When countries’ governments and financial organisations do not do enough to tackle the threat of money laundering and terrorist financing, sirens go off. Those sirens sound from the Financial Action Task Force (FATF).

The FATF tracks terrorist funding, helps mitigate risks, and promotes standards. If a country repeatedly fails to implement those standards, it can be named as a high-risk jurisdiction (placed on a blacklist) or in need of increased monitoring (placed on a grey list). Iran is the only Middle Eastern country on the blacklist, but several are now grey-listed: Algeria, Yemen, Syria, and—as of 25 October—Lebanon.

A list of failings

The December 2023 FATF report on Lebanon indicated that it had complied with 34 of the 40 official recommendations and stressed the need to address “partial compliance” with the remaining six. Some relate to the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) legislation, which requires the criminalisation of money laundering in accordance with the Vienna and Palermo Conventions, specifically amending the penalty for this offence to make it more dissuasive.

The report also said the government needed to improve its verification of certain categories of customers (such as holders of economic rights in credit transactions and a number of professions and occupations), develop better procedures for seizing, confiscating, and managing frozen criminal assets, and improve its extradition of criminals. Now that it has been ‘grey-listed,’ Lebanon’s financial transactions are subject to additional scrutiny.

The country had shortcomings in ten areas across four domains that need strengthening. These domains were judicial (promptly executing legal assistance requests), professional (improving understanding of risks), regulatory (increasing penalties for non-compliance), and procedural (improving the use of financial intelligence unit products by competent authorities).

Tackling corruption

It was not all bad news. The FATF commended the Central Bank of Lebanon for issuing a directive to banks and financial institutions to establish a dedicated department to combat crimes related to bribery and corruption.

But Beirut's most recent plan to restructure deposits and reform the banking sector divided deposits into 'legitimate' and 'illegitimate' categories, the latter estimated at around $40bn—roughly half the total. This implies that the directive is failing to prevent these deposits leaking into the banks and is thus failing fighting corruption.

In 2018, the International Monetary Fund (IMF) urged Lebanon to require senior public officials to publicly disclose their financial statements and any changes after being audited by a competent body.  This practice is common in developed countries like France, where citizens can see officials' financial disclosures online, and it would have been more effective for the FATF to urge Beirut to adopt this IMF recommendation.

Elephant in the room

The FATF commended the measures taken by the Central Bank of Lebanon to curb unauthorised financial activity, such as by granting a grace period for these activities to regularise their status. However, its deadline expired without the required regularisation from the Al Qard Al Hassan Foundation, described in Israeli media as "Hezbollah's bank." It is on the US Treasury's sanctions list for its use as a cover for Hezbollah's financial activities. 

The bank has access to the international financial system and has continued to engage in lending activities without notification, legal authorisation, or oversight from the Central Bank of Lebanon, as required by law. It has also continued to provide financial services to Hezbollah. Its branches were targeted by Israeli bombers last month.

Reports suggest that Hezbollah is trying to raise funds online through the Islamic Resistance Support Organisation (IRSO) to purchase weapons and drones, with transfers made through financial institutions to the IRSO's account at the Al-Qard Al-Hassan Foundation.

The shadow of money

It is striking that the FATF did not mention the transfer of funds abroad by senior politicians and officials just as the Association of Banks in Lebanon and the Central Bank planned to restrict withdrawals and transfers to the public. 

These transfers, believed to be more than $10bn, could be considered a form of money laundering by legal standards. It would have been prudent for the Central Bank of Lebanon, the foreign banks involved, and the FATF to have addressed this issue openly and taken a firm stance.

The FATF report does not call Hezbollah a terrorist organisation but a "local paramilitary organisation" with a "documented record of terrorist acts." Lebanon has been publishing its national assessment of money laundering and terrorist financing risks since 2011, with 123 convictions for terrorist financing between 2017 and 2021, yet this does not take account of Hezbollah's activities.

Therefore, there is still an urgent need for a specific and exclusive assessment of Hezbollah, which the Central Bank, with help from the Special Investigations Commission and the Banking Control Commission, should periodically update. 

Cue the blame game

The Central Bank's legal obligations require it to assess the risks associated with the laundering of illicit funds and the contamination of clean funds by the financing of terrorism and inform the government of potential harm to the economy or currency.

Had such assessments been prepared earlier, and reviewed by the relevant political, banking, and administrative officials—especially judges and security personnel—it would have had a positive impact on their policies and decisions, avoiding the path that led to an informal cash economy, and Lebanon's inclusion on the FATF grey list. 

Central Bank officials insist that they have done what is required of them and that the matter is now in the hands of politicians. Given the circumstances, that certainly appears a striking claim to make.