Lebanon’s Cash-Reliant Economy Amid Crisis: A Haven for Financial Crime?

Date: July 7, 2023

Overview

Amid political instability and regional conflicts, Lebanon, once known as the ‘Switzerland of the Middle East,’ now grapples with a severe economic crisis. An entrenched political elite has eroded the credibility of the state, resulting in a heavily cash-reliant economy.

Economic Crisis: Causes and Consequences

Roots of the Crisis

• Heavily borrowed post-civil war, piled up debt
• Political instability and decreased foreign currency inflows
• Central Bank’s financial engineering reforms
• Unrestrained borrowing of Eurobonds and state lending

2019 Protests and Exacerbated Crisis

• Massive protests against elite policies
• Drying up of foreign currency inflows
• Instability led to hyperinflation and a devalued currency

Institutional Failures and Corruption

Central Bank and Government’s Mismanagement

• Devalued currency and hyperinflation
• Citizens unable to afford basic necessities

The Port Explosion: Reflection of State Failures

• 2020 explosion at Beirut’s port killed over 200 people
• No significant change post-disaster

The Distrust of Banks and the Shadow Economy

Economic Instability and Loss of Faith in Banks

• Growth of shadow economy, estimated at 50-60% of GDP
• Illicit transactions and activities, making it difficult to monitor

Exposure to Financial Crime Risks

• Risks of money laundering and terrorist financing
• Exploitation by terrorist organizations like Hezbollah

FATF’s Response

• Narrowly avoided greylisting at June 2023 plenary session
• One-year period to introduce necessary reforms

Path Forward

• Make concerted efforts to reform anti-financial crime legislation and regulations
• Mitigate financial crime risks in a cash-dependent economy
• Visit Themis for in-depth country risk reports analyzing financial crime risks and outlining jurisdictions’ legal, regulatory, and institutional frameworks