Policy, Position Papers

Capital Control: Concealing Corruption

August 26, 2022

Passing a capital control law shouldn’t only be a tool to appeal for international aid while preserving underlying corruption but should endorse structural economic reforms that are deep-rooted within a holistic financial recovery plan.

I. SUMMARY

This position paper1 presents a coherent position on the latest capital control draft law as a tool to a solid and fairer control of deposits flow, limiting corruption and increasing accountability. The paper is summarized as follows:

The proposed devious law holds many flaws:

  • The latest draft law explicitly grants exemption to the bank’s financial crimes, in ongoing or future lawsuits. The amnesty is guaranteed in local and foreign jurisdictions and also absolves banks from any obligations to pay compensation and to be held accountable to the current illegal capital controls. This seems to be the intended purpose of the law rather than a true attempt to begin the reform process.
  • The latest draft law, if passed in its current fashion, will consecrate in law the immoral discrimination between depositors by adopting distinctive measures between the “old” and “new” foreign currency in the banking system. This abuse obliges depositors to unfairly foot the bills of losses while witnessing the dramatic decrease in their savings’ value.    
  • The membership structure of the capital control committee is rife with conflicts of interests including, the BDL governor, the Minister of Finance, oversight bodies (the BCCL & an assigned entity within BDL ) and the appointment of non-governmental members who are also politically compromised and connected to the banking sector.
  • The capital control committee’s power extends beyond overseeing and implementing capital controls while deciding transfer thresholds and currency and exemption categories
  • Capital control exemption categories are inaccurate and ambiguous, allowing boundless manipulation, corruption and clientelism.
  • There is no action path or mechanism to object and file appeals to the commission’s decisions, leaving it to operate with complete freedom.
  • The suggested implementation and renewal timeframes are not rooted in any solid and transparent financial reporting mechanisms.

Required adjustments:

Below is a list of suggestions to allow a fair implementation of capital control:

  • The committee’s members should be politically independent. Its members should be elected through well-defined transparent procedures. Specific nomination, selection and election procedures should be included. 
  • The committee’s oversight bodies can’t be related, either directly or indirectly, to any of its members. 
  • A well-defined operational framework should be included to dictate the committee’s area of authority, but mostly limit it within a clear scope.  
  • Exemption categories, defined and ruled over by the committee, should be well rigorously described. 
  • Withdrawal limits should be fluid within specific timeframes, and the setting withdrawal monthly threshold shouldn’t be purely in the hands of the CCC. A justified gradual lift of monthly withdrawals limit should be described with its relative timeframe.
  • Restrictions on domestic transfers should be loosened and lifted. The law should create conditions allowing to gradually lift all restrictions.
  • The activation of new accounts should be allowed. The law should focus on limiting the outflow of money and not its domestic use.
  • Banks should definitely not enjoy retroactive amnesty, of any kind.
  • In fact, the capital control legislation should apply retroactively to October 17, 2019, facilitating the identification and prosecution of those who transferred money abroad after that date. Doing so would also require appropriate amendments to the banking secrecy legislation. The latest banking secrecy legislation doesn’t have a retroactive aspect towards past transactions. The identification of capital flight after October 2019 for a fairer capital control should jointly go with an amended banking secrecy law.
  • The law needs to sequence capital control lifting based on properly defined economic reporting and analysis to assess its efficiency and impact with regards to economic progress and the balance of payments.

II. INTRODUCTION

Well-designed capital controls are crucial to Lebanon’s financial recovery. They can limit capital flight, reduce the fluctuating depreciation of the LBP and the decline of foreign exchange reserves of the BDL, among other benefits.  Capital controls are also an essential condition to access IMF 2 funding. However, Lebanese depositors have been under non-regulatory and non-legitimate capital controls since October 2019. Banks, under the orders of BDL, have been and are still arbitrarily restricting customers’ access to their savings, through different measures and decisions that vary between local banks.  These scattered capital controls, which have no constitutional or legal legitimacy, are facilitating rampant discrimination between well-connected elites and most other depositors, instead of pushing the country towards sound economic reforms. Lebanon witnessed a mass exodus of capital outflow in the midst of capital restrictions and bank closure. Capital flight of connected depositors amounted close to $6 billion between 17 October 2019 and 30 January 2020.

