Fighting Money Laundering and Terrorist Financing

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Text / Section 2 / FMCI / Circular No. 1 / Rev. 7 – 31/02/2022

Basic Circular No. 1 for Financial Intermediation Institutions, also directed to Collective Investment Bodies [1]

We enclose a copy of Basic Decision No. 12837 dated June 26, 2018, concerning the combating of money laundering and terrorist financing.

Beirut, June 26, 2018 Governor of Bank of Lebanon Riad Tawfiq Salamah

[1] This circular applies to "Collective Investment Bodies" operating in Lebanon under Article 50 of Intermediation Decision No. 13440 dated May 27, 2022 (Intermediation Circular No. 625).

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Basic Decision No. 12837 Combating Money Laundering and Terrorist Financing

The Governor of Bank of Lebanon, Based on the provisions of Law No. 44 dated November 24, 2015, on combating money laundering and terrorist financing, particularly Article Four thereof; Based on Law No. 234 dated June 10, 2000, concerning the regulation of the financial intermediation profession; Based on Law No. 161 dated August 17, 2011, concerning financial markets; Based on Basic Decision No. 7818 dated May 18, 2001, and its amendments concerning the system for supervising financial and banking operations to combat money laundering and terrorist financing; Based on the Code of Conduct for Financial Markets issued by the Lebanese Capital Market Authority (CMA) dated November 10, 2016; Based on the recommendations of the Financial Action Task Force (FATF); Based on the decision of the Central Council of Bank of Lebanon taken in its session held on June 20, 2018;

Decrees the following:

Article One The following terms shall have the meanings indicated below:

• "Client": Any natural or legal person, whether a company, institution, legal arrangement (such as Trust), body, organization, or non-profit association (mutual funds, cooperatives, social care centers, charities, clubs, etc.). [Amended by Article Two of Intermediation Decision No. 13386 dated December 23, 2021 (Intermediation Circular No. 603).]

• "Beneficial Owner": Any natural person who actually owns or controls, ultimately and directly or indirectly, the "Client" and/or the natural person on whose behalf transactions are conducted. Indirect ownership/control includes cases where ownership/control is exercised through successive holdings or through indirect control mechanisms.

Article Two Financial intermediation companies shall, each in respect of its own activities:

1. Prohibit the maintenance of anonymous or nominee accounts, and adopt clear procedures for opening accounts.
2. Apply due diligence measures regarding clients and beneficial owners, regardless of transaction value, which include verifying the identity of all permanent and transient, resident and non-resident clients; determining their profession/business nature; understanding the corporate structure and/or control mechanisms of legal persons; identifying and understanding the purpose of the transaction or account opening; obtaining relevant information regarding this purpose when necessary; identifying the "Beneficial Owner" and source of funds; and continuously monitoring transactions, particularly in the following cases:
   • Before or upon conducting transactions or opening all types of accounts.
   • Electronic fund transfers by all means.
   • When executing one or multiple related transactions totaling LBP 10,000,000 (Lebanese Pounds) or its equivalent.
   • When there is suspicion that a client may be attempting money laundering or terrorist financing.

Article Three When determining the identity of the "Beneficial Owner": First: For legal person clients, determine and take necessary measures to identify these persons as follows:

1. Identify every natural person who directly or indirectly owns, in total, 20% or more of the legal person's capital. [Amended by Article Three of Intermediation Decision No. 13386 dated December 23, 2021 (Intermediation Circular No. 603).]

2. If there is doubt regarding whether the natural person(s) identified in point (1) are the determined beneficial owners, or if no natural person owns 20% or more of the capital, it is mandatory to identify the natural persons who exercise control over the legal person through other means (e.g., majority voting rights, appointment/removal rights of board members).

3. If no natural person is identified as specified in points (1) and (2), it is mandatory to take necessary measures to identify and determine the identity of persons holding senior management positions.

