As risk of money laundering is amplified by a growing cash economy to disguise illicitly obtained assets, Lebanon’s Central Bank introduces needless amendments towards strengthening AML/CFT regulations
Despite new measures taken by the Banque du Liban (BDL), the listing of Lebanon on the Middle East and North Africa Financial Action Task Force (MENAFATF) grey list seems imminent, experts in close contacts with the issue told NOW. The MENAFATF wants to adopt and implement 40 recommendations on combating money laundering and financing of terrorism and proliferation. 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’ and the Hezbollah 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.
If Lebanon is placed on the grey list, it could lead to several adverse outcomes, including a decrease in foreign direct investment, which is critically needed. Companies based in Lebanon may also face higher costs of doing business with foreign counterparts due to increased due diligence requirements. Additionally, there may be stricter restrictions in countries with stringent measures on cross-jurisdictional operations involving countries listed on the grey list. The MENAFATF is voluntary and co-operative in nature and independent from any other international body or organization; it was established by agreement between the governments of its members and is not based on an international treaty. It sets its own work, regulations, rules and procedures and co-operates with other international bodies, notably the FATF, to achieve its objectives.
The Central Bank issued basic circular 168 that was addressed to banks, financial institutions, leasing companies, institutions that issue and promote charge and credit cards, institutions engaged in electronic financial and banking operations, money dealers and specialized lending entities. However, this seems not sufficient, sources affirm. The core issue behind the MENAFATF grey list is a series of compliance measures Lebanon has not yet adhered to.
Lately the organization issued a report titled “Anti-money Laundering and Counter-terrorist Financing Measures: The Republic of Lebanon Mutual Evaluation Report.” The report assessed Lebanon’s anti-money laundering (AML) and counter-terrorist financing (CFT) measures. It evaluated Lebanon’s compliance with the FATF’s 40 recommendations, the effectiveness of the AML/CFT system, and provided recommendations for strengthening the existing framework. Lebanon is likely to be placed on a grey list of countries under special scrutiny over unsatisfactory practices to prevent money laundering and terrorism financing, three sources familiar with the matter told Reuters. Being added to the list would be another major blow to a country in a financial tailspin since 2019 and struggling to secure a deal with the International Monetary Fund. The cumulative score of that evaluation puts Lebanon “one mark over the threshold to be grey-listed,” said a diplomatic source who had seen a copy of the preliminary report.
According to the draft Lebanon was scored as only partially compliant in several categories, including anti-money laundering measures, transparency on beneficial ownership of firms and mutual legal assistance in asset freezing and confiscation. “Lebanon is pitching for more leniency, and trying to have an improved score on one of the categories so it is no longer within the grey-listing zone,” the diplomatic source said.
What is Lebanon’s governance action missing?
According to NOW’s sources, the FATF wants to see the implementation of the parts of the AML/CFT Action Plan related to the unregulated financial sector, which emerged due to the challenges faced by the banking system, should be prioritized.
The MENAFATF report revealed several key findings concerning Lebanon’s compliance with FATF recommendations. Although the NRA included the most critical crimes and sectors at high risk of money laundering and terrorist financing, it found a low level of understanding of ML and TF threats stemming from the unregulated financial sector, high-level government corruption, and the activities of a major paramilitary group. Sectoral reviews of the financial sector showed that most public entities have a solid understanding of money laundering risks, while some are still developing in this area. Regarding terrorist financing, competent authorities have a good grasp of the primary risks, except for those linked to local paramilitary groups. In the private sector, banks generally understand ML/TF risks well, while others are still developing their understanding.
The financial crisis has led many Lebanese citizens to invest in precious metals and stones as a safe haven. As a result, there is a need to update risk assessments for this sector, making them more comprehensive to address risks associated with precious metals trading. Competent authorities have access to financial and related data during investigations of ML and TF cases, either directly or indirectly. In TF cases, authorities rely heavily on financial intelligence, often requesting it from the Cassation Public Prosecutor. However, in ML cases, there is limited reliance on financial intelligence. There are gaps in the implementation of freezing assets and reporting to the Special Investigation Commission (SIC) concerning accused individuals and entities.
Key measures needed
Lebanon must assess and mitigate the risks associated with the activities of the main local paramilitary group as well as significant efforts should be made to train and develop the skills of key competent authorities, especially within the Customs & Tax Directorates, so they can effectively utilize financial intelligence to proactively trace money laundering (ML) evidence, the MENAFATF recommends. Accordingly Lebanon lacks law enforcement agencies and the Cassation Public Prosecutor should maintain reliable, consistent, and centralized data that can be regularly reviewed to build strong ML cases. The law establishing the “National Fund for the Management and Investment of Assets under Recovery or Recovered Related to Crimes and Proceeds during the Freezing or Seizure phase” should be enacted promptly, the evaluation quoted.
Also timely international cooperation should be pursued, proportional to the size of the predicate offences and ML/TF crimes. The watchdog also wants to see a comprehensive mechanism established to combat narcotic drug trafficking, ensuring timely and effective international cooperation. Efforts should be made to allow the General Intelligence Directorate and the Information Division timely access to all financial intelligence to strengthen financial investigations. Also supervisory authorities must regularly remind financial institutions (FIs) and DNFBPs of the national mechanism requirements related to updates in UN sanctions lists to ensure immediate freezing of assets. They should also monitor compliance with Targeted Financial Sanctions (TFS) requirements and enforce sanctions for violations.
