By Sam Heller — foreignpolicy.com — For the last two and a half years, Lebanon’s economy has been in free fall. The country’s currency, the lira, has lost more than 90 percent of its value against the U.S. dollar; GDP has shrunk by nearly 60 percent; and close to 80 percent of Lebanese have slipped below the poverty line, along with practically all of the 1.5 million Syrian refugees living in Lebanon. Hundreds of thousands of people have fled the country.
The crisis, which is among the worst to hit any country in modern history, was precipitated by the collapse of what UN Secretary General António Guterres described as “something similar to a Ponzi scheme”: for years, the country’s central bank used ordinary bank depositors’ money to finance the corrupt and wasteful spending of successive Lebanese governments. Participants in the scheme reaped huge returns—until 2019, when it all came tumbling down. The pyramid scheme may not have been technically illegal, but it nonetheless amounted to corruption on a grand scale: Lebanese elites made a killing, spirited their ill-gotten gains abroad, and left millions of their impoverished countrymen holding the bag.
But the crisis wasn’t just caused by greed and corruption; it has been prolonged by the unwillingness of those who are responsible to change their ways or to assume their fair share of the country’s massive financial losses. International donors are willing to discuss a bailout that could right the economy, but Lebanese leaders have resisted even the most basic reforms that lenders have demanded as a precondition for a rescue package. The country’s political and financial elites have benefited handsomely from the current system, and they stand to lose from any ordered resolution of Lebanon’s national bankruptcy. According to the World Bank, Lebanon is now mired in a “deliberate depression,” one that has been “orchestrated by the country’s elite that has long captured the state and lived off its economic rents.”
Lebanon’s predicament poses a unique challenge for the Biden administration, which hopes to prevent the total collapse of the country and has declared fighting corruption a national security priority. In line with President Joe Biden’s global anticorruption agenda, U.S. officials have pushed Lebanese leaders to rein in corruption and make the reforms that would enable an international bailout. But few in Lebanon take the United States at its word, since Washington has long tolerated corruption among its partners in Lebanon and weaponized anticorruption measures against its enemies.
Even now, American messaging on corruption and reform suffers from a conspicuous—and deadly—omission: U.S. officials have remained largely silent on the grandly corrupt scheme that precipitated Lebanon’s national bankruptcy, and in which key U.S. partners are implicated. When it comes to corruption in Lebanon, the United States has a credibility problem—one that the Biden administration will need to remedy if it wants to be a useful partner in reform. The administration’s approach to Lebanon, where fighting corruption and preventing state collapse necessarily go hand in hand, is a vital test of its commitment to combating corruption globally.
CORRUPTION OF A STATE
Lebanon is governed by an unwieldy sectarian system that divides political representation among 18 officially recognized sects—each with its own political boss and patrimonial fiefdom. By divvying the top government positions among Sunnis, Shiites, and Christians, however, this system has facilitated the capture of state institutions by elites, enabling them to exploit public resources for private gain and to solidify their hold on their sectarian constituencies.
Corruption in Lebanon, however, is not just a matter of political patronage and rotten public contracting. For decades, Lebanon’s largely unproductive economy relied on regular infusions of foreign capital to function. When those inflows slowed because of deepening political disfunction and conflict—including in neighboring Syria—the country’s central bank resorted in 2016 to what it called “financial engineering” to fund government deficits and maintain an artificially high value for the Lebanese lira. In short, the central bank paid Lebanese commercial banks exorbitant interest rates for dollar deposits, and those banks in turn offered their own generous returns to lure more depositors. Everyone involved made a lot of money, even as the country’s financial sector stealthily took on huge systemic risk.
Financial engineering wasn’t just a high-risk move to prop up Lebanon’s government and currency. It was also the latest version of a decades-old compact between government and financial elites in which public resources feed the country’s oversized banking sector. Lebanon’s political class is deeply enmeshed with its financial elites. In the most prominent example, Saad Hariri, son of former prime minister and business tycoon Rafik Hariri who served as prime minister himself from 2009 to 2011 and from 2016 to 2020, is the main shareholder in one of the country’s largest banks. It may not have been illegal for Lebanese officials to benefit from the central bank’s ruinous policies, but it was certainly corrupt.
Lebanese elites made a killing and left millions of their impoverished countrymen holding the bag. And it all fell apart in October 2019, when already struggling Lebanese banks reacted to massive antigovernment protests by shutting their doors and denying depositors access to their accounts. This apparent attempt to preempt a bank run sparked a fatal crisis of confidence in the country’s banking sector, rendering Lebanon’s private banks, central bank, and state all suddenly insolvent. Total losses to the country’s financial sector are estimated in the tens of billions of U.S. dollars. The arrival of the coronavirus pandemic in early 2020 compounded the country’s economic misery, as did a catastrophic explosion at the port of Beirut in August of that year, which killed more than 200 people and caused billions of dollars of damage.
Foreign donors have conditioned the massive bailout needed to stabilize Lebanon’s economy on an agreement between Lebanon and the International Monetary Fund (IMF) that would require fiscal discipline and reform. Yet Lebanon’s leaders—and their allies in the banking sector—have not cooperated. Instead, they have resisted any resolution of the country’s national bankruptcy that would disadvantage bank shareholders or top depositors. They also have yet to carry out basic measures—including approving a plan to restructure Lebanon’s external debt and unifying the country’s multiple exchange rates—that the IMF has required as preconditions for a bailout. In the meantime, private banks have allowed elites to move their money out of the country while restricting ordinary depositors’ access to their accounts, meaning that the heaviest burden from Lebanon’s economic losses has fallen on those least able to bear it.
