A French court on Thursday ordered an investigation into new IMF chief Christine Lagarde's role in a $400 million arbitration deal in favor of a controversial tycoon.
Investigators will open an inquiry this week into possible charges of "complicity to embezzlement of public funds" and "complicity to forgery," prosecutors said.
Lagarde was France's finance minister when magnate Bernard Tapie won a 2008 settlement with a French state-owned bank over the mishandled sale of sportswear maker Adidas in the 1990s.
Critics viewed the settlement as an overly generous chunk of taxpayer money handed to a brash businessman.
The investigation comes as Lagarde is working to improve the reputation of the Washington-based International Monetary Fundafter her predecessor, Dominique Strauss-Kahn, quit to face charges he tried to rape a New York hotel maid. He denies the charges.
A commission at France's Court of Justice of the Republic—which convenes rarely and exclusively to handle cases involving government ministers—decided that an investigation should be launched into Lagarde's role in the arbitration deal.
The probe is likely to take months and may not result in a trial—but if it does, and if Lagarde should be convicted, she could face up to 10 years in prison. Lagarde can only be questioned by prosecutors if preliminary charges will eventually be filed against her.
The probe was prompted by a request from a senior prosecutor in May, who said he suspected Lagarde overstepped her authority in allowing the arbitration to go forward.
Lagarde's lawyer, Yves Repiquet, said his client is not worried about the investigation and even welcomes it. "We'll get to the bottom of things. There will no longer be the least doubt," he told reporters after speaking with her by phone.
The possibility of a French investigation dogged Lagarde even before she was appointed to head the IMF, and the institution's executive board reiterated its confidence in Lagarde Thursday.
The Tapie case was discussed prior to Lagarde's selection and "the Board is confident that she will be able to effectively carry out her duties as Managing Director," the IMF said in a statement.
Critics in France have said the Adidas case shouldn't have gone to a private arbitration authority in the first place because it involved a state-owned bank, Credit Lyonnais, and that Lagarde should have questioned the independence of one of the arbitration panel's judges.
The head of the Socialist opposition in the French parliament, Jean-Marc Ayrault, had pushed for an investigation and welcomed Thursday's decision. He said it "confirms the existence of anomalies and irregularities in the handling of this case."
"All this illustrates the confusion of political, economic and financial interests that reign at the summit of the state since the election of Nicolas Sarkozy," he said in a statement.
Lagarde is a member of Sarkozy's UMP party.
While Lagarde was finance minister, she won praise for her role in international negotiations during the global financial crisis and Europe's debt troubles.
After the legal troubles of her IMF predecessor Strauss-Kahn, Lagarde's contract now says she is "expected to observe the highest standards of ethical conduct" and "shall strive to avoid even the appearance of impropriety in your conduct."