Embezzlement at the Lebanese central bank: Did auditors overlook alleged fraud?

Auditing under increased scrutiny amid allegations of misconduct

Lebanon's central bank building in Beirut. Reuters

As investigations into alleged misconduct at the Banque du Liban continue, questions are arising regarding the failure of local and international auditors to raise the alarm on potential financial fraud.

Lebanon's central bank Governor Riad Salameh is suspected by at least six European countries of orchestrating an embezzlement scheme, which consisted of making commercial banks pay commissions to his brother's company, Forry Associates Ltd, without them knowing, each time they bought instruments from the central bank.

Both brothers deny any wrongdoing.

For over a decade, this alleged embezzlement scheme went unnoticed by Deloitte and Ernst & Young, which had provided sign-offs on the central bank's financial statements without raising any red flags about potential irregularities in the “clearing” account at the BDL where the Forry commissions were deposited.

More recently, Mr Salameh has also faced allegations of falsifying banking statements he submitted to the judiciary to account for his wealth, while his personal accounts at the BDL were reviewed and given the green light by an international audit firm.

The small Mediterranean country finds itself amid a larger international story on global auditing firms.

This came after accounting scandals involving the Big Four accounting firms cast doubts on their ability to uphold quality standards and maintain their independence.

In Lebanon, it is not one firm or one bank but the whole financial system that collapsed without warning from auditing firms. The crisis exposed losses of almost $70 billion wiping depositors' savings out and triggering an uncontrolled inflationary spiral, which plunged more than 80 per cent of the population into poverty.

Representatives from Ernst & Young, Deloitte, and BDO, Semaan, Gholam & Co, were questioned as witnesses by European prosecutors in Lebanon last week as part of their investigation into the BDL embezzlement scandal.

These three auditing companies, all of whom have reviewed accounts at the central bank, did not respond to The National's request for comments on irregularities.

The seriousness of the accusations has reportedly prompted French judges to notify Mr Salameh — ahead of his May 16 hearing — of their intent to press preliminary fraud and money laundering charges.

Hearings that revealed that auditors knew about the existence of a “confidential account” at the central bank, along with judicial documents and audit reports, give an insight into how BDL slipped through the net.

After months of silence, the Ministry of Finance confirmed to The National that the BDL forensic audit, intended to bring clarity to the matter, has once again been delayed.

A 'confidential' account

At least $326 million worth of commissions were deposited between April 2002 and October 2014 in a “clearing” account at the central bank, which was then allegedly funnelled to Europe through complex layering operations to buy high-end properties in Europe belonging to Salameh and his relatives.

Mr Salameh claimed that this account was accessible to BDL auditors, the local offices of Deloitte and EY, and “was operated transparently”.

“This dedicated account was naturally accessible to auditors of the BDL, who raised questions about it for the years 2016 and 2017”, wrote the Swiss Lawyers for Mr Salameh in a letter to the judiciary in 2021.

However, the auditors claim differently.

Ramzi Accaoui, a representative of EY, said in a 2021 hearing before the Lebanese judge in charge of a parallel probe on the Forry case, that the governor declined to give the two auditors access to the account due to “confidentiality”.

The two auditors considered the response “satisfactory”, he added.

According to Walid Nakfour's hearing, another auditor for EY, the governor asked them to exclude the account from the “scope of the audit,” and, as a result, he said, auditors did not mention it in their final report

It remains unclear why auditors waited until 2016 to request clarification about an account that was opened in 2002, as neither Deloitte nor EY responded to a request for comment.

“There is no reason why this account would be deemed confidential, and why auditors would not disclose that they were denied access to it in their report,” said a banking and financial expert.

“Without oversight from an audit committee, the governor had the complete prerogative to define the auditing scope, but this had led to abuses against fundamental principles of good auditing practices.”

The two firms quit in 2019, amid criticism that their sign-off on BDL statements, which did not adhere to International Financial Reporting Standards and International Accounting Standards, allowed the central bank to conceal billions of dollars in losses.

“There has been some complacency by the BDL auditors, who are appointed by the central bank's management. This created a conflict of interest as they will avoid producing negative reports, which were anyway kept secret, against the one who pays their fees”, said Toufic Chambord, a former law professor at the American University of Beirut.

Another of the Big Four firms, KPMG, was appointed in 2020 to audit BDL's account, but their findings have yet to be made public.

The self-audit

Recent reports indicate that the French judiciary suspects Mr Salameh of fraud on the grounds of falsifying banking accounts, as well as money laundering.

Investigators looked into bank accounts allegedly held by Raja Salameh at Al Mawarid on behalf of his brother, the governor, with exceptionally high returns between 1993 and 2019.

But they suspect they have been falsified in an attempt to cover up allegations of illicit enrichment.

According to the Salameh brothers' hearings with the Lebanese judge, all the withdrawals made from these accounts were deposited into Riad Salameh's account at the central bank via checks and transfers.

Yet, the governor's personal accounts at the BDL have been reviewed by BDO, Semaan, Gholam & Co, the Lebanese partner of the International firm BDO, upon request from Mr Salameh to support his case.

The report, referred to as an audit by the governor and handed over to prime minister Najib Mikati in 2021 citing the “principle of transparency,” did not uncover any evidence of fraud.

The document, seen by The National, also stated that no public funds were channelled to Forry.

When asked why BDO Semaan did not detect any irregularities during their review, Antoine Gholam, a partner at the auditing firm, said in an email: “I am sure you can understand I cannot answer your questions.”

A key distinction is that, as revealed by Reuters, the document did not in fact “constitute an audit or a review made in accordance with International Standards on Auditing”, as per the engagement letter, despite Mr Salameh's characterisation of the document, and the firm's silence on the matter.

The long overdue audit

As allegations of mismanagement and corruption began to mount at the central bank, the Lebanese government commissioned consulting firm Alvarez & Marsal to conduct a forensic audit in September 2020.

The audit was plagued by delays and setbacks, amid political disputes and a lack of compliance by the central bank, which cited banking secrecy.

A&M quit a month after the initial agreement, and In September 2021, was commissioned again by caretaker finance minister Youssef Khalil.

The company were supposed to hand over a preliminary report in September 2022, but it has yet to appear.

Last week, the Ministry of Finance told The National that “according to (their) last correspondence with A&M, and due to a technical delay, the preliminary report should be finalised within a period of three weeks”.

Alvarez & Marsal did not answer a request for comment.

The forensic audit was “supposed to scrutinise the financial transactions with regard to the law, to shed light on how and why depositors’ funds were lost”, said Sibylle Rizk, director of public policies at advocacy group Kulluna Irada.

But experts have since lowered their expectations, stressing that Lebanon has signed a contract for $2.7 million, “that works against its own interests”, said Lebanese lawyer Karim Daher.

“The contract with A&M only encompasses a preliminary report totally independent from a prospective final report, which would need a new contract — this is very rare in comparison with similar missions,” he said.

The firm, he added, has also required that if the “report is approved for use as evidence in a legal proceeding”, any reference to their name “must be removed” and that they assume no responsibility for any conclusions flowing from the preliminary audit report.

“The contract also does not link payment to results since, as payment is not contingent upon the outcome of the preliminary report,” he added.

“The concern is that this may lead to superficial reports that tick the boxes, exonerating potential wrongdoers.”