets Authority
The CMA is an independent authority that was established by virtue of Law no. 161, dated August 25, 2011 (Law 161). Law 161 notably provides for the general guidelines and requirements in relation to capital markets and financial operations in the Lebanese jurisdiction. The CMA's main purpose is the regulation and supervision of the Lebanese capital markets in lieu of the BDL. The duties of the CMA notably consist of ensuring the safe investment in financial instruments, and encouraging the financial markets in Lebanon by coordinating with the concerned sectors.
The CMA is composed of a board, a general secretary, a control unit for the financial markets, and a sanctions committee. For the purpose of undertaking its functions, the CMA coordinates and cooperates with similar authorities, with the BDL and any other concerned authority or institution in Lebanon or outside Lebanon. The management of the CMA is undertaken by a board presided by the governor of the BDL. The main prerogatives of the board of the CMA is the encouragement and protection of investments, as well as the implementation of general regulations for the financial markets. The board of the CMA notably grants
Ø Licenses for the incorporation of collective investment schemes and financial intermediation institutions, and
Ø Prior-authorization for the marketing and distribution of financial products on the Lebanon market.
Law 161 provides for the creation of a special capital markets court, known as the special Capital Markets' Court, which would settle any dispute or conflict arising between investors and promoters of financial instruments. The CMA has issued to date several decisions regarding notably (and not limited to):
Ø the disclosure policies that should be adopted by certain companies,
Ø crowd funding regulations,
Ø compliance (including KYC requirements and forms) and audit units’ obligations,
Ø the licensing and authorization requirements notably regarding financial intermediary institutions, financial instruments’ marketing and distribution, collective investment funds and collective Islamic investment funds,
Ø the requirements regarding individuals undertaking certain licensed activities, and
Ø the prohibition of price manipulation relating to financial instruments. The decisions issued by the CMA have replaced the circulars and decisions previously issued by the BDL and which dealt with the same matters.
With respect to the marketing and distribution of financial products on the Lebanese market, the CMA has adopted the same approach
previously adopted by the BDL. Hence, the CMA is in principle, flexible and open to the distribution of sophisticated and innovative financial
products, instruments and securities in Lebanon, provided that this is done in compliance with its regulatory requirements.
Although the CMA is maintaining an open mind regarding the transacting and distribution of new financial instruments and products in Lebanon, it is also showing a sound and risk-averse approach to regulation, most notably as may be evidenced by
Ø its Decision 12 (as amended in June 2015) regarding derivative operations, which imposes specific conditions on financial intermediaries operating in Lebanon and trading on their own accounts in derivatives and certain other structured products and securities - such measures continue to allow the Lebanese banking and capital markets sector to remain relatively healthy to date, despite the global financial turmoil - or
Ø its Decision 22 regarding the prohibition of price manipulation relating to financial instruments that notably prohibits any person, whether an individual or a legal entity, including any institution that is licensed to undertake operations specific to financial instruments, from short-selling any of the Lebanese financial instruments unless the instruments that are intended to be sold are owned by the client on the date of the sale.
Furthermore, the CMA has issued, on 10 November 2016, two new regulations, namely Series 3000 regarding Business Conduct Regulation in Capital Markets (Series 3000) and Series 4000 regarding Market Conduct Regulation in Capital Markets (Series 4000).
Series 3000 applies to the securities business activities of approved institutions (it does not apply to banking or credit activities regulated by the BDL); approved institutions are institutions or entities that are licensed by the CMA to carry on securities business in Lebanon under the licensing and registration regulation. The main purpose of Series 3000 is to:
Ø establish the rules and code of conduct that an approved institution must comply with in carrying out securities business and dealing with clients,
Ø define the policies, procedures, systems and controls that an approved institution must establish, implement and keep up to date,
Ø establish the rules on handling of client money and client assets by an approved institution,
Ø set out the requirements to notify or report certain matters to the CMA, and
Ø establish the rules and code of conduct that a registered person must comply with in carrying out his or her responsibilities at an approved institution.
Series 4000 applies to trading in, and conduct related to dealing in, traded securities. The main purpose of Series 4000 is to:
Ø regulate conduct in the securities markets,
Ø set out the details of the prohibitions on insider trading and market manipulation, and
Ø set out the details of approved institutions’ obligations in carrying out transactions in the market.
