Awal Bank Chapter 11 Filing

There's a report in AlQabas Thursday edition that Judge Groper denied Awal Bank's Chapter 11 petition.  At this point, there is nothing posted on the NY Southern District Bankruptcy Court website.  The last document there is the notice of 26 October for the hearing to be held today (27 October).

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.

AlGosaibi v Maan AlSanea - Secondary Sales and the Fix

Here's an interesting article from AlQabas which reports that some international lenders have sold a part of their debts to the two troubled family groups to hedge funds and distressed debt funds at between 20 and 40 cents on the dollar.

The motive of the selling banks is given as concern that collection of any amounts will take a long time given the complicated affairs of the companies as well as lawsuits from every side.   Or as the Arabic has it more poetically  دعاوى قضائية من كل حدب وصوب .  Even if there is a settlement between the two groups and their creditors.

This raises an intriguing question.  Why are the buyers buying?  Particularly in such a distressed scenario as this where the amounts are so very very large.  And at prices up to 40 cents????

There are a few possibilities here:

1. Al Qabas' informed banking sources may not be so well informed.  
2. The funds have lost their minds.  
3. Or they know (or think they do) something that the wider creditor group doesn't.  One answer would be that there's some sort of "fix" going on to settle the debts.   

The only thing mitigating against this last explanation is the price range.  In a case like this secondary prices should be in the teens, if that. 

So why is presumably "smart" money paying more?

Without knowing the volumes, the identities of the buyers (which may show whether the money is inherently smart or not), and if the buying is focused on particular loans, it's hard to say.

But if the upper bound to the price given is right, I'm betting it's irrational exuberance.

Gulf Bank: The Golden "Prize"

 

The Gold's There.  Look Closer.

According to the informed sources of Al Watan, a European Group is now bidding to acquire a significant/meaningful share in Gulf Bank through the services of a Kuwaiti intermediary.  And is therefore bidding against the Qatari Group.

The article goes on to say that GB is expected to declare a profit of KD35 million for the first nine months of 2010.  3Q10 provisioning is expected to be much less than during the first two quarters this year  because GB has provisioned 100% of Saad and Al Gosaibi exposure (KD 120 million!) plus 100% for The Investment Dar, 50% for Global,  and 50% for Aayan Leasing and Investment.

Anyone out there know if the provision levels for TID, Global, and Aayan are Central Bank mandated?  Or if they're just GB's calculations.

I guess Global may be among the worlds leading investment banks  for M&A as Mr. Al Sumait said not so long ago (a post is coming on that topic) but seems to be in rather poor company with respect to its loan repayment prospects.  Half full or half empty?  But nonetheless better than some others.

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.

US Congress to Investigate Middle East "Money Laundering"

For A Cleaner Clean

Frank Kane at The National reports that the US Congress will hold a hearing tomorrow on US$1 billion of money transfers from the Middle East through the USA over the past six years in connection with claims of money laundering.  

 

As you'll note from the article, a central part of the claims seems to relate to the dispute between AHAB and Mr. Al Sanea.  

 

The Al Gosaibis continue to accuse him of wrongdoing and he just as steadfastly denies any impropriety.

It will be interesting to follow the testimony to see what emerges.

Those who follow other blogs may recall the February 2009 reports of the discovery of US$ 5 million  in a Dubai laundromat.  If anyone out there has an update, I'd be interested in hearing.

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.

Lenders Selling Saad Group Loans

Remedial Lending Class

Asa Fitch at The National reports on some loan sales by Saad lenders.

This makes perfect sense. 

It's highly unlikely that Saad or AHAB, for that matter, are suddenly going to settle their debts.  It's likely that there will be considerable more time before a deal is struck.  And then repayment is likely to be painfully slow over a long period.

It makes perfect sense for lenders with modest sized tickets to exit now.  End the uncertainty.  Devote resources to other more productive efforts than negotiating a rescheduling and then tracking the performance of a weak credit.

The sad thing is that bankers have ADD so that any lessons learned are remembered for only a short period making the cost of tuition not effective.

AlGosaibi v Maan AlSanea - More on The "Fix"

They say there is no surer proof of someone's intelligence than the fact that he or she agrees with you. (See point #3 below).

Echoing a theme raised here earlier, AlQabas has an update on the AlGosaibi and Saad debt restructurings:

1. AHAB has reportedly offered to settle with its creditors at 15 cents on the dollar, an offer that creditors are reported to have rejected as they did the earlier 9 cents offer -- absolutely.
2. Saad has offered to settle a large (but unspecified) portion of its debt to its creditors but noted that freezes on its assets in the USA and Europe resulting from AHAB lawsuits against it frustrated that desire.
3. The Saudi Government is currently undertaking intensive efforts to achieve an accommodation (or reconciliation) between the two groups so that reschedulings can move forward.

As you'll notice, Saad's offer is as well a strong tactical move to develop support for The Fix.

While the article doesn't contain proof of its assertions, nonetheless it clearly demonstrates remarkable insight -- at least using the principle stated in the first paragraph. 

