Salameh's arrest what do we know so far??

Lebanon's former central bank governor, Riad Salameh, was arrested in Beirut on Tuesday september 3rd over alleged financial crimes linked to a brokerage company, three judicial sources said, his first arrest after years of accusations at home and abroad. He will be held for four days as a "precautionary arrest" before the case is transferred to the Beirut public prosecutor, another judicial source said.

OPTIMUM INVEST affair scandal has been disclosed following an independent commission report’s disclosure of a USD 8 billion Ponzi scheme related to Lebanese debt papers. The magnitude of this scheme is astonishing, with 45 meticulously engineered, multi-billion trades over 3 years, all adhering to the same complex script. It was a meticulously designed plan by BDL to conceal its losses and enrich a select few using public funds. The scheme, disclosed by the Central Market Authority (CMA) in 2015 and a report by Kroll’s forensic unit last week, indicates that Optimum Invest SAL, a Lebanese brokerage firm, received special favors from former Central Bank Governor Riad Salameh on illicit commissions for trading. Auditors have characterized these as “extravagant” irregularities, “breach of trust,” “conflicts of interest,” and “irregular transactions.” In a written statement on its website, Optimum Invest denied all allegations of wrongdoing.

Optimum's CEO Reine Abboud told Reuters by phone that the company had not been present at the hearing and heard about the arrest through local media.

Salameh, 73, was the bank governor for 30 years but his final years were marred by charges of financial crimes, including illicit enrichment through public funds, by authorities in Lebanon and several Western countries.

Legal experts say his indictment and temporary detention Tuesday by Lebanon’s public prosecutor are unlikely to result in extradition to France, where he also holds citizenship. Lebanese law generally prohibits extradition of its citizens. Lebanese analysts say that given the access Salameh has to information about the financial activities of the country’s most powerful people, authorities are likely trying to prevent his extradition and could drag out legal procedures for years.

“Throughout all these years, Salameh did not operate independently, but with the consent and collaboration of Lebanon’s political elites,” said US David Schenker, who is now a fellow at the Washington Institute for Near East Policy, a think tank. “It’s like the mob’s bookkeeper has been apprehended and is awaiting trial.

The affair represents a scandal for appointed auditor Alvarez & Marsal, which only uncovered 2 of the 45 trades in its subpar report; Deloitte, the auditor who didn’t raise any red flags; and the current BDL management for failing to investigate. The fact that Alvarez & Marsal uncovered only two out of 45 such trades reflects poorly on its work quality and forensic audit report. That Deloitte didn’t raise any red flags about these trades is a damning indictment of the current state of the auditing industry.

The 2015 audit of Optimum was conducted by the Capital Markets Authority’s (CMA) financial control unit, an independent regulatory body that focuses on financial market practices in Lebanon.

It’s noteworthy that the Lebanese government hired Alvarez & Marsal, a New York-based professional services firm, to conduct a forensic audit of Lebanon’s central bank (BDL) accounts since 2015 amid claims of mismanagement in the corruption-plagued country.

At the time, six companies tendered for the job after refusing to contract Kroll due to its alleged links with Israel, with whom Lebanon is at war. The Cabinet opted for Alvarez & Marsal, although the cost of contracting the firm was higher than that of contracting Kroll. It planned to have a team in Lebanon consisting of two directors and nine associates at a cost of USD 2.2 million, while Kroll’s financial offer was only half a million. Notably, Lebanon’s political class fears the forensic audit because it could implicate political parties that have shared power since 1997. The report has emerged after claims of strong resistance within the CMA to release it to the relevant authorities.

Window Dressing or Fraud?

Investigators found that the intermediary levied a 0.38 percent commission each time a commercial bank bought financial instruments from the central bank, without performing actual services in exchange. According to Jean Riachi, chairman of FFA Private Bank, the stated objective (by BDL’s central council) of the 45 transactions, termed back-to-back, was to generate retro commissions for BDL to offset losses on its financial engineering operations – some refer to them as Swaps. These are neither swaps nor repos nor even back-to-back transactions that normally involve three parties, including the intermediary.

Hence, BDL would lend the money for Optimum to buy the bonds with the full futures coupons, and BDL would buy them back without the coupons. The coupons would return as “commissions,” with only two of the 45 transactions involving such “commissions” being flagged by A&M as the money landed in a transitory account then paid to third parties. “My best guess: the original purpose of these sham transactions was indeed to cook the books of BDL but ‘someone’ was tempted to help himself along the way,” he said. His other guess is that all the other 43 transactions were indeed booked in BDL’s profit and loss statement.

