Transcript: The ‘Ponzi scheme’ behind Lebanon’s economic collapse

This is an audio transcript of the Behind the Money podcast episode: ‘The ‘Ponzi scheme’ behind Lebanon’s economic collapse’

Saffeya Ahmed
It’s June 2021. A man named Riad Salameh is in the customs line at an airport in France. He’s the central bank governor of Lebanon, and his private jet has just touched down in Paris. Customs agents approached Salameh and asked him how much cash he has on him.

Raya Jalabi
He says he’s carrying €15,000, which is what he thinks is the limit that you’re legally allowed to carry into France.

Saffeya Ahmed
That’s Raya Jalabi. She’s the FT’s Middle East correspondent and she lives in Lebanon. She tells me that border agents searched Salameh’s bag and €15,000 is not exactly all they find.

Raya Jalabi
They instead found it’s €84,430 and $7,710 exactly in cash. And so the border agents obviously ask him to justify those sums. And he said he had simply, quote, forgotten that the cash, his own, was in his bag.

Saffeya Ahmed
Nearly $100,000 seems pretty hard to just forget about.

Raya Jalabi
A friend of mine’s teenage daughter said to me, she’s just like, I just don’t understand. Like, how can you forget about an enormous pile of cash in your bag? Like, who does that?

Saffeya Ahmed
What piqued Raya’s interest here is the timing of all of it. When Salameh was stopped at the airport with all of this money, Lebanon was in the middle of an economic crisis.

Raya Jalabi
The fact that he could seemingly forget that he had $100,000 in cash in a suitcase that he had just forgotten about, when millions of Lebanese across the country was frozen out of their life savings, it really jumps out at you. I mean, it just shows you the sort of deep chasm between his lifestyle and that of most in 2021. I mean, he was jetting to and from France by private jet while most people were struggling to survive on $100 a month.

Saffeya Ahmed
To Raya, this was symbolic of all that has gone wrong in Lebanon while Salameh was in charge of the central bank. And since that day in the airport, a lot has come out. Salameh is facing a range of financial allegations, everything from fiscal fraud to embezzling $330mn of Lebanon’s public funds. Several countries — including the US, the UK, France and Lebanon itself — are investigating him. And while he’s just one name on Lebanon’s long list of allegedly corrupt government officials, the allegations against him are some of the most brazen that Raya has ever seen in the country.

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I’m Saffeya Ahmed from the Financial Times, in for Michela Tindera. The world’s longest serving central banker, Riad Salameh, has been mired in scandals since Lebanon’s economy fell apart a few years ago. And the size of his personal fortune has raised many eyebrows. Today, on Behind the Money, we’re looking at the role Salameh played in his country’s economic downfall and whether it can ever recover.

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Riad Salameh was the governor of Lebanon’s central bank, called the Banque du Liban, or BdL, for three decades.

[VOICE CLIP OF RIAD SALAMEH]

Raya Jalabi
He’s born in 1950, so he’s 73, and he’s often very dapper in a suit. And he’s always sort of looks very well-dressed and very well-put together.

Saffeya Ahmed
Before making his way to leading the central bank, his career matched his look. He was your classic suited-up banker working at Merrill Lynch.

Raya Jalabi
And it would ultimately prove to be a really important chapter in his life because it was there that he managed the portfolio of a wealthy Lebanese tycoon who lived in Saudi Arabia called Rafik Hariri.

Saffeya Ahmed
That relationship with Rafik Hariri proves crucial because Hariri becomes the prime minister of Lebanon in the early 90s. And one of his key appointments, Riad Salameh as governor of the central bank in 1993.

Raya Jalabi
Typically the governor of the central bank oversees and controls the banking industry and monetary policy. But in Lebanon, the law gives the governor extraordinary leeway of the bank’s operations. And so some people I’ve spoken to who are experts in central banks say that it’s unusual the degree to which he had control over the bank’s operations.

Saffeya Ahmed
When Salameh takes over, Lebanon is in a dire place. It’s just emerged from a brutal civil war that lasted 15 years.

Raya Jalabi
So the immediate couple of years after the war were deeply unstable, catastrophic in terms of its economy. It was not in good shape.

