Banks seek a judicial deal with the government to eliminate charges of "money flight" in 2019, start strike over Fransabank seizure of assets

by Maan Al-Barazi

It is no secret that the strike in the banking sector comes in conjunction of a number of legal issues that have ignited a controversy over the legality of the drawn bank check, but the violations on transfers in 2019 and the quest to find a settlement with the political authorities about the losses of the sector.

According to press information, there will be soon a decision to escalate bankers protests some measures will be a complete closure of the banking sector branches. Reportedly bankers want to see concrete measures to discharge banks from different legal suits and ratify the so called capital control law. None of the solutions appear on the near horizon! On the contrary, it seems that closure of the banks operating branches will take longer than expected.

How did we reach here??

On February 1, 2023, the Court of Cassation issued two decisions annulling the decision to stop the execution of the ruling that was placed by two depositors on the assets of Fransabank in several branches, and again to allow the Police Department in Beirut to resume the seizing fn the assets of this bank as a guarantee for the payment of the bank check drawn from this bank in their favour. This follows a decision on March 14 2022 by a Lebanese judge to freeze the assets of five top banks and members of their boards while she investigates transactions they undertook with the country's central bank. The asset freeze against Bank of Beirut, Bank Audi, SGBL, Blom Bank and Bankmed applies to properties, vehicles and shares in companies owned by the banks or the members of their boards.

Following this move three months it is noteworthy that the Head of the Execution Department in the Ministry of Justice in Beirut, Mariana Anani, had initiated the procedures for seizing Fransabank’s assets and followed them up after the First Instance Judge, Rola Abdullah who refused to stop their implementation in her decision issued on 3/7/2022. However, this seizure soon collided with enormous pressure from the Association of Banks, which reached the point where the latter announced a protest strike against what it called “judicial populism,” on March 21 and 22, 2022.

Lebanon’s financial collapse since 2019 is a story of how a vision for rebuilding a nation once known as the Switzerland of the Middle East was derailed by corruption and mismanagement as a sectarian elite borrowed with few restraints. It is also a tale of a profiteering scheme orchestrated by politicians and bankers to channel state resources and illegal money transfers.

Some economists have described Lebanon’s financial system as a nationally regulated Ponzi scheme, where new money is borrowed to pay existing creditors. It works until fresh money runs out. But how did the nation of about 6 million people get there? After the civil war, Lebanon balanced its books with tourism receipts, foreign aid, earnings from its financial industry and the largesse of Gulf Arab states, which bankrolled the state by bolstering central bank reserves. Yet one of its most reliable sources of dollars was remittances from the millions of Lebanese who went abroad to find work. Even in the 2008 global financial crash, they sent cash home. But remittances started slowing from 2011 as Lebanon’s sectarian squabbling led to more political sclerosis and much of the Middle East, including neighbouring Syria, descended into chaos. Sunni Muslim Gulf states turned away with the rising influence in Lebanon of Iran, via Hezbollah, a heavily armed Lebanese Shi’ite group whose political power has grown.

The budget deficit rocketed and the balance of payments sank deeper into the red, as transfers failed to match imports of everything from staple foods to flashy cars. And then come the banks when in 2016 they began offering remarkable interest rates for new deposits of dollars - an officially accepted currency in the dollarised economy - and even more extraordinary rates for Lebanese pound deposits.

Lebanon was still politically dysfunctional. Rivalries left it without a president for most of 2016. But the central bank, Banque du Liban, led by former Merrill Lynch banker Riad Salameh since 1993, introduced “financial engineering”, a range of mechanisms that amounted to offering banks lavish returns for new dollars. Improved dollar flows showed up in climbing foreign reserves. What was less obvious - and is now a point of contention - was a rise in liabilities. By some accounts, the central bank’s assets are more than wiped out by what it owes, so it may be sitting on big losses.

Meanwhile, the cost of servicing Lebanon’s debt surged to about a third or more of budget spending.

WHAT TRIGGERED THE COLLAPSE?

When the state needed to rein in spending, politicians splurged on a public sector pay rise before the 2018 election. And the government’s failure to deliver reforms meant foreign donors held back billions of dollars in aid they had pledged.

