Contacted by Le Commerce du Levant in January, the Swiss attorney general’s office confirmed that it had sent a request for mutual legal assistance to Lebanese authorities as part of a criminal investigation into “aggravated money laundering in connection with possible embezzlement to the detriment of the Banque du Liban,” without disclosing the contents of the case.
Part of the information in the case was, however, transmitted to Lebanon’s seniormost public prosecutor, Ghassan Ouiedat, who in turn questioned BDL Gov. Riad Salameh and launched an investigation into the matter in Lebanon.
Two separate sources who had access to the Swiss investigation document revealed their main findings to Le Commerce du Levant.
What is the Swiss attorney general’s investigation about?
According to the sources, the investigation is into the alleged payment of more than $330 million in brokerage fees between 2002 and 2014 by BDL to Forry Associates Ltd., a company registered in 2001 in the Virgin Islands, whose beneficiary owner is Raja Salameh, the governor’s younger brother.
The link between Raja Salameh and Forry had been revealed in 2015 in the context of the SwissLeaks journalistic investigation, which leaked banking documents from HSBC. The documents showed that the beneficiary of the Forry company account at HSBC bank in Geneva was Raja Salameh.
The payments by BDL to Forry were made within the framework of a brokerage contract whereby the Lebanese central bank entrusted the company with the task of managing financial securities estimated at over $90 billion throughout the contract’s duration, for a commission amounting to three-eighths of 1 percent of the traded amount.
The transfer of funds that had transited through several Swiss banks appears to have set the Swiss authorities thinking.
Some $258 million was indeed transferred to the accounts of Raja Salameh in Switzerland, of which $207 million was later wired to accounts held at five Lebanese banks.
Another portion of the profits generated by Forry were allegedly transferred to the accounts of three other companies, which Swiss authorities suspect belong to Riad Salameh.
The three companies are Westlake Commercial Inc., a Panama-based company that reportedly received over $7 million between 2008 and 2012; SI2SA, which benefited from a transfer of 970,000 Swiss francs ($1.053 million) in October 2011; and finally Red Street 10 SA, which received more than 7.3 million Swiss francs ($7.9 million) in August 2019 via SI2SA, allowing the purchase of real estate in Switzerland.
In 2013, a transfer of more than $2 million was also made from Forry’s account to that of Raja Salameh in Switzerland. The latter then wired the same sum to SI2SA.
The Swiss document also mentions the transfer of 1 million Swiss francs from Westlake Commercial Inc. to the Rise Invest SA company, the account of which is in Switzerland and is held by Marianne Howayek, a senior advisor to BDL and assistant to the governor.
The Swiss authorities also deemed another transaction suspicious: an operation allegedly carried out through a BDL account that was opened by Riad Salameh with a Swiss bank. This account was used in 2012 to transfer treasury bills that were issued in 2010 and matured in 2013, for an amount of $153 million, to a Lebanese bank.
The transaction was settled in an account opened with the Federal Reserve Bank of New York, but it had unusual characteristics, prompting the Swiss prosecutor to ask about the details of the buyer, the market price, and whether or not the securities were sold before their maturity.
According to several corroborating sources, it was the Swiss bank through which these transactions took place that sounded the alarm to the Swiss Financial Market Supervisory Authority.
What is the nature of the contract between Forry and BDL?
Citing the Right to Access Information Law, Le Commerce du Levant requested several weeks ago a copy of the contract with Forry Associates Ltd. from the central bank, but to no avail.
According to the two aforementioned sources, the Swiss request for legal assistance refers to brokerage services on eurobonds and treasury bills.
Eurobonds are debt securities denominated in dollars and issued by the Finance Ministry on the international market. But when the government cannot find buyers in the primary market, the central bank can act as a buyer of last resort.
“It is possible for the central bank, in its capacity as the guarantor of the financial system, to buy the debt securities with its foreign currency reserves, and gradually resell them to banks on the secondary market,” explains one financier.
What’s more, since 2017, in the absence of both local and international investors, BDL subscribed to all eurobonds issued by the state. It is on this secondary market that the broker’s — i.e. Forry’s — services could have been used.
Regarding the treasury bills issued by the central bank each week on behalf of the Finance Ministry, it is still not clear why BDL resorted to brokerage services.
“It is the Finance Ministry that sells treasury bills directly to banks; there is no middleman. It is absurd to imagine that a brokerage firm based outside Lebanon is acting as an intermediary to sell securities in Lebanese lira inside Lebanon,” adds the financier.
One lawyer points out, however, that “it is impossible at this stage to know exactly how involved Forry was in these brokerage activities, what instrument it managed and in what proportion.”
Is it normal for a central bank to use the services of a brokerage firm?
Yes, in certain cases and under certain conditions, it is normal for a central bank to use a brokerage firm’s services, several banking sources say.
“A central bank can choose to deal with a brokerage firm when it does not wish to reveal its identity to buy or sell securities. The entry of a central bank in a market could affect the price,” explains a banker.
Resorting to a brokerage firm also saves some costs.
“The [central bank] may find it cheaper to outsource brokerage services and pay a commission than to invest in a brokerage department, which might require investing in technology. Using a broker also means they can benefit from a certain network of investors,” adds the banker.
But when it does decide to use a brokerage firm, “a central bank [usually] deals with reputable and well-established brokers, and not a company based in the Virgin Islands,” says the source.
BDL, for instance, signed a non-exclusive contract with Optimum Invest SAL, a Lebanese brokerage company established in 2004, a fact mentioned by several bankers, who, on the other hand, claim to have never heard of Forry.
