On October 25, the Financial Action Task Force (FATF) added Lebanon to its “grey list”, a term used for countries under increased scrutiny from the global watchdog due to inadequacies in their anti-money laundering (AML) and countering the financing of terrorism (CFT) frameworks.
Lev Yuriditsky
The list of 24 countries includes three others from the Middle East and North Africa (MENA), namely, Yemen, Syria, and Algeria, the latter of which was also added in October during FATF’s plenary session.
Lebanon’s addition comes just under a year after FATF’s Mutual Evaluation Report, released in December, that specifically commented on the risks from Hezbollah, although it wasn’t named and, instead, referenced as a “major local paramilitary organization”.
The report also noted high-level corruption, tax evasion, trade based money laundering risks, illicit trafficking, and smuggling, among others that are intimately connected with the terror financing risks associated with Hezbollah. Indeed, I discussed exactly this during my recent presentation alongside Baker Regulatory in the Channel Island of Jersey.
It further listed various gaps in Lebanon’s regulatory framework.
This includes the scope of coverage of money laundering predicate crimes, a lack of regulatory independence, poor monitoring for financial crimes, a commercial registry with no requirement for criminal records checks on company founders, and a lack of disciplinary measures against Designated Non-Financial Businesses and Professionals.
The report addressed deficiencies in enforcing existing AML/CFT laws due to a lack of resources, as well as ineffective beneficial ownership identification and poor international cooperation, especially with regards to terror finance and other financial crimes.
Lebanon also faces systemic issues arising from banking secrecy, which is in turn facilitated by the cash-driven economy.
This is not to say that the FATF hasn’t acknowledged the efforts made by Lebanon to address the above and also the significant challenges faced as a result of the ongoing armed conflict with Israel.Indeed, it granted Lebanon two years, instead of one, in order to address the issues raised during the grey listing.
While all such listings impact a country’s financial sector through various means, including damaging its reputation and investment prospects, raising transaction costs due to additional compliance requirements, and causing losses in correspondent banking relationships, among others, we anticipate that the impact on Lebanon will be particularly strong. This is in light of the financial crisis that the country has been facing since 2019, which already impacted its global reputation, reliability, ease of doing business, and other metrics. Furthermore, the conflict with Israel, as well as the high risk for terror financing exposure when conducting business with Lebanon, has served to deter foreign investment.
This, along with the political stalemate and lack of resources, indicates that there is a high risk that Lebanon will struggle in addressing its shortcomings, something well recognized by the global financial sector and demonstrated by FATF granting Lebanon that additional year to address its gaps. Despite this leniency, the international community will likely see Lebanon’s prospects as too low and begin even further reducing business and investments there.