HomePoliticsAnalysisIllicit Funding and Cash Economy Questioned by US Treasury, Estimated at Nearly 46% of GDP

Illicit Funding and Cash Economy Questioned by US Treasury, Estimated at Nearly 46% of GDP

A picture shows Lebanon's central bank headquarters in Beirut on July 31, 2023. (Photo by JOSEPH EID / AFP)

Growing concerns have emerged over Lebanon's cash economy facilitating money laundering, potentially reversing economic progress and increasing vulnerability to financial crimes. The U.S. Treasury has urged Lebanese authorities to prevent the funneling of funds to groups like Hamas, highlighting the risk to Lebanon's financial integrity, writes Maan Barazy.

Growing concerns have surfaced that Lebanon’s cash-based economy is facilitating money launderers in concealing the origins of funds for the Palestinian group Hamas’ activities. Furthermore, the increasing reliance on cash transactions poses a threat to reverse the progress Lebanon made before 2019, making the economy more susceptible to financial crime vulnerabilities. Experts warn that the risk of money laundering is amplified by the use of cash to disguise illicitly obtained assets, and cash transactions could undo the efforts made prior to the crisis to bolster Lebanon’s financial integrity and establish comprehensive anti-financial crime measures.

The US Treasury has voiced these concerns on several occasions. Moreover, a top U.S. Treasury official during a visit to Beirut urged Lebanese authorities to block the channeling of funds to Hamas through Lebanon. Jesse Baker, Deputy Assistant Secretary of the Treasury for Asia and the Middle East, engaged with Lebanese politicians and financial sector officials last week. Notably, the Office of Foreign Assets Control (OFAC) has enforced a Lebanon sanctions program since August 1, 2007, following President’s Executive Order (E.O.) 13441, “Blocking Property of Persons Undermining the Sovereignty of Lebanon or Its Democratic Processes and Institutions.” 

An anonymous source from the Central Bank of Lebanon mentioned that the discussions bore resemblance to a fact-finding mission, including numerous other officials and members of the political elite here. “We underscored BDL’s Anti Money Laundering protocols in place within the system,” he added. The U.S. Treasury Department has identified several Lebanese companies used by Hezbollah and its affiliates for alleged money laundering. The involvement of Lebanon’s financial sector in these activities is often unclear. Although most U.S. sanctions and court documents list companies in Lebanon involved in these operations, they rarely specify the financial institutions utilized. Nonetheless, this situation poses significant risks for the Lebanese banking sector. 

Press reports have indicated that the acting governor of the Central Bank, Wassim Manssouri, reassured the US Treasury’s Assistant Secretary for Asia and the Middle East in the Office of Terrorist Financing and Financial Crimes, Jesse Baker, that Hamas could not conduct bank transfers from Lebanon, whether through banks or financial companies, as relayed in local media and confirmed by Central Bank sources. Lebanon’s reliance on its cash economy has attracted scrutiny. Bachir El Nakib, Founder of Compliance Alert Consultancy and an AML compliance expert, stated: “Lebanon’s cash economy undoubtedly makes it easier for money launderers to hide the source of funds for illicit and illegal activities,” adding that an increased dependence on cash transactions is likely to reverse the progress Lebanon achieved before 2019, exposing the economy to greater risks of financial crimes. 

Speaking to NOWLEBANON, El Nakib mentioned that the risk of money laundering has escalated with the use of cash to mask illegally acquired assets, and cash transactions could undermine the progress made before the crisis in strengthening Lebanon’s financial integrity and enacting widespread anti-financial crime measures. “The cash economy facilitates the thriving of organizations classified by OFAC as exchangers amid a growing dependency on cash, as foreign exchange companies began to deplete the cash reserves sought by Lebanon’s Central Bank, turning instead to Hezbollah’s shadow network of foreign exchanges to obtain these dollars,” he explained. 

The United States has sanctioned numerous Hezbollah-affiliated financial facilitators attempting to leverage the financial crisis to fund their activities, he added. On compliance issues, El Nakib noted: “FATF’s mutual evaluation report 2023 surprisingly did not place Lebanon on the grey list; the country narrowly escaped this fate by scoring just one point above the threshold.” The FATF grey list flags countries under intense scrutiny for inadequate measures to combat money laundering and terrorism financing. FATF’s evaluation highlighted Lebanon’s anti-money laundering protocols, transparency in beneficial ownership, and mutual legal assistance in asset freezing and confiscation as areas of concern, marking the country as ‘partially compliant’ in these areas. 