The question remains will AlGosaibi itself get "fixed" in the process?

AlGosaibi v Maan AlSanea - Al Gosaibi to Get "Fixed"?

There are several meanings to the word "fix":

1. To repair something that is broken:  He "fixed" the pipe.
2. To arrange for a desired outcome:   He "fixed" the race.
3. To spay or neuter an animal:  Tom's cat was "fixed".

In previous posts on this topic we've dealt with the one or more of the first two meanings.

Now let's look at the third.

As seems likely now, the main action in the resolution of the dispute between AHAB and Mr. AlSanea over allegations  of misconduct as well as the resolution of the creditors' repayment is going to take place in the Kingdom.

In legal action outside of the Kingdom, AHAB (or its counsel) have:

1. Made rather serious allegations against Mr. Al Sanea (Allegations he continues to vigorously deny) which are not only personally damaging to him but as well to the reputation of the Kingdom.  And a bit socially discordant for folks who like to settle their disputes among themselves - quietly, by mutual consent out of the lime light.
2. Expressed a preference for NY and other foreign non Saudi jurisdictions which might be seen as spreading doubts about their ability to secure justice in the Kingdom.  And, if a family like AlGosaibi can't get justice, who then can?  This has involved some comments about the Special Saudi Commission.  As well, there have been other comments usually in response to forum non conveniens pleadings - which could be interpreted  to evidence the belief that the Saudi Courts are inferior to those of say New York.  And again very publicly made.

Will there now be a strong sentiment on the part of the authorities to send a clear message to Saudis that the patient quiet strategy that Mr. Al Sanea practiced is preferable to the more noisy one of the AlGosaibi's?  Or will all be forgiven in the reconciliation proceedings to take place in Saudi?  After all, the family is an old and important one.

In case you're wondering, AHAB's logo is in two separate "pieces" on its website.  Perhaps a symbol of things to come?

AlGosaibi v Maan AlSanea - The Financial Times "The Fix is In"

Here at Suq Al Mal some of the most vigorous exercise we get is from patting ourselves on the back. 

Before I head to the showers after this strenuous work-out, I'd just note that those who read Suq Al Mal read the main theme from today's Financial Times article starting back in June.  And most recently here.

From the FT:

The two decisions put a halt to the key cases at the heart of the scandal, and are a blow for Ahab, which has mounted an aggressive campaign against Mr Sanea, accusing him of a “massive fraud” that it claims could be as much as $10bn

Saudi officials have been tight-lipped about the dispute, and a high-level committee was set up to resolve the issue away from public glare. But it has reportedly been annoyed by the attention Ahab and its allegations have heaped on the conservative kingdom. 

And as always we close by noting that Mr. AlSanea continues to vigorously deny involvement in any fraud or other misconduct.

AlGosaibi v Maan AlSanea - Almost "Fixed"

There has been a remarkable reversal of fortune of late for AHAB.  

First was the decision by Trowers and Hamlins back in June to sue AHAB and which gave what I described as the first indication that the concerned authorities in the GCC were moving to make this messy problem "go away."   And that the Grant Thornton settlement proposal might be seen as a promising vehicle. to achieving that end.  Essentially GT's Plan involves a pooling of assets of the two companies to settle global creditor claims and the dropping of lawsuits between the two parties.  Those lawsuits have been the primary venue for the charges of fraud levied against Mr. AlSanea by AHAB.  Charges as we always note here on Suq Al Mal Mr. AlSanea continues to deny.  Ending the lawsuits probably allows "diplomatic cover" for jurisdictions to quietly let these difficult and embarrassing matters expire.

Yesterday (28 July) Asa Fitch at The National reported the Caymans Court decision to put its proceedings "on ice" to allow the special Saudi committee to make a determination.   I commented that it looked to me like the "fix" was in as this step increased the pressure on AlGosaibi to agree to the Grant Thornton settlement proposal and that:

A similar movement by the New York Supreme Court would, I think, confirm that this is what is happening. 

In what might be a remarkable judicial coincidence, but just maybe  is not,  today (29 June) NY Supreme Court Justice, the Honorable Richard Lowe III issued final disposition rulings effectively terminating the cases he was adjudicating based on "forum non conveniens".  

Frank Kane's article in The National provides some useful information.   But there's a bit more.  Judge Lowe did not just terminate the Mashreqbank cases but also that of AlAhli Bank which did not involve any countersuit by AHAB.

The three cases and their NY Supreme Court reference numbers are:

1. 601650/2009 - Mashreqbank v AHAB to which AHAB had added Mr. AlSanea and Awal Bank as a Third Party Defendants
2. 602171/2009 - Mashreqbank v the Individual Partners of AHAB
3. 602847/2009 Ahli Bank of Kuwait v Mr. AlSanea and Saad Trading Contracting and Financial Services

The decision (some 19 pages ) is Document 134 in Supreme Court Case Reference 601650/2009 which can be accessed at the NY Supreme Court Website  http://iapps.courts.state.ny.us/webcivil/FCASMain.