Saffeya Ahmed
But Salameh and Prime Minister Hariri have a plan for getting the country back on its feet, and that’s to build an economy that’s super-reliant on foreign money coming in. They think it’s a good idea because Lebanon’s opaque banking system is very attractive to its rich Gulf neighbours who are looking for places to store their money. And that means ideally, the flow of dollars coming into the country won’t ever dry up. So to do this, Salameh and Hariri make a critical decision in 1997. But it’s the first of two moves that ultimately sets the country on course for financial ruin. They peg the Lebanese pound to the US dollar at a fixed rate, meaning about 1,500 Lebanese pounds would be equal to $1.

Raya Jalabi
I mean, the main thing is that it sort of provides some kind of stability and some kind of rational expectation of how the currency would fluctuate or not. Right? So it makes trade easier. And though it has benefits, its obvious major downside is that this kind of system relies on a permanent inflow of dollars, which is obviously not the domestic currency that is printed by the central bank.

Saffeya Ahmed
But Lebanon has a pretty comfortable flow of dollars coming in from neighbouring Arab states right now. So the dollar peg works and Salameh is praised as a financial genius. Multiple industry publications even named him the world’s best central banker.

Raya Jalabi
From that point onwards, from the 90s into the first decade of the next millennium, Lebanon prospered and reconstruction really boomed. So you had major reconstruction projects, including downtown Beirut’s complete rehabilitation. You had investment in big infrastructure projects.

Saffeya Ahmed
So everyone’s happy, right?

Raya Jalabi
But what soon became clear is that the country was also living way beyond its means. And so government after government was drowning the country in profligate spending. So its debt-to-GDP ratio was one of the world’s highest, averaging something like 150 per cent for most of the past two decades. And that sort of lasted up until the mid 2000s, I’d say. And then you start to hit trouble again.

Saffeya Ahmed
Then in 2011, war breaks out in Syria and suddenly Lebanon’s steady flow of dollars from the Gulf isn’t so steady anymore.

Raya Jalabi
I mean, it’s nervousness about the war next door, but it’s also just the political consequence of the decisions of Lebanese leaders to side with Bashar al-Assad’s regime in Syria. Gulf Arab states take the opposite track, breaking publicly with Assad. So they start pulling their money away from Lebanon. And you know, I read a statistic recently that before 2011, Saudi Arabia had about $1bn invested in Lebanon. And today it’s a little over 10 per cent of that. So it just shows you this pretty, pretty rapid, actually withdrawal of funds around 2011 and the fact that that’s never really picked up back again. So for a whole system that was geared towards depending on these foreign inflows, you start to panic when this cash sort of stops coming in.

Saffeya Ahmed
Salameh knows something needs to change to get more dollars back in the system. So in 2016, he props up Lebanon’s economy with a solution he dubs financial engineering. It’s the second critical choice he makes that’s setting the country up for an economic crisis. Basically by offering artificially high interest rates, we’re talking like 12 per cent, Salameh made it really attractive for everyone to dump their dollars at the Banque du Liban. And at one point, economists estimate that more than two-thirds of all Lebanese bank deposits end up invested with the BdL. At first, it seems like Salameh’s financial engineering is paying off — another brilliant move by arguably the world’s greatest central banker. Depositors are getting great returns and Lebanon’s economy is riding high. But rises under the surface, things are not well.

Raya Jalabi
The sort of simplest way to describe it is that so the central bank is incentivising everyone to deposit their dollars into the system. Then the BdL was using those dollars to effectively make payments that were due. And so that essentially points to a system that was never going to be able to pay back its depositors because effectively their money was being disappeared into the system.

Saffeya Ahmed
So the BdL is using those deposits to pay off government debt, meaning there’d be nothing left if someone went to withdraw their money. Economists say this financial engineering sounds like just another word for a Ponzi scheme.

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This system can’t last long. It’s completely unsustainable. And in late 2019, everyday Lebanese people are suddenly blindsided by the man they thought was a financial genius.

Raya Jalabi
It wasn’t until 2019 when you had this sort of tripartite crisis, which is like a currency crisis, a banking sector crisis and an economic collapse, that people started to understand what had been happening. And essentially, you start to see some kind of fluctuation in the pound and you see people start to panic.

Saffeya Ahmed
The government tries taxing its citizens extra to get more money back at the central bank and stop the panic. Most notably, they try to tax WhatsApp calls, but that kind of backfires and the people’s panic turns to protest.

[CLIP OF PROTESTERS CHANTING]

Raya Jalabi
And so essentially this collapse starts to compound. And by the spring of 2020, after months of uncertainty and a really drastic fall in the currency, Lebanon defaults on its debt for the first time ever. And so at that point, you see that the country is really mired in a very, very deep crisis where you have essentially frozen banks. You have a collapse in the currency and you have complete stagnation in the economy.

