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Banking Regulations
 
 
Phasellus Venenatis

Banking Regulations in Lebanon (An Overall by Badri and Salim El Meouchi Law Firm)

Lebanon has positioned itself as a regional leader with respect to banking and financial infrastructure and services. The dynamic evolving banking infrastructure

in Lebanon has supported a credible and secure banking and financial sector despite the political instability inherent to the region.

In this period of great financial uncertainty where banks in many developed economies have been purchased or largely financed by their governments, Lebanon seems to be one of the few countries with a relatively stable banking

and financial sector that is still financing the Lebanese government through purchases of treasury bills. This relative stability is in large part due to the cautious management of the Central Bank of Lebanon (“BDL”).

The banking sector in Lebanon is regulated and monitored by the BDL. The BDL was established by the Code of Money and Credit enacted on August 1, 1963, by Decree no. 13513 (hereinafter referred to as the “CMC”) and has effectively started its operations on April 1, 1964.

The BDL is a public legal entity enjoying financial and administrative autonomy.

Article 70 of the CMC assigns to BDL the general aim of safeguarding the national currency in order to ensure and sustain social and economic growth.

The BDL is also vested with other powers aimed at the supervision and development of the banking sector.

The Banking Control Commission (“BCC”), an independent commission created within the BDL in 1967, regulates banks in order to ensure their strict compliance with legal provisions applicable to banking practices. In this respect, the BCC controls the books of banks and may request all information deemed necessary, they may also carry out investigations within such banks at all levels. Based notably on the BCC’s reports and investigations, the BDL may impose disciplinary sanctions on banks determined to be in violation of or inconsistent with legal provisions.

Only institutions that are constituted as joint-stock companies may be authorised to carry on the banking profession in Lebanon.

The establishment of any Lebanese bank and the opening of any branch of a foreign bank in Lebanon are subject to an authorisation issued by the Central Board of the BDL. Such authorisation is to be granted by the BDL in its sole appreciation if it is deemed of public interest.

Each year, the BDL publishes in the Official Gazette the list of banks whose applications have been accepted.

In 1999, the central depository Midclear was constituted. The main functions of Midclear may be summarized as follows: safekeeping of securities for participants; immobilization of physical securities; real-time book-entry, clearing and settlement of transactions in a secure and cost-effective environment through Clearstream and Euroclear; accurate, timely and cost-effective collection, distribution and accounting of dividends and interest payments; maintenance of shareholders' registers; and registering and safeguarding all banks' shares.

Proof of ownership, trading operations, share pledging and instituting other rights over banks’ shares are effected through the books of Midclear. All financial instruments and movable securities issued and offered for subscription and negotiation in financial markets are deposited with Midclear.

The Lebanese banking sector is governed by numerous legal texts and we shall briefly address hereinafter some of the main laws in this respect:

Banking secrecy is a pillar of the Lebanese banking sector. Banks established in Lebanon and branches of foreign banks are subject to the professional banking secrecy as provided for in the law of September 3, 1956.

Managers and employees of the said banks as well as all persons who, through their position or function, have knowledge of the bank’s books, operations and correspondence, are bound to absolute secrecy in favour of the bank’s clients.

They may not disclose to any party whatsoever, whether a private individual or an administrative, military or judicial authority, the names of clients, their assets and facts of which they are aware, except in several cases provided in the law, such as the written authorisation of the client or in case the client is declared bankrupt, etc.

In order to safeguard their investments, banking institutions may exchange exclusively among themselves and under the seal of secrecy, information relating to their clients’ debtor accounts.

Furthermore, AML (Anti Money Laundering) and CFT (Combating the Financing of Terrorism) considerations permitting, indeed requiring, disclosure are discussed below.

By virtue of the law on joint-accounts enacted in 1961, banks may open, for their clients, joint-accounts that are operated by either party of the account.

In case of death of one of the account holders, the surviving joint holder(s) may dispose of and freely operate the entire account. The bank cannot provide any information to the heirs of the deceased holder unless a clause to the contrary is expressly provided for in the joint-account contract.

In case of declaration of bankruptcy of one of the holders of the joint-account and absent proof to the contrary, the creditor balance of the said account is presumed to belong to the bankrupt joint holder.

Banking secrecy waivers in relation to the joint account must be given by all parties of the joint-account in order to be valid.

