AlGosaibi v Maan AlSanea - Fortis Bank v Abu Dhabi Islamic Bank In Re Awal Bank

Asa Fitch over at The National has an interesting article on Fortis Bank's suit against ADIB for some US$40 million for ADIB's failure to honor its confirmation of an Awal Bank LC which was the basis for Fortis adding its own confirmation.  

The underlying transaction appears to one of those fairly common "Islamic" transactions - a loan disguised as a commodity purchase transaction carefully to  meet "Shari'ah compliant" banking "principles".  Yes, those quotations marks mean exactly what you think they do.

ADIB is asserting fraud in the inception by Mr. AlSanea as its defense against payment to Fortis.

Where have I heard that legal defense before?

And this is as good place as any to note that Mr. AlSanea denies any wrongdoing.

In any case, I'll post a bit more on this in a day or two once I regain my composure.  I can't stop laughing.

I thought the letters of credit that Ahli Bank Kuwait issued for TIBC were a howl.   ADIB's "letter of credit" is beyond that.  

As an extra bonus for your patience, I'll also post on BNPP Bahrain's suit against ADIB for some US$44.9 million involving letters of credit issued by TIBC that BNPP confirmed against ADIB's irrevocable undertaking.  

AlGosaibi v Maan AlSanea - Grant Thornton to Broker "Peace" Deal? Authorities Supporing?

Frank Kane over at The National reports that Grant Thornton is trying to broker a settlement between AHAB and Mr. AlSanea.  Under what is described as the proposed deal, the parties would cease litigation against one another and pool assets to repay outstanding debt.  The stated goal is to maximize creditor recovery.  First, by eliminating the costs of litigation which no doubt would be considerable.  Second, and perhaps, more importantly, shortening the time frame until ultimate payment. 

Acceptance of the proposed plan would also achieve at least four other highly convenient goals:

1. It probably closes the book on allegations of financial crimes - which would no doubt be a comfort to any party who may have committed a crime.   In this regard, it should be noted that not a single party to the dispute has admitted to any wrongdoing.  And all aver they are as pure as newly fallen snow.  Perhaps, the proverbial pristine white snows of Saudi Arabia. 
2. It could relieve jurisdictions of the need to engage in complicated, messy and uncertain criminal prosecutions.
3. It will reduce (but not eliminate) the current intense scrutiny and reputation bashing of regulators and their countries - an unwelcome event fed largely by continuing press reports of the feud.
4. It would settle the dispute between two very important Saudi parties via a compromise .  Peace among the tribes rather than a victory for one side over the other.  Well consonant with Saudi tradition.

As the Cayman Islands' Court appointed liquidator for Mr. Al Sanea's Cayman companies,  GT's sense of fiduciary duty is clearly the motive for devising the settlement plan.   

As outlined above the plan would benefit other parties.  And they might well be expected to promote its acceptance.

Since the beginning of the crisis, Mr. AlSanea has suffered  heavy personal opprobrium in the press despite his repeated denial of any wrongdoing.  He and his firms have borne the brunt of legal actions filed.  And thus he may be well incentivized to deal.  

AHAB has until recently had a kinder fate.  And may therefore need a bit of prodding.   As well, they are perhaps the key to acceptance given the nature and vehemence of their accusations against Mr. AlSanea.  If they will sign the deal, then it may be easier for Mr. AlSanea to agree-  particularly if as expected the deal will involve a removal of accusations.

That's why I wonder about the recent spate of litigation directed against AHAB.  

Could it be that certain authorities are attempting to put pressure on AHAB with the view of securing its acceptance?

You'll recall that in announcing its US$720 million lawsuit against TIBC on 16 June Trowers and Hamlins said it took the action "following referral of the claim by the Council of Ministers." Clearly a reference to the Saudi CoM.  No doubt, any proposed legal actions were vetted as well by Trowers and Hamlins with its employer, the Central Bank of Bahrain.   In both cases an official "green light" to proceed.

Then again this all may be coincidence, though I don't think so.  The affair has dragged on to long.  Each day it persists is highly inconvenient for important parties who no doubt feel that it's time to close the book and move on.

Bahrain Court Rules in Favor of Central Bank of Bahrain's Decision to Place Awal Bank in Administration

The CBB issued a press release noting that a Bahrain Court had issued a ruling supporting its decision to place Awal Bank in "administration".  The former Chairman (Mr. Al Sanea) had raised a court case challenging the CBB's action.

It's not clear from the press release or news items (which seem to be a mere transcription of the press release) whether this is the Court of First Instance (which I suspect) or a higher level.  If it is the Court of First Instance, Mr. AlSanea would of course have the right to an appeal. As well, if it is the Appeals Court.  Like American baseball, the Bahraini system gives each litigant three goes at bat - with the Cassation Court (Supreme Court) being the final one.  

I'm guessing that Mr. AlSanea may take another swing in the courts.  And here it's appropriate to remark that Mr. AlSanea still continues to deny any wrongdoing in the conduct of his business affairs.

The importance of the ruling to CBB is evident from the inclusion of quotes from three senior executives.  Their common focus on the CBB's actions to maintain the strength and reputation of the Bahrain banking sector no doubt reflects some concern over the market's perceptions of both. 

AlGosaibi Offers Creditors 20% on the Dollar Plus Proceeds of Lawsuits Against Maan AlSanea

Quoting informed sources, Frank Kane at The National reports that AHAB has offered creditors a cash payment of US$1.8 billion on US$9 billion of liabilities plus up to US$4 billion hoped to result from AHAB lawsuits against Mr. AlSanea.   

As Mr. Kane notes and as I have as well before, Mr. AlSanea continues to deny AHAB's allegations against him.

The al Gosaibi family of Saudi Arabia is prepared to sell much of its 70-year-old business empire to help pay its creditors, informed sources say.

The proposed net payment is a minimum of 20% (US$1.8 billion) with a maximum of 64.4% (US$5.8 billion).

As the article points out, the net value of Mr. AlSanea's assets is not known. 

