RICO civil class action suit against Lebanon central banker and banks worrisome

Riad Salameh, Banque du Liban (BDL), six Lebanese commercial banks and three international accounting and audit firms with Lebanese affiliates have been named as defendants in a class action case filed earlier this month in the United States District Court of New Jersey by a group of US citizen plaintiffs who’s money is stuck in Lebanese banks.

The case is the first to allege violation of the RICO Act of 1970 (the Racketeer Influenced and Corrupt Organizations Act) by claiming a conspiracy existed between the named banks (commercial bank conspirators) and BDL, a Lebanese government institution, in order to attract large sums of money from US citizens of Arab and Lebanese extraction before 2019 for the sole purpose of funding the Lebanese state and the purchase of food and medicines and other necessities after dollar remittances into the country began to dwindle in 2015.

 

 

The court document goes into detail stating that bank staff using email and other electronic means of communications assured potential US-based depositors of the robustness of the Lebanese banking system, the law suit alleges they knew that it wasn’t as advertised.

 

“This is the first case of its kind to allege a single conspiracy, in violation of federal RICO and state common law of conspiracy, directed by BDL and including a large consortium of Lebanese commercial banks (the “Commercial Bank Conspirators”), who were specifically directed, and incented, by BDL to increase their dollar-denominated deposits, which they did. It is based on the centrally orchestrated “financial engineering” scheme orchestrated by BDL, which is described in a 2023 audit report of BDL issued by an accounting firm retained by Lebanon’s Ministry of Finance. U.S-based depositors were the targets of this conspiracy, which was focused on extracting dollars from the United States.” the case document states.

 

The Racketeer Influenced and Corrupt Organizations Act (RICO) passed in 1970 is a US federal law targeting organized criminal activity and racketeering. A racketeer is someone running a racket, or who engages in dishonest and fraudulent business dealings.

 

Local banks are understandably concerned about this latest case, not because it is the first or even the last to be filed by the many foreign depositors in Lebanese banks, both in the US and elsewhere, but probably because of what a Civil RICO class action is.

 

What is Civil RICO?

 

In short Civil RICO action enhances existing criminal punishments, it provides incentive for victims of the more serious, planned and ongoing crimes to support the efforts of the US Justice Department through private law suits, resulting in compensation for the victims and punishment of the wrongdoer at no cost to the tax payer. In the US there are attorneys that specialize in this kind of law suit.

 

The reason such law suits are popular is that Civil RICO has a lower burden of proof than in criminal RICO trials. For a civil RICO action to succeed 12 jurors selected from among the plaintiffs’ peers must find that it is “more likely than not that the racketeering activities did occur”.

 

Individuals or groups of individuals need to be shown to have worked together in a conspiracy to further a common illegal enterprise under RICO, such as: wire or mail fraud, money laundering, counterfeiting, embezzlement, illegal gambling, extortion and bribery.

 

Also why Civil Rico cases are popular is because if successful, the plaintiffs are awarded ‘treble damages’, if a plaintiff had a deposit of $100,000 in a defendant bank and that person wins the case, he gets paid $300,000.

 

As for how enforceable a ruling in favor of the plaintiffs would be, it’s a matter of perspective and some debate. But there is no doubt that a ruling against Lebanese commercial banks would affect their relations with correspondent banks, a vital link for the movement of money into and out of Lebanon. The fact Lebanon’s central bank is named as a defendant, makes this case even more concerning, as the plaintiffs seem to suggest some kind of fraud and outright theft of funds was orchestrated by the Lebanese State or elements within the state in cooperation with commercial banks.

 

What are the details of the alleged crime?

 

The case document claims: “The shareholders and executives of the Commercial Bank Conspirators, many of whom served in high levels of the government, portrayed the banking system as strong and flourishing, and they received rich distributions and salaries. In reality, the interest rates were unsustainable, and placed the Commercial Bank Conspirators in jeopardy once new deposits ebbed and depositors sought to remove their USD from the Commercial Bank Conspirators.”

 

In brief, the officers and owners of the banks are being accused of misrepresenting the soundness of the Lebanese banking sector to potential depositors.

 

The document goes on to add: “BDL was also vulnerable as a result of the strain on the Commercial Bank Conspirators which deposit USD with BDL to provide it with liquidity. By early 2015, Lebanese banks began recognizing depleting USD deposits, which strained the system as the banks’ interest obligations increased. BDL and the Commercial Bank Conspirators needed to adjust their business model, which would have revealed the false premise on which BDL engineered the banking system and the shareholders and executives of the Commercial Bank Conspirators would have no longer been able to enrich themselves to same extent…”

 

“… The Lebanese commercial banking sector was clearly aware of the impending crisis because Commercial Bank Conspirators were one of its main architects. Beginning in 2016, the Lebanese Central Bank began offering the Commercial Bank Conspirators lavish returns on any fresh U.S. dollars that they could bring in from their clients, a process known as “financial engineering,” to resolve dwindling confidence in the Lebanese economy in the years beforehand. The Commercial Bank Conspirators attracted new U.S. dollars by offering exorbitant and unsustainably high interest rates to depositors, despite knowing that they would have to fraudulently induce new depositors to pay back such high interest rates and keep their scheme propped up.” In the last three lines, the case document seems to allege that the actions of the defendants resembles a kind of pyramid scheme.

