Financial Crime World

Lebanon’s Economic Crisis: A Haven for Financial Crimes Amidst Instability and Political Unrest

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Date: July 7, 2023

Once known as the “Switzerland of the Middle East,” Lebanon now grapples with a severe economic crisis, marked by political instability, regional conflicts, and alarming levels of corruption and mismanagement. In this article, we discuss the roots of Lebanon’s economic downturn, its impact on the increase in financial crimes, and the international scrutiny the country is facing.

The Economic Fallout: From Debt to Distrust

  1. Hefty Loans and a Crippling Debt Crisis: Tracing the economic turmoil back to post-civil war years, successive Lebanese governments took on heavy loans, resulting in a crippling debt crisis.
  2. Financial Engineering Reforms and Public Protests: Government attempts at financial engineering reforms that resembled a Ponzi scheme led to widespread public anger and protests against the political elite.
  3. The Collapse of Foreign Currency Inflows: Political instability and the Arab Spring in 2011 led to a decline in foreign currency inflows and the government’s inability to pay its debts.

Government Mismanagement and Widespread Corruption

  1. Political Instability and Mismanagement: Lebanon’s government has been unable to respond effectively to the economic crisis, resulting in a near 90% currency devaluation and triple-digit inflation.
  2. The Beirut Port Explosion: The 2020 Beirut port explosion amplified the public’s distrust in the government, shedding light on corruption and graft within the state.

Cash Economy: Opportunities for Financial Crimes

  1. Unregulated Financial Markets: With a crumbling banking sector and a population increasingly reliant on cash transactions, Lebanon’s economy is more vulnerable to financial crimes.
  2. Illicit Activities and Consequences: Financial crimes, such as money laundering and terrorist financing, represent a significant risk to Lebanon’s financial integrity and the well-being of its population.

Terrorist Organizations and Money Laundering

  1. Hezbollah and Money Acquisition: Terrorist organizations like Hezbollah have exploited the cash-dependent economy, operating within a shadow network of foreign exchanges to acquire dollars for the Central Bank.
  2. International Sanctions and Consequences: The United States has imposed sanctions on several Hezbollah-linked financial facilitators, accusing them of funding activities at the expense of the Lebanese population.

The Limits of International Scrutiny

  1. The Financial Action Task Force (FATF): Although Lebanon did not face greylisting at its latest plenary session in June 2023, the country remains under increased international scrutiny and will have to address financial, monetary, and banking reforms within one year.
  2. Informing Decisions: At Themis, we provide country risk reports that evaluate financial crime risks in jurisdictions, offering in-depth analysis on their legal, regulatory, and institutional frameworks governing financial crime. Our reports adhere to international best practices, allowing clients to make informed decisions as they navigate global markets.