Regulations on the Control of Financial and Banking Operations for Fighting Money Laundering and Terrorist Financing

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Old Number: 1912 | Text/Section R 1/83/T-12-31/2023

Basic Circular for Banks No. 83 Addressed also to Financial Institutions, Leasing Companies, and Entities Issuing and Promoting Prepaid/Debit Cards Operating in Lebanon 1

2 We enclose copies of both the Basic Decision No. 7818 dated 18/5/2001 3 and the System for Supervision of Financial and Banking Operations to Combat Money Laundering and Terrorist Financing attached thereto.

Beirut, 18 May 2001 Governor of the Central Bank of Lebanon Riad Tawfiq Salamé

1 - This Circular was applied to leasing companies and entities issuing/promoting prepaid/debit cards operating in Lebanon pursuant to Article 14 of Interim Decision No. 13388 dated 23/12/2021 (Interim Circular No. 605). 2 - In accordance with Article 2 of Interim Decision No. 8488 dated 17/9/2003 (Interim Circular No. 35), banks and financial institutions must notify this Decision and its attached System to their supervisory commissioners. 3 - The name of this System was amended by Interim Decision No. 10622 dated 30/12/2010 (Interim Circular No. 241) and was originally: "System for Supervision of Financial and Banking Operations to Combat Money Laundering".

552

Basic Decision No. 7818 System for Supervision of Financial and Banking Operations to Combat Money Laundering and Terrorist Financing 1

The Governor of the Central Bank of Lebanon, 2 Based on the provisions of Law No. 318 dated 20/4/2001 (Combating Money Laundering), particularly Article 5 thereof, and based on the Central Council's Decision taken in its meeting held on 16/5/2001,

Decrees as follows:

Article 1: The "System for Supervision of Financial and Banking Operations to Combat Money Laundering and Terrorist Financing" attached to this Decision is put into effect. Article 2: Each of the following is repealed:

• 1 Sub-paragraph (2) of Article 1 of Basic Decision No. 6349 dated 24/10/1996 attached to Basic Circular for Banks and Financial Institutions No. 29 dated 24/10/1996.
• 2 Decision No. 7511 dated 21/1/2000 attached to Circular for Banks No. 1792 dated 21/1/2000. Article 3: This Decision and its attached System shall take effect immediately upon their issuance. Article 4: This Decision and its attached System shall be published in the Official Gazette.

Beirut, 18 May 2001 Governor of the Central Bank of Lebanon Riad Tawfiq Salamé

1 - The name of this System was amended by Interim Decision No. 10622 dated 30/12/2010 (Interim Circular No. 241) and was originally: "System for Supervision of Financial and Banking Operations to Combat Money Laundering". 2 - This Law is considered replaced by Law No. 44 issued on 24/11/2015. 3 - The circular number is according to the old numbering system.

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System for Supervision of Financial and Banking Operations to Combat Money Laundering and Terrorist Financing

Article 1: This System is established in implementation of the provisions of Law No. 318 dated 20/4/2001 concerning the combating of money laundering. Banks shall supervise operations conducted with their clients to avoid involvement in money laundering or terrorist financing, by adopting at least the rules specified in this System.

Section I: Relations with Foreign Correspondent Banks Article 2: A bank shall not enter into or continue a correspondence relationship with a shell bank. When establishing relationships with foreign correspondent banks or other similar banking correspondence relationships, it must be confirmed that the bank has a genuine presence based on obtained documentary evidence, in addition to not dealing with shell banks, enjoying a good reputation, being subject to adequate supervision, and having undergone investigation regarding money laundering or terrorist financing or supervisory measures. It must also adopt adequate and effective procedures to combat money laundering and terrorist financing. In addition to the above, the bank shall apply the following procedures:

• 1 Obtaining senior management approval before establishing relationships with correspondent banks. 2 - Verifying the nature of activity of the foreign "Respondent Bank" it deals with.
• 3 Understanding the responsibility of each bank and its foreign "Respondent Bank".

1 - The System is replaced pursuant to Article 1 of Interim Decision No. 10622 dated 30/12/2010 (Interim Circular No. 241). 2 - This Law is considered replaced by Law No. 44 issued on 24/11/2015. 3 - This Article was amended by Article 1 of Interim Decision No. 13093 dated 7/8/2019 (Interim Circular No. 523). 4 - The latest amendment to this paragraph was introduced by Article 1 of Interim Decision No. 13440 dated 7/5/2022 (Interim Circular No. 256). 5 - This paragraph was amended by Article 1 of Interim Decision No. 13461 dated 19/7/2022 (Interim Circular No. 633).

