Showing posts with label Saudi Arabia. Show all posts
Showing posts with label Saudi Arabia. Show all posts

Tuesday 28 January 2020

Setback for Golden Belt Sukuk Holders

Worth Its Weight in Golden Belt Sukuks
On 27 January Citibank who are acting as Delegate for the Golden Belt Sukuk (the Company) advised that:
On 25 December 2019, the trustee of the financial reorganisation of Saad and Maan Al-Sanea pursuant to the Bankruptcy Regulation (Kingdom of Saudi Arabia Royal Decree No. M/50) informed that the Commercial Court in Dammam had rejected including the claims of the Company and the Delegate in the financial reorganisation. On 1 January 2020, the Company and the Delegate filed appeals against these decisions. The appeals will be decided by the Court of Appeal of Saudi Arabia

It’s highly likely that the estate-in-reorganization is insufficient to pay creditors a significant portion of their outstanding dues. Nevertheless, this is a setback for Sukuk holders.

Earlier posts on Golden Belt (10 in all) can be accessed using this link.
 

Wednesday 22 March 2017

Saudi Investment Banking Fee Riches – Just How “Rich”?

Happy Banker Counts His Legendary Saudi Fees

March 16 Bloomberg reported that Saudi Fee Riches Will Keep Citicorp and Credit Suisse Waiting.  Bloomberg didn’t say how long but the article implies it could be a bit of a wait.
AA thinks it will be even longer before banks get “rich” off Saudi or MENA fees.  (Editor’s Note:  With this post SAM has adopted the Spicer Style Book convention on the use of quotation marks.) 
"Rich” is a relative term.  A chap or chapette with US$10,000 equivalent in Pakistan is doing quite well.  That same amount in Luxembourg not so well.   AA is assuming talk of “riches” is in relation to the latter, though ...
The 2015 net income figures cited by Bloomberg in the article for net profits at HSBC KSA and  JPMorgan KSA (respectively US$75 million and US$10 million) indicate just how far there is to go.   For these banks this is "hobby" not mainframe LOB income.   
A few quotes from the Bloomberg article to set the stage.
Saudi Arabia and its ambitious reform plans are the focus of all the hype in Middle Eastern financial circles these days, but it’s still in the United Arab Emirates where banks are earning most of their money.

Investment banking fees paid to lenders in the U.A.E. were 45 percent higher than in the kingdom last year, according to New York-based research firm Freeman & Co. Saudi Arabia has trailed the U.A.E. for fees earned from merger and acquisitions, equity capital market and financing deals since 2011, and is off to a slower start this year, according to the data.

Global banks are investing in Saudi Arabia in preparation for an expected fee bonanza.
Sounds fantastic.  45% higher.  Fee bonanza, albeit “expected”.
There is no sweeter song to banks and bankers than of outsized fee revenue which carries the happy implication of the bonuses such flows imply.  Think on average near to 50%--at least in happier days—shared with self-professed hard working and “savvy” bankers.
But let’s take a closer look.
First at the quantum of fees as per Bloomberg.
Banks earned $237 million in investment banking fees in the U.A.E. last year, compared with $164 million in Saudi Arabia, the Freeman data shows. Lenders secured $154 million from financing deals in the Emirates, compared with $121 million in Saudi Arabia, even after the kingdom raised $17.5 billion in the largest-ever emerging-market debt sale. M&A fees in the U.A.E. were $70 million, almost triple the $24 million earned in Saudi Arabia.
Just how big are these numbers in the global context?
Charitably speaking, rounding errors.
Thomson Reuters (TR) estimates that global investment banking fees in 2016 were approximately US$85 billion.   The fee rich geographical areas are USA and Europe (primarily Western Europe). As per TR’s report roughly US$45 billion of the US$85 billion related to US deals.
On that basis, parsing UAE and KSA fee levels either individually or in total is like analyzing the relative positions of Sunderland and Middlesbrough.  Which is the better team?  Which of the two  will take home silver next season? 
If that US$85 billion total hasn’t already well and truly taken the luster off talk of KSA IB fee “riches”, or for that matter UAE or MENA IB fee riches, let's drill down a bit further..
The charts below are compiled from Thomson Reuters individual LOB reports on estimated full-year 2016 global investment banking fees for just three IB revenue streams so they don’t total to US$85 billion mentioned.  Just three to provide a bit more granular detail on where MENA fits in the global fee picture.
2016 Estimated Investment Banking Fees
Billions of US Dollars
M&A 

