Awal Bank – Hibis Europe 2009 Investigative Report

This post presents the findings of the Hibis Europe entitled "Report to the Public Prosecutor Bahrain Review of Awal Bank" dated 6 August 2009 (the "Report").

The Hibis Report is contained in the 5 February 2010 filing by Ahmad Hamad AlGosaibi & Brother's counsel and is available at the Supreme Court of New York's website (http://iapps.courts.state.ny.us/webcivil/FCASMain). All the electronic filings in this case can be accessed through that website using the Case Index Number 601650/2009 MASHREQBANK PSC vs. AL GOSAIBI, AHMED HAMAD.   The Report is Exhibit 11 in Document #83.  If you initially have difficulties at the SCNY website, keep trying.  The site appears to be somewhat temperamental.

 

As I noted in my post about the Ernst and Young Report on The International Banking Corporation, I have no independent way to verify that this is indeed a true and correct copy of the Report except for the sworn testimony of the counsel of Ahmad Hamad AlGosaibi. This caveat should not be read as implying any lack of faith in his certification, but merely as a factual statement of the limitations of my knowledge.

 

As before I will quote from the report and make some comments based on the assumption that this is the Hibis Report and that its conclusions are accurate. 

A bit of housekeeping.  Paragraphs and pages in the Report filed with the SCNY do not bear numbers. I have numbered the pages starting from the "INTRODUCTION SECTION". On that basis the Report comprises 47 pages.  In some cases I have redacted the names of staff at AB.   You should also be aware that the Report also includes some excerpts of interviews Hibis conducted with senior managers of Awal Bank.  You might want to read the report itself to see those as I have not transcribed them here.  And it's good practice to take a look at the original sources and not solely rely on tafsir.

 

The report begins with a summary and then a more detailed discussion of eight cases.