Second: For legal arrangement clients (such as Trusts), determine and take necessary measures to identify these persons as follows:

1. Regarding Trusts, it is mandatory to identify the identity of each of:
   • The Settlor.
   • The Trustee.
   • The Protector.
   • The Beneficiary, and if their identity is not determined or identified, the categories of persons for whom the legal arrangement was established.
   • Any other natural person who actually exercises control over the Trust through direct or indirect ownership or other means. The definitions listed in the glossary attached to the Forty Recommendations issued by FATF shall be adopted for determining the above.
2. Regarding other types of legal arrangements (including Trust-like structures), it is mandatory to identify persons holding positions similar to those specified in point (1) of this "Second" paragraph.

Third: When determining the identity of the "Beneficial Owner", the same due diligence measures required for clients, including those issued by the Special Investigation Unit (SIU), shall be applied.

Article Four To verify the identity of the Client and Beneficial Owner, the employee responsible for executing the transaction shall request from the client or their representative the following official documents or statements: a) If the client is a natural person, presentation of a passport, national ID card, individual registration statement, or residence permit. b) If the client is a legal person (company, institution, or legal arrangement), a certified copy of the Articles of Association, registration certificate, ownership structure, bylaws detailing share/part distribution (direct or indirect), and a list of authorized signatories, in addition to copies of the identity documents of each legal representative, directors, and natural persons who directly or indirectly own a percentage granting them actual control over the company's management, in addition to the "Beneficial Owner" statement 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 or proof authorizing such person, in addition to presenting and verifying documents related to the identity of the agent, principal, and representative. Due diligence measures shall also be applied to non-professional agents. [Amended by Articles 9 and 10 of Intermediation Decision No. 13440 dated May 27, 2022 (Intermediation Circular No. 625).]

Article Five Financial intermediation companies shall retain all records obtained through due diligence measures regarding the "Client" and "Beneficial Owner", specifically their full name, profession, place of residence address, registered office address (for legal persons), and financial status. Account files shall be kept for at least five years after account closure or termination of the client relationship, along with all documents related to all transactions (including commercial correspondence and results of any analyses conducted), for a minimum of five years after transaction completion. Transaction records must be sufficient to allow the reconstruction of individual transactions, enabling these records to serve as evidence for litigation and prosecution in case of any criminal activity. [Amended by Articles 3, 9, and 10 of Intermediation Decisions No. 13386 and 13459 dated December 23, 2021, and July 19, 2022 respectively (Intermediation Circulars No. 603 and 631).]

Article Six If due diligence measures stipulated in Article Two above cannot be satisfactorily carried out for clients and beneficial owners, the company shall refuse to open an account or commence transactions/conduct operations/terminate the client relationship. Consideration must also be given to reporting to the Special Investigation Unit (SIU).

Article Seven Financial intermediation companies shall apply due diligence measures continuously to all clients, including updating or adding information on the approved Know Your Customer (KYC) Form resulting from any changes in the client's status, particularly when there is doubt about the validity or accuracy of previously declared information, or upon subsequent changes in the identity of the "Client" or "Beneficial Owner". To this end, each company must prepare a specific action plan with defined timelines to implement these obligations. [Amended by Article 3 of Intermediation Decision No. 13386 dated December 23, 2021 (Intermediation Circular No. 603).]

Article Eight Financial intermediation companies shall:

1. In case of suspicion that the "Client" is not the "Beneficial Owner", or if the client declares that the beneficial owner is a third party, request a written declaration from the "Client" specifying the "Beneficial Owner" (actual beneficiary), particularly their name, alias, place of residence, profession, and financial status information, and retain a copy of this declaration and the identity of the "Beneficial Owner" for the period mentioned in Article Five. Suspicion regarding the identity of the "Beneficial Owner" arises, among others, in the following cases: a) When power of attorney is granted to a non-professional (non-lawyer, agent, or financial intermediary), and it appears that no relationship links them to the principal explaining the authorization. b) When transactions are conducted through institutions or companies acting as fronts (Front Companies). c) If the client's financial status is known to the executing employee, and the value of the intended transaction is disproportionate to that financial status. d) If other relevant indicators attract the company's attention within its operations.

