A fine levied on Bank of Beirut UK in March came as a reminder of the difficulties Lebanese banks and their foreign units are facing, in a global environment of increased regulatory scrutiny. London’s Financial Conduct Authority (FCA) said that between 2011 and 2013 the bank had “repeatedly provided the regulator with misleading information”, after being told to do more to ensure it was not being used for financial crimes.
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At just £2.1 million, the fine is minuscule compared to the billion dollar-plus fines the US has handed European banks for poor money laundering controls or sanctions breaking. However, in addition to the fine, the FCA also banned the unit of Bank of Beirut – Lebanon’s sixth biggest bank, and regarded in Beirut’s banking community as particularly strong in trade finance – from booking new clients in “high-risk jurisdictions” for just over four months.
The FCA defined “high-risk” as any country scoring 60 or less in the Corruption Perceptions Index published by Berlin nonprofit group Transparency International. That includes countries where Bank of Beirut has offices, including Ghana, Iraq, Libya and Nigeria – as well as the group’s home country, Lebanon itself.
Bank of Beirut’s UK subsidiary said it had not deliberately broken any FCA principles, and it did not profit or cause loss to its customers or counterparties in doing so. It noted the FCA had not found an actual breach of its control and risk management systems. Even so, it said since 2013 it has “significantly enhanced the resources in its compliance and risk teams” – and that it had hired a new head of risk and compliance, and replaced the chief executive.
“Compliance with its regulatory obligations is a key area of focus for the bank going forward,” the bank stated.
The news follows a 2011 debacle in which the US treasury said Beirut-based Lebanese Canadian Bank (LCB) had helped launder hundreds of millions of dollars for a drug trafficking network between South America and the Middle East and Europe, via West Africa – a network which also helped finance the Lebanese Shia organization Hizbollah, a terrorist group, according to the US.
That episode led to LCB’s closure and the sale of most its assets to Société Générale’s Lebanese unit. Although LCB settled in the US, the head of the Lebanese central bank’s anti-money laundering unit, Abdul Hafiz Mansour, says there were no convictions in Lebanon, due to a lack of evidence.
Nevertheless, since then, Mansour says the Lebanese central bank has slapped new compliance requirements on banks, such as making them observe not just local requirements but also requirements their correspondent must observe, including sanctions lists. Lebanese banks’ compliance burdens have since rocketed, meaning “an important additional cost”, says Freddie Baz, chief financial officer at Audi.
The banks themselves seem to recognize there is little choice. “We are a dollarized economy; we need access to the US financial system,” says Nassib Ghobril, chief economist at Byblos Bank.
“We can’t afford to be left like Russia, Argentina or Iran. We rely on our diaspora,” says Marwan Mikhael, Blominvest’s head of research.
“Our intention is to respect international norms,” says Riad Salamé, Lebanon’s central bank governor. “We’re serious about it. We’re implementing laws and regulations for that. The banks will have to abide by these new international criteria for their operations, and the market will decide which bank can do it, and which bank cannot do it.”
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Audi, the biggest Lebanese bank, now has 46 compliance officers in Lebanon and an additional 62 outside Lebanon. Chahdan Jebeyli, Audi’s head of compliance, says that number will now increase by 80 people due to a central bank circular last year requiring a compliance officer in every bank branch in Lebanon. A Blominvest research note in December says such costs may make it harder for smaller banks to survive on their own, making mergers more attractive.
In a speech in Beirut in 2013, Daniel Glaser, assistant secretary for terrorist financing at the US treasury, recognized that “the Lebanese financial system is a critical asset to the people of Lebanon”. But an expansion strategy in countries perceived as equally risky or even riskier than Lebanon, such as west African nations with big Lebanese business communities, Iraq, and eventually Syria, are crucial elements of the sector’s growth potential.
Chris Finney, a former insider at the UK’s Financial Services Authority, and now a partner at US law firm Cooley, says expansion in countries Western states deem high risk will mean Lebanese banks will inevitably face bigger regulatory burdens. “The UK and European perspective is that if you have branches or a head office outside Europe or the US and Canada, the risk from money laundering and terrorist financing can be assumed to be higher,” he says.
For Finney, one danger is that even Lebanese banks deem it no longer worthwhile doing business in places like Iraq and Africa – countries in urgent need of banking services. “It’s making it harder for the ordinary guy to go about his business,” he says. “That could mean regulators could be pushing people back into poverty, and into precisely the kinds of activity they are trying to guard against.”
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Local firms are using the experience of doing business in acute political volatility for the next stage of their international expansion. Braving coups, corruption and violence, banks are expanding into some hair-raising countries.