$30
Debt Capital Markets

$24
Global Syndicated Loans

$16
Total

$70

MENA Share of Estimated Global Fees
M&A 

0.083%
Debt Capital Markets

0.517%
Global Syndicated Loans

0.500%

Note: 0.083% is 0.00083 in decimal terms.  
MENA fees at their highest don’t reach 1% of total global estimated fees in any of the categories above.    
Side note:  You can sign up for free copies of TR’s reports (which are quarterly) if you have a corporate email or so AA has been told.  Disclosure:  I didn’t hear this from a Fox News commentator, but the information is almost certainly as, if not more, credible, if you can believe that.
Seems to AA that not too many banks or bankers are going to get rich off this level of MENA fees. 
These MENA M&A fees are less than the fees for some single deals in the USA or Europe.  Profit-oriented banks and bonus-hungry bankers are likely to focus elsewhere, particularly where the same or similar templates can be applied to a greater flow of transactions.
Typical AA Irrelevant Aside:  Once some years ago in one of our weekly deal review meetings with some of the highest life forms in the firm present ethereally electronically as befits their exalted existence, one of my colleagues began touting a deal with $6 million in revenue.  A rather distraught team leader jumped in to minimize embarrassment by noting the deal was significant for “potential market development”.  An unfortunate turn of phrase.  The “big” man or others of nearly the same rarefied stature would periodically ask how PMD was coming along when they wanted to tweak a tail.  PMD thereafter became a sort of tag line in the group to justify “certain” behaviors.  There was the case of a rather large beverage expense incurred with several colleagues that AA successfully explained as “PMD brainstorming”.   
What could change to propel MENA into relevant fee territory?
Fees are the product of volume and pricing.  (Math pun intended).
US and Europe have volume.  MENA doesn’t have the volumes.  Even with KSA’s economic plans sustained volumes at the US/Europe level are unlikely.
But there’s another problem.  Low fee levels, particularly in KSA, as Bloomberg notes.
Banks and advisers working on Saudi Arabia’s $6 billion National Commercial Bank IPO, the world’s second-largest IPO in 2014 after Alibaba Group Holding Ltd., received about $6.7 million in fees, or about 0.1 percent of the offering’s value. By comparison, Credit Suisse and Morgan Stanley took about 1.2 percent of proceeds on the Alibaba sale.
"The Aramco IPO is likely to have fees hugely squeezed," said Emad Mostaque, chief investment officer of emerging market hedge fund Capricorn Fund Managers.

One might argue that MENA fees are depressed now because current clients are predominantly public sector entities that generally pay lower fees.
Indeed.
What are the prospects for a local private sector Alibaba (other than the one pictured above) and the sort of private sector deals we see in the USA or Europe?
Off in the distant future if at all.
After the successful National Commercial Bank IPO, KSA state entities retained some 60% of the bank.  The planned Aramco IPO targets placing a whopping 5% of existing shares, leaving 95% in government hands.  In neither case are private sector fees likely to apply to follow-on deals.  And if the initial performance holds (NCB was wildly oversubscribed and Aramco is likely to be as well), market demand will bolster client demand for lower fees. 
That doesn’t mean that foreign banks will shun Saudi or other MENA deals.
Fees aren’t the sole criterion for participating in a deal. 
Sometimes “maintaining relationships” or “creating” them is a compelling motive.  The mantra goes: Do a cut-price deal, gain admission to the client’s magic circle of favored banks, be repaid many times with  subsequent richly priced deals.  But often the subsequent “rich” deal is a mirage.  If the client is used to “cut rate” prices, future transactions are likely to be just as “fee skinny” as the entrée deal. 
Or if the deal is strategically important to the country, your reward will be a fast track to a banking license in the country where you can earn above average profits from private sector clients. That’s the theory, though this also often doesn’t work out in practice.
Banks have other motives, e.g., doing deals to enhance league table position to bolster their image and marketing.  That’s why you’ll see more than the necessary number of banks on very large or very prestigious deals often working for a song.  But without sustained substantial fee revenue such efforts come to naught. 
Also sadly, as history shows, despite self-proclaimed “smarts”, IBs are prone to fads, fashions, and, yes, hype.  See Lehman, Bear, Citi, et al.  Or dotcoms,mortgages, whales, etc.  If the music is playing, there is a strong compulsion to get up and dance.

