Local governance Lebanon

Forensic audit in Lebanon: Goodbye to accountability?

Sabine El Hayek, Legal Research Officer at DRI Lebanon examines the impact of consultancy firm Alvarez and Marsal’s (A&M) decision to withdraw from conducting a forensic audit on Lebanon’s central bank, citing a lack of cooperation from the Lebanese authorities. This comes at a time when Lebanese politicians are being accused of systematic corruption and malpractices.

The central bank initially had until 3 November 2020 to turn in the required information for A&M to proceed with the forensic audit over its accounts. Even though caretaker Finance Minister Ghazi Wazni ensured that A&M’s mission would be extended for three months to give the central bank another chance to comply with its contractual obligations, the company decided to withdraw nevertheless.

The central bank invoked the 1956 Banking Secrecy Law to justify its stance, claiming that Lebanese banks are subject to professional secrecy. It also resorted to Article 151 of the Code of Money and Credit which “prohibits any current or former central bank employee, in any capacity, from disclosing the secrecy established by the law of 1956. This obligation covers all information and facts concerning clients of the central bank, banks, and financial institutions.” However, if the central bank’s intention were to cooperate with the company, it would have lifted the secrecy from its accounts from the start for the purpose of the forensic audit. The forensic audit aimed to reveal embezzlement, money laundering, insider trading, and corruption operations.

According to the government’s contract with A&M, the Preliminary Forensic Audit Report would have cost Lebanon 2,100,000 USD, covering a 10-week period from the commencement decision up to the submission of the report. A&M is entitled to benefit from a fixed-break fee of 150,000 USD if the company is unable to start its work because it did not receive adequate information from the central bank. A&M received 40% of the fee upon signing the terms of the engagement, payable before beginning service delivery.

Based on a legal memorandum prepared by the Committee of Legislation and Consultations at the Ministry of Justice (No. 981 of 22/10/2020), caretaker Justice Minister Marie-Claude Najm stressed that banking secrecy does not apply to state accounts, nor to the central bank’s accounts, as this information was made public under the Access to Information Law (No. 28/2017). While secrecy is limited to private accounts, these may still be audited by using encryption codes and anonymity. Furthermore, banking secrecy cannot and should not be used against the public interest or to protect criminal wrongdoings.

What are the solutions to the banking secrecy issue?

A headway is still possible. According to Karim Daher, President of the Lebanese Association for Taxpayers’ Rights, “MPs should file a draft law made of one article stipulating that the forensic audit on the central bank’s accounts is mandatory and does not violate banking secrecy.” On 19 November, the parliamentary bloc “The Strong Republic” announced their intention to introduce such a draft law made for A&M to accomplish its mission, and for a one-year duration.

To exhort the MPs to adopt this law, “the President of Lebanon could send a letter to the Parliament, following Article 53 (§10) of the Constitution, and state the urgency of the forensic audit and its importance in curbing corruption,” he said in a recent interview on the Sawt El-Shaab radio channel. On 24 November, President Aoun addressed a letter to Parliament urging policymakers to cooperate and conduct the forensic audit because it is a key condition to achieve the needed reforms and implement the aid programmes.

The vote should be done by a show of hands and be live-streamed. Although this does not increase the chances of passing the law, it strengthens transparency in compliance with the Access to Information Law and allows decision-makers that are obstructing the forensic audit to be held publicly accountable.

What impedes the Special Investigation Commission from acting?

As per the “Curbing Money Laundering and Terrorism Financing Law” (No. 44/2015), the Special Investigation Commission has a judicial status and is entitled to lift banking secrecy. It may request so to review suspicious transaction reports and conduct financial investigations in coordination with foreign and local competent authorities. The Commission is not subject to the central bank’s authority.

Nevertheless, the Commission could have been the competent authority to assist forensic auditors in conducting their mission, had its role not been undermined. The current head of this Commission is the governor of the central bank himself, which not only violates the Code of Money and Credit but also poses a major conflict of interest.

Given the urgency of the situation, DRI Lebanon recommends

  • Carrying out an impartial forensic audit on the central bank’s accounts to restore the solvency of public finances by providing the necessary tools for a credible outcome
  • Enforcing political and institutional reforms so that the recovery plan discussed with the International Monetary Fund to induce funds and assist Lebanon financially is implemented
  • Improving transparency and accountability to restore trust in Lebanese public administrations.
Tags: Corruption