French magistrates have placed the 58-year old under formal investigation. The charges of "negligence" are related to the so-called "Tapie affair" and the probe hinges on an alleged compensation payment.

The Tapie affair relates to the sale of the stake owned by French businessman Bernard Tapie in German sports equipment maker Adidas. In 1990, Tapie - who was one of the colourful French businessmen at the time and ex-owner of the football club Olympique Marseille - bought a majority stake in Adidas.

Three years later, he commissioned the French bank Crédit Lyonnais, now part of Crédit Agricole, to sell his share. The state-run bank, however, was neither allowed to buy the stake for itself nor profit from the sale. But that was what the bank did, Tapie claimed.

Tapie was awarded a 400-million-euro state compensation payout by the arbitration panel

Crédit Lyonnais acquired the shares for about two billion francs (France's former currency) and sold them within three months for almost double the price. Tapie accused the bank of shortchanging shareholders and profiting from it. He later went to court.

Sarkozy's extended arm?

After a 15-year legal dispute between the businessman and the financial institution, Lagarde intervened. She was then French Finance Minister at that time under Nicholas Sarkozy. Lagarde referred the dispute to a three-member arbitration panel in a bid to resolve the conflict once and for all. The panel then awarded a 400-million-euro ($527-million) state compensation payout, including interest, to Tapie.

It is speculated that Lagarde commissioned the arbitration panel at the urging of Sarkozy. The favorable verdict was suspected to have been a favor Tapie received in return for supporting Sarkozy's presidential campaign in 2007.

Since 2011, investigators have been examining whether the decision to refer the matter to an arbitration panel complied with the law. In the course of these investigations, raids were conducted in 2013 on the houses of Bernard Tapie and Stéphane Richard, then Lagarde's chief of staff, now head of France's largest telecom company Orange. The authorities also searched Lagarde's Paris home as part of their investigation.

It is speculated that Lagarde commissioned the arbitration panel at the urging of Sarkozy.

'No intention of resigning'

Since then, the current IMF head has been repeatedly questioned by the Cour de Justice de la République, a court set up to deal with the alleged malpractices of government ministers. The IMF has always stood behind Lagarde since the start of the investigation.

But the launch of a formal investigation complicates matters for the organization as Lagarde can no longer be viewed solely as a witness to the whole affair, which had been the case previously.

The investigation could also force the IMF chief out of office. Lagarde, however, announced that she had no intention of resigning. "I am returning to work in Washington this afternoon," she said Wednesday on BFMTV, adding that "I have asked my lawyer to use all recourse against this decision which I consider to be completely unfounded."