Capital Controls: Depositors More Aggrieved than Ever by the Absence of Relevant Legislation

Thousands of bank clients have been trying for almost a year to organize themselves to gain access to their savings.

Capital Controls: Depositors More Aggrieved than Ever by the Absence of Relevant Legislation

For almost a year now, Lebanese banks have imposed illegal and informal banking restrictions on accounts, preventing depositors from freely accessing their savings. Joseph Eid/AFP

It will soon be a year since the Lebanese were hit hard by the restrictions imposed by their banks. More specifically, these restrictions limit access by depositors to their foreign currency deposits. These restrictions have been amplified over time without parliament intervening to legalize them, leaving many depositors at the mercy of the discretionary choices made by their banks. "Some clients have been unfairly denied access to their savings by their banks, while others have been able to have them surreptitiously transferred out of the country," said Fouad Debs, a lawyer with Debs and Associates and one of more than 20 active members of the League of Depositors. Born first as a movement within the popular protest that broke out on October 17, 2019 against the ruling class, and declared this year before the Ministry of Interior and Municipalities, the League of Depositors aims to bring together enough aggrieved bank clients. Ultimately, it would like to have a say on how to salvage the Lebanese economy and how to distribute the burden of the losses accumulated by the state, the banks and the Banque du Liban (BDL).

Thousands of Aggrieved Depositors

The league claims to have already been contacted by thousands of Lebanese bank clients, whom it assists on a voluntary basis in their efforts to win disputes over access to their deposits. Their clients would only bear the irreducible legal costs. "We assist depositors who come to us in good faith, regardless of their profile. What is happening is terrible because the most vulnerable people, those who have sometimes saved money for their entire life while there is no universal pension system in Lebanon, are being hit hard," Debs added.

In July, the newly-resigned director general of the Finance Ministry, Alain Bifani, who also slammed the door on the Lebanese team negotiating financial assistance with the International Monetary Fund (IMF), claimed in comments to the international press that between $5.5 billion and $6 billion had been "smuggled" out of the country by "bankers who do not allow depositors to withdraw $100." This situation was made possible, according to several lawyers contacted by L'Orient-Le Jour, by the fact that Lebanon has still not adopted a law that establishes formal capital controls.

"With great arrogance, a majority of banks play on this legal vacuum, which means that, on the one hand, they cannot legally be accused of acceding to the demands of their privileged clients, as Lebanese law guarantees private property; and, on the other hand, there is no easy way to force them to accede to the demands of their more modest clients without going through a lengthy trial," a lawyer said, speaking on condition of anonymity.

"Without a law that is well-suited to the issues, it is infinitely more complicated for a depositor to assert his or her rights in court, especially if he or she is in a hurry. The procedures are lengthy: it takes several months for a summary judgment that allows for a solution, at least temporarily, such as forcing the bank to release the funds requested by the client to be cashed before the court reaches a judgment on the merits of the case, which can be delayed even longer," he added. "Banks have plenty of time to appeal decisions against them, which allows them to delay the deadline even further. This also applies to depositors residing abroad who have simultaneously launched proceedings before a court in their host country," a second lawyer said.

Faced with increased lawsuits, the Association of Banks of Lebanon (ABL) has simply put a telephone number and an email address into service to collect claims, for which it assures to intervene with the relevant banks, sometimes successfully.

In the meantime, many depositors are still trying their luck in the country's courts. The latest case, reported by a source close to the case, stands in contrast to the previous ones. Prosecutions were initiated by the attorney general for financial affairs, Jean Tannous. That's a first. The proceedings targeted Byblos Bank and its Board Chairman on the grounds that the bank did not agree to have a client repay her dollar-denominated loan by settling due monthly payments in Lebanese pounds at the official rate. Instead, the bank allegedly applied the rate of LL3,900 per dollar, set by the BDL for certain types of transactions. According to the source, the bank then drained the account of the loan's guarantor. When contacted, Bank Byblos said it had not yet officially commented on the matter. It should be noted that different banks are subject to procedures initiated by depositors, including BLOM Bank, Bank Audi, SGBL and BankMed.

Currently, some banks are trying to stifle litigation by offering depositors the option of a bank check, which is only cashable in Lebanon. "Banks are relieved of their responsibilities by issuing bank checks drawn on the BDL, whereas, financially, the value of the bank check on the market does not represent the amount of the deposit. Also, the handing over of the bank check to the depositor is not enough to extinguish the debt since only collection extinguishes the debt," said Jad Kobeissi, a lawyer who is member of the Beirut and Paris bar associations.

