By Kiran Nasir Gore and Charles H. Camp
In October 2019, Lebanon’s domestic financial crisis finally started to make international headlines. Mass protests erupted with a focus on national financial stability and government corruption. At the center of these concerns lie the policies and practices of Banque du Liban, Association of Banks in Lebanon (ABL), and Lebanese commercial banks – they had worked together for years to artificially buoy the country’s economic condition, which was now crumbling. To protect themselves, Lebanese commercial banks swiftly imposed a variety of restrictions on their customers’ ability to access funds, including restrictions on withdrawal amounts, transfer of funds, and foreign currency transactions. Few commentators have focused on the impact of these actions on foreign banking customers, who find themselves unable to access their monetary deposits and caught within a web of highly sensitive and crucially important local economic concerns. This article draws on our years of work representing clients in international disputes, and our specialized experience in cases involving international banks, to provide guidance to those foreign banking customers. First, we explain the historic context for the foreign funds held by Lebanese banks. Then, we explore examples of possible legal solutions available to foreign customers – both private individuals and corporations.
Introduction
In many ways, Lebanon’s international financial footprint is negligible. In mid-2019, the International Monetary Fund classified Lebanon as an emerging market developing economy, with an estimated GDP of approximately USD$60 billion.[i] Most of its bonded debt is held by local banks, including Banque du Liban (the Lebanese Central Bank) and its stability has faced economic challenges from a variety of domestic, regional, and global events – for example, the 2006 Lebanon War, the 2008 financial crisis, and the 2011 Syrian Civil War.[ii] In October 2019, after years of unrest, these issues finally came to mass international attention when prolonged protests erupted across the country with local commercial banks as the symbolic focus. Protesters voiced their concerns over national financial stability and government corruption. These concerns have grown as confidence in the banking sector has dropped, businesses have closed, and unemployment rates increased. The crisis is further magnified as the spread of COVID-19 continues and its economic fallout deepens.
The policies and practices – past and present – of Banque du Liban; Association of Banks in Lebanon (ABL), a membership-based consortium of Lebanese commercial banks; and local commercial banks are at the center of the crisis. They swiftly reacted to the protests in the interest of the local banking sector. During the first two weeks of protests in October, local commercial banks completely closed and banking customers were unable to make transfers or withdrawals. As the situation somewhat stabilized, banks reopened, but customers faced several restrictions on their ability to access funds. They faced restrictions on withdrawal amounts, transfer of funds, and foreign currency transactions. Experts describe these restrictions as de facto capital controls, apparently implemented by local commercial banks, but coordinated and overseen by ABL to prevent “capital flight.”[iii]
These restrictions have seemingly been implemented by necessity, to retain liquidity in Lebanon’s ailing economy.[iv] But this does very little to ameliorate banking customers’ pressing financial concerns. They are rightfully frustrated and forceful demands at local branches are increasing.[v] It seems banking restrictions and public dissatisfaction are far from over. The controls imposed by Banque du Liban and ABL have made it impossible to transfer money abroad or convert Lebanese pounds into other currencies at the official rate. Many businesses are unable to import goods, a key element of the Lebanese economy. In recent weeks, protesters have defied public health-related government lockdown orders to participate in demonstrations about the banking sector, with violent incidents increasing.[vi]
These mass protests have been driven by local banking customers, but foreign banking customers have also been harmed. They share concerns with the local population. They want access to their account deposits and face the added challenge of trying to access the funds abroad. Ironically, these same foreign customers provided cash flows that in recent years were a major source of Lebanon’s financial stability. Few commentators have focused on these foreign banking customers, who find themselves unable to access their monetary deposits and caught within a web of highly sensitive and crucially important local economic concerns.
This article draws on our years of work representing clients in international disputes, and our specialized experience in cases involving international banks, to provide guidance to foreign banking customers impacted by Lebanon’s financial crisis. First, we explain the historic context for the foreign funds held by Lebanese banks. Then, we explore examples of possible legal solutions available to foreign customers – both private individuals and corporations.