Regulatory Supervision: Banking Control Commission of Lebanon (BCCL)
Despite the inception of the CMA, the BDL continues to grant licences for the establishment of banks (and branches of foreign banks), financial institutions, exchange institutions (or money dealers), leasing companies, in Lebanon, and it is notably the BCCL that controls and supervises these institutions.
The BCCL is an independent regulatory supervision body 1967, the BCCL's function is to supervise banks, financial institutions, exchange institutions (or money dealers), brokerage firms and leasing companies. It performs its supervisory functions as an independent body in close coordination with the governor of the BDL.
The supervision team evaluates the financial soundness of regulated entities, notably through on-site and off-site reviews that include the analysis of financial statements and the monitoring of the implementation by these institutions of notably (but not limited to) the provisions of the Lebanese Code of Money and Credit, the BDL's international accounting standards, the BDL’s regulations and the BCCL's circulars and instructions.
The BCCL can also impose enforcements and remedial measures on banking institutions in breach.
Role of the Capital Markets Control Unit (CMCU)
With respect to the CMA, although the board of the CMA grants licenses for the establishment of financial intermediation institutions and for collective investments funds in Lebanon, the Capital Markets Control Unit (the “CMCU”) controls the capital markets and hence these institutions. The CMCU benefits from operational autonomy and its expenses are fully covered by the CMA. It has the power to, inter alia, monitor compliance with implementation rules and all other texts issued under Law 161, and to perform compliance investigations and collect evidence for detecting violations detrimental to a sound capital markets trading.
The Custodian and Clearing Centre of Financial Instruments (Midclear)
Midclear S.A.L, is the Custodian and Clearing Centre of financial instruments for Lebanon and the Middle East, which was established by Law no. 139 dated October 26, 1999 (Law 139), to ensure the efficiency and effectiveness of the operations in this market, and to provide safeguards for members, traders and investors, to maintain the confidence of Lebanese, regional and international investors in the Lebanese market. Midclear was established to address a variety of operational and risk issues related to the safekeeping and physical settlement of financial instruments and was appointed Central Depository for Lebanon in 1999, and Central Registrar for Lebanese banks' shares in 2001. The main functions of Midclear include the safekeeping of securities for participants; the immobilisation of physical securities; book-entry clearing and settlement of transactions in a secure and cost effective environment; accurate, timely and cost effective means of collecting, distributing and accounting for dividend and interest payments; maintaining shareholders registers; and administering mutual funds.
With the implementation of CMA Law 161, Midclear is now considered as duly authorized by the CMA to operate as custodian for securities, and as a clearing and settlement center for financial settlement operations, according to the provisions of Law 139. Furthermore, Midclear should provide the CMA with audited and organized financial statements according to the international audit standards and the conditions determined by the CMA, noting that the latter could impose on Midclear to present reports provided for in specific regulations.
The Beirut Stock Exchange (BSE)
The Beirut Stock Exchange (the BSE), is a public institution ruled by the provisions of the BSE Bylaws (notably in Decree 7667, dated 16 December 1995). The BSE has witnessed renewed interest from foreign investors, particularly from the United States and Europe. In December 2006, it successfully implemented a remote trading system and, using this system, authorised brokers can now handle the demands of their customers directly from their offices. An agreement was signed by the BSE and the National Technology Group, which aims to give institutional and retail investors greater flexibility and more confidence to make informed investment decisions in the BSE.
Furthermore, the issuance of Law 161 introduced new rules concerning the regulation of stock exchanges. As a result, stock exchanges will be established and operated by Lebanese joint-stock companies the incorporation of which is authorised by the board of the CMA, in accordance with special regulations that it will put in place and in which it will determine the conditions of the stock exchange’s establishment, the conditions of appointment of the stock exchange’s board members and of their acceptance of their mandate, in addition to the procedures and rules in compliance with which these companies must operate.
Banking Secrecy Law (BSL) Vs. AML/CTF
Banking secrecy remains one of the cornerstones and defining features of the Lebanese banking sector. Recent developments have included a reconciliation of this fundamental principle of the Lebanese banking sector with the need to fight money laundering and the financing of illicit activities. Banks incorporated in Lebanon and branches of foreign banks are subject to the obligation of banking secrecy, as regulated by the Banking Secrecy Law.
