Hezbollah Financial Scandal: From Mughniyeh to Madoff

Salah Ezzedine, a leading Lebanese businessman, turned himself in to Lebanese authorities last week when his large-scale Ponzi scheme collapsed and he declared bankruptcy. This is could be a major blow to Hezbollah, which has already had a very bad year.

Ezzedine was closely tied to Hezbollah and several top Hezbollah leaders personally lost money in investments with him. Now referred to as Hezbollah’s Madoff, he had once been known as the Mughniyeh of money (in reference to Hezbollah’s long-time operations chief Imad Mughniyeh who was killed in a car-bombing in February 2008.)

Ezzedine was well known in Lebanon as a businessman and philanthropist. He ran an organization that arranged trips to Mecca and owned Dar al-Hadi, an Islamic publishing house that published books by senior Hezbollah figures and was visited by former Iranian Foreign Minister Ali Akbar Velayati in 2004.

Ezzedine’s companies took major losses when the price of oil began to fall and he reportedly sought to cover these losses by bringing in more investors. His investors not only included major Gulf businessmen (hence the extensive coverage of the case in the Gulf) but also thousands of modest Lebanese Shia. Reportedly people mortgaged their house to invest with Ezzedine and take advantage of his promised high returns.

This is a double-hit on Hezbollah. First it appears that they have lost a great deal of money (some reports are that it was over $600 million). What’s more, they will be challenged in replacing these lost funds as donors become more wary of donating or investing with Hezbollah.

But there is a second aspect to this. Imagine if Madoff were closely linked with a political party. Even if the party had not done anything wrong, the relationship would have seriously damaged that party’s public standing. Hezbollah was regarded as being a basically clean political party in a country where corruption runs rampant. Further, for Hezbollah to counter this perception they will need to spend money – and they will have far less of it to spread around.

The importance of this loss in public standing should not be underestimated, models of Hezbollah behavior indicate that the organization takes its public standing within Lebanon very seriously – and its disappointing performance in Lebanon’s elections indicates that their public standing in Lebanon is weakening.

The latest reports are that Hezbollah Secretary-General Nasrallah is denying that Hezbollah was linked to the bankruptcy scandal. But it will be tough to persuade people that there was no link, considering the deep ties between Ezzedine and Hezbollah. Ezzedine’s publishing company, Dar al-Hadi was named for Nasrallah’s son Hadi who was killed fighting Israel in 1997.

At the same time, Hezbollah has also failed to avenge the assassination of its operations chief Imad Mughniyeh. Several plots have been disrupted, most recently a plan targeting the IDF chief of staff. Hezbollah seems to have gone from being the “A team of terrorism” to the bad news Bears. Mughniyeh must be turning in his grave.

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4 Responses

  1. This story has wider implications. Iran has decided to cut back on funding to Hezbollah and instead has been funneling money to Shiite’s in Saudi Arabia, Yemen and Iraq in an attempt to destabilize the region. Hezbollah had been making money hand over fist through the drug trade and other criminal activities which could have prompted Iran to believe that the cuts wouldn’t hurt. It will be interesting to see if a new strategy, or perhaps even a desperate attack, will manifest in the near future.

  2. Great to hear from you and great points. We don't really know what their balance sheet looks like – but whatever the loss, it is more than matched by the serious political hit they are going to take on this.

    They've been trying to hit Israel since Mughniyeh died – without luck. Will they ramp it up – I don't know. They don't want to provoke an Israeli response, it will just make them less popular in Lebanon.

    My modeling work strongly indicates that Lebanese politics is central to their thinking.

    Serious folks should start thinking about a Hezbollah endgame – maybe not immediate – but in the foreseeable future.

  3. I agree with your assessment on Hezbollah's political considerations, I was just discussing parallel ramifications. I'm really curious about your modeling. Is it available online? Do you include any Hezbollah presence/contact outside of Lebanon such as South America? How do you factor Iranian influence?

    I don't get to play with modeling much; I have over 6000 employees worldwide to look after which keeps me busy.

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