If Lebanon is ‘grey-listed,’ this will only compound the country’s problems.

Lebanon, a nation with a history marred by internal conflicts, sectarian divides, and external interventions, is now at a critical juncture. As the Financial Action Task Force (FATF) evaluates Lebanon’s compliance with global standards for combating money laundering and terrorist financing, a pressing question looms: Can Lebanon’s government and banking sector rise to the challenge?

Lebanon is under intense scrutiny by the FATF, an intergovernmental organization established in 1989 to develop policies to combat money laundering and terrorist financing. The FATF sets international standards and promotes their global implementation, with regional bodies like the Middle East and North Africa Financial Action Task Force (MENA-FATF) ensuring adherence in specific regions. As a member of the MENA-FATF, Lebanon is at risk of being placed back on the FATF’s “grey list” in October due to significant shortcomings in its anti-money laundering (AML) and counter-terrorism financing (CFT) frameworks.

This looming downgrade stems from a 2023 assessment that found Lebanon’s efforts lacking despite a one-year extension to make improvements. Should Lebanon be grey-listed, its fragile financial sector could face even stricter compliance demands from foreign correspondent banks, further deepening its economic crisis. The central bank has been actively engaging with international bodies, including the IMF and the U.S. Treasury, in a bid to avert this outcome, but the situation remains precarious.

Lebanon’s predicament is deeply rooted in its complex and often toxic history. Prolonged conflicts, foreign interventions, and entrenched sectarian divisions have left the state with fragile structures and weakened institutions, complicating efforts to implement and sustain effective AML and CFT measures. The geopolitical landscape further hinders progress, as Lebanon is frequently caught between competing regional and international powers, exacerbating the challenges in meeting FATF’s expectations.

The country’s historical context is marked by devastating conflicts that have left lasting scars on its socio-political fabric. The Lebanese Civil War, Israeli invasions, and the spillover from the Syrian conflict have all contributed to a fragile state where governance is often undermined by sectarianism and external influences. This environment has made it difficult for the central government to assert control over the entire country, with non-state actors such as Hezbollah wielding significant power and influence. These historical and geopolitical factors directly impact Lebanon’s ability to implement and enforce FATF guidelines effectively.

The implications of grey-listing are severe. Already under strain, Lebanese banks could face even more stringent compliance requirements from their foreign counterparts, further isolating Lebanon’s financial system from the global market. This isolation would exacerbate the country’s ongoing economic crisis, deepening the financial instability that has plagued Lebanon for years.

The willingness and ability of Lebanon’s state actors and bankers to comply with FATF guidelines hinge on several factors. The political landscape is deeply divided, with sectarian interests often taking precedence over national concerns. The presence of powerful non-state actors like Hezbollah complicates efforts to establish a unified national policy on AML and CFT. While there is some willingness at the level of the central bank and among specific political figures, the overall political will to implement comprehensive reforms remains questionable. The entrenched interests of various sectarian groups, each with its external alliances, create significant obstacles to meaningful change.

Lebanon’s state institutions, weakened by years of conflict and corruption, struggle to enforce laws uniformly nationwide. The judiciary and law enforcement agencies, essential for upholding AML and CFT measures, are often undermined by political interference and a lack of resources. Strengthening these institutions is critical, but it requires both time and a commitment to reducing sectarian influence—a challenging task in Lebanon’s current context.

Lebanese banks have already begun tightening their compliance procedures in anticipation of a potential grey-listing. However, the banking sector is not immune to the broader socio-political challenges that plague the country. Banks’ willingness to comply with FATF guidelines is driven by the need to maintain relationships with foreign correspondent banks and avoid further isolation. Yet their ability to do so is constrained by the overarching weaknesses in Lebanon’s governance structures.

A critical issue compounding these challenges is the excessive reliance on cash for domestic transactions, which undermines the state’s ability to combat money laundering. The extensive use of cash in Lebanon’s economy makes it difficult to track financial flows, thereby facilitating the movement of illicit funds. This reliance on cash hampers efforts to enforce AML measures, bypassing the formal banking system where transactions are more easily monitored and regulated. Addressing this issue requires a concerted effort to promote digital payments and banking services and stronger regulatory oversight.

Lebanon’s challenges in meeting FATF compliance are deeply rooted in the country’s political, institutional, and economic fabric. While there are pockets of willingness to enact reforms, the broader environment—marked by political fragmentation, institutional weakness, and an overreliance on cash—poses significant barriers. For Lebanon to navigate these challenges successfully, a comprehensive approach that addresses these core issues is essential. This will require the commitment of state actors and bankers and a collective national effort to overcome the systemic obstacles that have long hindered the country’s progress in combating money laundering and terrorist financing.

To achieve compliance with FATF guidelines, Lebanon must embark on a multifaceted approach that addresses both its internal weaknesses and the external pressures it faces.