The final spark for unrest came in October 2019 with a plan to tax WhatsApp calls. With a big diaspora and Lebanon’s low tax regime skewed in favour of the rich, slapping a fee on the way many Lebanese kept in touch with relatives was disastrous. Mass protests, driven by a disenchanted youth demanding wholesale change, erupted against a political elite, many of them aging warlords who thrived while others struggled. Foreign exchange inflows dried up and dollars exited Lebanon. Banks no longer had enough dollars to pay depositors queuing outside, so they shut their doors.

The currency collapsed, sliding from 1,500 to the dollar to a street rate of as much as 8,000 it is 65 000 at the time I wrote this article. Banks were given predominance in Lebanon’s political life. The most notorious case was that of the illegal transfer of money and assets in the period before the 2019 crisis.

Today the strong lobby of the banks is pushing towards resolving those charges and introducing a capital control law which will trespass all these charges. Further the lobby is seeking to regularize itself the proportion of money given to depositors.

There has been a lot of blame on banks on facilitating transfers of funds in the pre-crisis period, depositors say that banks have facilitated flight of these funds to international accounts ; the matter that has anticipated the downfall of the system. Of course the story goes beyond that On 30 August 2021, Appellate Public Prosecutor in Mount Lebanon Ghada Aoun charged several people in the so=called Mecattaf money-smuggling case.

What Did the Unwanted Investigation Reveal?

Hence, Aoun charged Michel Mecattaf and his company, as well as Co-owner of SGBL Sehnaoui, with laundering illicit money obtained through the exploitation of privileged information, namely the information that the national currency would drop, thereby making illicit profits. This contributed to the fall of the national currency and speculation on it (Article 1 of the Law to Combat Money Laundering and Terrorism Financing no. 44 of 2015 in conjunction with Article 210 of the Penal Code in relation to the bank and the company, and Article 3 of Item A of the Law to Combat Public Sector Corruption and Establish the National Anti-Corruption Commission no. 175 of 2020). She also charged the first two with breaking seals (Article 395 of the Penal Code) and asked that the penalty be increased because they continued operating and executing transfers for approximately three months after the business had been wax-sealed. Finally, she charged Michel Mecattaf with tax evasion.

The charges issued by Judge Aoun, which were published on several media and social media platforms, mentioned the following facts:

·????????Between 2015 and 2019, the company Mecattaf transferred USD13.3 billion abroad, including USD4.3 billion whose sources remain unknown.

·????????The company Mecattaf brought into Lebanon from unknown sources USD355 million in 2020 and USD243 million in 2021 (during the months encompassed by the investigation), i.e. a total of USD598 million.

·????????SGBL and Sehnaoui transferred USD1.017 billion in 2019 and 2020 in an exploitation of information that the national currency would drop, thereby making illicit profits.

·????????Michel Mecattaf erased some of the company’s data.

·????????Mecattaf and Sehnaoui took advantage of privileged information that they learned in their professional capacity.

·????????Riad Salameh colluded with SGBL and the company Mecattaf to commit illicit acts as they intentionally harmed the national currency and economy.

·????????The president of the Banking Control Commission of Lebanon (BCCL) withheld information from the investigation and neglected to investigate crimes that she could have discovered.

·????????The company PricewaterhouseCoopers made a false statement and concealed information from the judiciary.

·????????Mecattaf and his company broke seals and continued to transfer money abroad until 23 August 2021, i.e. one week before the charges were issued.

As for central bank governor Riad Salameh, Aoun charged him with complicity in money laundering, as well as corruption, influence peddling, breaching job duties, and abusing authority (Articles 371, 363, and 377 of the Penal Code in conjunction with Article 3 of Law no. 175). While she accused him of colluding, in his capacity as the bank’s governor and as president of the Special Investigation Commission (SIC), with SGBL and the company Mecattaf with an intent to undermine the Lebanese economy and currency (at odds with his key function of safeguarding the national currency), she did not explicitly charge him with the Penal Code articles that address these crimes.

