BDL’s forensic audit: chronicle of a failure foretold

BDL’s forensic audit: chronicle of a failure foretold

(Credit: L'Orient-Le Jour/Archive)

BEIRUT — Over the past two years, several factors have turned the forensic audit of Banque Du Liban’s accounts and transactions into a tragicomedy. It started with BDL using the Banking Secrecy Law as a pretext for refusing to meet the requests of Alvarez & Marsal Middle East Limited (A&M), a UAE subsidiary of the main American company of the same name, assigned to conduct this audit for the first time in September 2020.

Such a pretext is unfounded, as banking secrecy does not apply to the public institutions’ accounts. Nevertheless, this has led Parliament to vote in favor of a law lifting banking secrecy on the accounts of BDL and public institutions for a one-year period, which subsequently allowed the signing of a new contract in September 2021 in order for the same firm to conduct the audit.

While the law temporarily lifting banking secrecy on public accounts expires on Dec. 29, BDL has not handed over the whole requested information to the auditing firm, now arguing that the contract needs to be revisited before doing so.

In addition, the MPs did not see fit to vote for the renewal of the law in their latest session. Hence, there is every reason to fear that once the legal deadline lapses, BDL would decline to disclose the information, which it claims is protected by the Banking Secrecy Law. Once more, Alvarez & Marsal would probably note that Lebanese laws in force make it impossible for the firm to access the information needed to accomplish its mission.

These fears are particularly legitimate since everything seems to have been carefully crafted from the beginning, so that the audit comes to nothing and does not point the finger at any official, though a large segment of the public hopes that this audit will send a strong signal of greater transparency, professionalism and integrity in the country as a whole.

In fact, it would be no exaggeration to say that the whole process — the negotiation, drafting and execution of the contract with A&M — constitutes a typical example of poor governance and failure to safeguard public funds. Delving into the provisions of the second contract struck with the firm will illustrate this point.

The BDL is absent from the contract

First, when it comes to the way the contract was awarded and the contracting parties, such a process would usually, in compliance with applicable laws and norms, ensure bringing the most qualified service provider at the best value for money – a price suitable for the tendering administration.

In this vein, three comments can be made. First, the area of expertise of the service provider should be an essential criterion for a forensic audit — which consists of a detailed and intensive audit aiming to uncover cases of fraud, deliberate misconduct or mismanagement, including embezzlement of funds and other financial crimes.

Yet, based on A&M’s own website, the firm seems to have no real, and recognized expertise either in auditing or forensic auditing. On several occasions in the contract, in fact, A&M was keen not to classify its mission to an “audit.” Rather the contract defined it as a “consulting and advisory mission.” It also disavowed any obligation to comply with related American or international auditing standards in the execution of its contract. connection therewith.

It is worth bearing in mind that Lebanese laws and regulations regulating the audit mission do not seem to have been taken into consideration or respected in this process as well:

Law no. 364 of 1994, which regulates the certified accountancy profession, prohibits foreign entities and experts from practicing this profession in Lebanon unless registered, licensed or having a special authorization from the association of accountants, and subjects violators to penal sanctions (under article 17 of the said law and article 393 of the Penal Code).

Remarkably, the fact that the contract was signed by the Emirati subsidiary of a US firm makes it possible to exempt the parent company from any liability or collective guarantee (as per Article 1 [c] of the contract). It also enables the Emirati firm to benefit from tax optimization — under the 1999 Double Taxation Treaty between Lebanon and the UAE, which subjects some ad-hoc projects implemented in Lebanon by the Emirati company to taxes in the UAE.

Unlike the US, however, the UAE does not tax its resident companies’ overseas operations. This implies that activities in Lebanon, and financed by a public fund, are totally exempt from taxes, which violates the rules of tax fairness and fair competition.

It should also be noted that in the contract, the Lebanese state is committed to ensure that all requests and obligations are met by BDL, which itself is not a party to the contract. In accordance with Article 13 of the Lebanese Code of Money and Credit Code, which grants BDL financial and relative administrative autonomy, BDL can judge whether or not the contract contradicts said law, and subsequently whether it is required to cooperate or not.

Subsequently, any further request for information should be addressed to the Lebanese state, which is in charge of ensuring BDL’s cooperation. Naturally, it would have been more judicious to add BDL as a direct party to the contract, so as to implement its provisions and to reply in case it failed or refused to cooperate.

Liability release?

When it comes to the scope of the mission, A&M undertakes to present a preliminary report on the audit findings under the contract, without A&M explaining the minimum information requirements that must be contained in the report, especially the potential infringements and crimes.