Wednesday 20 October 2010

Gulf Bank Kuwait - On the Mend. No More Loans to Saudis.

A banker's memory is a wonderful thing.  
Even the most painful experiences can be forgotten. 

Michel Accad gave an interview at the Reuters Middle East Investment Summit in which he made the following points:
  1. 3Q10 is the turning point in GB's two year strategy to rebuild.  
  2. Each subsequent quarter will be a relative improvement over the previous.  
  3. By 3Q11 the rebuilding will be done (apparently one quarter ahead of time) and the bank will move to strengthen its income generation or its geographic coverage.
  4. The goal is to increase local market share from today's 12% to some 16% in five years.
  5. After 3Q10, the Bank will not need to provision as much but will continue to do so for precautionary reasons (rather than need).
  6. The Bank has decided not to make any loans to Saudi clients for at least 3 years.  No doubt a reaction to its troubles with AlGosaibi and Saad Groups.  
  7. Instead it will, however, make loans to foreign investors for their projects in Kuwait. And no doubt concentrate on its high quality Kuwaiti clients.
  8. As of 3Q10, the Bank has successfully reduced its non performing loans below 20% of the total portfolio.  That's a lot of "Saudi" clients, it appears.

Monday 18 October 2010

Saudi Capital Markets Authority Levies Fines and Penalties in Excess of SAR102 Million

On 12 October the Saudi Capital Markets Authority levied another set of record fines and penalties but not as high as its all time record of SAR278 million last January.  If you look closely, you'll see that many of those cited today were also involved in that fine.

The CMA levied SAR800,000 in fines and SAR99,434,098.10 in penalties (disgorgement of illegal gains) against seven individuals (two of whom were apparently not involved in illegal activity but received gains from that activity).  The fines and penalties concern trading in the shares of Al Baha Investment and Development Company between 23 July 2006 and 27 September 2006 as follows:

A.  Mr. Jarrallah Bin Muhammad Bin Nassir Al-Jarrallah
  1. Return of SAR28,923,826.57 in illegal trading earnings on the trading.
  2. A fine of SAR 300,000.
  3. Prohibition from purchasing traded shares for seven years.
  4. Prohibition from working in a securities firm for seven years.
  5. Prohibition from acting as a broker, portfolio manager or investment advisor for seven years.

B.  Messrs. Sa'id Bin Muhammad Bin Nassir Al-Jarrallah, Fa'iz Bin Salih Bin Abdullah Bin Mahfouz, Nabil Bin Mu'id Bin Yahya AlQahtani
  1. Sai'd to return illegal trading gains of SAR2,119,935.00
  2. Nabil to return illegal trading gains of SAR24,896,213.23
  3. Each of the three of them fined SAR100,000.
  4. Prohibition from purchasing traded shares for five years.
  5. Prohibition from working in a securities firm for five years.
  6. Prohibition from acting as a broker, portfolio manager or investment advisor for five years.
C.  Mr. Abdulrahman Bin Abdulmuhsin Bin Sulayman AlMoajil
  1. A fine of SAR200,000.
  2. Prohibition from purchasing traded shares for five years.
  3. Prohibition from working in a securities firm for five years.
  4. Prohibition from acting as a broker, portfolio manager or investment advisor for seven years.
D.  Mr. Muhammad Bin Nasser Bin Jarallah Al-Jarallah
  1. Return of illegal trading gains in his account of SAR38,293,835 caused by actions of Jarallah, Said and Fa'iz.   No fine as he apparently was not involved in the activities just a beneficiary.
E.  Mr. Nasser Bin Muhammad Bin Nasser Al-Jarallah
  1. Return of illegal trading gains in his account of SAR5,200,288.30.  Like Mr. Muhammad immediately above, a fine was not levied against him, presumably because he was not involved in the illegal activities.
I'm guessing our friends above just didn't trade two stocks back in 2006 so we may be seeing more enforcement actions from the Saudi CMA.

