Lebanon Bank Secrecy Law
Under the initiative of Cabinet Minister Raymond Edde, Lebanon Law No. 1/1956 on Bank Secrecy was adopted in 1956 establishing bank secrecy in Lebanon. The latter was inspired by the Swiss banking system and believed that the country could reap benefits from a similar system.
The policy makers were influenced by two main factors:
- A political factor: At that time Lebanon enjoyed political stability unlike its neighbouring countries such as Syria and Egypt which were affected by political instability and an outflow of investments.
- An economic factor: The desire to attract foreign deposits into the Lebanese banking sectors.
This was an ideal context to adopt a bank secrecy law. Lebanon Law No. 1/1956 incited investors and elites of the region to transfer their assets into the Lebanese banking sector. Lebanon at the time was the only country in the Middle East to adopt a liberal system economically and politically, hence acquiring the label of “the Switzerland of the Middle East.” Lebanon Law No. 1/1956 benefited the country and contributed to the growth of the banking sector. However, almost 70 years later, the Lebanese banking sector, paralysed by the worst financial crisis in Lebanese history, bank insolvency and de facto capital controls faces major public distrust.
From economic growth to economic collapse, Lebanon Law No. 1/1956 still applies today. This commentary aims to explain how Lebanon Law No. 1/1956 is implemented, identify its beneficiaries and determine its limits.
Merits and main provisions of Lebanon Law No. 1/1956
The scope of banking secrecy
In essence, banking secrecy is an agreement between banks and the clients by which the client's activities and details remain confidential and private. Article 2 of Lebanon Law No. 1/1956 prohibits banks in Lebanon to disclose information about their clients such as their name or their funds to anyone whether it is a private individual or a public authority. This duty is imposed on the managers, employers, directors of the bank and anyone who, by virtue of their position, has information concerning the bank's books transactions or correspondence. According to Article 1 of Lebanon Law No. 1/1956, this duty applies to all banks in operation in Lebanon, including branches of foreign banks. Lebanon Law No. 1/1956 did not intend to create secrecy as a privilege to be enjoyed by banks, but rather intended to impose banking secrecy as a duty that banks must observe, not only for the benefit of the economy and the banking profession, but also for the interest of the public.
Sanctions for violations of Lebanon Law No. 1/1956
The violation of banking secrecy is considered a misdemeanour. Article 7 of Lebanon Law No. 1/1956 specifies that it is punishable by imprisonment for a period of three to twelve months under the Criminal Code. The same sanctions apply to any attempts of violations under Article 127 and 203 of the Code of Currency and Credit. Furthermore, a person who was indicted for this violation is prohibited from undertaking employment in the banking sector. This prohibition is permanent and applies to both intentional (sanctioned under criminal law) or unintentional (sanctioned under common law) violations.
Exemptions from bank secrecy
There are limited exceptions to banking secrecy in Lebanon. These exceptions are either derived from Lebanon Law No. 1/1956 itself, or from other sources in domestic legislation such as Lebanon Law No. 159/1999 on Illicit Enrichment.
Exceptions found within Lebanon Law No. 1/1956
Article 2 of Lebanon Law No. 1/1956 specifies that information concerning the names of the clients, their funds or any related matter may be disclosed only if:
- the client or the concerned heirs gave their written consent,
- the client is declared bankrupt, or
- in the case where a lawsuit is taking place between the bank and the client over banking operations.
Article 7 of Lebanon Law No. 1/1956 also specifies that banks are exempt from invoking professional secrecy if they are requested to do so by judicial authorities concerning illicit enrichment lawsuits. This exception was initially tied to the old Illicit Enrichment Laws of 1953 and 1954 but currently concerns the latest illicit Lebanon Law No. 159/1999, which we will discuss further in the next section.
Exceptions in other domestic laws
Lebanon Law No. 159/1999 on Illicit Enrichment
Lebanon Law No. 159/1999, adopted in 1999 and recently amended in October 2020, criminalizes illicit enrichment and defines it as the significant increase in the assets of a public servant, judge or associates. Initially, Lebanon Law No. 159/1999 stipulates that banks are forbidden from invoking bank secrecy under Lebanon Law No. 1/1956 when investigations conducted by the relevant judiciary in cases of illicit enrichment are concerned. Additionally, Article 2 of Lebanon Law No. 159/1999 imposes a duty on public officials to submit a financial declaration of their assets and their families' assets. Article 3 of Lebanon Law No. 159/1999 further specifies that the public officials must submit this declaration upon assuming office and upon termination of their services.