Political pressures from officials in the government resulted in the Beirut Court of Appeal headed by Judge Habib Rizkallah (who is the husband of the daughter of the former head of the Association of Banks, Joseph Tarabay) issuing a decision to stop the implementation of the seizure of Fransabank’s assets, on 3/22/2022, that is, in conjunction with the banks’ strike. This decision is the one that was overturned by the second chamber of the Court of Cassation, which is composed of its president, Modi Matran, and two members, Samih Sfeir and Hassan Sakina. While some judicial bodies dismissed this type of lawsuit for one reason or another, four judicial bodies in Beirut, Nabatiyeh, Matn, and Zahle issued preliminary rulings accepting them in decisions that included important considerations about the function of the judiciary in protecting basic rights, or protecting banks depositors. Some provisions were not without a clear condemnation of the roles of Machiavellian banks that risked people's interests in order to reap quick and unjustified profits. Despite the importance of these rulings, some of them were suspended by the courts of appeal (as is the case with the rulings issued by the Nabatiyeh Court), while others were suspended by the Court of Cassation. It became clear later that the judiciary deliberately postponed the deadlines for long periods, in contradiction to the principles of haste in them.

The responsibility for the lack of provisions in the case of a check drawn on the Banque du Liban id the responsibility of the issuer bank, i.e. the Banque du Liban (and here we mention Article No.: /666/ of the Lebanese Penal Code), as well as on the drawer (the seized bank) for being legally responsible for the payment. Consequently, the decision was based on the bank’s contractual and quasi-criminal errors, to hold it responsible for the damage resulting from its failure to obtain, to date, the value of its deposit.

What do banks object??

While the banks claimed that drawing similar checks exonerates them towards depositors, several judicial bodies have proven that this is not the case in general, and especially in the present circumstances. As the bearer of this check finds himself faced with the impossibility of receiving its value, then he has no choice but to deposit it with another bank, that is, if it is possible for him to open ?an account with this bank, so that the other bank returns to seizing his deposit, which enters the depositor as a result “in an endless cycle of restrictions on his right.” move and dispose of his money.” The decision of the Court of Cassation came to implicitly affirm in the context of its refusal to stop the execution process of the check.

Secondly, it is a trend that opens the door wide for submitting requests for seizure of the assets of all banks that have sought to pay the rights of their depositors through this type of check. This matter would push the parliament to speed up the approval of a proposal to restrict the rights of depositors, in order to cover the practices of banks, and in practice to replace the currently prevailing informal capital control with a regular capital control.

To note that when the Court of Cassation overturned the decision of the Court of Appeal on the grounds that it exposed the basis of the dispute, which is still pending before the primary authority in a way that affects the right to trial on two levels, it returned and decided that the bank check constitutes a valid executive document, considering that there is no reason to stop its implementation.

Requests to lift bank secrecy

The strike announced by the General Assembly of Banks in Lebanon, on the surface, is the issue of “not recognizing the check, especially the bank check, as a legal means of payment, and allowing execution to the drawer even before proving that the check was not collected and that provisions are not available, regardless of the fact that it violates the law.

To be noted that banks fear today the revival of many cases and court orders against the banks especially the issue related to the transfer of about $ 8.8 billion in The first months of the crisis (while linking this to financial engineering operations that took place in 2016!), the banks defended themselves regarding them by confirming that the sums they borrowed from the Banque du Liban to cover external obligations, so as not to be exposed to correspondent banks, with the international legal repercussions.

On the other hand, the prosecution confirms that "there are suspicions in these transfers, and that they came at the expense of the rest of the depositors, and not all of them were to cover external obligations, but rather money belonging to influential people and bankers."