What's interesting about the decision?

1. First, Judge Lowe ruled that NY courts did have jurisdiction but dismissed the cases on the grounds of forum non conveniens.  Key reasons cited were: (a) availability of other judicial venues for the cases; (b)  presence of key witnesses in the Middle East; (c) local laws govern some key documents. (d) documents in Arabic language and witnesses English language skills, etc.  From the ruling it seems he sees Dubai as the venue for Mashreq's cases (with AHAB then able to raise its claim against Mr. AlSanea in Dubai or Saudi).  And Kuwait as that for AlAhli Bank's case.
2. Second, another significant "bit" of Judge Lowe's rationale for accepting the forum non conveniens argument was that Mashreqbank stated that it was happy to litigate in either NY or Dubai.  And  that in fact Mashreqbank had commenced a lawsuit in Dubai which includes (but is not solely restricted to) the FX transactions which are the subject of NY cases.  See Page 16 of the ruling.   Now, at first blush, this seems a bit surprising.  Why would Mashreqbank incur the not inconsiderable costs of launching a case in New York and then cavalierly toss it away by telling Judge Lowe that it was indifferent to venue?  Perhaps, the answer is to be found in AHAB's defense:  that Mashreq knew the FX transactions were disguised loans and that therefore they were somehow colluding with Mr. AlSanea.  A rather messy situation.  One complicated by AHAB's motion to have the NY Supreme Court compel disclosure under the very strict requirements of NY law.   Perhaps the shift to the more "convenient" judicial venue in Dubai would allow this issue to be dealt with in a more "convenient" way (at least for Mashreq).  And then again perhaps not.  Perhaps it was just a cost cutting measure - Mashreq decided to husband cash by running one instead of two expensive litigations.  And the case in Dubai is for almost twice that in New York.  So there is more "bang" per lawyer "buck" there.  Perhaps it was a belief that justice would be more swift in Dubai.  Perhaps it was another reason entirely.
3. The dismissal of the Ahli case is a bit more concerning - or perhaps should be to BNPP and Fortis who have lawsuits against Abu Dhabi International Bank.  If the Honorable Justice Melvin Schweitzer (who is handling the Fortis and BNPP actions) takes Judge Lowe's ruling as a useful precedent - both banks might wind up  in judicial venues they'd rather not.  NY has a very  large  well reasoned body of case law on letters of credit.  Bahrain would appear to have much less.  At least this could be a conclusion drawn from the Bahraini Court's ruling in ADIB's favor in both actions.  There the Court seemed remarkably unperturbed by the fact that ADIB's case was commenced after both banks had incurred irrevocable payment obligations.  Though to be fair, as I understand it, the Bahrain judgment is not final. 

AHAB does have the right to appeal Judge Lowe's ruling.  Overturning the ruling will I think be as the Japanese say "Possible but very difficult".

AlGosaibi v Maan AlSanea - The "Fix" is In? Caymans Island Case "On Hold" Pending Determination of Saudi Panel

Asa Fitch over at The National reports that the Caymans Island Court has suspended its proceedings pending determination by the special Saudi commission set up earlier to investigate allegations of fraud against Mr. AlSanea.

I had posited a bit earlier that for a variety of reasons various jurisdictions would prefer that this  messy dispute  "go away" - especially given the nature of the claims and counterclaims raised by the two protagonists.

The Caymans Court ruling seems to be another step in that direction.  A similar movement by the New York Supreme Court would, I think, confirm that this is what is happening.  If you've been following that case, you will have noticed that on several occasions the judge has mused (signaled?) whether Saudi is after all the proper forum.

Letting the Saudis make a determination as to who is guilty, if anyone, relieves foreign courts of the burden of decision making.  It also allows these jurisdictions to avoid antagonizing the Saudi Government, which no doubt would prefer that any dirty laundry involving its nationals be washed in private. 

And, if by chance, their proceedings result instead in a compromise solution - or "fix" - a pooling of assets to settle claims with a dropping of allegations of misconduct so much the better. 

The ruling is labeled a setback for the AlGosaibis, who as I noted are probably the party whose acceptance of the Grant Thornton "settlement plan" is key to moving forward.  Indeed it is a setback.  As such then it is a powerful incentive to "make a deal".

However, pressure remains on Mr. AlSanea.  The stay on his US$9.2 billion of assets has been reaffirmed.  And the Caymans Court has said that if the Saudi proceedings prove inadequate, it will reopen its own.  So if AHAB suddenly makes a generous offer of peace, no doubt plenty of incentive for him to reply positively.

And this is the usual appropriate place to note that Mr. AlSanea continues to deny involvement in any wrongdoing.

AlGosaibi v Maan AlSanea - English Court Rules Saad to Pay ADCB US$33.1 Million

Asa Fitch over at The National reports that an English Court has ruled in favor of ADCB ordering Saad Trading Contracting and Financial Services to pay ADCB US$33.1 million for a defaulted foreign exchange swap.  The default was triggered by a decline (withdrawal) of STFCS' rating last year June.

