Friday, December 18, 2009
Transparency, Dubai style. That's the DIFC there on the upper right. Under the....um.... cloud.
So this piece is a difficult one for me to write for a number of reasons. One is that I worked very hard and very long and believed passionately in some of the institutions that are made ridiculous by the story. It is also hard for me to write because it largely proves a friend of mine correct in an argument we have been having for several years.
Our argument was about the DIFC, the financial free zone in Dubai that was in the news on Monday. In addition to giving Dubai World $10 billion in order to give Dubai World and its creditors time to negotiate Abu Dhabi and Dubai also agreed to establish an insolvency process for Dubai World in the event that things don’t work out. That process makes the DIFC courts the jurisdiction of any suits against Dubai World and establishes a tribunal made up largely of DIFC judges to hear all disputes and adjudicate an insolvency if it becomes necessary. Naturally if you are going to have any confidence in that process you have confidence in the DIFC, the regulator the DFSA, and the DIFC court system and this is what my argument was about.
The DIFC is a special legal zone within Dubai that adjudicates commercial disputes according to laws based on those in the UK with judges brought in from UK common law jurisdictions. This makes legal outcomes and contract enforcement much more certain than they are in a Sharia court for reasons that will require another post altogether. The DIFC also has a regulator, the DFSA, which is responsible for supervising the financial activities within the zone and the DFSA was intended to operate to a higher standard than other regulators in the region. There was also the DIFX an exchange built to international standards which, on account of the superior legal and regulatory framework (and a great effort of one of the DIFX members) was able to connect to Euroclear and through that to the international financial system.
My theory was that the DIFC was a major advance for the region and would have quite a few healthy effects on the region as other countries sought to import its innovations. This would in turn make it easier to raise capital to start businesses and might breathe some life into the non-oil, non-real estate sectors of the gulf and offer more meaningful employment.
My friend had another theory. His theory was that the entire legal and regulatory structure was a sham designed to rent office space and sell apartments. He thought of the whole thing as kind of a gimmick, like say, building an island in the shape of a palm tree in order to sell villas.
One thing you need to know if you are going to get in an argument with an Arab guy is that they are relentless. My friend, let’s call him Abdullah Al Gravedancer, would make this point to me whenever he could. There we were at the Caribou Coffee in the DIFC and he would pound the table and say “The DIFC is a fraud.” I would be in the office in London he would ring me up and tell me “The DIFC is a fraud.” I’d be with my family back in the US on Thanksgiving I would get a text message saying “The DIFC is a fraud.” The peak was when I was at the IMF meeting in Singapore and Abdullah was on his honeymoon, he called me and told me “the DIFC is a fraud.” It got to the point where I was afraid to lift the lid on my garbage cans for fear he would pop out of them yelling “the DIFC is a fraud!”
The thing you need to know about American is that we can be argumentative as well and I fought Abdullah whenever this topic came up. Also as Americans we are pragmatic people so I took it further and tried to make my theory that the DIFC was about reality not realty by working on improving it. I worked with the DIFC legislative body on the laws, I worked with the DFSA on their enforcement, I worked with the DIFX on everything under the sun. I levered my firm into the region and marshalled all the resources of a major investment bank to support the DIFC in theory and practice. To my mind not only was the DIFC not a fraud but it was the best chance I would get to try to make life better for people in the middle east by improving their financial system.
Then a few days ago I saw a news story posted on facebook that, once I had investigated it, made me fear that perhaps the DIFC is a fraud.
To be continued...