The Ali Baba Mafia: An Insider Guide to Lebanon’s Financial Collapse

The Corrupt Ruling Cartel

Lebanon has been in a so-called Revolution or ‘Thawra’ since October 17, 2019 against bad governance, economic injustice and a corrupt ruling elite, referred herein as ‘the Cartel’. They transformed Lebanon into a severely corrupt country, a Narcos Lebanon scenario, a Cartel that is not necessarily trading drugs, but looting Lebanon. 

The Lebanese civil war ‘Warlords’ were legitimized at the Al-Taif Accords in 1992 and were given since then, the reins of power to be shared with their partners, and therefore total control of the country.

They have mismanaged the country and have instituted their cronies at all levels, corrupting all branches of government: executive, legislature, judiciary.

At the root of this is said to be the Lebanese confessional political system of power-sharing agreements between the elite representing different communities, in effect since independence in 1943. These individuals distribute wealth and services through clientelist networks that bind citizens to the ruling elite.

Such informal networks have hindered the development of regulatory state institutions to challenge rampant corruption and contributed to shrinking space for civil society.

In 2018 Lebanon ranked as 138/180 with a score of 28/100, on the Corruption Perceptions index, as per Transparency International, an indicator of the high level of corruption and lack of proper governance.

The current President and the caretaker Prime Minister, in their latest televised speeches have both acknowledged the extent to which corruption has run rampant, even during their tenure. Moreover, the head of most political parties have also acknowledged corruption as a major issue in governing Lebanon. Today, they are attempting to hijack the fight against corruption as theirs, while they should recuse themselves as they themselves the enablers.

Through their looting and mis-management, the Cartel have led the country to financial ruin.

The Banking System a Partner-in-Crime to the Dire Economic Situation

According to Infopro Research 160,000 jobs have been lost since October and 10% of companies have closed since, while hospitals are struggling to get supplies and stay afloat.

Lebanon’s has accrued a massive debt of c. $86 billion as of July 2019, 152+% of GDP, while the rating agency Fitch estimates a possible default on $88 billion, the third most indebted nation after Japan and Greece .

Till today even after so many investments and financial foreign aid, the country has no electricity supplied 24/7 (not to mention other basic services like reliable water supply, trash management etc…) while the state subsidizes this sector on average USD 2 billion per annum -- so if we count 20 years that would be around 40 billion US Dollars nearly half the current debt -- an illustration of the rampant corruption and extent of mismanagement.

If Lebanon's Central Bank and SIC do not fully investigate the transfers out of Lebanon, including the source of PEP money, this would be a breach of duty and prove they work in collusion with the corrupt political powers, at the expense of the People.

The Lebanese Central Bank (BDL) and commercial Banks through the Association of Banks in Lebanon (ABL) are coordinated, and seem to have colluded with the ruling Cartel, as “banks and politicians” both are benefiting from public debt service. In 2015, conflicts of interests ran amok as “politicians that own[ed] 45% of banks” would have had no interest in reducing government spending and in reducing public debt. The Lebanese feel further betrayed, as the Governor of the BDL had constantly assured the Lebanese that the financial situation was sound and went as far as to say that it was “top”, as recently as August 6th 2019.

In breach of their fiduciary duties towards their depositors, and driven by greed, the commercial Banks invested on average 6.1 x their capital in Sovereign Debt in a losing venture called the Lebanese Government, searching for high interest returns offered by the BDL. To illustrate, interests at commercial banks reached on July 2019, after caps were introduced, 12% on Lebanese Pounds and as high as 8% on US Dollars, although higher interests up to 14% were offered on minimum USD 5 million “fresh” inbound funds blocked for three years, while the Fed’s interest rate stood at about 2.25%.

The instruments, via the BDL, financed the ballooning trade deficits, Electricite Du Liban, and the wages of the staggering 300,000 civil servants, who were employed by the Political Parties against their votes and loyalty, through the endemic ‘feudal’ patronage system.

To keep the Lebanese Pound peg to the Dollar, the BDL introduced ‘financial engineering’ measures to uphold its value artificially at the expense of the needs of the Lebanese People, to the point that some have dubbed not only the BDL ‘financial engineering’ measures, but the economic system as a whole (with the Banks as complicit in) a giant ‘Ponzi’ Scheme.

Informal capital control measures are now being implemented, limiting the Lebanese from accessing hard earned savings. Limits have been imposed and restricted to necessary basic needs.