Saad does have the right of appeal.

And of course obtaining a court decision in one's favor and obtaining the cash are two different things. 

AlGosaibi v Maan AlSanea - Fortis Bank v ADIB - Fortis Drops "Structured" Bombshell

 

 Warning:  Ethics Depicted in Picture May be Smaller Than They Appear

In  my earlier post analyzing the Awal Bank L/C I spent a bit of time speculating on the transaction as a disguised money on money loan and the potential role of Bunge in the second leg, the purchase on a spot basis of the commodity back from from AlGosaibi/Awal Bank.  The necessary step to get funds to AlGosaibi for the loan.

As they say (and they are right), reading is fundamental.   I could have saved a bit of time by looking a bit closer at two documents I had printed out.  

Today having posted on the BNPP lawsuit against ADIB, I decided to finish off the ADIB topic by commenting on the two latest submissions by ADIB and Fortis' counsel in the Fortis Case (NY Supreme Court Reference #601948/2009) - Documents #78 and #79.   Documents I had printed out on 9 July!

Right there on the first page of the 9 June 2010 letter from George O. Richardson, III, Esq.  of Sullivan & Worcester, Fortis' counsel, was the revelation that Bunge had informed ADIB of the precise nature of the transaction via an email prior dated 7 April 2008 - that is, prior to the date  ADIB agreed to confirm Awal Bank's letter of credit.  ADIB's SWIFT confirmation to Fortis was sent 16 June 2008  as per Document #24 Exhibit #2.  Some two or so months later.   By the way, that document (not the Bunge 7 April email but the copy of  SWIFT confirmation of the LC) was submitted by ADIB as part of Nuhad Saliba's Declaration.  Ms. Saliba is Head of the New Countries and Global Wholesale Banking Department at ADIB.

The Bunge email was sent by Rachel Wong of Bunge SA Geneva to Naeem Ishaque, Manager Financial Institutions at ADIB.  There are a variety of copy parties but their affiliations are not clear from the message.  The email is Exhibit #1 to Exhibit A in the Richardson Letter (Document #79).

So what did the Bunge email say?

"Section 15. Structure  This is a structured transaction whereby Discounting Bank [AA:  Fortis though at this point Fortis name is not mentioned, perhaps because Bunge was still shopping the second confirmation] is required to discount or fund the Instrument in favor of the Beneficiary once the documents are deemed in compliance at its counter, Applicant [AA:  AlGosaibi Trading] will on-sell the Goods to another Bunge affiliated company ("Bunge Buyer").  Once Beneficiary receives the discounted proceeds under the Instrument, Bunge Buyer will effect sight payment to the Applicant immediately.  Applicant will enjoy the cash financing during the Tenor [AA:  the 360 days from acceptance of documents until payment] before repaying the Issuing Bank [AA:  Awal Bank] on maturity of the Instrument."

This effectively demolishes ADIB's argument that it thought this was a trade transaction and that somehow it was tricked and so inadvertently and innocently defrauded.   ADIB is clearly an active and knowing participant in the transaction which equally clearly is a "money on money" loan.  Some might say that transactions like this are  a fraud against the Shari'ah. (With respect to AA's position please see the last sentence).

It also raises a very fundamental question about ADIB's earlier legal arguments in which it and its counsel claim that the bank did not see this was a structured transaction and had no inkling that it was participating in a money on money financing.   

ADIB's learned counsel at Dewey & LeBoeuf have set a high standard of knowledge in their previous pleadings.  They asserted that because Fortis Singapore advised a L/C for the same goods and in fact the same documents, Fortis Netherlands - half way across the world - was deemed to know this with respect to the Awal LC  it confirmed. 

Therefore, it seems highly appropriate and fair to apply D&LB's standard to ADIB with even more rigor because ADIB operates from a single country.  Thus with the greater proximity one would no doubt expect that the knowledge at ADIB permeated every level of that firm, including the chap who makes the tea.

Some might also be tempted to remark that there is a repetitive pattern here with "Islamic" banks of much less than كلام شريف  in their legal pleadings as in the case of TID v BLOM.

Heeding the admonition of Imam AlGhazali, AA will remain silent on all these points.

AlGosaibi v Maan AlSanea - BNPP versus Abu Dhabi Islamic Bank in re TIBC L/Cs

In discussing the Fortis lawsuit against ADIB, I mentioned that ADIB was also a defendant in a lawsuit brought by BNP Paribas' "Full Commercial" Branch in the Kingdom of Bahrain.

The relevant documents can be found at the NY Supreme Court Website http://iapps.courts.state.ny.us/webcivil/FCASMain  under Case # 603365/2009.   Or more precisely one document as all that is posted so far is the complaint by BNPP - missing what I'll bet ares some very interesting attachments.  Unclear why this is.  Especially since the submission in question dates from November 2009.