The latest draft law seeks to legitimize the current practices, exempt banks from any ongoing or future prosecution in court, while giving unbounded power to a biased committee which decides how the law is applied. The Lebanese politico-financial decision makers seek and push for a retroactive aspect of a law when retroactivity serves their benefits (capital controls), but refute it when it doesn’t (lifting banking secrecy). The currently enforced measures are therefore used as an appeal for international aid and tool to preserve rampant corruption rather than a key pillar within a wider integral economic recovery plan. Accordingly, this paper highlights the underlying fraudulent flaws of the latest capital control draft (30 March 2022), while providing a coherent position on how capital controls can be implemented to shoulder the country’s financial recovery while protecting depositors’ rights.   

III. FLAWS OF CURRENT LAW

  • The illegal turned legal:

Past, present, and future amnesty:

Article 12 of the latest draft explicitly grants amnesty to Lebanon’s banks, BDL, financial institutions and even the state to any ongoing or future prosecution concerning illegitimate capital controls imposed since October 2019. Immunity applies no matter the nature of the lawsuits, in local and foreign jurisdictions, and even includes any decision that can be appealed in the future. Therefore, this latest capital control law will shield banks retroactively from all ongoing and future litigations. The amnesty clause absolves banks from any obligation to pay compensation, and to be held accountable for their illegitimate capital control practices. Such a draft bill cannot pass: it legalizes the arbitrary obstructive practices adopted by the banks forbidding people their righteous access to their own money.  It also dissolves the judiciary’s power and renders justice idle within the politico-financial grip.   

  • Preserving “reforms” in the hands of the corrupt: the Capital Control Committee 

Capital Control Committee Members: 

Article 3 of the latest capital control draft law designates a Capital Control Committee (CCC) responsible for making amendments to the law, ruling on exceptions, and submitting quarterly reports to the Cabinet. The CCC is constituted of the BDL governor, Minister of Finance, two economic experts and a high-ranking judge, and the latter three figures are appointed by the prime minister. The BDL’s governor and the Minister of Finance are on this decisive committee which has high discretionary power, despite their alleged personal culpability for Lebanon’s economic collapse, preserving the solid politico-financial grip on depositors’ money. The selection of non-governmental related members (economic experts and high-ranking judge) is also not transparent and very far from impartiality, compromising any independence from political authority.  Article 3 only mentions that the prime minister picks the two economic experts and the high-ranking judge without specifying any selection criteria or area of expertise, except the required level of the judge. Article 3 also doesn’t provide specifications guaranteeing that these members are impartial and politically independent/unbiased.  

Operational framework and accountability:

The draft law fails to indicate the rules and provisions the CCC will be subject to .Article 10 states that the Banking Control Commission of Lebanon (BCCL) and the BDL are responsible for overseeing the law’s implementation, overlooking relevant decisions and regulations, and reporting violations by Lebanese Banks. The BCCL – which is one of the two main regulatory bodies embedded within BDL – is a five-member commission, including members from the Association of Banks in Lebanon. It includes delegates from the Ministries of Economy and Finance. Hence, ministerial representatives provide direct, systemic political influence over the BCCL. The Association of Banks in Lebanon (ABL) elects one member, and wields power over another BCCL nominee, that is formally made by the National Institute of Guarantee for Deposits (NIGD), given that the ABL holds a majority stake in NIGD management. BCCL also always works in close coordination with the BDL governor, even though BCCL is meant to enjoy institutional independence (See Figure 1).  

The daft law also doesn’t provide any framework of accountability in case the CCC fails the proper implementation of the law. Article 11 only describes the penalization imposed on every person in case of violations of the law, or if they provide incomplete or inaccurate data or information. It therefore gives the CCC flexibility in complying and implementing the law.

Hence, if passed in its present form, the capital control law would see the nation’s rapacious politico-banking elites wield even more control over narrow interests.  