    Sunday 10 October 2010

    Boubyan Bank to Liquidate Shares Owned by Awal Bank to Partially (Very Partially) Collect Debt


    Mohamed Sha'ban at Al Qabas reports that having received judicial authority, Boubyan will sell some 300,000 shares in International Finance Company on the KSE to partially settle a debt of SAR 111 million owed by Awal to it.  Furthermore it will sell some 61,000 Global GDRs listed on the LSE through the manager of the fund holding the  shares.

    Since AlDawliah is trading at around KD0.250 per share the recovery is half of that pictured above.  A penny on a dollar of debt.

    Golden Belt Sukuk 1 Certificateholders Make Up Their Minds

    Today via an announcement on the Bahrain Stock  Exchange Citibank, the Delegate on the Golden Belt Sukuk, advsied:

    The Delegate refers to previous notices issued by the Delegate dated 24 August 2009, 7  October 2009, 17 November 2009, 23 November 2009, 2 February 2010, 16 March 2010, 28 April 2010 and 22 July 2010.

    In these notices, the Delegate noted that, in accordance with the Terms and Conditions of the Certificates, prior to acting upon any instructions from Certificateholders it is entitled to be  indemnified to its satisfaction.

    The Delegate confirms that on 27 September 2010, it entered into a deed of indemnity (the  Deed of Indemnity) with a number of Certificateholders (the Indemnifying  Certificateholders). The Indemnifying Certificateholders represent at least 25 per cent in  aggregate face amount of the Certificates outstanding.

    Acting under instructions from the Indemnifying Certificateholders, the Delegate has served a  Notice of termination of the Sub-Lease and made a demand for all amounts due under the  under the Costs Undertaking.

    Wednesday 29 September 2010

    AlGosaibi v Maan AlSanea - New Venue The US Congress


    If you've been following the continuing dispute between AHAB and Mr. Al Sanea, you know from reading Frank Kane over at The National that the latest "round" is scheduled for a new venue - the US Congress. As a side comment, if you're not reading The National already, you should.

    As per the schedule, the hearing was held on September 28th at 4:00PM.  The prepared testimony of the four witnesses can be found here at the US House of Representatives' Financial Services Committee.  The listed topic is terrorism finance.

    Among those giving testimony was Eric L. Lewis, Esquire, of the Washington DC office of Bachman Robinson & Lewis.  As you'll see from the attached biography, he has an extensive background in investigating financial crimes.

    His prepared remarks are here.

    Interestingly in his description of his experience and current assignments (page 1 paragraph 2), he does not mention his current assignment and that of his firm for AHAB - though it is clear later in the testimony that there is this link.  I'm confident this was an oversight and was corrected when he read his statement this afternoon.

    His comments do not deal with terrorism per se, but with what he feels are serious defects in the provision of correspondent bank accounts which terrorists might exploit.  I am sure that just by perhaps a fortuitous coincidence his remarks might also help the case of his client, AHAB, in their legal battle with Mr. Al Sanea.

    In that regard he focuses on what he alleges to be criminal activity by Mr. Al Sanea.  As always, let's stop to note that to this day Mr. Al Sanea continues to deny any improper or illegal behavior.

