The Pressure is Mounting: Urgent Legislative Reforms to Strengthen Lebanon’s AML/CFT Framework

Lebanon now faces heightened scrutiny due to its recent placement on the Financial Action Task Force’s (FATF) grey list, underscoring the critical need for urgent reforms. Despite notable legislative efforts, such as the enactment of Law 318 in 2001 and Law 44 in 2015 (which replaced Law 318/2001), Lebanon's AML/CFT framework remains partially compliant with FATF’s 40 Recommendations. This grey-listing poses systemic risks, with severe repercussions for the nation’s financial stability and its ability to engage internationally.

The pressure for reform is likely to intensify following the recent ceasefire agreement with Israel, marking a pivotal moment of stability in the region. Additionally, with the anticipated election of a new president on January 9, 2025, and the subsequent formation of a new government, Lebanon stands at a critical juncture. These political developments create a unique opportunity to implement bold and comprehensive reforms that address the deficiencies in Lebanon’s AML/CFT framework.

To mitigate the risks and restore confidence in Lebanon's financial system, policymakers must move beyond technical compliance issues and prioritize practical, impactful reforms that deliver immediate and long-lasting results. Each of the following actions represents a vital step in Lebanon’s drive to exit FATF’s grey list and regain its financial and international standing.

Strengthening Money Laundering Offense

Recommendation 3

Issue: Gaps exist in the criminalization of money laundering, and enforcement remains ineffective.

Action: Prioritize amendments to existing laws to fully incorporate all predicate offenses under international conventions. Immediate action should be taken to enhance judicial training and establish specialized prosecution units to ensure consistent and effective enforcement. This will significantly reduce the systemic risk posed by money laundering activities.

Enhancing Confiscation and Provisional Measures

Recommendation 4

Issue: Lebanon’s mechanisms to identify, freeze, and confiscate proceeds of crime are inadequate, with limited coordination between law enforcement and the judiciary.

Action: Introduce legislation to streamline asset freezing and confiscation processes. Establish an Asset Management Office to handle confiscated assets and ensure that these assets are managed transparently and effectively. Strengthening international cooperation for cross-border asset recovery is crucial for mitigating the systemic risks associated with illicit financial flows.

Criminalizing Terrorist Financing

Recommendation 5

Issue: The legal framework for prosecuting terrorist financing is not comprehensive, and there is a lack of specialized units.

Action: Align terrorism financing laws fully with international standards by immediately establishing specialized law enforcement units and implementing extensive training programs for relevant personnel. This action will have a direct impact on reducing the systemic risk posed by terrorist financing activities.

Regulating Non-Profit Organizations

Recommendation 8

Issue: Lebanon’s regulation and monitoring of non-profit organizations (NPOs) are insufficient to prevent their misuse for terrorist financing.

Action: Develop and implement a comprehensive regulatory framework for NPOs, including mandatory registration, audits, and enhanced monitoring of funding sources. Prioritize NPOs in high-risk sectors to address immediate vulnerabilities and systemic risks.

Strengthening Customer Due Diligence

Recommendation 10

Issue: Inconsistent application of Customer Due Diligence (CDD) across financial institutions, particularly in high-risk scenarios.

Action: Strengthen regulatory enforcement and mandate Enhanced Due Diligence (EDD) for high-risk customers. Encourage the immediate adoption of automated systems to flag suspicious activities, reducing the systemic risks posed by non-compliant institutions.

Handling Politically Exposed Persons (PEPs)

Recommendation 12

Issue: Insufficient screening and monitoring of PEPs by financial institutions pose a significant risk.

Action: Update regulations to require enhanced due diligence for PEPs, establish a central database, and conduct regular audits to ensure compliance. Immediate action is needed to address the systemic risks associated with PEPs' financial activities.

Addressing Risks of New Technologies

Recommendation 15

Issue: Lebanon lacks a robust regulatory framework for new technologies, such as virtual assets, creating significant risks.

Action: Develop and implement a comprehensive regulatory framework for virtual assets. Conduct a national risk assessment and implement awareness campaigns targeting financial institutions and regulators. These actions will mitigate the systemic risks associated with emerging financial technologies.

Ensuring Transparency and Beneficial Ownership

Recommendations 24 & 25

Issue: Lack of centralized and accessible information on beneficial ownership of legal persons and arrangements.

Action: Enact laws mandating the disclosure of beneficial ownership information and establish a central registry. Enhance inter-agency coordination for effective monitoring, addressing systemic risks related to the opacity of ownership structures.

Regulating Designated Non-Financial Businesses and Professions (DNFBPs)

Recommendation 28)

Issue: DNFBPs, such as real estate agents and lawyers, are not effectively supervised for AML/CFT compliance.

Action: Strengthen regulatory frameworks and supervisory mechanisms for DNFBPs. Provide targeted guidance and training to ensure these sectors are not weak links in the financial system, thereby reducing systemic risks.

Enhancing Mutual Legal Assistance and Extradition

Recommendations 38 & 39)

Issue: Lebanon’s framework for mutual legal assistance and extradition is inefficient, with significant delays.

Action: Reform laws to streamline mutual legal assistance and extradition processes. Enhance capacity building for relevant authorities and negotiate bilateral treaties for smoother cooperation. These steps will be critical in mitigating systemic risks related to cross-border criminal activities.

Time is of the essence. Lebanon must urgently prioritize the enactment and enforcement of essential legislative reforms to meet FATF standards and address the vulnerabilities that led to its grey-listing. Focus should be directed toward reforms with the most immediate and significant impact on strengthening the nation’s financial integrity and regulatory framework. Decisive action backed by unwavering political commitment is essential to not only mitigate systemic risks but also to navigate Lebanon out of the grey-listing status, thereby restoring both local and international confidence in its financial institutions. The government, financial institutions, and regulatory bodies must work in cohesive alignment to protect Lebanon’s economic future, secure its financial stability, and re-establish its standing within the global financial community.