DFSA "Fires" Damas Board and Levies Fine - Dramatic But There's Much More Behind the Headlines

Following the conclusion of its investigation which began last October, the DFSA announced 21 March a series of actions against the Abdullah Brothers (Tamjid, Tawhid, and Tawfique) and Damas International Limited ("DIL").

Abdullah Brothers (Enforceable Undertaking)

1. Resignation from the Board of DIL and the Boards of any of its subsidiaries within 30 days.
2. A 10 year ban on the Tawhid Abdullah from acting as a director  of Damas or any other company on the DIFC or with the promotion, formation or management of any DIFC company or reporting entity without the prior permission of the DFSA.  His two brothers are subject to a similar ban but only for five years.  Though all three may serve as consultants to DIL.
3. Agreement to disclose assets and liabilities in excess of AED300,000.  This clearly to provide the information necessary for Point #4 below.
4. Reimbursement of DIL funds (Directors' Draws, gold borrowing, etc).
5. Restriction on the Brothers dealing in their assets in excess of AED300,000 except with written permission from the Board or its delegate . Another safeguard to secure repayment.
6. A US$3,000,000 fine.  $300,000 payable immediately with the remainder suspended indefinitely, though if the Brothers fail to comply with their undertaking, some or all of this amount can be made "due".

 Damas International Limited (Enforceable Undertaking)

1. DIL shall take actions to secure the resignation of all Board members in 30 days.  Some press reports have referred to the "voluntary" resignation of the Board.  This is scarcely voluntary.
2. Calling of an Extraordinary General Meeting of shareholders to elect replacement directors within 30 days.
3. Creation of Board Committees:  Audit, Compliance and Risk Committee, Nomination Committee, and Remuneration.  With follow-up on their effectiveness.
4. Appointment of qualified and experienced individuals to the Audit Committee.  Bimonthly mandatory meetings.  You can read that as an assessment of the previous Audit Committee.
5. Establishment of an effective Internal Audit function with adequate Board oversight.
6. Replacement of the existing external auditor with a firm acceptable to the (new) Board and the DFSA for the financial year beginning 1 April 2010. You can read that as a decided vote of "no confidence" in the existing auditor.
7. Enhancement of Board information and reports.
8. Establishment of a Risk Management Department with adequate procedures and Board oversight.
9. Establish, maintain and regularly review its financial controls.  Included immediate termination of Directors' right to draw funds.  And enhanced procedures for related party transactions.
10. Greater clarity in roles and responsibilities between the Board and senior managers with specific accountabilities assigned.
11. Appointment of a compliance officer.
12. Appointment of a company secretary.
13. Establishment of a connected persons register.
14. Recovery of the Abdullah Brothers' "Director Drawings" with quarterly reports to shareholders on progress.
15. Submission to periodic DFSA reviews of compliance with the enforceable undertaking. 
16. A US$700,000 fine. US$100,000 is payable immediately.  US$600,000 is suspended.   However, if DIL fails to comply with the Enforceable Undertaking, all or some of the suspended amount can be reinstated.

Dramatic as this is, it is really just the tip of the iceberg.  What's more significant are the detailed DFSA findings that led to these rather severe enforcement actions.

I'll take a look at these in more detail in a subsequent post.  For now, a summary around two key themes: 

1. An almost unbelievable  pattern of  disregard for the health of DIL and the rights of minority shareholders and other stakeholders by the Abdullah Brothers.  
2. A profound failure of corporate governance at the board, senior officer and auditor levels.

Sad as it is, this sort of behavior is not unknown.  

But what is troubling is the involvement of a Government of Dubai  related company,  DIG, a subsidiary of Dubai Holding, in a transaction designed to inflate the amount of  investor demand for the Damas IPO.  As presented in the DFSA Report, the Abdullah Brothers transferred DIL funds to three DIG related companies who "bought" shares, ostensibly for their own account.  This sale helped secure a listing on the DIFX (now Nasdaq Dubai) by creating the impression that the Exchange's 25% free float requirement. had been met.  Later a series of back dated transactions were used in an attempt to disguise the nature of the initial transaction.

Were DIG and its affiliates innocent dupes in this process?  Or complicit?  The DFSA does not take a position.  Many who read the portion  of the DFSA document dealing with this transaction are going to come away with serious questions about the business practice and ethics of DIG and its affiliates.