Middle East Intelligence Bulletin
Jointly published by the United States Committee for a Free Lebanon and the Middle East Forum
  Vol. 6   No. 1 Table of Contents
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January 2004 


The Al-Madina Bank Scandal
by Gary C. Gambill and Ziad K. Abdelnour

During the last six months, Lebanese public attention has been fixated on the country's largest banking scandal in over three decades. That the collapse of Bank Al-Madina in mid-2003 should attract such concern is not surprising. Relative to the overall size of its economy, Lebanon has the largest banking sector in the world, with deposits of roughly $40 billion in more than 70 private banks. While other sectors of the economy have languished in recent years, Lebanon's bank secrecy laws and open market economy have continued to make it attractive to capital. When a bank fails in Lebanon, people demand answers - the collapse of Intra Bank in 1966 brought down nearly a dozen other institutions and caused a major economic crisis.

And the collapse of Al-Madina was no ordinary bank failure - over a billion dollars of depositors' assets simply disappeared and informed sources say that the bank was involved in laundering billions of dollars from the Russian mafia, Saudi Islamic associations and the former Iraqi regime of Saddam Hussein. It is difficult to imagine a scandal more threatening to the reputation of Lebanon's much-touted banking system.

However, rather than seeking to shore up the reputation of the country's financial sector by prosecuting those responsible for criminal wrongdoing to the fullest extent of the law, the Lebanese government has tried to cover up the scandal and intimidate journalists investigating it. When the perpetrators of a major crime in Lebanon enjoy such blanket immunity from prosecution, the hand of Syria is usually involved. Syrian protection allows Subhi Tufaili, a former secretary-general of Hezbollah who came under indictment in January 1998 after his henchmen killed several Lebanese soldiers, to make public appearances today without fear of arrest.

In the case of Al-Madina, however, the criminals are not terrorist fugitives, but belong to a special class of postwar nouveaux riches who have come to dominate most sectors of the economy in Syrian-occupied Lebanon. Whether their business is banking or stolen cars, the most important and necessary ingredient of success for aspiring entrepreneurs in Lebanon today is not cost efficiency or marketing savvy, but political protection, obtained through tacit partnerships with Syrian military and intelligence officials in Lebanon (or with Lebanese politicians close enough to Damascus to impart such protection themselves). In return, a large portion of the windfall profits that accrue to those who circumvent the law with impunity invariably finds its way into Syrian pockets.

A Tale of Two Families

Rana Qoleilat

Al-Madina and its subsidiary, United Credit Bank (UCB), are owned by two Druze brothers with dual Lebanese-Saudi citizenship from the town of Baakline, Adnan and Ibrahim Abu Ayash. Adnan, an engineer by profession, made his fortune in Saudi Arabia owing to his friendship with Nasser al-Rashid, an influential advisor to King Fahd. In 1984, he purchased Al-Madina from its Saudi owners and appointed his brother deputy chairman.

Beginning in 1998, evidence of money laundering and other illicit activity at Al-Madina began coming to the attention of Lebanon's ostensibly independent bank regulatory authorities. Most of the suspicious transactions were carried out by a woman named Rana Qoleilat, a file clerk from a humble family in Lebanon (her father was a building superintendent) who rose to become Ibrahim's chief aide and was given power of attorney to carry out transactions on behalf of the two brothers. How she attained this position has been the matter of considerable dispute, but apparently her central role in the bank's repeated violations of the credit and banking code was intended to allow the Abu Ayash brothers to plausibly deny knowledge of any wrongdoing (they later made precisely this claim).

Rana was richly rewarded for her work at the bank and funneled millions of dollars to her brother, Taha (and, to a lesser extent, his twin brother Bassel), who became the biggest depositor in Al-Madina and enjoyed dizzying success as an entrepreneur. Rumors of Taha's shady business dealings abounded, both in Lebanon and abroad (in 2001, Belgium froze his assets on suspicion of money laundering). Meanwhile, he accumulated a large portfolio of assets in Lebanon, including the luxury Sheraton-Coral Beach hotel in Beirut, several hotels in Mount Lebanon, a luxury car rental with a fleet of over 180 vehicles, and seven yachts. According to informed Lebanese sources, however, the Qoleilat family's fortune was mainly a front for assets owned secretly by high-level Lebanese and Syrian officials.

