Fundamental Circular to Persons Subject to the Provisions of Articles 183 and 184 of the Code of Money and Credit

"Lending Offices" No. 2

We deposit with you a copy of Fundamental Decision No. 12,174 dated January 21, 2016, concerning the conditions for conducting lending operations in accordance with the provisions of Articles 183 and 184 of the Code of Money and Credit.

Beirut, January 21, 2016
Governor of the Central Bank of Lebanon
Riad Tawfiq Salamah

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Fundamental Decision No. 12,174

Conditions for Conducting Lending Operations in Accordance with the Provisions of Articles 183 and 184 of the Code of Money and Credit

The Governor of the Central Bank of Lebanon,
Based on the Code of Money and Credit, particularly Articles 70, 79, 183, 184, and 200 thereof; And since Article 184 of the Code of Money and Credit imposes on the institutions mentioned in Article 183 to comply with measures that may be adopted by "the Central Bank of Lebanon" regarding lending, particularly those concerning operations under Article 79 and the directives it may provide regarding their administration; And based on Fundamental Decision No. 11,948 dated February 12, 2015, concerning the request for information from persons subject to the provisions of Articles 183 and 184 of the Code of Money and Credit "Lending Offices"; And based on a decision by the Central Bank Council taken in its meeting held on January 14, 2016; Decrees as follows:

Article 1: Persons subject to the provisions of Articles 183 and 184 of the Code of Money and Credit, hereinafter referred to as "Lending Offices", are prohibited from conducting lending operations unless they comply with the conditions and procedures specified in this Decision.

Article 2: The subject matter of "Lending Offices" must be confined to lending operations.

Article 3: The minimum capital for any "Lending Office" operating in Lebanon is set at two billion Lebanese Lira, paid and issued in full as a single lump sum to the Central Bank of Lebanon.

Article 4: "Lending Offices" must conduct their business through their main office and are prohibited from opening any branch without prior approval from the Central Bank of Lebanon, provided that they have free own funds equivalent to one billion Lebanese Lira for each branch.

Article 5: "Lending Offices" must, upon establishment, submit to the Central Bank of Lebanon a declaration signed in accordance with procedures, accompanied by three copies (one original) of the following documents:

• A. Regarding Limited Liability Companies:

  1. Document proving the identity of each shareholder and beneficial owner (ID card, passport, individual registration statement, or a copy of the commercial registry file if any shareholder is a legal entity).
  2. Minutes and attendance sheet of the founding general assembly, through which members of the board of directors were elected and a supervisory commissioner was appointed, registered with the commercial registry secretariat.
  3. Minutes of the first board meeting, through which the chairman was elected and an assistant general manager was appointed (if any), registered with the commercial registry secretariat.
  4. Summary, not older than three months, of the judicial register for each of the aforementioned natural persons and representatives of legal entities.
  5. Statement containing material and moral information and an accurate assessment of the financial standing of each shareholder and assistant general manager.
  6. Company registration application submitted to the commercial registry secretariat.
  7. Company registration certificate issued by the commercial registry secretariat.
  8. Commercial announcement certified by the commercial registry secretariat.
  9. Company statutes, signed and certified in accordance with procedures.
     (Amended by Article 1 of Interim Decision No. 12,800 dated May 2, 2018 (Interim Circular No. 490).) (Amended by Article 46 of Interim Decision No. 13,440 dated May 27, 2022 (Interim Circular No. 625).)

• B. Regarding Limited Partnerships (Commandite par Actions):

  1. Document proving the identity of each managing partner, sleeping partner, and beneficial owner (ID card, passport, individual registration statement, or a copy of the commercial registry file if any partner is a legal entity).
  2. General assembly minutes and attendance sheet, through which supervisory commissioners or the manager were appointed, certified by the commercial registry secretariat and approved by all managing partners (if applicable).
  3. Summary, not older than three months, of the judicial register for each of the aforementioned natural persons and representatives of legal entities.
  4. Statement containing material and moral information and an accurate assessment of the financial standing of each partner and manager.
  5. Company registration application submitted to the commercial registry secretariat.
  6. Company registration certificate issued by the commercial registry secretariat.
  7. Commercial announcement certified by the commercial registry secretariat.
  8. Company statutes, signed and certified in accordance with procedures.