Additional indirect power:

The BCCL is also indirectly given the power to lift banking secrecy, and by association, this power extends to the CCC. The third clause in Article 10 explicitly gives the BCCL authority to request from financial institutions, including the banks, to provide all the required information and documents it deems necessary to carry its oversight responsibilities. This is, within the context of underlying conflict of interests and corruption, a cause of concern as it allows for abuse of power. The law also doesn’t provide any framework, committee or action path to object to the CCC’s decisions.

The old vs the new:

At present, the illegal distinction between old and new money is not codified in law, something the latest draft of the capital control law seeks to change. The latest draft aims to codify a distinction between “old money” and “new money” in clause 17 of Article 2. “New money” is a newly introduced term defining foreign currency transferred from non-local accounts to local accounts, or deposits in foreign currencies that occurred after 17 November 2019.

The latest draft law binds depositors to accept the new money paradigm and to absolve banks of their responsibilities, while there is no clear framework outlining how depositors will re-access the full amount and value of “old money”. Such differentiation aims to legalize withholding depositors’ money, and to use and devalue it without any encumbrance and restraints. This new term should be refuted amidst the absence of sound fiscal reforms and financial plans, as it empowers banks to keep seizing the public’s money, backed up by amnesty. Adopting distinctive measures between accounts allows the unlawful discrimination between depositors, unarguably going against the right to individual property and the principle of equality enshrined in Articles 7[1] and 15[2] of the Lebanese Constitution.

Handcuffing the innocent: depositors

“Old money” is subject to restrictions and controls set and imposed by the CCC. The latest draft legislation Article 6 allows “old money” depositors to withdraw (by credit card or not) up to 1000 USD per month either in USD, LBP, or both. The CCC has the power to adjust this amount by setting a new withdrawal threshold, and to set the terms and conditions of withdrawals. Therefore, the CCC also has the authority to determine the withdrawal currency. The designated currency left in the hands of the CCC will most probably be the LBP, or at the Sayrafa platform’s rate. The real tradable value of this money is henceforth decreased,  leading to the dramatic loss of depositors’ savings.. Article 6 will therefore result in huge fiscal losses of depositors . Article 6 also clear;ly violates Articles 690[3] and 760[4] of the Lebanese law of “obligations and contracts”  entailing that the depository is obligated to keep and return deposits, and that The lender is responsible for hidden defects in the loaned items and for expropriating them on the pretext of entitlement.

Unclear exemptions:

The compromised CCC would also enjoy broad discretion to determine exemptions under the capital control regime.  Article 4 gives the committee discretionary powers to define, approve and amend what it deems appropriate and necessary transfers, operations and payments without any framework defining criteria, limits, and accountability. Article 4 explicitly lists various categories of exemptions, including transfers abroad for food imports, healthcare, medication, and fuel costs among others. For each category of exemptions, ambiguity reigns supreme.  For example, the draft law exempts “Ongoing payments for the expenses of students registered abroad”. It lacks clarity on what kind of expenses, within which timeframe, from which types of accounts, etc. The “necessary imports” category also requires additional precision, as it contains, subcategories such as “necessary external services”, which is very broad, and extensive. Ambiguity and imprecise exemptions open doors for corruption and manipulation, giving the CCC ample room to make concessions unrelated to the capital control law’s exemption categories, introducing a codified, arbitrary way out for privileged depositors and businesses.

  1. REQUIRED ADJUSTMENTS:

The capital control law shouldn’t be used as an opportunity for delaying fiscal measures, or to create additional loopholes to feed nepotism or clientelism. Capital controls shouldn’t be considered as a standalone piece of legislation, but as a key pillar within a framework of a comprehensive financial and economic vision of banking sector restructuring that guarantees that depositors can access their money in the future under a final deal. Focus should be shifted towards limiting the outflow of capital out of the domestic economy and halting the massive LBP devaluation, while addressing the deficits in the balance of payments. Below is a list of considerations to guarantee a fair capital control law:

Article 1: “Objective”

Article 1 should specify that this law aims to introduce exceptional and temporary capital controls on cash withdrawals and transfers abroad.

