reforms

BDL Audit: Cabinet Chooses Turnaround Specialist Alvarez & Marsal

The US-based firm participated in the liquidation and restructuring of the investment bank Lehman Brothers.

BDL Audit: Cabinet Chooses Turnaround Specialist Alvarez & Marsal

The cabinet said it will hire the firms KPMG and Oliver Wyman - based respectively in The Netherlands and the United States - to participate in other aspects of the audit. Photo Dalati & Nohra

After postponement for several months, Banque du Liban (BDL)'s audit, which the cabinet pledged to carry out in parallel with its negotiations with the International Monetary Fund (IMF) over financial assistance to rescue the country, may finally take place.

The council of ministers, which convened Tuesday at the presidential palace in Baabda, eventu-ally chose the firm Alvarez & Marsal to carry out the forensic audit aspect, according to an-nouncements made even before the end of the meeting. This choice came after a weeks-long controversy over the firm Kroll, which, after being approved by the cabinet in April, was finally rejected by several ministers on the pretext - uncorroborated by specific incriminating factors - that it is an "Israeli agency."

The cabinet also confirmed that it will hire the firms KPMG and Oliver Wyman - based respec-tively in The Netherlands and the United States - to participate in other aspects of the audit. A Finance Ministry source said the contracts would be "signed quickly."

Different from Kroll

Based in New York, Alvarez & Marsal was founded in 1983. It is responsible for turnaround management, corporate restructuring and performance optimization. But its specialty is "posi-tive restructuring," which is an approach to limit restructuring's negative human capital impact on the productivity of the organization in question. On its page published on the professional social network LinkedIn, the firm defines itself as an actor capable of intervening "when con-ventional approaches are not enough to drive change and achieve results." It has a Middle East office in Dubai.

Among its achievements, the firm, for example, participated between 2008 and 2012 in the re-structuring and asset sale of the US investment bank Lehman Brothers, which was one of the first victims of the 2008 financial crisis. In 2013, the restructuring of the bank was described by the judges of the Bankruptcy Court at the Southern District of New York, James Gidden and James Peck, as "very successful, not just for clients but for creditors." Lehman Brothers has al-ready repaid $125 billion to its customers and creditors, out of the total it owes.

Alvarez & Marsal only started reinforcing its forensic audit capabilities a few years ago, but it has already on board several specialists, such as Bill Waldie, an executive whose career in-cludes working for the Federal Bureau of Investigation (FBI). "Alvarez & Marsal is not exactly in the same niche as Kroll, which specializes in investigations to reconstruct transaction history, using the services of former intelligence personnel. Its main mission is rather to (clean up) an entity's balance sheet, including settling liabilities, which leads it to conduct research on certain transactions," a financial expert said, speaking on condition of anonymity.

"Seigniorage on Financial Stability"

As would have been the case for Kroll, Alvarez & Marsal will therefore carry out the heavy task of auditing the accounts of the Central Bank, which shares with the state and the banking sector debts amounting to 241 trillion Lebanese pounds, or $69 billion at a revised exchange rate of LL 3,500 per dollar. The official parity is still, on paper, LL 1,507.5 per dollar, but the black market rate is still around LL 8,000. The amount of liquid foreign currency reserves at the Central Bank would be less than $20 billion, according to a well-informed source, who said this total includes the obligatory reserves of banks. Gold is not included in this total ($16.7 billion in mid-July, the second highest reserves in the Arab world after Saudi Arabia's, and the 20th largest in the world).

Central Bank Governor Riad Salamé was on Tuesday the target of an attack in an article pub-lished by The Financial Times and which cited leaked accounting documents dating back to 2018, accusing him of having "arbitrarily boosted the institution's assets by at least $6bn using unorthodox accounting measures." According to a banker contacted by L'Orient-Le Jour, these assets were described as "seigniorage revenues on financial stability." The amounts of such revenues were arbitrarily determined by the governor, in contravention of all accounting prin-ciples in force. This point was also raised by The Financial Times.

Seigniorage revenues are generated by the difference between the costs of producing and dis-tributing a currency and the face value of the currency. The concept of "seigniorage revenues on financial stability" does not correspond to any known accounting practice. "The process is unorthodox, but it is not illegal either, whether with respect to local or international regula-tions," said the financial expert, who also indicated that "the core of the question is less wheth-er the governor had the right to do what he did than whether he had gone too far."

The BDL has not yet responded to these comments, nor has Deloitte and Ernst & Young, which usually audit the central bank's accounts.

Shared Opinions

In any case, the hiring of Alvarez & Marsal caused many to react, sometimes adopting polar-ized positions. A source close to the matter said the fact that the cabinet chose this firm over Forensic Technologies International Consulting (FTI Consulting or FTI), which was approached at one point, is "good news" which was "welcomed by the parties requesting an audit of the BDL's accounts." However, the source does not rule out the possibility that those hostile to this pro-spect "may try to sabotage this new attempt to move forward" while negotiations with the IMF are at a standstill.

Proposed by Finance Minister Ghazi Wazni, who is close to Parliament Speaker Nabih Berri's Amal movement, FTI was at a time about to take Kroll's place. Its candidacy was considered at the council of ministers meeting on July 7 but without a decision being taken. Presented as an alternative to Kroll, FTI was nevertheless more of a public relations firm, whose main business is to manage the image of its clients with investors. Unlike Kroll, the firm has offices in Tel Aviv, raising questions about Kroll's exclusion, at the request of the two Shiite parties, Amal and Hez-bollah, because of its alleged links to Israel.

But the choice of Alvarez & Marsal has also been criticized, especially on social media, by ex-perts who highlighted the history of one of its executives, Joseph Berardini. A general manager at the firm since 2008, the US businessman made a career in 1972 and reached executive posi-tions in 1982 with Arthur Andersen, which was the fifth largest auditing firm before ceasing op-erations. However, the firm was swept away by the case involving the bankruptcy of the famous US energy group Enron, which unfolded in 2001 and is considered one of the biggest financial scandals of recent decades.

The US Department of Justice accused Arthur Andersen at the time of having "orchestrated massive destruction of documents," although the firm denied any involvement. Berardini re-signed as an executive at the auditing firm, which was convicted in 2002 by a Texas court of "obstruction of justice" regarding the destruction of documents. In 2005, however, the US Su-preme Court overturned the conviction.


(This article was originally published in French in L'Orient-Le Jour on the 22nd of July)



After postponement for several months, Banque du Liban (BDL)'s audit, which the cabinet pledged to carry out in parallel with its negotiations with the International Monetary Fund (IMF) over financial assistance to rescue the country, may finally take place.

The council of ministers, which convened Tuesday at the presidential palace in Baabda, eventu-ally chose the firm Alvarez & Marsal to...

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