This is the reason why the European Union is punishing Lebanese bankers | Beirut explosion | World Weekly

This is the reason why the European Union is punishing Lebanese bankers |  Beirut explosion

 | World Weekly


One year has passed since the explosion of the Beirut Port on August 4, 2020. With summer temperatures rising to record levels, so too is the political temperature in Lebanon. The families of the blast victims suffered 12 months of lack of accountability and blatant interference in the judicial process. Public anger is escalating and threatening to turn into another wave of unrest.

As the painful anniversary approaches, the European Union has announced a framework that “provides the possibility of imposing sanctions on persons and entities responsible for undermining democracy or the rule of law in Lebanon.” The long-awaited move is in fact a warning shot aimed at pressuring the intransigent Lebanese elites to make reforms.

Those same elites who presided over the explosion evaded responsibility for Lebanon’s mounting economic crisis – which the World Bank has ranked among the worst ever recorded. Political leaders prioritized partisan disputes over rebuilding the country, and failed to replace the government, which resigned after the explosion.

While pressure from the West is welcome, targeted sanctions on Lebanese politicians risk losing sight unless they are more effective in their attack on the country’s actual power structure. And in Lebanon, the real power – and culprit – lies in the country’s banking sector, which is responsible for the country’s ongoing economic collapse.

Together with the Banque du Liban (BDL), Lebanon’s central bank, commercial banks participated in a structured national Ponzi scheme that drilled an $80 billion public debt hole in the country’s public finances. Instead of establishing capital controls and enacting a recovery plan, the BDL and the banking sector devised their own shadow financial plan, which used multiple blatantly illegal exchange rates, informal capital controls, and the printing of massive amounts of local currency.

This current arrangement, which would certainly be considered misconduct under the EU sanctions framework, shifts the crushing burden of the crisis on the shoulders of ordinary Lebanese, who have to cut up to 80 percent of their cash withdrawals.

These solutions have wiped out the life savings of the Lebanese and left them with chronic shortages of electricity, food, and medicine – the Banque du Liban can no longer support their import from the country’s rapidly dwindling foreign exchange reserves. However, those with sufficient connections to the banking sector have already moved their money abroad, with an estimated $30 billion leaving the country since mid-2019.

Sanctions on the banking sector would provide Western policymakers with a technically sound and more effective system than the “framework” proposed by the European Union. This is because sanctions, to work effectively, must be directed at a clearly defined group of individuals and entities who are responsible, have the ability to influence change, and feel threatened by sanctions.

Currently, the proposed EU sanctions target Lebanon’s political leaders, many of whom do not necessarily meet these criteria or who have shown themselves unwilling to challenge BDL or the banking sector, not least because of their current or past business relationships with the industry. .

A baseline study from 2016 found that individuals closely associated with the political elite control 43 percent of assets in Lebanon’s commercial banking sector. The same research found that eight families control 29 percent of the banking sector’s assets, led by the family of former Prime Minister Saad Hariri.

Through the investment company GroupMed Holding, the Hariri family currently controls a majority stake in BankMed, one of the largest banks in Lebanon. Saad Hariri’s succession as prime minister is his fellow billionaire Najib Mikati, who was under investigation for embezzlement of a state-backed housing fund, with close ties to Bank Audi, Lebanon’s largest bank in terms of assets. Mikati’s brother and business partner, Taha, owns a stake in Bank Audi through his investment company, Investment & Business Holding.

Hariri and Mikati had great opportunities to reform the banking sector and public finances when they were prime ministers. They did not and there is no reason to believe that they will in the future.

This is why direct sanctions on financial leaders may be more effective. For example, the sanctions against Banque du Liban officials could help Lebanon conclude a fair rescue deal with the International Monetary Fund. Currently, the main obstacle before securing a loan program is the need for BDL audit. In the past, the central bank has repeatedly blocked this process and will continue to do so until the current BDL governor and commercial banks have a real incentive to facilitate it – something that EU sanctions can provide.

And smarter sanctions against Lebanese banks and bankers will force foreign institutions and companies to stay away from polluting Lebanese banks. Years of irresponsibly high interest rates have attracted all kinds of hungry investors, including members of the Persian Gulf royal family, the European Bank for Reconstruction and Development (EBRD), the World Bank’s International Finance Corporation (IFC) and France’s official development agency, Agence. Française de Développement (AFD).

For Western institutions at least, holding stakes in banks directly implicated in the “willful” economic collapse of an entire nation should be a clear moral hazard. The threat of Western sanctions will surely encourage them to withdraw from the Lebanese banking system.

While sanctions as an international pressure tool have at times been criticized for having led to unfair collective sanctions for entire countries, fears that the Lebanese people would suffer from such measures imposed on their financial leaders are unfounded. It is hard to imagine how punishing banks that gobble up people’s deposits can make the situation worse. If the sanctions target specific individuals within the country’s financial elite, this would prevent any repercussions that might affect the Lebanese public.

Moreover, the sanctions imposed on the Lebanese financial sector have proven to be effective in bringing about immediate change in the country. Over the past decade, two Lebanese banks have been brought down by a simple decree from the US Treasury on suspicion of money laundering for Hezbollah.

US pressure also opened Lebanon’s outdated system of banking secrecy for the first time, as Lebanese banks sought to comply with Washington’s Offshore Account Tax Compliance Act. Banking institutions are required by law to provide information to US tax investigators about US customers.

Without decisive action, the future looks very bleak for Lebanon, which is rapidly turning into a failed state. If that happens, a repeat of the 2015 migrant crisis is not inconceivable; There is no other wave of extremism like the one that gave birth to ISIS.

Instead of watching on the sidelines as another political and humanitarian crisis erupts, the West could impose sanctions on the financial sector to reverse the course of the meltdown in Lebanon. The only cost of such measures would be to reduce the wealth of some already well-to-do bankers and politicians.

The opinions expressed in this article are those of the author and do not necessarily reflect the editorial position of Al Jazeera.





Source link