By Tim Eaton
The extraordinary story of Libya’s overseas investments and seemingly endless battles over their control.
Back to the Future
The creation of the Government of National Accord (GNA) following UN-mediated peace efforts in December 2015 was intended to reunify Libya’s governing institutions, but it has failed. Bouhadi says he met with the GNA’s prime minister Fayez al-Serraj and invited him to appoint a new LIA chair and CEO, but no decision came.
Bouhadi came under pressure from the eastern-based authorities who do not accept the legitimacy of the GNA and decided to resign in August 2016.
Serraj moved to appoint Ali Mahmoud as the new LIA chair and CEO while the eastern-based authorities appointed their own replacement. This left the LIA with three rival claimants to its throne – one associated with the eastern authorities, Breish who was appointed by the former Zidan government, and Ali Mahmoud, appointed by the GNA.
Due process seemed to have collapsed and a flurry of litigation was unleashed once again, this time taking until July 2017 for the GNA to complete Mahmoud’s appointment.
There was also a struggle on the ground for control of the LIA headquarters in Tripoli with both Mahmoud and Breish seeking to remain in the offices. They even took turns ousting each other with Mahmoud asking security guards to escort Breish from the building in September 2016 only for Breish to return to the offices in February 2017 armed with a court order in favour of his return. Mahmoud eventually obtained control of the offices in May that year.
The legal muddle meant the armed groups in control of the LIA headquarters could in effect decide which leadership team would enter. Armed groups had long been able to pressure those within the LIA – Breish recalls up to 40 ‘militiamen’ entering his office in 2014 to demand employment, noting he was then briefly detained by them when he refused to accede to their demands.
Such developments provided context for the ongoing London-based proceedings over the contested leadership of the LIA – a somewhat bizarre spectacle whereby a UK judge sitting in a UK court was being asked to rule on the procedural validity of LIA appointments as laid out in Libyan law.
The judge eventually ruled in March 2020 that the GNA resolution appointing Mahmoud was ‘incapable of being successfully challenged before the Libyan courts’.
Neither Mahmoud or Breish were in the courtroom when this verdict was delivered. Both were in fact in detention in Tripoli – apparently after yet another set of legal proceedings emanating from another of the LIA’s early investment decisions involving Palladyne International Asset Management (PIAM).
PIAM was appointed as an investment manager for $700 million of LIA, LAIP and Libyan Foreign Bank funds in 2007. Its CEO Ismail Abudher is the son-in-law of the late former Libyan prime minister Shukri Ghanem and, in 2013, the LIA became aware of investigations into concerns over allegations of possible financial impropriety by Abudher in the Netherlands, leading the LIA to refer the issue to its lawyers.
Abudher denied the allegations but in May 2014 the LIA board of directors removed PIAM due to concerns over the management of the funds. The LIA claimed the funds were under complete control of PIAM without representation of the original investors, questioned the fees charged by PIAM as excessive and identified payments to intermediaries to be reviewed.
PIAM challenged the decision to remove it in the courts in the Cayman Islands on the basis that it violated the asset freeze, and also brought proceedings against Ahmed Jehani and Ali Baruni, whom the LIA had appointed as replacement directors of the funds in 2014.
In January 2019, the judge ruled in the LIA’s favour, noting that ‘concerns regarding the risks faced by the Libyan Investors in leaving the Plaintiff [PIAM] in control of the substantial investments held for the Libyan state were real and genuine… There were clearly a number of grounds for concern which included fees, performance and the absence or slow delivery of information’.
PIAM lost on all counts in the court of first instance and in the Cayman Islands Court of Appeals. PIAM then appealed to the Privy Council which has reportedly refused to hear the application.
The case had ripple effects in Tripoli and laid bare the administrative chaos. Following the release of the draft judgement in the Cayman Islands, the LIA removed the directors it appointed in 2014 and reappointed PIAM.
Mahmoud was subsequently arrested on 6 February 2019 on an arrest warrant issued by the Libyan prosecutor general. He would remain in detention until April when he was released and returned to his post. Breish was arrested soon after seemingly on charges relating to allegations of inappropriately using Libyan public money. He was also released in April and says all charges against him have been dismissed.
