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 �00A;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 -------------- ¶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