Christine Lagarde may be subject to criminal investigation

Christine Lagarde, the director of the International Monetary Fund, may be formally placed under criminal investigation on suspicion of being an accessory to fraud and the misuse of public funds when she completes two days of questioning by a French court today.

Ms Lagarde is not suspected of personal enrichment, but of incompetence, negligence or having been instrumentalised by the former president Nicolas Sarkozy to reward a political ally, the businessman and ex-convict Bernard Tapie, with a €403 million out-of-court settlement in 2008.

A spokesman at IMF headquarters in Washington yesterday said the board has confidence in Ms Lagarde’s ability to fulfil her duties. The fund made a similar statement after Ms Lagarde’s Paris apartment was searched by police in March.

'Assisted witness'
The special court was created to try cabinet ministers for offences committed while in office. Ms Lagarde was Mr Sarkozy's finance minister from 2007-2011. The two-day hearing takes place behind closed doors. If Ms Lagarde is not placed under investigation, she may be ascribed the less serious legal status of "assisted witness", which would nonetheless leave her at the beck and call of the court.

French cabinet ministers are required to resign if they are placed under criminal investigation, but Ms Lagarde is not expected to step down at the IMF. If she did, she would be the second former French finance minister to leave the IMF in disgrace, following Dominique Strauss-Kahn in 2011.

Ms Lagarde announced her candidacy for the IMF job on May 25th, 2011, four days after the investigative website Mediapart revealed a secret report by government auditors detailing numerous irregularities in the Tapie case. Before she was appointed, Ms Lagarde informed the IMF board that she might be summoned to testify.

Ms Lagarde arrived at the court, on the Esplanade des Invalides, at 8.30 am yesterday, tall, elegant and cheery as ever, after spending two days in Paris preparing for the hearing.

She reportedly carried a hitherto unrevealed study by independent experts supporting her decision to seek private arbitration in Mr Tapie’s case against the then state-owned Crédit Lyonnais bank over the sale of the Adidas sports equipment company. Ms Lagarde ignored advice from her advisers at the finance ministry.

Arbitration
The dispute had been the subject of nine sets of legal proceedings, and Ms Lagarde said it "seemed like the best solution at the time" to send it to private arbitration. Jean-Louis Borloo, who had preceded her at the finance ministry for one month, and had been Mr Tapie's lawyer, had already set the process in motion.

The Paris appeals court had awarded Mr Tapie €135 million in 2005, a decision that was upheld by the highest jurisdiction, the Court of Cassation, in 2006. Legal experts say Mr Tapie had exhausted all recourse and that Ms Lagarde had no reason to revive the case. She introduced the notion of “mental distress” suffered by Mr Tapie and his wife to the proceedings. €50 million of the final €403 million settlement was for “mental distress”.

An August 2011 prosecutor's report, quoted by the Canard enchaîné journal, concluded that Ms Lagarde's decisions were "systematically unfavourable to the interests . . . of the state" and made clear that "under the apparent regularity of an arbitration procedure was hidden in reality a concerted action with the goal of obtaining for the Tapies . . . the sums they had not until then been able to obtain" from the justice system.

The three arbitors who decided in Mr Tapie’s favour shared a €1 million fee. Auditors’ reports say two of them should have been disqualified, one because he had worked with Mr Tapie’s lawyer, the other because he had been in the leadership of a now defunct political party with Mr Tapie.

The current French finance minister Pierre Moscovici told Le Monde that the socialist government may try to annul the 2008 settlement if it is proven to have harmed the interests of the state. If Ms Lagarde is placed under investigation today, the government may find itself in the awkward position of attempting to take back the money awarded to Mr Tapie, while defending Ms Lagarde's integrity.

“Ms Lagarde retains the full confidence of French authorities at the head of the IMF,” Mr Moscovici said.