^[1] https://www.menafatf.org/information-center/menafatf-publications/republic-lebanon-mutual-evaluation-report

WHAT IS THE FINANICAL ACTION TASK FORCE?

The Financial Action Task Force (FATF) is an intergovernmental organization established in 1989 to develop policies aimed at combating money laundering, terrorist financing, and other threats to the integrity of the international financial system.

The FATF sets international standards and monitors countries' efforts to implement these standards effectively through assessments and mutual evaluations of Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) measures. It also examines the extent to which a country's legislative and regulatory framework is complete and complies with international standards for combating money laundering and terrorist financing. 

REASONS FOR LEBANON’S POTENTIAL GREY LISTING

Lebanon's potential grey listing is based on several aspects evaluated by the FATF, from technical standards to their effective implementation. In Lebanon’s specific context, systemic factors related to the financial system are  also a main cause. Another key component is what the FATF 2023 report refers to as the activities of “a prominent local paramilitary organization”, referring to Hezbollah without naming it.

The report highlights high-level government corruption, tax evasion (such as tampering with shipping documents, submission of falsified invoices, and tax fraud schemes related to illegal VAT refunds) as major predicate offenses generating criminal proceeds for money laundering. It further highlights illicit trafficking in narcotic drugs and psychotropic substances, cybercrime, and emerging threats such as smuggling to other countries and counterfeiting of goods.

1.     INADEQUATE REGULATORY FRAMEWORK

        Lebanon's laws, regulations, and procedures require several amendments, with         technical aspects and governance structures needing improvement

·      Law No. 44/2015 on Anti-Money Laundering lacks key elements. The report highlights that the law doesn't cover all crimes linked to money laundering, and that, among other shortcomings, penalties for money laundering are too weak, treating them as minor offenses.

 ·    The Special Investigation Commission (SIC), responsible for anti-money laundering efforts, is compromised by its direct reporting to the BDL governor, as evidenced by the money laundering case against former governor Riad Salameh. Structural reforms are needed to address the excessive concentration of power in this oversight body, which undermines regulatory independence and heightens conflict of interest.

·      Regulatory oversight focuses more on verifying companies than on individual transactions, weakening monitoring efforts against financial crimes. Since 2018, the commercial registry stopped requiring founders' criminal records, potentially enabling criminals to establish legal entities. This issue is worsened by the registry's outdated infrastructure and lack of safeguards to prevent money laundering and terrorist financing.

·      Detecting and addressing criminal risk is subpar. While penalties target banks, disciplinary measures are lacking for most Designated Non-Financial Businesses and Professions (DNFBPs), except notaries. While effective legal oversight is essential to close this gap, professional secrecy limits the Bar Association's ability to ensure compliance. The report also highlights that while banks, large money changers, jewelers, and lawyers are good at detecting criminal risk, smaller money changers, insurance firms, and real estate professionals, and notaries are less able/willing to do so.

2.     INEFFECTIVE IMPLEMENTATION OF EXISTING LEGAL FRAMEWORK

    Effective law enforcement is a major concern. The judicial system is compromised and     dedicated resources are insufficient.

·      Deficiencies in enforcing anti-money laundering and counter-terrorism financing laws. Inefficiencies in the judicial system, such as delays and inconsistencies, further weaken the framework by hindering the prosecution of financial crimes and contributing to a lack of judicial decisions and comprehensive data on money laundering cases.

·      Lack of dedicated resources for investigating financial crimes, such as tax services and asset-freezing powers. Money laundering cases are primarily identified through police and financial investigators based on reports from the Cassation Public Prosecution, with limited input from tax and customs authorities, and potentially overlooking significant issues like customs smuggling, tax evasion, and drug trafficking.

·      Challenges in seizing criminal assets. Authorities rarely convert freezes into permanent confiscations despite having the legal framework. There is also a lack of strategy for recovering assets hidden abroad.

·      Weaknesses in identifying beneficial owners. While some institutions verify real owners, they often overlook entities with indirect control and handle notaries' accounts inconsistently. Additionally, Lebanon lacks effective sanctions for non-compliance with beneficial ownership information requests. A unified definition and process for identifying beneficial ownership, including guidance on notaries' accounts, is needed.

·      Subpar international judicial cooperation. MLA requests do not match the country's risk profile, and delays, especially in asset recovery, hinder investigations. Cooperation on terrorist financing and other financial crimes is inconsistent.  

3.     SYSTEMIC FINANCIAL CAUSES

    The expansion of the cash economy and proliferation of money transfer operators and     looser compliance measures are among the chief drivers behind Lebanon’s potential grey     listing.

·      Failure to address long-overdue bank sector restructuring measures: this fuels the cash economy and creates opportunities for illicit activities by by-passing established banking procedures.

·      Hostile compliance environment: despite claims of compliance, the cash-driven nature of transactions complicates anti-money laundering efforts.

·      Banking secrecy: this greatly hinders financial transparency, leading to illicit activities and potential involvement of front companies and illicit funds from various countries.

·      Activities of money transfer operators: Unlike banks, money transfer operators face looser controls, facilitating money laundering through multiple accounts and small deposits. Compliance requirements exist for international transactions but are less stringent for internal Lebanese flows.

4.     HEZBOLLAH’S ACTIVITIES

      For the FATF, “while Lebanon demonstrates a strong understanding of most terrorist financing (TF) risks,  there's a critical gap related to […] risks stemming from the activities of a major local paramilitary organization”. It adds that the Lebanese authorities do not account for such risks and that “Lebanon should produce an assessment of money laundering and terrorist financing risks associated with the […] organization and ensure these risks are mitigated”.

IMPLICATIONS OF LEBANON’S GREY LISTING

1.     ON LEBANON’S RISK PROFILE

·      Heightened Reputation Risk: grey-listing will solidify Lebanon's perception as a high-risk jurisdiction, amplifying existing concerns about its financial stability and AML/CFT practices.

·      Hindered Investment Prospects: grey-listing will discourage foreign investment in Lebanon, further impeding economic recovery.

2.     ON INDIVIDUALS & ENTERPRISES

·      Increased Compliance Requirements and Transaction Costs: this leads to stricter due diligence, delays, and increased costs for individuals and businesses engaged in international financial transactions. Such added scrutiny disrupts business operations, especially for those with international dealings.

·      Potential Account Closures: banks may scrutinize Lebanese account holders more closely, leading to account closures or limitations on transactions.

3.     ON THE BANKING SECTOR

·      Reduced Correspondent Banking: Lebanese banks may lose correspondent relationships, complicating international transactions.

·      Declining Dollar Revenues: grey-listing could further diminish dollar inflows, worsening the liquidity crisis for Lebanese banks and reducing revenues from dollar transactions.

·      Stalled Recapitalization: grey-listing may undermine efforts to inject new capital in the banking sector, once a restructuring decision is taken, due to higher capital costs and increased risks.