Libya’s Shadow on Sovereign Wealth Funds

NEW YORK – As Libya’s citizens rebuild their lives and economy, undoing the corruption in the Libyan Investment Authority (LIA), the sovereign wealth fund in which Muammar el-Qaddafi’s regime allegedly stashed and misused Libya’s oil wealth, is becoming a priority. The National Transitional Council is debating who should take over Libya’s Central Bank and the LIA’s assets – an especially important decision, given that oil production is not expected to return to pre-war levels for several years.

Regardless of how the Libyan government eventually handles the LIA, all sovereign wealth funds – and their advisers and fundraisers – can learn several important lessons. Of course, no one should infer from the Libyan case that other SWFs across the board are riddled with corruption and conflicts of interest. The LIA has always been exceptional; indeed, several indices that rank SWFs on transparency, accountability, and governance issues have traditionally given only Iran a lower ranking.

Yet, while hard cases tend to make bad law and it is too early to judge, the LIA should be a wake-up call for corporations and funds both in the Middle East and around the globe.

First, governments should better clarify the sources of funding behind each particular investment. Private funding that turns out to be public funding tied to the ruling family or government ministers presents different political and financial risks and should therefore be valued differently.