Lebanese banking secrecy, relic of a decaying liberal model

Lebanese banking secrecy, once considered a blessing for the country’s growth, has turned against a Lebanon now in crisis. Reformed several times to comply with international standards, banking secrecy has lost its scope without disappearing. The abolition of this legislation called for during the 2019 revolt to end the practices of political leaders accused of illicit enrichment faces fierce opposition. Despite the corruption it covers and the tax revenues it hinders, the bankers’ obligation of discretion is defended tooth and nail by the country’s political and financial oligarchy…

From “miracle” to nightmare

Banking secrecy is a legal obligation for banks to maintain the confidentiality of information about their customers. A waiver of this obligation may be requested by the courts in the context of a criminal investigation. The opacity of the banking system varies from one country to another depending on its legislation. The choice of such legislation may be motivated by an economic strategy which makes it possible to attract investors to local banks who are anxious to preserve their anonymity.

A magic wand brandished in the 1950s to accomplish the “economic miracle” that the Pays du Cèdre experienced, banking secrecy today represents a significant shortfall for tax authorities. Consecrated by the law of 1956, the opacity of Lebanese banks regarding the information of their clients, combined with legal and financial arrangements, has created the conditions for tax evasion known to all. In recent years, the miracle has turned into a nightmare. In 2020, Prime Minister Hassan Diab made a chilling observation “The state is no longer able to protect the Lebanese and ensure them a decent life. They can barely withdraw their money from the bank, their purchasing power has collapsed and the value of the Lebanese pound has been reduced to a trickle.

The state’s constant indebtedness, fueled by foreign capital, has worked like a Ponzi pyramid. As soon as investors began to doubt the solvency of the Lebanese Central Bank, the whole financial mechanism collapsed.

Clearly, the political class is unanimous on the need for massive IMF aid as the only means of injecting capital into the Lebanese Central Bank, shunned by all the creditors in the world. The Bretton Woods institution demands in return structural reforms, notably that of the banking sector, which Lebanese leaders are not determined to accept. Inevitably, the negotiations initiated since the spring of 2020 are stalling and the granting of the 11 billion dollars remains pending…

The trap of financialization is closing

Betting on an economy geared towards the tertiary sector and capital movements (to the detriment of the development of the agricultural and industrial sectors), the country has created the conditions for its own fragility. In the 1950s, young Lebanon decided to adopt liberal legislation with the intention of making its economy flourish thanks to the attraction of foreign savings, facilitated by banking secrecy. As investors fled neighboring countries, this strategy paid off. The country experienced, in the following years, a massive influx of capital from the oil monarchies of the Gulf and the Lebanese diaspora.

At the end of the civil war in the 1990s, Prime Minister Rafiq Hariri revived the liberal doctrine in the country. Its monetary policy consisted in making Lebanon a safe deposit box for the fortunes of the Gulf countries thanks to extremely attractive interest rates (15 to 20%). The state’s constant indebtedness, fueled by foreign capital, has worked like a Ponzi pyramid. As soon as investors began to doubt the solvency of the Lebanese Central Bank, the whole financial mechanism collapsed.

This is what was observed in 2020 when Lebanon, in debt to the tune of 170% of its GDP (the 3rd highest rate in the world), declared itself in default of payment. Agriculture and industry, poor relatives of public investment for decades, to the benefit of the tertiary and real estate sector, have remained at the embryonic stage. At a time when its financial pillar has collapsed, the Lebanese state has inevitably been hit hard by the lack of diversification of its economy. The country, extremely dependent on the outside, is now forced to import between 65% and 80% of goods related to their food needs. In 2021, more three quarters of the population has fallen below the multidimensional poverty line according to the study of the United Nations Economic and Social Commission for Western Asia. However, the politically influential large fortunes are relentlessly resisting the disappearance of banking secrecy.

Corruption and loss of profit

Lebanon is considered one of the most corrupt countries in the world by Transparency International in 2021 (with the 154th place out of the 180 countries studied). The NGO believes that this is generalized and affects all levels of society, especially political parties, parliament, public administration, customs and the police. This phenomenon is not new: during the civil war (1975-1990), bank secrecy facilitated the transfer of funds benefiting the militias and the arms markets. Corruption has also sullied the state institution. And for good reason, since the 1980s, community leaders had control over entire ministries. The facts of corruption and tax evasion, criminalized but rarely prosecutedfavored the illicit enrichment of a handful of high-ranking personalities and cost the public finances dearly.

