LEBANON: TREASURY U/S LEVEY DISCUSSES HIZBALLAH,

C O N F I D E N T I A L SECTION 01 OF 04 BEIRUT 000598

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E.O. 12958: DECL: 06/01/2019
TAGS: EFIN ETTC PREL PGOV PTER PINR LE IR
SUBJECT: LEBANON: TREASURY U/S LEVEY DISCUSSES HIZBALLAH,
IRAN AND REPUTATION OF BANKING SECTOR WITH LEBANESE BANKING
SECTOR

REF: A. BEIRUT 469

B. STATE 37028

C. BEIRUT 422

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

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


1. (C) Treasury Under Secretary for Terrorism and Financial
Intelligence Stuart Levey, accompanied by the Ambassador,
reaffirmed to Lebanese interlocutors at the Central Bank of
Lebanon, the Banking ControlCommission, Ministry of Finance,
and private sectr bankers that the U.S. valued its
cooperative rlationship with Lebanon to protect the
integrity of the international financial system and combat
terrorist financing and other illicit finance during his
one-day visit to Lebanon on May 15. Levey cautioned that
despite the divergence of political opinion between the U.S.
and Lebanon vis-a-vis Hizballah, a May 13 Financial Times
article in which Hizballah admitted to providing full support
to Hamas -- a designated terrorist organization in both the
U.S. and Europe -- was a clear signal that the GOL should not
look the other way but instead remain vigilant to deny
Hizballah access to the banking system.


2. (C) On Iran, Levey discussed with his interlocutors the
threat posed by Iran to the international financial system
because of its deceptive financial practices and use of the
banking system to facilitate proliferation and terrorism. He
noted that, because major financial institutions had cut off
their Iran business based on the high risk associated with
it, Iran was now seeking to partner with financial
institutions outside of Iran where Iranian entities could
obtain a controlling interest in banking institutions, create
joint ventures, or purchase banks to improve its access to
the international financial system.


3. (C) Levey's interlocutors concurred with Levey's
assessment that Lebanon's political and security stability
depended on the level of confidence in the banking sector.
The bankers emphasized that they were professionals and were
charged with maintaining the integrity of the system, yet
several expressed concern about a possible negative reaction
from the U.S. if the Hizballah-led March 8 alliance were to
win a majority in the June 7 parliamentary elections. End
summary.


4. (U) U/S Levey and his Chief of Staff and Senior Advisor,
Christy Clark, visited Beirut May 15. Accompanied by the
Ambassador and Poloff, they met with the four Vice Governors
of the Central Bank (Raed Charafeddine (Shia),Saad Andary
(Druze),Mohammad Baasiri (Sunni),and Haroutian Samuelian
(Armenian Orthodox)); head of the Banking Control Commission
(BCC) Walid Alameddine; Minister of Finance Mohamad Chatah;
and 16 representatives of Lebanese and international
commercial banks.

HIZBALLAH ADMITS
TO SUPPORTING HAMAS,
WHAT WILL THE GOL DO?
--------------


5. (C) U/S Levey pointed to a May 13 Financial Times article
in which Hizballah Deputy Secretary General Naim Qassem
admitted Hizballah provides full support for Hamas as a clear
sign of Hizballah's illicit financial and terrorist activity.
Levey noted that Hizballah's support for Hamas, which is
recognized not only by the United States but also the
Europeans as a terrorist organization, could result in the
Europeans treating financial interaction with Hizballah

BEIRUT 00000598 002 OF 004


differently. He offered that Hizballah's open support for
Hamas may resonate in Europe, and this is something worth
thinking about in terms of Lebanon's own banking sector.
Levey warned the GOL representatives that it was also their
responsibility to adhere to agreed upon international codes
of conduct to combat terrorist financing, irrespective of
Hizballah's participation in the government.


6. Acting Central Bank Governor Raed Charafeddine said the
CBL was "very clear about the operating practices" of the
commercial banks and did not want to expose Lebanon's system
to any "shadow of a doubt." Charafeddine added that although
he is Shia, he is a professional first; it is the job of the
Central Bank "to protect the banking system," he said.
Mohammad Baasiri, one of four Vice Governors and concurrently
head of Lebanon's Financial Intelligence Unit-equivalent, the
Special Investigation Commission (SIC),strongly emphasized
the GOL's commitment to international financial practices,
despite the divergence in the U.S. and GOL positions
vis-a-vis Hizballah.


7. (C) Walid Alameddine, head of the Banking Control
Commission, concurred with his Central Bank colleagues and
added that Hizballah's financing does not come through the
formal banking system in Lebanon. The commercial bankers
disclosed that they take the international standards one step
further by refusing even to open accounts for any person or
entity related to Hizballah. Vice Governor Raed Charafeddine
gave an example, later confirmed by Fransabank (where
Charafeddine was formerly Deputy General Manager),whereby
the bank denied, recently, the application of a Hizballah-run
school to establish a banking domicile to pay the salaries of
its teachers.