TAKE A STAND
Ever since Biden unveiled a new strategy for fighting corruption last year, U.S. officials have placed greater emphasis on tackling the problem in Lebanon. U.S. Treasury Department officials have urged Lebanese leaders and bankers to step up due diligence efforts and improve transparency and accountability. In October 2021, the United States imposed sanctions on two politically connected Lebanese businessmen and one member of Parliament for illicit enrichment and undermining the rule of law. And in December, Dorothy Shea, the U.S. ambassador in Beirut, presented a Lebanese investigative journalist with an anticorruption award, using the occasion to emphasize Washington’s newfound commitment to battling corruption.
None of this is especially convincing, however, given that the United States is seen as close to some of the Lebanese officials most responsible for the current crisis. Central bank governor Riad Salameh, in particular, has long worked with the United States to counter Hezbollah financing. In addition to bearing responsibility for the central bank’s policy of financial engineering and the country’s economic collapse, Salameh faces serious allegations of self-dealing and illicit enrichment. Yet until recently, many in Lebanon regarded him as untouchable because of his relationship with Washington, and not without reason. In May 2020, Shea gave a television interview in which she defended Salameh, saying that the United States “has worked very closely with him over the years” and that “he enjoys great confidence in the international financial community.” That interview came at a pivotal moment in Lebanese politics, just as Lebanese news outlets reported that Salameh, along with the country’s banking lobby and many of its allies in Parliament, was opposing a Lebanese government financial recovery plan that was supposed to serve as the basis for negotiations with the IMF and that would have disadvantaged financial sector interests. Salameh and his allies won out, talks with the IMF collapsed, and Lebanon’s economic crisis has dragged on for two more years.
But the problem is not just that the United States has looked away from corruption in the past, it’s that it has also allowed anticorruption efforts to be politicized in a way that undermined their credibility. In 2020, for instance, the Trump administration used the Global Magnitsky Act to sanction the leading Maronite Christian politician Gebran Bassil, ostensibly for corruption but really because he is an ally of Hezbollah. David Schenker, who served as assistant secretary of state for near eastern affairs from 2019 to 2021, admitted as much after leaving office. “We leveled a series of sanctions against Hezbollah and its Lebanese allies,” he said, “including, importantly, non-Shia, culminating in the Global Magnitsky designation of Gebran Bassil for corruption.” The Biden administration’s October 2021 anticorruption sanctions could likewise be plausibly construed as targeting Hezbollah allies, given the individuals targeted.
The U.S. needs to prioritize Lebanon’s economy over preserving relationships with the leaders who tanked it. If the Biden administration wants Lebanon’s leaders to take its concerns about corruption seriously, it needs to shed the United States’ reputation for tolerating corruption among friendly elites and dispel the impression that anticorruption measures such as sanctions are really tools to curtail Hezbollah’s influence in Lebanon.
To that end, Washington will have to stress the necessity of reform to its Lebanese interlocutors, coordinating closely with allies such as France. U.S. officials should push Lebanon’s leaders to meet the IMF’s preconditions for assistance, including by taking steps to restructure the financial sector, consolidate its failing banks, and audit the central bank—measures that Lebanese elites have sought to obstruct. In addition, the United States should insist that any economic recovery plan must protect small depositors and provide social support for the country’s most vulnerable.
But really fighting corruption in Lebanon will require more than just condemning corruption in rhetorical terms and advocating for specific reforms. It will require Washington to break publicly with financial elites such as Salameh who bear responsibility for the country’s collapse. This is vital because the domestic political fight over who should be blamed for the crisis and who should bear its costs is still ongoing. Lebanon’s central bank and commercial banks deny responsibility for the country’s current predicament. They have argued that they should be made whole at the Lebanese public’s expense. In this internal debate, elites seeking to stymie reform draw strength from their ties with the United States—which is why they have consistently sought to portray interactions with U.S. officials as affirmation from Washington. The United States should not be seen as siding with the same elites who are resisting necessary reforms.
In addition to calling out Lebanese officials for their role in the current crisis, the Biden administration can signal its seriousness about fighting corruption by imposing new sanctions on corrupt Lebanese figures across the sectarian and political spectrum. It should follow up its October 2021 anticorruption sanctions by targeting additional politicians, bankers, and media figures implicated in public corruption, including individuals associated with traditionally U.S.-friendly parties.
Taking a harder line on corruption will inevitably damage some longstanding U.S. relationships with Lebanese politicians and financial elites. But these figures have little choice but to cooperate with Washington on U.S. priorities such as countering terrorism financing and excluding Hezbollah from international banking networks, given that the United States can effectively shut noncompliant banks out of the global financial system. And in any case, the United States needs to prioritize rescuing Lebanon’s economy over preserving relationships with the leaders who tanked it. That requires promoting painful reforms at the expense of Lebanese elites, including those seen as friendly toward the United States.
Lebanon is a major test of the Biden administration’s anticorruption agenda. What the United States does there won’t just affect the odds of a rescue package that could prevent the Lebanese state from failing; it will also demonstrate to corrupt regimes around the world that Washington is serious about fighting corruption. To do that, however, the Biden administration will have to show Lebanese leaders that it will no longer tolerate the kind of grand corruption that cratered Lebanon’s economy. Failing that, Biden’s anticorruption rhetoric will be just words.
