Why did the Auditors sing off accounts of bank that funded drug barons and terrorists?

Charlotte Freeman and Shannon Millican, the widows of two of the soldiers slain in Karbala, are among the claimants in a class action rumbling its way through the US courts against four big London-listed banks: HSBC, Barclays, RBS and Standard Chartered, plus Swiss giant Credit Suisse.

The five face claims based on allegations they handled billions of dollars of transfers for Iranian financial institutions.

Those Iranian clients, it is alleged, went on to channel money to groups including Hezbollah, which trained and armed Shia groups in Iraq that kidnapped and killed American citizens, including Freeman and Millican.

The banks deny wrongdoing in the case, known as Freeman v HSBC and have filed a motion to dismiss.

Sceptics might think that attempts to pin blame on them for events in Iraq through a complicated chain of alleged transactions is far-fetched. It may also seem like a question of chasing the deepest pockets rather than the genuine culprits. But these and similar lawsuits may well clog the courts and dog bank shareholders for years to come.

The latest legal battle about to break out involves accusations that a branch of giant audit firm Deloitte failed to spot 'rampant criminality' at a Beirut bank.

The lender, Lebanese Canadian Bank (LCB), was shut down four years ago by US authorities for channelling funds to drug barons and terrorist group Hezbollah. At its peak, LCB was the eighth largest bank in Lebanon with assets of more than $5bn. Its assets were bought by French lender Societe Generale five years ago for $580m.

According to Michele Leonhart, the former head of the US Drug Enforcement Administration, LCB 'played a key role in facilitating money laundering' for Hezbollah-controlled organisations across the globe. The Americans believe that hundreds of millions of dollars sloshed through LCB's systems between 2007 and 2011 under the guise of selling second hand cars from the US to buyers in West Africa.

Abu Nahl claims he tried to fix defective controls at the bank, but hit a brick wall both at LCB and the Lebanese central bank. Nest says it is 'inconceivable' that nefarious activity on such a grand scale could have gone unnoticed by the auditors. Regardless of the result in this case, Deloitte & Touche Middle East is just one of a list of leading financial firms facing courtroom battles over alleged terror finance.

Arab Bank, a major Middle Eastern lender, last year reached a settlement in a New York legal case accusing it of sharing in the responsibility for terrorist acts in the early 2000s in which Americans were killed or wounded.

As the HSBC v Freeman lawsuit shows, some of Britain's biggest banks are already in the lawyers' sights.

This Abou Nahl case yet again raises persistent questions over whether banks and their auditors are failing to stem the multibillion-pound tide of drug and terror cash swilling round the financial system.

A near-$130m claim has been filed in Dubai against Deloitte's middle eastern outpost by a Gulf-based entrepreneur, Ghazi Abu Nahl.

Five years ago, a the US Treasury FIU (FinCEN) investigation claimed to uncover systematic money laundering concern at Lebanese Canadian Bank (LCB) brought the institution to its knees. Now, the firm responsible for auditing LCB’s accounts — the Middle East offshoot of Deloitte & Touche — is being sued for failing to highlight the alleged criminal activity. 

In a public notice in 2011, the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) identified LCB as a “financial institution of primary money laundering concern”, and said the bank had played a major role in facilitating the activities of an international drug trafficking and terrorism network.

FinCEN claimed the bank helped launder through TBML (Trade-Based Money Laundering) at least $329m between 2007 and 2011 through a complex scheme linked to the Iranian Islamist organisation Hezbollah, which the US government designates as a terrorist group since 2006.

The alleged scheme involved intricate layers of corruption. Funds wired from Lebanon were used to purchase used cars in the US that were resold in West Africa, according to a statement from the US Drug Enforcement Administration in 2011. Cash from the sale of the cars, along with the proceeds of drug trafficking in Mexico and Columbia, were alleged to have been sent back to Lebanon via financial institutions including LCB and two Lebanese exchange houses, and substantial portions of the cash paid to Hezbollah.

