Coming Clean: Time to Open Lebanon's Chamber of Banking Secrets

Lebanon’s financial sector has long enticed customers with offers of banking secrecy. As in Switzerland, this system has allowed shady characters – both Lebanese and foreign – to stash illicit wealth in Beirut’s vaults. But banking secrecy does something else, just as insidious: it helps destroy Lebanon’s tax potential.

Executive Summary

As Lebanon descends into financial collapse, answers to crucial questions lie behind the shroud of banking secrecy – the strict laws that keep account information confidential. Are powerful citizens stashing illicit wealth inside Lebanese banks? Which account holders should take a progressive “haircut” after profiting from Lebanon’s regulated Ponzi scheme? (See the first instalment in this working paper series, “Extend and Pretend: Lebanon’s Financial House of Cards.”)

Banking secrecy also stands in the way of Lebanon achieving fairer, progressive, and more sustainable public finances, capable of reducing public debt and driving investment. Alarmingly, estimates suggest that Lebanon recovers less than half of its potential tax revenue. This situation has come about mainly due to the country’s dismally low top tax rate (20%), and the government’s failure to properly enforce and collect progressive taxes, which citizens pay based on what they can afford.

Alongside the government’s lax attitude to tax compliance, banking secrecy helps many Lebanese submit false tax returns, knowing that the Ministry of Finance cannot directly audit their bank accounts. The state has increasingly turned to more regressive taxes (most notoriously, the proposed WhatsApp tax), which disproportionately burden people with lower incomes. The result is widening inequality and social malaise — both evident drivers of the current protest movement.

The only road around banking secrecy goes through the Special Investigation Commission (SIC). An unelected body, the SIC can force banks to reveal account information about suspected financial crimes. In reality, the SIC was established at the behest of foreign governments – chiefly, the United States – to combat money laundering. True to those origins, the SIC is far more likely to lift banking secrecy for requests from overseas. By contrast, it hardly ever compels banks to hand over information to the Ministry of Finance, Lebanon’s tax authority.

Due to increased foreign scrutiny, Lebanon has become a less attractive place to covertly stash cash – yet, banking secrecy continues to hobble state revenue. Therefore, the time has come for Lebanon to do away with the practice altogether. But taking down banking secrecy all at once will likely do more harm than good. Secrecy is one of the pillars of Lebanon’s financial sector – removing it immediately would likely result in more capital flight, which is the last thing Lebanon needs at the moment.

Instead, Lebanon should pursue a staged dismantling of the banking secrecy framework. First, confidentiality protections should be lifted for all public officials and civil servants, along with all parties who are awarded state contracts.

Next, the reforms should allow financial investigators to access the accounts of all Lebanese citizens, facilitating stronger compliance with progressive taxes. Then, non-resident account holders should also lose their rights to banking secrecy.

For those final steps to take place, Lebanon’s banks will need to stop relying on what – until recently – were easy wins: providing tax haven services and offering progressively higher interest rates. In other words, Lebanese banks must start working harder for their money, and for the Lebanese economy too. Loans should go to high risk (but more productive) sectors, and small businesses that sustain real jobs and client bases for a healthier, more stable financial industry.