Lebanon’s Frail Economic Ecosystem
Lebanon’s national financial ecosystem and local banking balance sheet are inextricably intertwined. Banque du Liban’s Governor Riad Salameh (who has already served a 26-year tenure as Governor) was once lauded for the “financial engineering” that facilitated Lebanon’s financial stability. Today, he is publicly criticized for the fallout from those same economic policies and his financial engineering has been compared to a Ponzi scheme.[vii]
At the dawn of the 2008 financial crisis, Salameh told the BBC: “I saw the crisis coming and I told the commercial banks in 2007 to get out of all international investments related to the international markets.”[viii] This move, coupled with other steps implemented by the government and local commercial banks, allowed the government’s financial balance sheet to continue thriving even during tough times. Banque du Liban pegged the Lebanese pound to the U.S. dollar.[ix] Meanwhile, the Lebanese government financed itself by selling a large portfolio of bonds in mostly U.S. dollars (and sometimes in Lebanese pounds) to Banque du Liban and local Lebanese banks.[x]
The local banks, in turn, raised money by making themselves exceedingly attractive to private foreign banking customers by offering high interest rates for U.S. dollar and other foreign currency accounts (as high as 15% per year). Banque du Liban also took loans from the local commercial banks at high interest rates and required local commercial banks to limit their debt and maintain at least 30% of their assets in cash.[xi] This foreign currency cashflow, along with government loans and purchase of Eurobonds, created an artificial buoying effect.
Shortly after protests erupted, Salameh announced a series of banking measures to ease the crisis and avoid a shortage of goods in the market. His remedies included lenders’ acceptance of Lebanese pounds from clients repaying dollar loans, reevaluation of credit facilities cut as the protests began, and coverage of certain bounced checks.[xii] However, local commercial banks continue to impose their own restrictions on withdrawals. In February 2020, Al Jazeera reported that Lebanese banks further tightened limits on foreign currency withdrawals, with at least one financial institution restricting depositors to a maximum withdrawal of $400 a month.[xiii] Meanwhile, in March 2020, Lebanon defaulted on a major Eurobond.[xiv] In April 2020, Banque du Liban acknowledged the changed national circumstances by setting a new alternative exchange rate for smaller bank depositors that devalues the Lebanese pound by more than 40% compared to the previously applicable exchange rate.[xv] More recent reports suggest that even this practice has shifted and local commercial banks are no longer dispensing U.S. dollars at all, regardless of the nature of the account.[xvi]
Holding Lebanese Commercial Banks Accountable for Private Foreign Deposits
Much of the foreign currency available to Lebanese commercial banks came from deposits made by Lebanese living abroad. For years, this seemed to be a mutually advantageous arrangement: Lebanese in the diaspora felt they were supporting their homeland’s economy while benefiting from significant interest rates, and local commercial banks obtained an influx of foreign currency.[xvii] Yet today, Lebanese abroad are suffering some of the greatest financial losses owing to the magnitude of their trapped deposits. Other foreign individuals and corporations are in the same situation.
These trapped deposits could be the basis for a variety of legal claims, including conversion and unjust enrichment. Claims would be based on the benefit that local commercial banks obtained from foreign currency deposits through years of banking relationships with these customers. Now, by wrongfully denying access to those deposits, banks must compensate their customers for both the value of the deposits and any additional related damages they may have sustained by being denied access to those deposits since October 2019. A fraud claim may also be successful if a local commercial bank knew of its liquidity problems, failed to make relevant disclosures to its customers, and caused its customers to make deposits through misrepresentations. Based on the deep connections between Banque du Liban and ABL, in which nearly all local commercial banks hold membership, such a claim has merit.
Foreign banking customers may have further claims against other Lebanese institutions, including Banque du Liban and ABL, if they issued “bad” bank checks in foreign currency, intended for deposit abroad, and later dishonored by Banque du Liban. While regular checks are negotiable instruments, bank checks hold special status and refusal to pay upon presentment can be equivalent to breach of contract.
Separate and parallel, certain claims may be possible if a local commercial bank declines to dispense funds from a foreign currency account in that foreign currency. However, the success of these claims depends not only on the bank’s customer terms and conditions, but also on the source of the decision to control currency: Is it a unilateral decision by the local commercial bank, or is driven by a change in Lebanese law or a decision of the State?
However, it is challenging to assert these substantive claims abroad in a jurisdictionally-sound manner. At first blush, these claims seem fully local to Lebanon. Indeed, the parties’ banking relationship would be governed by the bank’s customer terms and conditions and those terms and conditions likely provide how (and under what law) any disputes arising out of the banking relationship are to be resolved. This would be a fact-specific inquiry for the court presented with such a claim.