554 4 - Taking steps to reach self-satisfaction, regarding payment accounts opened by foreign correspondent banks ("Accounts Through Payable"), that these banks have fulfilled their due diligence obligations toward clients who have direct access to the correspondent bank's accounts, and ensuring their ability to provide relevant due diligence information upon request.

Section II: Customer Relations and Due Diligence Procedures Article 3 (1):

• The following terms are defined as:
• "Client": Any natural or legal person, whether a company, institution, or any type/legal structure (such as Trusts, Associations, Organizations, Non-profit entities (mutual funds, cooperatives, social care homes, charities, clubs, etc.)).
• "Beneficial Owner": Any natural person who ultimately owns or controls, directly or indirectly, the "Client" and/or the natural person on whose behalf operations are conducted. Indirect ownership/control includes cases where ownership/control is through successive holdings or indirect control mechanisms.

2 - Banks, in particular, shall refrain from maintaining anonymous or nominal accounts, adopt clear procedures for opening accounts, and apply due diligence procedures including verifying the identity of both their permanent and transient clients (residents and non-residents), determining their profession, tax residence, obtaining explicit written declarations, understanding the corporate ownership structure and/or control, defining the purpose of the transaction/account opening, obtaining relevant information on this purpose, identifying the "Beneficial Owner", and monitoring operations continuously, especially in the following cases:

1 - Before or upon conducting transactions or opening all types of accounts, including credit and numbered accounts. 2 - Lending operations. 3 - Organizing iron safe deposit box leases. 4 - Electronic fund transfer operations. 5 - Cash operations amounting to or exceeding USD 10,000 (or equivalent in any other currency). Cash operations include cash payments made by clients at bank counters (cash deposits, foreign exchange, purchase of precious metals, purchase of financial instruments for cash, subscription to treasury bills for cash, purchase of checks for cash including traveler's checks, etc.).

1 - The latest amendment to this sub-paragraph was introduced by Article 1 of Interim Decision No. 12826 dated 13/6/2018 (Interim Circular No. 498). 2 - The latest amendment to the beginning of this sub-paragraph was introduced by Article 2 of Interim Decision No. 13388 dated 23/12/2021 (Interim Circular No. 605).

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• When determining the identity of the "Beneficial Owner", the same due diligence procedures required for "Clients" must be applied, including those issued by the Special Investigation Authority. 2 - The employee responsible for executing the operation shall apply due diligence procedures, including verifying client identity, regardless of transaction value, if they notice a single or multiple related transactions amounting to USD 10,000 (or equivalent) as mentioned in sub-paragraph (2) of this Article, or if they have doubts about a client attempting money laundering or terrorist financing. 3 - To verify the identity of the client and beneficial owner, the employee responsible for executing the operation shall request the following official documents or data from the client or their representative: a) If a natural person, presentation of passport, national ID card, individual registration statement, or residence permit. b) If a legal person (company, institution, or legal structure), presentation of duly authenticated documents according to regulations regarding the Articles of Association, registration certificate, ownership structure, a list showing share/equity distribution (direct or indirect), nature of associated voting rights, and a list of authorized signatories, along with copies of the ID of each legal representative, manager, and natural persons who directly or indirectly hold a percentage granting them actual control over the company's management, plus a statement of the "Beneficial Owner" submitted to the Ministry of Finance and the Commercial Register. c) If the transaction is conducted through an agent or representative, presentation of the original or a certified copy of the power of attorney proving authorization, along with documents related to the identity of the agent and principal/client, verified accordingly. Due diligence procedures specified in sub-paragraph (2) of Article 3 above shall also apply to non-professional agents. d) If the transaction is conducted through correspondence, official certification of signature on the same document or via an independent certificate. Signature verification or client identity (resident abroad) can be confirmed through a correspondent bank, subsidiary, representative office, branch, or another bank known to have good supervision and adequate/effective AML/CFT procedures, provided the first transaction on the account is issued from an account in the client's name at a bank also subject to good supervision and adequate/effective AML/CFT rules. The bank bears responsibility for the accuracy of data/information when relying on a third party to identify and verify clients.