Bankruptcy of banks is under control of the BDL. Indeed, banks that have become insolvent are subject notably to (i) Law no. 2/67 dated January 16, 1967, (“Law 2/67”) setting out the specific measures to be taken in the event of a bank’s insolvency, and (ii) temporary Law no. 110/91 dated November 7, 1991, (“Law 110/91”) governing seizure of banks.

Law 2/67, aims to preserve viable banks, increase the responsibility of banks' senior officers and penalise defaulting individuals and legal entities. It describes the specific measures to be taken in the event of a bank’s insolvency. Pursuant to Law 2/67, whenever a bank (i) declares its own failure to pay its debts, (ii) fails to pay any debt due to the BDL upon maturity, (iii) draws a check on the BDL without sufficient provision, or (iv) fails to provide sufficient provision to cover a debtor balance resulting from the clearinghouse operations, the competent court must confirm or declare, upon request, failure of the concerned bank.

Law No. 520, of 1996, (“Fiduciary Law”) on Financial Markets Development and Fiduciary Agreements provides protection for investors against insolvency or bankruptcy of a fiduciary institution entrusted with fiduciary assets.

Pursuant to the Fiduciary Law, the constituent may enter into a fiduciary agreement either for transfer of title, or as a guarantee for the benefit of another party (the beneficiary), with or without consideration. The constituent may designate the beneficiary prior to or after the formation of the fiduciary estate.

The constituent may also substitute another beneficiary as long as the originally named beneficiary has not accepted the fiduciary assets. The fiduciary estate may also be constituted as a guarantee for the benefit of the fiduciary agent itself who will be the beneficiary of such fiduciary account.

Upon expiry of the term of the fiduciary agreement, the fiduciary assets will be returned with accruals thereon and proceeds to the constituent or the beneficiary, as applicable after deduction of any remuneration, commissions, expenses and other rights of the fiduciary agent as specified in the agreement.

The fiduciary agent is required to hold the fiduciary estate off-balance sheet and to identify each fiduciary estate as an individual unit, separate from the fiduciary agent's own assets and other fiduciary estates held by the fiduciary agent.

The Fiduciary Law, combined with Lebanon’s law on banking secrecy, offers opportunities and added value for Lebanese and foreign investors.

Taking into account the Law on Banking Secrecy, the Lebanese legislature enacted a comprehensive AML Law in 2001 which reconciles the principles of banking secrecy with the need to remain compliant with best current practice and with international anti money laundering and CFT standards.

Institutions that are subject to the provisions of the Law on Banking Secrecy must control their operations with clients in order to avoid involvement in potential money laundering operations. Banks and financial institutions must undertake control measures to avoid involvement in transactions that might be covering up money laundering operations.

The Anti-Money Laundering Law has established the Special Investigation Commission (hereinafter the “Commission” or “SIC”) for fighting money laundering, which is an independent legal entity with judicial status. The SIC, which is Lebanon's Financial Intelligence Unit (FIU), receives, analyzes, and investigates reports on suspicious transactions and ensures compliance of banks, financial institutions, and other reporting entities with the anti-money laundering laws and regulations.

In 2001, a law on the issuance and transfer of banks' shares repealed previous laws that restricted foreign ownership of banks' shares. This made foreign investment more appealing. The said law requires the BDL’s prior authorization where a share transfer involves more than 5% of the bank’s shares, irrespective of the nationality of the subscriber or buyer. The law also provides for the issuance of preferred non-voting shares and stock-options under specific conditions.

In February 2004, the law on the incorporation of Islamic banks in Lebanon was enacted, based on principles governing Islamic transactions. The said law authorises Islamic banks to purchase real estate for the purposes of undertaking investment projects, without abiding by the limitations of the CMC and the law related to the acquisition by non Lebanese of the real estate in Lebanon. The minimum capital required for the incorporation of an Islamic bank is 150 billion Lebanese pounds, with some exceptions.

A law issued on February 2005, concerning consumer protection contains provisions applicable to banking and financial Institutions. The said law notably defines "abusive clauses ", and compels banks not to draft abusive clauses in the agreements with their clients.

Conclusion

Lebanon’s banking and financial sector is unique in its attractive features and its resilience and stability, despite numerous periods of political unrest. The sector has also proven its ability to constantly evolve in the aim of adapting to national, regional and international trends and requirements. It has remained attractive to more resilient, long-sighted investors in the region and beyond.

