The Sentry
A Divided Banking System and Ineffective Financial Controls
Illicit activities flourish in Libya partly because of the dysfunctional character of the licit banking sector, which remains dominated by the state. Indeed, the mechanisms employed by Libya’s main kleptocrats cannot be understood without looking at how they are connected to the evolving economic and financial structures of the state and the administrative divisions between east and west Libya that emerged in 2014. Because of the added opacity in eastern Libya as compared to western Libya, illicit schemes prospering in the east are often harder to detect.
Policymakers’ perceptions of Libyan kleptocracy are often skewed by the lack of information available. For instance, the Tripoli-based Audit Bureau’s reports shed light on some of the irregularities affecting the government and several public institutions in the west, but the Audit Bureau’s eastern counterpart does not report publicly on the financial practices of major structures, such as Haftar’s armed coalition or its Military Investment Authority.
The Central Bank of Libya
Money laundering in Libya will remain difficult to combat unless the political and institutional split that has plagued the country’s banking sector is addressed. Sitting at the heart of the Libyan economy, the CBL in Tripoli—responsible for regulating the nation’s entire banking sector—has become a critical center of political power in its own right, determining who receives state funds.
It has both directly and indirectly conditioned the development of the economies in east and west Libya since 2011, embodying a key intersection whereby contending interests cohabitate. In several regards, the sharing of the state’s economic privileges among rival political factions is tacitly adjudicated by the CBL in Tripoli, which has been spearheaded by its governor Sadiq al-Kabir since his appointment in September 2011.
Since 2014, checks and balances on the management of state income and spending have degraded, and the absence of a legislatively approved budget has helped the CBL in Tripoli develop an unprecedented degree of discretionary authority while relegating the ministries of Finance, Planning, and the Economy into quasi-irrelevance. From 2015 on, a handful of officials at the helm of the CBL in Tripoli have decided which expenditure items requested by the two rival governments in Tripoli and in the eastern province would be funded by the state.
The technocratic institution became a politically powerful arbiter between each state organ and its own funds, making it difficult for government officials to plan economic policy. Libya operating without a proper voted budget for several years had turned CBL governor Kabir into the country’s most powerful man, a businessman who worked for the Libyan treasury department in the 1990s under Qadhafi told The Sentry.
In 2014, amid the eruption of Libya’s second civil war, the CBL in Tripoli disconnected its provincial branch in the east from the rest of the banking network’s national clearing system. The punitive move was mainly designed to prevent further disbursement of public funds to eastern-based actors, such as Khalifa Haftar’s LAAF.
The CBL in Tripoli carried on wiring the salaries meant for public sector employees in eastern Libya, including military officers aligned with Haftar, provided they were hired in 2014 or earlier, but the salary money for eastern-based recipients was funneled into accounts at commercial bank branches located in the west, not the east. Because of the east-west split introduced in the autumn of 2014, obtaining physical cash became particularly difficult for the commercial banks in the east.
In response, the CBL’s eastern branch established its own processes, creating a parallel ledger system and a secondary banknote circuit. The resulting discordance with Tripoli has created profound vulnerabilities in Libya’s banking system and public finances. Between 2014 and 2020, the interim government of Prime Minister Abdullah al-Thani, based in the east, borrowed approximately 71 billion Libyan dinars (LYD) (then $52 billion), mainly from the CBL’s eastern branch.
To a lesser extent, the Thani government also borrowed from the commercial banks in the east.103 In May 2016, the eastern authorities began importing dinar banknotes from Russia, again without official authorization from Tripoli. Over the subsequent four years, Kremlin-controlled printing company Goznak delivered at least 14 billion LYD (then about $10 billion) in the form of Russian-minted banknotes to Libya’s eastern factions.
The real total was likely a few more billion, according to an eastern Libyan business owner and two banking veterans interviewed by The Sentry. The eastern-based authorities distributed the Russian banknotes in a nontransparent fashion, thus impairing the ability to track their allocation. Despite rhetorical claims to the contrary, no meaningful reunification of the CBL has yet materialized.
