Lebanon Report FATF Evaluations to come
The key component of FATF mutual evaluation
Mutual Evaluations have two basic components, effectiveness and technical compliance. The main component of a mutual evaluation is effectiveness. This is the focus of the on-site visit to the assessed country.
FATF mutual evaluations are in-depth country reports analysing the implementation and effectiveness of measures to combat money laundering and terrorist financing. Mutual evaluations are peer reviews, where members from different countries assess another country. A mutual evaluation report provides an in-depth description and analysis of a country’s system for preventing criminal abuse of the financial system as well as focused recommendations to the country to further strengthen its system.
Mutual evaluations are strict and a country is only deemed compliant if it can prove this to the other members. In other words, the onus is on the assessed country to demonstrate that it has an effective framework to protect the financial system from abuse.
Mutual Evaluations have two basic components, effectiveness and technical compliance.
The main component of a mutual evaluation is effectiveness. This is the focus of the on-site visit to the assessed country. During this visit, the assessment team will require evidence that demonstrates that the assessed country’s measures are working and deliver the right results. What is expected from a country differs, depending on the money laundering / terrorist financing and other risks it is exposed to.
To ensure consistent and fair assessments, the FATF has developed an elaborate assessment methodology.
The assessment of technical compliance is part of each mutual evaluation. The assessed country must provide information on the laws, regulations and any other legal instruments it has in place to combat money laundering and the financing of terrorism and proliferation.
This used to be the main focus of FATF, and FATF still requires the legal framework to be in place. But experience has shown that having the laws in the books is not enough, the main focus is now on effectiveness.
The mutual evaluation report is an assessment of a country’s measures to combat money laundering and the financing of terrorism and proliferation of weapons of mass destruction. This includes an assessment of a country’s actions to address the risks emanating from designated terrorists or terrorist organisations. The mutual evaluation report is without prejudice to the status or justification that led to the designation of an entity as a terrorist or terrorist group or organisation.
When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring. This list is often externally referred to as the “grey list”.
How long does a mutual evaluation takes?
The mutual evaluation process is very thorough and intensive. In a single round of evaluations, the FATF assesses over 40 jurisdictions (other jurisdictions in the global network are assessed by the FATF-style Regional Bodies, the IMF and the World Bank). Each assessment takes 14 months for the team to complete.
What is the FATF rating for Lebanon
According to that Evaluation, Lebanon was deemed Compliant for 4 and Largely Compliant for 19 of the FATF 40 + 9 Recommendations.
Lebanon is not currently identified by FATF as having substantial money laundering and terrorist financing (ML/TF) risks or having strategic AML/CFT deficiencies.
Compliance with FATF Recommendations
The last Mutual Evaluation Report relating to the implementation of anti-money laundering and counter-terrorist financing standards in Lebanon was undertaken by the Financial Action Task Force (FATF) in 2009. According to that Evaluation, Lebanon was deemed Compliant for 4 and Largely Compliant for 19 of the FATF 40 + 9 Recommendations. It was Partially Compliant or Non-Compliant for 5 of the 6 Core Recommendations.
US Department of State Money Laundering assessment (INCSR)
Lebanon was last deemed a Jurisdiction of Primary Concern in the US Department of State 2018 International Narcotics Control Strategy Report (INCSR). The Overview from that report was as follows: -
Lebanon is a hub for banking activities in the Middle East and Eastern Mediterranean and has one of the most sophisticated banking sectors in the region. Over the past two years, Lebanon’s government passed key legislation that strengthened its AML regime. The Central Bank of Lebanon, together with its Special Investigation Commission (SIC), regularly issues and updates compliance regulations in accordance with international banking standards. The SIC, Lebanon’s FIU, is also the main AML supervisory authority and is empowered to freeze financial transactions and accounts.
UN, US and EU sanctions in force, which include the freezing of funds and economic resources of those suspected of being involved in planning, sponsoring, organising or perpetrating the terrorist bombing in Beirut in 2005 resulting in a number of deaths, including that of former Lebanese Prime Minister Hariri, a prohibition on providing, directly or indirectly, technical assistance relating to military activities and to the provision, manufacture, maintenance and use of arms and related material, and A prohibition on financing or financial assistance related to military activities in Lebanon.