Assuming for a moment that AHAB would be successful in its lawsuits, I believe it would become another of Mr. AlSanea's unsecured creditors.   And would therefore be entitled to a proportionate share of the "estate".  As well, the resolution of the lawsuits is probably something that will require a very long time to settle.  In objecting to a potential suit against itself by Trowers and Hamlins,  AHAB is reported to have said that "litigating the intercompany positions will take years if not decades and that such litigation only depletes resources that will be needed to effect a workable commercial settlement".   One may perhaps safely presume that the same would apply to AHAB lawsuits against Mr. AlSanea.  

Putting aside the depleted resources argument, one might argue that the present value of the proposed settlement is therefore less, much less, than 64% or 20% for that matter (which will depend on sales of AHAB assets). 

AlGosaibi v Maan AlSanea - Trowers and Hamlins Statement

One of my new and frequent commentators mused whether the fact that Trowers and Hamlins had launched a lawsuit against AHAB represented any sort of determination by T&H about the guilt or innocence of the parties involved in the case.

I had speculated that T&H was merely doing its job - going after the registered debtors of TIBC and pursuing collection of funds without making any such judgments.

That left us in a stand-off of opinions.

So, I posed a question to T&H through Hill and Knowlton.  Today I received the following response which I quote verbatim.

A Trowers and Hamlins spokesperson said: “Our investigations to date and other extrinsic evidence provided by third parties - which we are still considering - would suggest that there were irregularities in the manner in which the business of TIBC and other institutions connected with the AHAB / Saad situation was conducted.  However, investigation of fraud or other criminal activities and/or other material non-compliance by officers or other stakeholders of TIBC with the law or regulatory requirements essentially remains the remit of the public prosecutor and the CBB respectively and it is therefore not appropriate for us to comment or speculate further.”

As you'd expect a law firm to do, this statement is carefully crafted to avoid creating any unwanted legal problems for T&H.

There are several points I think are worthy of comment:

1. That at this point what T&H has seen suggests - though not conclusively - that there were "irregularities in the manner in which the business of TIBC and other institutions connected with AHAB / Saad situation was conducted".
2. That investigation of fraud, criminal activities or material non compliance with regulations is not T&H's responsibility but that of the "Relevant Authorities" in the Kingdom of Bahrain.
3. Accordingly, T&H will not comment on such matters.
   

Il Accuse! -- Former TIBC CEO Flees Bahrain

 Copyright Allied Artists

As reported in the Torygraph, Glenn Stewart has managed to escape from the apparently intolerable conditions he was being held under in Bahrain.  And has filed a formal charge with the International Court of Human Rights for false imprisonment designed to "deliberately inflict mental cruelty and torture". 

You'll recall (if you force yourself to think some rather unpleasant thoughts) that instead of being incarcerated in one of Bahrain's jails (by all means the sort of thing one should definitely avoid),  he was forbidden to leave the island while investigations into the collapse of TIBC were ongoing.  A sort of a modified house arrest with Bahrain as the house.  I guess the nearest comparative would be the French penal colony known as "Devil's Island" for more than one reason.

As he aptly put it, having escaped from these conditions of inhumane treatment, he is akin to a runaway slave.

If that weren't disturbing enough, from the article it's hard to avoid drawing the conclusion that the parties the Bahraini authorities have detained in connection with the collapses of TIBC and Awal believe they are victims of an unjustified conspiracy against them involving the Bahraini authorities, Ernst and Young, and Hibis and perhaps others.   The Bahraini Authorities would seem to include at a minimum, the Central Bank of Bahrain, the Attorney General of Bahrain and various investigative organs of the CID - though it is unclear whether other entities and individuals might be involved.  Nor how high up this goes!  I'd also hasten to add that it's unclear whether all these parties are alleged to have been active co-conspirators.  Or whether some of them may have been unwitting dupes.

According to direct quotes from Mr. Stewart it also seems this conspiracy has sinister undertones of persecution of "Westerners".

It's reports like this that make Abu Arqala wonder when justice will be done, if ever.

 

And finally a hat tip to Rupert Bumfrey, I would have missed this disturbing story if he had not reported it on his blog.  It doesn't seem to have been reported elsewhere yet. And that could, perhaps, be a chilling indication of the extent of this plot.  Or then again perhaps not.

AlGosaibi v Maan AlSanea - AlGosaibi Attempts to Enlist Kuwaiti Banks Against Saad

AlQabas reports that AlGosaibi and its counsel (Saudi and American lawyers) met with Kuwaiti banks exposed to both AlGosaibi and the Saad Group to request that they unite their legal actions against Saad by forming an alliance whose goal would be the combining of their individual legal documents and other evidence, including any forged documents or documents suspected of being forged to strengthen the legal position of all creditors in recovering their money through the legal process.

At the beginning of the meeting the Kuwait banks reportedly indicated their intention not to co-operate with one party of the debtors.  

The representatives of AlGosaibi responded by:

1. Assuring of the start of a "new page" of co-operation between AlG and its creditors.  You'll recall earlier that AlQabas had carried a report that Kuwaiti creditors were frustrated with AlG's responses to their attempts at contact and negotiation.
2. That the Kuwaiti banks should have a permanent representative in the creditors committee in Riyadh and Dubai so that they would learn "in near proximity" (first hand) what was happening.
3. That 70% of the AlGosaibi Group's wealth had been designated to pay its debts.

The banks responded to the last point by noting they were not going to entertain any discounts on the debt from any party (either AlG or Saad).  And that they were on the verge of taking legal steps against Saad.  This is described in the last paragraph of the article as the filing of cases in Saudi by some and by others in the USA.

The article then notes that the Central Bank of Kuwait has instructed Kuwaiti financial institutions to provision 100% for AlG and Saad exposure by 31 December 2010.  Three banks have almost already achieved that level.  It being understood that some banks had relatively small exposures.  As for those with larger exposures it's expected that they will require until the end of the year.

Assuming the article is correct, what's interesting about this is the apparent attempt by AlGosaibi to enlist creditors in its campaign against Maan AlSanea and the Saad Group.  As you'll recall, AlG has accused Mr. AlSanea of forging certain documents to obtain loans in AlG's name but then using the funds for his own purposes.  And, as you'll recall, Mr. AlSanea vigorously denies these accusations.

