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The global financial crimes watchdog has added Lebanon to its “grey list,” dealing another blow to the country reeling from years of economic crisis and now an all-out war with Israel.
The Paris-based Financial Action Task Force (FATF) announced on Friday that it would add Lebanon to its list of more than 20 countries subject to “enhanced surveillance” due to concerns over money laundering and terrorist financing.
Analysts say Lebanon’s judiciary is incompetent and the country’s increasingly cash-based economy following the 2019 banking sector collapse has heightened concerns about illicit financial flows.
The watchdog rated the effectiveness of Lebanon’s money laundering prosecutions and investigations as “low” in its 2023 assessment.
Although the measures are not as severe as being placed on a watchdog’s “blacklist,” gray listings can still damage a country’s reputation and scare off foreign investors. The IMF has said in the past that the designation has had a “substantial and material adverse impact” on capital flows to gray-listed countries.
Many of the financial exclusions associated with the gray list are already being felt in Lebanon. Following the currency and banking sector collapse five years ago, many global banks ended their “correspondent” relationships with local lenders.
However, the designation could worsen Lebanon’s economic problems by making it more difficult for nationals working abroad to send cash to relatives still living there, potentially impacting the country’s mainstay of GDP. There is sex.
“Deportations from abroad to Lebanon will be subject to very high scrutiny,” Lebanese economist Roy Badaro said.
“Banks are likely to face increased scrutiny, higher compliance costs and delays, and already weak banking channels will be further weakened by the reliability of remittances,” said Leila Dagher, a Lebanese economist and former government advisor. It’s going to go down,” he said. “Money transfer providers, which have become a more popular alternative since 2019, may also be affected.”
Some fear that the remaining correspondent banks could cut ties due to increased compliance costs. “We’ve been given verbal assurances that that won’t happen, but you never know,” Dugger said.
Lebanon has been urged to make reforms to avoid gray listing after a 2023 assessment by the watchdog found it was only partially compliant in key areas and entered a one-year monitoring period. He was given a one-year grace period. Political impasse meant the requirements were not met.
“FATF MENA has on several occasions requested the Lebanese government what should be done to resolve issues with all other stakeholders, including members of the judiciary,” said Lebanese expert on fiscal policy and anti-corruption. said attorney Karim Daher. “The Lebanese government did not take this very seriously.”
In its 2023 Mutual Assessment Report, the FATF said Lebanese officials “failed to take into account the (terrorist financing) risks arising from the activities of the main local militias,” which is clearly linked to Hezbollah. This is a reference to
A year of rising tensions between Hezbollah and Israel had already curbed a slow economic recovery after the pandemic, when the conflict escalated into a full-scale war last month.
Since then, Israel has bombarded Lebanon with thousands of airstrikes and launched a ground invasion of southern Lebanon.
Lebanon must now implement the action plan agreed with the watchdog and be removed from the gray list.
Analysts said the designation could be the catalyst for change.
“This will put pressure on authorities to adopt and implement the reform roadmap needed to avoid blacklisting and prevent Lebanon’s further international financial exclusion,” said Alia Mbaid, chief MENA economist at Jefferies. Therefore, gray listing could be a positive possibility.”
“This is a political signal to the political class that this cannot continue any longer,” Badaro said.
