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A global financial crime watchdog has placed Lebanon on its ‘grey list’, dealing a fresh blow to a country reeling from a years-long economic crisis and now waging 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 have prompted it to add Lebanon to a list of more than 20 countries subject to “enhanced surveillance”.
Lebanon’s ineffective judiciary, and increasingly cash-based economy in the wake of the 2019 banking sector collapse, had raised concerns about illicit financial flows, analysts said.
The watchdog gave Lebanon’s money laundering prosecution and investigation a “low” effectiveness rating in a 2023 review.
Although the measure is not as strict as being placed on the watchdog’s “blacklist”, a gray list can still damage a country’s reputation and deter foreign investors. The IMF has done the same in the past said the designation has had “a large, significant negative effect” on capital inflows to countries on the gray list.
Much of the financial exclusion associated with the gray list is already being felt in Lebanon – many global banks have severed ‘correspondent’ ties with local lenders following the collapse of the currency and banking sector five years ago.
But the designation could worsen Lebanon’s economic problems by making it harder for citizens working abroad to pay back money to relatives still living there, which would hit a pillar of the country’s GDP.
“The transfers from outside to Lebanon will be examined very seriously,” said Roy Badaro, a Lebanese economist.
“Banks are likely to face heightened scrutiny, higher compliance costs and delays, making the already fragile banking channel even less reliable for remittances,” said Leila Dagher, a Lebanese economist and former government adviser. “Money transfer providers, which have become a more popular alternative since 2019, could also be affected.”
Some fear that the remaining correspondent banks could cut ties due to higher compliance costs. “There are verbal guarantees that this won’t happen, but no one knows,” Dagher said.
Lebanon was given a year to implement reforms to avoid the gray list after a 2023 review by the watchdog found the country was only partially compliant in key areas, putting it under a one-year observation period . Due to the political impasse, the demands were not met.
“FATF MENA has asked the Lebanese government on several occasions to do what it needs to do to resolve the issues with all other players, including those in the judiciary,” said Karim Daher, a Lebanese lawyer who focuses on tax policy and anti-corruption. “The Lebanese government did not take this very seriously.”
The FATF said in its 2023 mutual evaluation report that Lebanese officials “do not take it into account [terrorist financing] risks arising from the activities of a major local paramilitary organization” – a clear reference to Hezbollah.
A year of simmering tensions between Hezbollah and Israel had already strained a modest post-pandemic economic recovery when the conflict spiraled into full-blown war last month.
Israel has since bombarded Lebanon with thousands of airstrikes and launched a ground invasion in the south of the country.
Lebanon must now implement an action plan agreed with the watchdog to be removed from the gray list.
Analysts said the appointment could be a catalyst for change.
“A gray list could be positive as it would put pressure on the authorities to adopt and implement a reform roadmap needed to avoid a blacklist and prevent Lebanon’s increasing international financial exclusion” , said Alia Moubayed, chief MENA economist at Jefferies.
“It is a political signal to the political class that they cannot continue,” Badaro said.