According to several sources, while the fees charged by the company are aligned with market prices, “the obscurity surrounding the contract is unusual. The choice of a broker should normally be transparent, and the reasons for its selection clearly outlined,” says another banker.
This is particularly true since the identity of the beneficiary of the contract raises the question of conflict of interest.
What does Lebanese law say about conflict of interest?
“The Swiss law applies in relation to aggravated money laundering, according to Law 305 of Article 2 of the Swiss Criminal Code. But to understand if there has been indeed misappropriation of funds to the detriment of BDL, it is necessary to determine whether or not the origin of the suspicious sums is an offense to BDL’s public interests and therefore check what the Lebanese law stipulates in this regard,” explains a lawyer.
Several articles could apply. While conflict of interest is not clearly addressed in the Code of Money and Credit, Article 20 of the law stipulates that the governor’s function is “incompatible with any type of mandate, public function, activity in a company or any other professional work, irrespective of whether such activity or work be remunerated or not,” explains the lawyer.
“But if it turns out that the governor was able, through his brother, to financially benefit from the contract signed with Forry, then this is a violation of the principle of neutrality,” adds the lawyer.
According to the same source, the Lebanese Criminal Code could also be invoked here: “There are accusations such as abuse of position or influence peddling, which are punishable under the criminal code, within the framework of the acts of corruption defined in Article 351 [and those following] of the penal code.”
Other laws such as those on illicit enrichment and anti-corruption may also apply.
But “at this stage, it is impossible to pass judgment on the transfers that were made, which is something that must be justified by the governor [himself] before the prosecutors,” explains the lawyer.
He goes on to say that “the BDL’s internal regulations must also be checked, in order to verify whether they mention cases of conflict of interest or if [the governor] is required to disclose the content of the contracts.”
Have BDL’s contract-awarding procedures been violated?
The details on BDL governance are not publicly available.
In their request for mutual legal assistance, the Swiss prosecutors also asked for information on the modalities of decision-making and control within the institution, the legal status of the governor, the specific rules in matters of conflict of interest, and procedures regarding intermediation agents such as brokers.
Some of these matters also fall within the scope of the forensic audit.
According to an internal BDL source, such contracts “would normally have to be approved by the [BDL] Central Council,” which includes the governor, the four vice governors and the directors-general of the Economy and Finance ministries.
The governor claims to have followed this procedure, according to a source familiar with the matter — something that must be confirmed in the minutes of meetings at the time.
Has BDL suffered any damages?
A legal source confirmed that “identifying the damaged party could be a key point in this case,” stressing that the brokerage fees could have been paid by subscribers, and thus commercial banks rather than the central bank.
The Swiss investigation document is based on transfers made from a BDL account to Forry, but it could be “the subscribers who made the payment through an intermediary account with the Banque du Liban. We will have to find out if this is a common practice with other brokers and what is the benefit of doing so. But for now, the governor has to explain,” says the source.
“Still, the commission fee argument does not rule out the potential case of conflict of interest, which must be made explicit,” he adds.
Another lawyer believes that “even if it were the subscribers who made the payment, the commission was removed from the total price of the securities, so this constitutes a shortfall for BDL.”
What’s more, the Swiss report does not specify whether or not the transfers were made from a personal account — the governor, like any other central bank employee, can have a personal account with BDL — or from an account belonging to the institution.
Where do the proceedings stand today?
The Swiss have made several demands to obtain particular documents on BDL’s governance, details of the transfers related to the case, the method of calculating commissions, documents in relation to the contract signed with Forry, and a list of witnesses.
The Swiss prosecutor also asked to question Riad and Raja Salameh, as well as Howayek as a witness.
According to one of the sources familiar with the investigation, there has been correspondence on three occasions between the prosecutor and Riad Salameh, who agreed to travel to Switzerland to be questioned on a date that the Swiss attorney general’s office has yet to determine.
Riad Salameh’s assets in Switzerland have been frozen as a precaution since the start of the investigation and “as long as the procedures progress, the funds may remain blocked,” according to Saudrine Giroud, a lawyer in Geneva.
What might the next steps be?
The procedure from here out depends in part on the decision of the Swiss authorities.
“We have to see how far the Swiss are ready to go, knowing that if the information proves to be true, the reputation of the Swiss banking system would be at stake,” says a diplomatic source, stressing that this is a divisive issue.
“This case might prove to be a Pandora’s box,” the source adds.
But even if there is political will to move things forward, especially after the tragedy of the Aug. 4 Beirut port blast and stagnation from the political and economic crises gripping the country, “the procedures of economic crime remain long. It is not unusual that such procedures could drag on for one year or even 10 years in certain cases involving sensitive interests and requiring international mutual assistance procedures,” explains Giroud.
She goes on to say that “once the investigation is completed, depending on the gravity of the facts and the obtained results, the prosecutor would either close the case if there was no offense, issue a summary penalty order if the facts are of lesser severity, or issue an indictment for trial in court if the facts exceed a certain gravity.”
The penalty could go up to five years in prison for aggravated money laundering, or even more if other crimes such as fraud, dishonest management or breach of trust were proven. The ill-gotten assets would then be confiscated by the Swiss authorities.
In order to recover such assets, BDL, which is the party the investigation may find to have been harmed, would have to be involved in proceedings “as plaintiff to assert its rights over the assets in dispute,” says Giroud.
This article was originally published in French in Le Commerce du Levant. Translation by Sahar Ghoussoub.
Contacted by Le Commerce du Levant in January, the Swiss attorney general’s office confirmed that it had sent a request for mutual legal assistance to Lebanese authorities as part of a criminal investigation into “aggravated money laundering in connection with possible embezzlement to the detriment of the Banque du Liban,” without disclosing the contents of the case.Part of the information...