Increasingly Harsh Restrictions

The Byblos Bank case "is neither the first nor the last of its kind. The worst part is that this situation has been going on for about a year without the authorities moving a finger,” said one of the lawyers interviewed. He cited as an example a recent statement by the chairman of parliament's finance and budget committee, MP Ibrahim Kanaan, who "pretended to discover" that the lack of regulation was a problem. The lawyer recalled that on July 13, Kanaan said the par-liament was "not ready to increase the restrictions imposed on depositors without a clear plan prepared by the banks and the state." "The restrictions are already monstrous for ordinary de-positors. But parliament does not seem to have any conscience issues as it wastes even more time debating a matter whose full details have already been identified," he added.

These measures, which began take shape last August when the BDL and the banking sector started to limit the amount of dollars injected into the market, first took the form of limits on foreign currency withdrawals - varying from one institution to another - and gradually increased over the months that followed. It was not until November that the ABL, to which the law does not grant any jurisdiction in this area, legitimized the existence of these restrictions, which were then described as "temporary." At that time, the association was preparing to order the reopening of the country's banks, in the wake of the events related to the popular protest of October 17. Reluctant to admit that the sector was going through a liquidity crisis that has been brewing since the end of 2017, it also took advantage of these events to justify the implementation of the banks' measures.

Transfers abroad were then limited to "urgent" expenses that the depositor would have to justify; bank facilities granted to businesses were limited or even cancelled, as were facilities already applied for cash withdrawals, either at the counter or through ATMs, and which will be reduced even more over the months. In November, the ABL introduced the concept of "fresh funds," which are foreign currency amounts deposited in special accounts opened for specific reasons and subject to no restrictions, as opposed to "Lebanese dollar" accounts, which are the deposits on which banks have imposed the most restrictions, because they did not have any more the liquidity to cover them. This measure only legitimized on April 9, 2020, via a BDL cir-cular (No. 150).

Nail in the Coffin

The last nails in the coffin of the depositors’ rights came in the wake of the Covid-19 confinement in mid-March, when the banks simply stopped giving cash dollars to their clients and the BDL began issuing circulars allowing for the withdrawal of "Lebanese dollars" at a rate higher than the market's, under certain conditions (circulars 148 and No. 151, among others). Then, in the months that followed, the authorities gradually allowed licensed moneychangers to limit access to foreign currencies altogether - for those who have only Lebanese pounds to trade and who do not want to pay the high black market price to buy dollars - in some very limited cases.

"This delegation of power is one of the signs that shows the total lack of political will to formalize capital controls," said the first lawyer. The situation has been even more complicated for depositors since April, when money transfer companies had to convert foreign currency amounts transferred to their clients in Lebanon into pounds at a lower rate than the black market's. However, this decision may be called into question shortly, according to sources close to the sector, who nevertheless stress that the measure should be accompanied by an increase in transfer fees.

To make matters worse, the introduction of banking restrictions, which also constitutes violations not only of the liberal economy consecrated by the constitution and the law but also equal treatment of all citizens before the law, was done without the legislature moving a finger. Despite some timid attempts, such as the bill introduced by Zahle MP Michel Daher in November, parliamentarians have never seriously contemplated the adoption of a legal text regulating capital controls.

The cabinet itself prepared a bill. But it was eventually withdrawn by Finance Minister Ghazi Wazni, a member of Parliament Speaker Nabih Berri's Amal movement. Berri clearly expressed his opposition to the adoption of such a legal text, although it was requested by the IMF, with whom Lebanon has been negotiating financial assistance since May. The government's intentions on this issue are not yet clear. Finally, the BDL, which was authorized by the Currency and Credit Code to temporarily endorse such measures when they have been taken and for a limited period of time to allow MPs to react, has also not taken the initiative.

According to the second lawyer interviewed, the adoption of a law formalizing capital controls, frightens the political class "because it will de facto eliminate some of what is left of the country's banking secrecy which is still enforceable by the country's authorities, given the various legal texts that Lebanon has adopted in relation to the exchange of tax information or the fight against money laundering and financing terrorism."

(This article was originally published in French in L'Orient-Le Jour on the 27th of July)

It will soon be a year since the Lebanese were hit hard by the restrictions imposed by their banks. More specifically, these restrictions limit access by depositors to their foreign currency deposits. These restrictions have been amplified over time without parliament intervening to legalize them, leaving many depositors at the mercy of the discretionary choices made by their banks. "Some...