How an obscure bank circular will worsen Lebanon's financial crisis

Alongside these three responses, banks have been increasing their income from higher commission fees and charges for bank accounts and other operations.

There is also a fourth move that may be the most dangerous and could easily be overlooked, not least due to its name – Basic Circular No. 165­­­­­­ – issued by the Bank of Lebanon and due to be applied from the beginning of June.

It might, on first glance, seem like a purely technical circular from the BDL on "the electronic settlement of cash funds" but there is potentially much more to it than that. 

Circular 165 calls on banks to open new accounts with the BDL in Lebanese pounds and foreign currencies, intended exclusively for the settlement of electronic transfers and the clearing of cheques and card payments with so-called "cash funds" – defined by the BDL as funds received by banks after 17 November, 2019 (the date of financial collapse), either through cash deposits or transfers from abroad.

Attention was drawn to the advantages of these proposals, mainly the restoration of liquidity to the banking sector, which would lead to a decrease in the lira's exchange rate, the re-launch of some banking services and loans, and the opening of credit.

It was also said that Circular 165 would lead to a reduction of the cash economy by opening up new electronic funds, cutting the amount of banknotes stored at homes and making payment systems more secure.

Serious implications and dangers

But such a system has serious implications and dangers, including violating the law. By limiting "fresh money" deposits to transactions by their depositors only, Circular No.165 undermines any chance to reconfigure old foreign-currency deposits.

In effect, Circular 165 would mean a two-tiered banking system. There would be, in effect, accounts free of restrictions for deposits made after 17 November 2019, with funds available for any and all financial services.

This free banking zone would contrast with the heavily restricted deposits made before that date. Account holders on the wrong side of the line can only access some of their money and with great loss.

This amounts to a clear administrative and wilful aberration of these deposits and is unacceptable under both the rules, and even the law.

An administrative decision from the BDL, which is what Circular 165 is, should not be enough to establish a free banking zone in this way. Even the Council of Ministers would be exceeding their powers in setting it up. It requires a special law to be passed.

That is how a similar free banking zone was set up in the 1970s. It was dedicated to deposits in foreign currencies by non-residents and featured a number of exemptions and privileges.

The establishment of a foreign exchange clearing house at the central bank also requires a special legal provision, since the concession granted to the BDL is to manage the issuance and operations of Lebanese pounds. The law doesn't take into consideration the existence of foreign currency clearing in relation to BDL dealings in these currencies.

Also, the establishment of a local dollar clearing is contrary to what the BDL governor has already demanded and adopted in dealing with banks: that cleared payments be made in Lebanese pounds, even if obligations are in foreign currencies. According to the governor's position, this negates any need for foreign currency clearing.

Finally, the creation of foreign currency clearing houses is usually based on the idea of strengthening or launching financial operations in currencies beyond their national borders.

That is what happened with the launch of Chinese yuan clearing centres in Germany and the United Kingdom, under special agreements between the central banks of both countries with the Central Bank of China.

Proper arrangement lacking

Such a proper arrangement is lacking in Lebanon. There is no special agreement signed by the country with the US regarding the establishment of a dollar clearing on Lebanese territory and regulating its working conditions. 

Also, there are no commercial or financial operations that justify the establishment of such clearing in the first place, unlike Britain and Germany's arrangements with China.

Circular 165's two-tier approach also undermines any possibility of reconfiguring the deposits in foreign currencies made before the crisis hit in 2019. It specifies that the new funds in the free banking zone must be tied to new depositors.

This is in flagrant violation of the constitutional protection of private property, equality among citizens, and the maintenance of the free economy. It also violates the BDL's duty to preserve the banking sector and people's deposits.

Then there are concerns over the new dollar deposits, which would be drawn in under the BDL's pretext that Lebanon needs dollar clearing operations. The funds will be vulnerable to the central bank's whims. 

At the first opportunity and without any supervision, accountability, or guarantees, it may dispense with these dollars, just as it has done with other foreign currency reserves, including mandatory reserves deposited with it by banks – without making it public until the extent of the crisis emerged.

A road to sanctions and deeper suffering

Circular 165 exposes Lebanon to serious risks that it can't afford to take. It may even mean harsh sanctions end up being imposed on the country, up to its potential exclusion from the global financial system.

That could follow if the BDL allows transactions and settlements of dollar payments through domestic clearing without passing through the US system and correspondent banks – that is, without external control over the movement of funds and their legitimacy.

Lebanon could, in effect, facilitate  the laundering of drug money, corruption funds, and the proceeds of organised crime. Its planned dollar clearing could also allow deals with sanctioned countries, especially after Lebanon's emergence in recent years as a hotbed for the drug trade, with the inclusion of organisations from the country in international lists of organised crime.

Read more: Hezbollah's sordid history of organised crime

The US expects dollar transactions to eventually pass through a clearing house based on its soil, to ensure they are properly eligible and are legitimate according to US law, as well as being in compliance with its sanctions.

Lebanese account holders affected by Circular 165's proposals have a chance here to object. They can request that the relevant US authorities take appropriate action to shut down dollar clearing.

Illegal, unnecessary and dangerous

Circular 165 is illegal, unnecessary and exposes Lebanon to real and serious dangers.

The country needs to set up a framework for dollarisation, be it permanent or temporary. That is clearly justified and it should preserve the rights of all on an equal basis.

Hundreds of thousands of Lebanese depositors have lost their savings. There should be petitions in town and village squares across the country calling for a collective lawsuit in the US to demand that Circular 165 be stopped.

And those responsible for the financial plight of a nation should be brought to justice and punished, regardless of their public or private positions. Their property and assets, wherever they may be, should be seized and then used to help restore the lost deposits.