FATCA Versus Lebanon Bank Secrecy Law
By Bachir El Nakib
Banking secrecy was established in Lebanon by the Banking Secrecy Law 1956. At the time, Lebanon enjoyed political stability and was a model banking services provider among neighbouring countries. Policy makers were motivated by:
- an economic factor, which stemmed from the flow of foreign deposits into the Lebanese banking sector; and
- a political factor, which stemmed from the conviction that the presence of foreign deposits in the banking sector in Lebanon would afford it political stability.
The Banking Secrecy Law binds all financial entities regulated by the Central Bank of Lebanon to absolute secrecy with respect to clients' personal and account-related information, and provides that banking secrecy can be lifted in only very limited circumstances.
However, since the enactment of the Banking Secrecy Law, cross-border banking services have evolved substantially. The banking sector has become a powerful player in cross-border transactions and a new era of global monitoring and supervision has dawned, in which the sector is continually fighting against the criminal and unlawful use of the worldwide banking network.
The Lebanese authorities have managed to resist pressure from the global community to replace the Banking Secrecy Law. However, new laws and regulations have been gradually enacted and special commissions have been established (ie, the Special Investigation Commission and the Banking Control Commission) to combat money laundering, tax evasion and other forms of criminal activity.
A new challenge has now emerged. As of July 2014, financial institutions (including Lebanese banks, financial institutions, investment banks, private banks, brokerage banks and any other institutions providing banking or financial services) must comply with the US Foreign Account Tax Compliance Act (FATCA).
Supervisory authorities and anti-money laundering
The banking system in Lebanon is closely monitored by the Central Bank of Lebanon, the Special Investigation Commission and the Banking Control Commission. These three independent institutions are vested with broad powers to tackle money laundering, tax evasion and other forms of criminal activity, among other things. In addition, they play an active role in ensuring compliance by Lebanese banks with the relevant laws and Central Bank of Lebanon circulars.
Central Bank of Lebanon
The Central Bank of Lebanon has issued several decisions imposing cautious measures and anti-money laundering obligations on banks with a view to preventing reputational risk related to terrorism financing. One example is Central Bank of Lebanon Circular 128/2013, requiring all banks operating in Lebanon to set up an in-house compliance department, including a unit for complying with anti-money laundering measures and counteracting the financing of terrorism.
The main role of the in-house compliance department is to implement compliance procedures to:
- verify compliance with the laws, regulations, procedures and directives issued by the Central Bank of Lebanon, the Banking Control Commission, the Special Investigation Commission and any other relevant body; and
- control, fight and prevent money laundering and terrorism financing, based on Article 11 of Central Bank of Lebanon Basic Circular 7818/2001.
The Special Investigation Commission
In 2001 the legislature enacted the comprehensive Anti-money Laundering Law (318/2001) in an effort to comply with international anti-money laundering standards while respecting the principle of banking secrecy. The Anti-money Laundering Law provides for increased reporting obligations and the establishment of the Special Investigation Commission, whose mandate includes investigating suspected money-laundering offences and deciding when to lift banking secrecy.
The Central Bank of Lebanon has presented a proposal to amend the Anti-money Laundering Law to include tax evasion as a money-laundering offence, allowing banking secrecy to be lifted. The amendment was approved by the Council of Ministers and is awaiting parliamentary approval. In any case, the Anti-money Laundering Law allows waivers of secrecy if a client is suspected of embezzling public funds. It could be argued that such embezzlement qualifies as tax evasion and therefore the amendment is ideal, but not strictly necessary.
The Banking Control Commission
The function of the Banking Control Commission is to supervise banks, financial institutions, money dealers, brokerage firms and leasing companies. If the commission suspects that a Lebanese bank has not implemented the laws and circulars issued by the Central Bank of Lebanon (including the Banking Secrecy Law), it may impose corrective measures.
The Central Bank of Lebanon and the Association of Banks in Lebanon seem inclined to adopt a constructive approach towards a well-orchestrated implementation of FATCA in accordance with Lebanese law, without compromising on banking secrecy.
In November 2013 Central Bank of Lebanon Governor Riad Salamé announced that the Lebanese government and the Central Bank of Lebanon would not join the intergovernmental agreement on FATCA compliance, and that each Lebanese bank would have to join the intergovernmental agreement on an individual basis. The Special Investigation Commission will help banks to overcome potential disclosure problems in the absence of ratification of the relevant treaty with the United States.
On another occasion, Salamé confirmed that the implementation of FATCA would not compromise the Banking Secrecy Law. He noted that if a US citizen client does not comply with a bank's request for information, the client could be referred to the Special Investigation Commission.
Many Lebanese banks have complained that compliance with FATCA imposes a costly screening, implementation and compliance process infrastructure in order to identify and report information about their US clients to the US Internal Revenue Service (IRS).
Accordingly, Lebanese banks are asking US citizen clients to sign special waivers allowing banks to report on their accounts to the IRS. If a US citizen refuses to execute such waiver, the bank may inform the IRS of this in line with FATCA stipulations.
The Lebanese Banking Secrecy Law of 1956
On September 3, 1956, the Lebanese Secrecy Law was promulgated. This law has constituted a major achievement towards increasing confidence in the Lebanese banking system and encouraging foreign capital to choose Lebanon as a refuge. Moreover, it has been one of the major factors that have been contributing toward the growth of the banking sector in Lebanon, and making Lebanon a major financial and monetary center in the Middle East.
Because of the importance of this law, in the following we will highlight on its major features: its nature, its subjects, its prohibition, its exemptions and the sanctions imposed in case of its violation.
A. The Nature of the Banking Secrecy
The Lebanese Secrecy Law did not create secrecy as a privilege to be enjoyed by banks but as a duty banks must observe, not just for the benefit of the banking profession, but more specifically for the interest of the public and of those who deal with banks.
This duty is imposed by the legislator who can enlarge or reduce its scope taking into consideration the interest of the general public and of the depositors. By this law anonymity is secured, a code number deposit account can be opened for a client and a safe can be leased for a client.
B. Who is Subject to this Law?
1- All banks in operation in Lebanon, whether Lebanese or branches of foreign banks. (Art. 1)
2- Directors and employees of these banks, and any person who, by virtue of his job, has knowledge of any information concerning the bank’s books, transactions or correspondence. (Art. 2)
C. The Prohibition
All the persons referred to in Article 2 are prohibited from revealing any information concerning the names of clients, their funds and related matters to any person or authorities.
D. Exemptions to the Prohibition
Information concerning names of clients, their funds and related matters may be revealed in cases of:
1- A written permission by the concerned client or his heirs.
2- A person declared bankrupt.
3- A legal action between a bank and its client.
4- An exchange of information concerning indebted accounts between banks for reason of securing their investments.
5- Actions of illegal enrichment upon the request of the judicial authorities.
Sanctions for the Violation of the Banking Secrecy Law
1.Violation of banking secrecy is considered as a misdemeanor punished under the Criminal Code by three months to one year imprisonment.
2. A person charged for this violation is prohibited from performing the profession of a banker or being a bank’s employee. This prohibition applies to both intentional (in which case it is a criminal infraction) and unintentional (sanctioned under common law) violation of banking secrecy. It is permanent and does not stop in case of rehabilitation nor does it disappear by a lapse of time.