• C. Regarding Simple Partnerships (Commandite Simple) and General Partnerships (Société en Nom Collectif):

  1. Document proving the identity of each partner and beneficial owner (ID card, passport, individual registration statement, or a copy of the commercial registry file if any partner is a legal entity).
  2. Appointment decision for supervisory commissioners or auditors, as applicable.
  3. Summary, not older than three months, of the judicial register for each of the aforementioned natural persons and representatives of legal entities.
  4. Statement containing material and moral information and an accurate assessment of the financial standing of each partner.
  5. Company registration application submitted to the commercial registry secretariat.
  6. Company registration certificate issued by the commercial registry secretariat.
  7. Commercial announcement certified by the commercial registry secretariat.
  8. Company contract, signed and certified in accordance with procedures.
     (Amended by Article 47 of Interim Decision No. 13,440 dated May 27, 2022 (Interim Circular No. 625).) (Amended by Article 48 of Interim Decision No. 13,440 dated May 27, 2022 (Interim Circular No. 625).)

• D. Regarding Sole Establishments:

  1. Document proving the identity of the sole establishment owner (ID card, passport, or individual registration statement).
  2. Appointment decision for the auditor.
  3. Summary, not older than three months, of the judicial register for the establishment owner and the auditor.
  4. Statement containing material and moral information and an accurate assessment of the financial standing of the establishment owner.
  5. Establishment registration application submitted to the commercial registry secretariat.
  6. Establishment registration certificate issued by the commercial registry secretariat.
  7. Commercial announcement certified by the commercial registry secretariat.

Article 6: "Lending Offices" must continuously prove that their assets actually exceed their liabilities to third parties by an amount equal to at least the value of their capital or funds allocated for their operations.
A Lending Office may not reduce its capital or recover any part of it.
"Lending Offices", if they incur losses, must rebuild their capital before June 30 of the financial year following the year in which the losses were realized.

Article 7: "Lending Offices" must appoint a primary supervisory commissioner or auditor, as applicable, from among well-known companies.

Article 8: "Lending Offices" must notify the Central Bank of Lebanon regarding any:

• Amendment to the company statutes or contract.
• Resignation from the establishment, its shares, or stakes, as applicable, and amendment of the address of their main office or any branch, providing the Central Bank with documents proving the new address.
• Funds placed by the sole establishment owner, shareholders, or partners, as applicable, at the disposal of the "Lending Office" to conduct its operations, with precise disclosure of the sources of these funds.
• Issuance of bonds by "Lending Offices" established as limited liability companies.

Article 9: The Central Bank Council may, based on the required material and moral competence of the sole establishment owner, shareholders, partners, or board members or managers, particularly regarding no criminal or civil judgments having been issued against any of them or their partners in Lebanon or abroad for committing any ordinary felony, theft, mismanagement, fraud, money laundering, terrorist financing, or bankruptcy declaration, or regarding any of them being listed on local or international sanctions lists, object to:

1. Any resignation from the establishment, shares, or stakes of any "Lending Office".
2. The election of the chairman or any board member, or the appointment of a manager in any "Lending Office", or the continuation of their operations by any of these persons.
   The Central Bank's objections in this regard are binding on "Lending Offices" and the concerned persons.
   (Amended at the beginning of this article by Article 49 of Interim Decision No. 13,440 dated May 27, 2022 (Interim Circular No. 625).) (Amended by Article 2 of Interim Decision No. 12,800 dated May 2, 2018 (Interim Circular No. 490).)

Article 10:
First: The maximum limit for total facilities granted by any "Lending Office" operating in Lebanon to one person, natural or legal, or belonging to an interconnected group of debtors, according to the definition in regulatory texts issued by the Central Bank of Lebanon, is set at 5% of the Lending Office's own funds or 150,000,000 L.L., whichever is less, provided that the client's total monthly loan repayments from banks, financial institutions, and other lending offices do not exceed 35% of the income of a family consisting of husband and wife. Second: As an exception to the provisions of the "First" paragraph of this article, a "Lending Office" may, at its own responsibility, not comply with the provisions stipulated in the "First" paragraph of this article and Article 11, Item (5), below, if the following conditions are met:

• The client has not benefited more than once from the provisions of this "Second" paragraph.
• The client has not previously borrowed from any other "Lending Office" based on the provisions of this "Second" paragraph.
• The value of the loan granted by the "Lending Office" to the client (natural or legal person, or belonging to an interconnected group of debtors) does not exceed 100,000,000 L.L.
• The real estate title deed is free of any mortgage or other encumbrance, if the collateral provided for the loan granted is the borrower's primary residence, with verification undertaken at the responsibility of the concerned "Lending Office".

