Chronicle of the Middle East and North Africa

Lebanon’s Amended Banking Secrecy Law: Causes and Consequences

On October 29, 2022, the amendment to the banking secrecy law was formally adopted by the President of the Republic, ending Lebanon's era of extensive banking secrecy.

Lebanon’s Banking Secrecy Law
Lebanese depositors queue to withdraw money from a Fransabank branch in Beirut on September 26, 2022. JOSEPH EID / AFP

Ali Noureddine

This article was translated from Arabic.

On October 18, 2022, the Lebanese Parliament passed an amendment to the banking secrecy law that would remove limitations and facilitate the work of relevant government agencies including the tax authority, the courts, the Banking Control Commission, and the Central Bank.

On October 29, 2022, these amendments were formally adopted by the President of the Republic, ending Lebanon’s era of extensive banking secrecy, which had historically served as the foundation of the nation’s economic system. This development marks a significant financial milestone that merits consideration in terms of its and origin and economic ramifications.

The Parliament stalled the passing of these reforms for two years and five months in an effort to delay the abolishment of banking secrecy law in its previous form.

These modifications have only been made in response to the IMF’s demands, which it insisted upon as a condition of the deal signed with Lebanon.

Those benefiting from banking secrecy were in fact the banks that are implicated in irregularities that squandered depositors’ money, individuals seeking to evade taxes, and prominent officials accused of illicit enrichment.

Given the power these individuals wield within the political and financial systems, it was not anticipated that these revisions would be passed without much effort and intense pressure from the Fund.

The history of banking secrecy and its role in Lebanon

A special law was adopted in Lebanon on September 3, 1956, prohibiting Lebanese banks from revealing the names, accounts, and activities of their customers, including to the government. This law signaled the start of the banking secrecy era.

Rigid adherence to the legislation was observed. Anyone who broke the law, including bank managers or staff, faced three months up to a year in prison.

On April 20, 2001, the Anti-Money Laundering Law came into force, upholding the law’s strict standards for financial confidentiality.

Under the auspices of the Central Bank, a “Special Investigation Commission” was established. It was given exclusive authority to lift banking secrecy in order to confirm instances of money laundering within the financial system.

As a result of all these changes, the Lebanese banking system was transformed into a tax haven.

Lebanese expats and international businessmen looking for a safe place to hide their money from the prying eyes of the tax authorities in the countries where they did business, turned to Lebanese banks.

Due to the fact that many Arab countries had socialist or controlled economies, Middle Eastern traders also often sought the country’s banks.

The oil boom brought huge riches to Gulf princes and businesses who were drawn to the Lebanese banking system since it was open to global financial networks at a time when the Gulf countries hadn’t yet created their capital markets.

Due to all of these factors, banking secrecy became a crucial tenet of the Lebanese banking system and allowed Lebanon to draw in substantial sums of foreign investment.

Since the framework was designed to enable governments to borrow from the overextended banking sector to pay budget deficits, official financial policies sought to expand the banking system at any cost.

The rationale behind the IMF’s position

Modifying the Banking Secrecy Law and abolishing secrecy became the primary reform measure demanded of the country as part of the financial recovery plan negotiated with the IMF.

The Fund’s request was largely influenced by international institutions’ initiatives taken in recent years to promote transparency. Another crucial element is the capacity to cooperate with governmental agencies in the battle against financial crimes, money laundering, and terrorism financing.

Furthermore, the gains of banking secrecy had run their course. Since 2015, Lebanon has been obligated to approve international agreements that enable other countries to monitor the deposits made by their nationals in the local banking system.

To risk leaving the international banking system would have been Lebanon’s other option. Because of this, banking secrecy no longer drew remittances or deposits from those looking for tax under Lebanon’s new obligations.

Nevertheless, banking secrecy was not entirely eliminated at the time these agreements were established. The laws continued to safeguard Lebanese citizens by prohibiting access to their bank accounts by the country’s tax officials and the judiciary.

Considering the fact that banking secrecy had weighted down the Lebanese economy for the past seven years without helping the financial system, the IMF demanded that it be lifted.

Furthermore, banking secrecy was rendered obsolete after the major banking collapse of 2019. This increased the dangers around the Lebanese banking system and made it challenging for it to attract fresh deposits.

Additionally, its revision permits the Banking Control Commission and Banque du Liban to appraise the assets of the bankrupt banking system and oversee the restructuring process.

Change after many obstacles

Given the significant influence that major financiers, politicians, and banks that profited from the law hold, the Parliament attempted to obstruct efforts to lift banking secrecy since May 2020.

Work on the bill was delayed and prolonged, and efforts were made to adopt laws that only partially lifted the secrecy surrounding bank accounts.

However, Parliament was compelled to ratify revisions as a result of both domestic and foreign pressure. Before the end of his tenure, Lebanon’s President Michel Aoun signed the legislation – a final step in the process.

The judiciary will therefore be able to lift banking secrecy by seeking information directly from the banks without the need to go through any other administrative body, in accordance with the revisions.

The local tax authorities will also be able to check for tax evasion by correlating the statements they receive with information from bank accounts.

Most importantly, the Central Bank and the Banking Control Commission will be able to view and audit the details of bank budgets. This right was previously reserved for the Special Investigation Commission in cases of money laundering.

Overall, these amendments are not ideal seeing as they contain numerous loopholes that undermine the efficiency of the legislation. They include restrictions on the judiciary’s ability to access information in situations in which a lawsuit has been filed rather than during initial investigations that precede filing a lawsuit.

While the remaining gaps can be addressed gradually down the line, the approved amendments do indicate relative progress in terms of financial transparency – a development that is urgently needed in Lebanon.