2. Report to the Governor of Bank of Lebanon, in his capacity as Chairman of the "Special Investigation Unit", immediately if they have confirmations or suspicions, based on reasonable or objective grounds, that the transaction or its execution relates to money laundering or related predicate crimes, terrorist financing, terrorist acts, or terrorist organizations, regardless of the transaction amount. In cases where the company suspects money laundering/terrorist financing and reasonably believes that executing due diligence will alert the client, it may refrain from continuing these procedures provided that the "Special Investigation Unit" is notified immediately. [Amended by Article 3 of Intermediation Decision No. 13386 dated December 23, 2021 (Intermediation Circular No. 603).]

Article Nine Financial intermediation companies shall:

1. Take appropriate steps to identify, assess, and understand their money laundering and terrorist financing risks based on a Risk-Based Approach (RBA) to classify clients and transactions according to risk levels: low risk, medium risk, and high risk. Client, country, and service risks shall be considered, among others, when classifying client and transaction risks:

• Client Risk (Customer Risk): Clients whose professions are primarily cash-based (money exchange, restaurants/nightclubs, car trade, non-banking institutions conducting electronic fund transfers); Politically Exposed Persons (PEPs); Offshore companies; Companies located in known tax havens; Non face-to-face customers; Clients dealing only through intermediaries; Clients dealing via fiduciary/trust arrangements; Clients who are nationals of or residents in countries that do not apply or do not fully apply FATF recommendations; Non-profit associations, especially newly established ones without clear programs and funding sources.
• Country Risk: Strictness of laws combating money laundering/terrorist financing and effectiveness of supervisory/judicial authorities; Existence of bank secrecy; Country's status regarding corruption and organized crime.
• Service Risk: Private portfolio management; Management of collective investment bodies; Trading/dealing in financial instruments. [Amended by Articles 12 and 13 of Intermediation Decision No. 13440 dated May 27, 2022 (Intermediation Circular No. 625).]

2. Establish and implement control measures based on risk, and as a minimum, regarding clients, beneficial owners, Politically Exposed Persons (PEPs), their family members, closely related persons, and "high risk" classified transactions, by adopting the following enhanced measures to manage and mitigate risks: a) Enhanced supervision 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 the source of their wealth. c) Obtaining senior management approval to conduct or continue transactions with clients, commensurate with the determined risk level. d) Conducting periodic reviews of client relationships. e) Conducting continuous comparison with the adopted peer classification. f) Establishing an appropriate system to determine if the "Client" or "Beneficial Owner" is a Politically Exposed Person (PEP). [Amended by Article 52 of Intermediation Decision No. 13440 dated May 27, 2022 (Intermediation Circular No. 625).]

3. Consider the time period of establishing the relationship with the client and their good track record.

4. Rely on IT programs to conduct necessary supervision according to the adopted classification.

5. Senior management procedures, based on a specific policy and controls/obligations stipulated in this article, for risk classification and mitigation.

6. Document risk assessment results when necessary and retain them to provide to competent authorities upon request. [Amended by Articles 3, 9, and 10 of Intermediation Decisions No. 13386 and 13459 dated December 23, 2021, and July 19, 2022 respectively (Intermediation Circulars No. 603 and 631).]

Article Ten Financial intermediation institutions shall establish and adopt an effective internal control system, including appointing a Compliance Officer at the management level, possessing sufficient expertise in combating money laundering and terrorist financing. Their duties shall be as follows:

1. Develop a procedures manual for combating money laundering and terrorist financing, taking into account the obligations in this decision, considering the company's structure and existing departments, and developing it as needed. They shall submit the Know Your Customer (KYC) Form (subject of Article Seven above) to senior management for approval and adoption. [Amended by Article 2 of Intermediation Decision No. 13459 dated July 19, 2022 (Intermediation Circular No. 631).]

2. Audit transactions conducted throughout the client relationship period to ensure consistency between executed transactions and what the company knows about clients, their activity patterns, represented risks, and, if necessary, source of funds. [Amended by Article 3 of Intermediation Decision No. 13459 dated July 19, 2022 (Intermediation Circular No. 631).]