The investigation had serious ramifications for LCB; financial institutions ended their relationships with the bank and it was barred from operating in the US, the Lebanon Central Bank Governor Mr. Riad Salameh presuaded the bank Chairman, Georges Zard Abou-Jaoude to liquidate the bank and sell all it's balance sheer and shares to SGBL. the Bank went into liquidation and remains in receivership, having forfeited $102m of its assets to settle an as yet unchallenged US government lawsuit based on FinCEN’s findings.

The investigation also dealt a blow to LCB’s investors — among them, Dubai and Lebanon-based investment firm Nest Investments (Holding), which was set up by Gulf entrepreneur Ghazi Abu Nahl and operates in 22 countries, according to its website.

Claiming losses of about $128m, Nest Investments and ten other minority shareholders with a 24 percent stake in the bank have filed legal action against the ‘Big Four’ firm contracted to audit its accounts since 1995.

According to a claim lodged in Dubai International Financial Centre (DIFC) Courts in July by: 

  1. Nest Investments;
  2. Abu Nahl, the Jordanian Expatriates Investment Holding Company; and
  3. Qatar’s Sheikh Nasser Bin Ali Bin Saud Al Thani;

The claimant group are suing the Middle East offshoot of Deloitte & Touche and its managing partner Joseph El Fadl for alleged deceit or negligence. The firm continues to serve as auditor to LCB under Lebanese insolvency regulations.

The claimants argue that Deloitte & Touche Middle East (DTME) failed in its duty as auditor by deceitfully or negligently failing to highlight financial and anti-money laundering concerns regarding LCB’s accounts. They claim DTME allowed its relationship with LCB board and senior management to become compromised, and argue that the firm failed to adhere to Deloitte’s global standards on professionalism and objectivity, according to particulars of a claim filed in the DIFC Court of First Instance. 

Nest Investments and 10 other minority shareholders have filed a $230 million negligence lawsuit against Deloitte & Touche Middle East and managing partner Joseph El Fadl at the DIFC Courts.

A spokesperson for the claimants said the evidence suggests that DTME “turned a blind eye” to allegations of corruption within its client bank. “DTME audited LCB for more than a decade. Their professional audit opinions, which acquitted the bank of any misconduct, were completely at odds with the US Treasury’s designation of LCB as a banker for drug cartels and terrorists.

 “This claim alleges they ignored clear red flags and international audit standards, failed to acknowledge allegations of serious wrongdoing from a number of independent sources, and turned a blind eye to the facts.”

 "The complaint arises out of international money laundering scheme designed, coordinated and implemented by Georges Zard Abou Jaoude, Mohammad Hamdoun, Ahmad Safa, and other defendants to benefit from the operations of international narcoterrorists, including Hezbollah, as well as to line the pockets of defendants themselves", a document filed with the court said. 

The 49-page document claims that Abou Jaoude and Hamdoun were fully aware of the money laundering and terrorism financing activities at their bank and did nothing about it. Abou Jaoude office was not available for comment.

A spokesperson for DTME’s office in Lebanon said in a statement last week: “We have become aware of a case filed by a group of claimants representing minority shareholders of the Lebanese Canadian Bank (the Bank) against Deloitte & Touche Middle East (ME) and one of its partners.

“Deloitte & Touche (ME) and the said partner have never entered into any contractual services relationship with this group of claimants. We believe the claim is frivolous and we will be taking legal measures as may be appropriate.

“The confidentiality obligations towards the Bank, as well the relevant regulator, prevent us from any further comments on the matter. We are confident that the relevant Deloitte entity has served the Bank, with the highest degree of integrity and professionalism, and stands by the quality of its work.

“The services provided to the Bank were conducted in accordance with Deloitte’s professional standards as well as international standards and in line with the regulatory requirements as set by the regulators.”

The claim is the first of its kind to be considered by DIFC Courts — targeting an established global accountancy brand for alleged failings in its audit of a client bank accused of money laundering by government regulators.

Who Audit the Auditors?

The case highlights problems with the network model deployed by the "Big Four"Deloitte, PwC, KPMG and EY.

