A judge in Dubai has green-lighted a trial that will determine whether a Deloitte member firm was negligent as auditor of Lebanese Canadian Bank (LCB), which was found to be at the centre of a global money laundering scheme linked to terrorist group Hezbollah and drug cartels.
Around $230m of illicit funds were said to have passed through LCB’s accounts while Deloitte was auditor.
The case in the Dubai International Financial Centre Courts is brought against Deloitte & Touche Middle East (DTME), the member firm under which Deloitte & Touche in Lebanon, the bank’s auditor, operated.
As auditor of LCB from 1995 until the bank’s liquidation, the firm is accused of deceit and negligence in failing to detect extensive money laundering.
The claimants are minority shareholders in the now defunct bank, holding approximately 24% of LCB shares. They allege that had Deloitte properly fulfilled its role as auditor, the bank would not have gone into liquidation, and that “the breaches of duties caused them collective loss in the order of USD $128m.”
As Deloitte remains the auditor in liquidation, a spokesperson for Nest International, one of the claimants, said: “It is therefore particularly important that the allegations against DTME be heard and answered in a competent court.”
The case will specifically look at audits undertaken between 2006-2008.
While the charges were brought to the DIFC Courts in 2016, the court has now rejected two applications – one made by the claimants, applying to include Joseph El Fadl, managing partner of Deloitte & Touche Lebanon, as a new party pursuant and one by Deloitte to strike-out the claim over jurisdictional concerns.
The full judgement questions whether DTME is liable for the actions of it’s Lebanese branch, which is a sub-licensee.
The shareholders argued that they would not be able to get a fair trial in Beirut, and that bringing the case to the Dubai Courts is appropriate as DTME had oversight of the Lebanon-based firm. The trial will likely examine these issues.
The judge rejected both applications and said the trial had a “real chance of success” and should proceed.
The landmark ruling means that this will be the first audit negligence claim of its kind heard in the DIFC Courts, and raises questions about the potential liability for DIFC institutions, like DTME, for the acts or omissions of foreign agents in other jurisdictions.
Illicit activity occurring at LCB was first uncovered by an investigation by the FBI and the Drug Enforcement Administration (DEA) in the US, who found that the bank was acting as a hub for a global money laundering scheme with links to Hezbollah, drug cartels and narcotics trafficking.
The intricate scheme involved drugs from South America being sold in Europe and proceeds being mixed with legitimate money generated from selling used US cars in Africa. A portion of proceeds would then be diverted to Hezbollah.
The Treasury said that LCB was liable “through management complicity, failure of internal controls, and lack of application of prudent banking standards.”
The US State Department designates Hezbollah as terrorist organisation.
Following these revelations, the US Treasury branded the bank a “financial institution of primary money laundering concern”, effectively a kiss of death leading to the bank being banned from the USD clearing system globally.
The bank merged with French bank Société Générale in 2011, effected by a transfer of most its assets to Société Générale’s Lebanese unit.
In 2013 LCB agreed to pay a settlement of $102m off the back of the US investigations, supposedly agreed to by shareholders to allow the bank’s sale to be finalised.