Tuesday, December 29, 2009

Remember when Dr. Omar had a garage full of Ferraris just for working for the government? Man this fraud decree blows.




Sheikh Mohammed bin Rashid Al Maktoum laid aside his title of Vice President of the United Arab Emirates and picked up his more familiar mantle as Ruler of Dubai today and issued a decree. This decree concerns the penalties for graft and how one might avoid them. I don’t have a copy of it myself as of yet so I have only the press release and the newspaper articles about it which seem to generally be a rewording of the press release.

The law increases the penalties for fraudulently seizing public or private funds to prison terms of between 5 and 20 years. Lest this seem a little too draconian the law also stipulates that anyone who gives back the money signs a “settlement agreement with their debtors,” (I’m sure they mean creditors but I wanted to get the quote correct.) At the same time Dubai announced a partnership with AT Kearney to create new policy tools to attract foreign direct investment. Unsurprisingly all the people who work for Sheikh Mohammed think its a great idea.

This is all very interesting. The press release says that this is designed to “eradicate all forms of fraud thus enhancing the Emirates position as a leading global business hub,” and also that it “facilitates the redemption of funds fraudulently seized from public or private money.” I think the latter goal may be more important than the former.

Back when I was trying to figure out how to legally invest in Saudi equities as a non-GCC national or institution one of the laws that got in the way was something called the anti-coverup rule. This was a law that essentially criminalized Saudi nationals assisting foreign investment into the kingdom by holding shares in their name as nominees for non-Saudis. The penalty when I first got to the Kingdom was 5 years in prison and a 500,000 SAR fine. Let me assure you, a five star hotel in Riyadh is no picnic, prison? Forget it.

The thing is, despite this draconian penalty people did this all the time and if you were say... running the middle eastern equity business for a large international bank it was really annoying. The clients would come in and say, “why can’t you guys help me invest in Saudi? Bank XYZ in Dubai does it, Bank ABC in Qatar does it. But I don’t like having to take the credit of banks ABC or XYZ, I want to take your credit.” Then I would have to patiently explain that as we were an international firm and governed by multiple regulators we were in fact, unlike our local competition, obliged to comply with the law and indeed our compliance with the law was what made us more creditworthy than ABC and XYZ in the first place.

Of course all kinds of foreign investment was going on in Saudi Arabia through these nominee accounts. The Saudi Authorities knew it, it’s impossible to keep secrets in that part of the world, but the legal and surveillance tools at their disposal were unequal to the task. Thus no one was ever prosecuted under the anti-coverup rule but in 2007 the penalty was increased from five to seven years in prison and the fine raised to 700,000 SAR. Why did they do this? They did it to raise the expected value of the cost of breaking the rule. They knew that the financial community knew that the probability of the rule being enforced was minimal so they raised the punishment. The increase in jail sentences for fraud in Dubai strikes me as a similar effort.

The increased sentences are not the interesting part of this decree. The interesting part is the amnesty for those who pay back the money or reach a “settlement agreement.” So basically you can go to prison for a mighty long time if you fraudulently assign yourself funds from “public or private sources,” but if you return the funds or agree to a partial return of the funds you are scott free. I think this implies two things. First is that it is likely that when the bankruptcy... errr... restructuring... experts started going over the books of Dubai Holding, Dubai World, ICD, and DIFC they found fairly striking discrepancies between the debts owed and the assets owned and probably also noticed that the CEOs kept showing up in Ferraris.

As I have written in my pieces on Dr. Omar and Naser Nabulsi a little self dealing was not uncommon in Dubai generally as long as it was not egregious. My guess is that if asset prices had continued to go skyward (pardon the pun) no one would be asking any questions about this. As it stands the discrepancies between the asset and liability sides of the balance sheets of Dubai Inc are highly inconvenient and probably substantial. Ordinarily Sheikh Mohammed would privately reprimand his lieutenants and move forward but now he has Abu Dhabi breathing down his neck, and _he needs the money_.

Trouble is Sheikh Mohammed’s lieutenants were no fools and a lot of that money has probably found its way into numbered accounts in Switzerland, Singapore and Lebanon where it will never be heard from again. Unless the account holders have a really good reason to bring it back. Or 20 years worth of good reasons. My guess is that this is a warning being issued to people who have taken a lot of money from Dubai Inc, many of whom probably thought they were entitled to do so at the time, that Sheikh Mohammed fully intends to get that money back so that he can pay off Abu Dhabi.

While this may be bad news for some of Sheikh Mohammed’s former lieutenants guess who it’s good news for: the brothers Abdullah. While it increases the penalties for fraudulent seizure of private funds it grants amnesty to anyone who signs a “settlement agreement.” The disgraced CEO of Damas Tawhid Abdullah signed just such an agreement with the management of Damas which pledged 350 million shares worth about $50 million in the event that he doesn’t pay back the $165 million he took from the company within 18 months. Why would the shareholders agree to such a settlement which potentially locks in a $110 million loss? Well they were represented by the MD Tawfiq Abduallah, the brother of disgraced CEO. That’s right folks, the man who perpetrated the fraud and the MD at the time of settlement agreement are brothers who both owned 17% of the shares. Outstanding.

If the brothers Abdullah are allowed to get away clean from looting Damas Dubai is going to need a lot more than a few million dollars worth of consulting from AT Kearny to recover from the blow to its' credibility.

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