    His argument is that there were repeated critical failures of know-your-customer due diligence ("KYC") by the American Bank that opened  the main US Dollar clearing account for AHAB's Money Exchange Division in NYC.   He notes that the Money Exchange advised the American Bank that it anticipated a volume of US$15 billion per year through its account.  As Mr. Lewis notes, this amount was out of proportion to the business conducted by the Money Exchange - which he places at US$60 million per year.  He also comments that the total of remittances from the Kingdom were about US$21 billion in 2008.  Therefore, it would be unrealistic for the bank to make the assumption that AHAB Money Exchange had the preponderant a share of the remittances business in the Kingdom as it operated from a single office in the Eastern Province.

    Mr. Lewis identifies four red flags which he asserts were missed by the American Bank: (a) a high risk region and country (b) a money remittance business which accepts business from "walk in" customers where he asserts the Money Exchange's KYC would be non existent or weak, (c) massive transactional volume, and (d) a transactional volume vastly disproportionate to the customer's ostensible business.

    As a side comment, I'd note that these requirements reflect the due diligence standards established by the FATF in its 40 Recommendations.  Recommendations 5, 7 and 11 are the relevant ones.

    The Financial Action Task Force is an inter-governmental organization set up  by to combat money laundering and the financing terrorism.  It does not have any legal enforcement powers.  Rather it sets global standards, monitors individual countries' compliance therewith, including naming and shaming non compliant jurisdictions (which triggers additional AML procedures under the 40 Recommendations).  It also serves as a clearing house for the exchange of expertise and information on money laundering. The FATF has also issued Nine Special Recommendations on Terrorism Finance.

    Summing up what he sees as a failure of due diligence, he states (page 3 paragraph 4):
    "Yet, in this case, our investigation revealed no evidence of any significant due diligence or AML investigation by [American Bank] of the Money Exchange in connection with the opening of the [American Bank] account in 1998, or really at any time after the opening of the account - even after the imposition of much more strict anti-money laundering  and know-your-customer requirements after the tragedy of 9/11."
    On page 4 paragraph 2 he levies another serious charge:
    "Literally at the same time it was under investigation and was negotiating this settlement with the DA’s office, [American Bank] was in communication with the Money Exchange, which was running about a $20 billion  annual volume at that time. [American Bank] asked the company to change its name to something without the words “Money Exchange,” which might be a red flag to [American Bank's] auditors or compliance officials. [American Bank] also asked the Money Exchange to cease engaging in walk-in money remittance business. But this aspect appears to have been perfunctory and not to have been followed up. The Money Exchange simply proffered a new name not suggestive of money remittance services—it went from “Ahmad Hamad Algosaibi Brothers Money Exchange, Commission and Investment” to “Ahmad Hamad Algosaibi Brothers Finance, Development and Investment.” It went right on doing walk-in remittance business. Its enormous movement of funds through its account at [American Bank] remained unchanged. The truth is that if [American Bank] had done its due diligence, it would have been immediately obvious that the throughput in the account actually had nothing to do with any money remittance business. And even the $15 billion a year predicted transaction volume was substantially exceeded. So [American Bank] failed to ask why a money exchange would need to process $15 billion per year and went it started to process in excess of $20 billion or $30 billion per  year, it failed to ask why there was an additional $5 or $15 billion per year in transactions. On a per  transaction fee basis, this was all good, no-risk business for [American Bank].”
    As we look at the issue of the American Bank's requirement that the Money Exchange change its name, the major pieces of public evidence in that regard - of which I am aware - are from the submission by AHAB's counsel  (by an attorney from Mr. Lewis' firm) in NY Supreme Court Case 601650/2009 - Mashreqbank v AlGosaibi.  These are exhibits #16 (Document #93) and #19 (Document #96).  You can read these for yourself by going to the NY Supreme Court's website at http://iapps.courts.state.ny.us/webcivil/FCASMain.  Perform an Index Search using the CRN 601650/2009 and follow through until you find a tab for e-filed documents (at the lower right hand of a screen).

    Exhibit #19 (pages 7-8) contains a memo dated 12 June 2006 from Mr. Mark Hayley to Mr. Al Sanea relaying his account (I haven't seen any document which purports to relay the American Bank's account) of a meeting with the American Bank:
    "The Money Exchange must not act or be perceived to act as a money service business.  Accordingly, no walk in business can be accepted, even if the customer is well known to us (e.g., Saad, AlGosaibi and Aramco staff).