Fostering national reconciliation through inclusive dialogue among Lebanon’s diverse sectarian and political factions is crucial. Building trust and understanding between communities can pave the way for a more unified approach to AML and CFT measures.

Governance reforms are essential to improve transparency and accountability and reduce sectarian influence. This includes enhancing the capacity of the Lebanese Armed Forces and security agencies to uphold national security impartially.

Addressing the issue of non-state armed groups, particularly Hezbollah’s military wing, is pivotal for long-term stability. A comprehensive national dialogue on disarmament and efforts to integrate armed groups into the national defense framework can help consolidate the state’s monopoly on legitimate force.

Tackling Lebanon’s economic challenges is crucial to reducing socio-economic grievances that fuel instability. Structural reforms addressing the debt crisis, fostering economic growth, and creating job opportunities are key to reviving the economy.

Lebanon’s potential to comply with FATF’s guidelines is deeply intertwined with its history and socio-political dynamics. While efforts within the country to avert a grey-listing are underway, the challenges are immense. The willingness of state actors and bankers to push for compliance exists, but the broader context of political fragmentation, institutional weakness, and external pressures often undermine it.

For Lebanon to navigate this crisis and avoid the severe consequences of being grey-listed, it must undertake significant reforms addressing its current predicament’s root causes. Lebanon can hope to achieve the stability and compliance required to meet FATF standards only through a concerted effort by all stakeholders supported by the international community. The road ahead is fraught with challenges, but the alternative—further isolation and economic decline—leaves Lebanon with little choice but to strive for meaningful change.

Lebanon’s complex history of conflict

Lebanon’s history is marred by conflicts that significantly shape its socio-political landscape. The country’s unique sectarian composition and regional and international interventions have led to a fragile state susceptible to internal and external pressures.

Let’s explore significant conflicts that have defined Lebanon’s modern history, examine their lasting impacts, and suggest a multifaceted approach to steering the country towards lasting stability and peace.

The Lebanese Civil War, one of the most destructive and protracted conflicts in Lebanon’s history, ran from 1975 to 1990. It began as internal sectarian tensions escalated into a full-scale war involving various factions and foreign interventions. The conflict was marked by sectarian violence among Maronite Christians, Sunni Muslims, Shia Muslims, and Druze. This war led to widespread destruction, loss of life, and displacement, with deep social and political repercussions that continue to affect the country today.

Lebanon faced multiple invasions by Israel, notably in 1978 and 1982. The 1978 invasion, known as Operation Litani, aimed to push back Palestinian militants, while the 1982 invasion sought to eliminate the Palestine Liberation Organization (PLO) presence in Lebanon. Israel’s occupation of southern Lebanon until 2000 led to prolonged resistance and armed conflict, particularly with Hezbollah, significantly shaping Lebanon’s political and military dynamics.

The 2006 conflict between Israel and Hezbollah had profound implications for Lebanon’s domestic landscape. The month-long war resulted in extensive damage to infrastructure, significant civilian casualties, and displacement. It exacerbated existing social and political divisions, particularly regarding Hezbollah’s role in Lebanon. Despite the devastation, Hezbollah emerged with increased political and military influence within the country.

The Syrian civil war, which began in 2011, had significant spillover effects on Lebanon, profoundly impacting its political, social, and security dynamics. The influx of over 1.5 million Syrian refugees strained Lebanon’s resources, infrastructure, and economy. The conflict also exacerbated political polarization and sectarian tensions within Lebanon, further complicating its delicate political balance.

The conflicts that have plagued Lebanon have left deep scars, contributing to the country’s current challenges. The socio-political fabric of Lebanon remains fragile, with governance structures weakened by sectarian divisions and external influences. The economy has been severely damaged, with infrastructure repeatedly destroyed and financial resources drained by the need for reconstruction. The presence of non-state armed groups, particularly Hezbollah, continues to pose a challenge to the authority of the Lebanese state.

Moreover, the spillover of the Syrian conflict has added to Lebanon’s socio-economic burdens, with the refugee crisis exacerbating existing tensions and putting further strain on the country’s resources. These ongoing challenges constantly test Lebanon’s ability to maintain stability, making the pursuit of peace and development increasingly difficult.

Lebanon’s path to stability and peace is fraught with historical and contemporary challenges. The legacy of past conflicts continues to influence the country’s socio-political dynamics, while the spillover effects of regional conflicts add to the complexity of maintaining stability. However, Lebanon can navigate towards a more peaceful and stable future by pursuing a comprehensive and multifaceted approach that addresses internal divisions, strengthens state institutions, and manages external influences. This journey requires concerted efforts from all Lebanese stakeholders, supported by the international community, to ensure that the scars of the past do not dictate the country’s future.