Therefore, there is a risk that the drafted report will be limited, ambiguous or even erroneous, which would falsely discharge BDL and other potential violators of all liability, while allowing A&M to collect its fees. Under the contract the Lebanese state could also request a second report, which would lead to the signing of a new contract and the payment of additional fees to the detriment of taxpayers’ interests.

In this respect, a comparison with similar international contracts shows that it is common for contracts to provide for two cumulative and complementary reports. An interim report that sketches the progress of the work and obstacles encountered, and a final report describing the investigation’s findings in a clear and detailed way.

The fees agreed upon in international contracts usually cover these two reports. In addition, the method for setting the lump sum for the expenses and remunerations as specified in the present contract totally contradicts common practice. This practice is based on an hourly rate approved in advance, with a ceiling that cannot be exceeded, which enables an objective and fair evaluation of the work conducted and the actual time invoiced with full transparency.

This leads us to the conclusion that the compensation payment in the aforementioned contract has nothing to do with the report’s content or conclusions, and that A&M cannot be held accountable for any shortcomings or failures due to missing information. It is as if the intent were to obtain from the start a final and irrevocable discharge and release from liability.

In terms of liability, the contract binds the Lebanese state to bear all responsibility, including in particular the risk of loss, damages or recourse to which A&M would be subject as a result of the performance of its mission (except for cases of negligence or deliberate serious misconduct), and the obligation to compensation and indemnity, which could amount to several million dollars.

However, it is common in this type of contract that the contracting public authority protects itself against any risks and to include in the contract clauses requiring the service provider to pay compensation for all risks of recourse against the state, in terms of complaints, loss and damage resulting from its mission — especially in cases of negligence, omission or deliberate act.

The service provider must also be obliged to cooperate and join the state — at its request — in the subsequent legal proceedings for the prosecution and recovery of ill-gotten property based on the evidence included in its report and its conclusions. It also needs to have the necessary insurance, at its own expense and during the entire contract period, that would cover any professional malpractice and safety risks, in case physical harm was inflicted upon its staff.

Lack of transparency

In addition, the contract restricts the ability to publish and disclose the report. This obligation is limited to specific cases and to the sole use of the Lebanese state, in accordance with the agreed objective and purpose.

Also, A&M’s consent is required in some cases. This is contrary to the spirit and the purpose of the report, as well as to the laws in force, especially when it comes to the publication of the findings in accordance with the principle of transparency and Law no .28 of 2017 on the right to access information. The latter states that “any legal or natural person has the right to access and view information and documents of an administration.”

In this specific case, the mission is supposed to involve reporting on possible contraventions and embezzlement that have led to the economic and financial collapse that has plunged the Lebanese into precariousness and poverty. It is therefore the right of every taxpayer and every citizen to learn the truth in this issue.

Finally, the contract states that the applicable law in the event of a contractual dispute is British law (of England and Wales). This is totally unacceptable, on one hand because Lebanon is a sovereign state, and on the other hand, to ensure consistency and harmony as the parties are obliged under the contract to respect and to comply with the applicable Lebanese laws.

In light of all the above, it is legitimate to ask whether all the parties involved (the state, BDL and A&M) have “made the arrangement” to ensure they are not held accountable in case they fail to cooperate or to obtain convincing results, while making sure they comply to the Lebanese laws in force (which are quite equivocal and restrictive) – that is, whether they did not agree in advance, even implicitly, to present a pro forma report that neither incriminates them nor harms their reputations.

Due to the high risk involved, it is urgent to bring A&M and the BDL together as quickly as possible, and to give them notice to coordinate their action in order to finalize the provision of documents, or else they would risk bearing responsibility (a contractual one for some, a disciplinary or criminal liability for others) for the delays and failures in the fulfillment of obligations. Otherwise, it is pressing to pass the law extending the deadline as soon as possible due to its negative effects that facilitate corruption, or ideally to adopt a law lifting banking secrecy permanently.

Everyone has the duty to sound the alarm and seek to turn the table through popular and media pressure, similar to the one that brought down the disastrous amnesty law nearly two years ago and, more recently, the pressure that resulted in referring back the scandalous capital control draft law provisions to the Parliament committee.

So let’s act quickly, in order not to rule in favor of Albert Einstein’s bitter prophecy: “The world will not be destroyed by those who do evil, but by those who watch them without doing anything.”

This article was originally published in French in L'Orient-Le Jour. Translation by Joelle El Khoury.

BEIRUT — Over the past two years, several factors have turned the forensic audit of Banque Du Liban’s accounts and transactions into a tragicomedy. It started with BDL using the Banking Secrecy Law as a pretext for refusing to meet the requests of Alvarez & Marsal Middle East Limited (A&M), a UAE subsidiary of the main American company of the same name, assigned to conduct this audit...