Article 2: “Definitions”

  • Clause 6 defines the Sayrafa platform. It is noteworthy that a special separate legislation should be developed for Sayrafa
  • Clause 17 defines the new term “new money”, being all the foreign transfers made in foreign currency to local accounts, and all foreign currency deposits made after 17 November 2019. November should be substituted by October 17 2022.

Article 3: “Establishing a special committee”

  • The CCC’s members should be politically independent, and not deeply enshrined within the conflicts of interest that led to Lebanon’s financial collapse. The BDL’s governor as a member of the committee compromises its independency. The including of the BCCL which contains members of the ABL is a blatant attempt to dull the fair application of the law. Financial and judicial experts should also be elected within transparent procedures. These experts shouldn’t be assigned solely by the prime minister but should go through a fair and clear election process. Article 3 should include specific nomination and selection criteria and election procedures, while all members of the committee should be devoid of conflicts of interest (any economic interest connected to the banks).
  • Article 3 should also state when the committee’s periodic meetings are held, what is the number of required attendees, and how the decisions are made. For example, the law can state that the committee should hold meetings twice a month, in the presence of half of its members plus one, and the decisions are taken based on the majority’s votes.
  • The same applies for the CCC’s oversight bodies as the BCCL is compromised. The authorities and duties of the oversight bodies should also be well defined and specific, listing the CCC and banking institutions’ accountability measures.
  • The CCC cannot subjectively dictate how to amend the law, define and redefine exemption categories, set and adjust withdrawal thresholds, and approve transactions, especially if the CCC is compromised. A well-defined operational framework should be included within the law, specifying its areas of authority.
  • Appealing the CCC’s decisions should also be made possible through a specific scheme.

Article 4: “Cross-border transfers, checking account payments and transfers”

  • As per article 4 listing the exemptions from capital controls, the 7th clause tackles the “Necessary imports” category. The transactions within this category are defined by the CCC. The list is preceded by “which may include, but is not limited to”. This terminology opens welcoming doors for twists and turns on what the biased CCC can approve and consider as a “necessary import”. This sentence should therefore be removed, or substituted by a more binding term, such as “only limited to”, or “only inclusive of”.
  • Article 4 should specify the kind of “operations, transfers and payments for the benefit of the Lebanese government? (Clause 3), and who are the specific recipients. Clause 6 needs to specify if locals will be able to complete transfers to foreign students in USD, and when’s the student registration date limit covered within clause 6. Point (i) in clause 7 mentions “necessary external services”. Can’t newly registered students abroad, expats, and new medical bills be “necessary external services”? . Clause 8 exempting “Transfers, operations and payments determined and modified by the Committee in accordance with the requirements of the economic situation” should be removed, or have descriptive scenarios. Clause 8 should list the possibilities of what could be these operations and payments and how do they fit within the progress of the economic situation.
  • The CCC has broad authority to define and adjust exemption categories, and to amend and approve transfers and payment operations. Exemption categories and approved payment operations should therefore all be well defined within the basis of this law following the examples in the point above. Exemption categories shouldn’t be left at the mercy of the CCC without any accountability, control, and accurate reporting mechanisms. Same applies to the last clause in Article 5.
  • The exemption categories are very broad. The list should therefore be specific, elaborated, and descriptive with definitive selection criteria and sub-categories.
  • Foreign direct investments (FDIs) should be added to the categories exempt from capital controls to encourage economic growth.

Article 6: “Withdrawals”

  • Article 6 subjects depositors’ withdrawals, at the exception of “new money” accounts, to withdraw a maximum monthly limit of 1000 USD in either USD, LBP, or both as mentioned in clause 2. The committee determines the terms, conditions, and scope of application within Article 6. The ambiguity of clause 2 calls for the consolidation of the exchange rate adopted for withdrawals. Clear withdrawal scenarios, for each type of account and currency, should be listed.
  • A threshold of accounts – depending on the total deposit amount – affected by capital controls should be set.
  • Withdrawal limits should be fluid within specific timeframes, and the setting withdrawal monthly threshold shouldn’t be purely in the hands of the CCC. A justified gradual lift of monthly withdrawals limit should be described with its relative timeframe. Article 14 time bounds this law to 2 years (renewable once), meaning 2 to 4 years of maximum withdrawal limit of 1000 USD (with undefined exchange rate) per month. Due to a lack of confidence in the CCC, it is assumable that this limit might decrease with time, instead of gradually increasing. It is therefore unacceptable to set fixed and unclear withdrawal limits over long periods of time. It will not only lead to a deterioration in the quality of life, but to depositors baring the biggest share of distribution of losses.
  • The draft law needs to specify how the remaining USD at the BDL will be managed and for what purpose within a framework of transparency.