Foreign customers with connection to the U.S. may have an apt solution for this hurdle. It would likely not be enough to claim that jurisdiction is created by the correspondent banking relationship between Lebanese commercial banks and New York banks. Indeed, New York courts have previously rejected identical arguments.[xviii] However, based on our substantial experience litigating international disputes, we believe U.S. courts could find personal jurisdiction if there are predicate acts that have a connection to and/or cause damage in the U.S. Again, this would be a fact-specific inquiry for the court hearing the claim and its merit would depend on the precise details and steps leading to a customer’s claim against the bank.
Holding the Lebanese State Accountable for Failure to Protect Foreign Investments
Undeniably, the Lebanese government and related entities are centrally involved in the current economic crisis and challenges faced by foreign investors who wish to access deposits held in local commercial banks. It may be possible, in lieu of or in addition to other avenues, to assert a claim against the State for violation of a bilateral or multilateral investment treaty.
Lebanon is party to fifty bilateral or multilateral investment treaties.[xix] Each treaty provides certain protections and allows for international arbitration proceedings to be commenced by qualified “investors” with qualified “investments” against the State to assert claims for damages caused by improper State action.
The first hurdle is determining whether the potential claimant is a qualified “investor.” There is no treaty with the U.S. that would allow American nationals to assert such a claim. This path only would be available to individuals and companies holding certain other nationalities. Since many potential claimants may be from the Lebanese diaspora, it is important to consider under the specific treaty whether dual nationals (where one nationality is Lebanese) would qualify to assert claims against Lebanon.
The next hurdle, determining whether a qualified “investment” exists, can be more straightforward because the bank deposits themselves may be enough. As discussed above, Banque du Liban has been inextricably involved in local commercial banks’ decision to offer high interest rates on foreign currency deposits. Many foreigners were attracted by these favorable terms and, over the years, benefited from steady returns. This could serve as a qualified investment under the most widely accepted legal test in investment arbitration jurisprudence: It involves a contribution of assets, over time, involving some element of risk, with the investment actively contributing to the State’s economy.[xx]
After satisfying these hurdles, potential claimants must frame their claims to match the protections offered by the applicable treaty. Protections available under Lebanon’s various treaties include “free transfer” provisions, “fair and equitable treatment”/ “minimum standard of treatment” provisions, and “full protection and security” provisions. While resolving a dispute with a troubled State is by no means the quickest legal remedy, we encourage potential claimants to seek specialized advice to determine if this avenue would help vindicate their rights.
Conclusion
Lebanon’s path to rebuild its economic stability and integrity will be a long and uphill battle. While Banque du Liban, ABL, and local commercial banks claim limitations are necessary to retain liquidity within Lebanon’s economy, this does nothing to ameliorate their customers’ immediate concerns and financial needs. Just like local banking customers, foreign customers are rightfully frustrated. However, this does not necessarily mean that foreign banking customers, who have been deprived of the value of their bank deposits, are without remedies. Thoughtful legal guidance can help potential claimants navigate the jurisdictional challenges and devise thorough solutions to vindicate their rights.
About the Authors
Charles H. Camp is an international lawyer with over thirty years of experience representing foreign and domestic clients in international litigation, arbitration, negotiation, and international debt recovery. He has expertise in international banking disputes, with a lengthy track record of matters with a nexus to the Middle East. In 2001, Mr. Camp opened the Law Offices of Charles H. Camp, P.C. in Washington, D.C. to focus on effective, personalized representation in complex, international matters. Mr. Camp teaches international negotiations at the George Washington University Law School.
Kiran Nasir Gore is Counsel at the Law Offices of Charles H. Camp, P.C. Her expertise is in international dispute resolution, including advocacy before U.S. courts, commercial and investment arbitration tribunals, and investigative authorities. Ms. Gore has experience representing globally renowned clients in the banking and finance sector and has significant experience representing Middle Eastern clients. She also draws on her professional experiences as an educator at the George Washington University Law School and New York University’s Global Study Center in Washington, D.C.
References
[i] World Economic Outlook Database, April 2019, www.IMF.org.
[ii] Brad W. Setser, Lebanon’s Imminent Financial Crisis, Council on Foreign Relations Blog (Feb. 18, 2020), https://www.cfr.org/blog/lebanons-imminent-financial-crisis.