In the past two days, banks were under pressure to lift banking secrecy on the accounts and operations of chairmen, members of boards of directors and executives in a number of banks, in addition to current and former auditors. Opinions differed on the interpretation of articles in the Bank Secrecy Amendment Law. To be noted that banks refused to meet confidentiality disclosure requests, which prompted the concerned judicial authority to open new lawsuits against them with the possibility of conducting raids and issuing subpoenas and arresting everyone who refuses to meet confidentiality of disclosure requests. To note that Article 4 of Law No. 2/67 and its amendments and Article 489 of the Land Trade Law Article 1 stipulates that declaring bankruptcy a person must “be a merchant and be in a state of stopping payment,” which allows the creditor “to submit a request to declare the bank in question ceasing to pay.” As for the second article, it indicates that “every merchant who stops paying his commercial debts is considered in the event of bankruptcy, and every merchant who does not support financial confidence in him except by means that clearly appear to be illegal. It is noteworthy that 18 liberal professions unions were preparing to file collective legal lawsuits against banks, the actions would be inflicted on the chairmen of their boards of directors.

The banking sector is under pressure also to refinance and restructure; thus the Central Bank issued earlier Circular No. 154 and required banks to boost capital by 20 percent and raise liquidity in external accounts with correspondent banks as high as 3 percent of deposits in foreign currencies.

The deadline has passed but no action have been taken by the BDL nor the banking Control Commission to impose the decision.

The government had pledged, according to its ministerial statement, to protect “the funds of depositors, especially the small ones,” and to “enhance the capitalization of banks by pumping cash liquidity, banks using their reserves, dealing with loan defaults, restructuring the banking sector, and banks selling their investments abroad as indicated by Circular No. 027/2020 issued by the Association of Banks on January 30, 2020.

Bank dominance

In view of these initiatives, then it is necessary to warn that the law will turn into a tool aimed at consolidating the dominance of banks without stopping at the principles of fairness and solidarity and the relationship of law and legislative work with them, as if the law is here to serve the interest of banks exclusively, and that those directly concerned with the aforementioned procedures, i.e. depositors And industrialists and merchants submit once again to the practices of those who have a long hand in the current crisis.

Regardless of all is the basis of the strike founded or not?

Are we at a time to reconsider the legal foundations of banking?

On 11/30/2021, the head of the Beirut Execution Department, Judge Mariana Anani, took a decision unique of its kind in Lebanon, with commercial provisions / execution registered under No. 54/2021, in which she indicated that “returning the deposit according to bank checks does not exonerate the bank, since this method does not Depositors have now achieved actual fulfillment, as the bank, in its relationship with the depositor, bears the responsibility for breaching the implementation of its contractual obligations, whether directly related to the implementation of the banking operation required of it such as making bank transfers, or in terms of what is related to the professional obligations imposed on banks not to breach the credit integrity and the need to secure the necessary liquidity The supply of checks means preserving the rights and money of depositors, and the need to return the deposit to its owners in a manner that achieves actual fulfillment for them and does not cause them any harm or lead to depriving them of actually obtaining their money or using it and investing it productively. The withdrawing bank is with the drawee, the Banque du Liban, and there is no room for the appreciating bank to invoke exceptional circumstances, since preserving the interests of depositors and the economy The NBK is not done by holding the depositor responsible for the consequences of a crisis in which he had no role.

In order to correct the points that were raised in an erroneous manner, especially those related to the extent to which the check is considered a means of payment or not in the event of payment of a debt that is not related to the ruling of refunding a bank deposit, we clarify the following:

·????????First: The decision considered that transferring funds abroad is a right of the depositor towards the bank, and any restriction to it constitutes a violation of legal principles, including the right of ownership and the principle of free movement of capital stipulated in the introduction to the Lebanese constitution, as well as banking professional norms, and therefore the obligation to transfer money abroad. It is an obligation imposed on the banks and is not an option or a right that it exercises at discretion (and in this the decision subject of the comment is considered a starting point in investigating the responsibility of the banks for the money that escaped from them during the crisis and in a manner that is illegal).

·????????Second: For the first time, we see a judicial decision based on the effect of the International Geneva Convention for Check issued on: 3/19/1931, and this is a positive matter and indicates that the judges of my country are relied upon to achieve the country’s renaissance, especially since this agreement was approved by Lebanon, the French mandate at the time. Among its articles, the provisions of the check were relied upon and incorporated into the internal legislative text. And she emphasized that the check is a means of external circulation, and thus the illegal claim made by the banks that the check is a means of internal circulation only has been dropped; Therefore, the decision removed the legality from that phrase that banks put on the board of the check, which is “to be cleared only in Lebanon,” because the check is an external means of circulation by law, and this is a matter of high importance.

