Alvarez & Marsal delivers damning report on Lebanon's central bank

14 August 2023 4 min. read

A preliminary forensic report of Banque du Liban has painted a damning picture of Lebanon’s central bank, exposing a range of illegal and concerning practices that contributed to the nation’s dire financial situation.

Conducted by Alvarez & Marsal, a US-headquartered management consulting firm, the financial audit spanned the period from 2015 to early 2020. The report comprises 332 pages and sheds light on the complex accounting and financial engineering practices conducted by the Banque du Liban – riddled with mismanagement and illicit behaviour.

The report – which encountered numerous obstacles and delays and faced resistance from key policy makers – said that the financial engineering conducted by the central bank was “highly costly, with a total cost of 115 trillion Lebanese pounds ($7.7 billion) between 2015 and 2020.”

Alvarez & Marsal delivers damning report on Lebanon's central bankThe report further found that while the central bank had a foreign currency surplus of $7.2 billion at the end of 2015, by the end of 2020 that had become a deficit of $50.7 billion.

The rapid deterioration of the financial situation was not reflected in the balance sheet and financial statements, as the Banque du Liban’s use of unconventional accounting standards allowed it to exaggerate the value of its assets and profits, the report said. A major chunk of losses was kept off the balance sheet and instead recorded under different categories.

“The positions and losses of Banque du Liban are presented through netting of assets and liabilities and through recording them in unexplained and general accounts such as ‘other assets’ and ‘clearance and settlement accounts,’” the report said.

“No loss is shown at all in the balance sheet,” it added, noting that no information was provided to the public, such as profit and loss accounts from 2015 to 2020, interest paid to major depositors or granted to major borrowers, or the methodology for reporting those interests.

Meanwhile, the central bank relied heavily on seigniorage – earnings from issuing money and banking activities. However, the practice was not adequately disclosed, audited, or transparent, leading to a misleading representation of the bank’s financial health.

The role of the governor

The role of former governor Riad Salameh, who stepped down last month, is heavily criticised by the report. Salameh shaped monetary policy, established accounting standards that concealed accumulated losses, installed weak control mechanisms, and determined which banks would benefit from loans and financial engineering.

The document also concluded that members of the central council “did not challenge Salameh’s decisions or oversee the related details.” The central council includes the governor, four vice governors and two government representatives, namely the director general of the Ministry of Finance and the director general of the Ministry of Economy and Trade.

Salameh is further criticised for overseeing a number of “illegitimate commissions totaling $111 million” during the period assessed. These commissions were funneled through a complex network, involving entities like Forry Associates, a company linked to Salameh’s brother. The investigation uncovered questionable practices, including commissions charged to commercial banks without any corresponding services rendered.

The news comes after the US Treasury last week announced sanctions on Salameh, as well as his son Nadi Salameh, brother Raja Salameh, assistant Marianne Howayek and friend Anna Kozakova.

The $111 million amount complements the continuing examination of European investigators relating to suspicious commissions totalling $330 million that were funnelled into Forry Associates from 2002 to 2016.

Calls for action

The report’s findings shed light on the factors contributing to Lebanon’s ongoing economic crisis. The combination of questionable financial practices, lack of transparency, and inadequate oversight has exacerbated the country’s financial woes. The central bank’s mismanagement, as highlighted by the report, has played a significant role in the devaluation of the national currency, ballooning deficits, and increasing inflation.

The release of the preliminary forensic report has triggered calls from civil movements to urgently address the systemic issues within Lebanon’s central bank, while numerous Lebanese politicians (including caretaker Finance minister Youssef Khalil) have called upon the judiciary to conduct an investigation and urged the parliament to take action.

Commenting on the report, the IMF said that addressing these concerns is crucial for restoring confidence in Lebanon’s financial system and laying the groundwork for economic recovery.