In Tripoli, the remaining members of the LIA board of directors subsequently denied knowledge of the decision to reappoint PIAM and voided the decision under the authority of its acting chair, only for the board of trustees to then rule the voiding invalid. Four new directors were then appointed to manage the investments instead of PIAM.
The LIA has explained its decision to re-appoint PIAM as an interim solution because the LIA-appointed directors ‘refused to recognize the authority of the GNA-appointed board of directors and could legally act without any board oversight’. Yet it is difficult to understand why PIAM would be re-appointed and not another entity given the legal proceedings and the concerns arising from the allegations levelled at PIAM. Mahmoud said he is unable to comment on the Palladyne case as it remains ongoing in the courts.
Safeguarding a nation’s wealth
‘I took control under chaos’ said Ali Mahmoud when interviewed in January 2021. ‘I inherited a divided management and the LIA had lost control over many of its subsidiaries. There was a lack of information, no audit process and no risk management’.
Mahmoud said his plans for the near future include a programme of internal governance reform in coordination with Oliver Wyman, the conduct of valuation of LIA assets worldwide conducted by Deloitte, and an audit of LIA accounts conducted by EY. He also says a ‘mega-project’ will soon be initiated to consolidate financial statements for LIA funds and investment portfolios.
But despite clear goals, Mahmoud’s comments illustrate that almost ten years on from the ousting of Gaddafi, the LIA is still yet to adequately identify its assets and rationalize its management. The organization has now stated that, following the UK court decision in favour of Mahmoud, it can collect the requisite financial information from its subsidiaries and meet its financial reporting requirements.
But those with a close working knowledge of the LIA are sceptical whether this will happen to the desired standard. Ahmed Jehani says: ‘Although it was founded 14 years ago, the LIA has never published any consolidated accounts, audited or otherwise. There have been elements of the LIA that have produced accounts, but these are the exceptions.’
He argues this will undermine any auditing process as it is not the responsibility of the auditors to prepare accounts, and emphasizes the importance of establishing consolidated accounts which encompass all the LIA’s approximately 550 subsidiaries.
It also means any valuation of the assets made prior to that point could be fundamentally undermined. Abdulmagid Breish says it is relatively easy for the LIA to meet the standards in its own accounting but that the accounts of the subsidiaries need to move several levels up the scale in terms of accountancy practices for the LIA’s accounts to be properly consolidated.
How much is the LIA worth?
Coming up with an accurate estimate of the value of the LIA is challenging for several reasons:
Firstly, the LIA does not possess ‘consolidated’ accounts for all of its subsidiaries. This means the value of these companies is in some cases stated as their original ‘book value’, i.e. the amount of investment placed in the company at the outset. This does not account for issues such as asset depreciation or appreciation.
Secondly, the interconnectedness of institutions makes it unclear who owns what. Many LIA entities are jointly financed by other Libyan state institutions. Oilinvest, for example, is jointly owned by LAFICO, the Libyan Foreign Bank (state-owned) and the Libyan National Oil Corporation.
A significant sum of LIA cash – around $18 billion – is held at an account within the Central Bank of Libya, but the management of these funds is unclear. The LIA has also reportedly issued loans to a number of its subsidiaries and other state institutions.
Finally, the December 2020 decision to change the official exchange rate of the Libyan dinar to the US dollar (from 1.4 LYD = 1 USD to 4.48 LYD = 1 USD) significantly affects the dollar valuation of LIA assets held in Libyan dinars. This is notably the case for the Libyan Local Investment and Development Fund, which had its approximate $8 billion of funding transferred into dinars.
Existing estimates of LIA assets seem to remain based on a $67 billion valuation in 2010. In 2016, the UN Panel of Experts concluded that frozen assets had declined in value from $65 billion to around $55-$60 billion.
Experts interviewed for this paper projected the LIA’s subsidiaries had declined in value. They note that the historic book value for the subsidiaries ($24.5 billion) is outdated. A 2015 valuation by the Libyan Audit Bureau placed the value at $14.5 billion. The result is significant uncertainty. The LIA says it is soon to publicly release a valuation of its assets.
The next objective for the LIA is to seek amendments to the terms of the asset freeze. A report it commissioned announced in December 2020 that the LIA’s equity investments have underperformed market averages to the tune of $4.1bn since 2011. The LIA complains significant funds are being held in negative equity while investments in bonds that have matured are converted into cash without being reinvested.