Many of the suspicious transactions at Al-Madina were purchases of real estate. The bank would purchase assets at an inflated price, on the condition that the sellers deposit their earnings in Al-Madina. The depositor would then receive a passbook that is properly signed, stamped and issued, but not recorded in the bank's books. The bank offered substantially inflated interest on such deposits, which the beneficiaries could regularly cash at the bank. The interest payments, however, were paid out from special funds not carried on the books of the bank. In other cases, real estate would be purchased with one or more post-dated checks (also unrecorded in Al-Madina's books) drawn on the Central Bank, but not actually presented for collection because they were paid on maturity from the same special funds, in effect yielding a similarly inflated interest rate. Many of these inflows and outflows were disguised by filing false documentation with the Banking Control Commission (BCC), an independent administrative body set up in 1967 to monitor private banks - meaning that, in effect, the bank was guilty of money laundering.

According to an informed Lebanese source, the amounts of money laundered in this way were relatively small until a few years ago, when the former Iraqi regime began channeling billions of dollars (and Euros) to high-ranking Syrian officials. The Syrian banking system's foreign exchange controls and overall lack of sophistication made it impossible for the money to be laundered there, so a number of Lebanese banks were used, with Al-Madina at the forefront. Although the increased scale of the bank's money laundering must have drawn the attention of officials at Lebanon's Central Bank, no action was taken - the proceeds were lining too many pockets.

The Scandal Erupts

This pyramid scheme worked fine until the influx of Iraqi money began to dry up in the countdown to war. Taha Qoleilat panicked and withdrew a large portion of his deposits at the bank early last year.[1] Rumors of impending bankruptcy at the bank prompted other depositors to begin withdrawing funds as well, sparking a liquidity crisis at the bank. On February 6, the Central Bank suddenly froze the financial assets of the Abu Ayash brothers, the three Qoleilat siblings, and seven of their associates,[2] citing unauthorized investments using depositor's assets and suspected money laundering. While this decision must have been initiated at the highest levels of the Lebanese government, the question of who made it and why remains unclear to this day.

Riad Salameh

Within days, however, Central Bank Governor Riad Salameh started backtracking, calling Adnan Abu Ayash a "reliable" banker and declaring that Al-Madina had provided him with documentation to prove that it was capable of honoring its commitments to depositors. The Abu Ayash brothers reportedly pledged to inject around $450 million into Al-Madina and UCB to make up for the shortfall and began making monthly installments. In early March, the Central Bank reported that its investigation had uncovered no evidence of any illegal transactions at the bank and unfroze the assets of all 12 individuals. According to an informed Lebanese source, Salameh later confided privately that he was told his life would be in danger if he didn't reverse the decision.

However, the Abu Ayash brothers failed to meet their financial obligations. In April, the BCC submitted a report to the Higher Banking Authority (a separate regulatory body that determines penalties for violations) indicating that Al-Madina and UCB had fallen below their required reserve deposits by a deficit of over $300 million and cast doubt on the banks' claims to have deposits of $429 million at the Deutche Bank and $12 million at Credit Suisse.[3] A second report, filed in early July, accused the banks' managers of embezzling millions of dollars, falsifying documents to cover up the theft, and granting loans without proper collateral.[4] In late June, a check signed by Izzat Qaddoura, whose deposits in the bank totaled around $7 million, bounced, prompting Qaddoura to file a complaint with the financial courts. On July 11, following an emergency cabinet session, the Central Bank again froze the assets of the same 12 individuals.

Whoever forced Lebanon's Central Bank to rescind its February decree freezing the assets of those involved in the scandal apparently did so in order to allow the beneficiaries of the bank's illicit activities to protect their assets. According to a report in the daily Al-Nahar, following the February liquidity crisis the Abu Ayash brothers sold about 85% of their real estate holdings to front men. The paper also noted ominously that the Finance Ministry began blocking public access to documents concerning their real estate holdings in its automated database.[5] Several Lebanese sources familiar with details of the cases said that several Syrian officials closed their accounts at the bank during this period; according to one source, Maj. Gen. Ghazi Kanaan withdrew $42 million.

In July, the Central Bank effectively seized control of Al-Madina and began assessing the value of the frozen assets, which were estimated by most observers to have fallen short of the bank's deficit by at least $100 million. However, on September 8, Prosecutor-General Adnan Addoum suddenly announced that the judiciary was ending its probe of the two banks, claiming that they had raised enough funds to cover all deposits. No details were given about the sudden injection of cash or where it had come from.