    Instead we must have a full account relationship with every customer requiring to transfer money and every account relationship requires full KYC documentation and compliance.

    According to [American Bank], perception is also important and the words "Money Exchange" in our name could be seen by the regulators as an indication of money service activities.  Therefore we need to change our name."
    This document can be read in two ways.

    In the first - favorable to the American Bank - they are telling AHAB that the Money Exchange can no longer operate as a money exchange.  That it must terminate business of that nature.  And as a result should change its name so that there is no suggestion that it is engaged in that business.  Presuming that it did of course eliminate this business, then it would be highly appropriate for the entity to change its name.

    In the second - unfavorable way - the document can be read to imply that the change in name is cosmetic designed to circumvent the bank's internal audit and controls.   That the entity would continue to perform money transfer services but for account holders.  Under this theory, since the ME was not licensed as a bank or investment company, it would remain a money exchange.

    There are really two fundamental issues here:
    1. What is the business this entity is engaged in"  Is it a money exchange firm?   Is it operating as an unlicensed and unregulated bank?  Is is something else?  
    2. What is the legal status of the entity?  When I was a rookie banker (who dealt with the Money Exchange and other AHAB entities), I knew that it was a division of the AHAB Partnership.  That it did not have a separate legal identity.   That's a critical matter for a banker as it affects one's rights under the law.  Important as well in determining who had the right to sign to commit the entity to a legal document, to sign a payment order.  And important for issues like ultra vires defenses.
    The memo is crystal clear.
    "Since we call National Bottling a "company" it would not be inconsistent to call the Algosaibi Investment Division a "company".  By calling ourselves Algosaibi Investment Company we could explain that this is the first step towards eventual incorporation following the grant of a bank of investment company license.

    This new name will not change our constitutional position as a division of Ahmad Hamad Algosaibi & Brothers Company -- Partnership.  Our letterhead should continue to disclose this -- see attached.”
    The memo then notes that they should obtain a CR for the Investment Company.  Another key point:  one does not need to be a separate legal entity to obtain a CR in the Kingdom.  Caveat banker.

    Exhibit #16 contains a memo from Mr. Hayley to Mr. Al Sanea dated 14 July 2006 which contains Mr. Hayley's account of a 3 July  meeting with the American Bank.  That memo notes that:
    1. KYC Anti Money Laundering procedures must be revised to eliminate any "walk in" business and that a draft (apparently incorporating same) was sent to the American Bank. 
    2. The account name must be changed to Ahmad Hamad Algosaibi & Brothers Company.  (Note that's the Partnership name - a legal entity unlike the Money Exchange.) 
    3. The Money Exchange name must be changed.  "This is necessary even if our account with [American Bank] is maintained in the Partnership name."
    Again it is possible to read this document in a manner favorable to the American Bank.  The client has told  it banker that it has ceased walk in business and has provided that banker a draft internal document. which reflects this.  Thus, meeting the American Bank's requirement.  The account is to be registered in the name of the Partnership - a legal entity.  References to "money exchange" are being removed to conform to the facts and thus to avoid raising false issues.

    We don't have the full set of information that Mr. Lewis does so there may be other documents and evidence he has which enable him to draw his conclusion.  So at this point from what we have here the jury is out.  But the American Bank at this point does appear to have a reasonable case.

    There are a couple of other points from his testimony.
    1. The American Bank advised that the original account opening records were lost in the 9/11 tragedy.  Rather poor form in record retention and security.   Certainly not in compliance with FATF Recommendations, but then as is pretty well known the US was fairly relaxed about these matters prior to 9/11.
    2. On page 5 Mr. Lewis asserts that "Awal Bank was a creature of Al Sanea's fraud and was, further, the bank of choice for the children of a foreign head of state who appeared to be using Awal Bank to launder funds."  The BD64,000 question here is whether his bank was an active conspirator.  Or whether it was being taken advantage of by these third parties.  I cannot think of a single major USA bank or UK bank that has not been fined by a regulator for lapses in implementing proper AML procedures.  If that's the case with Awal - a lapse in procedures, then they are in the company of many household name financial institutions from the "Developed" West.  If they were an active participant, the company they keep is a much much smaller circle of banks.
    One last bit to cover and we're done:  the presumed profitability of the account that caused the American Bank to short circuit due diligence (taking Mr. Lewis allegations at face value).

