Lebanon's move to suspend supervisory authority for financial sector branded 'dangerous'

Lebanon has suspended the oversight authority for capital markets, which had previously uncovered important financial scandals – a decision that was condemned as “dangerous” by one of its board members.

The institution's mission is to oversee capital markets – which are financial markets that bring buyers and sellers together to trade financial assets – and protect investors from fraudulent activities.

“It's a dangerous turning point: the financial sector will find itself lacking a major supervisory authority,” Walid Kadri, one of the board members of the Capital Market Authority (CMA), told The National.

The decision is not final. A meeting is scheduled on Tuesday to explore financing options in response to internal dissent.

The CMA board voted to suspend the institution, citing financial reasons at the end of December 2023. Employees were given the option to take unpaid leave for at least six months or resign by January 10, while board members are expected to retain their positions.

“The financial reasons put forth for the suspension are not acceptable,” said Mr Kadri. “There is enough financing for 2024 from the contributions of the institutions we licence,” he added, planning to present this argument during Tuesday's meeting.

The quorum for the CMA board to convene is four out of seven members, which comprise three government-appointed independent members and five permanent positions, including its chairman, the governor of the Banque du Liban. Decisions are reached by a majority vote.

Lebanon's once seemingly robust financial sector collapsed in 2019 collapsed in 2019, with losses surpassing $70 billion and causing insolvency in banks and the destruction of the local currency.

As financial scandals continue to emerge, calls for increased accountability have grown to uncover the reasons behind the collapse, described by the World Bank as one of the worst financial crises in over 150 years.

Central bank scandal

The CMA's Financial Control Unit, responsible for investigations and audit missions, played a crucial role in exposing irregularities related to Optimum Invest SAL, a broker closely associated with Lebanon's central bank.

In its audit, the CMA accused Optimum of “extravagant” irregularities in transactions with commercial banks.

Optimum has “forcefully” rejected the “baseless allegations” concerning its transactions with BDL uncovered in another audit conducted by Alvarez & Marsal, stressing their “commitment to compliance with applicable laws and regulations”. It did not comment on the CMA report.

The revelations follow the Forry Associates scandal, another brokerage firm suspected of siphoning off more than $300 million from the central bank.

Arrest warrants have been issued by France and Germany for Riad Salameh, the former central bank governor, on charges of money laundering, while the US and the UK have imposed sanctions on him and his relatives.

Mr Salameh has consistently denied the accusations.

“It’s obvious that the suspension is not a matter of financing or resources. For me, the real reason remains unclear,” Nadine Abdelnour, the secretary general of CMA told The National.

Mr Kadri pointed out that the suspension of the CMA coincides with an increase in unlicensed institutions providing financial products and asset management services on the black market – which would thrive without regulatory oversight.

He voiced concerns that the decision might favour networks of vested interests at the expense of the public. “Many of these companies ultimately end up misappropriating their clients' funds,” Mr Kadri said.

'Empty shell'

Other industry insiders maintain that the decision is purely driven by financial considerations and is intended as a temporary measure until a solution to find additional funding is identified.

The employees' low salaries, which have been greatly diminished by hyperinflation and are now a few hundred dollars per month, have prompted the departure of many qualified professionals from their positions, according to a source close to the CMA.

This is especially the case within the financial investigation unit, the CMA's core competency, where only one employee remains, according to the source.

“The current financing does not allow a re-evaluation of employees' salaries, and it will be challenging to attract new hires given the current salary levels,” the source said.

“The decision is only temporary. The essential thing is to exert pressure to secure adequate funding to effectively sustain the institution, but there is no point in keeping an empty shell and maintaining an institution that is not able to do its job,” the source added.

The source said the decision would be reversed if financing was found. Otherwise, it emphasised that the board would maintain essential functions, such as receiving files, while preserving current data, allowing for a quick restart when funding permits.

“Information regarding Optimum transactions has already been sent to the judiciary,” the source said, denying allegations that there might be an attempt to bury sensitive files.

‘General settlement’

However, for Lebanese lawyer Karim Daher, this decision is part of a “general settlement” regarding financial crimes in Lebanon.

The decision to suspend the CMA “eliminates a crucial path for exposing all the wrongdoings committed”, he told The National. “This perpetuates a sense of impunity and the absence of accountability”.

The move “also goes against good practice; every functioning country has capital market authorities to supervise the financial sector”.

It also reduces the possibility for any investors affected by Lebanese banks' wrongdoings to denounce and claim their rights before the CMA, Mr Daher said.

“The CMA can take regulatory measures against banks and financial institutions and imposes sanctions in case of violation, while also claiming damages and penalties. I have personally received many requests from investors affected by banks' misconduct, which I have redirected to the CMA or pool of specialised lawyers”.

Affected investors are mainly holders of preferred shares, bonds’ and notes’ holders, he said.

Lebanon's security situation, with a border conflict at its southern frontier with Israel threatening to evolve into a full-scale war, has diverted attention from the financial crisis.

Yet, accountability for the economic downturn, which has left Lebanese depositors unable to access their lifelong savings, remains elusive. Despite a series of financial scandals, the Lebanese judiciary has yet to hold any officials or members of the banking sector accountable.

“It has been six months since the findings from Optimum's audit were presented to the judiciary, and yet, no action has been taken,” said Mr Daher.