AlG appears to be trying to bolster its accusations of wrongdoing by Mr. AlSanea  by enlisting third parties to join in its campaign.  By portraying itself as the innocent victim of wrongdoing,  AlG may hope to  deflect creditor anger and pressure (from itself) to Mr. AlSanea.  A tactic, that if successful, might also set the stage for a later justification for a discount on the debt.

AlGosaibi v Maan AlSanea - Allegations of Forgery - Evidence Inconclusive?

Here's an article from the Gulf Daily News in which a forsenic expert is quoted as saying that it is not possible to determine if Sulayman AlGosaibi's signatures were forged or not.

There are a couple of interesting things about this report.

In  the NY Supreme Court Case (601650/2009), as part of a forum non conveniens argument, the attorney for Maan AlSanea submitted a  sworn statement by one of AlGosaibi's lawyers, Andrew John Ford, given in connection with the suit of British Arab Commercial Bank and others against AlGosaibi.  This is Document 107-2 (Exhibit 25), which you can access by going to the Supreme Court of New York's website, and undertaking an Index Search using the above case number (601650/2009)

Here's paragraph #13 of the Ford statement.

"AHAB says that this borrowing was obtained by the forgery of the signatures of the chairman of AHAB by or at the direction of Mr AI Sanea on hundreds of banking documents. It has submitted many of the  banking documents to forensic examination by Dr Audrey Giles, head of the Giles Document Laboratory  and formerly head of the Questioned Documents Section of the Metropolitan Police Forensic Science Laboratory. Dr Giles' work has been hampered by the lack of original documents (many of which were  removed from the Money Exchange by Mr AI Sanea and which he has refused to return). Nevertheless she  has so far concluded that there is evidence that the signatures on at least 286 banking documents are not  genuine. On some documents, signatures have been applied by colour photocopying or by an inkjet printer and then traced over with a porous-tip pen; on others, the signatures are identical matches of those on  other documents and therefore highly unlikely to be genuine. In some cases the signatures were applied to  documents at a time when it would have been physically impossible for the purported author to have  signed because of incapacitating illness."

It's unclear if

1. Based on additional work, Dr.  Giles has changed her earlier findings.  
2. Or this refers solely to this particular batch of documents cited in the Gulf Daily News article.

Presumably, more information will be forthcoming.

AlGosaibi v Maan AlSanea - Allegations of Forgery Confirmed?

If you've been following this legal battle, you'll know that the the key defense of the AlGosaibis is that there was widespread forgery of signatures of key members of the family on documents used to obtain loans from international and regional banks.  And that they never received the proceeds of the loans.   They have accused Mr. AlSanea of being the mastermind of this alleged plot.  Mr. AlSanea for his part has vigorously denied any wrongdoing.

On 5 April, the Kuwaiti newspaper Al-Seyassah published a lengthy account  (some five pages when printed out) of an alleged evidence file/document "T-1437" which was supposedly prepared by Bahraini criminal justice experts about the allegations of forgery of Sulayman AlGosaibi and Ahmed Al Gosaibi's signatures on a variety of documents.   As per Al-Seyassah's account the report supports the AlGosaibi's contention that there was forgery, though the report does not identify the forger or forgers.

Al-Seyassah states that it received the document from an anonymous source - apparently via an email.

The article also discusses the latest New York Court hearings related to Mashrekbank v AlGosaibi (to which AlGosaibi has added Mr. AlSanea as a third party defendant).

I've given the document a quick read and if I have time I may post a bit more on it later.  In  the interim, you can use the link above to read the document.  The print version of Al-Seyassah has some charts/illustrations. 

It's important to note that there is no way of knowing whether the document is authentic. And as Al-Seyassah notes in its article there is a "propaganda" campaign going on by partisans of either side.

It's also important to note that Mr. AlSanea vigorously denies any wrongdoing.  And that no Court has found anyone guilty or exonerated anyone in this case.

Awal Bank - Purported Central Bank of Bahrain Letter

A few days ago I was given what is purported to be a copy of a letter from the Governor of the Central Bank of Bahrain to the Attorney General of the Kingdom of Bahrain.

First of all, it's very important to state up front that I have no way of verifying the authenticity of this document.  

Second, the copy I have does not bear any written legend restricting its audience such as "Strictly Private" or "Secret" etc.  And it appears that this letter or one close to it served as the basis for the Al-Seyassah (Kuwait) article I posted on earlier.  So it seems in one form or another to be "out" for public comment.

2009/204/MM

30 July 2009

His Excellency the Distinguished AlSayyid Abdul Rahman AlSayyid

First Public Lawyer (Attorney General)

Public Prosecution

As-Salam Alaykum wa Rahmat Allah wa Barakatuhu

I want to inform Your Excellency that Awal Bank, a bank licensed by the Central Bank of Bahrain, has encountered difficulties in settling its obligations toward creditors (or lenders) - local and international banks and financial institutions - beginning in May 2009.

Immediately upon learning of this [AA: Awal's inability to pay creditors], the Central Bank engaged a specialist company - Hibis Company - as an investigator to determine the circumstances that caused this inability/difficulty.  It has become clear from the preliminary results of the investigation that there were numerous violations of Central Bank regulations, excesses (going beyond proper bounds) in the management of the bank  which constitute a form of deceptions, breach of trust, embezzlement, and money laundering.

In this regard during previous years the management of the bank embarked on providing the Central Bank misleading reports/statements on the operations of the bank.  Among the most prominent of violations that the management engaged in was the presentation (appearance) of profits though fraud and forgery.  In addition to the lack of implementation of regulations specifically on the combating of money laundering which has led to suspicions of the involvement of the bank in this activity.

Based on these dangerous excesses/violations which have led to the insolvency of the bank towards its creditors, the Central Bank has decided to place the bank under Administration according to Article 136 of the Central Bank of Bahrain and Financial Institutions Law #64 of 2007.  Your Excellency knows quite well also that the conduct/actions which the management of the bank engaged in which led to its insolvency have negative reflections on the reputation of the banking sector in the Kingdom of Bahrain, especially given the result of its large dealings which were concluded with regional and international financial institutions.

