Kuwait Ministry of Commerce and Industry Takes Action Against Abuse of Related Party Transactions

Earlier AlQabas had reported that the Kuwaiti Ministry of Commerce and Industry (MOIC) had discovered material violations in related party transactions undertaken by Kuwaiti companies. Earlier post here.

AlQabas now reports the Department of Shareholding Companies has written a general circular to a number of companies in which it requires that they return funds withdrawn from their companies for certain transactions described as related party transactions. Or that they provide a firm undertaking to do so. Both to be accomplished this year. The penalty for failure to comply is that the MOIC will refuse to allow these companies to found new companies.

The MOIC took this step after it discovered that companies were withdrawing funds under the pretext of related party transactions. An action described as "fraudulent" (tadlis) and hiding the true position of the companies from their shareholders. The financial crisis was offered as an explanation for companies abandoning sound principles for related party transactions.

One particular prominent set of violations were intercompany loans between parent and related companies. It was noted that many of these were now in the process of regularization through settlement via transfer of ownership of shares. Another violation mentioned was that by investment firms who extended loans from funds they managed for other parties. The article closes by noting that these excesses (literally exceeding proper bounds) give rise to suspicions that there was collusion for benefit among companies, members of boards of directors or members of executive management.

Taking the AlQabas story as accurate there are a few conclusions we can infer:

1. The pattern of "looting" companies to benefit another is sufficiently widespread and/or the amounts involved are sufficiently substantial. Otherwise the MOIC would deal with a small problem much more quietly.
   
2. Unspoken is if there will be recourse to the public prosecutor. Perhaps, the intent is to allow the companies an opportunity to put things right.  If they do so, no prosecution.  And if not, then ...
   
3. The reference to investment companies "raiding" funds they manage to lend to themselves is intriguing. There is only one public instance of this that I am aware of: the very substantial sums of money advanced by Global MENA Financial Assets to Global Investment House. And just recently the last remaining obligation was agreed to be settled by a share swap. Earlier posts here and here and here and here and here.