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Lagarde, who has been at the helm of the IMF since 2011, was France’s finance minister at the time of the controversial payout.
The unusually generous 2008 arbitration deal, paid from public funds, prompted years of legal disputes that remain unresolved.
A special court ruled in December that Lagarde should stand trial, but she appealed. France’s Court of Cassation on Friday rejected the appeal.
Her lawyer Patrick Maisonneuve expressed regret over the decision, but said he was “convinced” the trial would prove his client was innocent in the affair.
Romain Dupeyre, an international lawyer and arbitration specialist, said Lagarde could face up to one year in jail and a fine of €15,000, but warned a final ruling was nowhere in sight.
“Whatever decision this very specific court takes may still be challenged before the French supreme court, so it could take years before a final decision on this issue,” Dupeyre told FRANCE 24.
Lagarde is accused of negligence by improperly signing off on the decision to allow an extremely rare out-of-court arbitration in a dispute between Tapie, a supporter of conservative former president Nicolas Sarkozy, and the state.
The arbitration judges later ruled in Tapie’s favour and ordered the state payout to him, but appeals courts have since thrown out the settlement decision.
A Paris appeals court has ordered Tapie to reimburse the state, but the colourful businessman has lodged an appeal, which is still pending.
The case goes back to when Tapie had sued the state for compensation after selling his stake in sports company Adidas to Crédit Lyonnais in 1993. He claimed the bank had defrauded him after it later resold his stake for a much higher sum.
Despite the shadow of the case looming over her, Lagarde was appointed in January for a second five-year term as managing director of the IMF.
The global institution expressed support for its managing director, despite the charges and the pending trial in France.
“The executive board has been briefed on recent developments related to this matter, and continues to express its confidence in the managing director’s ability to effectively carry out her duties,” IMF spokesman Gerry Rice said.