The development adds another layer of complexity to Lebanon’s ongoing economic challenges, potentially deterring much-needed foreign investment at a crucial time for the country’s recovery efforts
Lebanon is set to be placed on a financial crime watchdog’s grey list this week, with experts pointing to the country’s expanding cash economy and parallel financial system as key drivers behind the designation, according to senior economists and sources familiar with the matter.
The Financial Action Task Force (FATF) is expected to announce its final decision to add Lebanon to its grey list of countries requiring special scrutiny during its plenary session in Paris on Friday, despite Lebanese officials’ appeals for leniency.
The designation comes as Lebanon grapples with a complex web of challenges, including a widespread shift away from traditional banking following the 2019 financial crisis, which has created new vulnerabilities in the financial system.
“The cash economy and alternative financial organisations currently play a bigger role, and in those types of transactions and organisations the risk of money laundering and terrorism financing is high,” Patrick Mardini, CEO of the Lebanese Institute for Market Studies (LIMS), told Arabian Business.
“They attract anybody who wants to do illicit activities because of the nature of cash and the nature of this parallel economy,” he added.
The grey-listing decision follows a preliminary evaluation in May last year, after which Lebanon was granted a one-year period to address gaps in various areas, including anti-money laundering measures, transparency on beneficial ownership of firms, and legal assistance in asset freezing and confiscation.
Central bank governor Wassim Mansouri, who had previously expressed his commitment to keeping Lebanon off the FATF grey list, is currently in the United States for the International Monetary Fund and World Bank annual meetings before heading to Paris for the FATF plenary.
Lebanese government to blame
According to Mardini, the responsibility for the grey-listing lies primarily with the government rather than the central bank.
“The problem is not from the central bank. I think that the international community is pleased with the central bank’s performance,” he said, noting that the central bank has successfully tackled several key challenges, including stopping hyperinflation and government financing in both Lebanese pounds and US dollars.
“The problem is actually with the Lebanese government [as] they did not comply with the FATF request. The central bank complied but the government did not,” Mardini explained.
The government, he said, failed to implement necessary measures to combat terrorism financing and money laundering, including strengthening investigation units and providing adequate resources.
The timing of the grey-listing is particularly challenging for Lebanon, which faces mounting economic pressures amid expanding Israeli military operations against Hezbollah. Former economy minister and central bank vice governor Nasser Saidi recently estimated that Israel’s bombing campaign has resulted in damage that will cost $25 billion to repair.
Despite these challenges, there are some efforts to mitigate the impact of the grey-listing. “The central bank has been working to try to minimise the impact of grey-listing on the economy by trying to ensure that corresponding banks will still work with Lebanon,” Mardini noted.
However, he criticised the lack of transparency in the FATF’s communication regarding specific requirements for Lebanon.
“Everyone in Lebanon knows that we will or might be grey listed but nobody really knows why. And there is an illusion that it is because of the central bank and the banking sector,” he said, calling for more clarity about which organisations and activities are problematic.
The situation represents a significant shift from the period before the 2019 crisis when Lebanon had made progress in strengthening its financial sector’s regulatory framework.
“When the transactions in Lebanon within the past year before the crisis were within the banking sector, Lebanon strengthened the framework of anti-money laundering and terrorism financing within the financial sector in order to sort out those problems and avoid being grey-listed,” Mardini explained.
The grey-listing decision comes just as France prepares to host an international conference on Thursday aimed at mobilising humanitarian aid for Lebanon and strengthening security in the country’s southern region.
Sources familiar with the FATF proceedings indicated to Reuters that while Lebanon will be grey-listed, it will be granted an extended deadline to work on some of the requested reforms.
The development adds another layer of complexity to Lebanon’s ongoing economic challenges, potentially deterring much-needed foreign investment at a crucial time for the country’s recovery efforts.