Chronicle of the Middle East and North Africa

Forensic Audit: A dream of Forbidden Truth

Forensic Audit
A picture taken on November 11, 2019, shows an ATM that has been sealed by Lebanese anti-government protesters in the capital Beirut during a rally against the banking system. Patrick BAZ / AFP

Ali Noureddine

Since Lebanon entered the tunnel of economic collapse, quite a few technical financial terms have surfaced in the lexicon of Lebanese political life, foremost of which is the phrase “forensic audit” of the Central Bank. This audit track, which the Lebanese Cabinet approved on March 26, 2020, was supposed to be the primary tool for dissecting the Central Bank’s budgets, understanding the type of losses it incurred, determining responsibilities and identifying the causes of the banking collapse that obliterated the deposits and savings of the Lebanese. 

In fact, many in Lebanon awaited this particular audit in order to ascertain the accuracy of analyses that pointed to organized frauds involving banking operations during the years preceding the collapse. Since the course of economic recovery will inevitably be based on some form of distribution of losses resulting from the collapse, in addition to distributing the cost of the financial correction process, waiting for the outcome of this audit was necessary to devise financial plans according to the size, quality and causes of losses that the detailed audit of budgets would reveal. 

However, more than a year and nine months since Cabinet’s approval of the audit process, and despite the commissioning of the international auditing company “Alvarez & Marsal” to carry out this task this process, the firm has yet to start its work on the Central Bank. Over the months, obstacles that prevented the company from conducting its work appeared over and over again, denying the company the information it needed to carry out the forensic audit contract and halting its work despite the presence of a government decree requiring it to carry out this task. 

The end result of this is that more than two years after the financial collapse, the Lebanese remain in the dark regarding the secrets of the Central Bank accounts and the beneficiaries of the operations that led to the banking system’s losses. The great irony today is that the Lebanese government has begun to devise a financial recovery plan without the benefit of a comprehensive and objective audit by a neutral party that would allow it to understand the path that led to the banking crisis, in light of significant skepticism regarding the data provided by the governor of the Central Bank.

At the beginning of 2022, the Parliament approved the law on lifting banking secrecy to enable Alvarez & Marsal to circumvent such barriers in its mission to conduct a forensic audit, expires. Consequently, since the company has yet to start the audit process as it has not been able to obtain the information it needs, it is expected that this track will return to square one this year.

The company might even decide to withdraw from this mission permanently, noting that it had previously taken such a decision to terminate its contract with the Lebanese state for the same reason before the government signed a new contract pledging to provide the information Alvarez & Marsal needed.

All these developments open the file of forensic audit wide open at the beginning of 2022. The repercussions of derailing the forensic audit process will not be limited to depriving the Lebanese of their right to know the facts of the banking collapse or to formulate a poor financial plan that is not based on a comprehensive and objective audit of bank accounts. Rather, the most damaging consequence lies in the loss of credibility on the international front for any financial recovery plan that is not coupled with an audit of this type. 

This is especially true since the comprehensive and detailed audit of the budgets of the Central Bank represented from the beginning a prerequisite for agreeing to a loan program for Lebanon, with all concerned foreign countries adamant that Lebanon must implement this process as a reform condition before any significant aid or international cover for Lebanon’s financial plans is provided.

“Forced is your brother, not a hero.”

From the very start, Lebanon’s leaders had no interest in carrying out such a detailed audit of the Central Bank’s accounts, especially if the purpose of the audit was to review the dubious operations that preceded the financial collapse and to reveal the identity of those involved in some of these operations, which pumped fictitious profits for the benefit of bank owners in return for accumulation of losses in the balance sheets of the Central Bank – these operations were described as “financial engineering.” 

It should be noted that such operations played a major role in the depletion of customers’ dollar deposits, which banks deposited with the Central Bank, which led to the subsequent collapse of the banking system. In all cases, and as it is well known, the problem in Lebanon has always been the intertwined interests of the political class and the big influencers in the financial system, which explains the desperation of the political class to obstruct any scrutiny that would expose these operations which took place between the banks and the Central Bank.

An observer may therefore wonder why Lebanese authorities agreed to the financial audit process if they were not keen to have an audit conducted in the first place, and since from the beginning, they had every intention to later obstruct this process.

In short, the authorities’ approval of the forensic audit process was merely a concession to external pressures, specifically pressure from the International Monetary Fund, which insisted on conducting a comprehensive audit of the Central Bank’s figures, to accompany any negotiations that Lebanon would participate in to obtain a loan from the Fund. 