1. Page 1 and Page 3 : "Awal Bank is managed on a day to day basis by Maan Al Sanea, who is based in AlKhobar in Saudi Arabia. Al Sanea operates with an autocratic and dictatorial management style suppressing any form of entrepreneurial spirit. Maan Al Sanea makes the decisions relating to any and all transactions that take place at Awal Bank; for example the Chief Executive Officer can only authorize payments of under BDH 12,000." 
2. Page 3 "Many of Awal's transactions with third parties involve entities owned by the AlGosaibi family, such as The International Banking Corporation [TIBC], AlGosaibi Trading Services [ATS} and AlGosaibi Money Exchange [ALGME]." 
3. Page 3: Summary of Findings. "In June 2009 Hibis Europe Limited [Hibis] was retained by the Central Bank of Bahrain [CBB] to conduct a review of the Awal Banking operation. Following the review Hibis prepared eight Evidence Case Files outlining the various criminal and regulatory breaches. The supporting evidence has been obtained as a result of reviewing bank records, recovering data from the bank records and interviews with bank employees. There are many other transactions at the bank that we have not yet reviewed." 
4. Page 3: "Evidence Case Files. For the purposes of this summary file, each identified criminal offense and regulatory breach has been catalogued and exhibited separately in a series of Evidence Case Files- Volumes 1 to 8."  
5. AA: These include: Evidence Case File 1 Fraudulent Land Deals; ECF 2 Foreign Exchange Transactions with ALGME; ECF 3 Redacted (However, the case diagram on page 26 remains. It is labeled "Money Laundering"); ECF 4 Fraudulent Foreign Exchange Deal with SAAD Group, ECF 5 Unsupported Foreign Exchange Deal, ECF 6 (Unlabeled, but detailed later in the report as breach of trust in accepting a deposit); ECF 7 Letters of Credit and ECF 8 Regulatory Issues. 
6. Page 4 "Hibis has identified approximately US$2 billion of suspicious and fraudulent transactions involving criminal offenses and regulatory breaches." 
7. Page 4 "Hibis would like to point out that all the evidence that we have gathered indicates that the Chairman of Awal Bank, Maan Al Sanea, is the central figure in the conspiracy and the main beneficiary of the frauds. Al Sanea's management style has allowed him to control all of the transactions at the bank and use the senior management of the bank to assist him in these frauds." 
8. Page 4: "The common theme that Hibis has seen for most of the frauds discovered and investigated to date is that AlGosaibi assets have been used to the benefit of Maan Al Sanea. Examples of this include land in the name of AlGosaibi being used as collateral to create a profit for Maan Al Sanea through fictitious land deal and the profit for these deals being transferred from ALGME to Awal Bank when the bank is losing money. It is the opinion of Hibis that Maan AlSanea has either disadvantaged the AlGosaibi family for his own personal benefit or used their resources to benefit Awal Bank." 
9. Page 4: "As a result of the preliminary 20 day review completed by Hibis it is our opinion and proven beyond reasonable doubt that senior management of Awal Bank have colluded and conspired together to commit criminal acts and significant breaches of banking regulations and CBB Law." 
10. Page 5: "New Finding. At the time of preparing the Evidence Case Files evidence allegations were made that on the 26^th and 27^th May 2009 all the Commercial Loan files were removed from Awal Bank and sent to the Chairman's office. At this time, Awal Bank was in serious financial trouble and it appears the Chairman wanted the documentation removed from the bank and although senior management were advised against it they allowed the complete files to be removed." 
11. Page 6: "Hibis believes the removal of these files was a breach of CBB law and was done with the objective of removing evidence of a fraud." 
12. Page 6: "In 2007 and 2008 Awal Bank made about 50 commercial loans to entities in Saudi Arabia. All the loans were arranged by the Chairman, Maan Al Sanea, and no one at Awal Bank was involved in meeting or communicating with the alleged "borrowers". Hibis has not investigated these loans but are very suspicious of who the real beneficiaries are. At the end of 2008 these commercial loans were paid up or converted in to the land deals that a reported in Evidence Case File 1." 
13. Page 12: Evidence Case File 1. "The investments in land shown on the Awal balance sheet (AA: US$1.5 billion) are the result of 8 unusual transactions which were recorded from 2008-2009. Seven of the transactions are supported instructions from Maan Al Sanea or his representative from the Saad Group." 
14. Page 13: "Hibis believes that Maan Al Sanea does not in fact own the properties that are described in Awal bank's documentation and that the fair value of the properties is far less that what is on the Awal balance sheet and the figures have been grossly inflated." "Hibis believes that the USD$200 million of reported profits represents False Accounting on behalf of Awal Bank". "Hibis believes that Maan Al Sanea is not entitled to USD$ 461 million nor the USD$ 543 million of cash and assets transferred to him as a result of these land deals." 
15. Pages 15 -16: Evidence Case File 2 "Awal anticipated substantial losses for the year end of 2008, engaged in the transfer of profits from ALGME to Awal through the use of fraudulent FX transactions. Identified sixty transactions entered on the records of Awal Bank that were entered after the event. All positions closed during 2008 and 2009 resulted in Awal making a profit and ALGME being disadvantaged". 
16. Page 20: "To conduct 60 foreign exchange transactions where one party always wins and the other party always loses is not possible and is against the laws of probability. The backdated foreign exchange transactions have been used to justify the transfer of profits from ALGME to Awal." 
17. Pages 22- 26 Evidence Case File 3. Redacted but from Page 26 apparently involving an allegation of money laundering. 
18. Page 27: Evidence Case File 4. "The purpose of preparing this Evidence Case File 4 – Foreign Exchange Deal with SAAD Group is to illustrate is to describe how false accounting was used to treat three deposits totaling USD$44 million on 21^st and 23^rd April 2009 from Singularis Holdings as a Foreign Exchange profit in May 2009." 
19. Page 30: Evidence Case File 5: "The purpose of preparing this Evidence Case File 5 – Unsupported FX deals between Awal & ALGME is to outline an allegation made by an employee of Awal Bank [name redacted by AA] who is employed as an FX Trader with Awal. [Name redacted] alleges that Awal Bank entered in to an unsupported Foreign Exchange Deal for GBP 60 million. This allegation is supported by his colleague [name redacted by AA]. "
20. Page 40: Evidence Case File 6. "The pending liquidity crisis was identified and known to Awal and the CBB aat the time that the first deposit was taken from [name redacted for filing]. While the investigation has not identified evidence of intent to defraud [name redacted for filing] by knowingly entering into a transaction that the bank might be able to honour, the issue of a Breach of Trust arises, given the extent of the liquidity crisis known within Awal Bank from May 12^th 2009 onwards." AA: This ECF relates to two US$1 million deposits taken by Awal – one on 14^th May and the other on 21^st May 2009. 
21. Page 41: Evidence Case File 7 – Letters of Credit. "To date Hibis has not discovered fraud in the Letters of Credit transactions. The evidence is that the Letter of Credit transactions have been structured to the disadvantage of AlGosaibi Trading Services [ATS] and to the advantage of Awal Bank." 
22. Page 44: "The preliminary analysis of these transactions conducted by Hibis estimates that Awal has obtained an unjustified benefit of more than USD$20 million during 2007, 2008, and 2009. Further analysis has yet to be done to establish if fraud has taken place."   AA:  This refers to Point #21.
23. Page 45: Evidence Case File 8 – Regulatory Breaches. "Within the limited time allotted to this Phase 1 review "Quick Wins" Hibis Europe Limited [Hibis] have established the following: Misleading the CBB about cash flow on the 14^th May 2009; The Excom approved land deals after the transaction had been completed by the Chairman, Maan Al Sanea; Shredding of Awal documentation by [name redacted by AA], Chief Financial Officer on the 25^th June 2009; the role of Awal Bank's Chief Internal Auditor in [personal pronoun redacted] employment at TIBC."
    

Comments:

Here are some personal reactions to the Report which are based upon the assumption that it is Hibis' report and accurately reflects the situation at Awal Bank.

1. This Report differs from that issued by Ernst and Young in that it alleges criminal activity and fraud. (Note  that word "alleges".  An allegation is a charge not a conviction or judicial proof).  
2. I was surprised to read that the CEO of the bank had such a modest payment approval limit, i.e. BD 12,000.  
3. Assuming the accuracy of this Report and the E&Y Report, I'm also wondering what the reaction of external auditors including CBB examiners was to what appear in both the case of Awal Bank and TIBC to be a high level of related party transactions. Or were the relations of these parties so cleverly disguised so that they were hidden? If these allegations are true, then a rather sophisticated mechanism would have been required to respond to auditor confirmations to avoid creating suspicion. But in that case how were E&Y and Hibis able to penetrate the veil in rather short time? One would expect external auditors to spend more than 21 days in an institution during the entire year. And for CBB examiners to spend at least that time. 
4. Was it that when the cash ran out that it became a case of staff speaking up?