The Sentry
The rise of the black market
Subject to no formal governance or state control, Libya’s black market has matured into a pervasive, liquid platform through which participants can convert large quantities of Libyan dinars into dollars. In this way, substantial quantities of physical currency can change hands safely and without leaving a paper trail. Furthermore, the black market in Libya is linked to its counterparts in other countries, such as the UAE, Turkey, Syria, and Lebanon.
The array of mechanisms that enable diversion and personal enrichment developed in conjunction with the enlargement of the black market over the last decade. Between 2013 and 2016, in particular, long oil blockades in the east significantly reduced Libya’s dollar revenues from oil and gas, spurring a major crisis of confidence in the formal banking system.
The entire banking system was affected, and the dinar’s dollar value fell on the black market, while the official rate of exchange was left unchanged. This margin of difference, which lasted until late 2018, enabled massive profits, particularly via letters of credit (LCs). An adjustment of the official exchange rate in 2020 significantly reduced these opportunities. Yet LCs have carried on offering vital utility to Libyan factions as the only artery of access to foreign currency within the formal banking sector.
As black market operators, tycoons, and armed group leaders worked together to profit from the situation, the population at large suffered. The persistent, chronic shortage in banknotes made it difficult for Libyans o withdraw cash from their accounts, establishing the black market as vital to households and businesses for their everyday activities.
At the height of the liquidity crisis, from 2016 to 2019, households and merchants alike were so desperate to extract physical banknotes from their accounts that they wound up doing so on the black market, even though it required them to forgo a chunk of their bank check’s value. Only operators linked to armed groups could render this service, given the importance of physical logistics and armed might for anyone involved in accessing and distributing banknotes.
As a result of these dynamics, distinguishing between the licit and illicit sectors in Libya has become almost impossible. Cash moves constantly between the formal sector of the economy and the black market, making it easy for illicit actors to launder their dirty money by recycling it into seemingly legitimate commercial bank accounts and then sending it abroad in the form of dollars.
A study by the UN’s Inter-regional Crime and Justice Research Institute found that corruption and money laundering are cross-cutting issues that connect criminality in Libya with cross-border, international illicit financial flows. More broadly, the continued vulnerability of Libya’s banking system renders its licit economy vitally reliant upon the black market for basic movements of capital between the eastern and western parts of the country.
As the CBL’s eastern branch remains cut off from the Tripoli payment clearing system, the nation’s entire banking network remains dependent on ad hoc cash transfers coordinated by the CBL’s headquarters. Only a unified, digitized clearing system can close these loopholes. The UN has sought to utilize an internationally conducted financial review of the CBL as a means of supporting its reunification, but to no avail.
Unless and until progress is made on that front, Libya’s black market will continue to play an indispensable role in the nation’s licit economy, rendering efforts to combat money laundering difficult.
The Role of Letters of Credit (LCs)in Libya
Because the Libyan dinar is not a freely tradable currency, the CBL fulfills a crucial function when it comes to converting the dinar into US dollars and other hard currencies by providing a documentary LC program to commercial banks. The LC program is meant to let public institutions, private companies, and other bank customers convert dinars into dollars at the official exchange rate, which is fixed and published by the CBL.
Applicant companies must be registered to receive LCs from the CBL. Regulations require that companies deposit 100% of the value of the LC in Libyan dinars with the commercial bank through which they applied, although this seldom happens, according to insiders. Once the relevant documentation is approved by the commercial bank, the application is
assessed by a CBL committee through an electronic system. The governor himself eventually authorizes the list of LCs to be granted. The subsequent issuance of the LCs can take anywhere from a few weeks to several months, often depending upon the personal connections of the company in question. Correspondent banks are responsible for due diligence on the LCs, both of the transaction and of the partner bank. But given that so many Lcs are processed by CBL-owned banks, due diligence on the partner bank often equates to due diligence on the CBL and its subsidiaries.
Moreover, the CBL is also in charge of anti-money laundering checks in Libya on all completed transactions. Thus, in many cases, the CBL is present directly or indirectly at all stages of the transaction, from the applicant bank to domestic authorization, overseas execution, and subsequent scrutiny. In the context of the post-2011 Libyan crisis, access to LCs became strategically vital for any political or armed faction committed to prevailing over its rivals.
Because payments in dinars are not accepted outside the country, Libyan-based actors deprived of access to LCs would be isolated from foreign banks, unable to purchase vehicles, supplies, or other goods abroad. And given the small size of the markets inside Libya, their dinars would be of limited utility. However, LCs are also subject to misuse and abuse, including for money laundering purposes. For those who hold large quantities of ill-gotten dinars and have access to LCs, they can be employed as a convenient means of sending that wealth abroad, as Libya’s cash-based economy makes it difficult to distinguish between licit and illicit funds.
Moreover, when the black market exchange rate significantly differs from the official rate, large profits can be captured using fraudulent LCs and the complicity of willful or militarily coerced bank managers. In such instances, actors do not import the stated goods but instead present false bills of lading in order to have the CBL transfer the LC dollar amounts abroad. The foreign-based recipient of the dollars is an entity either working with or controlled by the Libyan purchaser, and the dollars thus generated are then pocketed as pure profit or sold on to black market traders at a higher rate.
The black market traders subsequently sell the hard currency to Libyan actors, including merchants and households, who need to move money internationally but cannot access the CBL’s formal foreign exchange program. This type of illegal arbitrage was particularly lucrative from 2015 through 2018.
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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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