On that basis, the Central Bank of Bahrain decided to refer this case to the Public Prosecutor to take the legal actions you deem appropriate in this matter.

We would like to draw your kind (noble) attention to the following individuals whose names are in the "sphere" of suspicion according to the Hibis Report which is in the final stages of preparation and which we will provide you shortly.  For this reason, we trust that you will prevent them from leaving the Kingdom to protect the conduct of the investigation in this case.

There then follows a list of 11 names.  

[I have deliberately not mentioned the names of the 11 individuals listed in this letter as there is an ongoing investigation.  And perhaps more important this document is unverified.  Is it actually the CBB's letter?]

Then a final salutation and a signature.

At this point it is appropriate to note that as far as I know all the individuals who have been named in this list deny any wrongdoing.  Equally that none has been convicted by a competent Court of any wrongdoing.  And if the press reports I have read are complete, none have been charged with any crimes.  As I noted in an earlier post, often material witnesses are restrained from traveling so that they will be available to investigators during the investigation.

And finally yet again.  This is a purported copy of a letter issued by the Central Bank of Bahrain in this matter.  I cannot vouch for its authenticity.  

Bahrain - Already Big Money Laundering Scandal to Get Even Bigger?

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You might wonder how the current money laundering investigation could get any bigger.  After all, a former senior member of the Government has been interrogated by the Bahraini authorities in connection with allegations of money laundering and has been removed from his ministerial duties.  Whether the latter is just for the duration of the investigation or is permanent is not clear to me.

A couple of things seem to be pointing that there's a lot more to come in this story.

Before we go too much further, this is an appropriate place to note that what follows is based on  accounts and rumors circulating in the market. So a healthy does of skepticism is warranted.

It seems the number of financial institutions and other entities alleged to be involved  in money laundering is fairly extensive. The Al-Seyassah article I quoted in an earlier post has this language:  دائرة موسعة من الجهات شاركت في غسل الاموال

A recurring theme in these accounts is that the current investigation directly resulted from the two forensic investigations that the CBB launched into TIBC and Awal Bank last year.  That in particular the investigation into Awal Bank provided the loose thread that when pulled led to larger revelations.   The nexus is supposedly a Bahraini bank with significant ownership by two banks from a country in the region through which Awal made some transfers reportedly through Azerbayjan.  If the accounts are correct (and there's no way to know for sure at this point), further checking of transfers through that bank uncovered other transactions the Bahraini Government decided to pursue.   And the current investigations concern those other transfers.

As you'll recall the Hibis Report which was filed in the Supreme Court of New York in support of the AlGosaibi's claim against Mr. AlSanea had Evidence Case File #3 redacted.  From a later exhibit which was not removed, it appears this section dealt with allegations of money laundering.

And here it is appropriate to note that Mr. AlSanea has vigorously denied any wrongdoing in any of his businesses or conduct thereof.  And that as well the former Bahraini Minister also denies any wrongdoing.  The legal process in Bahrain is the proper forum in which legal determinations will be made.  At this point, we should allow this process to proceed and defer any judgments until the Court speaks.

Cayman Islands Court Declares Maan AlSanea In Contempt

The Financial Times reports that a Cayman Islands Court has declared Mr. AlSanea in contempt for violating the US$9.2 billion asset freeze it imposed.

Two violations were cited:

1. Transfer of US$60 million to the Saad Specialist Hospital last July
2. Putting one of his companies, Singularis, into voluntary liquidation.

Mr. AlSanea offered the following defenses.

Re the SSH transfer:

1. He was not aware that the freezing order applied when he made the transfer
2. His net worth is US$12.4 billion and so the transfer of US$60 million has no material impact on the freeze.

Re Singularis:

1. He was merely following legal advice and did not know that placing the company into liquidation violated the order.

The Court apparently did not buy these arguments. Here's the FT's characterization of the Court's assessment.

The judgment said it was "clear that an order for imprisonment would be futile and in any event perhaps unjustified", but the court found that "specific breaches of its orders" had "amounted to contempt

In light of the Court's reaction, I think it is really unfortunate that the FT didn't provide a bit more on Mr. AlSanea's defense regarding the requirements of the freezing order.   He certainly deserves his day in Court - including the Court of Public Opinion.

I would like to know if Mr. Al Sanea's is asserting that:

1. The legal draftsmanship skills of the Cayman Islands' Court are so poor that the Order was unclear.
2. The Order was clear but the Court delayed in communicating it to Mr. Al Sanea and his counsel.
3. The Order was clear and promptly delivered to his counsel, but they failed to notify him in time, i.e. before he took these actions.
4. Or the Order was clear, delivered to his counsel promptly and they relayed it to him promptly with sound legal advice, but the chap in the mail room forgot to bring it to him in time.
5. Or the Order was clear, delivered to his counsel promptly, relayed to him promptly and delivered by  that mail room chap the same day, but his counsel misinterpreted the Court Order.  And thus gave him what turned out to be faulty legal advice.
6. Or the Order was clear, delivered to his counsel promptly, relayed to him promptly with sound legal advice, delivered the same day by the mail room chap, but that he  simply forgot.  This is perhaps the most tragic explanation of all:  senior manager syndrome.  Or "SMS" as it's known to corporate lawyers.  It's as pernicious as Alzheimers, though it appears to be work related, not genetic. 

I have seen the most senior levels of my home country government or senior executives at major multinational firms  forced by relentless questioning in Congress to admit the terrible toll their office has taken on them.  That is, they are under such pressure from the volume and highly stressful critical nature of their work that their memories are affected.  Not only can they not remember what was discussed at a meeting, they may not even recall the meeting took place.  They don't  appear to remember much of what they do or why they did it.  Entire days or issues disappear from recollection.  I recall seeing one Harvard JD holding the most senior legal position in my country being forced by heartless Congressman to reveal that he really couldn't remember much of anything.  A rather pathetic sight, though luckily, he apparently still knew his own name.  Perhaps a sign that there is a hope for reversal. 