The Arab League (comprising 22 Arab member states), of which this country is a member, has approved imposing sanctions on Syria. These include: -
Cutting off transactions with the Syrian central bank
Halting funding by Arab governments for projects in Syria
A ban on senior Syrian officials travelling to other Arab countries
A freeze on assets related to President Bashar al-Assad's government
The declaration also calls on Arab central banks to monitor transfers to Syria, with the exception of remittances from Syrians abroad.
It should be noted that Lebanon and Iraq have refused to impose the sanctions.
The Arab League has also boycotted Israel in a systematic effort to isolate Israel economically in support of the Palestinians, however, the implementation of the boycott has varied over time among member states. There are three tiers to the boycott. The primary boycott prohibits the importation of Israeli-origin goods and services into boycotting countries. The secondary boycott prohibits individuals, as well as private and public sector firms and organizations, in member countries from engaging in business with any entity that does business in Israel. The Arab League maintains a blacklist of such firms. The tertiary boycott prohibits any entity in a member country from doing business with a company or individual that has business dealings with U.S. or other firms on the Arab League blacklist.
BRIBERY & CORRUPTION
Rating (100-Good / 0-Bad)
Transparency International Corruption Index 24
World Governance Indicator – Control of Corruption 11
Corruption is a major obstacle for companies operating or planning to invest in Lebanon. Businesses are mostly hindered by entrenched patronage networks monopolizing the economy and impeding competitiveness, but also by petty corruption when applying for basic services. The Lebanese Penal Code criminalizes most forms of corruption; including active and passive bribery and the bribery of foreign officials, however, enforcement of these laws is poor. Offering bribes and gifts are widespread practices and an established way of doing business in the country. Facilitation payments are illegal in Lebanon. For further information - GAN Integrity Business Anti-Corruption Portal
Lebanon has a free-market economy and a strong laissez-faire commercial tradition. The government does not restrict foreign investment; however, the investment climate suffers from red tape, corruption, arbitrary licensing decisions, complex customs procedures, high taxes, tariffs, and fees, archaic legislation, and weak intellectual property rights. The Lebanese economy is service-oriented; main growth sectors include banking and tourism.
The 1975-90 civil war seriously damaged Lebanon's economic infrastructure, cut national output by half, and derailed Lebanon's position as a Middle Eastern entrepot and banking hub. Following the civil war, Lebanon rebuilt much of its war-torn physical and financial infrastructure by borrowing heavily, mostly from domestic banks, which saddled the government with a huge debt burden. Pledges of economic and financial reforms made at separate international donor conferences during the 2000s have mostly gone unfulfilled, including those made during the Paris III Donor Conference in 2007, following the July 2006 war.
Spillover from the Syrian conflict, including the influx of more than 1.1 million registered Syrian refugees, has increased internal tension and slowed economic growth to the 1-2% range in 2011-15, after four years of averaging 8% growth. Syrian refugees have increased the labor supply, but pushed more Lebanese into unemployment. Chronic fiscal deficits have increased Lebanon’s debt-to-GDP ratio, the fourth highest in the world; most of the debt is held internally by Lebanese banks. Weak economic growth limits tax revenues, while the largest government expenditures remain debt servicing, salaries for government workers, and transfers to the electricity sector. These limitations constrain other government spending and limit the government’s ability to invest in necessary infrastructure improvements, such as water, electricity, and transportation.