Media commentators across the ideological spectrum accused "political powers" of intervening to halt the judicial probe. Al-Nahar editor Gibran Tueni likened the decision to ending the prosecution of a thief "just because he involuntarily returned what he stole after the thievery was uncovered." Even if some mysterious injection of funds had indeed secured the rights of depositors, he noted, Addoum's interpretation of the law "encourages and even legalizes theft and embezzlement" by making it a risk-free venture. "Perpetrators take their chance on stealing and getting away with it or getting caught and returning their loot, with no punishment attached."[6] The fact that several members of parliament close to Prime Minister Rafiq Hariri condemned the decision, while allies of President Emile Lahoud remained silent, left little doubt as to which politicians benefited from the decision. Syrian journalist Nizar Nayyouf, who lives in exile in France, later claimed to have been told by Syrian intelligence sources that Lahoud's son, Emile, Jr., and Karim Pakradouni were major beneficiaries.

In reaction to the uproar, Addoum hastened to declare that individuals implicated in the scandal may still face criminal charges. However, Adnan Abu Ayash had ignored several subpoenas to return to Lebanon from Saudi Arabia to be question on violations of lending laws and falsification of reports to regulators. His brother Ibrahim, who remained in Lebanon, had also ignored several subpoenas and was not even gracious enough to stay out of public places. Complaints in the media about the failure to arrest Ibrahim resulted in a rather strange turn of events on September 16. Addoum blamed the Interior Ministry for failing to apprehend him despite the fact that his whereabouts were common knowledge. Interior Minister Elias Murr then demanded an explanation from the commander of the Interior Security Forces, Maj. Gen. Marwan Zein, who insisted that he had not received an arrest warrant from the judiciary - kicking the ball back to Addoum, who then filed the necessary paperwork. Within hours, Ibrahim was arrested at a hotel in the mountain resort of Broummana.[7]

On September 20, the judiciary finally issued the first criminal indictments pertaining to the scandal, charging the Abu Ayash brothers with issuing a bad check for $21 million to Ali Ahmed. Around one hundred of Ibrahim's relatives and colleagues demonstrated outside the Palace of Justice, calling on him to reveal the identities of the "real culprits" behind the scandal (i.e. the high-level political figures who received kickbacks from his activities). Ibrahim was then released after Ali Ahmed dropped the charges and reached an out-of-court settlement.

This process repeated itself again and again in the following months as over half a dozen plaintiffs filed lawsuits against the Abu Ayash and Qoleilat families. In what became a daily ritual for public consumption, senior managers at Al-Madina were called to the Justice Palace for questioning, but it was clearly the government's intention to ensure that all the disputes were settled out of court. In November, Ibrahim was arrested again, this time in response to charges filed by Qaddoura, and Rana Qoleilat was arrested for her alleged involvement in siphoning money from the account of Roula Soueid. Days later, Soueid dropped the charges and Rana left prison. Another plaintiff, Saleh Assi, also dropped his case against Rana after reaching an out of court settlement. Other plaintiffs currently in the process of negotiating settlements with Qoleilat include Ismail Bazzi, Imad Hariri, Abdel-Latif Haidar, and Ismail Ramadan.

Until very recently, the only criminal charges filed against the Abu Ayash and Qoleilat families were those that involved specific plaintiffs - those that can be settled out of court. In light of the fact that the Qoleilats' assets in Lebanon have been frozen, the question of how they are settling these debts has been shrouded in mystery. Evidently, some of the invisible beneficiaries of theft at the bank (presumably high level Lebanese and Syrian figures) have been returning some of the stolen funds via the Qoleilats. The reason why the government was reluctant to prosecute anyone in connection with the scandal for crimes in which there was no plaintiff to be bought off (money laundering, document forgery, etc.) is clear - lifting their "political cover" might lead them to implicate those in government who profited from the wrongdoing.

Meanwhile, the authorities put pressure on media outlets to abstain from any reporting that hinted at the involvement of political figures in Al-Madina. In July, Amer Mashmousheh of Al-Liwa newspaper was prosecuted for questioning the state's handling of the scandal. In December, New Television (NTV) owner Tahsin Khayyat was arrested and detained for 26 hours. He later attributed his arrest to NTV's "fierce campaign against the thieves of $1.1 billion of bank deposits" and blamed politicians who "took tens of millions of dollars in bribes" for demanding it.[8]

According to a close associate of Khayyat who spoke with MEIB, however, he was arrested after receiving from an unknown source records showing that Gen. Rustom Ghazaleh, the head of Syrian military intelligence in Lebanon, had compiled millions of dollars in charges on a credit card issued by the bank. The source described Khayyat's ordeal in detail:

When Ghazaleh became aware of it, he phoned Khayyat and asked him to return the records. The call developed into an angry argument. Within minutes, hundreds of special forces from the Lebanese Army Intelligence Directorate raided NTV offices and Khayyat's home. That was when Khayyat was taken into custody for 26 hours. The purpose of the raids was to recover the sensitive records. After his release Khayyat told me that he was forced to call his wife from where he was detained at the Ministry of Defense and ask her to give the Lebanese Army Intelligence agents access to his private safe, which she did. I don't know if the records were recovered but I tend to believe they were, and that this is what led to Khayyat's release after 26 hours.