In August 2023, the CBL’s Tripoli leadership and its Benghazi counterpart jointly announced their reunification, with the CBL’s eastern chief agreeing to act as the nationwide institution’s deputy governor under Kabir’s continuing governorship. Critically, however, the notion of a board of directors tasked with overseeing the work of the CBL was removed from the CBL’s website—a potential violation of Libyan law. Moreover, no indication exists that the longstanding issue of irregular public debts accumulated in eastern Libya was resolved, nor was the issue of two separate treasuries—one for each rival government.
Until proven otherwise, the fault lines within the banking sector have yet to be repaired. Divisions between governments and their rival CBL leaderships have helped undermine budget negotiations. Negotiations between CBL officials from the east and west yielded a tentative agreement on a unified budget in January 2021. But these talks ceased after the March 2021 emergence of the GNU and never gave rise to a ratified, unified budget law. Nonetheless, in the spring of 2021, Tripoli integrated many eastern expenditures into its own finances.
In addition to that, the Tripoli CBL sent funds to the LAAF and eastern authorities, an opaque arrangement that continues today. Yet, following the March 2022 emergence of a new parallel government in Sirte, the eastern factions reactivated the financing mechanisms developed in 2014-2021 for the purpose of providing a funding source for the LAAF and the House of Representatives-appointed government—without oversight and without coordination with Tripoli authorities. The sway of the CBL extends into the private sector as well. The CBL has the ability to influence which actors succeed in the private sector by determining which businesses are able to access trade financing.
Notably, the CBL is the majority shareholder in the two overseas banks that handle a significant proportion of Libya’s trade financing: the Arab Banking Corporation (Bank ABC), headquartered in Bahrain, and—via the 100% CBL-owned Libyan Foreign Bank—the British Arab Commercial Bank, headquartered in the UK. Sadiq al-Kabir joined the board of Bank ABC in December 2011,124 becoming the first CBL governor to hold the position of chair of the Bank ABC Group’s board of directors concurrently. Bank ABC reported that Kabir received $142,500 in 2022 in remuneration for his engagement with the board.
A broken system
While many of the frailties in Libya’s banking sector today arose as a result of the polarized politics of 2014, they are perpetuated because they facilitate the mechanisms employed by Libya’s kleptocrats. The continued split of the banking system aids an array of illicit practices and black market businesses whose beneficiaries use their clout and influence to resist a return to normalcy.
Those responsible for overseeing the banking system know that they would be easier to replace if they implemented proper systemic fixes, and so they are incentivized to merely manage the broken system rather than repair it. One clear illustration of this tendency is the constant necessity for the CBL to distribute large amounts of physical banknotes across the country. Additionally, some of the banking-related abuses carried out from 2014 to 2020 are likely to be repeated.
For instance, from 2016 to 2018, eastern Libyan bosses used the Russian-printed banknotes to buy large quantities of dollars on the black market, weakening the dinar’s exchange rate and further eroding the purchasing power of ordinary households across Libya. Today, there is little to stop Haftar’s faction from importing several more billion in Russian-printed banknotes, and this may even be likely given that, in late 2022, Haftar’s faction resumed borrowing from eastern commercial banks without formal authorization from Tripoli.
The Haftar family has developed its sway over eastern-based economic and financial institutions, sparking fears about systemic vulnerability and potential abuses of state finances. From 2014 to 2020, Haftar’s military influence helped convince commercial banks in eastern Libya to assist LAAF-aligned bodies; this included the Commerce and Development Bank, which was led by Jamal Abdel Malek until May 2022.
More recently, the Haftar family and its closest associates have gone even further in ensuring the political loyalty of key bankers and financiers in eastern Libya. Since 2022, several positions with crucial financial responsibilities have been given to individuals with close links to the Haftar family.
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The Sentry is an investigative and policy organization that seeks to disable multinational predatory networks that benefit from violent conflict, repression, and kleptocracy.
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