1 - This paragraph was amended by Article 2 of Interim Decision No. 13440 dated 27/5/2022 (Interim Circular No. 625). 2 - The latest amendment to this sub-paragraph was introduced by Article 2 of Interim Decision No. 13461 dated 19/7/2022 (Interim Circular No. 633).

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5 - Banks shall retain all records obtained through due diligence procedures regarding "Clients" and "Beneficial Owners", specifically their full name, profession, residential address, registered business address (or main place of work for legal persons), financial status, and account files for at least five years after account closure or termination of the business relationship. All documents related to all operations, including commercial correspondence and results of any analysis performed, shall be retained for at least five years after the operation is completed. Operation records must be sufficient to allow reconstruction of individual operations, serving as evidence for litigation and prosecution in case of criminal activity.

1 - This paragraph was amended by Article 2 of Interim Decision No. 13440 dated 27/5/2022 (Interim Circular No. 625). 2 - The latest amendment to this sub-paragraph was introduced by Article 2 of Interim Decision No. 13461 dated 19/7/2022 (Interim Circular No. 633).

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6 - If due diligence procedures specified in sub-paragraph (2) of Article 3 for clients and beneficial owners cannot be satisfactorily performed, the account shall not be opened, business/transaction initiated, or the relationship terminated. Notification to the "Special Investigation Authority" established by Law No. 318 dated 20/4/2001 (considered replaced by Law No. 44 concerning combating money laundering and terrorist financing dated 24/11/2015) shall also be considered.

1 - This paragraph was amended by Article 2 of Interim Decision No. 13440 dated 27/5/2022 (Interim Circular No. 625). 2 - This sub-paragraph was added by Article 4 of Interim Decision No. 13093 dated 7/8/2019 (Interim Circular No. 523).

7 - Banks, when opening numbered deposit accounts for clients pursuant to Article 3 of the Bank Secrecy Law dated 3/9/1956, shall use numbers and/or letters exclusively for identification of these accounts, refrain from using aliases, and apply all due diligence procedures regarding them.

Article 4: Banks shall, in case of doubt that the client is not the beneficial owner or if the client states the beneficial owner is a third party, request a written declaration from the client specifying the beneficial owner (actual beneficiary), particularly their name, surname, residence, profession, financial status information, and shall retain a copy of this declaration and the beneficial owner's identity for the period mentioned in sub-paragraph (5) of Article 3 above. Doubt regarding the identity of the beneficial owner arises in the following cases, illustratively and not exhaustively: a) When granting power of attorney to a non-professional (non-lawyer, agent, or financial intermediary), it appears the relationship with the principal justifies the proxy. b) When dealing through numbered accounts or via front companies/entities. c) If the client's financial status is known to the executing employee, and the transaction value is disproportionate to that status. d) If other notable indicators catch the bank's attention within its business operations.

1 - The latest amendment to this paragraph was introduced by Article 2 of Interim Decision No. 13440 dated 27/5/2022 (Interim Circular No. 625). 2 - This sub-paragraph was added by Article 4 of Interim Decision No. 13093 dated 7/8/2019 (Interim Circular No. 523).

558 Article 5: Banks shall immediately notify the Governor of the Central Bank of Lebanon, in his capacity as head of the "Special Investigation Authority", if they have confirmations or doubts based on reasonable or objective grounds, that the banking operation or its attempt relates to money laundering or related predicate crimes, terrorist financing, terrorist acts, or terrorist organizations. This applies regardless of the transaction amount, particularly when:

• Doubts arise and cannot be resolved regarding the accuracy of the client's written declaration about the beneficial owner's identity, or if misleading/inaccurate information was provided regarding this identity.
• It is determined that the client was deceived during verification of the client or beneficial owner's identity, and doubts persist regarding information provided by the client.
• Transfers or checks are returned directly or upon request of concerned parties, especially correspondent banks, due to forgery or suspicion that they involve suspicious operations.
• They have reasonable grounds to believe that executing due diligence procedures will alert the client to the bank's suspicion of money laundering or terrorist financing. In this case, the bank is allowed to cease these procedures.