The recommendations highlighted that notaries public, precious metals and stones traders, exchange houses, and real estate agents must be adequately informed about the ML/TF risks associated with their activities. The Ministry of Justice and SIC, as the entities responsible for these sectors, should ensure this information is disseminated. Lebanon lacks unified definition of beneficial owners should be established to clarify the handling of bank accounts held by notaries public. Regulators of financial institutions should continue their efforts to monitor unlicensed activities. Additionally, FIs and DNFBPs should be well-informed about the requirements of UNSCRs 1718 and 2231 concerning North Korea and Iran.
Also the activities of accountants should be supervised and reassessed to ensure compliance with AML/CFT requirements under Article 5 of Law No. 44 on money laundering. Similarly, the Ministry of Justice should supervise lawyers’ activities, as is done with notaries public. Non-profit organizations (NPOs) should be subject to supervision due to their receipt of foreign support, the report said.
Lebanese authorities across all institutions and entities must intensify their efforts to enhance and update their actions, addressing key findings to avoid being placed on the FATF grey list. For example the General Directorate of Customs must improve its technological and technical capabilities to effectively seize prohibited goods at borders and detect sanctions evasion.
What’s new in the circular?
As per BDL, this circular is in accordance with Law 44 of November 24, 2015 regarding fighting money laundering and terrorist financings Basic decision 12147 of December 22, 2015 concerning the implementation of UN Security Council resolutions No 1267 (1999), No 1988 (2011) and No 1989 (2011), in addition to any related successor resolutions and Basic decision 12253 of May 3, 2016 on dealing with the US Act of December 18, 2015.
The BDL wants details of all shareholders and stockholders that own more than 5% of shares and stocks. Beneficial owners who own and/or exercise effective control over more than 5% of shares and stocks through direct ownership, indirect ownership through a legal person, or through other means including chairman and members of the Board of Directors and also senior executive management members. The BDL recommendations are falling short of the needed action of money laundering, a source who asked for anonymity said. BDL may request the above-mentioned details for shareholders, stockholders or beneficial owners owning less than 5% if the bank, company or institution is not listed on the stock exchange and those owning more than 2% in banks, companies or institutions listed on the stock exchange.
Can Lebanon apply MENAFATF recommendations?
FATF grey list countries have a strategic deficiency in their AML/CFT regime, and depending on the risk-based approach taken by an entity, grey list countries are treated as high-risk countries, Bachir El-Nakib, a regulatory supervision consultant and founder of compliancealert.org told NOW.
Both the FATF grey List and Blacklist serve as a guiding light for businesses to assess the risks associated with jurisdictions and customers. The regulated entities take a risk-based approach and decide if the risks posed by a customer are within its risk appetite. The FATF lists for jurisdictions subject to a call for action, and jurisdictions under increased monitoring, he said.
Did Lebanon ever satisfy MENAFATF requirements? “More to do in the legislative”, El-Nakib believes.
Seemingly more actions are needed from Lebanon’s legislative bodies. By early September Lebanon final evaluation is expected to come out , there’s more concern that the outcome will be negative, he added. Lebanon is estimated to be classified on the grey list, he said. If it happens, such classification could impact Lebanon severely with its fragile economy not to mention it’s non performing banking sector, leading to move isolation from the Global financial system, knowing for over two years the G7 considered placing Lebanon on the grey list due to unsatisfactory practices in relation to weaknesses establishing the ultimate beneficial ownership in non financial services.
The issue of illicit finance
US Treasury officials have expressed concerns about Lebanon’s large illicit financial service companies and a cash economy that accounts for around 46% of the country’s GDP, according to World Bank estimates. This unregulated cash flow is feared to potentially finance groups like Hamas and Hezbollah, both of which are blacklisted and sanctioned by the US Treasury Department.
Rumours have emerged concerning BDL’s Circular 165, with speculations that the US Treasury official is questioning whether this circular could facilitate money laundering and terrorism financing. For context, Circular 165 was issued by BDL on April 19, 2023, and pertains to electronic settlement operations related to “banknotes” or “cash money.” Specifically, it requires all banks to open new accounts for cash (in US dollars and Lebanese pounds) to be used exclusively for settling electronic bank transfers for cash money and for clearing checks traded with cash money.
This circular has not only drawn attention from Lebanese media and legal experts but has also sparked interest in the international media. For instance, the Washington Institute for Near East Policy published a policy analysis paper on June 22, 2024, titled “Cash Cabal.” The paper discusses the origins of Lebanon’s financial crisis, which began with the government’s decision to default on $32 billion in sovereign foreign debt. It also analyses Circular 165, noting that when transfers are made between clients at different banks (e.g., a client at Bank A transferring to a client at Bank B), BDL directly handles the transaction by debiting Bank A’s Fresh dollar account and crediting Bank B’s account at BDL, bypassing the correspondent banks abroad. This process leaves the receiving bank (Bank B) unaware of the money’s origin, especially if the transferring bank (Bank A) is a small institution without a correspondent bank. The publication concludes that if the US Treasury approves this mechanism, it could lead to issues that the cash-dollar economy cannot manage.
According to El-Nakib 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.
Maan Barazy is an economist and founder and president of the National Council of Entrepreneurship and Innovation. He tweets @maanbarazy.
The views in this story reflect those of the author alone and do not necessarily reflect the beliefs of NOW.