As per Lebanon BS Law, banks, their officers and their employees are bound to absolute secrecy in favour of their clients and may not disclose to any party the names of their clients or any information regarding their accounts. This covers private individuals, governmental, administrative, military or judicial authorities. The only instances in which a bank may disclose such information is with the client's written authorisation (or, if deceased, the client's heirs or legatees), when a client is declared bankrupt, or in the event of a dispute between the client and the bank resulting from their banking relations.
Exchange of Information for Tax Purposes (EITP)
The Law No. 55 regarding the exchange of information for tax purposes was recently issued on 27 October 2016 (Law 55) to notably reflect “CRS) or international tax reporting standards. In brief, the purpose of this Law 55 is:
Ø applying and implementing the provisions of any international agreement or treaty duly concluded and signed that provides for the exchange of information for tax purposes, including the automatic exchange of information between Lebanon and a foreign state, and
Ø making it mandatory to remit the information requested by virtue of the aforementioned agreement or treaty, noting that certain conditions regarding disclosure apply depending on whether the requested information is covered by the Banking Secrecy Law or not.
While Law 161 provides that any person that is or was part of the CMA or a company or collective investment fund operating in the Lebanese financial markets must maintain secrecy of any information or data that he/she becomes aware of by virtue of his/her position or work and relating not only to the investors in these markets but also to the companies and entities that are concerned with this investment. Without prejudice to the provisions of the Banking Secrecy Law, this obligation may not be invoked regarding requests that are issued by any of the board of the CMA, the CMCU, the sanctions committee, the Capital Markets Court or the criminal courts and that are addressed to the concerned parties through the chairman of the board of the CMA; this obligation may also not be invoked in the implementation of the provisions of Law 161 and/or any of its implementation regulations.
Fighting Money Laundering and Terrorist Financing (AML/CFT)
While taking into account the Banking Secrecy Law, the Lebanese legislator enacted on 24 November 2015 Law No. 44 Fighting Money Laundering and Terrorist Financing (AML/CFT) (Law 44), which amended and replaced Law No. 318 dated April 20, 2001 (as amended in 2003). Law 44 reconciles the principles of banking secrecy with the need to remain compliant with best current practice and with international anti-money laundering standards. Hence, institutions that are subject to the provisions of the Banking Secrecy Law must control their operations with clients to avoid involvement in potential money laundering operations.
Banks, financial institutions, financial leasing companies, institutions that issue and promote credit cards or debit cards, institutions that perform electronic money transfers, exchange institutions, institutions that undertake financial intermediation, collective investment schemes, and any institution that requires a license or that is supervised by the BDL, must comply notably with the following obligations:
Ø apply due diligence measures on permanent customers (whether such customers are physical persons, legal entities, or specific legal structures), in order to verify their identity based on reliable documents, information or data,
Ø apply due diligence measures on occasional customers in order to verify their identity, in the event the amount of the operation or the series of operations exceeds the amount specified by the BDL,
Ø identify the economic right owner and take the necessary steps to verify his/her identity, based on reliable documents, information or data,
Ø keep copies of the documents relating to all the transactions and to the information or data or copies of the documents relating to the identity of the concerned parties for a period of at least 5 years following the completion of the operation or the termination of the relationship, whichever is longer,
Ø continuously monitor and review the business relationship,
Ø apply the measures specified in the aforementioned items (i) to (v), to both permanent and occasional customers, when a doubt arises regarding the accuracy or adequacy of the information provided relating to the identification of said permanent and occasional customers, or when a doubt arises regarding money laundering or terrorist financing, regardless of any thresholds or exceptions that would limit the application of such measures, and
Ø take into account the indicators that point to the possibility of there being money laundering or terrorist financing operations, and the due diligence and precaution principles, in order to uncover suspicious operations.
Lebanon FIU or The Special Investigation Commission (the SIC) was established at the BDL. The SIC is an independent legal entity, having a judicial status, and is not subject, in the exercise of its activities, to the BDL's authority. The mission of the SIC includes:
Ø receiving suspicious transaction reports,
Ø investigating operations that are suspected to be money-laundering or terrorist financing crimes and taking the relevant appropriate decisions in respect of such crimes, notably the decision to temporarily, and by way of precaution, freeze the suspicious accounts and/or transactions, for specified period of times,
Ø verifying that some of the concerned parties subject to the provisions of Law 44 are complying with the obligations stipulated in Law 44 and in the regulations issued in relation thereto, and
Ø issuing recommendations to all concerned parties. The SIC also has the exclusive authority to take the following decisions, further to undertaking the necessary verifications and analysis:
- The permanent freeze of the accounts and/or concerned operations and/or lifting of the banking secrecy for the benefit notably of the competent judicial authorities with respect to the accounts and/or operations regarding which there is a suspicion that they relate to money-laundering or terrorist financing; and
- Ensuring the traceability of the suspicious accounts.