IRAN'S FINANCING OPTIONS
CONSTRAINED, NEW TACTICS
UNDER CONSIDERATION
--------------


8. (C) Turning to Iran, U/S Levey told his interlocutors that
there was evidence that Iran was actively searching for new
outlets to access the international financial system.
Iranian entities, he said, sought to partner with financial
institutions abroad to obtain a controlling interest in
banking institutions, create joint ventures, or purchase
banks. U/S Levey encouraged the GOL to implement
countermeasures to protect the Lebanese banking system from
the terrorist financing and money laundering risks posed by
Iran, as called for by the Financial Action Task Force (FATF)
at its plenary session in February. Although there has been a
recent increase in economic cooperation between Lebanon and
Iran (ref C),the Central Bank governors were not as
concerned about Iranian manipulation of Lebanon's banking
system. They requested, however, that the U.S. "communicate
in full transparency and full faith" to the CBL and SIC if it
had specific concerns.


9. (C) Baasiri and the other CBL governors argued that the
threat from Iranian banking entities was very small in
Lebanon, with only one Iranian bank -- Bank Saderat --
operating there. Bank Saderat (also designated by the U.S.
under its terrorism Executive Order, E.O. 13223),has five
branches in Lebanon with total assets amounting to
approximately USD 100 million, less than 0.011 percent of
Lebanon's banking sector, Alameddine said. Bank Saderat was
a "very small but irritating" institution for the GOL because
of the U.S.-designation and the international attention
focused on Iran, he added.


10. (C) U/S Levey explained that the United States had acted
against Bank Saderat for facilitating Iran's support to

BEIRUT 00000598 003 OF 004


terrorism and that, as a result no U.S. person can do
business with it. He noted Paragraph 10 of UNSCR 1803, which
calls on states to exercise vigilance over the activities of
financial institutions in their territories with all Iranian
banks, particularly Banks Melli and Saderat. Furthermore,
U/S described the restrictive measures that the European
Union had put in place in response to this provision and
noted that European banks have largely stopped doing business
with Iran. He cautioned the Lebanese financial authorities
about Saderat's conduct and also the possibility that Iran
could attempt to enter Lebanon's banking system through the
use of front companies or hidden identities and affiliations
with Iranian entities. In addition, U/S Levey offered U.S.
assistance to the GOL, if requested, to investigate whether
certain individuals or entities had ties to Iran's designated
banks.


11. (C) The case of the reactivation of a loan from the
Export Development Bank of Iran (EDBI) to the GOL (reftels)
was also a concern, U/S Levey said. Minister of Finance
Mohamad Chatah, Alameddine and the CBL governors reiterated
their belief that the signing of the reactivation was
"probably a mistake," but the original loan was initiated in
2003 before EDBI's designation. Chatah also explained that
the loan is a government to government transaction, rather
than through the commercial banks, and could be a viable
source of funding for development projects. However, Chatah
said the issue was under review in the cabinet and would be
studied carefully.

LEBANON'S STABILITY
DEPENDS ON CONFIDENCE
IN BANKING SECTOR
--------------


12. (C) Treasury U/S Levey emphasized to the Central Bank
Governors, the Banking Control Commission, Minister of
Finance and commercial bankers the value of the U.S.-Lebanon
banking sector relationship. In these turbulent economic and
financial times, Levey said, Lebanon is an exceptional
example of a regional economy that has weathered the global
financial crisis relatively well. He continued, however,
that concerns exist about Lebanon's ability to avoid a
"crisis of reputation" and a lack of confidence from
international investors, should Hizballah become more active
in the formal banking sector. He noted again Hizballah's
support for another terrorist organization, Hamas, and the
fact that Hamas was recognized as a terrorist organization in
Europe. The commercial bankers, especially, were the most
adamant that until now the Lebanese banking sector "was
successful avoiding toxic assets and toxic activities," said
Dr. Joseph Torbey, former President of the Association of
Banks in Lebanon (ABL). They were committed to maintaining
this vigilance, he said, for the sake of the whole system.


13. (C) Alameddine, on the other hand, was less optimistic
and characterized the Lebanese banking system was vulnerable.
Although financially Lebanon's banks are overcapitalized, he
said, they are still vulnerable. Alameddine, seconded by
others, said that should anything happen to shake confidence
in Lebanon's banking sector, the political stability of the
country would fall by the wayside.


14. (C) In a coffee reception following the roundtable with
the commercial bankers, several expressed their private
concerns to U/S Levey about a negative U.S. reaction to the
outcome of the June 7 parliamentary elections if the
Hizballah-led opposition were to win the majority. A
negative U.S. reaction, the bankers opined, could contribute
to a lack of confidence in the banking system and undermine
Lebanon's financial sector.

BEIRUT 00000598 004 OF 004




15. (C) The bankers also raised grievances about the
discrepancies between the U.S.-designations lists and the
UN-designations lists. The more identical the two lists are,
the easier it was for Lebanon to take action against the
designated individuals or organizations, the bankers said.
The bankers also sought U.S. assistance to help alleviate
"reputation risk." They reported that it was not uncommon
for other countries, especially in Asia, to delay receipt of
outgoing transfers from Lebanon because of a perception that
all transactions out of Lebanon were inherently linked to
Hizballah. U/S Levey offered to use his office to sensitize
other countries to this issue and provide an accurate
explanation of UN Security Council Resolution (UNSCR) 1701 --
which calls on all states to take necessary measures to
prevent the provision of assistance, training, or weapons, to
any entity not authorized by the GOL -- because that
resolution does not preclude countries from financial
dealings with Lebanon.


16. (U) U/S Levey has cleared this message.
SISON