AUB IFI: Short Analysis of A&M’s BdL Forensic Audit

Last week, a report by the Issam Fares Institute (IFI) at AUB, “THE FORENSIC REPORT OF THE BANQUE DU LIBAN: A SHORT ANALYSIS”, prepared by the Associate Fellow Dr Sami Geadah, was published. The report provides a brief but succinct analysis of Alvarez and Marsal’s (A&M) BdL Forensic Audit.

According to the report, the “forensic audit investigated whether financial transactions were used for their intended purpose; whether prices paid by the BdL were unduly inflated; whether payments were made to fictitious companies; and whether there were inappropriate reporting schemes or misuse of funds. It was also tasked to examine changes in the BdL balance sheet and composition of its foreign exchange accounts; examine the ‘financial engineering’ operations and related movements in commercial bank accounts. The governance and controls assessment reviewed the internal controls at the BdL, including in comparison with other central banks, and made relevant recommendations”. As important, “the assessment was initially expected to take 12 weeks, but it took almost three years to complete, after the first contract to conduct it was signed with the government. The authors note that repeated delays in the provision of information led to a pause of the review at several intervals. The assessors were not given access to BdL premises, and interaction with BdL staff was restricted to written questions and answers, which limited the possibility for follow-up questions and to explore issues in depth”.

The report lists A&M’s major BDL assessments as follows:

• “BdL’s financial position and its foreign exchange holdings declined sharply during 2015-2020, and that this deterioration was obscured by unconventional accounting methods. Concerns about the BdL’s accounting were raised many years prior to 2015; in fact, there were several estimates that the BdL’s capital and net foreign asset positions were negative some time ago. Adjusting the BdL financial statements based on conventional accounting methodologies, the report estimates the net equity position of the BdL to be a negative USD 51 billion at end-2020. Its foreign exchange position is also estimated to have become highly negative, which was accompanied by a shift in commercial bank foreign exchange assets from abroad to the central bank.
• “BdL was run by the governor with little effective oversight or accountability. This was reflected in several aspects of the BdL’s operations, including its accounting, financial engineering, and expenses. As such, “the Central Council (CC) has been ineffective in its duties. It offered no challenge to the governor, raising issues related to its competence, mandate, and independence… and here was indeed a failure to effectively use the CC. The minutes of CC meetings rarely show any dissent with the governor… Perhaps even more surprising than the general acquiescence of the governor’s actions by the vice governors is the ineffective government supervision”.
• “BdL used unconventional accounting methods, which hid its losses and negative equity position. A large part of this relates to its accounting for seigniorage (the financial benefit that a central bank derives from issuing a currency) and deferring the cost of its financial engineering operations”.
• “Financial engineering operations were costly to the BdL, given the premiums that were paid to acquire treasury bills and to encourage the placement of deposits in Lebanese lira. The data shows that almost all banks benefited from financial engineering’. The assessment also noted that “there were irregularities in the way consulting commissions related to the financial engineering operations were developed”.

In terms of recommendations by A&M’s Forensic Audit, the report mentions three important ones:

First, there should be a “focus on governance, namely on strengthening institutions and regulations. While there is certainly a need to strengthen institutions, there seems to be a broader issue of a culture of non-accountability, which may go well beyond the BdL and beyond laws and regulations. There are mechanisms already in place for the government to supervise the BdL that it did not use. This lack of accountability may be symptomatic of other state institutions in Lebanon. Possible ongoing examples are progress in dealing with the Beirut port explosion and the electricity sector”.

Second, as the report covered the years 2015-2020 an “assessment of the BdL during more recent years – particularly related to the Sayrafa foreign exchange platform and the policies that led to the massive decline in foreign exchange reserves – would be highly relevant to addressing concerns related to its handling of the crisis”.

Third, several areas need further investigation, “including with regards to the financial engineering operations and BdL commissions. These areas could be investigated with better access to information from the BdL, especially given public concerns about the motivation and beneficiaries of some of the BdL’s actions”.