News clip 1
Lebanon’s currency has lost more than 90 per cent of its value.

News clip 2
One of the worst financial collapses since the 1800s.

News clip 3
Food prices have skyrocketed.

News clip 4
The country is facing its worst economic crisis in decades.

Saffeya Ahmed
Millions of people’s savings are wiped out. Inflation soars. Basic necessities are suddenly unaffordable. It becomes what the World Bank calls one of the worst economic depressions in the world. And all Raya could wonder, amid all this chaos, where was the world’s best central banker?

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As millions of Lebanese people are getting locked out of their savings accounts and losing everything they have, Salameh is pretty much doing the opposite.

Raya Jalabi
He seemed to be faring fine. And people started asking quite a few questions about it because not only could you criticise him for allegedly mishandling monetary policy and the banking sector, but people sort of started asking questions as to why he was so wealthy, given that he was a public servant.

Saffeya Ahmed
And his fortune catches the attention of investigators in a couple of different countries who are curious where all this wealth came from when Lebanon’s economy was doing so badly.

Raya Jalabi
So in 2020, there was an investigation that was started in Switzerland, and that triggered multiple more investigations across Europe and in Lebanon.

Saffeya Ahmed
Now, how much money Salameh actually has is a bit of a mystery. Publicly, he’s always said his personal fortune is around $23mn. But privately to investigators, he said it’s somewhere around 10 times that. Raya has combed through documents from those investigations that paint a picture of how that wealth may have jumped so much.

Raya Jalabi
And essentially, it all stems from these sort of suspicious transfers that were discovered in Swiss jurisdiction that led to the uncovering of this scheme through which Salameh and his brother are accused of embezzling $330mn, at least, in public funds.

Saffeya Ahmed
Yup, you heard that right: 330mn in public funding. The government’s money. And investigators believe it’s all been funnelled through a company called Forry Associates.

Raya Jalabi
The company is owned entirely by the governor’s younger brother, Raja Salameh. And so European investigators alleged that this company was the main vehicle through which Salameh embezzled approximately $330mn from the BdL between 2002 and 2016. And much of that was funnelled into luxury real estate acquisitions across European capitals, in Lebanon and in the US.

Saffeya Ahmed
Raya tells me that on paper, this firm was supposed to be an intermediary between the BdL and commercial banks to buy and sell things like eurobonds, Treasury bills, certificates of deposit. But Forry is more of a shell of a company than it is a legitimate enterprise. All of its transactions were either made to Riad Salameh, his brother, or offshore companies. And a French investigation found that Forry wasn’t even providing any real services.

Raya Jalabi
So what’s interesting is that more than two years into the probe, investigators have yet to substantiate that Forry had any activities beyond receiving money from the central bank. So they haven’t found a list of clients or employees. And even in searches of Forry’s offices in Beirut, there were no employees, no fixed telephone line. There was no letterhead, even, with Forry’s name on it. There was nothing to indicate that Forry was an operational company. And we couldn’t even contact the company when we tried.

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Saffeya Ahmed
Aside from Forry, investigators are also looking at how Salameh ran Lebanon’s banking sector and whether his decisions as central bank governor damaged the country’s economy. Many experts say that they did. Specifically, Salameh’s decision to make Lebanon so reliant on incoming dollars by fixing the Lebanese pound and never changing it.

Raya Jalabi
Experts and economists say that this decision was really the catalyst for this meltdown because it meant that the central bank governor decided to sort of find creative ways of supplementing that lack of dollar inflow that was coming into the country. So they do point to it as one of the most consequential decisions that led us to where we are today.

Saffeya Ahmed
And the financial engineering piece where the BdL used depositor money to pay off government debt, that was just the icing on the cake.

Raya Jalabi
That effectively was allegedly a fraudulent scheme, essentially. So that’s what the World Bank and politicians and economists and even French President Emmanuel Macron has called the Ponzi scheme.

Saffeya Ahmed
But amid this storm of allegations that he mismanaged Lebanon’s economy and siphoned hundreds of millions from the BdL, Salameh maintains he’s done no wrong, as does his brother. Just listen to what Salameh said in an interview with a French news station a couple of years ago.

Voice clip of Riad Salameh
I don’t think that you can blame the central bank for doing what it had to do to maintain stability and serve the Lebanese. So anyway, my conscience is clear.