·????????Third: The decision was considered as support for the provisions of Article /444/ of the Trade Law, that although the check is a means of payment, it does not absolve its drawer of liability except when its value is received. Consequently, the decision did not negate this feature that it enjoys from the check, but it considered it dependent on the condition of receiving the value. to be considered a complete fulfillment; That is, he considered that the return of the bank deposit by virtue of a check is not legally correct, because the drawer and the drawee who are well-versed in the fundamentals of the banking business are subject to the obligation to secure supplies, in contrast to the rule of paying off the ordinary debt among the public. Therefore, the decision, in our opinion, did not include fulfillment operations that take place by virtue of a check between a creditor and a debtor who is not in a bank. For clarification, it is necessary to differentiate between two cases

§?The first case: it applies to the reality of the bank deposit that is paid to the depositor by the banks according to a check, and here it was considered that the fulfillment does not achieve its goal because the current crisis has led to the deprivation of the depositor from receiving his deposit in cash by the banks, and this is an investigation, but it is justice that refuses to benefit from an artificial The crisis is one of the repercussions of what his hands have achieved.

§?The second case: it relates to the payment of a debt by the public by virtue of a check. Here, in our opinion, the check remains a means of payment that lists all its effects.

·????????Fourth: The process of paying by following the system of entry in the account does not absolve the bank of the obligation except in the event of the approval of the check holder or the beneficiary of it, i. The restrictions imposed by banks at present, which basically refuse to open accounts with checks.

This systemic crisis can only be resolved by accelerating long-adopted solutions, foremost of which are the Capital Control Law and the Banking Restructuring Law. Incidentally, the Capital Control Law does not absolve banks of liability, but rather sets controls on withdrawals and transfers abroad pending the distribution of losses to everyone, including banks within their restructuring law, so that linking the approval of the Capital Control Law to the restructuring law violates the simplest rules of reason and logic. Likewise, this systemic crisis cannot be resolved through arbitrary summons against banks on suspicion of money laundering, at the request of not innocent people who are not even depositors in these banks, with the aim of pressuring them and obliging them to violate the banking secrecy law and subjecting them to criminal prosecution, all with the aim of giving known parties banking information. In a retroactive way, entire segments of society are never limited to the management of banks, as the latter was informed verbally that it will extend to segments of employees, i.e. to everyone who has dealt and deals in the public sector, and all this without any justification or identification and hunting for what is filtered from this information of materials that can be exploited. These summons did not care to encapsulate its request on suspicion of money laundering, despite all the warnings of the repercussions of this unjustified suspicion on foreign correspondent banks that might close the accounts of Lebanese banks and deal the national economy a fatal blow.

Will Mikati intervene through the Cassation Public Prosecution and the Financial Public Prosecution to change the course of cases and investigations? Or are the banks obligated to abide with harsh and sudden consequences? Or does the banking stubbornness continue with the strike that suffocates everyone and puts them in front of the need to find a way out by bringing a banker-judicial politician out of this unprecedented impasse in the history of banks, even if it is necessary to intervene in the work of the judiciary, similar to what happened in the port explosion case?

It remains to be noted that banks are also pressing for the rapid approval of the Capital Control Law that protects them from depositors’ cases. By way of comparison between the cases of money laundering and the fairness of depositors, a judicial source confirms that “banks adhere to the goals of banking secrecy as if they are the “holy of holies”, while mocking the slogan “the sanctity of deposits”, from which up to 85% of their value is deducted daily.

In 2019, between banks closing their doors and reopening them to depositors, the value of the national currency gradually declined and the exchange rate of the dollar increased, while banks limited withdrawals in all currencies, and succeeded, with the cooperation of the Banque du Liban, in continuing to practice cutting deposits in a convincing manner, through the dual exchange rate policy. Which was opened by the Banque du Liban in cooperation with the banks before the uprising, so what after the reopening in 2023?