Here are the facts from the material posted on the NY Supreme Court's website:

1. In March 2009, ADIB issued six irrevocable reimbursement undertakings ("IRU's") in favor of BNPP to induce it to confirm 6 "commercial" letters of credit issued by The International Banking Corporation in favor of Dawnay Day and Co for the Account of AlGosaibi Trading Company.
2. BNPP confirmed TIBC's letters of credit and then upon presentation of the documents accepted the documents and the time drafts presented.  
3. On an unspecified date, BNPP claimed reimbursement of some US$44,875,000 from ADIB.  Presumably, the maturity date of the accepted time drafts.
4. ADIB refused to pay.
5. In September 2009 (after acceptance of the drafts by BNPP) ADIB obtained a judgment in Bahrain Court enjoining ADIB from making any payment.  
6. BNPP is seeking to have the Court issue a temporary restraining order preventing ADIB from moving assets (presumably balances in its correspondent accounts in NY) from the USA.
7. Its claim is for the principal of the payment (US$44,875,000) plus interest, attorney's fees and costs.

Now to some comments.

1. It's not clear to me why there isn't more precision in documents sent to the Court with exact dates when events took place, additional details of the individual transactions -  currency, goods, tenor, etc.  Perhaps time was of the essence and BNPP's lawyers wanted to file quickly to block the potential movement of assets outside of the USA. 
2. Dawnay Day was a very large "financial firm" with a commodities trading wing which ran into some "financial difficulties" as a result, I believe, of the global financial crisis (small "g" as always).  It was also an active participant in structured "Islamic" trade transactions as described in my post about Fortis.  It had at least one subsidiary Condor Trading which it uses so that the "purchaser" and "seller" of the goods are not the same party.  
3. It appears (but the documentary record here is very slim so this is an educated guess) to be a mirror of the Fortis transaction.  The TIBC L/Cs are one half of the "Islamic" structure:  the purchase on deferred terms.  For TIBC/AlGosaibi to actually get the funds a spot sale on a cash basis is required.  That could have been with Condor with TIBC Bank acting as the "arranger" of the transaction.   That is probably the most likely scenario and the one that I think happened - but again note this is an educated (or uneducated) guess.
4. Since discovery in other legal cases has resulted in the publication of  some details of at least the US - domiciled US dollar accounts of Awal Bank and TIBC, clever boots might be looking through that material for incoming credits around the time of the negotiation/acceptance (but not the payment date) of the first leg letters of credit. That is in the Fortis case the Awal Bank LC confirmed by Fortis under ADIB's IRU.  And in the BNPP case, the letters of credit issued by TIBC and confirmed by BNPP against ADIB's IRUs.  If these are indeed disguised clean money on money loans, the second leg (the spot sale) should have occurred around the same time.  The amounts would not necessarily be the same as interest on the loan might be built into the price on the first leg (the deferred payment).
5. But one key additional bit of information.  If we look at the Fortis Case (NY Supreme Court Reference 601948/2009 Exhibit #2 Document #34 Amended Declaration of Qays Zubi, we note two things.  First, TIBC LC's seem to have been denominated in Euros not US.  Second, a restraining order has only been obtained for four L/Cs not six as mentioned in BNPP's complaint.  The total of the L/C's mentioned in the Qays Zubi Declaration are some Euros 18,243,975.  Clearly, that does not equal US$44,875,000.  Two L/Cs are "missing".  Does that give Fortis a legal "wedge"?
6. We also learn that the payment dates on the TIBC L/Cs were between 22 June and 24 June.  You'll also notice that the certified translation has an error in that it shows the last LC as due March 23,2009.  The Arabic clearly states (in "Western" numbers not Arabic!!!) 23 June. 
7. The central point of BNPP's claim (like that of Fortis) is that under a documentary (aka commercial) letter of credit the bank's obligation to pay is independent of the commercial contract.  Its obligation is set by the terms of the letter of credit.  Compliance with the documentary requirements of the letter of credit establishes the obligation.  
8. To overcome the rather substantial amount of case law and precedents in favor of BNPP's legal position, I believe ADIB has to prove two things. (a)  Fraud in the inception.    (b) Involvement of BNPP in that fraud.  That is a a tough row to hoe as the saying goes.  

AlGosaibi v Maan AlSanea - Legal Case Summary and Status

Citi, the Delegate on Saad's Golden Belt Sukuk 1, has posted a notice on the BSE listing the legal cases  it is aware of involving Mr. Al Sanea and his companies as well as their current status.

Besides conveying useful information, the Delegate is putting Golden Belt Certificateholders on notice that other creditors of Mr. AlSanea and his companies are pursuing legal claims.  As long as Golden Belt Certificateholders are not, they are effectively in a junior position.

Why?

As I read the Delegate's last announcement, while a sufficient number of Certificateholders (more than 25%) have voted for Dissolution of the Trust, they have not indemnified the Delegate to its satisfaction.   That is, agreed to reimburse Citi for expenses.  Until that happens, the Delegate is not obligated to take the legal steps to dissolve the Trust, claim on the Repurchase Obligation of Saad Trading and Contracting, and in the event of non payment by STC pursue STC in Court.   Thus, the Certificateholders are effectively in a subordinate position against STC - they have an uncalled guarantee.  

