Compliance with international regulation on AML/CFT: the case of banks in Lebanon

Author:Wassim Shahin
Position:School of Business, Lebanese American University, Byblos, Lebanon

Purpose – The purpose of this paper is to highlight and analyze the experience of banks operating in Lebanon in their compliance with international regulation on anti-money laundering and the counter-financing of terrorism (AML/CFT). The paper addresses the compliance policies by presenting a case study of the experience of the Lebanese banking sector in achieving a global anti-money... (see full summary)

I Introduction

The present article which is motivated by the presentation in the session entitled “Fraud and abuse – the new players in town” in the Thirtieth International Symposium on Economic Crime at the University of Cambridge, 2012, reflects the compliance with international regulation on anti-money laundering and the counter-financing of terrorism (AML/CFT) by banks operating in Lebanon. The literature on AML/CFT takes three directions. First, countries are to abide by the recommendations of the international body in charge of regulation namely the Financial Action Task Force ( FATF, n.d. ) on the laundering of money. This body has been in operation since 1990 coming up with 40+9 recommendations and 25 criteria emanating from these recommendations1. 23 countries not fulfilling these criteria were initially listed as non-cooperative in 2000-20012. Currently, the recommendations have been revised and reduced to 40 in number with countries not abiding by them (currently 42 countries) listed as ones with AML/CFT deficiencies3. The second direction is through cooperation among countries in the form of mutual agreements and assistance and the signing and acceding of treaties developed by various conventions. The third direction is through personal initiatives of individual countries to insulate their banking systems from the abuse of ill-gotten money in the spirit of achieving not only AML but also reverse money laundering. Whereas the first aims at preventing dirty money from becoming clean again, the second aims at preventing clean money from turning dirty at the outset necessitating proper usage of funds by banks.

Lebanon has been achieving its AML/CFT initiatives on all three fronts by following a combination of all three directions. The aim of this paper is to address these initiatives to present a case study of how a small open economy with a free market oriented banking sector can through compliance with international rules, proper regulations and personal initiatives in the global fight for AML/CFT achieve an AML strategy. I start in Section II by analyzing the growth of deposits in banks operating in Lebanon, citing the sources of this growth and highlighting the uses of funds. Data analysis shows a trend in deposit increase since the end of the Lebanese strife in 1993. Section III uses a chronological approach to emphasize the compliance of the Lebanese banking sector and the domestic regulatory body with international initiatives aimed at curtailing and combatting money laundering and the financing of terrorism. It presents evidence on the effective AML domestic initiatives especially over the last decade and sheds light on the positive international regulatory assessment of these initiatives as well as the favorable view of the Lebanese banking sector. Section IV discusses the current FATF initiatives and the latest state of affairs in the international regulation and sanction attempts to curtail money laundering and the financing of terrorism. In this section, I highlight and discuss the current banking attempts in Lebanon to comply with all international initiatives and sanctions especially ones developed in 2011-2012 to prevent the abuse of the banking sector by ill-gotten money. The last section concludes with remarks on policy implications.

II Deposit and loan growth

Deposits in the Lebanese banking sector witnessed continuous growth since 1993 after the end of the civil strife. As Figure 1 shows, deposits grew by 215 percent in the first 11 years of this century (subject to a stable exchange rate) with the growth spreading evenly across various years. Specifically, casual empiricism shows a growth of 14.55 percent in 2003 as opposed to 15.58 percent in 2008, and 12.55 percent in 2004 in comparison to 10.23 percent in 2007 and 12.10 percent in 2010. Only 2009 reflected a deviation from other years with a growth of 23 percent due to the positive impact of the financial crisis of this period on the Lebanese banking sector and the Lebanese economy that created a safe haven for non-resident Lebanese funds flowing out of the world embattled economies. Additionally, the sources of deposit growth have historically been, to a large extent, remittances of Lebanese non-residents to the homeland as there is a wide social and economic network between Lebanon's Diaspora and Lebanese residents. This network impacts the performance of the Lebanese economy and the growth of deposits at banks. Lebanon has a huge and diversified Diaspora, with the number of Lebanese residing abroad much exceeding the local population. There is as such the Gulf and Arabian Peninsula community, the West African emigrants, The Latin America group, and the emigrants to the industrialized New World in the USA, Canada and Australia. These communities have a genuine business abroad. A very large population of professional Lebanese work in the main regional and international commercial and financial centers with thousands being very successful in most fields among which finance and banking, marketing and advertising, commerce, legal and consulting services. All these communities have a good reputation in their host countries and enjoy a distinguished vitality and efficiency and thus contribute to the economic, financial, social and cultural activities of those countries. They are also a main source of financial inflows and remittances to their families, due to the important social and economic bounds with the home land, or to their own accounts, as they still maintain assets and equity and hope to return sometime in the future or at retirement. The inflow of steady and occasional funds and remittances is channeled through banks to finance consumption, or financial and real assets investment, or to start up a business or support the expansion of an existing one. When times are more risky at home, funds will flow out of the country; when times are rosy at home or risky overseas, assets will flow into Lebanon.

This largely explains the acceleration and deceleration in the...

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