What's even sadder is the lack of public concern or compassion.  During the entire health care reform debate, I did not hear a single politician - conservative or liberal - raise the plight of this group - many struck down by SMS in the prime of their careers.  I believe that Aristotle said something on how one could judge a civilization by how it treated a certain group. I'm sure this is the group he was thinking of.

Kuwaiti Banks Prepare to Sue Saad and AlGosaibi

AlQabas reports today that KFH, Commercial Bank of Kuwait, Gulf Bank, and Burgan Bank today launched the first steps towards suing the two groups after becoming convinced that negotiations had reached a dead end.  From the article, it sounds like negotiations never took place.  Quoting unnamed banking sources, AlQ says that the complaints were lack of response to repeated contacts (no answers) or agreeing to meetings but not showing.  Kind of hard to conduct negotiations under those conditions.

The four banks are owed some US$1.5 billion.  Legal advisors have apparently been selected.  Formal launch of legal proceedings is not expected for at least one month while loan files are put together (I'm assuming this refers to work at the lawyers since presumably the banks had their files together for their negotiations) and a decision is made as to where to file the suit.  Complicating factors are the diversity of governing laws for the debts (English, Kuwaiti, Saudi are mentioned), different types of credit extensions - bi-lateral loans, syndicated loans (in which Kuwaiti banks are participants). And I'll presume since KFH is involved some are structured as "Islamic" loans.   The latter point - where to file - will be a choice of the  most preferred/advantageous law (from the creditors' standpoint)  as well as the opportunity to put "hands" on the two group's assets.  

The Central Bank of Kuwait is said to be fully supportive.

The article notes that international banks are also reported to be getting ready to launch legal actions.

It also comments that Ahli United Bank has already (and it's been some time now) sued Saad Group in New York.

And what is perhaps the most relevant point here, the Central Bank of Kuwait has told the banks that they must comply with its request for 100% provisioning for the two groups by 31 December 2010.

Judging by that latter comment, I suppose the appropriate thing to do here is wish the banks in Kuwait الله معكم

AlGosaibi v Maan AlSanea: What Does Arrest Mean?

(This is the first post reviewing documents submitted in Case 601650/2009.  More details here).

There's been a lot of speculation on this issue - some of it informed and some not so well informed, including right here on this blog.

Some new information has emerged on this topic in the form of a legally sworn statement by one of the parties.

As you perhaps know, Ahmad Hamad al Gosaibi and Brothers (AHAB) added Maan AlSanea as a Third Party Defendant to the case brought against them in the Supreme Court of New York (Case Index #601650/2009).

Mr. AlSanea has been arguing that New York is a forum non conveniens. Therefore, the case should be dropped or that he should be severed from the case.

On 9 March 2010, Document #106 was published on the Supreme Court's website under Case 601650/2009.  

It is an affidavit from Mr. AlSanea containing arguments why NY is inconvenient.  These include the usual arguments you'd expect:  (a) many documents relating to the case are in Arabic, (b) the sudden discovery of profound lack of English skills among witnesses (including several who previously  were able to routinely negotiate and conduct complex multi-million dollar transactions in English and who were involved in the running of global multi-billion dollar businesses in English), (c) none of the witnesses live in the USA, (d) the robust legal procedures in the Kingdom of Saudi Arabia,  and so on. You should, of course, read Mr. AlSanea's affidavit to understand his argument in full so that you can judge its merits for yourself.

What's pertinent to this post is a new defense:  many of the key witnesses are under travel bans. And  taking this document on its face enables us to make some definitive statements about the legal status of some of the parties involved.

First, we learn that these parties are not currently incarcerated.  Nor would it appear that they have placed under house arrest - where they are confined to their residences.   

Rather they are forbidden to leave the Kingdom of Saudi Arabia or the Kingdom of Bahrain.  Usually, this procedure involves the surrender of one's passport and a "notation"  in the records of  the "Customs and Immigration Officers" at border crossings, including airports.

In his affidavit, Mr. AlSanea lists the following individuals subject to travel bans:

1. Himself - by Saudi Arabia
2. Yousef, Saud, Dawood, AbdulMuhsin, Waleed Kamal Ahmad Hamad Al Gosaibi - who Mr. AlSanea understands are subject to similar travel bans imposed by Saudi Arabia.  Note that caveat.
3. Mr. Alistair McLeod, Former Acting CEO of Awal Bank, resident of Bahrain and subject to a travel ban imposed by Bahrain.
4. Mr. Anthony James, Former COO of Awal Bank, resident of Bahrain and subject to a travel ban, imposed by Bahrain.
5. Mr. Cliff Giddings, Former Head of Operations of Awal Bank, resident of Bahrain and subjectd to a travel ban imposed by Bahrain.
6. Mr. Mateen AK Mirza, Former Head of Treasury at Awal Bank, resident of Bahrain and subject to a travel ban imposed by Bahrain.
7. Mr. Yasser Al Sharif, Former Risk Manager of Awal Bank, resident of Saudi Arabia but subject to a travel ban by Bahrain.  (Confess I'm not clear how this would work legally.  If he's not resident in Bahrain, he would seem to be outside Bahrain's legal control).

It's very important to note two things:

1. The imposition of a "travel ban" on an individual is not a finding of guilt.  Nor is it necessarily an indication of the suspicion of guilt.  Often witnesses who can give testimony material to an investigation are banned from traveling so that they will be available to the court.  Of course travel bans are also imposed on individuals who may be  later charged with some wrongdoing.   Though being charged and being guilty can be two different things.  As per Mr. AlSanea's affidavit, you will note that both sides in the dispute - the AlGosaibis and Mr. AlSanea himself - are subject to a travel ban.
2. The Court will make the final legal judgment of quilt in this matter.  As far as I know, no Court has yet rendered such a verdict.