The Delegate is doing this to cover its legal posterior.  In the event that the Certificateholders' recovery is adversely affected by failure to take action, the Delegate will have a legal defense that it has done all it  was obligated to do to protect their rights.

The thorny issue for Certificateholders is whether they agree to repay Citi for legal expenses involved in taking such actions.  Will the net recovery after the expenses be more than if they did not take action?

And this is I suppose as good a place as any to note that Mr. AlSanea still denies any improper or illegal behavior.

AlGosaibi v Maan AlSanea - Abu Dhabi Commercial Bank Sues Saad for US$32 Million

Asa Fitch over at The National reports that ADCB has filed suit in London against Saad Trading and Contracting over a default on a currency swap of US$32 million.

There's really not much to add on top of what's in the article.

AlGosaibi v Maan AlSanea - Fortis Bank versus ADIB - The Letter of Credit

See important additional information here on Bunge's role in transaction and ADIB's knowledge of the nature of the transaction.

As promised a look at the Letter of Credit ("L/C") issued by Awal Bank which Abu Dhabi Islamic Bank ("ADIB") advised and confirmed to Fortis Bank Netherlands.

The text of the L/C issued by ADIB through Fortis is Exhibit #2 to Document #24, the Declaration of Nuhaid Saliba dated 31 August 2009. Note Exhibit #1 is the text that Awal proposed to ADIB.  That of course is not the instrument on which Fortis relied and through which ADIB conveyed its irrevocable undertaking.  Exhibit #2 is the key document as ADIB is its author.

And just to be complete, as you'll recall, ADIB is asserting fraud as the basis for voiding its obligation but not fraudulent documents or fraudulent shipment or non shipment.  Most jurisdictions have held that if the documents comply with the terms of the L/C then the bank is obligated to pay.  The "fraud" defense is applicable only in very limited circumstances.  

These and other documents can be found at the NY Supreme Court Website http://iapps.courts.state.ny.us/webcivil/FCASMain  under Case # 601948/2009, 

Let's step through the details of the L/C.

1. Issue Date: 16 June 2008.
2. Expiry Date:  14 July 2008
3. Applicable Rules:  UCPURR = Uniform Customs and Practice for Documentary Credits (#600 of 2007) and Uniform Rules for Bank-to-Bank Reimbursement under Documentary Credits (#725 of 2007).  The former sets forth the rules for the handling of L/Cs.  The latter the rules for banks to reimburse or pay one another   These are pretty much the standard governing principles for commercial letters of credit (aka "documentary credits").
4. Issuing Bank:  Awal Bank BSC Bahrain
5. Applicant - AlGosaibi Trading Services Hamilton Bermuda
6. Beneficiary - Bunge SA Switzerland
7. Currency/Amount:  US$39.999,996.52
8. Payment:  360 Days after acceptance of documents.
9. Port Loading:  Any port in Brazil.
10. Final Destination: Any port in Taiwan and/or Spain.
11. Latest Date of Shipment:  30 June 2008.
12. Goods Description:  (a) 52,686.31 MTS of Brazilian soybeans, packing in bulk at US$564.90 Per MT CFR Taiwan (b) 30,000.00 MTS of Brazilian maize SLM packing in bulk at US$341.25 per MT CFR Spain.  (Note: CFR = Cost and Freight)
13. Documents Required:  (a) One copy of commercial invoice.  (b) One photocopy of the bill of lading. (c) One copy of beneficiary's certificate stating that the copies of shipping documents provided are true and correct copies of the originals.  That the original bills of lading relating to the shipment should be sent to the Notify Party stated in the B/Ls or to the agent at destination and that the goods described should be discharged at the port state in the B/Ls.

Additional Conditions:

1. Third party documents except drafts and invoices acceptable.
2. Documents showing one or more third party (ies) as shipper and/or exporter are acceptable.
3. Fax or photocopy of documents are acceptable.  Documents issued before LC issuance (including B/L) are acceptable.
4. Documents acceptable inspite of any and all discrepancies with exception that invoice value drawn may not exceed the maximum letter of credit value and the letter of credit may not be expired.
5. Typing mistakes do not constitute a discrepancies.
6. Late presentation of documents is accepted on the condition that documents are presented within LC validity.
7. Bill of lading presenting a greater quantity/amount than shown on invoice is acceptable.
8. Documents shall be acceptable as presented.
9. Abu Dhabi Islamic Bank Abu Dhabi UAE is authorise to confirm this L/C and advise it to Fortis Bank Rotterdam.
10. Fortis Bank Rotterdam is authorised to confirm this L/C at the request and for the account of the beneficiary.  The confirmation of the first advising bank, that is Abu Dhabi Islamic Bank, Abu Dhabi UAE covers the obligation of the issuing bank, that is Awal Bank BSC, Manama and the confirmation of the Fortis Bank (Nederland) NV Rotterdam only covers the obligations of the first advising bank, Abu Dhabi Islamic Bank, Abu Dhabi UAE.
11. Charges:  ADIB's confirmation charge (a cool US$500,000) for Awal.  Fortis' charge (not specified here) for Bunge.

