IMF chief Christine Lagarde has been placed under formal investigation by French magistrates for her alleged role in a long-running political fraud case. (Reuters)

Christine Lagarde, the head of the International Monetary Fund, said Wednesday she has been placed under official investigation for negligence in a long-running French corruption probe dating to her days as France’s finance minister.

The probe stems from her oversight as finance minister of a 2008 dispute that ultimately produced multimillion-dollar payouts by an arbitration panel to a French business tycoon, Bernard Tapie, a friend of then-President Nicolas Sarkozy.

“After three years of proceedings, dozens of hours of questioning, the court found from the evidence that I committed no offense, and the only allegation is that I was not sufficiently vigilant,” Lagarde said in a statement released to Agence France-Presse.  “I have instructed my lawyer to appeal this decision, which I consider totally without merit.”

Lagarde was previously named a witness in the heavily publicized investigation, which resulted in several rounds of interrogation. Wednesday’s development ratchets up the probe, placing her in significantly more jeopardy.

The appeals process is expected to last one to three years. If it is rejected, Lagarde then would likely be officially charged and could stand trial. Negligence is a relatively minor charge in the scheme of corruption probes, especially considering the informal investigation initially centered on accusations of conspiracy and fraud. Still, conviction of negligence carries a fine and potentially a brief prison sentence. Ultimately, it could force her to step down as head of the International Monetary Fund.

But that worst-case scenario remains a long way off. Christopher L. Baker, an attorney representing Lagarde, said he did not think the current investigation would disrupt her duties.

“The legal team in Paris does not believe that in the next two years this process will require any material involvement or distractions for the managing director,” he said.

Largarde flew to Washington from Paris on Wednesday and was expected to brief the IMF’s board of directors as soon as possible. An IMF spokesman declined to comment further. The fund was aware of the ongoing inquiry when she was appointed to lead the organization in July 2011 and has backed her leadership even as French authorities searched her home a few years later.

“This is something that the board and the membership has addressed,” said Edwin Truman, senior fellow at the Peterson Institute for International Economics. “I would be surprised if anything happened now.”

Even if Lagarde were forced to take a temporary leave of absence, leadership of the IMF would fall to deputy managing director David Lipton, a former adviser to Presidents Obama and Clinton who joined the fund the same year as Lagarde. Truman said Lipton and Lagarde have worked closely together and share similar visions for the IMF.

Still, the decision by the Court of Justice of the Republic, which investigates actions by senior French government officials, is another headache for the IMF, the Washington-based organization that lends money to troubled governments and developing nations.

Lagarde is one of the world’s most visible and influential financial officials, who has played a significant role in helping resolve the European debt crisis and continues to push for structural reforms in emerging markets. She took the job after her predecessor, Dominique Strauss-Kahn was forced to resign over charges of sexual assault, which were later dropped.

The investigation into Lagarde is linked to the nearly two-decade dispute between Tapie, a former French cabinet minister, and the French state-owned bank Crédit Lyonnais. Tapie believed the bank had bilked him out of millions of dollars when it sold his ownership stake of Adidas in the 1990s.

During her term as French finance minister, Lagarde handed the matter over to an arbitration panel. That panel awarded Tapie a settlement of 400 million euros (about $527 million), outraging critics. Assets of the bank, which had collapsed, were held by the government at the time, making them vulnerable to political intervention.

Critics say that the arbitration process was biased towards Tapie–and gave the tycoon an unusually big payout–after the once-socialist businessman supported the center-right Sarkozy in France’s 2007 presidential election.

“There’s no way you can really deal with [Lagarde’s investigation] without dealing with the long and complicated history of this case,” said Christopher J. Mesnooh, an attorney based in Paris and partner at Field Fisher Waterhouse. “This will not be an easy thing to dispose of either way.”