    How do correspondent banks (like our American Bank) make money on an account?

    Generally, it's through a combination of per item charges (debits, credits, payments, account statements, etc) plus some fixed charge for maintaining the account (a required minimum balance or a yearly fee).

    Let's look at the item which drives the overwhelming bulk of the per item charges:  payment charges.

    The per item charge is independent of the amount of the payment.  A payment for $100,000 costs the same as one for $100,00,000 - all other things being equal.

    So what drives the per item price for a payment?
    1. The manner in which the instructions are delivered to the correspondent bank. Payments delivered in machine readable form (through SWIFT or the correspondent's proprietary payment system - often PC based) are preferred because they do not require as much effort to process as those which are not in machine readable or electronic form.  In the latter case, the correspondent has to employ staff to take the non machine readable instructions from the client, input them into the payment system with of course the obligatory checking of the payments by a second employee to make sure they've been entered properly.  So pricing for manual payments is much higher than electronic ones.  
    2. There is a further distinction for electronic payments - whether they are straight through or need to be repaired.  To go "straight through" the payment system, payments need certain codes for the receiving bank, the beneficiary etc.  If the client (here Algosaibi) inputs all this information correctly, then the NY correspondent has little to no operational work.  If not, then a member of the correspondent bank's operations staff has to enter this information. Note that with a straight through payment if sufficient funds are in the client's account, the payment is released without any manual intervention by the correspondent.  If there are insufficient funds, a credit officer may have to make a decision whether to release the payment or not.  Generally, there is no charge for credit approval.  So as you'd expect, straight through payments not requiring any "repairs" are priced lower than electronic payments requiring repairs.
    Let's make some assumptions and see what sort of revenue (note revenue not net profit) the American Bank may have been making on the Money Exchange account.
    1. $20 billion in payments through the account per year.  Since Algosaibi did not start out with $20 billion in the account, they'll need to arrange cover for these payments by having credits of US$20 billion. 
    2. Each payment and credit at US$25 million.  That's 800 of each.  We'll also look at the highly unlikely scenario where each is US$1 million.  That means 20,000 of each. 
    3. US$5 per payment and per credit.   We'll also look at higher levels.  A not very likely US$10 per item.  And a totally unrealistic US$50 per item.   One further fussy note.  Generally, credits are not priced the same as payments.  They're priced lower because they come to the correspondent in  electronic form.  And if there's a problem with applying the payment, the correspondent charges fairly hefty "investigation" fees.  What's the point you ask?  There's a lot of excess in my pricing. Credits are probably much much less than the payment price.
    4. Other charges of $1,000 per month.  This should more than cover the miscellaneous per credit, per debit, account statement mailing, etc. 
    5. A fixed charge of US$100,000 per year.  This should be well above what the American Bank required. 
    6. Since Mr. Lewis mentioned that the same bank had been fined US$7.5 million for running a Latin American account through which over US$3 billion was transferred during 4.5 years,  we'll use that as the minimum fine.
    What are the results?

    Scenario 1:  Payment and Credit Size US$25 million

    Per Item Charges$5 Per Item$10 Per Item$50 Per Item
    800 Payments$4,000$8,000$40,000
    800 Credits$4,000$8,000$40,000
    Sub Total $8,000$16,000$80,000
    Fixed Charges
    Account Fee$100,000$100,000$100,000
    Miscellaneous $ 12,000$ 12,000$ 12,000
    Sub Total$112,000$112,000$112,000
    GRAND TOTAL$120,000$128,000$192,000

    Comments:
    1. Here we're using $25 million per item which is realistic for the sort of business the Money Exchange was conducting.  And this certainly fits with the data in the account statements disclosed as part of Mashreqbank case. 
    2. With this assumption the accounts have fairly modest total revenues, even at the completely unrealistic price of US$50 per item.  
    3. If you think my assumptions are too low, double the results.  It's still hard to see a rational businessman running the risk of a US$7.5 million fine - which might be much larger given the amounts transferred through the accounts.  And not only is there the fine but also the damage to one's business reputation.  The dangers to one's franchise can be very serious.  Riggs Bank is a cautionary tale.
    But maybe I'm being too generous.  So let's look at another scenario.

