It’s the Middle East’s quiet war. How can you cut Hezbollah off from its lifeblood — Iranian petrodollars?
While the world’s attention has been focused on Gaza and the intensifying skirmishes farther north between Israel and Lebanon’s Hezbollah, which diplomats fear could trigger a broader war, a battle over Iranian terror financing has been smoldering behind the scenes.
The dispute — pitting several Arab countries against Europe and the U.S. — could have profound implications for the region’s security and is poised to come to a head in the coming weeks as global money laundering authorities decide whether to come down hard on Lebanon or give it a pass.
The conflict is playing out in the halls of the Paris-based Financial Action Task Force (FATF), the global money-laundering watchdog. In the coming weeks it is expected to place Lebanon on its “gray list” of wayward jurisdictions and determine what reforms the country would have to implement in order to receive a good bill of health and avoid FATF’s dreaded “blacklist.”
Though FATF — which was set up by the G7 in 1989 and has since grown to include dozens of members from around the world — has no formal enforcement powers, its evaluations can have a chilling effect on a nation’s ability to operate in the world of international finance.
Tougher approach
Hamas’ Oct. 7 attacks on Israel offered a brutal reminder of the perils of allowing such funds to flow unchecked. Indeed, Israel, the U.S. and other western governments didn’t just turn a blind eye to the millions that flowed to the terror group from Qatar and Iran, they all but encouraged it, reasoning that the money would help stabilize Gaza.
That experience might be why western security officials have been urging international regulators in recent months to take a much more aggressive approach towards sanctioning money laundering and terror financing in Lebanon involving entities linked to Hezbollah.
Officials familiar with FATF’s investigation, who spoke to POLITICO on the condition they not be named, said Lebanon would normally be an open and shut case, given how egregious the evidence of money laundering and terror financing in the country is.
Yet the broader dynamic in both Lebanon and the Middle East has complicated things. To begin with, Hezbollah’s influence over Lebanon’s core institutions means its central government is unable to enforce even the most basic international money laundering norms.
An even bigger problem, the western diplomats said, is that several countries in the region, including Bahrain and Libya, have locked arms with Lebanon in opposing international regulators’ push for a crackdown, making it all but impossible to effectively target Hezbollah’s illicit financing.
FATF declined to comment for this article.
The current battle within FATF is not centered on whether Lebanon should be on the gray list, but rather on the conditions it would have to meet to get off the list following a two-year review period, especially in relation to the role of Hezbollah in the country’s banking system.
The unregulated bank
Iran began funding Hezbollah in the 1980s — support that has enabled the terrorist group to establish a state within a state in Lebanon as it waged its battles against Israel. Despite Hezbollah’s stranglehold on Lebanon and its economy, the terror group remains heavily reliant on Iranian funding, much of which it receives in cash that it then funnels into Lebanon’s banking system.
Its main conduit is a Hezbollah-controlled financial firm known as al-Qard al-Hasan Association, or AQAH. Hezbollah relies on AQAH, effectively a bank, to pay its soldiers and other officials as well as to provide banking services to local communities.
Amid the political and economic turmoil that has plagued Lebanon in recent years, AQAH has expanded its operations to become one of Lebanon’s largest banks, with deposits estimated in the billions of dollars, western officials said.
What distinguishes AQAH from other Lebanese banks is that it isn’t regulated and doesn’t even possess a banking license.
The biggest difference of all: Thanks to its designation by the Lebanese government as a non-profit organization, AQAH doesn’t pay taxes.
The U.S. government, which placed AQAH on its sanctions list in 2007, describes the group as “a cover to manage [Hezbollah’s] financial activities and gain access to the international financial system.”
Terrorism track-record
Yet the U.S. designation did little to hamper AQAH’s business. The group has little difficulty conducting its business in Lebanon or the broader Middle East. Indeed, AQAH’s cross-border activities will likely become ever easier to undertake following a decision by the Arab League in June to stop referring to Hezbollah as a terror organization.
The question of Hezbollah’s terror designation is also a point of contention within FATF. Disagreement over the issue contributed to a monthslong delay in a report on Lebanon that was finally published in December. In the end, the regulators didn’t call out Hezbollah by name, settling instead on a euphemism: “A major local paramilitary organization with a well-documented track record of committing terrorist acts.”
“Lebanon should produce an assessment of money laundering and terror financing risks associated with a major local paramilitary organization and ensure these risks are mitigated,” FATF wrote in its recent Lebanon report.
Hezbollah has carried out scores of terrorist attacks since the 1980s, including car bombings, suicide attacks and drone strikes, killing hundreds, including many Americans and Israelis, military personnel and civilians. Today, the Shiite militia, which analysts say may have as many as 50,000 foot soldiers, is one of the largest private armies in the world.
The U.S., European Union and dozens of countries around the world have designated the Iran-backed Shiite militia as a terrorist organization.
Western diplomats worry that if FATF doesn’t do so, it will be easier for Lebanon to avoid cracking down on AQAH and money will continue to flow to Hezbollah from Iran and elsewhere unchecked.
The diplomats argued that ultimately a stronger approach by FATF would help Lebanon reform its system and begin drawing foreign investment, which has fled the country in recent years. Without assurances that Lebanon is not a haven for money laundering and terror financing, they’re unlikely to return.
“A tough evaluation would actually help the Lebanese get out of this situation,” one of the diplomats said.
