Will Riad Salameh's arrest keep Lebanon off the FATF greylist?

Some think that Salameh's arrest and the risk of Lebanon being greylisted are connected, with the former aimed at preventing or mitigating the latter.

Salameh is now retired and no longer has any influence or access, so his arrest appears to be more sacrificial or symbolic than part of any systemic action. It is also unlikely to sway the FATF, which seems determined to greylist Lebanon regardless.

From London to Brussels

The BOL under Mansouri thinks Lebanon's greylisting by the FATF is inevitable, so it is working hard to salvage whatever confidence the country still has. The aim is to prevent Lebanon's complete financial isolation and to keep the remittances by Lebanese expatriates coming in. These dollars currently help to maintain the nation's balance of payments.

In London, Mansouri has been talking to the big international banks, urging them not to cut ties with Lebanese banks if, as expected, Lebanon is placed on the FATF's greylist. Meanwhile, in Brussels, a BOL team of legal, finance, and administrative experts has been outlining its reform plan. This includes unifying the exchange rate, referring hundreds of cases from the BOL's Special Investigation Commission to the judiciary on suspicion of money laundering, and halting state funding from BOL reserves, something that had become the norm.

While they may have some success, Lebanon still faces big obstacles in its quest not to be greylisted, not least because of the demands being made and the nature of the Lebanese institutions that can make them.

Radical reform

The FATF wants immediate and radical reform related to tax, customs, and the judiciary (particularly in combating tax evasion and money laundering), plus budget transparency, a restructured banking sector, and updated anti-corruption laws. Mansouri and his team know that these reforms are necessary, but they are beyond the BOL's powers. Instead, it comes under the jurisdiction of the Lebanese state, its oversight bodies, and legislative (parliamentary) and executive (government) branches.

The BOL can only advise—and even then, only if asked. As a result, it cannot make promises on behalf of a state that appears indifferent to the interests of its people and incapable of enforcing its own laws.

The central bank may now be back doing what Salameh reportedly did for two decades: buying time for the Lebanese state. He is alleged to have done so by recycling depositors' money and hence burdening the BOL with debt.

Mansouri now wants to re-engineer Lebanon's relationships with the international institutions and global banks that have been monitoring the Lebanese crisis and the progress of necessary reforms. Lebanon has long been urged to abide by principles of financial transparency and sound governance, and for the Lebanese state—including its security, judicial, and regulators—to help combat corruption and promote the rule of law.

The final nail in the coffin

Someone who is well abreast of developments is lawyer Ali Zbeeb, head of the Banking Affairs and Depositors' Rights Protection Committee at the Beirut Bar Association. He thinks the FATF will greylist Lebanon but shares concerns about who can fix the problems. "The relevant authorities for this issue extend beyond the regulatory bodies, such as the central bank and the ministry of finance," he says.

"They encompass various sectors, including the bar associations, notaries, currency exchange shops, financial companies, banks, gold and diamond traders, and the ministries of defence and interior, as well as customs agencies."

In August 2022 and July 2023, FATF teams visited Lebanon. In a report after the 2023 visit, their final conclusion highlighted 46 deficiencies in the country's financial and legal systems. While 25 have been partially addressed, 21 remain unresolved. Zbeeb has considered the impact of FATF greylisting, noting how other Middle Eastern countries have been listed "without significant repercussions" but says, "Lebanon's situation is different".

Lebanon "is experiencing its worst economic, financial, and monetary crisis, leading to a complete collapse in the value of the national currency, the economy, and citizens' purchasing power," he explains. "Placing Lebanon on the greylist would be the final nail in the coffin of the Lebanese economy."

Despite Mansouri's efforts to mitigate the consequences on financial transfers and the issuance of letters of credit, Zbeeb thinks some banks will reduce their dealings with Lebanese banks and limit their interactions with the BOL. There will be a impact will be on remittances, which constituted around 20% of Lebanon's gross national product (GDP), or about $8bn, before the crisis began in 2019.

Today, money is still sent to the country from Lebanese abroad, but is now transferred in cash rather than through commercial banks, who have frozen depositors' funds. Banks' repeated legal violations—without oversight or accountability—have eroded trust in the banking sector and created a parallel 'cash economy' which has increased the likelihood of money laundering. 

Analysts say smuggling could now increase, especially given Lebanon's current inability to import goods smoothly. Lebanon has, therefore, lost its three main sources of funding: remittances, industry and exports (Lebanon is a net importer, and local industry has been highly taxed), and foreign direct investment, which has dried up due to a lack of trust in the country's economy and banking sector.

Too little, too late

Zbeeb says he hopes that Salameh's arrest is not "one of the theatrics meant to deceive international financial institutions, starting with the FATF, into believing that the path to reform has been paved and that the suspected mastermind has been apprehended".

Even if it did, it would only offer temporary relief. The International Monetary Fund (IMF), the World Bank, and the Organisation of Economic Cooperation and Development (OECD) may all yet withhold technical or financial assistance if Lebanon is greylisted.

Lebanon's caretaker government, the finance ministry, and the BOL are all being urged to convene an emergency meeting ahead of any greylisting as Salameh gets dragged through the courts. Yet for Zbeeb, this is too little, too late.

"If the investigation is expanded to cover all financial engineering activities, and if the BOL investigates selective transfers and holds accountable all bank chairpersons and board members, and if a law to restructure the banks is implemented, partially guaranteeing depositors' rights and reopening citizens' accounts that were arbitrarily closed, then these steps could be seen as indicators of reform," he says.

But that is not going to happen. Lebanon has had the chance to do these things over the past two years but has not. For Zbeeb, "it is too late". Even if the Lebanese state does manage to shut the stable door, the horse has already bolted.