Now to the tafsir.

First, as is pretty clear from the text of the L/C this is not a typical documentary letter of credit.  It is closer to a standby letter of credit - which you can think of as a guarantee of payment.

1. At no time do any of the banks involved have an original bill of lading in their possession.  An original bill of lading is generally required by a shipping company to release goods it has shipped.    Having the B/L provides a measure of collateral security, if the applicant does not pay.  Now in a transaction in which the bank is giving its obligation to pay the beneficiary in the future (in this case 360 days after it accepts the documents) having the B/L only provides collateral comfort for a short period while it is at risk for the applicant or issuing bank's failure to pay.
2. In Additional Conditions #4, the issuing bank has explicitly waived all and any discrepancies in the documents except for the amount drawn under the credit and presentation within the L/C validity.  That means any other condition.  Hardly the stance that a party concerned with the underlying commercial transaction would take.  The power to refuse payment for discrepancies (in the documents) provides a way to enforce the terms of the contract on the seller. Giving this right up doesn't make a lot of commercial sense.
3. In Additional Conditions #7, B/Ls showing a larger quantity are acceptable.  Under UCP 600, for bulk commodities, a variation of +/- 5% is allowed (Article 30 (b)) unless prohibited.  5% of the amount shipped would be roughly US$2 million.  Would all of you out there who think that Bunge is going to ship another US$2 million worth of crops but not get paid for them, please raise your hands?  Didn't think I'd see any.  Of course there is no harm in this clause as it benefits the applicant.   But what is the commercial reason this would be included?  
4. A couple other conditions are worthy of mention.  As noted above, Additional Condition #1  allows third parties on the shipping documents.  Meaning the shipper need not be Bunge and the party receiving the goods need not be AlGosaibi.   Additional Condition #3 allows documents to be dated prior to the L/C issuance. Faxes of documents are acceptable.  Coupled with the earlier waiver of  all discrepancies except for payment amount and presentation within L/C validity, all this looks like setting up the conditions for document shopping.  That is, making it very very easy to find conforming documents from another trade transaction not involving the parties named in the L/C.  All one needs is access to documents and a photocopier.

Second, is there a commercial reason for such a structure?  Possibly but how likely?

1. The above conditions would be useful if both parties were engaged in rapid turnover trading.  Bunge strikes a deal with ATS at price X but finds another seller willing to sell at less than X.  Being able to substitute sellers/shippers allows Bunge to make an additional profit by buying the goods from this other party and delivering to ATS.  This condition allows ATS to sell the goods  to a third party, Buyer B, before it has taken possession by switching the delivery party.
2. But waiving the right to refuse to pay for any discrepancies could be problematical if ATS has on sold the goods as described to new Buyer B.   One would think Buyer B would have stipulated certain quantity and type of goods and reserve the right to refuse payments if these and other conditions that it required were not met.  Now perhaps Buyer B has waived these.  But what are the chances?  The goods are the commercial heart of the transaction.
3. On that score it might be more typical to see an inspection certificate (of the goods) particularly since a third party shipper might not be as reliable as Bunge. 
4. Now it's not unheard of that cargoes already at sea are sold (remember that documents issued prior to the L/C issuance date are acceptable).  But at that point, one should know the exact quantity of the goods and the identity of the parties.  And this could be incorporated into the L/C.  Now, I suppose the transaction could be taking place so quickly that speed was of the essence - a split second response required.  However, the documents submitted in the case indicate that ADIB cogitated for a while (though perhaps not long enough) before agreeing to the transaction.  And then it appears the transaction amount was increased after it had given an approval for a lower amount.  And so it had an opportunity like Proud Edward "tae think again".  Though to be fair, ADIB seems like Proud Edward to have thought again after "24 June" and not before.
5. Generally, transactions of this sort would be secured (from the intermediary buyer's perspective -- here ATS) by use of a transferable letter of credit (opened by the final buyer Buyer B in favor of ATS).  Or through a "back to back" L/C which is a particular favorite among many MENA banks though it is technically less sound from a protection perspective, including for the issuing/confirming banks of the second or "back to back" L/C.

Third, so what could be another reason for this structure?   To provide Awal and/or ATS financing.  But this requires a few bits more in the structure.

