A New Normal Must Emerge From The Ruin! Essential Reforms Awaits: An AML/CFT Front in Lebanon.

Lebanon's placement on the FATF grey list highlights deep-seated issues within its financial sector and broader economy. Although the primary responsibility for meeting AML/CFT (Anti-Money Laundering and Countering the Financing of Terrorism) standards falls to lawmakers—who have yet to release an official statement on FATF’s decision, much less an action plan to exit the grey list—other key stakeholders share this responsibility. The Central Bank, which claims significant efforts to maintain correspondent relationships and uphold Lebanon’s global financial connections, and the financial institutions also play crucial roles. Yet, there is a fourth critical, often-overlooked element: the conduct of Lebanon’s business community. Since the shift toward cash-based transactions to sustain domestic economic activities, the business sector has operated with considerable autonomy, which poses challenges to achieving compliance. Let’s examine the role of each stakeholder, emphasizing the business community's conduct as an essential factor in achieving FATF compliance, reinforcing Lebanon’s financial integrity, and safeguarding its global financial access.

UNDERSTANDING THE RESPONSIBILITIES IN AML/CFT COMPLIANCE?

Bridging Legislative Gaps, LAWMAKERS

• Problem Legislative loopholes currently allow money laundering, terrorist financing, and other financial crimes to persist. Lebanon’s existing legal framework, while comprehensive, requires reinforcement, particularly in areas like beneficial ownership transparency and oversight of high-risk sectors.
• Responsibility Lawmakers must act to close these gaps by enacting robust AML/CFT legislation and aligning it with international standards.
• Action Prioritize legal reforms that empower authorities to enforce AML/CFT laws effectively, ensuring legal and financial infrastructure meets FATF expectations.?

Oversight and Enforcement, BANQUE DU LIBAN (BDL)

• Problem The Central Bank plays a key role in AML/CFT compliance but faces challenges in enforcing stringent oversight of financial institutions.
• Responsibility It must enhance its supervision of banks, ensuring that these institutions conduct adequate due diligence, report suspicious activities, and follow international sanctions.
• Action The Central Bank needs to strengthen its capabilities to conduct rigorous audits, enforce penalties for non-compliance, and coordinate closely with other regulatory bodies.?

Frontline Implementation, FINANCIAL INSTITUTIONS

• Problem Financial institutions are responsible for the practical application of AML/CFT measures, but some may lack the infrastructure to detect and report suspicious transactions effectively.
• Responsibility Banks must implement robust Customer Due Diligence (CDD), record-keeping, and reporting systems to comply with AML/CFT laws.
• Action Financial institutions should invest in compliance systems, ensure their staff is properly trained, and collaborate with regulators to support AML/CFT efforts.?

Lebanon’s BUSINESS COMMUNITY

• Problem The business community, particularly sectors vulnerable to money laundering, such as real estate, precious metals, and luxury goods, often lacks adequate AML/CFT awareness and compliance measures. This creates risks for money laundering and terrorist financing activities that exploit these sectors, undermining economic stability and Lebanon's global reputation.
• Responsibility The business community must recognize its role in AML/CFT compliance, actively adopting measures to prevent financial crimes within its operations. Businesses should engage in risk assessments and ensure transparency in transactions, especially in high-value sectors.
• Action Businesses should establish internal policies for AML/CFT compliance, including thorough due diligence and training for staff to identify and report suspicious activity. Collaborating with financial institutions and regulators to share information and enhance sector-specific AML/CFT standards will further strengthen these efforts.

Moreover, the conduct of Lebanon’s business community significantly influences the effectiveness of AML/CFT measures and impacts financial institutions on multiple fronts. Firms that engage in tax evasion or other regulatory non-compliance activities pose both direct and indirect risks to financial institutions. Banks could inadvertently facilitate these firms’ financial operations, exposing themselves to legal, financial, and reputational risks that extend beyond Lebanon’s borders.

Local and International Compliance Challenges. While tax evasion in Lebanon directly undermines the integrity of the country’s AML/CFT framework, the issue is not limited to local tax obligations. Many Lebanese businesses are subject to international standards under frameworks like the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standards (CRS), both of which require financial institutions to report foreign assets held by U.S. citizens (FATCA) and other global residents (CRS).

• Under FATCA, Lebanese banks are required to report information on U.S. account holders to the IRS. Non-compliant clients who attempt to avoid this reporting pose a risk to financial institutions, as failure to comply with FATCA can lead to significant penalties, including a 30% withholding tax on U.S.-sourced payments to the bank. This adds a layer of scrutiny for Lebanese banks, which must implement strong due diligence and reporting processes to avoid penalties and maintain access to the U.S. financial system.
• CRS, developed by the OECD, requires banks to automatically exchange information on foreign account holders with tax authorities in over 100 participating jurisdictions. Lebanese financial institutions are expected to identify and report non-resident account holders to prevent tax evasion on a global scale. If a Lebanese business evades these reporting requirements, it not only endangers its own compliance status but also puts the bank at risk of failing to meet international standards. This failure can damage the bank’s relationships with correspondent banks and lead to reputational damage that undermines trust with international partners.