  1.  In June (2015), Saudi Arabia’s stock market regulator the Capital Markets Authority (CMA) said it had banned the Riyadh unit of Deloitte & Touche from providing accounting services in the kingdom for two years because of its work with a local contractor, Mohammad Al Mojil Group, which had been sanctioned for market violations. One week earlier, a Saudi court sentenced three of the construction group’s executives to jail terms, including founder Mohammad Al Mojil and his son Adel Al Mojil, for misrepresenting the company’s value. 
  2.  Last July (2016), an Asian offshoot of Deloitte became the third auditor of stricken Malaysian government investment fund 1MBD to resign, apparently after failing to raise questions about an alleged massive fraud under investigation by regulators. 
  3. Last August (2016), PwC settled a $5.5bn case in Florida described as the largest-ever lawsuit against an accountancy firm to date. PwC’s local branch was sued by a trustee of failed mortgage broker Taylor, Bean & Whitaker, which was implicated by US federal investigators in a multi-billion-dollar fraud with Colonial BancGroup and went bankrupt in 2009. The claimant alleged that the fraud went undetected by PwC, its auditor at the time, as a result of “gross negligence”, according to reports from the US.

 Expert Opinion

James Peterson, lawyer and author of Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms, says there are inherent issues with the Big Four’s detached regional ownership model. He notes that the Big Four’s regional networks are made up of individual firms (mainly as partnerships but with local variations) that are organised at country level and owned by local partners, and are wholly separate legal entities from the brand ‘parent’. There is some form of central administrative structure but nothing as formal as the traditional holding company-plus-subsidiaries model.

“The global structures of the Big Four accounting networks have developed so as to serve the multinational needs of their large clients, who require professional presence and expertise in dozens of countries to produce financial statements reflecting the global scope of their operations.

“The Big Four are able, therefore, to deploy expertise and methodologies beyond the capabilities of the smaller firms of local or regional size and scope. While they aspire to deliver services to their clients at a high and consistent level of quality, they are challenged to do so by issues of distance, language, culture and costs.

“At the same time, the agencies of regulation and law enforcement that oversee the accounting profession typically operate only at a local country level, under limitations of jurisdiction, authority, resources and vision.”

As a result, global headquarters are detached from the operations of their regional partners and cannot adequately monitor compliance with international standards.

In the Nest Investments case, the claimants base their concerns on the findings of the US investigation in 2011, according to the court documents. They argue that the structure of various entities operating under the ‘Deloitte’ brand lacks transparency. Crucially, they argue that DTME should have spotted and sounded the alarm on a string of suspect transactions, but did not.

Deloitte & Touche Middle East (DTME) has been the Lebanese Canadian Bank’s (LCB) main auditor since 1995 and remains its auditor in liquidation.

FinCEN’s report in 2011 provides an indication of the extent of the alleged oversight, the claimants argue. A media statement from FinCEN at the time said LCB had permitted Hezbollah-related entities to conduct cash transactions, in some cases as much as $260,000 and 200,000,000 Lebanese pounds ($132,758) per day, “without disclosing the source or purpose of the money”.

The statement said: “LCB — through management complicity, failure of internal controls, and lack of application of prudent banking standards — has been used extensively by persons associated with an international drug trafficking and money laundering network to move hundreds of millions of dollars in cash proceeds from illicit drug sales into the formal financial system.

It added: “LCB’s involvement in money laundering is also attributable to a failure to adequately control transactions that are highly vulnerable to criminal exploitation, including cash deposits and cross-border wire transfers; inadequate risk-based due diligence on high-risk customers including exchange houses, and, in some cases, complicity in the laundering activity by LCB senior managers.

“At least one of the individuals involved in this global drug trafficking and money laundering network has worked directly with LCB managers to conduct his transactions.”

Nest Investments, which invested in LCB in the mid-1990s, and other minority shareholders, became concerned by the absence of robust counter terrorism or anti-money laundering procedures at the bank and raised these concerns with the board of directors, according to court documents. There was also no internal audit committee until the claimants installed one.

Their concerns were regularly brushed away by LCB senior management, they allege.

The claimants allege that, at the time, they believed this stemmed from incompetence, not a cover-up of criminal activity, according to a spokesperson for Nest Investments. There are concurrent proceedings taking place against LCB senior management in New York, also lodged by minority shareholders.

DTME acted as LCB’s auditors from 1995 and remains the auditor in liquidation. Its tenure is currently being renewed by the majority shareholders, according to the spokesperson.