Saffeya Ahmed
The interviewer asked Salameh what he thinks about being compared to Charles Ponzi or Bernie Madoff.

Voice clip of Riad Salameh
Well, of course, I don’t think I can match with Ponzi or Madoff. They are much more greedier than me. But we are a central bank. We are not an investment bank. The central bank has functions. It has to put injections of funds or withdraw funds. So to stimulate the economy or control the prices. And this is what we are doing.

Raya Jalabi
Salameh has denied all allegations of wrongdoing repeatedly ever since the first whiffs of any wrongdoing came out three years ago. His claim that Forry was a legitimate contract, a legitimate entity. And he also says that regarding his personal fortune, that he had his own money, which is all made legitimately from his job at Merrill Lynch and also through wise investing over the years. And so he sort of brushes off any allegations that he siphoned off public funds.

Saffeya Ahmed
Salameh stepped down from his role as central bank governor earlier this year after 30 years on the job. He left as the world’s longest-serving central banker ever. And he walked out in an unexpected fashion.

[VOICE CLIP OF RIAD SALAMEH PLAYING]

Raya Jalabi
On the day he left office, he walked down to a cheering crowd. He had sort of dozens of people meet him at the steps of the bank, applauding him, and there was a musical procession. And you know, it was quite vivacious.

[AUDIO CLIP OF MUSICAL PROCESSION PLAYING]

It really rubbed a lot of people the wrong way because he is someone who essentially is accused of all of these financial crimes and he wasn’t living in shame. He wasn’t even being discreet about it. He was applauding himself and spoke a few words about how they had touched his heart and how he was going to go enjoy his retirement.

Saffeya Ahmed
Now, you’ve got to remember that Salameh is not the sole person accused of fuelling Lebanon’s crisis. The country’s government is rife with corruption and has been for decades. Salameh is just a cog in a much larger machine.

Raya Jalabi
For the last 30 years, you’ve had a political establishment that has worked together very closely to ensure the continuation of this kleptocracy. It is one of the most corrupt countries in the world, and it has been that way for 30 years.

Saffeya Ahmed
Raya tells me it’s tough to tell if Lebanon’s economy can bounce back. And complicating that even more is Israel’s war with Hamas right next door. Since October 7th, Hizbollah, which is an Iran-backed Lebanese militant group that’s allied with Hamas, has engaged in pretty much daily clashes with Israel’s military. And at first, everything in Lebanon stood still.

Raya Jalabi
No one is going to school, jobs were sort of frozen like everyone is kind of frozen in fear, waiting to see if they were going to enter the war more completely.

Saffeya Ahmed
Important parts of the economy like agriculture and tourism that had finally recovered a little, fell right off a cliff. And Lebanon’s government has had to focus more on this looming war rather than trying to get the country out of this economic hole.

Raya Jalabi
Before the war, the general consensus was the only way out of Lebanon’s economic crisis is to enact the economic and political reforms that are so desperately needed and that the international community has repeatedly demanded in order to unlock any kind of aid to come into the country. Even something as simple as reforming banking secrecy so you could stop having as much dirty money flowing through Lebanon’s banks. But the political establishment has refused to do that over and over again. Essentially, this political class has been holding the country hostage because they’ve refused to enact these reforms.

Saffeya Ahmed
Raya says there are two outcomes for Lebanon’s economy, and they are entirely dependent on what direction this war goes.

Raya Jalabi
Either the war abates and the economy can slowly start to pick itself up again, particularly in the tourism sector, or what most people are terrified of is that the war will expand to a bigger regional confrontation and that could engulf Lebanon. And if that happens, the main fear is that this time around it would be completely decimated and there would be barely any money for reconstruction because, A, the country is broke itself. But B, none of the foreign partners will want to invest any money knowing that historically it’s been used for corruption.

Saffeya Ahmed
But regardless of what happens next, the seeds of Lebanon’s economic crisis were planted long before this. And Riad Salameh, he’s now in hiding. When he first started out, some industry publications called him the world’s best central banker. Thirty years later and things have changed. On the day he left office, one headline read, “The world’s worst central banker retires”. 

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Thanks for listening. Today’s episode was hosted by me, Saffeya Ahmed. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco and Breen Turner. Special thanks to Viki Merrick, Monique Mulima, Dan Stewart and Michela Tindera. Cheryl Brumley is the global head of audio.

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