Mashreqbank v AlGosaibi – Analysis of FX Deals

This post is based on the affidavit (including appendices) submitted by Bruce R. Grace, Esq. of Baach Robinson & Lewis PLLC, who are the attorneys for Ahmad Hamad AlGosaibi & Brothers Company ("AHAB") in the above lawsuit. Attorney Grace submitted these documents to the Supreme Court of the State of New York on 5 February 2010. They were filed as Document #83. But since then for some reason there's been a change. Document #83 has been deleted and it and each of the exhibits contained have been filed as separate documents all dated 25 February. The specific document used as the basis for this post and referred to herein is Document #87-1. 

You can access electronic documents filings for this case at the Supreme Court of New York's website (http://iapps.courts.state.ny.us/webcivil/FCASMain). Search using Case Index #601650/2009. Follow the steps. You have to go through several pages. On the page labeled "WebCivil Supreme – Case Detail" go to the bottom of the page and click on the "Show EFiled Documents" button.

As usual, a caveat. As you read documents filed in the case, keep in mind that each side's lawyers are not disinterested partisans of truth. They are hired to represent their clients.

From the documents I've read it's clear that both parties agree that there was an FX transaction in the name of AHAB with Mashreqbank under which Mashreqbank was to pay US$150 million to AHAB's account at Bank of America on 28 April 2009 and AHAB was to pay SAR564.3 million to Mashreqbank value 5 May 2009. They also agree that Mashreq fulfilled its side of the contract but that AHAB did not.

As you'd expect both parties have different views about this latter fact. Here's how I would summarize their arguments. AHAB has two key contentions. First that they were the victim of a fraud perpetrated by Mr. AlSanea. And second that from the nature and pattern of the deals Mashreq should have known the deals themselves were questionable. Therefore, Mashreq is in some sense complicit. On its part, Mashreqbank has vigorously denied knowledge of any wrongdoing in the deals and asserts that it was acting in commercial good faith. The Bank also argues that the instructions it received appeared to come from duly authorized parties at AHAB. Simply put, there is a commercial deal which AHAB needs to honor. That's my take. But, I suggest you read the case documents themselves to get a complete picture of their positions.

Putting aside the issue of who is right and who is wrong, let's take a closer look at the FX deal which is the subject of this case.

The FX transaction is somewhat unusual as it is a "split value" deal. Normally FX deals have both parties making payments on the same day. If Bank A sells Bank B Sterling against the US Dollar, on the settlement date Bank A remits Sterling to Bank B's account. And on the same day Bank B remits the countervalue in US Dollars to Bank A's account. In a split value date deal, one party pays before the other. The party who pays first is taking risk that the second party might not pay. It is taking a credit risk that the second party may not pay its side of the transaction due to financial problems – being put under administration, entering bankruptcy, etc. Even in an FX transaction where settlement occurs on the same day, there is that credit risk. Herstatt Bank is an example. However, the longer the gap between the first party's payment and the second party's the more credit risk the first party is bearing. 

So what could be the reasons why parties would agree to a split value settlement mechanism?

Credit Risk Management

If one of the parties were concerned about the creditworthiness of the other, it could mitigate its risk by requiring the weaker party to pay first. After confirming receipt of funds and only then, the stronger party would remit its funds. This eliminates credit risk on the weaker party. The time between the two payments would be primarily a function of two things. First, the time it takes for the stronger party to confirm receipt of the funds from the weaker party. Second, how soon thereafter, the stronger party is operationally able to make its payment of the countervalue currency.

Given the currencies involved – the US Dollar and the Saudi Riyal- confirmation of receipt should be relatively easily. There are two widely available methods which provide quick and efficient information (as well as payment functionality) to banks around the world. The shared global "utility" called SWIFT. And proprietary systems offered by various major banks around the world – generally based on access via the Internet using PCs.  AHAB and Mashreq would have access to one or both of these.

In terms of payments, same day payments for these currencies should be no problem.  The US system has been "wired" for some time.  Saudi Arabia has had an electronic interbank payment system - including same day payments - since 1997 SARIE (Saudi Arabian Riyal Interbank Express).  Payment instructions could be transmitted by SWIFT or a proprietary bank system.

Two conclusions. 

First, This can't be a credit motivated transaction since the stronger credit, Mashreq, is paying first.

Second, the gap between payments, seven days, is longer than what a credit driven transaction would require.  Three days is probably sufficient as this represents the  "worst case" in terms of operational timing.  That is, if  Mashreq were to remit US Dollars on a Wednesday,  because of later NY working hours, AHAB might not be able to confirm receipt until the next business day. Even if staff came in on Thursday to confirm receipt, a SAR payment couldn't be made until Saturday. 

The only thing that could lengthen the period would be seasonal holidays, e.g., Eid Al Fitr, Eid AlAdha, National Day, etc.  Were there any seasonal holidays during late April / early May 2009 that extended the time period?   No! 

So I think we can safely exclude credit concerns as a motive for a split value date deal in this case.

OPERATIONAL REQUIREMENTS – DISPARITY OF WORKING DAYS

The second reason for these transactions is ostensibly disparity of working days. That is, on the settlement date, New York is open for US Dollar payments but Riyadh (and the rest of Saudi) is closed for the weekend or a holiday. As noted above, Saudi Arabia's "weekend" is Thursday and Friday. 

In this transaction US Dollars settled on Tuesday 28 April 2009 with the SAR on Tuesday 5 May 2009. There were five Saudi working days from 28 April to 5 May: Tuesday 28 April, Wednesday 29 April, Saturday 2 May, Sunday 3 May and Monday 4 May. There were no "seasonal" holidays during this period. So it is hard to see that there is an operational reason for the seven day gap.

A key question though (at least in my mind) is whether even with a disparity of working days such a split value deal would be entertained. 

When I worked for financial firms in the ME managed according to "USA" practices, a split value deal (except one undertaken for credit reasons) was strictly forbidden.  And generally there was  no interest in the extra hassle involved with credit motivated split value deals.   Two reasons. First, such a transaction could be a way of providing a short term money market loan to a party. Such extensions of credit were required to take place under lines specifically designated for loans.  If a transaction does not appear as a loan, a bank might extend another loan well beyond its risk tolerance for that customer. Another reason was integrity of our financial statements and regulatory reporting. A loan should be reported as a loan not an FX transaction.

