As Lebanon faces significant challenges over its economic and political future, public trust in its institutions and the rule of the law is eroding. Particularly amidst allegations of widespread corruption that have permeated through the judiciary.
Lebanon’s Court of Cassation is preparing to deliver its verdict in the long-running dispute between the International Bank of Lebanon and Iraq Telecom, giving Lebanese courts an opportunity to signal to international investors that it takes seriously its arbitral obligations, as set out in the New York Convention.
The multijurisdictional case centres around a $150 million loan provided by Intercontinental Bank of Lebanon (IBL) to Korek Telecom, an Iraqi mobile operator, that was used to defraud Iraq Telecom out of hundreds of millions of dollars.
A 2021 arbitration panel presided over by Swiss Arbitrator Pierre-Yves Gunter found that IBL acted as a counterfeit lender in concert with Korek’s Chair, Saber Barzani. This, Gunter found, resulted in Iraq Telecom being defrauded over a subsequent subordination agreement relating to an unsecured loan.
Barzani and IBL Bank misrepresented a $150 million loan to Korek, declaring it as unsecured despite the fact that it was fully collateralised by Barzani. As a result of this deception, Iraq Telecom agreed to a subordination agreement that prevented Korek from repaying Iraq Telecom after Korek defaulted on its IBL loan.
The final element of Iraq Telecom’s position is that Barzani was secretly paid by IBL Bank through interest payments on Korek’s IBL loan, thus depriving the company of receiving it’s just share of payments.
In subsequent arbitration proceedings, Iraq Telecom sought declaratory relief and was awarded a $3m arbitration against IBL Bank. Attempts by IBL Bank to get this award annulled were rejected by courts in both Beirut and New York. In New York, IBL Bank requested a stay in proceedings until the Lebanese court made its decision. The US court’s rejection of this request was made on the grounds that IBL Bank was unlikely to succeed in getting the award cancelled in Lebanon.
Recently, however, in a rare move, the Beirut court upheld the annulment of the arbitral award. This raised concerns as the Court infrequently upholds such appeals. Of note, IBL Bank’s legal representative was Randa Abou Sleiman, sister of Lebanon’s former labour minister and candidate for Governor of the Central Bank, Camille Abou Sleiman.
The case is now before the Lebanese Court of Cassation, which will either uphold the award to Iraq Telecom and align itself with the US courts, or uphold the lower Beirut court’s decision, signalling that Lebanon is not yet ready to leave behind ideas that illicit acts are without consequence within its borders.
The fraudulent subordination agreement exemplifies how cross-border transactions can both facilitate and shield corrupt practices from scrutiny. The opacity of such financial agreements does little for public trust, and even less to assure investors that Lebanon is a safe pair of hands when it comes to facilitating financial dealings.
The political and economic context of this case makes it all the more important that the Court uphold the rule of law and send a message that Lebanon is opposed to corruption. Lebanon’s new Prime Minister Nawaf Salam, also the former President of the International Court of Justice, will surely recognise that judicial autonomy is a top priority. Thus, the Court of Cassation has an opportunity to strike a blow against financial and judicial corruption and uphold the rule of law in its judgment on the Iraq Telecom case.
Recent cases provide clear examples for the Court to follow, like that of Privinvest, a Lebanese shipping group implicated in a 2023 case regarding hidden debts. As part of the so-called “Tuna Bonds” scandal Privinvest was found to have paid bribes to Mozambican officials to deliver sovereign guarantees related to a large-scale tuna fishing project. A ruling from London’s High Court saw Privinvest ordered to pay almost $2bn to Mozambique, with around $1.5bn of that an indemnity in relation to costs Mozambique was liable to pay to lenders and bondholders.
The Privinvest case had devastating consequences for Mozambique’s economy. Much of the $2bn in loans secured by Credit Suisse and VTB Bank was funnelled into bribes for government officials. After Mozambique defaulted on these debts, the IMF and the World Bank cut aid to the country which accelerated its economic decline.
The reputational damage of the Tuna Bonds scandal was significant and long-lasting for Mozambique, and the Republic has still not financially recovered. For Lebanon, it has become existentially tied to the scandal. There were severeconsequences for those found guilty of corruption, and the prosecution of those involved highlights the impact that arbitration rulings can have on how seriously countries are perceived when it comes to dealing with corruption.
In regard to what the Iraq Telecom case means for Lebanon, failure by the Court of Cassation to uphold the arbitration award could severely damage the country’s credibility as a destination for international business, while undermining its standing as a reliable forum for commercial dispute resolution. With this decisive step, there is hope that Lebanon can finally begin to address its deep-seated corruption and culture of impunity.
Read more:
IBL Verdict: A Turning Point for Lebanon’s Fight Against Cross-Border Corruption?
