Over the years Lebanon has been bombarded with a myriad of catastrophes that have deeply impacted the functionality of the state and its citizens. Alongside corruption, war, and the Beirut port explosion – the largest non-nuclear blast in modern history – Lebanon has since 2019 experienced a severe financial crisis.
The crisis has its origins in the monetary policies put in place by Riad Salameh, who was the governor of Lebanon’s central bank, the Banque du Liban, from 1993 until 2023. In the years following the Lebanese civil war, which ended in 1990, Salameh was tasked with the role of rebuilding the country’s banking sector; financing the reconstruction of its destroyed infrastructure; attracting funding; and luring back the millions of Lebanese who fled the country during the conflict. To achieve these objectives, Salameh introduced high interest rates to attract deposits and remittances from the large Lebanese diaspora, as well as affluent investors from the Arab region. This was particularly appealing to many as the Lebanese lira remained pegged at 1,507 to the US dollar for several decades.
The deposits and remittances were used to service government debt and plug budget deficits. As the system relied on a constant inflow of new dollars to pay the high interest promised on existing deposits, it came to be described as a Ponzi-like scheme. However, the 2011 outbreak of the Arab Spring and the civil war in neighbouring Syria created a climate of political and social uncertainty in Lebanon causing the inflow of remittances and fresh dollars to severely slowdown exponentially.
Instead of reforming this financial model, Salameh doubled down, and by 2016 the interest rates offered exceeded 20 percent.
By late 2019, the cracks in the system resulted in its inevitable collapse. Banks imposed limits on withdrawals, and the central bank began dipping into its reserves, which substantially consisted of depositors’ savings, to maintain the currency’s peg to the dollar. Being deprived of their life savings, many Lebanese citizens were left feeling uncertain about their future financial prospects, and to this day, the same questions and doubts continue to loom over the country.
Despite being often referred to as the ‘magician’ of finance, Riad Salameh’s image of financial mastery was shattered as the Lebanese financial crisis unfolded and deepened. Salameh is currently the subject of several investigations in Lebanon and abroad for his alleged role in the embezzlement of public funds, money laundering, forgery, illicit enrichment, and tax evasion.
While it would be incorrect to place all the blame for the situation on a single individual, Salameh’s three-decade tenure at the Banque du Liban both embodied and actively drove structural failures in the country’s banking sector, making him not just a symbol of the crisis but a central architect of the very conditions that led to the collapse of the Lebanese economy.
The effects on Lebanon’s population
When the crisis erupted, the consequences for ordinary citizens were immediate and devastating. Millions of Lebanese were suddenly cut off from their life savings after the banking system froze deposits worth over USD 100 billion, whilst the currency plunged by a shocking 95% in value against the US dollar.
The collapse of the Lebanese banking system was just one tenet of the financial crisis – its severity impacted the country as a whole. The crisis resulted in mass unemployment, especially amongst the young – in 2020 it stood at just over 27% -, and resulted in a large increase in poverty, especially amongst women, migrant workers, Syrian and Palestinian refugees, and people with disabilities. Many of those affected were forced to resort to dangerous migration routes towards Europe by sea. As an example, in April of 2022, a boat carrying around 80 Lebanese, Syrians, and Palestinians sank off the coast of Tripoli following interception by the Lebanese Navy. Only 48 people were rescued.
A legal spill over
What began as a domestic financial collapse has since spilled far beyond Lebanon’s borders, exporting legal, economic, and reputational risks to foreign jurisdictions. Fighting the spirit of defeatism, many Lebanese depositors who have been locked out of their dollar accounts have turned towards foreign courts to recover their trapped funds, particularly those based in the UK, France, Switzerland, and the USA. This has unleashed a wave of diaspora-led litigation, dragging foreign legal systems and correspondent banks into disputes that originated in Lebanon.
For instance, in the UK, a Lebanese national filed two successful claims against two Lebanese banks, Bank of Beirut and Banque Libano-Française, for the return of funds they held on his behalf. After these institutions failed to remit his deposits back to the UK, he filed separate legal proceedings against each and secured court approval to serve the claims abroad by alternative means. Both cases went to trial in 2022 in the UK High Court and were ruled in his favour.
These legal disputes abroad have not only expanded the geographical scope of Lebanon’s banking crisis but have also introduced new layers of legal, financial, and compliance risk for foreign institutions and investors. As a result, the crisis is no longer confined to courtrooms; it is playing out in day-to-day banking practice, visible in heightened scrutiny of Lebanese clients and transactions, growing reluctance among foreign banks to maintain relationships with Lebanese institutions, and stricter customer due diligence and anti-money-laundering controls. These factors are reshaping how foreign institutions engage with Lebanon’s financial sector and the steps they must take to mitigate risk.
Due diligence and risk mapping
In parallel with the wave of litigation abroad, Lebanon has experienced a dramatic deterioration in regulatory oversight, mainly due to the state’s failure to meet international standards. For example, the International Monetary Fund has made it clear that Lebanon’s regulatory foundations have been eroding for years[1]. Core pillars of oversight, from bank supervision to resolution tools and deposit insurance, remain outdated and underpowered, with persistent gaps in autonomy, governance, access to information, and the ability to enforce rules.
Investors and clients wanting to engage with Lebanon’s financial sector will be forced towards greater reliance on due diligence and risk mapping as essentials for safeguarding against legal, financial, and operational risks stemming from ongoing litigation abroad, weakened regulatory oversight, and exposure to financial crime – particularly money laundering, alleged Hezbollah-linked financing that may give rise to sanctions risk, and other illicit financial flows. This requires identifying which Lebanese financial institutions are involved in litigation, understanding their exposure to foreign legal systems, and assessing their AML vulnerabilities before entering into any relationships.
Without the necessary due diligence checks and risk mapping, those seeking to engage with Lebanese banks risk becoming entangled in enforcement proceedings, facing regulatory scrutiny, or experiencing sudden operational disruptions stemming from asset freezes and legal judgments abroad.
This analysis is a contribution made by Yara Mahdi, Senior Analyst at SET Advisory.