El Nakib stated that Lebanon is expected to submit a progress report to MENA-FATF in 2024, outlining identified deficiencies and the corrective actions undertaken. According to the World Bank, Lebanon’s cash economy emerged amidst a financial and economic crisis, leading to a diminished confidence in the Lebanese banking sector, with a majority of financial transactions now conducted in cash and banking sector credit lines fully collateralized in cash. The World Bank emphasized the importance of estimating the cash economy’s size to comprehend transaction dynamics and the potential impacts of a widespread cash economy on fiscal and monetary policy effectiveness. The report pointed out that a burgeoning cash economy dilutes fiscal policy’s impact, hampers tax buoyancy, and incentivizes tax evasion. Moreover, it suggested that monetary policy efficacy is diminished as cash transactions supplant banking operations.

 Concurrently, the World Bank described the USD cash economy as the total USD in circulation, largely encompassing legal transactions within a heavily dollarized Lebanese economy. The cash economy’s size in Lebanon, calculated by comparing  “GDP from the expenditures side” to Gross National Disposable Income (GNDI) as published by the Central Administration of Statistics (CAS), reached a peak of $2.8 billion (5.6% of GDP) in 2015, escalating to $4.5 billion (14.20% of GDP) by 2020. Due to the lack of updated data from the CAS’ national accounts, the World Bank employed a tailored approach to estimate the cash economy for 2021 and 2022. This approach considered several USD cash circulation sources: withdrawals of pre-crisis foreign currency deposits, BDL’s foreign exchange interventions, USD remittances from the Lebanese diaspora, USD cash stored in homes since the crisis onset, USD cash entering Lebanon through both legal and illicit means, humanitarian and development cash assistance, and post-crisis USD bank deposits not affected by informal bank-imposed capital controls. The World Bank made several assumptions for its estimation, including the immediate conversion of LBP cash to USD at market rates to preserve purchasing power and the calculation of banking sector deleveraging by deducting foreign currency loans from deposits. 

Moreover, it assumed that the net foreign currency deposits, after loan deductions, were withdrawn in compliance with BDL circular 158, either in cash or through discounted checks, contributing to the cash economy. Consequently, the World Bank estimated Lebanon’s cash economy at $6.05 billion in 2021, equating to 26.2% of nominal GDP, and $9.86 billion in 2022, accounting for 45.7% of GDP. The significant increase in the cash economy’s size in 2022 was attributed to a near halt in capital flight, largely due to stricter informal capital controls, and the relative increase in cash economy size as a percentage of GDP resulted from a drop in nominal GDP from $23.13 billion in 2021 to $21.55 billion in 2022. The World Bank also noted that the prevalence of cash transactions heightens the risk of money laundering and creates more opportunities for tax evasion. The report cautioned that the growing reliance on cash transactions risks undermining Lebanon’s progress in enhancing the country’s financial integrity through robust anti-money laundering measures in the banking sector prior to the current crisis. Moreover, it observed that cash economies aid in obscuring the origins of funds used in illicit and illegal activities. Finally, the World Bank remarked that cash economies encourage informality among small and micro businesses and reduce productivity due to the lack of economies of scale, further exacerbating weaknesses in Lebanon’s tax code. 

A Treasury official, speaking anonymously on sensitive matters, shared with Lebanese authorities “specific concerns” about “the movement of Hamas funds through Lebanon, Hezbollah funds from Iran into Lebanon, and then out into other regional areas,” urging “proactive measures” to address these issues. The official emphasized that these groups rely on fund flows to pay their fighters and conduct military operations, without which they cannot achieve their objectives. The Treasury official further highlighted that demonstrating compliance with global anti-money laundering and counter-terrorism financing standards is crucial for Lebanon to attract investment from the United States and the international community, which is essential for overcoming the country’s prolonged crisis. Baker advocated for Lebanon to intensify efforts against the burgeoning sector of illicit financial service companies, including illegal money exchange and unlicensed money transfer operations, which have thrived amidst the collapse of the country’s formal banking system over four years of economic turmoil. These businesses, along with a cash economy that the World Bank estimates to comprise nearly 46% of Lebanon’s GDP, provide alternatives for individuals and groups restricted from the formal financial system by U.S. sanctions, including Hamas and Hezbollah, both labeled as terrorist organizations by Washington.


Maan Barazy is an economist and founder and president of the National Council of Entrepreneurship and Innovation. He tweets @maanbarazy

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