Leading by example? How the IMF shot itself in the foot - again

TheThe Executive Board of the International Monetary Fund in June appointed former French finance minister Christine Lagarde as its Managing Director in full knowledge of the legal procedure concerning her and which this week led to the opening of an investigation into her suspected involvement in 'aiding and abetting falsification' and 'misappropriation of public funds'. At a moment of grave international economic turmoil, the IMF, still reeling from the Dominique Strauss-Kahn affair, finds itself further weakened.

Philippe Riès returns to the background of Lagarde's appointment and interviews Ted Truman, senior fellow with the Washington-based Peterson Institute for International Economics and a former assistant secretary of the US Treasury for International Affairs, about the consequences of Lagarde's predicament for the IMF.

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Having chosen to appoint Christine Lagarde as head of the International Monetary Fund (IMF) on June 28th, despite knowing fully about the legal process against her that was already underway in France, the institution's Executive Board and member countries this week found themselves reduced to holding out the uncertain hope that the judicial investigation now targeting her in France will not stop her from carrying out her functions as Managing Director.

Above all, they must hope that there are no new revelations to emerge in the course of the investigation that could force her to resign from the post that she has held for little more than a month.

After several months of deliberation, France's Court of Justice of the Republic (CJR) on Thursday decided to open an investigation into Christine Lagarde's role, when French finance minister, in suspected 'aiding and abetting falsification' and 'misappropriation of public funds' in the management of the arbitration procedure that led to a 403 million-euro payout from the public purse to businessman Bernard Tapie in 2008.

The CJR is the French court designated to investigate suspected criminal malpractice by government members in the course of their duties, and to judge them if charges are brought. A panel of magistrates will now investigate the actions of Lagarde and several senior civil servants in pushing through the private arbitration procedure that ensured the huge payout to Tapie and his wife, ending his longstanding dispute with a state agency handling the liabilities of the former Crédit Lyonnais bank.

The longstanding suspicions over the handling of the arbitration have been the subject of media reports, including a series of exclusive revelations by Mediapart, and highlighted by France's national audit office, the Court of Accounts (la Cour des comptes). It was a detailed report by the Court of Accounts, prepared last year, that served as the basis for the referral of the case to the CJR on May 10th by Jean-Louis Nadal, France's most senior public prosecutor before his retirement in June.

"Those who voted for her, the US, China, Brazil and others decided it was not something that was going to prevent her from doing her job," commented Edwin 'Ted' Truman, senior fellow with the Washington-based Peterson Institute for International Economics and a former assistant secretary of the US Treasury for International Affairs. "And I hope it is correct because if she ends up spending her time in Paris answering questions over the next 18 months, that would be a problem," added Truman, a specialist in the workings of the IMF.

"Of course, I don't think it is good from the stand point of the Fund," Truman told Mediapart. "It would have been better if the court had decided there wasn't a basis to move forward. But I think the membership of the Fund made their decision on June 28th with full knowledge of the situation. So, I don't think it [the French investigation] will have a particular impact on the support Miss Lagarde enjoys as the MD that comes from its members. Obviously, if she were convicted and facing ten years in jail or something like that, she would have to resign. Or if she would be involved in a trial process that would take a lot of her time, she might have to resign at that stage to. Obviously, the governments that supported her were ready to take that risk."

"If she had to step down that would be bad because the Fund because it would be the fourth MD in a row that would not have completed his or her term," Truman warned. "It is awkward for an organisation that is planning on people having this job for at least five years."

Indeed, Lagarde's three predecessors, Horst Kölher (who became German President), Rodrigo de Rato (a former Spanish Vice-President) and latterly Dominique Strauss-Kahn, arrested in New York in May on sex assault charges, all left their post as IMF Managing Director, either voluntarily or forced, without seeing through their full mandate.

"As far as the members are concerned, the executive board and the countries, maybe they made a mistake but if was not as if something has been dug out of her past all of a sudden," Truman added. "Everybody knew about it on June 28th. I think it is a little early to second guess the decision made at that time."

The IMF sought advice from French presidency

The IMF reacted on Thursday with a statement "in response to an action against Managing Director Christine Lagarde initiated by a French public prosecutor".

It read: "In regard to Ms. Lagarde, the Executive Board prior to its selection of the new Managing Director discussed the case in France. It would not be appropriate for the Board to comment on a case that is currently before the French judiciary. However, the Board is confident that she will be able to effectively carry out her duties as Managing Director."

Confirming information first published by Mediapart in June, the Wall Street Journal on Friday reported: "Before the IMF board selected Ms. Lagarde, the IMF's chief counsel discussed with French President Nicolas Sarkozy's office the potential risks posed by the case involving Mr. Tapie, according to a person close to the matter. The board was ultimately satisfied by the facts, this person said."

As one international economist close to the IMF commented: "It's as if in the Watergate case Richard Nixon was asked to give legal advice."

Ted Truman surmised that a postponement of a decision to appoint Lagarde had ben considered, and dismissed. "If it has been up to me I would have at least considered, and I am sure they did actually do that, whether they should postpone the decision about who would be elected until after they knew what would happen with this investigation, "he said. "Presumably they decided that even if the investigation went forward, it would not impair her capacity to do her job."

Clearly, neither the IMF's 24 Executive Board members, nor the international governments that gave them their voting instructions, were about to reverse their choice. Just as plainly, the Washington-based institution is banking on the notorious slowness of the French justice system - any eventual trial of Lagarde is not expected before several years - to ensure that the IMF can escape any significant disturbance from the legal situation in which its Managing Director now finds herself.

A different set of rules for some

While world finance and economies were on fire this week, with stock markets in turmoil, Christine Lagarde is on holiday. Speaking on her behalf, her French lawyer Yves Repiquet said he was certain that the French investigation would conclude that the case against her should be dismissed. "It will not be the first investigation to result in a case dismissed," he commented.

Just as in the Strauss-Kahn case, when French public opinion discovered the workings of the American justice system, the rest of the world appears lost for any understanding of the labyrinthine procedures of the justice system in France. Not least of these is the provision that the State and its lofty ranks are judged by specialized jurisdictions, something that is unthinkable under systems of ‘common law', and which has been advantageous for Christine Lagarde until now.

"The particular nature of this accusation is sufficiently obtuse not to reflect upon the moral at the Fund," speculated Ted Truman with regard to the IMF's staff, submitted to a strict code of good practices.

It remains to be seen what, in the coming months, will be the political impact of the Lagarde case, notably in countries submitted to, or threatened with, structural adjustment programmes that are either entirely or largely (in the euro zone) dictated by the IMF's experts. It is indeed a very uncomfortable situation for an institution that recommends the very greatest rigour in the management of taxpayers' money that it should now be led by a Managing Director who is under investigation in her own country for suspected "complicity in the misappropriation of public funds".

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The sting in the tail of Tapie and the Crédit Lyonnais payout