New fraud allegations hit Lebanon's central bank over $8 billion scheme

Alleged scheme involves 'sham transactions' between Lebanon's central bank and its lesser-known broker, Optimum, leaked audit papers show

Monetary policies of Lebanon's central bank have been blamed for the country's economic crisis. AP

Leaked financial disclosures suggest that Lebanon's central bank allegedly engaged in transactions with a Lebanese broker to mask hefty financial losses from unsustainable monetary policies.

The 45 transactions between 2015 and 2018 were flagged in a confidential audit conducted by the international forensic audit firm Kroll and seen by The National. It details the relationship between Banque du Liban (BDL) and Optimum Invest SA, a Lebanese broker.

BDL and the broker allegedly engaged in “round-tripping” of transactions, generating $8 billion in paper gains for the central bank by booking all potential future interest payments as current revenue without creating any economic value, according to the audit.

Financial experts have described the alleged transactions as a "fraud scheme" to obscure losses, leaving many questions unanswered. Two of the transactions have already been mentioned in a previous Alvarez & Marsal audit as they raised suspicions of money laundering.

“These findings are extremely shocking,” Henri Chaoul, a former Finance Ministry adviser, told The National. “This type of transaction would qualify as a sham transaction by any international standards."

The bank's policies were widely blamed in Lebanon for the country's deep economic crisis in 2019.

A western diplomat who has seen the audit told The National that the magnitude of the alleged scheme, representing about 15 per cent of the country's gross domestic product, and the lack of any alarm being raised, was “truly astonishing".

“This suggests a systemic pattern of fraud designed to offset losses generated by reckless monetary policies, with a scale significant enough to potentially destabilise an entire country," said the diplomat.

An inquiry into Optimum has already been opened in Lebanon. It is led by Ghada Aoun, a divisive judge who has previously investigated several cases of financial corruption.

A BDL source confirmed to The National that the banking regulator is looking into allegations of falsified financial statements.

The revelations come amid escalating calls for intensified scrutiny of irregularities within the Lebanese financial sector, which collapsed in 2019 leaving depositors locked out of their savings, destroying the value of the local currency and plunging 80 per cent of the population into poverty.

The downturn caught many off guard: for decades, the banking sector maintained an image of resilience, with former BDL governor Riad Salameh, now suspected of embezzlement in Europe, praised as the “magician” who kept the country's economy strong through wars and instability.

Five years into the crisis, pieces of the puzzle are now falling into place, uncovering the reasons behind what has been described by the World Bank as one of the worst economic disasters since 1850.

Mr Salameh, whose term as the BDL governor ended in July, did not answer The National's requests for comment.

When asked about these transactions, Optimum said that they "are obligated to respect the confidentiality imposed in our contract with Kroll".

It referred to its recently published statement stating that the Kroll audit “found no evidence of wrongdoing or illegality” on its part.

“All services rendered by Optimum to the BDL were within the competence of Optimum and conducted at arm's lengths, at the request of the BDL and on terms stipulated by the BDL,” the statement said.

'Special deals'

Optimum commissioned Kroll to produce the audit after the Beirut-based broker, established in 2004, came under scrutiny for “extravagant” irregularities in two previous audits.

Notably, in a 2015 audit, Lebanon's Capital Markets Authority's (CMA) financial control unit uncovered alleged “conflicts of interest” as they found that Optimum's former chairman, Antoine Salame, had close business partnerships with a senior director at the BDL, Raja Abou Asli.

The Kroll report said the “unusual” transactions, referred to as the “special deals” in the audit, were established through contracts signed between Optimum and the BDL through its governor. It added that all deals were executed through an Optimum current account with the BDL, which was operated directly by the central bank.

Experts say the transactions mean that BDL would loan funds to Optimum to buy Treasury bonds and then directly buy them back at a significant premium. The premium, equal to the bonds' future interest payments, was then mostly refunded to BDL as a commission, generating $8 billion in paper gains for BDL, the experts explained.

These alleged “round-tripping” transactions merely shuffle cash between accounts at the BDL and have no substantial economic value other than inflating the bonds. The Kroll audit said Optimum's brokerage fees reached more than $570,000.

According to the audit, the operations seemed aimed at offsetting losses caused by so-called “financial engineering”. This refers to alleged costly manoeuvres by the BDL to attract dollar deposits, maintain the currency peg and fund the government's spending.

These operations, later described as an alleged “Ponzi scheme” after the economy collapsed, led to losses on BDL's balance sheet surging after 2016. The losses quadruped in under two years, leaving the institution with little means to realistically compensate them.

Optimum's chairman, Mr Salame, told Kroll that “he believed his firm was simply assisting the central bank in implementing its well-publicised financial engineering strategy".

The brokerage company claimed in the audit that it was unaware “of the purpose of these transactions, how they were processed on BDL's side, or what they were used for".

Because the BDL governor was at the time an “outstanding figure”, and “their ultimate regulator”, Optimum said it “carried out the transactions as instructed”.

Mr Chaoul argued that the BDL is not the only entity to be held accountable. “Auditors from both sides of the transaction found that $8 billion was not a big enough amount to prompt disclosure. There is an urgent need for holding them accountable."

Deloitte and Ernst & Young, which had provided sign-offs on the BDL financial statements for decades, did not flag the alleged scheme.

Neither Deloitte nor Ernst & Young responded to The National's request for comment.

The 2023 Alvarez and Marsal audit on the management of Lebanon's central bank previously flagged two of the 45 transactions as “highly irregular,” allegedly resulting in $111 million in “illegitimate commissions.”

Auditors suspected this was a continuation of the Forry Associates Ltd scheme, another broker allegedly used by Mr Salameh to channel $330 million of public funds, which ceased activity the same year BDL transactions with Optimum began.

Experts now suggest that if the $8 billion worth of "sham transactions" were primarily intended to conceal losses, a portion of the "paper" profits may have also been diverted as commission to third parties.

Optimum said it “was unaware that the funds raised through these trades were used by the BDL to pay consulting commissions to third parties", according to the Kroll report.