Agriculture - products:
citrus, grapes, tomatoes, apples, vegetables, potatoes, olives, tobacco; sheep, goats
banking, tourism, food processing, wine, jewellery, cement, textiles, mineral and chemical products, wood and furniture products, oil refining, metal fabricating
Exports - commodities:
jewelry, base metals, chemicals, consumer goods, fruit and vegetables, tobacco, construction minerals, electric power machinery and switchgear, textile fibers, paper
Exports - partners:
Saudi Arabia 12.1%, UAE 10.6%, Iraq 7.6%, Syria 7.1%, South Africa 6.6% (2015)
Imports - commodities:
petroleum products, cars, medicinal products, clothing, meat and live animals, consumer goods, paper, textile fabrics, tobacco, electrical machinery and equipment, chemicals
Imports - partners:
China 11.5%, Italy 7.1%, Germany 6.8%, France 6%, US 5.7%, Russia 4.6%, Greece 4.4% (2015)
Investment Climate - US State Department
Lebanon’s deep economic depression since the end of 2019 is the result of an import-dependent economy out of hard currency and decades of financial mismanagement, including a state-sponsored “Ponzi” scheme that offered high interest rates to attract financial inflows. The August 2020 Port of Beirut explosion and the COVID-19 pandemic further hampered economic growth. A June 2021 World Bank report estimated that Lebanon’s depression is likely to rank among top three most severe economic crises since the 1850s. The World Bank estimated Lebanon’s real GDP fell 10.5 percent in 2021 after a 21.4 percent contraction in 2020. Lebanon’s currency, the Lebanese pound (LBP), has lost more than 90 percent of its value since 2019. As a result, inflation in an import-dependent economy reached 240 percent as of December 2021. Lebanon’s Central Bank is intervening in the foreign exchange market to stem the local currency’s fall at the expense of the country’s limited foreign currency reserves. Lebanon’s banks accumulated around $70 billion in USD losses and are USD insolvent. More than half the country’s population is considered poor, and up to 50 percent are unemployed.
On March 7, 2020, Lebanon announced it would default on and restructure its nearly $31 billion dollar-denominated debt, the first such default in Lebanon’s history. Lebanon has not yet entered into negotiations with bondholders and is unable to borrow on international capital markets, reducing the country’s ability to import key commodities and invest in infrastructure. International correspondent banks likely place increased levels of due diligence on domestic banks because of the incomplete implementation of anti-money laundering/countering the financing of terrorism (AML/CFT) standards. Correspondent banks have also introduced onerous requirements on their Lebanese counterparts because of increasing country risk. PM Najib Mikati formed a government in September 2021, after a 13-month political vacuum, and his Cabinet resumed talks with the IMF on a potential loan in January 2022.
While the Mikati government has drafted a plan to address the $69 billion in financial sector losses, the IMF is looking for the government to develop a more comprehensive social, economic, and financial reform program to stabilize the economy and lay the foundation for future growth. The IMF will likely require deep fiscal reforms to make Lebanon’s debt – which reached 194 percent of GDP in 2021 – more sustainable, including restructuring the financial sector, reforming state-owned enterprises, particularly the energy sector, strengthening governance and anti-corruption efforts, and unifying the country’s system of multiple currencies.
Absent holistic economic reforms, preferably as part of an IMF program, analysts assess that Lebanon’s near- and medium-term economic future is bleak, imperiling Lebanon’s potential as a destination for foreign investment. Much depends on how Lebanon implements overdue economic and governance reforms and attracts international assistance and foreign investment. If the country can implement necessary reforms, attract foreign capital, stabilize the exchange rate, and recapitalize its financial sector, then opportunities remain for U.S. companies. Lebanon still has the legal underpinnings of a free-market economy, a highly educated labor force, and limited restrictions on investors. The most alluring sector is the energy sector, particularly for power production, renewable energies, and oil and gas exploration, though challenges remain with corruption and a lack of transparency. Information and communication technology, healthcare, safety and security, waste management, and franchising have historically attracted U.S. investments. However, corruption and a lack of transparency have continued to cause frustration among local and foreign businesses. Other concerns include over-regulation, arbitrary licensing, outdated legislation, ineffectual courts, high taxes and fees, poor economic infrastructure, and a fragmented and opaque tendering and procurement processes. Social unrest driven by a decline in public services and growing food insecurity may further hamper the investment climate.
If Lebanon is able to reform its business environment, it may once again attract foreign investment. Lebanon’s economic crisis is likely to be long and painful, however, and recovery can only be accelerated through quick but careful implementation of reforms.
Special Investigation Commission (SIC)
Central Bank of Lebanon
Banking Control Commission
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