While some people struggle to access their deposits, those in power and/or associated to the ruling elite have supposedly managed to transfer some serious funds out of the country, a clear unfair discriminatory practise and unjust treatment of the Lebanese, and abuse of equitable treatment to all. As an example of nepotistic practices and conflicts of interests, some positions in the BDL are held by people affiliated and/or related or close to the political establishment.

A Long and Hard Struggle for ‘Real’ Change

In a serious quest for change to implement proper governance, the People have forced the resignation of the cabinet (on October 29) through peaceful and non-violent means. The popular revolt is asking for real change in governance (people and systems) via the formation of a new government of truly politically independent specialists.

People are seeking a new government with decree powers, to legislate (as Parliament is still in the hold of the ruling Cartel up until 2022) (i) for fair and truly representative elections, and (ii) for the independence of the judiciary (also here each political party have nominated their own proxy judges corrupting due-process), (iii) and for the return looted funds, demands that the Cartel will fight tooth and nail.

The potential donor countries at the CEDRE (Paris 2018) and GIS (Paris 2019) conferences to assist Lebanon, have withheld aid (i.e. : c.11 Billion US Dollars from CEDRE) until ‘real’ socio-economic reforms are instituted, starting with the formation of an “effective and credible government capable to meet the aspirations expressed by all the Lebanese that will have the capacity and credibility to deliver the necessary substantive policy package of economic reforms, and that will be committed to dissociate the country from regional tensions and crisis. It is urgent for the new government to be in place as quickly as possible”.

The Lebanese feel further betrayed, as the Governor of the BDL had constantly assured the Lebanese that the financial situation was sound and went as far as to say that it was “top”, as recently as August 6th 2019

In the Cartel’s ‘stickiness’ to power, it has connived to nominate a puppet Prime Minister, who at first look, seemed to answer the first demand of the Revolution, that of the formation of a fully independent government and PM.

The nominated PM is actually not ‘legally’ attached to any political party, he nevertheless did serve as previous Education Minister under the Mikati government (2011) and is considered to be a pro-Hezbollah candidate and by much of the foreign press.

The Cartel is attempting to ’dress up’ the future cabinet with qualified and respectable names to gain some legitimacy as a cover to receiving foreign financial aid -- a masquerade. So far indications show that the Free Patriotic Movement/Hezbollah alliance including Amal, who represent the Majority ruling coalition in Parliament, will form a one sided ‘8th of March’ Government disguised as one of independent specialists.

This is but a ‘trojan horse’ cosmetic attempt of “ticking the boxes” of the conditions-precedents set by donor countries (and the USA), who have asked for “credible” reforms, to gain external trust and therefore financial aid. The ruling alliance will still yield influence over the executive in contradiction to the will of the People and those of Donor countries, as the current political ruling alliance still controls Parliament, a ‘hijacked’ democracy.

Nevertheless, the ruling Parliamentary Majority alone cannot be held liable for Lebanon’s current socio-economic ruin. Their counter-parties in power (the Future Party, PSP, and others), are also explicitly or implicitly liable, as they also shared power, and jointly managed the country over the last 30 years. All of these players are avid at the long stalling games ( in government formation, etc…) and will claim that time has run out and that they need therefore to remain in power to ‘save’ the country, for security and other reasons, typical ‘pyromaniac fireman’ mafia like tactics.

Regardless, any attempt for serious change and reform will be very difficult, long, if not impossible to achieve.

Justice to be Served- Truths About the Out-Bound Transfers & Retrieving PEP Funds

During these difficult times, and while all Lebanese are struggling with their daily lives, especially after the informal capital control measures, access to deposits (today capped in some banks at USD 300 per week), and restrictions on transfers out of the country, there has been confirmation by a reputable economist and journalists that within the last 15 days, some major funds c. 2.5 Billion US Dollars were transferred out of the country, by 9 politicians and/or related parties, possibly to Switzerland, further straining much needed hard currency Bank reserves. According to Osama Habib of the Daily Star (TDS) 3 Billions US Dollars had already fled the country “before the eruption of the popular uprising”.

What needs to be done is to:

1. determine if such funds were transferred out, when, the amounts and to whom they belong (Politically Exposed Person PEP or otherwise).
2. If these funds are owned by PEP’s and/or associates, to freeze these funds to investigate whether they are legitimate or illicit funds.
3. If deemed to be illegitimate, to be eventually returned to their rightful owners and beneficiaries i.e. the Lebanese People.

