Banque Du Liban closed off with barbed wires. (Credit: Fouad Gemayel/L'Orient-Le Jour)
BEIRUT — The long-anticipated forensic audit report of Lebanon's Banque du Liban (BDL), as conducted by firm Alvarez & Marsal (A&M), was leaked to the press on Thursday.
This "preliminary" 332-page report, dated Aug. 7, 2023, examines BDL's accounts between Jan. 1, 2015, and Dec. 31, 2020.
In contrast to two previous two audits, which dealt with accounting and verification of BDL's accounting practices in relation to those of international central banks, A&M's report focuses on the legal and accounting aspect of the BDL audit and aims to trace transaction history to detect potential fraud.
These three audits are part of the requests made by a portion of the international community in order to provide assistance to Lebanon.
Although A&M's audit is not explicitly requested by the International Monetary Fund (IMF), from which Lebanon has been seeking $3 billion in aid, it has long been demanded by a significant portion of Lebanon's political class.
Officials attribute the current economic crisis to former BDL Governor Riad Salameh, whose term ended on July 31 after three decades in office.
If the first two audits had already flagged the central bank by identifying several accounting anomalies, A&M's report is by far the most scathing.
Twelve categories
The report covers 12 categories: BDL's balance sheets, foreign exchange reserves, financial engineering, financial positions, transparency in disclosing information about its balance sheet, balance with commercial banks and financial institutions, operational expenses, employee compensation, legal framework, unused control power, operations, and its overall transparency. Here are the main conclusions:
Falsification of balance sheets
Right from the start, the authors of the report noted that BDL's foreign exchange reserves deteriorated rapidly during the 2015-2020 period.
While the BDL had a foreign exchange surplus of $7.2 billion at the end of 2015, it showed a deficit of $50.7 billion at the end of 2020.
Excluding foreign currency assets, including Eurobonds, this negative balance stood at $70.9 billion at the end of 2020, which represents 230 percent of Lebanon's GDP (equivalent to $31.2 billion in 2020).
This situation also led to the deterioration of the financial position of the Banque du Liban, which, however, was not indicated in its annual balance sheets. Instead, unconventional accounting standards were adopted to mask these results and display positive results.
These practices allowed the central bank to overstate its assets, equity and profits while underestimating certain losses. This allowed the bank to "inflate" its balance sheet over the years — "both on the asset and liability side" — and to end the year "with amounts chosen by the governor, without any explanation," state the auditors.
The "overestimation of the BDL's profits" allowed it to avoid implementing a rescue plan involving a bailout from the Ministry of Finance and to continue disbursing the planned $40 million to the ministry's account, even though actual losses amounted to several billion dollars during the analyzed period.
A reassessment of the BDL's financial statements, conducted by A&M's team, reveals a deficit in capital of $51.3 billion in 2020.
Financial engineering
According to the audit report, this deterioration is also explained by the "increase in the cost of financial engineering" implemented in 2015, which was "hidden in the balance sheets" under a label of "deferred interest expenses and cost of certificates of deposit," known internally as the "pool."
The total cost of financial engineering is estimated at LL115 trillion at the end of 2020, according to A&M.
According to the documents, the report highlights that decisions related to these financial engineering activities were only vaguely approved by the members of BDL's central council.
For them, the governor had discretionary power without any oversight to determine the various terms of these operations (amounts, interest rates, and beneficiaries). This situation leads them to indicate that the central council — composed of the governor, the four vice-governors, and the two directors-general of the ministries of Finance, Economy, and Trade — played a role "well below the minimum standards of good governance found" within international central banks.
Forry and dubious transfers
Regarding the Forry Associates Ltd case, involving $333 million of alleged "illicit enrichment, forgery, and use of forged documents," A&M points out that there is evidence of "illegitimate commissions" during this period totaling over $111 million.
While the auditors are unable to determine the identity of the transfer beneficiaries, they specify that these sums were deposited with seven banks over 27 payments: Banque Misr Liban ($47 million), IBL Bank ($20.5 million), BLC Bank ($13.4 million), AM Bank ($7.4 million), Bank Audi ($5.4 million), Fransabank ($5.4 million), and HSBC Private Bank (Switzerland, $12.1 million).
Additionally, a preliminary analysis of accounts held at the BDL in the name of Salameh allowed A&M to identify $75 million transferred during this period to accounts held in 23 banks spread across Switzerland, Germany, Luxembourg, the United Kingdom, Lebanon, the United States, and France.
However, the firm notes that "further investigation" is needed to confirm the purpose of these transfers and the identity of the ultimate beneficiaries.
Governance
Regarding governance within the central bank, A&M deemed that the concentration of power exercised by the governor "exceeds what is reasonable within central banks," while the control that should be exercised over such authority was "insufficient."
Thus, it believes that the central council "has been largely ineffective as a governing body," as it did not challenge the governor's decision-making.
The governor "monopolized discussions and decisions," underlines the report's authors. Lastly, they noted that the government commissioner at the central bank, responsible for informing the Ministry of Finance and the central council about their supervisory role, did not conduct any "effective oversight."
Why did it take so long to prepare the report?
In the introduction to its report, A&M repeatedly stresses that its preparation was delayed by the BDL's lack of cooperation and the fact that certain data were not passed on to it due to the banking secrecy law.
Among these challenges, the firm mentioned that it was not "authorized to access the Banque du Liban site or to conduct interviews with staff or management." It also points out that despite "numerous requests for information and written questions [sent] to BDL employees," many of these remained unanswered.
In September 2020, A&M signed a contract with Lebanon to carry out this forensic audit. On Oct. 20, 2020, the firm requested the data required to perform this task. BDL objected and the contract was canceled.
However, the contract was renewed a year later when the company was informed that the requested information would be made available. On the other hand, BDL refused to allow A&M to come on-site and give it direct access to its servers in order to collect the data to be analyzed.
In the end, the study of this information was carried out at the Ministry of Finance. The BDL uploaded the data onto a server so A&M could only read it, without being able to retrieve it, further complicating the process.
Meanwhile, A&M reported that it had asked to interview 47 central bank employees. After reducing this request to nine, as requested by the BDL, the interviews were ultimately all refused by the Banque du Liban.
The BDL then asked the firm to write then send the questions. It was only on Feb.13, 2023, that the A&M team received answers from 14 members.
What were the objectives?
As explained in its report, A&M's forensic accounting audit was used, in particular, to :
- Validate that funds relating to financial transactions that took place at BDL or through BDL accounts during this period were used for the intended purposes
- Examine whether the prices or values of financial transactions were unjustly inflated
- Examine whether payments were made to fictitious companies or used for other inappropriate purposes
- Analyze red flags that may indicate misappropriation or inappropriate use of funds
- Examine how BDL's balance sheet assets and liabilities accumulated and evolved over time, and how BDL's reserves and liabilities are composed
- Examine the conditions governing the issuance of bonds and treasury bills, and BDL's subscription to these securities
- Examine the financial engineering operations carried out by BDL over the last five years
- Analyze movements in commercial bank deposits, particularly during the period of financial engineering operations
- Analyze the way in which deposits and loans from financial institutions to BDL have been reported