Disillusioned by the deficiency of public services and the ease with which the better-off get rid of taxes or launder their money, the rest of the population refuses to play a tax game. In the absence of a counterpart in terms of economic and social investments, taxpayers’ confidence in their leaders has been shattered. The resulting shortfall in public revenue calls into question the state’s ability to assume its most basic prerogatives. Results: the education system and the medical system are weakened, the army is sorely lacking in resources, the state of the infrastructure is deteriorating, civil servants are no longer paid up to their most basic needs and pensions have almost disappeared. This vicious circle is all the more perverse in that it encourages recourse to “corruption and parallel serviceswhich in turn lead to the political vote of allegiance and the weakening of the role of the state”, writes Karim Daher in The Trade of the Levant. Unsurprisingly, the increase in indirect taxation such as VAT or even that on the use of Whatsapp has triggered popular frustration which has led to the October 2019 uprisings.

Despite Lebanon’s adherence to the OECD standards on exchange of bank information and the Global Forum on Tax Transparency in 2017, bank secrecy persists. It is at a forced march that the country has modified its legislation to bring it into line with international standards. Under threat of being blacklisted by the Financial Action Task Force and the International Forum, Parliament passed a law extending the lifting of bank secrecy twenty additional crimes including those of corruption, illicit enrichment and embezzlement of public funds.

Deputy Ibrahim Kanaan, head of the parliamentary finance committee, reported to Le Figaro that the adoption of the law represents “an important step for Lebanon in the fight against corruption” while quickly qualifying his remarks. The mechanism only entrusts the right to lift bank secrecy to an anti-corruption authority and a commission of investigation of the Central Bank, and not to justice. This amendment was wanted by deputies fearing possible “political influences” on justice. However, according to MP Kanaan, this measure annihilates “the very essence of the law”. Indeed, the Central Bank’s investigation commission has already had this prerogative for years; which did not prevent billions are transferred abroad in peace.

Moreover, this law is mainly applied in the context of international prosecutions. Rare are the cases where it is used to fight against local corruption, for lack of political will. Lawyer Paul Morcos, author of a book entitled Banking secrecy facing its challenges, share the same opinion. He confirmed to journalists from Levant Trade that “there is no need to wait for an initiative from any political party to lift banking secrecy. The expert explains that the current body of legislation needs to be improved to ensure the effective prosecution of cases of corruption of political personnel. At present, the plaintiff who brings a case to court for illicit enrichment “also exposes himself to a fine of at least 200 million Lebanese pounds and three months to one year in prison” if his action is rejected. This sword of Damocles, hovering over the heads of whistleblowers, in no way encourages the punishment of this kind of abuse. In fact, fraudsters are still safe.

This summer, the Lebanese parliament reopened the file by proposing a new amendment to the law in the sense of reducing the scope of the banking sector, but this version still does not find favor in the eyes of the International Monetary Fund. The latter considered that the law still had significant shortcomings and urged the deputies to review certain points of the law. In other words, the agreement on the country’s rescue plan, of which banking secrecy is only one point among others, is not ready to be concluded immediately.

Something to hide Monsieur Salamé?

What better example than that of the investigation weighing on Riad Salamé, the president of the Central Bank? The Swiss justice demanded access to the account statements of the brokerage company of his brother, suspected of covering up his embezzlement. While the assistant prosecutor at the Court of Cassation had engaged in a battle against banking secrecy opposing him access to the accounts of Raja Salamé, one of the banks seized his hierarchy to obtain his exclusion. This first attempt at obstruction not having succeeded, the prosecutor ran into a new obstacle. The investigation having resumed in January 2022, the chief prosecutor suddenly ordered him to cancel the searches. Many observers see in this deus ex machine an intervention by Najib Mikati, current Prime Minister and billionaire shareholder of a Lebanese bank. By way of justification against the accusations of obstruction of justice, the latter brandishes “the need not to undermine what remains of the economic and financial pillars of the country”. Necessity, really?

Charlotte Fanar