1 - The latest amendment to this paragraph was introduced by Article 3 of Interim Decision No. 13440 dated 27/5/2022 (Interim Circular No. 526). 2 - This sub-paragraph was added by Article 5 of Interim Decision No. 13093 dated 7/8/2019 (Interim Circular No. 523). 3 - This article was added by Interim Decision No. 12874 dated 19/9/2018 (Interim Circular No. 508). 4 - The latest amendment to this article was introduced by Article 3 of Interim Decision No. 13461 dated 19/7/2022 (Interim Circular No. 633).

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Article 5 Recurring: Banks shall immediately notify the "Special Investigation Authority" of the procedures and measures they may take based on applicable laws and regulations concerning combating money laundering and terrorist financing, regarding freezing or closing any account belonging to a client, or refraining from dealing with or opening an account for them, clarifying the justified reasons supporting these procedures/measures.

Article 6: Banks shall apply due diligence procedures to their existing clients, including account holders opened before Law No. 318 dated 20/4/2001, based on relative importance and risks. They shall also take due diligence measures regarding existing business relationships at appropriate times, considering whether due diligence procedures were previously taken and when, and whether there are any changes in the client's status, particularly if doubt exists regarding the accuracy of previously declared information or subsequent changes in the client's or beneficial owner's identity. For this purpose, each bank must prepare specific action plans with defined timelines to implement these obligations.

Section III: Supervision of Certain Operations and Customers

Article 7 (1):

• Banks must apply enhanced due diligence procedures, including inquiring from the client about the source and destination of funds, transaction subject matter, beneficiary identity, and beneficial owner, when a transaction involves the following characteristics: a) The transaction occurs under unusual complexity conditions, which the bank must assess not only by type and nature but also by apparent purpose. b) The transaction appears to lack economic justification or legitimate purpose, particularly due to disparity between the transaction and the client's profession or habits/personality. c) One party to the transaction is a national of, or resident in, countries that do not apply Financial Action Task Force (FATF) recommendations or apply them inadequately, verified through periodic review of the FATF website, especially after each general meeting.

1 - The latest amendment to this paragraph was introduced by Article 6 of Interim Decision No. 13093 dated 7/8/2019 (Interim Circular No. 523).

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2 - Banks shall: First: When accepting a check drawn on any exchange office, or executing any banking operation upon request from exchange offices for one of their clients (directly or indirectly), and if the check/transaction value exceeds USD 10,000 (or equivalent), they shall take the following procedures: a) Confirm receipt of the notification specified in sub-paragraph (1) of Article 9 of the Executive System for the Exchange Profession Law attached to Basic Decision No. 7933 dated 27/9/2001, concerning required information about the transaction subject to the check or banking operation, specifically whether it involves cash received by the exchange office, and about the source, destination, beneficiary identity, and beneficial owner. b) Retain the mentioned notification for five years. c) Obtain the aforementioned notification directly from the concerned exchange office when presenting the check or requesting the banking operation, before receiving the mentioned notification. Second: Upon receiving a request to execute any transfer resulting from an exchange or shipping of cash and/or "precious metals" to third parties in Lebanon regardless of amount: a) Confirm receipt of the notification specified in sub-paragraph (2) of Article 9 of the Executive System for the Exchange Profession Law. b) Retain the mentioned notification for five years.

1 - This paragraph was amended by Article 1 of Interim Decision No. 10792 dated 22/8/2011 (Interim Circular No. 277).

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3 - Banks shall immediately notify the Central Bank of Lebanon if an exchange office delays sending either of the notifications mentioned in sub-paragraph (2) above.

4 - Banks are prohibited from:

• Opening any account for an exchange office before obtaining approval from the "Verification Unit" specified in Article 10 below.
• Opening accounts for exchange offices or executing transfers upon their request for purposes other than those specified in the Executive System for the Exchange Profession Law issued by the Central Bank of Lebanon.
• Accepting or executing currency exchange operations for any exchange office unless the latter is a client of the concerned bank. 5 2 - When issuing checkbooks to any exchange office, banks shall ensure all checks bear the phrase "Payable only to the first beneficiary".