DTME declined to comment on the specifics of the claim. It is understood the firm will argue that the case is “frivolous” on the grounds that Dubai is the wrong jurisdiction in which to bring the case and it should be heard in Lebanon, and also that there is insufficient evidence.

A source close to the proceedings remarks that numerous legal cases have been filed in Beirut and elsewhere involving some of the same parties as in the DIFC case, apparently demonstrating how litigious these parties are. The source notes that there are reputational issues at stake for Nest Investments and the others, and says it would otherwise be unusual for claimants in this sort of case to orchestrate a campaign to raise awareness of the case, as has happened.

The US Department of State classifies Hezbollah as a foreign terrorist organisation.

For example, another source claims that Ahmad Safa, a high-ranking official at Lebanon Central Bank - Regulatory Supervision Body (Banking Control Commission) who is also a former Assistant General Manager at LCB, has lodged a case in Beirut against Nest Investments.

The alleged Safa case.

It is understood that the USDOJ investigation named Safa in its statement on money laundering at LCB in 2011, and this detail has been included in the particulars of claim for the New York case against LCB’s senior management.

It is understood the claimants decided not to bring their case in Lebanon for fear it would be subject to “political interference”. They considered they would receive a fairer trial in DIFC Courts, it is understood. This is the claimants’ first attempt to sue DTME in any jurisdiction.

Under DIFC Courts regulations, it could be several months before DTME is obliged to file a counter claim. The first hearing would be to establish the DIFC as the most appropriate jurisdiction in which to air the proceedings; otherwise, the case would be dismissed.

Whether or not it progresses, the claim is of interest to any company or individual conducting business in the Middle East, and any onlooker questioning the effectiveness or otherwise of the Big Fours’ regional networks.

As a source close to the proceedings says: “Regional auditors are becoming an easy target for parties seeking to lay the blame somewhere for damaged investments due to fraud, negligence or malpractice — especially in the wake of the global financial crisis.”

Deloitte’s global business, Deloitte Touche Tohmatsu, has attempted to distance itself from the latest proceedings, issuing a statement saying:

“Ethics and integrity are at the heart of the Deloitte network. All member firms are required to operate under a code of conduct that includes Deloitte Touche Tohmatsu ethical principles.

“Member firms are required to comply with all applicable laws, regulations and professional standards.” Nonetheless, member firms are likely to be held under the spotlight for a while yet.

Separately, NatWest, now part of RBS, is defending a lawsuit from US victims and families who suffered terrorist attacks in Israel.

It is based on the fact that the familiar High Street lender maintained accounts for an organisation that claims to give humanitarian aid, but which the US and Israel believe funded Hamas terrorism.

The suit was dismissed in 2013, partly on the basis that the Bank of England had given NatWest permission to maintain the accounts, but was later revived.

Defenders of the banks believe they are being targeted by ambulance-chasing legal firms and that the case against them is tenuous. Lawyers, they say, are trying to cash in on the emotions of sympathy for the victims and anger at banks and accountants.

But RBS, Barclays, HSBC and Standard Chartered have paid large fines in the US for sanctions-busting, including with Iran, arguably leaving their flanks open to this kind of legal challenge.

Nor have auditors like Deloitte – whose clients included RBS when it was run by one of the firm's old boys, Fred Goodwin – covered themselves in glory.

'There has been criminality in the banks from money laundering to Libor rigging,' says accountancy expert Professor Prem Sikka. 'The auditors don't stop it.' 

The outcome of the LCB case and those against the banks lie in the future. But the very public failings of banks and their auditors are unlikely to win favour in the court of public opinion.'


1) Business.com -http://m.arabianbusiness.com/who-audits-auditors--645500.html


3) UK Businessinsider.com - http://uk.businessinsider.com/deloitte-and-touche-sued-in-dubai-over-lebanese-canadian-bank-collapse-2016-8

4) CPFinancial: http://www.cpifinancial.net/news/post/37230/deloitte-touche-middle-east-sued-over-alleged-negligence-and-deceit-in-their-audits-of-lcb

5) Global Radar - https://www.globalradar.com/aml-negligence-and-the-drug-trade/

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