The approval of the forensic audit track in March 2020, with the Lebanese state failing to pay its debts, and its tendency to negotiate with the IMF over a loan program, is possibly just an indication of the link between the forensic audit process and external pressures. The audit later became part of the reform demands imposed by the European Union, France, Britain, and Germany, which are precisely the parties from which Lebanon had hoped to obtain loans, aid, and investments after entering into a program with the IMF.

Simply put, the authorities dealt with forensic audit according to the Arabic idiom “Forced is your brother, not a hero,” which means, “To do something with reluctance,” and initially approved this process. After the assignment of Alvarez & Marsal, the Central Bank and political class sought to reduce the scope of information submitted to the company, with the aim of restricting the audit to a preliminary and superficial report that would not delve into the details of previous crimes, in the hope that international bodies would be satisfied with this report.

However, contrary to what everyone expected, Alvarez & Marsal has refused to carry out an audit in such a dubious manner in order to preserve its international credibility as a respected financial advisor. Thus the launch of the audit process has been held up to this day.

The importance of forensic auditing and ways to obstruct it

A forensic audit differs greatly from a regular accounting audit, which all companies routinely perform on an annual basis. The regular accounting audit is satisfied with reviewing the assets that hold accounts of financial operations and the method of recording expenses, revenues, assets, and liabilities to ensure that optimal accounting standards are followed by examining samples of accounting operations.

In a forensic audit, however, the company in charge of conducting the audit goes beyond numbers and restrictions to search for signs of any possible corruption or graft behind these operations by examining the reasons behind them, their beneficiaries, and the possibility that they involve a conflict of interest or circumvent applicable laws.

In other words, a forensic audit seeks to ascertain the possibility of fraud behind the budget numbers, even if the principles of preparing the budgets appear to be in order from a pure accounting point of view. Precisely for this reason, forensic audit firms often analyze operations carefully, rather than merely reviewing small samples of them, as in a regular accounting audit.

For all these reasons, as soon as Alvarez & Marsal was commissioned to conduct the audit in 2020, the obstruction process began on the part of the Central Bank, which refused to provide the firm with the information it requested using the banking secrecy law as a pretext. This came despite the fact that, as the Legislation and Consultation Commission, the Bar Association, and the Justice Ministry confirmed at the time, the banking secrecy law did not cover the accounts of the Central Bank that were subject to audit, and its effects were limited to the accounts of bank clients that had nothing to do with the forensic audit. 

Therefore, it was clear that the issue of bank secrecy at that stage was just a pretext without a legal basis employed to evade the implementation of the forensic audit contract or at least limit the scope of information provided to the auditing company. In the end, after Alvarez & Marsal failed to obtain the information it needed to implement the contract, the company decided to withdraw from this process and terminate its contract signed with the Lebanese state in November 2020.

In late 2020 Parliament passed a law under international pressure to suspend banking secrecy for the purposes of forensic audit for a period of one year from the date of the law’s adoption. The law aimed to suggest the presence of legal facilities to persuade Alvarez & Marsal to return to the forensic audit path for fear of European sanctions that could be imposed on those responsible for obstructing this audit in Lebanon. 

Indeed, the company returned to the forensic audit track after the law was passed and signed a new contract for this purpose with the Finance Ministry. However, the Central Bank once again sought to evade the firm’s requests, while throughout 2021, the Lebanese state stalled the procedures required for implementing the contract it signed with Alvarez & Marsal. Thus, the year 2021 passed, and with it, the deadline for lifting banking secrecy for the purposes of the forensic audit without the company being able to start the task of auditing the budgets of the Central Bank because it lacked the information it required to accomplish its mission.

As a result, Alvarez & Marsal is again on the verge of deciding to withdraw from its mission in Lebanon after the law that gave it the cover it needed to face the Central Bank’s pretexts expired, meaning the bank will return to its former array of excuses for not handing over information. 

With Alvarez & Marsal’s withdrawal, Lebanon will be in a difficult position in its negotiations with the International Monetary Fund, which has so far insisted on linking any future financial plan for Lebanon to a detailed audit of the Central Bank figures.

Perhaps more importantly, the dream of the Lebanese to discover the truth behind the maneuverings in the banking system, before and after the collapse, will remain elusive after it became clear that there is a tangled mess of secrets in the budgets of the Central Bank that everyone wants to hide from the eyes of public opinion and from financial audits.

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