Toxic Assets

Why banking with Hezbollah is bad for business

Translations of this item:

As mass protests and violence continue to take place throughout the Middle East, US and European policy makers have been called on to take action. Many have assumed this would take the form of military action or diplomacy. In the case of Libya, it has taken both. But as events drag on there and elsewhere, the appetite in Washington is actually turning increasingly towards economic means of achieving policy objectives.

In recent years, the US has engaged in economic warfare against rogue actors around the globe. A targeted financial sanctions regime has been put in place against countries that include Iran, Syria, Sudan and Myanmar, and groups classified by the US as terrorist organizations, such as Al-Qaeda, Hamas and Hezbollah. The banking sector, in particular, has been used by Washington and other world capitals to target countries, entities and corporations engaged in illicit finance.

Targeted financial measures have been taken against Libya’s Qadhafi regime, but perhaps the best recent example of how the US puts the economic screws to unsavory actors has taken place in Lebanon.

In addition to being one of the world’s most notorious militant groups (and political parties), Lebanese Hezbollah runs a massive finance operation. For years, it has abused the formal and informal financial sectors around the globe, and continues to move money to further its Islamist agenda. In February, the US Treasury Departmentnamed and shamed a Lebanese financial institution, the Lebanese Canadian Bank (LBC), for providing Hezbollah with banking services. Last week, lawyers for LCB called the charges “inaccurate, misleading, and on several occasions, simply incorrect.”

While not surprising that a Lebanese bank may have played such a role for Hezbollah, clearly the US was putting Lebanese banks on notice that providing Hezbollah with banking services will get you cut off from the US financial system.

In its action, the US Treasury blacklisted LCB and its subsidiaries under Section 311 of the Patriot Act for aiding and abetting acts of money laundering, terrorist financing and narcotics trafficking on behalf of Hezbollah to the tune of hundreds of millions of dollars.

Other banks that have earned this distinction include the Commercial Bank of Syria, Banco Delta Asia and Myanmar Mayflower Bank. According to the US Treasury, LCB helped Hezbollah move funds with the sale of illegal drugs from South America, Europe, West Africa and the Middle East, as well as move value through commodities like used car dealerships in the United States.

Whether most Lebanese like it or not, Hezbollah is a designated terrorist organization in the US. Today, there are reportedly Hezbollah-trained guerillas attacking coalition forces in Iraq. The group has also killed and kidnapped a great number of Europeans and other nationals throughout its sordid history. It is only natural, therefore, that the US government would blacklist a bank that has acted on Hezbollah’s behalf.

As importantly, it is worth remembering that LCB was blacklisted not only because it stands accused of serving as Hezbollah’s bankers, but because they were facilitating criminal activity.

The US government—and the US Treasury Department in particular—is tasked with ensuring the safety and soundness of US financial markets. When any financial institution engages in illicit activity, the US reserves the right to block their access to its market. In fact, the US has blacklisted approximately 250 financial institutions around the world for their role in activities that include proliferating weapons of mass destruction, terrorism and narcotics trafficking.

After the designation, Societe Generale won a bid to merge with LCB. It has been reported that LCB was put up for sale immediately after the Treasury designation, which essentially cut off the bank from the international market.

Societe Generale’s governor recently made comments that his bank made the offer to buy the bank with the understanding that they will ensure “a clean balance and [that it] is well managed despite the accusations leveled by the US Treasury.” Reading between the lines, Societe Generale was apparently promising to clean up LCB’s act.

Lebanese Central Bank Governor, Riad Salameh, recently stated that Washington has no intention of targeting the Lebanese banking sector. And he admitted that the US Treasury requested the merger as a way to “remove the scandal-hit administration and resume confidence in the bank.” LCB reportedly sold for as much as $620 million.

What can the Lebanese government do to avoid such embarrassments in the future? Treasury officials have warned foreign banks and companies that do business with Hezbollah that they could lose access to the US market. Lebanese banking authorities and government officials may wish to inform Lebanon’s 52 commercial banks that when they offer banking services to Hezbollah-linked companies, officials or any other “terrorist” entity, they are helping to circumvent US sanctions.

There are international organizations such as the Financial Actions Task Force (FATF), whose mission is to help countries and their banks comply with international standards. The Lebanese government and its banks might wish to avail themselves of their assistance.

The US government could not be more clear: Bankrolling “terrorism” is toxic for business if you carry out transactions with American entities or the US dollar. It’s a lesson bankers in Lebanon understand, and others during this Arab Spring may soon come to realize as well.