BELIEF, Bank Restructuring, Banking Crisis, Economic Update, Growth, Economic Growth

Lebanon Faces Grey List Threat Over Money Laundering and Terrorism Financing

10:32 | 30 April 2024LIMS output
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The Financial Action Task Force (FATF) is on the brink of placing Lebanon on its “grey list” due to inadequate measures against money laundering and terrorism financing, fueled in part by the country’s substantial cash economy, which constitutes roughly half of its economic activity. LIMS notes a severe financial crisis gripping the nation since 2019, reflected in the banking system’s collapse. This crisis rendered banks incapable of honoring pre-2019 deposits, eroding trust among depositors and investors, prompting a shift towards holding cash rather than risking it in banks.

For LIMS, a potential downgrade by the FATF would disrupt local banks’ relationships with correspondent banks, with the latter likely opting for de-risking by severing ties or imposing heightened compliance costs on Lebanese banks. These elevated costs, in turn, inflate expenses for foreign trade and remittances, casting a shadow on Lebanon’s economic prospects. Moreover, Lebanon’s tarnished reputation could deter foreign investors wary of accusations related to terrorism financing or money laundering, dampening foreign investment crucial for sustained economic growth.

In the absence of a fully functioning banking sector to address this issue, the International Monetary Fund (IMF) suggests restructuring the banking system, a proposal that the parliament is reluctant to pass. This dispute between the parliament and the IMF extended a five-year deadlock that has hindered economic recovery and disproportionately burdened vulnerable segments of society.

LIMS emphasizes the urgent need for a banking sector revival to jumpstart economic activity, advocating for measures such as segregating pre-crisis and post-crisis dollar deposits while waiting for the banking sector’s restructuring phase. Additionally, permitting Lebanese banks to accept and lend fresh dollar deposits and welcoming new, reputable banks into the market can help rebuild confidence and reduce cash dependency among the public, bolstering Lebanon’s financial resilience.

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