A forensic audit report prepared by "Alvarez & Marsal" confirms that former Governor Riad Salameh was unchallenged and uncontested in his control over the Central Bank. He defined monetary policy, set accounting standards, and decided which banks benefited from loans and financial engineering.
The report discusses the losses of the Central Bank of Lebanon, the company "Foori," the figures of the central council, and financial engineering. Comprising 332 pages divided into 14 chapters, it details complex accounting, banking, and administrative operations that clearly indicate Riad Salameh's responsibility in management. The Central Bank employed "non-traditional" accounting standards to prepare its financial statements. While this practice is used by many central banks globally, it typically follows established and clear alternative standards, which are lacking in the standards adopted by the Central Bank of Lebanon. These procedures have allowed the bank to publish its financial data in a non-transparent manner and to conceal significant information. The accounting standards on which the Central Bank based its financial statements are derived from its internal "accounting guide," approved by the central council. This guide has been amended on several occasions, including in 2016 and 2018.
At the end of 2015, the Central Bank had a surplus of foreign currencies amounting to $7.2 billion, but this turned into a deficit of $50.7 billion by the end of 2020. This was caused by a 119% increase in foreign currency deposits, financed through financial engineering operations, alongside an 18% decrease in foreign asset value. (The report effectively discusses attracting deposits from abroad and converting them into local assets). A significant and increasing portion of the assets in foreign currencies consists of local assets, which, if returned, would exert immense pressure on the Lebanese state, the population, and the economy. The shortfall in foreign currency reserves rose to $71.9 billion by the end of 2020, compared to a GDP of $31.2 billion, meaning the shortfall to GDP ratio was 230%.
The financial condition of the Central Bank deteriorated rapidly, but this was not reflected in the balance sheet and financial statements prepared under non-traditional accounting standards that allowed the bank to significantly overstate its assets and profits. Notably, the governor defined the liabilities of the Central Bank without any explanation. The capital deficit of the Central Bank reached $51.3 billion. In response, the Central Bank stated in July 2023 that "this is part of accounting policies approved by the Central Council of the Central Bank. Most central banks adopt accounting standards tailored to their needs and the monetary policies in place. The interest paid on the certificates of deposits and deposits aligns with the development of yields on Eurobond securities."
The accounting policies and standards followed by the Central Bank in executing financial engineering were exceptional given the personal factors, precision, and secrecy that characterized the governor's work. Even with unconventional policies, they should be auditable, clear, and understandable by an external party. The policies of the Central Bank in this regard failed.
Financial engineering proved to be very costly, involving: bonuses paid to purchase treasury bonds and extinguish certificates of deposits, interests on deposits and certificates of deposits, and high exchange rate differentials. It was noted that to avoid book losses, the Central Bank transferred costs to the budget, ultimately allowing it to show a profit in every year and distribute dividends worth $40 million to the Ministry of Finance. The cost of the interests kept in the budget was recorded as liabilities under "Miscellaneous Interest Expenses and Certificate of Deposit Costs," known as "Barakah." The total cost of financial engineering is estimated at about 115 trillion Lebanese pounds by the end of 2020.
The forensic report indicates that after adjusting the accounts manipulated by the Central Bank according to its "non-traditional" standards, the bank's capital account has been negative since 2015, with the capital deficit accumulating over the years up to 2020. In 2015, the bank's assets stood at 104 trillion pounds against liabilities of 124.9 trillion pounds, marking a deficit or negative capital of 22 trillion pounds. By 2020, the assets were 166 trillion pounds against liabilities of 239 trillion pounds, meaning the bank's capital was negative by 77 trillion pounds (valued at 1,507.5 pounds per dollar).
