After Iran’s attack on a Saudi oil refinery last weekend, the U.S. sent a Navy destroyer as a show of support for allies. But the USS Ramage didn’t sail to the Arabian Peninsula. It docked, bizarrely, in the Port of Beirut, in Lebanon—a country dominated by Iran’s terrorist proxy, Hezbollah.

The U.S. continues to treat Lebanon as a friend, even as the difference between its government and Hezbollah has become hard to discern. Earlier this summer, the U.S. Treasury imposed sanctions on Lebanon’s Jammal Trust Bank for facilitating Hezbollah transactions. Days later, Hezbollah fired missiles at Israel from territory it controls in southern Lebanon, with the government’s full support.

Over three U.S. administrations, since George W. Bush ’s second term, the Washington consensus on Lebanon has gone something like this: The best way to deal with the Hezbollah challenge is to empower the pro-Western political bloc, strengthen state institutions, and shield the banking sector. That’s like fighting cancer with a placebo, and the disease has overtaken the patient.

Although the Treasury described Jammal Trust as Hezbollah’s “bank of choice,” it’s hardly the only Lebanese bank infected with Hezbollah finance. In 2011 Treasury exposed a massive Hezbollah money-laundering operation running out of the Lebanese Canadian Bank, leading to its closure. Four years later, Treasury imposed sanctions on Lebanese businessman Qassem Hejeij, founder and then-chairman of Middle East and Africa Bank, for financially supporting Hezbollah financier Adham Tabaja. Mr. Hejeij resigned and handed responsibility to his son. Treasury chose not to impose sanctions on the bank, presumably for fear of further destabilizing the country’s banking sector.

The Tabaja network reared its head again. Last year, Treasury identified Muhammad al-Amin as a “liaison between Tabaja and banking officials” who “has assisted Tabaja in circumventing the impact of sanctions.” Amin Sherri, a Lebanese parliamentarian and Hezbollah member, was subjected to sanctions earlier this summer because he “facilitated Tabaja’s access to Lebanese banks.”

All this comes amid repeated and emphatic denials from Lebanese bankers and Beirut businessmen that their system is dirty.

The institution receiving the most U.S. support, the Lebanese Armed Forces, has worked hand in hand with Hezbollah nationwide. It has deployed jointly alongside Hezbollah fighters battling Sunni militants both in Lebanese cities and on the border with Syria. It has laid down supporting fire using U.S.-provided weapons and ammunition.

U.N. Security Council Resolution 1701, passed in 2006, called for Lebanon to disarm Hezbollah. Instead, the LAF looked the other way when Hezbollah spent two years digging subterranean cross-border attack tunnels into Israel. The LAF allowed the import through Lebanon’s international airport of technology, flown in by Iranian planes, to upgrade Hezbollah’s projectiles into precision-guided missiles. Hezbollah controls large parts of the country, even where the LAF is deployed, from Southern Lebanon to the eastern Bekaa region and neighborhoods and suburbs of Beirut, not to mention ports of entry.

The problem isn’t only a lack of control—it’s collusion. Israel recently exposed a Hezbollah precision-rocket facility in eastern Lebanon. The site of the Iran-led project is a short drive away from an LAF base, where the U.S. has delivered equipment, including ScanEagle reconnaissance drones. The base also hosts the U.S.- and U.K.-funded Land Border Training Center, designed to help the LAF secure Lebanon’s porous border. Hezbollah, with Iran’s assistance, built a missile facility next door.

The Washington consensus insists on continuing to back Beirut and shore up state institutions. But Hezbollah and its allies hold the majority in Parliament and dominate the government’s security and foreign policies. The U.S. warned Lebanon last year against allowing the group to control the lucrative Health Ministry. America’s purported Lebanese allies ignored this.

The State Department has long classified Lebanon as a “safe haven for terrorism.” In fact, it is something worse. With the banks, the military and the government itself answering to a terrorist organization, Lebanon is fully entwined with Hezbollah. The Trump administration deserves praise for going after dirty Lebanese banks. It’s time to break further with Washington’s consensus, acknowledge Lebanon as the Hezbollah state, and act accordingly.

Mr. Badran is a research fellow at Foundation for Defense of Democracies. Mr. Schanzer, a former terrorist finance analyst at the U.S. Treasury, is FDD’s senior vice president for research.