The BDL also issued on May 18, 2001, Decision No. 7818 regarding the Control of Financial and Banking Operations for AML/CFT addressed to banks and financial institutions, as amended, which renders effective the Regulations for the Control of Financial and Banking Operations for Fighting Money Laundering and Terrorist Financing (the Regulations); said Regulations notably provide that banks and financial institutions must undertake control measures to avoid involvement in transactions that might be covering up money laundering operations, and adopt clear procedures for opening accounts, and apply due diligence measures such as:
Ø verifying the identity of all their permanent and occasional clients, whether residents or non-residents,
Ø determining the true beneficiary of transactions carried out through agents, trustees or secret accounts;
Ø determining the purpose and the nature of the relationship or of the account opening, the economic right owner, and the source of funds,
Ø keeping copies of all transactions including clients' documentation for a period of at least five years.
In addition, the Regulations further require the establishment of specialized administrative units and bodies within the banks and financial institutions to ensure compliance notably with applicable Lebanese laws and regulations regarding AML/CFT procedures, KYC processes, and so forth.
Each bank and financial institution operating in Lebanon must establish an:
o AML/CFT board committee,
o AML/CFT compliance unit, and
o AML/CFT branch officer in each of the bank’s or financial institution’s branches.
The Regulations also notably impose several restrictions in the relations of banks with exchange institutions, notably by imposing conditions on banks when accepting cheques drawn on them from any exchange institution, or when implementing a banking operation upon the request of an exchange institution for the benefit of its clients, or when receiving a request to implement a transfer resulting from an exchange operation.
Furthermore, BDL Decision No. 10965 dated April 5, 2012, regarding the relationship between banks and financial institutions with their correspondents (Decision 10965), stresses on the necessity of implementing the Regulations, particularly with respect to customers who request the conduct of cross-border operations by way of correspondent banks or financial institutions, notably by
- adopting a risk based approach, and vetting the identity of both customers and economic right owner,
- setting procedures for continuously monitoring their accounts and operations, and
- notifying the SIC of any suspected operation. Decision 10965 also requires from banks and financial institutions that they deal with their correspondents abroad in conformity with the laws, regulations, procedures, sanctions and restrictions adopted by international legal organizations or by the sovereign authorities in the correspondents’ home countries.
In July 2006, the BDL issued Decision No. 9382 to ensure that Lebanese banks complied with the basic principles of corporate governance (notably corporate values, transparency, accountability of board members, evaluation of the bank's corporate governance policies, and control of the bank's implementation thereof).
Another development in corporate governance was a September 2007 decision by the BDL that set out rules related to corporate governance applicable to Lebanese Islamic banks. One of its principal rules is the obligation for Islamic banks to create a "corporate governance unit" that must be independent from the bank's operational management and must not have executive prerogatives, to be able to ensure the development and application of sound internal corporate governance rules.
On May 17, 2010, the BDL issued Decision No. 10439 addressed to banks, financial institutions and leasing companies that operate in Lebanon. It imposes on these institutions the obligation to include certain mandatory provisions in their loan agreements and their advertising materials to increase transparency in the loans given to clients.
Further developments were also introduced by the issuance of Intermediary Decision No. 10708 dated April 21, 2011 (amending aforementioned BDL Decision No. 9382 on corporate governance), that provides for new corporate governance obligations on banks operating in Lebanon. The said banks shall abide by the principles issued or to be issued by the International Basel Committee relating to regular cooperation on banking supervisory matters. Banks are required to prepare a corporate governance guide that will be published on their websites and in their yearly reports; such guide should be provided to the BCCL.
On a related note, the BDL issued Decision No. 11947 dated February 12, 2015, regarding the principles of carrying out banking and financial operations with customers whereby banks and financial institutions operating in Lebanon are now, in relation to the provision of banking and financial services and products of all kinds, under the obligation to educate their customers, raise their awareness, and explain to them their rights, by spreading awareness and education programs in the banks' and financial institutions’ head offices and branches, on their websites and by any other means of communication with customers.