Now I recognize that contrary to the beliefs of some what a "USA-style" managed institution does is not necessary infallible behavior. So I checked with an old friend who is long experienced  in Treasury at the DGM/AGM level in both "Arab" and "European" style managed banks. He told me that none of the institutions he worked for ever would entertain such a transaction. The counterparty would simply be told  that the deal had to be done on a common working day for both currencies so that settlement of both sides of the transaction could take place on the same day. But perhaps our horizons are too narrow.  Maybe other institutions apply different rules.  Even if that is the case (and I'm not persuaded that routinely doing split value date deals makes good business sense), the fact is that 28 April was a valid business day in both the Kingdom and the USA. So there was no operational reason both sides could not have settled on the 28 April. 

My friend also commented that the 3.762 FX rate used in the transaction was "non reflective of the market price". In his banks and mine, it was strictly forbidden to book transactions at non market rates. The concern was that one was assisting someone in manipulating their financials.

RATIONALE FOR THE SPLIT VALUE TRANSACTIONS

So if we've eliminated these two justifications, what could be the rationale this transaction?

If we examine the pattern of transactions, we can perhaps gain an insight into their purpose and rationale. 

In his affidavit Exhibit 1, page 20 paragraph #21 Attorney Grace states that between February 2005 and 5 May 2009, Mashreq and AHAB engaged in over "100 purported 'split value foreign exchange transactions' substantially identical to the transaction pleaded by Mashreq in the Complaint. Between January 2008 and 1 May 2009 alone, 52 split value foreign exchange transactions were carried out between Mashreq and the Money Exchange, totaling US$4.7 billion." 

He then goes on to describe that the transactions involved a payment of US Dollars by Mashreq to AlGosaibi's US Dollar account at Bank of America New York with AHAB to pay SAR to Mashreq at National Commercial Bank 3 to 12 days later. The FX rates used in these transactions were not at the prevailing spot FX rate. The SAR is fixed to the US Dollar at 3.75 SAR = $1.00. Interbank trading takes place in a narrow range around that rate. Before the settlement date, AHAB and Mashreq would engage in an offsetting deal to roll the existing deal forward. He also noted that in every deal Mashreq made a profit. AHAB never did.

Here's an outline of how this scenario might work. First, there is the original deal. Let's use the deal settling 5 May for SAR as the "Original Deal" (though to be clear that deal was actually the rollover of an earlier deal). That deal involved US Dollars against SAR with Mashreq paying US$150 million value 28 April with AHAB to pay SAR564.3 million on 5 May. If we presume AHAB doesn't have any money or wants to use its money for something else, how does it settle the payment due on 5 May to Mashreq?

Let's treat this as two separate deals. First a deal to cover the SAR payment due on 5 May (a "Closeout Deal"). And then a second deal to re-open the position in US Dollars (a "Rollover Deal").

In the Closeout Deal AHAB buys SAR from Mashreq against its (AHAB's) payment of US Dollars to Mashreq with settlement of both for value 5 May at the Spot Rate of 3.75. That takes care of the obligation to pay SAR from the Original Deal, except for Mashreq's profit SAR0.9 million which AHAB has to fund from its own resources. (The "profit" arises from the difference in SAR betweens US$150 million at SAR 3.75 = US$1.00 and SAR 3.762).

But now it needs US$150 million to pay for the SAR value 5 May under the Closeout Deal. Where does it get the US Dollars, if it doesn't already have them? From the Rollover Deal. Let's assume the Rollover Deal has the same terms as the Original Deal except the value dates are different. So, AHAB would buy US Dollars from Mashreq value 5 May against a payment of SAR to Mashreq value 12 May. This deal re-introduces the split value date.

While the Affidavit it sounds as though the Closeout Deal and the Rollover Deal were combined into a single deal, the Exhibits contain a copy of AHAB's confirmation for the Original Deal (itself a Rollover of an earlier deal). That confirm shows that there must have been two separate deals as outlined above. AHAB and Mashreq could agree to net the two deals' payments. And thus AHAB would owe Mashreq SAR0.9 million.   AHAB's obligation to pay Mashreq US$150 million (Closeout Deal) would be "offset" by Mashreq's obligation to pay US $150 million to AHAB (Rollover Deal).

Putting this information in tabular form might make the explanation clearer. The table below summarizes the cash flows by value date that would have occurred from a rollover of the transaction maturing 5 May. But note: no such rollover occurred: no Closeout Deal and no Rollover Deal. And since AHAB didn't settle the SAR payment on 5 May, Mashreq is pursuing them in Court.

Transaction	US$ 28 April	US$ 5 May	SAR 5 May	SAR 12 May
Original Deal FX Rate = 3.762	+$150MM		-SAR564.3MM
Closeout Deal FX Rate = 3.75	$0	-$150MM	+SAR562.5MM
Rollover Deal FX Rate = 3.762	$0	+$150MM		-SAR564.3MM
TOTAL CASHFLOW TO AHAB	+$150MM	US$0	-SAR1.8MM	-SAR564.3MM

As you can see from above the Closeout Deal and the Rollover Deal effectively push forward AHAB's payment of the SAR564.3 million to settle the original inflow of US$150 million. The only payment that does occur is the profit payment to Mashreq on 5 May. On each settlement date in the future (assuming the deal would be continued to be rolled forward), AHAB would pay Mashreq its profit. That explains why Mashreq always was making a "profit" on each deal.

Based on the above. 