Author: Badri and Salim El Meouchi Law Firm.

Contributors:

Chadia El Meouchi:

Chadia El Meouchi is Managing Partner of the Beirut and Doha offices of Badri and Salim El Meouchi Law Firm. She has been a member of the New York Bar since 2000.

Chadia joined the firm in 2000, and became Partner in 2005.

She is specialised in all aspects of corporate and commercial law, including M&A, banking and finance, insurance and project finance, Clean Development Mechanism (CDM), and privatisation.

Chadia obtained a BComm from Concordia University in Montreal, then read law at the University of Montreal before obtaining an LLM from Georgetown University in Washington, DC. She also holds a Certificate of Islamic Finance granted by the UK Securities and Investment Institute and ESA, and a Certificate in Arbitration and Alternative Dispute Resolution (ADR) from the Canadian International Arbitration Centre (at McGill University). Chadia has also obtained a post-graduate diploma in Oil and Gas Law at Robert Gordon University in Aberdeen, Scotland and is currently enrolled in an LLM in the same subject.

Chadia was a board member of the Lebanese Transparency Association from 2002 to 2009 and is a founding member and head of the Lebanese Corporate Governance Task Force’s Legal and Regulatory Committee (since 2004). She is a founder of Young Arab Leaders Lebanon and board member of Young Arab Leaders since 2008. She is a board member of the Young Leaders’ Integrity Alliance and Global Integrity Alliance since 2006.

She has also been nominated as a Henry Crown Fellow in 2008 by the Aspen Institute. Chadia is also the co-founder of the Aspen Institute with Shane Tedjarati (CEO of Honeywell Global) of the Middle East Leadership Initiative, established in 2009.

She has taught negotiation and English law classes, and has published a number of articles on corporate and financial law, as well as on corporate governance and transparency, privatisation, IP and insurance.

Chadia has been consistently recognised as a leading lawyer in a number of law directories and guides, including Chambers Global, IFLR 1000, European Legal 500, PLC Which Lawyer? And Asialaw.

Michel El Meouchi:

Michel El Meouchi joined the firm in 2007 as a Senior Associate, after working for 5 years in Montreal (Canada) for a Canadian law firm. Michel is a member of the Quebec Bar (since 2004) and the Ontario Bar (since 2007). Michel is mostly based out of the Qatar office.

Michel has worked on various corporate and commercial matters in North America and the Middle East. He has also acted for various banks and financial institutions regarding incorporation and regulatory matters.

Michel has contributed to various publications, notably on banking and financial law.

Michel has a Bachelor of Civil Law from the University of Montreal, and a graduate diploma in North American Common Law, also from the University of Montreal. He also holds a Certificate in Chinese Business Law from the China University of Political Science and Law, Beijing (China).

Well versed in humanitarian law, Michel was part of a Canadian Red Cross team regularly inspecting Citizenship and Immigration Canada detention centres and evaluating detention conditions of persons requesting asylum under Canadian refugee laws from 2004 to 2007.

Michel is fluent in English, French and Arabic.

Maria Jreissati:

Maria Jreissati joined Badri and Salim El Meouchi Law Firm in 2004, and has been a ember of the Beirut Bar since 2004.

She specialises in financial and banking law, both Islamic and conventional, and represents clients in a variety of financial transactions including regulatory work,

various forms of financing(for example, projects and real-estate acquisitions), and frequently advises on the structuring and distribution of financial products.

Maria also specialises in corporate governance for companies and financial institutions.

She has authored numerous publications in banking and commercial law, as well as in corporate governance.

Maria graduated from St. Joseph University, Beirut with a Master of Lebanese

and French Law,and obtained a D.E.A. in Banking and Financial Markets from St. Joseph University, Beirut in 2005.

Marie-Anne Jabbour:

Marie-Anne joined Badri and Salim El Meouchi Law Firm in 2008, and has been a member of the Beirut Bar since September 2008.

She graduated from La Sagesse University with a Bachelor of Civil Law in 2004, and with an advanced graduate degree (DEA) in Private Law in 2007.

Prior to joining the firm, Marie-Anne was working in the legal department of a leading Lebanese bank.

She has published articles on anti-money laundering and anti-corruption legislation in Lebanon.

Phasellus Venenatis
 
 
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