Is Lebanon Avoiding the Grey List? Or Have Things Gone Out of Control?

Lebanon is facing serious and complex challenges in its pursuit of compliance with anti-money laundering (AML) and counter-terrorism financing (CTF) standards set by the Financial Action Task Force (FATF) to ensure the integrity and stability of the global financial system. These challenges are not merely technical or legal obstacles but are reflective of deep-rooted political, social, and economic complexities.

The country suffers from overlapping authorities among political and sectarian forces, which hinders the possibility of implementing necessary reforms in an integrated and sustainable manner.

Given this reality, the efforts of the Lebanese government and banking institutions to achieve full compliance with FATF standards become an almost impossible task, as technical challenges intertwine with deeper barriers related to the structure of Lebanon’s political and social system.

These complexities necessitate the adoption of a comprehensive approach that goes beyond superficial solutions to address the deep-rooted issues facing the country.

Current Challenges

Lebanon is currently under increasing pressure from the FATF to comply with international standards for AML and CTF. In its 2023 assessment, the FATF found that Lebanon is significantly deficient in these areas, leading to an extension of the deadline for Lebanon to improve its standing until October 2024. Failure to achieve compliance could result in Lebanon being placed back on the “grey list,” which would have serious repercussions for its already beleaguered financial sector.

Factors Affecting Compliance

1. Political Will: The political landscape in Lebanon is sharply divided, with sectarian interests taking precedence over national concerns. This fragmentation obstructs national efforts to combat money laundering and terrorism financing, especially in the presence of influential non-governmental entities such as political parties.

2. Institutional Capacity: Lebanese state institutions suffer from severe weakness due to ongoing conflicts and widespread corruption. Institutions such as the judiciary and law enforcement agencies are plagued by political interference and lack of resources, impeding their ability to enforce and implement AML laws.

3. Banking Sector: Lebanese banks face significant challenges in maintaining relationships with foreign correspondent banks, which are vital for ensuring the flow of money and financial services across borders. Sustaining these relationships is crucial to avoid isolation from the global financial market, as Lebanese banks heavily rely on these correspondences for financial transactions and facilitating international trade.

In this context, Lebanon's Central Bank has issued key circulars, such as Circular No. 165 and 168, in recent months aimed at enhancing compliance with international standards and achieving greater transparency in the banking sector. These circulars require banks to provide accurate and detailed reports on ownership and management structures, as well as strengthening oversight of financial operations and implementing AML and CTF measures.

On the other hand, these circulars also seek to encourage citizens to return to using the formal banking system and reduce their reliance on cash.

However, these measures also reveal the complexity of the situation in Lebanon, as their implementation faces challenges related to rampant corruption and weak government institutions, further complicating the achievement of full compliance and placing the banking sector in a sensitive position before the international community.

If Lebanese banks fail to comply with the new directives and regain the trust of depositors and investors, they may find themselves increasingly isolated from the global financial system, exacerbating the country’s economic and financial crisis.

Reliance on Cash

One of the critical issues Lebanon faces in combating money laundering is its excessive reliance on cash for local transactions. This dependence complicates efforts to track illicit financial flows and undermines the effectiveness of the formal banking system.

The Way Forward: Practical Solutions for Lebanon

To emerge from the current crisis and achieve compliance with FATF standards, Lebanon must adopt an integrated approach that combines political, economic, and social reforms. Here are practical steps that Lebanese citizens can engage with directly:

1. National Reconciliation and Inclusive Dialogue

   • Building Trust: The government should work to bridge the gap of trust with citizens by enhancing transparency and accountability. This can be achieved by activating the role of oversight institutions and ensuring judicial independence. Local dialogues should also be encouraged to bring together various factions and sects to discuss their issues and propose solutions that foster national unity and support AML and CTF efforts.

2. Strengthening State Institutions

   • Governance Reforms: Efforts should focus on reforming government institutions to ensure transparency and accountability. Citizens need to see tangible steps towards reducing corruption, starting from monitoring public sector appointments to implementing penalties for corrupt individuals.

   • Supporting National Security Forces: Improving working conditions and training for security forces and the Lebanese army is essential to ensure their ability to enforce the rule of law without political or sectarian interference. Citizens should feel secure and confident that the state can protect their rights.

3. Transitioning to a Digital Economy

   • Promoting Electronic Payments and Digital Banking Services: Given the heavy reliance on cash, the government and banks must facilitate the use of electronic payment systems. This could include offering incentives to citizens who use digital payment methods and expanding infrastructure to reach remote areas.

   • Awareness and Education Campaigns: To build trust in the digital economy, awareness campaigns should be launched to explain the benefits of transitioning to a digital economy and how to protect personal data.

4. Reforming the Banking Sector

   • Enhancing Transparency and Accountability in Banks: Banks must commit to disclosing all transactions transparently. This requires updating banking laws to ensure all financial activities are under scrutiny.

   • Rebuilding Trust Between Banks and Depositors: Each bank should work individually to regain citizens' trust by committing to safeguarding deposits and maintaining transparency in financial policies. Citizens need guarantees that their funds are in safe hands.

5. Cooperation with the International Community

   • Partnership with International Organizations: Lebanon should leverage international community support by collaborating with global bodies like the International Monetary Fund (IMF) and the World Bank. This cooperation should focus on providing technical and financial assistance to implement necessary reforms.