This recalls transactions between banks and BDL in 2016, where banks could book immediate profits by selling their Treasury Bills in LBP to BDL at nominal value plus 50% of the remaining coupon value. However, BDL bought the Treasury Bills at nominal value plus the full value of future coupons, and simultaneously requested banks to pay it 50% of the cumulative future coupons as “commissions,” likely recording these as revenue for the year. Therefore, it is suggested that this represents clear potential window dressing by BDL and implies that BDL may have attempted to conceal its losses in Lebanese pounds by fabricating retro commissions while deferring losses or revenue shortfalls.

Essentially, by engaging in such economically meaningless actions, BDL was able to recognize revenues upfront that should have been spread over subsequent years. Thus, the “scandal” might revolve around another accounting maneuver rather than a straightforward embezzlement scheme. Hajjar, the prosecutor, said in a brief interview that Salameh was subject to a four-day detention and could be referred to an investigating judge who would either formally arrest or release him. He declined to discuss specific allegations. As photos circulated Tuesday of Salameh in custody, in a tie and white shirtsleeves, many found it hard to believe that the former central bank governor — once considered untouchable, a fixture of Lebanon’s political elite — would see jail time.

Salameh’s reputation had been one of a financial magician who kept the economy and currency afloat in a turbulent Lebanon, but it frayed badly as the country was gripped by a financial crisis beginning in 2019 that sparked triple-digit inflation and the collapse of the currency, and left people unable to access their money in banks.

According to banker Mike Azar, BDL booked a massive profit without any economic substance, just by round-tripping securities. BDL routed this profit (or part of it) to a “consulting account” allegedly used for under-the-table payouts. So not only has BDL fabricated paper profits, but it has also converted those accounting entries into a slush fund for shady disbursements. The round-trip securities trades were just a smokescreen to justify BDL booking “profits” and moving some of BDL’s own money into the “consulting account” slush fund to pretend it’s generating profits to conceal actual losses.

Despite facing charges in Lebanon, arrest warrants in both France and Germany and an Interpol Red Notice, Salameh had never previously been apprehended.

If the case continues, it would mark a rare example of Lebanese authorities bringing a top figure to account, in a system which critics say has long shielded the elite.

Caretaker Prime Minister Najib Mikati told pan-Arab broadcaster Al-Hadath that the government would not intervene in the case. Salameh worked closely with the Lebanon's top politicians throughout his tenure. This led critics to doubt whether the Lebanese judiciary - where appointments largely depend on political backing - would seriously investigate him.

UNDER SANCTIONS

Two of the judicial sources told Reuters that Salameh was arrested following a hearing at Lebanon's justice palace about the central bank's dealings with Optimum Invest.

They said Optimum had dealt with Lebanon's central bank to buy and sell treasury bonds and certificates of deposit with quick turnovers to make major profits. Lebanon's caretaker justice minister Henry Khoury told Reuters that he did not have details of the file. "There is no doubt that the Public Prosecutor did what was required of him and interrogated former governor Riad Salameh," he said. After taking the helm of the central bank following a devastating 15-year civil war, Salameh built a reputation as a competent steward of the financial system and was once seen as a possible president.

After he left office, the United States, Britain and Canada announced sanctions against him, accusing him of corrupt actions to enrich himself and his associates - allegations he also denied at the time. His fall mirrors that of Lebanon's financial system, which collapsed five years ago and now faces an appraisal by a financial watchdog in the coming weeks that could place it on a "grey list" warranting additional scrutiny. “Salameh abused his position of power, likely in violation of Lebanese law, to enrich himself and his associates by funneling hundreds of millions of dollars through layered shell companies to invest in European real estate,” a US treasury statement said, adding that Britain and Canada had also imposed sanctions on Salameh. The statement described a scheme in which Salameh used a shell company owned by his brother in the Virgin Islands to divert approximately $330 million from transactions involving Lebanon’s central bank. It said the stolen funds were “frequently transferred” to property management companies in several European countries, including France and Germany, both of which have issued arrest warrants for Salameh.

One of the main gap areas identified by the Financial Action Task Force was a lack of judicial action on alleged financial crimes. A diplomatic and a judicial source said they viewed Salameh's arrest as a potential attempt to try to show FATF appraisers something was now being done.

Yet to be answered: Who are the parties complicit in this money laundering plot? We might see a concerted effort to disguise the source/nature of funds, the use of a complicit intermediary, convoluted accounting to create a veneer of legitimacy, and the ultimate funneling of funds into a slush fund. Optimum Invest played along, serving as BDL’s tool and complicit intermediary. Its real benefit seems to have been currying favor with the BDL and securing its role as a preferred broker for other lucrative deals like the repos (and perhaps other benefits we don’t yet know about).