[iii] Emma Scolding, Tensions Mount at Lebanon’s Banks as Customers Push Against Capital Controls, Middle East Eye (Jan. 9, 2020), https://www.middleeasteye.net/news/confrontations-mount-lebanons-banks-customers-push-against-capital-controls; Samia Nakhoul and Lisa Barrington, Banks will Seek to Stop Money Leaving Lebanon When Doors Reopen: Sources, Reuters (Oct. 31, 2019), https://www.reuters.com/article/us-lebanon-protests-banks/banks-will-seek-to-stop-money-leaving-lebanon-when-doors-reopen-sources-idUSKBN1XA2QH.
[iv] Emma Scolding, Tensions Mount at Lebanon’s Banks as Customers Push Against Capital Controls, Middle East Eye (Jan. 9, 2020), https://www.middleeasteye.net/news/confrontations-mount-lebanons-banks-customers-push-against-capital-controls.
[v] Ibid.
[vi] Victoria Gatenby, Lebanon Protests Turn Violent Over Failing Economy, Al Jazeera (28 Apr 2020), https://www.aljazeera.com/news/2020/04/lebanon-protests-turn-violent-failing-economy-200428060704954.html.
[vii] Tom Arnold, In Lebanon, A renowned Central Bank Governor Faces Attack, Reuters (Nov. 15, 2019), https://www.reuters.com/article/us-lebanon-protests-cenbank/in-lebanon-a-renowned-central-bank-governor-faces-attack-idUSKBN1XP1FL.
[viii] Natalia Antelava, Lebanon ‘Immune’ to Financial Crisis, BBC (Dec. 5, 2008), http://news.bbc.co.uk/2/hi/middle_east/7764657.stm.
[ix] Ibid.
[x] Brad W. Setser, Lebanon’s Imminent Financial Crisis, Council on Foreign Relations Blog (Feb. 18, 2020), https://www.cfr.org/blog/lebanons-imminent-financial-crisis
[xi] Natalia Antelava, Lebanon ‘Immune’ to Financial Crisis, BBC (Dec. 5, 2008), http://news.bbc.co.uk/2/hi/middle_east/7764657.stm.
[xii] Dana Khraiche, Lebanon Offers Banks Dollars as ‘Haircut’ on Deposits Ruled Out, Bloomberg (Nov. 11, 2019), https://www.bloomberg.com/news/articles/2019-11-11/salameh-says-lebanon-has-no-plans-to-impose-capital-controls.
[xiii] Timour Azhari, ‘Not Legal’ But Necessary: Lebanon’s Banks Tighten Restrictions, Al Jazeera (Feb. 3, 2020), https://www.aljazeera.com/ajimpact/legal-lebanon-banks-tighten-restrictions-200203163004785.html.
[xiv] Lebanon Economy: QuickView – Creditors Fear Haircut on Sovereign Debt, EIU ViewsWire (Mar. 25, 2020).
[xv] Lebanon Economy: Quick View – Central Bank Sets New Exchange Rate for Bank Withdrawals, EIU ViewsWire (Apr. 8, 2020).
[xvi] Dana Khraiche, Lebanon’s Premier Slams Central Bank Chief Over Currency Chaos, Bloomberg (Apr. 24, 2020), https://www.bloomberg.com/news/articles/2020-04-24/lebanon-s-dollar-peg-gives-way-to-currency-chaos-after-default.
[xvii] Matein Khalid, Thinking the Unthinkable: Lebanon’s Sovereign Debt Default?, AMEInfo (Jan. 2, 2020), https://www.ameinfo.com/industry/finance/thinking-the-unthinkable-lebanons-sovereign-debt-default.
[xviii] See Georgakis v. Excel Mar. Carriers Ltd., 900 N.Y.S.2d 260, 261 (1st Dep’t 2010) (finding that “[e]ven assuming . . . defendant transacted business in New York, CPLR 302(a)(1) does not authorize the courts to exercise jurisdiction . . . because there is no relationship between defendant’s transaction of business and plaintiff’s claims.”).
[xix] See UNCTAD International Investment Agreements Navigator, https://investmentpolicy.unctad.org/international-investment-agreements/countries/116/lebanon
[xx] Salini v. Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction (July 16, 2001), https://www.italaw.com/sites/default/files/case-documents/ita0738.pdf
