A US couple this week sued the Central Bank of Lebanon and three Lebanese banks for $150 million in New York district court, alleging they were the victims of a “Ponzi scheme.”
“Plaintiffs Joseph A Daou and Karen M. Daou are married United States citizens
who deposited hard-earned United States dollars (“USD”) in three Lebanese banks, only to be preyed upon by the Ponzi scheme that is the Lebanese banking system,” the case filed in the Southern District of New York court said.
The couple, who are of Lebanese origin, say that BLC Bank, Credit Libanais Bank, and Al-Mawarid Bank aggressively pursued US dollar deposits.
“Beginning in 2016, Defendants conspired to defraud Plaintiffs of more than $18,500,000 USD in principal and accrued interest from Plaintiffs’ accounts in Lebanon,” the case, filed on Wednesday, reads.
It alleges that the Lebanese banks in question, in collusion with the central Banque du Liban, lured depositors with US dollars while knowing full well that the interest rates they were offering were unsustainable without a steady flow of new investors.
As of last year, the couple had $18 million deposited across the three banks named in the suit. They are suing for a total of $150 million, including damages and legal fees, and demanding a jury trial.
The couple claims they were assured as recently as last year that they would be able to conduct transactions with their deposits outside Lebanon.
“In 2019, Plaintiffs specifically advised all three banks that they needed to transfer their USD to satisfy Plaintiffs’ funding obligations for three highly valuable real estate
acquisitions in the United States.”
The case notes that Joseph Daou was courted by BLC branch manager Jean Claude Zakhia, who he considered his friend, to deposit his money in Lebanon.
Daou was offered interest rates over 15% if he would agree to a long-term deposit. He declined in favor of a deposit that would mature monthly at 9.5% interest, still a whopping sum by international standards.
“While these interest rates are enormous relative to the United States, they were prevalent in Lebanon at the time,” the case explains, in an apparent effort to absolve the couple from accusations they should have been well aware of the risks.
In 2016, Lebanon’s central bank launched a mechanism known as “financial engineering” to prop up the country’s dollar peg. To attract US dollars from the banks, it offered high interest rates on Lebanese pounds.
Financial engineering relied on deposits and remittances from Lebanese working abroad, like the Daous.
Those dollar-denominated deposits, however, plunged following the abduction and forced resignation of then-Lebanese Prime Minister Saad Hariri by Saudi Arabia in October 2017, which many saw as a warning sign.
But for the public at large, the severity of the dollar crunch began to show only last fall, when gas stations went on strike, unable to secure foreign currency for fuel, and a parallel market for dollars began to emerge.
Lebanon’s government, despite two attempts, has failed to institute capital controls, resulting in a steady bleed of foreign reserves from the system.
The Institute of International Finance, a global association of financial institutions, tracked roughly $30 billion in capital outflows between the start of the fourth quarter of 2019 and the first quarter of 2020.
The data was gleaned from a documented rise in the amount of deposits held by Lebanese nationals in foreign banks recorded by the Basel-based Bank for International Settlements.
Paul Morcos, a Lebanese banking lawyer, says his firm has taken up numerous cases of Lebanese seeking to get their money out of the country, or at least get their claim in the pipeline, before any new legislation makes it illegal.
“If they don’t get a positive response from the banks, they will at least get their rights before such a law is issued, because it won’t be applied retroactively,” he told Asia Times.