Lebanon placed on global money-laundering ‘grey list’

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A global watchdog for financial crime has placed Lebanon on its “grey list”, marking a fresh blow to a country reeling from a years-long economic crisis and now a full-scale war with Israel.

The Paris-based Financial Action Task Force (FATF) said on Friday that concerns over money laundering and terrorist financing prompted it to add Lebanon to a list of more than 20 countries subject to “increased monitoring”.

Lebanon’s ineffective judiciary, and increasingly cash-based economy in the wake of its 2019 banking sector collapse, had raised concerns about illicit flows of money, analysts said.

The watchdog gave Lebanon’s prosecution and investigation of money laundering a “low” effectiveness rating in a 2023 evaluation.

While the measure is not as severe as being placed on the watchdog’s “black list”, a grey listing can still harm a country’s reputation and scare off foreign investors. In the past, the IMF has said the designation has had “a large, significant negative effect” on capital inflows into grey-listed countries.

Much of the financial exclusion associated with grey listing is already being felt in Lebanon — many global banks have pulled “correspondent” ties with local lenders following the collapse of the currency and banking sector five years ago.

But the designation could exacerbate Lebanon’s economic problems by making it more difficult for its citizens working abroad to remit cash back to relatives still living there, affecting a pillar of the country’s GDP.

“The transfers from outside to Lebanon will be scrutinised very seriously,” said Roy Badaro, a Lebanese economist.

“Banks would likely face heightened scrutiny, higher compliance costs and delays, making the already fragile banking channel even less reliable for remittances,” said Leila Dagher, Lebanese economist and former governmental adviser. “Money transfer operators, which have become a more popular alternative since 2019, could also be impacted.”

Some fear that the remaining correspondent banks could sever ties due to increased compliance costs. “There are verbal assurances that this will not happen but no one knows,” said Dagher.

Lebanon was given a year to make reforms to avoid the grey list after a 2023 evaluation by the watchdog found the country only partially compliant in key areas, placing it under a year-long observation period. Political deadlock meant the requirements went unmet.

“FATF MENA on several occasions asked the Lebanese government to do what it had to do to resolve the problems with all the other players, including those in the judiciary,” said Karim Daher, a Lebanese lawyer focused on fiscal policy and anti-corruption. “The Lebanese government didn’t take this very seriously.”

FATF said in its mutual evaluation report in 2023 that Lebanese officials “do not account for [terrorist financing] risks stemming from the activities of a major local paramilitary organisation” — an apparent reference to Hizbollah.  

A year of simmering tensions between Hizbollah and Israel had already depressed a modest post-pandemic economic recovery when the conflict erupted into full-blown war last month.

Israel has since pounded Lebanon with thousands of air strikes and launched a ground invasion in the country’s south.

Lebanon must now implement an action plan agreed upon with the watchdog to be removed from its grey list.

Analysts said the designation could be an impetus for change.

“A grey listing may be positive as it would put pressure on the authorities into adopting and implementing a reform road map necessary to avoid a blacklisting, and prevent Lebanon’s increasing international financial exclusion,” said Alia Moubayed, MENA chief economist at Jefferies.

“It’s a political signal to the political class that they cannot continue,” said Badaro.