Broader Risks to Financial Institutions. Financial institutions that fail to identify and manage the risks posed by non-compliant clients could inadvertently become participants in global financial crimes. This creates a cycle where:

• A bank associated with clients who are evading FATCA or CRS obligations faces reputational damage. This damage can lead to loss of business, a reduction in trust with international counterparts, and increased scrutiny from foreign regulators.
• Banks that do not comply with FATCA and CRS may face sanctions from foreign tax authorities and risk losing their access to international financial markets. For instance, non-compliance with FATCA could result in direct financial penalties and restrictions that limit a bank’s operations with U.S.-based financial institutions.
• Meeting FATCA and CRS obligations requires a robust compliance infrastructure. Non-compliant clients add to the bank’s operational burdens, as they require additional monitoring, reporting, and due diligence efforts to ensure the institution remains in compliance with international standards.

Mitigating the Risks. To address these challenges, Lebanese financial institutions must prioritize compliance with local and international tax and reporting standards. Key actions include:

• Conducting rigorous due diligence on clients, especially business clients, to assess potential risks of non-compliance with local regulations, FATCA, and CRS requirements.
• Investing in technology and training to consistently meet FATCA and CRS reporting obligations, thereby minimizing risks of inadvertent non-compliance.
• Coordinating with the business community and local tax authorities to identify non-compliant clients and take appropriate measures, such as freezing accounts or reporting high-risk clients, to uphold the integrity of the financial system.

The Lebanese business community has a significant role in supporting AML/CFT efforts. Tackling tax evasion and non-compliance under local and international frameworks is essential for maintaining the reputation of Lebanese financial institutions globally. A proactive approach integrating local, national, and international compliance standards will help ensure that banks do not inadvertently facilitate tax evasion or regulatory breaches. By aligning with global AML/CFT expectations, Lebanese financial institutions can reduce risk exposure and contribute to the country’s financial stability.

Moreover, the Lebanese business community must adhere to international standards of accountability, including tax compliance, ethical practices, and lawful conduct, to access banking services. Non-compliance in these areas exposes the financial sector to regulatory and reputational risks.

In the absence of strong government enforcement, financial institutions often shoulder the unspoken responsibility of monitoring client behavior. With Lebanon’s grey-listing status, banks are now under heightened scrutiny to ensure compliance with Law 44 of 2015, covering all 21 crimes listed therein. This mandate requires banks to perform thorough background checks, closely monitor clients, and flag high-risk individuals engaged in illicit activities to avoid potential penalties and sanctions.

Building a Unified AML/CFT Compliance Framework in Lebanon’s Fragmented Regulatory Environment

Lebanon's financial institutions face numerous challenges due to a fragmented regulatory environment that places undue enforcement burdens on banks. Slow-moving and uncoordinated actions among government branches lead to complex compliance obligations, strained client relationships, and increased operational costs for financial institutions. The lack of communication between agencies, including tax authorities, regulatory bodies, and law enforcement, exacerbates this problem. Without access to critical, timely information, banks struggle to fully assess client risk, hindering their ability to proactively address potential threats.

To create a unified and effective AML/CFT framework, Lebanon must address these structural inefficiencies with targeted reforms:

• Banks should be mandated to perform enhanced due diligence on businesses identified by tax or regulatory authorities as high-risk. This additional scrutiny would help financial institutions thoroughly monitor and mitigate risks associated with high-risk clients.
• Requiring businesses to disclose their tax and regulatory compliance status during financial transactions will allow banks to make informed risk assessments, ultimately reducing their exposure to financial crime.
• A dedicated communication structure between the Central Bank, tax authorities, law enforcement, and regulatory bodies would facilitate real-time data sharing. This coordination will empower banks to manage compliance responsibilities more effectively, fostering a resilient AML/CFT ecosystem.
• Implementing policies that reward full compliance with AML/CFT norms, such as tax breaks or reduced regulatory fees, alongside penalties for non-compliance, could encourage a cultural shift toward accountability within Lebanon’s business sector.
• The Central Bank should issue updated guidelines specifically for managing relationships with high-risk clients, including reporting requirements for businesses under investigation and the obligation to halt certain transactions until they are cleared by relevant authorities.
• An independent body could oversee the conduct of businesses and their relationships with financial institutions, bridging the gap between private firms, banks, and regulatory agencies. This body would ensure that compliance standards are uniformly enforced and that banks receive the support needed to manage high-risk relationships effectively.?

The collective responsibilities of lawmakers, the Central Bank, financial institutions, and the business community underscore the need for a cohesive AML/CFT compliance strategy in Lebanon. To move beyond FATF’s grey-listing and toward a secure financial future, each sector must take active steps to combat financial crime. Policymakers and banks are urged to lead this transformation by strengthening policies, enhancing inter-agency communication, and cultivating a culture of compliance within the business community. By building a unified framework, Lebanon can not only meet international standards but also strengthen national economic stability and resilience.