Julia Irvine 14 Feb 2018 02:07pm

Deloitte to face court over Hezbollah-linked bank audit

A group of minority shareholders in the collapsed Lebanese Canadian Bank (LCB) have won the right to have their case against Deloitte & Touche Middle East (D&TME) heard in Dubai
Caption: The case against the Big Four firm will be held in Dubai

In a landmark ruling announced yesterday, a judge at the Dubai International Finance Centre (DIFC) Courts decided that the claim, brought by Nest Investments SAL, had a “real prospect of success” and should proceed to trial.

However, the court dismissed the claimant's action against Joe El Fadl, the firm’s global financial services group lead in the Middle East.

Both D&TME and El Fadl had applied to the DIFC Courts to have the case struck out on jurisdictional grounds since the bank was based in the Lebanon and had been audited there for nearly 20 years by Deloitte’s Beirut office.

The minority shareholders argued, however, that they would not get a fair hearing in Beirut because of political considerations and had therefore decided to lodge their claim in the DIFC Courts against the regional firm since the Beirut firm was acting as its agent and the DIFC regulated both Deloitte and El Fadl.

The action stems from the bank’s collapse following the US Treasury Department’s October 2011 statement identifying it as “a financial institution of primary money laundering concern”.

The statement went on to highlight LCB’s role in facilitating the money-laundering activities of an international drugs network based in the Lebanon. According to the Treasury, the network was smuggling drugs from South America into Europe and the Middle East via West Africa, using the proceeds – laundered with the help of LCB – to buy cars in the US which were then sent to West Africa.

The Treasury Department also accused LCB management of links to Hezbollah officials outside of Lebanon, including through a subsidiary in Gambia which was partially owned by a Lebanese individual who was known to be a Hezbollah supporter. The US considers Hezbollah to be a terrorist organisation.

Overall, the Treasury’s financial crimes enforcement network (FinCEN) found that nearly $230m (£166m) of illicit funds had been laundered through LCB’s accounts while Deloitte was its auditor.

LCB later settled with US prosecutors for a sum of $102m.

Nest Investments alleges that Deloitte failed in its duty as auditors and allowed its relationship with LCB senior management and the majority of shareholders to become compromised. It also claims the firm failed to adhere to Deloitte’s high global standards on integrity, professionalism and objectivity.

A spokesman for Nest said that it was pleased about the DIFC Court’s decision. “The allegations against D&TME are serious in nature – involving complicity in money laundering and terrorist financing through the Lebanese Canadian Bank.

“The defendant plays a prominent role in the Middle East audit market and remains the auditor in liquidation at the bank. It is therefore particularly important that the allegations against D&TME be heard and answered in a competent court.”

Deloitte, however, pointed out that the firm and El Fadl had never entered into any contractual services relationship with the group of claimants.

“The claim against the partner has been correctly rejected by the DIFC court,” it said.

“The claim against the firm is without merit and the judgment revealed fundamental deficiencies in the claim. For example, it is not reasonably arguable that DIFC law governs the claim and the claim is based entirely on DIFC law. The firm will continue to vigorously resist any attempt to pursue the claim.”

The ruling is important for two reasons. Not only will it be the first audit negligence case to be heard by the DIFC Courts but it also extends the potential liability of DIFC-regulated bodies to the acts or omissions of foreign agents based in other jurisdictions.