Article 11: "Lending Offices" are prohibited from:

• 1. Conducting their operations before obtaining knowledge and news from the Central Bank of Lebanon and its publication in the Official Gazette.
• 2. Borrowing, directly or indirectly, from banks and financial institutions operating in Lebanon.
• 3. Using for their operations the personal bank accounts belonging to the establishment owner, shareholders, or partners, as applicable.
• 4. Granting loans whose total exceeds four times their own funds for Lending Offices established as limited liability companies in Lebanon, and twice their own funds for other Lending Offices.
• 5. Granting clients loans with values less than 60% of the value of the provided collateral.
• 6. Collecting fees from clients for opening a lending file.
• 7. Obtaining from clients, as collateral for granted loans, irrevocable powers of attorney or sale agencies in their favor or on behalf of them or in favor/on behalf of any directly or indirectly affiliated third party.

Article 12: "Lending Offices" must comply with legal, regulatory, and application texts issued by the Central Bank of Lebanon and the Banks Supervision Committee in all that does not conflict with this Decision, particularly those concerning:

• Procedures and conditions of lending, its transparency, and procedures for conducting operations with clients.
• Actual interest rates charged to clients and the clear method of calculation.
• Combating money laundering and terrorist financing, including defining and identifying the "beneficial owner".
  (Amended by Article 3 of Interim Decision No. 12,800 dated May 2, 2018 (Interim Circular No. 490).) (Amended by Article 10 of Interim Decision No. 12,826 dated June 13, 2018 (Interim Circular No. 498).)

Article 12 bis:
First: The following terms are meant by the expressions:

• "Client": Every natural or legal person, whether a company, establishment, of any type, or any legal arrangement (Legal Arrangement) such as Trusts, associations, or non-profit organizations (mutual funds, cooperatives, social care homes, charities, clubs, etc.).
• "Beneficial Owner": Every natural person who actually owns or controls, ultimately (Ultimately), directly or indirectly, the "Client" and/or the natural person on whose behalf operations are conducted. Cases of indirect ownership/control include ownership/control through a chain of holdings or through other control mechanisms.

Second: "Lending Offices", each regarding itself, must refrain from maintaining anonymous or nominal accounts, adopt clear procedures for opening accounts, and apply due diligence procedures regarding clients and beneficial owners regardless of the transaction value. These include verifying the identity of each permanent and transient, resident and non-resident client, determining their profession, understanding how the ownership structure of a legal entity is formed and/or controlled, understanding and determining the purpose of the transaction and/or account opening, obtaining information related to this purpose as needed, identifying the "beneficial owner" and source of funds, and continuously monitoring operations, particularly in the following cases:

• Before or when conducting transactions or opening all types of accounts.
• When executing one or multiple related operations totaling 10,000 USD or equivalent on the same account or multiple accounts for one person.
• Existence of suspicion regarding a client's attempt to launder money or finance terrorism.
  (Added by Interim Decision No. 13,387 dated December 23, 2021 (Interim Circular No. 604).)

Third: When determining the identity of the "beneficial owner":

• 1. The "beneficial owner" is determined for clients who are legal entities and the necessary measures are taken to know their identity as follows:
     a. Determining the identity of each natural person who owns, directly or indirectly, an amount equal to or exceeding 20% of the capital of the legal entity. b. If there is doubt regarding whether the natural person(s) determined according to item (a) are the beneficial owners, or if no natural person owns 20% or more of the client's capital, it is required to determine the identity of natural persons who exercise control over the legal entity through other means (owning majority voting rights, appointment rights, or right to dismiss a majority of administrative or supervisory board members in an affiliated person...).
     c. If no natural person is identified as specified in paragraphs (a) and (b), it is required to take necessary measures to determine the identity of persons holding senior management positions.
• 2. The "beneficial owner" is determined for clients from the category of legal arrangements (Legal Arrangements) and necessary measures are taken to know their identity as follows:
     a. Regarding Trusts, it is required to determine the identity of each of: Settlor, Trustee, Protector, Beneficiary (and if not identified, the categories of persons for whom the Legal Arrangement was established), and any other natural person exercising actual control over the Trust through direct/indirect ownership or other means. The definitions in the list of terms attached to the Forty Recommendations issued by the Financial Action Task Force are used for determining this paragraph (a). b. Regarding other types of legal arrangements (Legal Arrangements), including Trust-like structures, it is required to determine the identity of persons holding positions similar to those specified in paragraph (a) of item (2).
• 3. When determining the identity of the "beneficial owner", applying the same due diligence procedures required for clients, including those issued by the "Special Investigation Body".