1. This L/C provides for a payment to Bunge 360 days from documentary acceptance.  At this point there has been no movement of funds.  Now it's not uncommon in such situations for the seller (Bunge in this case) to ask the confirming bank (Fortis) to make an immediate payment.  The bank would "buy" (discount) the acceptance for an amount less than its face value.  You can think of the difference as interest.  This could get the money to Bunge, though strictly speaking that's not necessary to get funding to ATS/Awal.  
2. If you reflect on the typical "Islamic" "trade" financing described above, you'll see that the ADIB L/C is the equivalent of the purchase of the goods on deferred payment basis.
3. Getting the funds to Awal/ATS requires the other half of the "Islamic" "trade" financing structure: the offsetting transaction the sale of the goods for spot settlement.  Such as sale could be either back to Bunge.  Or to a third party.  This may be a reason why ADIB's lawyers are pushing for further disclosure by Fortis to see if they are involved in this critical leg.
4. Just to close the Bunge circle.  The usual "Islamic" "trade" finance transaction keeps the deal "all in the family" so it's not inconceivable that they might have been involved.  If Bunge were involved, one would presume that it discounted the Fortis payment to use as the purchase price back from ATS/Awal - of course with a suitable commission for its trouble.   Note:  This is hypothetical.  I have no knowledge of Bunge being involved in the second leg. This discussion provides an illustration of how the transaction may have been structured.  Not that it was so structured.
5. Presumably, ATS did not hang on to the commodities with the intent of selling a year later.  Equally, it's unlikely that ATS has a "factory" in which to process the goods.  So the likely disposition of the goods is a sale.  If the goods were sold on a spot basis, then ATS/Awal have a one year loan due when the Fortis acceptance "matures" - irrespective whether Fortis has or has not discounted that obligation.
6. It's well known out there that commodity companies and brokers (including the one named in the TIBC  BNPP / ADIB legal dispute) specialize in providing "trade documents" for "Islamic" "trade" transactions that are really disguised financings.  Because Shari'ah Boards have become a bit more alert, many of these parties have established special purpose subsidiaries with completely different names so the buyers and sellers appear to be unrelated parties.   And have made presentations to  banks who wish to engage in "Islamic" "trade" transactions (or loans if you'd prefer) on how they  can help.
7. How does this work?  The financing bank arranges to acquire goods from Company A (Let's call it Dewey Night Company).  It then sells them to the Buyer (borrower if you will) on a deferred payment basis (the tenor of the loan) at original cost plus a mark-up.  At the same time it offers to sell the goods spot for the Buyer (borrower) to another company (Let's call that one "Eagle" Trading Company).  Usually the Murabaha contract (for this is a Murabaha trade transaction not a loan!) specifies that the spot sale cannot be for less than the original cost. The helpful commodity firm or broker provides all the required documents for the two sales   The mark-up miraculously just happens to equate to the interest on the loan.  Proving that in some forms of "Islam" miracles are indeed common. The commodity company makes a fee for its role - just as the innkeeper makes a profit for renting you a room for a night.  Documents are available for the Shari'ah Board to review if it wants.  These on their face document a trade transaction.  It seems everyone is happy.  و الله اعلم
8. And if you'd like to place a deposit with a bank, you can do the reverse transaction.

Fourth, how does this transaction differ from a typical "Islamic" "trade" transaction?

1. The ultimate financing bank in the transaction is ADIB.  While it is true that it does not advance funds, it is ultimately on the hook if Awal does not pay.  Under its confirmation it is obligated to pay Fortis if Fortis claims within the validity of the L/C and complies with the miniscule conditions provided.
2. For this transaction it only requires half of the set of documents.  A bit less financial engineering.
3. More importantly what is in effect a guarantee or a standby L/C is treated as a commercial L/C with a lower capital charge under Basel II.  Thus, ADIB's risk adjusted ROE/ROA is higher.  And more importantly, its CAR is higher.

Fifth, how credible is ADIB's sudden charge that something was wrong with the transaction?  That there was potential for fraud.

1. First, to accept ADIB's contention, one has to begin by assuming that ADIB has a very limited understanding of letters of credit and UCP600.  Or that the L/C Department personnel assigned to this transaction were incompetent.
2. Second, one also has to assume that ADIB is rather new to structured transactions.  However, since AA has seen ADIB's "Islamic" "trade" documentation of various flavors, at least for AA accepting that is more than a "bit of a stretch".
3. Third, the documents submitted by lawyers in this case indicate what would appear to be scrutiny of the transaction by ADIB's credit department.  If this transaction "slipped by" and wasn't recognized as a "structured" transaction - a payment guarantee and not a trade transaction - then one has to draw some rather unfortunate conclusions about credit analysis and risk management at that bank.
4. Rather what seems to have happened is that ADIB decided for about 500,000 good reasons (the US$ equivalent of the confirmation commission it received from Awal) to go forward with a structured transaction.   One that had some CAR advantages.  
5. Now that Awal has hit the wall, in what sadly seems to be a tradition of some "Islamic" banks (paging TID in re BLOM)  it's looking for a legal way out. (Paging Abu Yusuf).  At least in this case, it doesn't appear they're resorting to spurious arguments regarding the Shari'ah.
6. Finally most of what is labeled "Islamic" "trade" finance  is structured with manufactured transactions   All the parties (save perhaps for the Shari'ah Boards) know that these transactions are structured.   That they are really money on money loans, dressed up in thaubs and ghutras to disguise the reality.  For ADIB to suddenly claim ignorance of this is well beyond the plausible. 

A bit later I'll post some more comments on this case.  In the interim, you can look at the NY Supreme Court website.  Documents #78 and #79 contain letters by the two sides recapping the main points of their arguments.