A Reading of the Grounds for Placing Lebanon on the Grey List

The decision by the Financial Action Task Force (FATF) to place Lebanon on the grey list did not surprise those concerned; indeed, they were aware of the content of the decision before it was issued. In particular, the task force had been on the verge of placing Lebanon on this list at its meeting held in the United Arab Emirates in October of last year, against the backdrop of the cash economy's dominance over financial relations and commercial transactions, and the accompanying risks of money laundering and the encouragement of corruption, fraud and terrorist financing.

Since 2022, Lebanon had received warnings from more than one international body urging it to adhere to anti-money laundering requirements, prevent terrorist financing, commit to international transparency standards and comply with their stipulations. That had made Lebanon's placement on the grey list virtually a foregone conclusion since that time, especially as the Lebanese authorities neither worked to address the banking sector crisis and contain the cash economy, with the financial and economic challenges they represent, nor dealt with the threats and warnings they received with the required seriousness.

What prevented Lebanon from being placed on the grey list in 2023 was the preliminary assessment of the Lebanese economy conducted by the Middle East and North Africa division of the Financial Action Task Force, which kept Lebanon off the grey list after it achieved a total score one point above the threshold for entering the list. That followed Lebanon's classification as partially compliant with standards relating to fundamental requirements of the task force, including anti-money laundering measures, transparency regarding the beneficial ownership of companies, and mutual legal assistance concerning the freezing and confiscation of assets.

The new decision comes as the Lebanese economy suffers from a deep crisis of confidence, and at a time when the cash economy accounts for around 50% of the Lebanese market, compounding the challenges of adhering to standards for combating money laundering and preventing terrorist financing. This requires introducing amendments to the laws in force and existing measures so that they align with the requirements for Lebanon's compliance with these standards. Meanwhile, attempts by the Lebanese financial and monetary authorities to amend these laws and improve oversight mechanisms have fallen short of achieving their objective, amid a lack of judicial independence and the continued spread of corruption.

It is worth noting that this is not the first time Lebanon has been placed on the grey list; it was previously listed for the first time in 2000, before being removed from it in 2002. What helped secure Lebanon's removal from the grey list was the enactment of the anti-money laundering law in 2001, which met 23 out of the 24 criteria required to combat the crimes of money laundering and terrorist financing, as well as Lebanon's actual commitment to enforcing the provisions of this law during that period. This was in addition to the establishment of the compliance unit within the Special Investigation Commission at Banque du Liban and compliance departments in the banks, to subject banking transactions to review prior to their completion in order to achieve transparency.

The new Financial Action Task Force decision aims to monitor the extent of Lebanon's commitment to implementing international standards and conditions for combating money laundering and preventing terrorist financing, and to urge it not to continue ignoring these demands and evading their implementation. This is particularly so given that the talks held shortly before the decision was taken addressed the irregular functioning of Lebanese state institutions and the absence of judicial rulings in money laundering cases. The decision comes within the framework of increasing international pressure on Lebanon on the financial front, especially as it coincides with the Israeli aggression.

However, what may prevent negative effects or repercussions of the decision on Lebanon's monetary trajectory and financial transfers is the new decision's recognition that Banque du Liban and the banks have fulfilled their duties in adhering to international standards on transparency and applying global financial procedures. Another factor is the success of the acting governor of Banque du Liban, Dr. Wassim Mansouri, in preserving Lebanon's relations with the six international correspondent banks, which will keep their dealings with Lebanon as they were, as a result of the commitment of Banque du Liban and the banks to transparency requirements and other standards of the FATF and global financial institutions.

Although the decision to place Lebanon on the grey list does not impose direct restrictions on it, it places the country on the list of non-cooperative states that do not comply with standards and controls on money laundering and combating terrorist financing. That makes procedures relating to financial transfers more stringent, requiring additional documentation to prove the legitimacy of their sources and where they are spent. This listing entails heightened scrutiny of financial transfers, whether conducted through financial companies or through banks, and consequently leads to an increase in the cost of these transactions in addition to operational costs.

The burden caused by rising financial transfer costs resulting from the grey list will fall on the shoulders of the Lebanese citizen, who will have to bear the outcome of higher banking service costs. This could lead to a decline in financial transfers and increase the difficulties Lebanese face in obtaining foreign currencies, as a result of stricter scrutiny of financial transfers and the resulting risks of a higher rate of financial exclusion. This comes at a time when what remains of citizens' deposits is still trapped in the banking sector, and the most they can obtain from them does not exceed the value of their monthly food basket, to the exclusion of any other expenses.

On the other hand, if Lebanon's placement on this list continues for a long period, that could affect its financial relations with international financial institutions. Financial dealings with foreign banks and institutions could become more complicated, potentially reducing the volume of financial inflows and increasing the cost of external transfers. Investors may also find greater difficulty operating inside Lebanon, exacerbating its economic crisis.

While the Lebanese had expected the warnings of international financial institutions to lead to reforms in state finances and to addressing the banking sector crisis and restructuring and rehabilitating the sector, we find that the interest of these institutions, and particularly the Financial Action Task Force, is confined to combating money laundering and preventing terrorist financing. Yet it is impossible to achieve these objectives without achieving the required reforms and restoring confidence in the banking sector, something that will only be realised through returning deposits, not to say releasing them.

For all the importance of the objectives of the Financial Action Task Force and the importance of preserving Lebanon's relations with international financial institutions, amid the barbaric Israeli aggression against Lebanon and the vacancy in the presidency of the republic, talk of complying with Financial Action Task Force standards becomes a luxury, closer to nonsense than to responsible discourse. Lebanon, whose government failed to formulate solutions to its financial and economic crisis despite the relative stability it enjoyed, is today even less capable of confronting the social and economic repercussions of the aggression, so how can it restore the regular functioning of the banking sector and the regular functioning of the state and its institutions?

Translated from Arabic with AI. Read it in Arabic