Fourth: To verify the identity of the client and beneficial owner, the employee responsible for executing the transaction must request from the client or their representative the following official documents or data:

1. If a natural person, presentation of passport, ID card, individual registration statement, or residence permit.
2. If a legal person (company, establishment, or legal arrangement), a certified copy of the statutes, registration certificate, ownership structure, list showing how shares or stakes are distributed (directly or indirectly), and a list of authorized signatories, plus an ID copy of each legal representative, managers, and natural persons who own, directly or indirectly, a percentage granting them actual control over the company's management.
3. If the transaction is conducted through an agent or person acting on behalf of the client, presentation of the original or a certified copy of the power of attorney or document proving authorization, plus documents related to the identity of the agent and principal, and persons acting on behalf of the client, with verification. Due diligence procedures must also be applied to non-professional agents.
   (Amended at the beginning of this paragraph by Article 10 of Interim Decision No. 13,440 dated May 27, 2022 (Interim Circular No. 625).) (Amended by Article 10 of Interim Decision No. 13,440 dated May 27, 2022 (Interim Circular No. 625).) (Last amendment to this paragraph by Article 1 of Interim Decision No. 13,462 dated July 19, 2022 (Interim Circular No. 634).)

Fifth: "Lending Offices" must keep all records obtained through due diligence procedures regarding the "Client" and "Beneficial Owner" (Owner Beneficial), particularly their full name, profession, place of residence address, and registered office address for legal entities (or main workplace if different), their financial status, and account files for at least five years after closing the account or ending the business relationship, along with all documents related to all operations including commercial correspondence and results of any analysis conducted, for at least five years after completing the operation. Operation records must be sufficient to allow reconstruction of individual operations so that these records may serve as evidence for litigation and prosecution in case of any criminal activity.

Sixth: If due diligence procedures stipulated in the Second paragraph of this article cannot be satisfactorily carried out for clients and beneficial owners, accounts must not be opened or transactions commenced/ended. The possibility of notifying the "Special Investigation Body" should also be considered.

Seventh: "Lending Offices" must apply due diligence procedures continuously to all their clients regarding modifying or adding any information on the approved Customer Know Your Client (KYC) Form resulting from any changes in the "Client's" status, particularly if there is doubt about the validity or accuracy of previously declared information or subsequent changes in the identity of the "Client" or "beneficial owner". For this purpose, each company must prepare a specific timeline plan to execute these obligations.

Eighth: "Lending Offices" must:

• 1. In case of doubt that the "Client" is not the "beneficial owner", or if the "Client" states that the "beneficial owner" is a third party, request a written declaration from the "Client" specifying the "beneficial owner", particularly their name, reputation, place of residence, profession, and financial status information, and keep a copy of this declaration and the "beneficial owner's" identity for the period mentioned in the "Fifth paragraph" of this article. Doubt regarding the identity of the "beneficial owner" arises in the following cases, including but not limited to:
     a. If a power of attorney is given to a non-professional person (not a lawyer, general agent, or financial intermediary), it appears that no relationship connects them to the principal explaining their authorization. b. If transactions are conducted through institutions or companies forming front companies.
     c. If the "Client's" financial status is known by the employee executing the transaction and the value of the intended transaction is not proportional to their financial status.
     d. If other notable indicators attract the company's attention within the framework of conducting its operations.
• 2. Immediately notify the Governor of the Central Bank, in his capacity as Chairman of the "Special Investigation Body", if they have confirmations or suspicions, based on reasonable or objective grounds, that the transaction or its execution attempt relates to money laundering or related predicate crimes, terrorist financing, or terrorist acts/organizations, regardless of the transaction amount. Also, in cases where suspicion of money laundering or terrorist financing exists at the company and it reasonably believes that executing due diligence procedures will alert the client, they may refrain from continuing these procedures provided that immediate notification to the "Special Investigation Body" is made.