Article 7: “Local transfers and payments, and the use of exchange accounts”

  • Domestic payments and transfers should be allowed in USD (clause 1).
  • Restrictions on domestic transfers in the national currency should be lifted. A capital control law should aim at limiting the outflow of money, and not its domestic use (clause 2).

Article 9: “Opening new bank accounts”

  • Article 9 limits the activation of new accounts, at the exception of the specified categories. New accounts can be opened only if it fits the following categories, and only if proven that there is no other account available for these operations: pay salaries, pension or social welfare fees, transfer of foreign currency from a foreign account, and to deposit foreign currencies. Forbidding new accounts has no proper justification, and halts economic recovery. It consequently defies the IMF recommendations on establishing proper economic reforms and progress. Opening new bank accounts should be allowed in both LBP and USD. A capital control law needs to create conditions that would allow to gradually lift restrictions. Economic recovery is a key requirement to remove controls, and banning new accounts halts this progress. Banning new bank accounts forces people into a cash economy which can further feed corruption and halts economic recovery.

Article 10: “Monitoring the proper application of the law”

  • Article 10 mentions that 15 days after the approval of the capital control law, a special or central entity within BDL has to be formed to monitor its proper implementation by the CCC, along with the BCCL. The BCCL is one of the two main regulatory bodies embedded within BDL. The governor of the BDL is part of the CCC, as are members of the ABL. The implementation, regulation and amendments of the law are therefore compromised by the BDL governor. Regulatory and accountability bodies need to be impartial, unbiased and independent. An external independent entity with a specific number of participants should be assigned to monitor the proper application of the capital control law through a fair and clear election process. Article 10 should include specific nomination, selection, and election criteria. Members of the parliament could nominate and vote for potential candidate, as representatives of the Lebanese people. All nominated members should be devoid of conflicts of interests. Article 10 should therefore include specifications guaranteeing that the nominated members are impartial.

Article 12: “General provisions”

Article 12 protecting banks and financial institutions from any ongoing or future prosecution in local or foreign courts. Article 12 needs to be struck from the draft law completely.

Article 14: “Duration of the application of the law”

  • The listed duration is 2 years, renewable once based on the CCC’s decision. The law needs to sequence capital control lifting based on properly defined economic reporting and analysis to assess its efficiency and impact with regards to economic progress and the balance of payments. The extension should be defined ideally by an independent committee (economic/financial/audit…) and backed by justifiable findings. The parliament can also decide on whether to extend the application of the law as a representative of the public’s opinion.
  • The current biased CCC is most likely to extend the law’s implementation, as the latest draft is guaranteeing a twofold protection of banks: total amnesty and resting the distribution of financial losses on depositors’ shoulders.

References:

[1] As translated from Arabic: All Lebanese shall be equal before the law. They shall equally enjoy civil and political rights and shall equally be bound by public obligations and duties without any distinction

[2] As translated from Arabic: Rights of ownership shall be protected by law. No one’s property may be expropriated except for reasons of public utility, in the cases established by law and after fair compensation has been paid beforehand

[3] As translated from Arabic: the act of depositing is a contract whereby the depository (receiving end) receives from the depositor (giving end) a movable item and is obligated to keep it and return it unless both parties agree otherwise.

[4] As translated from Arabic, in chapter 3 regarding consumer loans: The lender is responsible for hidden defects in the loaned items and for expropriating them on the pretext of entitlement

Accountability Cartel control Financial crisis Social protection

D3M (Arabic for ‘support’) is a Badil initiative aimed at closing policy, strategy, legal, and advocacy gaps within Lebanon’s progressive civil society. In doing so, D3M seeks to bolster the progressive movement in its pursuit of nationwide policy and political change.

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