3. Ensure that documents, statements, or information obtained through due diligence measures are continuously updated and appropriate, by reviewing existing records, particularly for high-risk client categories, and documenting work through necessary periodic reports submitted to senior management. [Amended by Article 3 of Intermediation Decision No. 13386 dated December 23, 2021 (Intermediation Circular No. 603).]

4. Apply due diligence measures to existing clients based on relative importance and risks, and take due diligence measures regarding current business relationships at appropriate times, considering whether prior due diligence measures were taken and their timing and sufficiency. [Amended by Article 4 of Intermediation Decision No. 13459 dated July 19, 2022 (Intermediation Circular No. 631).]

5. Verify the proper application and effectiveness of procedures for combating money laundering/terrorist financing and account monitoring (using specialized IT programs if necessary, revealing money laundering/terrorist financing indicators) to confirm the absence of suspicious transactions and document work through necessary periodic reports submitted to senior management. [Amended by Article 5 of Intermediation Decision No. 13459 dated July 19, 2022 (Intermediation Circular No. 631).]

6. Apply enhanced due diligence measures commensurate with the risk level to business relationships and transactions conducted with natural and legal persons (including financial institutions) from countries where FATF recommends taking such measures. The company's website shall be reviewed periodically, especially after each general meeting of FATF. [Amended by Article 14 of Intermediation Decision No. 13440 dated May 27, 2022 (Intermediation Circular No. 625).]

7. [Deleted by Article 5 of Intermediation Decision No. 13459 dated July 19, 2022 (Intermediation Circular No. 631).]

Article Eleven Financial intermediation companies shall not enter into or continue correspondence relationships with shell banks. When establishing relationships with external correspondent banks or similar banking correspondence relationships, it must be confirmed that they have actual existence based on obtainable documentary evidence, in addition to not dealing with shell banks, enjoying a good reputation, being subject to good supervision, and having undergone money laundering/terrorist financing investigations or supervisory procedures. They shall adopt adequate and effective measures to combat money laundering and terrorist financing. In addition, the company shall apply the following procedures:

1. Obtain senior management approval before establishing relationships with correspondent banks. [Amended by Article 6 of Intermediation Decision No. 13459 dated July 19, 2022 (Intermediation Circular No. 631).]

2. Verify the nature of activity of the foreign bank (Respondent Bank) with which it deals. [Amended by Article 14 of Intermediation Decision No. 13440 dated May 27, 2022 (Intermediation Circular No. 625).]

3. Understand the responsibility of each company and the foreign bank (Respondent Bank). Conducting transactions allows reaching self-conclusion regarding payment accounts opened by foreign correspondent banks (Accounts Through Payable) that these banks have fulfilled their due diligence obligations towards clients who have direct access to the correspondent bank's accounts, and confirm that these banks can provide relevant due diligence information upon request. [Amended by Article 3 of Intermediation Decision No. 13386 dated December 23, 2021 (Intermediation Circular No. 603).]

Article Twelve Financial intermediation companies shall organize a centralized database for aggregated information related to money laundering and terrorist financing operations, including at least the names published by the "Special Investigation Unit" and the names of suspected accounts reported by the company, continuously updating this database.

Article Thirteen Financial intermediation companies are requested, each in respect of its own activities, to:

1. Continuously review any updates on the General Directorate of Internal Security (ISF) website (www.isf.gov.lb) regarding specified names listed on the National List concerning natural persons, legal persons, and entities involved in terrorism or terrorist financing. This shall be done through IT programs immediately upon the issuance of a freezing order, and taking necessary measures to freeze available funds or accounts/transactions (including those being attempted) or other assets belonging to these names or under their control (directly, indirectly, jointly), providing the "Special Investigation Unit" with confirmation within a maximum of 48 hours, along with available information. Freezing refers to prohibiting the transfer, conversion, disposal, or movement of funds and other assets owned or controlled by listed persons/entities. [Amended by Article 34 of Intermediation Decision No. 13440 dated May 27, 2022 (Intermediation Circular No. 625).]

2. Report to the "Special Investigation Unit" in case of similarity between a client's name and specific details listed on the National List mentioned in point (1) of this article.