Unable to do serious investigative reporting, Lebanese media outlets competed with one another to satiate the public's appetite for juicy stories about the personal lives, wealth, and glamour of the Abu Ayash and Qoleilat families. The attractive and publicity-savvy Rana Qoleilat became an instant celebrity. Her grandiose arrivals at the Justice Palace, surrounded by bodyguards and confidently flashing smiles in every direction, were choreographed for television. After her release from prison, reporters fawned over the starlet as she took out a cell phone and barked orders for her beautician to prepare for her arrival. "Rana Qoleilat . . . From Jail to the Hairdresser and Manicurist," read the headline of the London-based Arabic daily Al-Hayat.[9]

By the first week of January 2004, out of court settlements had been reached for most of the charges filed against Abu Ayash and Qoleilat and Lebanese newspapers were proclaiming that the scandal was "winding down."[10] Then, for unknown reasons, Qoleilat and several of her associates at the bank were taken back into custody and charged with violations of the monetary and credit law, including falsifying bank statements, forging signatures, and covering up "fraudulent clientele deposits."[11] Although the charges carry a maximum penalty of only five years in prison, Qoleilat lost her composure, crying uncontrollably as she was led from the Justice Palace, realizing that her political cover had been lifted.

Some informed sources speculate that the Lebanese authorities came under outside pressure to prosecute someone in connection with money laundering at the bank. Others say that high-ranking Syrian and Lebanese officials worried that attention-loving Qoleilat would leave the country at some point and tell her story, deciding that putting her in jail for several years, while her brothers remain free, was the best way of ensuring her silence. In any event, it is clear that most details about what happened at Al-Madina will not come to light any time soon.

The Al-Madina bank scandal underscores that the greatest obstacle to Lebanon's economic recovery is the government's inability to reestablish the kind of transparent regulatory environment that fueled the country's pre-war economic boom. Lebanon's much-vaunted banking system could be a powerful engine for economic growth; instead it functions more and more as an instrument of political patronage.

However, those who have been or will be victimized most by what happened at Al-Madina do not live in Lebanon. The Lebanese government's refusal to prevent its banking system from being used as a conduit for illicit terrorist financing will have ramifications around the world as funds that passed through the bank find their way into the hands of those who kill and maim the innocent.[12]

Notes

  [1] Monday Morning (Beirut), 17 February 2003.
  [2] Others included Iman Daher, manager of the Al-Madina's Hamra branch; Ahmed Ali Ahmed, a shareholder in the Verdun 730 and Verdun 732 shopping malls; Ihab Hamieh, Muhammad Fadi Sobh, Muhammad Mohieddine Soqa, Bilal Sayegh, Fouad Qahwaji.
  [3] Al-Nahar (Beirut), 13 July 2003.
  [4] The Daily Star (Beirut), 14 July 2003.
  [5] Al-Nahar (Beirut), 12 July 2003.
  [6] Al-Nahar (Beirut), 11 September 2003.
  [7] Al-Nahar (Beirut), 17 September 2003.
  [8] The Daily Star (Beirut), 9 December 2003.
  [9] The Associated Press, 2 December 2003.
  [10] See "Al-Madina Bank scandal winds down," The Daily Star, 8 January 2004.
  [11] Al-Nahar (Beirut), 21 January 2004.
  [12] In September 2003, after the United States asked Lebanon to freeze the assets of six individuals and five "charities" affiliated with the Palestinian terrorist group Hamas, the Central Bank sent a letter to all banks asking them to disclose any accounts they have in Lebanon. However, senior politicians later demanded a halt to the probe. A similar reversal took place regarding nearly half a billion dollars deposited by the former Iraqi regime in Lebanese banks - Central Bank officials initially pledged to surrender the funds, but later backtracked.


2004 Middle East Intelligence Bulletin. All rights reserved.

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