The recently amended Lebanon Law No. 159/1999 imposes that an additional declaration must be submitted every three years. Lebanon Law No. 159/1999 ensures that there are regular inspections. The new amended version of Lebanon Law No. 159/1999 pushes for more transparency, which in turn affects banking secrecy in multiple ways. For instance, the definition of public officials has been extended. Previously, a public official was defined as any person exercising a public function, the amendment now includes any person working on behalf of the government. This means that more people must declare their assets, therefore affecting the principle of banking secrecy on a greater scale.
Foreign Account Tax Compliance Act (FATCA)
The Foreign Tax Compliance Act is a legislation enacted in 2014 by the US. This legislation was applied worldwide, imposing a duty on banks and financial institutions to report to the Internal Revenue Service on accounts with FATCA indicia (US citizen, US citizen, power of attorney holder, etc.). Due to the strict sanctions involved, banks across Lebanon had no choice but to comply. Accordingly, secrecy on the concerned accounts is lifted.
Lebanon Law No. 44/2015 on Fighting Money Laundering and Terrorist Financing
In 2001, the Parliament adopted Lebanon Law No. 318/2001 on Anti-Money Laundering and the Fight Against Terrorism, which was subsequently amended by Lebanon Law No. 44/2015 on Fighting Money Laundering and Terrorist Financing. Lebanon Law No. 318/2001 aimed to conform with international anti-money laundering standards by imposing transparency without getting rid of banking secrecy. Lebanon Law No. 318/2001 created the “Special Investigation Commission” (SIC), an independent legal entity with judicial status. The SIC was granted the permission to lift banking secrecy as a temporary and preventive measure in order to investigate money laundering offences. The scope of the SIC's power widened in 2015 when Lebanon Law No. 44/2015 amended the original legislation. Lebanon Law No. 44/2015 extended anti-money laundering offences to corruption, tax evasion, embezzlement and illicit enrichment. This widening of possible offences gives permission to the SIC to lift bank secrecy in a larger amount of cases. Furthermore, Lebanon Law No. 44/2015 imposes a duty on bankers and professionals in the banking sector to apply due diligence, organise, store data of their clients and notify the SIC if they suspect that money laundering offences are being committed.
Lebanon Law No. 55/2016 on the Exchange of Information for Tax Purposes
New international laws and norms have gradually challenged the banking secrecy law in Lebanon over the decades. Many regulations from other jurisdictions have pushed bank secrecy in Lebanon to the edge. In 2016, the Lebanese Parliament enacted Lebanon Law No. 55/2016 on the Exchange of information for Tax Purposes as an implementation of the Conventions on the Mutual Administrative Assistance in Tax matters (MAC and MCAA) ratified by Lebanon. Lebanon Law No. 55/2016 enabled Lebanon to incorporate the Common Reporting Standards (CRS). Simply said, countries who are participants of the CRS must obtain and gather information from their financial institutions and exchange this information to other jurisdictions on an annual basis. This impacted the banking secrecy in Lebanon. It imposed a duty on banks and other financial institutions to identify the clients who are tax residents outside Lebanon. Banks and other financial institutions have a duty to compile and collect the information related to their clients' accounts and any related matters and send it to the relevant authorities in Lebanon, who in turn provide the information to foreign jurisdictions.
On 28 May 2020, the Lebanese Parliament intended to implement a new legislation that would override bank secrecy rules in order to fight the ongoing corruption that has plagued the country with an unprecedented economic crisis. This project has been scrapped, and so far there is no clear vision of whether such a legislation will be ratified at all. Banking secrecy was once an important tool for Lebanon's economy. However, it is clear today, amidst the economic collapse, that banking secrecy is no longer the beneficial tool it once was. Throughout the years, banking secrecy was transformed into a mean of corruption instead, for both public officials and citizens. In 2020, professionals across the country are trying to salvage the economy by organizing a way to recover stolen assets that were hidden and protected by Lebanon Law No. 1/1956. Asset recovery begins by collecting information about the assets concerned, and this cannot be possible if these assets are still protected by banking secrecy. This calls for a reform whereby at least political figures would be excluded from the privilege of banking secrecy. The banking sector is currently facing a complete public distrust and in order to regain this trust, transparency is a key.