Furthermore, all banks and financial institutions operating in Lebanon must prepare a policy regarding "the principles of undertaking banking and financial operations with customers" to be approved by the board of directors, and put in place the related procedures and required IT systems, in order to ensure inter alia,
Ø dealing with customers in a fair, equitable and professional manner,
Ø spreading among their employees, particularly those who deal directly with customers, the culture of transparent and fair dealings with customers, through training, capacity building, and enhancement of professional experience,
Ø providing customers with accurate, clear, and ample key information on the conditions, benefits and risks of products or services, informing them of any change in these conditions, and replying with high professionalism, accuracy and speed to any inquiry made by a customer.
Banks and financial institutions operating in Lebanon must also establish a unit in charge of implementing the policy relating to "the principles of undertaking banking and financial operations with customers". This unit shall be affiliated to the general manager, shall not be involved in the execution of operations, and shall be staffed with the necessary human and technical resources to perform its tasks.
Moreover, on August 14, 2013, the CMA issued Decision 4 (Decision 4) and Decision 5 (Decision 5) regarding respectively compliance and internal audit, which decisions apply to the following three categories of companies (the Relevant Companies):
1) Joint-stock companies working in Lebanon and the shares of which are traded on organized financial markets;
2) Joint-stock companies working in Lebanon and the shares of which may be listed in the regulated or unregulated (OTC) market, the shareholders of which exceed 20, and the total earnings of which vary between thirty billion and one hundred billion Lebanese Pounds; and
3) Joint-stock companies working in Lebanon and the shares of which may be listed in the regulated or unregulated (OTC) market, the shareholders of which exceed 20, and the total earnings of which exceed 100 billion Lebanese pounds.
The provisions of these decisions do not apply to banks, financial institutions and financial brokerage institutions operating in Lebanon.
Decision 4 imposes on the Relevant Companies the establishment of a compliance department to ensure the implementation of the applicable procedures, laws and regulations, in order to ensure compliance with the best administrative practices that ensure the protection of the shareholders’ and stakeholders' rights.
Decision 5 imposes on the Relevant Companies the establishment of a framework of internal control that ensures an independent and objective evaluation of the work of all the departments and units of the company and their activities, in the aim of increasing the effectiveness and the efficiency of control and risk management in order to guarantee the protection of the shareholders' and stakeholders' rights. Moreover, Decision 5 imposes on the Relevant Companies the establishment of an internal audit department composed of one or more persons depending on the size of the company and the variety and diversification of its activities and operations.
Furthermore, Series 3000 and Series 4000 also address issues relating to corporate governance.
Weathering the crises
The attractiveness of the Lebanese banking and financial sector ultimately resides in its ability to weather crisis after crisis, while maintaining a constant rate of development and evolution. Indeed, the BDL and the CMA regularly issue new regulations and decisions that aim at perfecting the system.
For instance, the regulations relating to the transfer and acquisition of shares in Lebanese banks and/or financial institutions have been amended. The rules now impose new requirements on the owners of shares in Lebanese banks and/or financial institutions to identify properly the true beneficial owners of such shares.
Furthermore, the BDL issued Intermediary Decision No. 12194 on 29 February 2016, which notably provides that banks and financial institutions are prohibited from undertaking any operation of any nature whatsoever, banking or non-banking or financial or non-financial, whether recorded in or off-balance sheet, with companies or mutual funds the parts or shares of which are totally or partially issued in bearer form or owned, whether directly or indirectly, by companies or mutual funds the parts or shares of which are totally or partially issued in bearer form. In the same context, this was later followed by the issuance of Law No. 75 dated 27 October 2016, regarding the cancellation of bearer shares and shares to order in joint-stock companies; this law provides, inter alia, that
Ø it is prohibited for any joint-stock company in Lebanon to issue new bearer shares or shares to order, as of the date of issuance of this law, and
Ø any joint-stock company in Lebanon that has bearer shares or shares to order must convert such shares to registered shares within a specific period of time, in accordance with the provisions of said law.
Other developments relating to Islamic finance and Islamic banks have also been enacted to allow for the increasing role of Islamic finance in the region. The fact that the CMA started its activities and is periodically issuing new decisions is also leading, and will certainly continue to lead, to important developments on many levels. Not only is Lebanon's banking and financial sector unique in its attractive features and its resilience and stability despite numerous periods of political unrest, it has also proven its ability to constantly evolve in the aim of adapting to national, regional and international trends and requirements.