Article 8: Banks, in particular, shall: a) Take the following indicators as evidence of money laundering or terrorist financing (illustratively and not exhaustively): 1 - Exchanging large quantities of small cash notes for larger notes of the same or other currencies. 2 - Large or repeated cashing operations (Cambio) starting from cash amounts. 3 - Client account activity, such as large or repeated deposits disproportionate to apparent activities. 4 - Operating an account primarily to transfer large amounts to foreign countries or receive large transfers, while the client's activity does not justify such operations. 5 - Large or repeated operations related to an offshore client's activity, found disproportionate to the client's business size. 6 - Exchanging cash quantities for electronic transfers or bank checks. 7 - Change in deposit pattern for a client exempt from filling out the Cash Transaction Slip (CTS). 8 - Client conducting large cash deposits and withdrawals without adequate personal identification. 9 - Paying or receiving bearer checks issued in a foreign country, drawn to order of a person and endorsed by previous depositors, or checks with varied amounts possibly unrelated to commercial operations or claimed to arise from gambling.

1 - This paragraph was added by Article 1 of Interim Decision No. 10725 dated 21/5/2011 (Interim Circular No. 262).

558 Recurring 4 10 - Cash deposits and/or bank transfers followed by direct and multiple withdrawals. 11 - Existence of multiple accounts for one client not justified by their profession, or frequent cash transfers between and across these accounts. 12 - Cash deposits and/or bank transfers occurring when the client's activity does not generate this volume of funds. 13 - Depositing bank/traveler's checks into a company/institution account not justified by its nature of work. 14 - Cash and/or bank transfers appearing unusual relative to the branch's location. 15 - Electronic banking operations appearing non-standard. 16 - Transfers between exchange office accounts and other accounts, especially those belonging to owners, partners, shareholders, directors, authorized signatories, or their family members (spouse, ascendants, descendants), particularly if followed by withdrawals. 17 - Cash deposit resulting from a real estate sale, followed by withdrawal or transfer to the buyer or any person designated by them, on the grounds of canceling the sale.

1 - This paragraph was added by Article 2 of Interim Decision No. 10725 dated 21/5/2011 (Interim Circular No. 262). 2 - This paragraph was added by Article 1 of Interim Decision No. 12948 dated 24/12/2018 (Interim Circular No. 513).

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b) Monitor opened accounts and operations conducted through the units/departments mentioned in Article 11 of this System, using specialized software programs enabling account and operation monitoring applicable to the aforementioned indicators, based on customer profiling, and extracting periodic reports (daily, weekly, monthly, annual). c) Take adequate measures to prevent the misuse of technological developments in money laundering or terrorist financing.

1 - This paragraph was added by Article 2 of Interim Decision No. 10725 dated 21/5/2011 (Interim Circular No. 262). 2 - This paragraph was added by Article 1 of Interim Decision No. 12948 dated 24/12/2018 (Interim Circular No. 513). 3 - The latest amendment to this paragraph was introduced by Article 7 of Interim Decision No. 13093 dated 7/8/2019 (Interim Circular No. 523).

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Article 9: Banks shall take appropriate steps to identify, assess, and understand their money laundering and terrorist financing risks, applying the following procedures based on this understanding: First: Adopt a Risk-Based Approach to classify clients and operations according to the following risk levels: Low Risk, Medium Risk, and High Risk. The following risks are considered (illustratively and not exhaustively):

• 1 Client Risk: a) Clients whose professions are primarily based on cash (exchange offices, gold and precious stones trade, restaurants and nightclubs, real estate companies, car trade, microfinance institutions, non-bank entities conducting electronic cash transfers...). b) Politically Exposed Persons (PEPs) according to FATF definition. c) "Offshore" companies. d) Companies located in countries known as tax havens. e) Non Face-to-Face Customers. f) Clients dealing exclusively through intermediaries. g) Clients dealing via fiduciary or trust arrangements. h) Companies with fully or partially bearer shares.

1 - This article was amended by Article 6 of Interim Decision No. 13388 dated 23/12/2021 (Interim Circular No. 605). 2 - This paragraph was amended by Article 1 of Interim Decision No. 12255 dated 4/5/2016 (Interim Circular No. 421). 3 - The latest amendment to this paragraph was introduced by Article 8 of Interim Decision No. 13093 dated 7/8/2019 (Interim Circular No. 523).

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i) Clients who are nationals of, or residents in, countries that do not apply FATF recommendations or apply them inadequately. j) Non-profit associations, especially newly established ones without clear programs and funding sources.

• 2 Country Risk: a) Strictness of laws concerning combating money laundering and terrorist financing, and effectiveness of supervisory/judicial authorities responsible for their application. b) Existence of bank secrecy. c) Country's status regarding corruption and organized crime.
• 3 Service Risk: a) Ad