    Scenario 2:  Payment and Credit Size US$1 million

    Per Item Charges$5 Per Item$10 Per Item$50 Per Item
    20,000 Payments$100,000$200,000$1,000,000
    20,000 Credits$100,000$200,000$1,000.000
    Sub Total $200,000$400,000$2,000,000
    Fixed Charges
    Account Fee$100,000$100,000$100,000
    Miscellaneous $ 12,000$ 12,000$ 12,000
    Sub Total$112,000$112,000$112,000
    GRAND TOTAL$312,000$532,000$2,112,000

    Comments:
    1. Frankly, this is a highly unrealistic scenario.   I've included it to show that even an outlier like this does not generate sufficient revenue to take risk. 
    2. Only if one combines it with the even more improbable US$50 per item charge do we get anywhere near a risk taking point. 
    3. But the simple fact is that when the account was being used banks were fighting to get a piece of business from AHAB - then one of the Kingdom's most prestigious groups as was Mr. Al Sanea's companies.  So US$5 per item is probably the high point for payments.  The pricing per item may even have been lower.  Hard to see this account being so lucrative that a bank would take a risk like this.
    Conclusion: 
    1. Correspondent accounts just aren't that lucrative .  
    2. Many of the major correspondent banks are feeling the pressure of AML regulations  and are highly sensitive not just to regulatory fines but to the risks of lawsuits by third parties (as happened to the Arab Bank's New York Branch).  And so they are reducing exposure by throwing marginal customers out.
    3. That being said, bankers often do very stupid things. And sometimes bankers don't work for the best interest of their firms.

    Wednesday 22 September 2010

    Mashreqbank v AlGosaibi - Al Sanea's Forum Non Conveniens Motion Successful

    Above Main Entrance to NY Supreme Court

    Looks like Mr. Al Sanea is continuing his run of victories in the NY Courts.  

    As you'll recall when Mashreqbank filed suit against AHAB in the NY Supreme Court, AHAB had Mr. Al Sanea added as a third party defendant.

    July 29 Judge Lowe of the NY Supreme Court ruled in favor of Mr. Al Sanea's request that due to forum non conveniens he and Awal Bank be removed as third party defendants. 

    While Mashreqbank is appealing, based on the pattern of judgments in the NY Supreme Court, their chances of obtaining a reversal of the ruling would appear to be somewhere between slim and none.   Wonder if AHAB will now find NY an inconvenient forum and file a motion.  There seems to be lots of precedents for this.

    (As before, the email notification from the NY Supreme Court is a bit late in arriving.)

    You can find earlier posts on this topic by using the label "Mashreqbank".

    The NY Supreme Court Case Reference # is 601650/2009.

    Al Ahli Bank of Kuwait v AlSanea & Saad Trading - NY Case Dismissed Forum Non Conveniens

    A Rather Inconvenient Place After All

    Judge Richard Love III of the Supreme Court of the State of New York decided last July that New York was indeed a forum non conveniens and so dismissed ABK's suit against Mr. Al Sanea and Saad Trading, Contracting and Financial Services Company.

    (In case you're wondering why the delayed posting, while the judgment was electronically filed 11 August, I didn't get an email until today).

    I suspect the new venue will turn out to be much much more convenient for Mr. Al Sanea.  Under AA's law of the conversation of legal energy, that may make it much much less convenient for ABK.  Such is life.

    You can find the judgment as Document #28 at the NY Supreme Court's website under Case # 602487/2009.

    If you use the tag "Al Ahli Bank of Kuwait" you will find earlier posts on this topic.