Ninth: "Lending Offices" must:

• 1. Take appropriate steps to identify, assess, and understand their money laundering and terrorist financing risks, and adopt a risk-based approach (Risk Based Approach) to classify clients and operations according to risk levels: low risk, medium risk, and high risk. Client risks, country risks, and service risks are considered, among others, when classifying client and operation risks:
     a. Client Risk (Customer Risk): Clients with professions primarily relying on cash funds; Politically Exposed Persons (PEPs); Offshore companies; Companies located in countries known as tax havens; Non-face-to-face customers; Clients from or residing in countries that do not apply FATF recommendations or apply them inadequately; Non-profit associations, particularly newly established ones without clear programs and funding sources. b. Country Risk (Country Risk): Strictness of laws regarding combating money laundering and terrorist financing, effectiveness of supervisory and judicial authorities responsible for applying them; Existence of bank secrecy; Country's status regarding corruption and organized crime.
     c. Service Risk (Service Risk): Commercial loans; Loans not based on sufficient cash/real collateral.
• 2. Establish risk-based control measures (Control Based Risk) and, at a minimum, regarding clients, beneficial owners as defined by the Financial Action Task Force (FATF), politically exposed persons (PEPs), their family members, closely related persons, and operations classified as "high risk" according to risk scoring, adopt the following enhanced measures for managing and reducing risks:
     a. Strict monitoring with priority and continuous enhanced follow-up of the business relationship. b. Obtaining more detailed information about clients and beneficial owners (Increased KYC Level), particularly determining their source of wealth.
     c. Obtaining senior management approval to deal or continue dealing with clients and execute operations commensurate with the determined risk level.
     d. Conducting periodic review of client relationships (Periodic Relationship Review). e. Conducting continuous comparison with similar adopted classification (Peer Comparison). f. Establishing a suitable system to determine if the "Client" or "beneficial owner" is politically exposed (PEP's Beneficial Owner). (Added Note: Added by Article 52 of Interim Decision No. 13,440 dated May 27, 2022 (Interim Circular No. 625): "Politically Exposed Persons are foreign or local persons entrusted with or having been entrusted with prominent public functions in a foreign country or locally, such as heads of state or government, senior politicians, senior government officials, judicial and military officials, senior executives in state-owned companies, important political party officials. Senior management members include directors, deputy directors, board members, or equivalent positions in any international organization." This definition does not apply to individuals holding middle or lower positions in the aforementioned categories.)
• 3. Taking into account the time period of establishing the relationship with the client and their good conduct.
• 4. Relying on information technology programs to conduct necessary monitoring according to the adopted classification.
• 5. Adopting a specific policy and controls/procedures by senior management based on the obligations stipulated in this article, for risk classification and reduction.
• 6. Documenting risk assessment results as needed and keeping them to provide competent authorities when necessary.

Tenth: "Lending Offices" must establish an effective internal control system (Internal Control System) including appointing a Compliance Officer at the management level, who must possess sufficient expertise in combating money laundering and terrorist financing. Their duties are as follows:

• 1. Developing an anti-money laundering and terrorist financing procedures manual taking into account the obligations in this Decision, considering the company's structure and existing departments, developing it as needed, and preparing the Customer Know Your Client (KYC) Form mentioned in the Seventh paragraph of this article, submitting them to senior management for approval and adoption.
• 2. Auditing operations conducted throughout the client relationship period to ensure consistency between executed operations and what the institution knows about clients, their activity patterns, and represented risks, and if necessary, source of funds.
• 3. Ensuring that documents, data, or information obtained through due diligence procedures are continuously updated and appropriate, by reviewing existing records, particularly for high-risk client categories, documenting their work with necessary periodic reports, and submitting them to senior management.
     (Last amendment to this item by Article 2 of Interim Decision No. 13,462 dated July 19, 2022 (Interim Circular No. 634).) (Amended by Article 3 of Interim Decision No. 13,462 dated July 19, 2022 (Interim Circular No. 634).)
• 4. Applying due diligence procedures to existing clients based on relative importance and risks, and taking due diligence measures regarding current business relationships at appropriate times, considering whether due diligence procedures have been previously taken and when, and the adequacy of obtained data.
• 5. Verifying the proper application and effectiveness of adopted anti-money laundering and terrorist financing procedures, monitoring accounts (through specialized IT programs if necessary showing indicators of money laundering or terrorist financing), and ensuring compliance with regulatory requirements.