 

The case document adds: “Specifically, Lebanese commercial bank personnel targeted U.S. citizens to solicit new deposits while the potential depositors were in the United States. The Commercial Bank Conspirators used mediums such as WhatsApp call and messaging, email, and phone conversations to solicit depositors…”

 

“… BDL and the Commercial Bank Conspirators agreed they would project strength and health for the Lebanese banking system they knew was facing an imminent liquidity crisis. The conspirators agreed to specifically target people of Lebanese descent living abroad, particularly United States citizens and residents.” The case document seems to establish intent by the banks to knowingly lie and misrepresent the health of Lebanese banks and the banking system and specifically targeting US citizens of Lebanese extraction with this message.

 

The case document point out that “Commercial Bank Conspirators were collecting very real dollars (from US citizens), and sending them to the BDL, in exchange for a mere “IOU” of questionable value. BDL and the Commercial Bank Conspirators agreed to use illegal means to carry out their conspiracy, including by making fraudulent misrepresentations and theft, all so the BDL executives and the shareholders and executives could further enrich themselves at the expense of their victims, which included depositors, borrowers and Lebanon. The conspirators’ scheme engineered the theft of tens of billions of dollars from over two and a half million people, including thousands of United States citizens and residents.”

 

The money came rolling in and then out

 

Deposits ballooned from 2015 to 2020 increasing by 115%, while BDL foreign currency assets held outside Lebanon fell from $35.8 billion in 2015 to $18.4 billion in 2020, and BDL’s locally held foreign assets increased from $12.7 billion to $21.2 billion in 2020, mostly money owed to BDL by the state, which A&M’s forensic audit said was likely unrecoverable.

 

This created a hole in BDL finances, a shortage in foreign currency reserves of $50.7 billion, but by excluding locally held assets deemed worthless that shortage climbs to $71.9 billion, or 230% of Lebanon’s GDP in 2020.

 

In fact, most Lebanese banks have funds on deposit with BDL, in many cases such deposits make up the largest asset on many banks’ balance sheets. In essence the viability of many banks rested on an IOU from BDL.

 

In a damning paragraph, the case document adds: “When the Lebanese banks could not induce sufficient new deposits to pay their obligations, the banks hoarded the USD deposits of many of their depositors by lying to induce customers to retain their deposits. Ultimately, the banks refused lawful withdrawal requests from their depositors. At the same time, the Lebanese banks discriminatoryly permitted politically connected depositors, bank executives, bank shareholders, and their relatives to offshore their USD, which of course only exacerbated the self-inflicted liquidity crisis. The Defendants’ scheme had collapsed, and BDL and the Lebanese banks resorted to outright theft of their depositors’ USD.”

 

The long Arm of American justice

 

RICO criminal prosecutions make careers in the US. Prosecutors in the US, like one time US attorney Rudolph Giuliani, salivate at the opportunity to bag headline grabbing big names in organized crime. When Giuliani was US Attorney he prosecuted the "Five Families" of New York City’s mafia, otherwise known as the commission in the 1985-86 mafia commission trial, known as the United States vs. Anthony Salerno et al. Using evidence obtained by the FBI, 11 organized crime figures were indicted under the RICO Act on charges including extortion, labor racketeering, and murder. Eight of them were convicted, most were sentenced to 100 years in prison each, the maximum possible sentence under that law.

 

This case probably catapulted Giuliani into a career in politics, winning the mayoral race in New York City in 1993 and again in 1997. Ironically, today, Giuliani is facing charges in the US state of Georgia under the same law made famous in American mafia movies.

 

Manuel Noriega, the Panamanian dictator, plucked from Panama City by US troops back in the day, was eventually prosecuted for among other things violation of the federal RICO Act. Being the head of state of a two-bit central American dictatorship (my sincere apologies to the Panamanian people) didn’t help him avoid American justice.

 

American justice is quite like no other system of justice, despite its many detractors and malingers especially in Hollywood movies, the system actually works and when is does it does so beautifully and no one escapes US justice. (Unlike the International Court of Justice (ICJ) that lacks both serious teeth and military backing to bring the guilty to book). As a Vlogger I follow, Osama Fawzi, once said in a note of warning to the corrupt and powerful in the Arab world, don’t rest too easy that you have escaped punishment, you could soon face American justice.

 

Eventually, everyone comes to an American court, either to ask for redress or in shackles.