Recent media reports have highlighted the looming possibility of Lebanon being placed on the gray list of countries subjected to special monitoring by the Financial Action Task Force (FATF). This development stems from concerns over inadequate measures taken by Lebanon to combat money laundering and terrorist financing.
According to analysis of LIMS, three key factors have contributed to the potential downgrade of Lebanon. Firstly, there has been a significant shift towards a cash-based economy, which makes it challenging to trace and monitor illegal financial transactions. Secondly, the lack of transparency regarding economic rights holders has raised suspicions and hampered efforts to combat illicit financial activities. Lastly, the non-cooperation of the judiciary in freezing assets and executing foreign judicial decisions has further undermined Lebanon’s compliance with international standards.
LIMS added that if Lebanon were to be placed on the FATF gray list, it would result in more stringent financial controls and increased compliance costs for correspondent banks. This, in turn, would have a profound impact on the domestic market, leading to reduced transfers, heightened scrutiny of importers, and increased costs associated with financial transactions.
To mitigate the risk of gray listing, the central bank has taken steps such as initiating the implementation of digital wallets and exploring the possibility of licensing new online banks. These initiatives aim to demonstrate Lebanon’s commitment to reducing the cash-based economy currently representing around 50% of Lebanon’s activity. This digital shift would allow greater transparency, facilitate financial inclusion, enable online and international transactions amidst the ongoing banking crisis, and enhance financial stability in the event of a bank failure. However, concerns about privacy arise as individuals value the confidentiality of their financial transactions. It is also important to differentiate between digital wallets and cryptocurrencies, as the former refers to a digital representation of fiat currency (e.g., digital Lebanese pound), whereas the latter encompasses decentralized digital currencies such as Bitcoin.
Despite the potential benefits, the Association of Banks in Lebanon (ABL) has expressed reservations about licensing electronic banks. LIMS argued that ABL fears competition as the new digital banks would function similarly to traditional banks but without physical branches. The entrance of new banks into the market will grant them a significant advantage over existing banks, as they will not be burdened by the current banking crisis and capital controls on their clients, thereby enhancing their competitive position. Therefore, the requirement of a substantial capital threshold of $50 million for launching electronic banks was set as a barrier to entry. LIMS argues that allowing new banks into the market would stimulate economic activity by attracting fresh dollar deposits and facilitating lending. Simultaneously, existing banks should undergo restructuring and resume their role in financial intermediation.
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