The LIA says it is seeking ‘feasible ways to more actively manage’ its portfolio. Although not seeking the removal of the asset freeze, it has prepared a set of proposals to amend the freeze through the creation of a ‘special purpose facility’ under the management of a custodian institution – likely still to be subject to the oversight of the sanctions committee in some fashion. This, argues Mahmoud, would ensure the asset freeze serves its function of protecting, rather than punishing, the LIA and its assets.
But several former senior employees of the LIA have rejected any amendment of the asset freeze, with most suggesting it be strengthened instead. Such a view emphasises the need for the LIA governance to first be improved before the terms of the freeze be considered for change.
In lieu of a change to the asset freeze’s terms, there also remains the potential for the LIA and its subsidiaries to obtain licenses to operate in international jurisdictions. Ali Baruni rejects the argument that licences to operate existing holdings are too difficult to obtain – and in fact, a number of LIA subsidiaries have obtained licences to navigate the freeze such as FM Capital Partners in London.
Next comes the question of how the LIA should position itself for the future. Here, a root and branch reform of the LIA to steer it away from directly managing assets would be in keeping with the operations of other major sovereign wealth funds. Mohsen Derregia highlights the example of LAP Green Networks, where the LIA tried to run a complex telecommunications business in African countries when it could have subcontracted the task to an operator experienced in the sector. Similar examples include managing hotels in Tunisia and office buildings in London.
Among former employees of the LIA, there is a strong sense that the LIA should be an owner not a manager. Rather than being encumbered with the administrative challenges of operating 550 subsidiaries, it would be better served by placing its investments strategically with external fund managers, who can be held to clear performance targets and fired if they perform poorly.
The LIA has proven it can do this – the Corinthia hotel chain is part-owned by the LIA but operated by a third-party. Breish says that a report he commissioned from Oliver Wyman in 2014 recommended liquidating 85 per cent of LIA assets.
Removing direct management of the subsidiaries would also reduce potential opportunities for corruption via dispensation of paid positions and contracts. There are various stories of LIA subsidiaries creating their own subsidiaries and refinancing that have not been substantiated. Derregia likens such a process to a ‘Russian doll effect’ because it can help sustain patronage networks.
At times of political upheaval, the cash of the LIA and its subsidiaries can be an enticing potential target for political interests. The dysfunction in Libya and the ongoing competition is so severe that Breish believes the LIA should be ‘totally wound down, [its assets] placed in a fund and accessed in 25 years’.
Regardless of the approach the LIA chooses for the management of its assets, a focus on returning to the strategic priorities outlined at its inception is certainly required – namely to invest the wealth of the Libyan people and to reduce its vulnerability to shifts in the global oil price and dependence on the oil sector. These remain priorities for the Libyan state.
The international community’s approach to freezing assets, developed in the early months of the 2011 uprising, has endured by default because the LIA has not been able to make the case for lifting the freeze. The international community has lessons to learn as illustrated by the inconsistencies in the application of the terms of the freeze and the lack of enforceability in some jurisdictions.
There is an opportunity for the UN Security Council to clarify its stance and remove inconsistencies that linger from previous resolutions over which entities should be affected and which should not.
It should learn from the experience of the last decade to seek to close loopholes that have allowed funds to continue flowing to some parts of the LIA but not others, most notably its subsidiaries.
But amendments to the freeze should be contingent on the LIA first delivering on its stated aim of improving the governance and transparency of its holdings.
If not, then states whose courtrooms have witnessed a raft of LIA-related litigation, should seek their own clarifications from the Sanctions Committee to reduce the potential for error and avoid any allegations of complicity being levelled at them.
Finally, the asset valuation currently being conducted for the LIA offers a valuable opportunity to bring some clarity and transparency to the fore. Presenting the findings of the assessment to the Libyan people to explain where their assets are being held and their value is a necessary first step in any reform process. The international community should encourage the public release of LIA financial information, especially with regard to subsidiaries operating within their jurisdictions.
Tim Eaton is a senior research fellow in the Middle East and North Africa Programme at Chatham House. His research focuses on the political economy of conflict in Libya.