LEBANON: CENTRAL BANK GOVERNOR STRESSES

C O N F I D E N T I A L SECTION 01 OF 02 BEIRUT 001619

SIPDIS

CAIRO FOR TREASURY ATTACHE ALEX SEVERENS
DEPT FOR NEA/FO, NEA/ELA
EEB/ESC/TFS
USUN FOR KHALILZAD/WOLFF/GERMAIN/SCHEDLBAUER
NSC FOR ABRAMS/RAMCHAND/YERGER/MCDERMOTT
TREASURY FOR KRIS DOUCETTE AND HOWARD MEDELSOHN

E.O. 12958: DECL: 11/12/2018
TAGS: ECON EFIN LE PTER
SUBJECT: LEBANON: CENTRAL BANK GOVERNOR STRESSES
COMMITTMENT TO STANDARDS AND REFORM TO TREASURY DAS
MENDELSOHN

Classified By: Ambassador Michele J. Sison for reasons 1.4 (b) and (d).

SUMMARY
--------------


1. (C) Central Bank Governor Riad Salameh stressed the Bank's
efforts to comply with all international rules and banking
regulations during his November 11 meeting with visiting
Treasury Department Deputy Assistant Secretary for
Intelligence and Analysis Howard Mendelsohn. He said that
although money laundering is "uncommon" in Lebanon, the
Central Bank keeps records of all deposits over ten thousand
dollars to enable future traces. Salameh is working to
include terrorism funding in the legal definition of money
laundering, but he stressed that "terrorism" in Lebanon does
not include Hizballah. Salameh and Mendelsohn agreed faster
sharing of information would allow banks to take action
against reported sources of illicit funding. Salameh is
pleased the new Emergency Post-Conflict Assistance Program
(EPCA II) -- expected to be signed in Washington on November
14 -- will instill discipline and transparancy at the
government level, which he argues is a necessary measure.
End Summary.

SALAMEH COMMITTED TO MEETING STANDARDS
--------------


2. (C) Central Bank Governor Riad Salameh emphasized the
Bank's committment to abide by all international rules and
banking regulations during his November 11 meeting with
visiting Treasury DAS for Intelligence and Analysis Howard
Mendelsohn, Ambassador, Treasury attache Alex Severens, and
Treasury analyst Kris Doucette. He said the Central Bank
cooperates as much as possible with international and U.S.
directives but said at times bigger steps require GOL
authority. He said the Central Bank "aims for full
cooperation" and has "the will to be very serious." Salameh
noted that, following the U.S. invasion of Iraq in 2003, the
Central Bank warned Lebanese banks to allow only transfers,
not withdrawals, from accounts held in Iraq in order to
maintain tracing capabilities.


3. (C) On ways to improve coordination between the U.S. and
Lebanon on blocking terrorist financing, Mendelsohn agreed to
share directly with the Central Bank and other banks in
Lebanon when the Treasury Department has information on
specific individuals. Salameh said banks could close
accounts immediately with the proper information. He noted
that sometimes he gets information to late too take action
because the account has been closed.

"LOTS OF CASH" CIRCULATING
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4. (C) Salameh said serious money laundering activities do
not occur through Lebanese banks, although the Central Bank
has investigated many cases. He cited investigations into
money laundering activities following the attacks against the
United States on September 11, 2001 that found no suspicious
accounts. The Central Bank keeps records of all deposits
over $10 thousand to enable future traces. Salameh is
working to include terrorism funding in the definition of
money laundering, but stressed that "terrorism" in Lebanon
does not include Hizballah.


5. (C) Discussing the movement of money in Lebanon, Salameh
said, "There is a lot of cash circulating," but it enters
Lebanon through the borders, not the banks, and is therefore
under Customs' jurisdiction. He described Lebanese as
international traders who move a lot of money, in cash or
goods, between countries to make a profit. The Central Bank,
the Customs Department, and other interested parties have
formed a committee to discuss the free circulation of large
amounts of money in the country. Salameh said lessons
learned from the current world financial situation should
include the need for increased regulation in cross-border
money exchanges.

HOPING FOR REFORM THROUGH EPCA
--------------


BEIRUT 00001619 002 OF 002



6. (C) The new Emergency Post-Conflict Assistance Program
(EPCA II) that is expected to be signed in Washington on
November 14 will instill discipline and transparancy at the
government level, a necessary measure according to Salameh.
Salameh said Lebanon's "monetary policy is saving its fiscal
policy," commenting that the country's monetary base is three
times its economy. Although the government needs reform, no
one is pursuing the changes; Salameh speculated that
politicans could be lulled into inaction by the country's
relative economic stability. However, Salameh argued
achieving reform was important to maintain confidence and
credibility in Lebanon's systems, citing privatation of
communications systems and overhaul of Electricite du Liban.
Salameh admitted that Lebanon was not favored by events -- 25
percent of Middle East Airlines was to be put up for sale,
but current market realities have delayed the sale.


7. (C) Salameh said he had made a deal with the IMF regarding
the EPCA's auditing requirement. Instead of four auditing
firms, Lebanon can use the two firms it currently works with,
as long as team members rotate within the firms. According
to Salameh, the Europeans also agreed to the change. Salameh
said he worries about the social security and pension plans
mentioned in the EPCA as they can generate inflation and
build an environment of corruption. Salameh argued that
government leaders should review the funds created after the
Lebanese civil war or for the provision of social services --
like the Council for the South, the Council for Development
and Reconstruction, the Fund for the Displaced, and the
Higher Relief Council -- since they could serve as sources of
instability.


8. (C) On Lebanon's relative protection for the current
economic downturn, Salameh desribed the Central Bank's
policies that he believed provided the buffer. Mainly,
Salameh said he opposed investment in non-transparent tools
that were extremely complicated to understand. Additionally,
Central Bank regulations that Lebanese banks keep 30 percent
absolute cash on hand and cap at 60 percent lending to real
estate projects and traders protect against large swings in
the market. Salameh said the Bank must complement its
performance by keeping its reputation with solid banking
procedures.


9. (U) DAS Mendelsohn has not had the opportunity to clear
this cable.




SISON