Article 2: International Banking Regulations 101

Monday, November 5, 2018

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Each country has a Central Bank that processes and filters international banking regulations for their implementation in the said country. The main role of this financial institution is to maintain currency stability and to manage the country's money supply. On a side note, the governor of the Lebanese Central Bank, called Banque Du Liban (BDL), has been nominated the best in Asia for several years regarding the policies applied to keep the stability of the sector and hence part of the economy in a country with tumultuous political, economical and social affairs.

Ever since governments have been focusing on reinforcing Anti Money Laundering (AML) practices and abiding by the general rules and regulations pertaining thereto, a Know Your Customer (KYC) form has become a must. It allows the bank or any other financial or non-financial institution to perform and complete customer due diligence (CDD) before taking them on board. Yes, you are reading right. The institution will profile you before accepting your money and/or trade. This process entails verifying the customer and their background and validating their authenticity prior to conducting any business. This process gets tricky when the entity opening the account is a Politically Exposed Person (PEP), or an NGO (Non-Governmental Organization)... This could be clarified within another article on banking compliance matters.

What you need to know here is that Lebanese Banks are required to abide by the Basel international regulatory framework (commonly dubbed Basel III) that is pertaining to them, i.e. they need to properly assess the market risks of their clients to increase the quality of their capital and improve their liquidity. These requirements have an impact on economic growth and were proposed in view of providing a safer financial environment and curbing the effects of the last crisis. As a comparison, in the USA, it is the Federal Reserve System or Fed that endorses the role of the Central Bank. The Federal Reserve System consists of both public and private components. 12 regional Federal Banks oversee privately owned banks all through the USA. The Fed controls the money supply, manages the country's foreign exchange and gold reserve, and also regulates international banking (for more info on the Federal Reserve, read this).

In addition to the compliance regulations, the Foreign Account Tax Compliance Act (FATCA) was enacted by the United States Congress in 2010 to ensure that any US person reports their financial assets outside the USA to the Internal Revenue Service (IRS), which collects taxes and enforces tax laws (for more info on the IRS, read this). Eh, w shou khassna ne7na?! (“and how does this concern us?!” for those who do not speak Lebanese). Well, our economy is highly dollarized and since most of our trade transacts in USD, which means it has to go through one of the US big banks, if we want to stay in the game, we need to play by the rules set by the master of the game... No questions asked. The penalties for non-compliance are very costly and might have dire consequences on the financial institution. Remember the Lebanese Canadian Bank story? Yes? It only required a US big bank to declare it will no longer deal with that small Lebanese bank for other US banks to follow and the Canadian Lebanese Bank was out of the market in less than 48 hours. The controversy and costs of FATCA have been a burden for most if not all countries. But again, do you want to trade in USD? Please apply strictly. Point. Nothing to discuss nor negotiate here.

Now next time your bank or someone addresses the aforementioned financial terms, you have a general idea of what it is about and you don't feel like conversing with Martians ;)


Links to the cartoons:

- Tax law


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An informative article written with an understandable vocabulary. It made me aware of how little my knowledge was about the subject. Hope others will appreciate it as much as I did!

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