Yes, to Truthful Investigations -No, to Biased and Conflicted Investigations

The governor of the BDL stated that the BDL will initiate an investigation.

There is no doubt that investigations will take place, as one has already been initiated by the Central Criminal Investigation Bureau under the supervision of the State Prosecutor Ouweidat on Dec 27, 2019. Prosecutor Ouweidat has also asked the Swiss Judiciary, the SIC and the BCCL for information related to transfer of ‘suspected transfer’ of illicit funds by some politicians. By creating a distinction between ‘suspected transfers’ and ‘non-illicit fund transfers’ the Prosecutor is already preempting by saying that transfers are not illegal. That said, illicit funds if any remain questionable, will still need to be investigated, regardless.

However, given suspected collusion between the BDL and the government, and clear conflicts of interests whereby the current governor of the BDL is also the chairman of the SIC (Special Investigation Commission for fighting Money Laundering and Terrorism Financing) there are doubts that any such investigations will get anywhere.

The caretaker Minister of Justice Albert Serhan, who is from the Strong Lebanon Parliamentary bloc affiliated with the CPL, has asked for help from the Swiss authorities, and has forwarded Ouweidat’s request for help. We have no idea how the wording was made, as the devil resides in the details. We have serious doubts that the ruling Parliament Majority, could also be conflicted (Hezbollah Member of Parliament MP Fadlallah as well as others MP’s such as MP Ibrahim Kanaan and politicians have also called for the investigation), and therefore could be in bad faith. Why would they investigate themselves and/or their partners, and if they do, why would they incriminate themselves and/or their partners? Questions about bias emerge and these investigations, if they ever yield conclusions, still need to be fair and equitable, and not lead to one-sided MccArthyistic ‘witch hunts’ to terminate/eliminate political foes.

Even on December 29,2019, MP Kanaan acknowledged that there are no capital control laws, enacted ‘de-jure’, and by his mere statement already justifying such transfers, if indeed they did occur. MP Kanaan has called for an investigation which would fall under law 44/2015 -- which may or may never happen and even if it did it could be steered to their advantage -- to look into the legality of such funds (and into their transfer out of the country).

Previous attempts to disclose details on PEP’s accounts and net worths were blocked, acknowledging that our laws are written to benefit the ruling cartel, as Lebanon still has banking secrecy and non-transparent ‘beneficial ownership’ and ‘subcontract’ laws for example.

Favoritism, Discrimination and Abuse of Citizens’ Rights

The important point, over and above the ‘illegitimacy’ of funds, to stress here is that, if any such transfers out did indeed occur, while all the Lebanese are subjected to ‘de-facto’ capital controls out of the country, and even to limits to their deposits internally, this would be a clear discriminatory practise by the Banks themselves, between citizens that are in power and/or associated with the ruling Cartel, versus those that are not connected to power and influence.

In spite of that no legal restriction on capital controls and transfers exist, any such transfers if deemed to be true, would be considered abusive practices, vis-a-vis the general population at large, by the ruling elite, directly implicating the specific banks that would have been complicit in such operations, including the supervisory governmental committees and agencies that have a duty to protect the rights of the citizens.

If the BDL, SIC and the BCCL do not act and investigate in full fairness and transparency on these transfers (and the lawful sources), this would be a breach of their duty and prove that the current management is in collusion with the ruling Political powers, at the expense of the Lebanese People.

Questions arise as to whether the Prosecutor did investigate with the BDL, BCCL, and the SIC and were the names of transferees revealed (or were these cherry picked)? Were the accounts owned (or associated to) by PEP’s? If yes, then the Prosecutor would already know the names and amounts by today. If the amounts ‘belonging’ to PEP’s were suspicious (amounts relative to salaries of PEP’s re. Illicit enrichment), did the Prosecutor trigger the SIC to investigate? And will the BCCL and SIC act in good faith and will “ decide on the seriousness of evidence and circumstantial evidence related to the commission of any such offence(s); to take in this regard the adequate decision” or will they be conflicted and fail to act in the interest of the People ?

As explained above, those in control of the BDL, BCCL, SIC, Parliament and Judiciary are one and the same of the ruling elite, and until the removal of ‘the Corrupt’, and change via a new truly independent government and new parliamentary elections, with non-corrupt ‘clean’ representatives, the results could remain hidden from the Public forever. Trust is lost and such official avenues seem to be closed for now until further notice, or at least difficult paths to follow.