1. These FX transactions were the equivalent of short term loans. 
2. The persistent "profit" on the deals was in effect the interest payment on the loan. 
3. The transaction FX rate of 3.762 compared to the 3.75 fixed parity results in an implied borrowing rate of 8.32% per annum. That rate might seem high. The day before the 28 April value date one month Libor was trading at roughly 43 basis points. That means the margin over Libor was roughly 7.9%. But remember that at that time spreads were still elevated due to subprime crisis, the failure of Lehman, etc. So there is some rationale to the credit spread here. 
4. Also as is hopefully clear, the Rollover Deals did not result in AHAB getting more money from Mashreq. Rather the Rollovers merely extended the maturity of the loan. So despite the US$4.7 billion volume of transactions mentioned, AHAB only received  (borrowed) US$150 million from Mashreq. 
5. Mashreq's dealers must have known that they were extending loans. Whether its management did is not determinable from the documents I've seen. 
6. In terms of justification for the transaction, it's hard to imagine that anyone with a knowledge of AHAB's business could consider these transactions were commercially necessary to fund the needs of the Money Exchange business. The volumes are too large relative to the Exchange's business.  Since the amounts were rolled forward, there was only one net cash inflow to AHAB. 
7. Nor would these transactions likely to be financially motivated "hedges", particularly, since the US$/SAR FX rate is fixed (and has been so for many many years) and since the Saudi Government has ample financial resources to maintain the "peg".

Kuwaiti Banks to Provision 100% for Saad and AlGosaibi?

AlQabas quotes unnamed banking sources that banks and financial firms have decided to increase provisions against their exposure to Saad and AlGosaibi to 100% in light of the fact that the condition of  the two Groups as not reassuring regarding the possibility of collection of the amounts due.  And that some banks have already received verbal instructions to do so.  (Presumably from the Central Bank, though this is not stated in the article).

One local bank pursuing Saad in court is said to have been surprised by the violent, confrontational and fierce tactics used by Saad to resist which means that the legal battle will be long.  In such circumstances it's not possible to leave the balances open or uncovered.  (This may be AlAhli Bank which was identified earlier as pursuing a court case against Saad in New York).

A banking source  (note now singular) is quoted as being pessimistic about recovery stating that the two factors of time and expenses to wage the protracted legal battle probably mean a net recovery of 20% to 25%.  (It's unclear if the recovery  amount includes interest or is just the principal.  And whether the calculation is face value or present value.  In any case it's small.)

Awal Bank & The International Banking Corporation - Update on Legal Investigations Including House Arrest of Maan AlSanea (?)

Here's a summary of a 17 February report from  AlWatan Newspaper (Bahrain) on the latest in the AlGosaibi/AlSanea affair.   For those who are interested in Mr. AlSanea's fate, you'll want to at least read #7 below.

AlWatan's article is based on an "informed source".

First, the head of the Public Prosecution Nawaf (Abdullah) Hamza, has formed a  panel of independent experts to provide an independent opinion on the financial statements of Awal Bank and The International Banking Corporation.  (Digression from article:  While not stated by AlWatan, clearly this report will be used as part of the justification for the levying of charges.  In 2007 the Public Prosecutor's Office also known as   النيابة الكلية  was given jurisdiction over the investigation of all financial and economic crimes.  At that time Mr. Hamza joined the office leaving his post as Head of the Middle Prosecution Office, though at that point he was not made head of Public Prosecution).

1. The investigations continue at both banks.  Lately the focus has been on management and employees.  It's not clear just how far down the management ladder the investigation is proceeding.  The article uses the terms "managers and employees".  
2. Among the parties being interrogated at the CEO and members of the Executive Committee at Awal Bank.
3. The investigation of Awal's Head of Operations has been completed.  There are no further details in the article on what the results were.
4. In the past 10 days, Awal's CEO has charges directed against him.  He has been released against an unspecified bond and forbidden to travel.  Later the article uses the term "rasmiyan" to refer to charges against the CEO of TIBC.  So assuming the insertion of that additional word was deliberate  and has significance, Awal's CEO appears not to have been formally charged with a crime.
5. Awal's Head of Treasury and Foreign Exchange has been released against a BD2,000 bond and forbidden to travel.  AlWatan does not mention that formal charges were levied.
6. The CEO of TIBC has been formally charged with breach of trust and stealing two billion dollars from AlGosaibi Company for Commercial Services (Bahrain).  He has been released from custody against a BD10,000 bond and forbidden to travel. 
7. The article lists five cases pending against Maan AlSanea in Bahrain: (a) Awal Bank v Maan AlSanea, (b) Bahrain Islamic Bank v Maan AlSanea and Others, (c) Bahrain Islamic Bank v Maan AlSanea and Others, (d) Hasan Sharif and 18 Others v Awal Bank (labor case),  and (e) Salah AlKawaari v Awal Bank (labor case).   I suspect the latter two cases were brought by individuals whose employment was terminated and who feel that their termination process and payments were not fair.  It is not uncommon for a dismissed employee in Bahrain to lodge a complaint with the Labour Ministry.  If the employer and employee cannot reach a solution among themselves, then the dispute proceeds to the Labour Court for a decision.  So, perhaps a more accurate statement is that there are three commercial cases against Mr. AlSanea.  With all the downsizing going on in Bahrain, just about every bank who let someone go, has at least one Labour case against it.
8. Also that a freeze (block) has been put on the assets of Mr. AlSanea and his family in Bahrain and that he has been forbidden to travel until the completion of the investigation.

That last point, the reported arrest, seems to be a topic of some interest out there from the number of hits this blog gets related to that topic. 

A couple of observations. 

First, as you've noticed from the cases pending against some of the senior managers of the two banks, they have been released from jail (against rather small bonds considering the allegation of the amounts involved) and forbidden to travel.   I'd guess that would involve surrender of one's passport. That is a modified form of house arrest, meaning in this case that they can move about within the country but may not leave.  No electronic ankle bracelets and stay at home rules.  Just to be clear I have not seen any credible report that Mr. AlSanea has been arrested/jailed.  I'd also note that modified house arrest would be fairly normal procedure for someone accused of a major crime.  Or someone who could be a material witness in an investigation.

Second, it's not clear to me if Mr. AlSanea is currently in Bahrain.  If he's not, then the Bahraini prohibition on travel would be theoretical rather than practical - at least until he entered the Kingdom.  My impression is that he is in Saudi Arabia, probably in AlKhobar.  If so, he's probably subject to similar restrictions on travel in the Kingdom. 

In the interest of fairness a couple of points.  And it's very important that all who follow news on these cases keep these two points in mind.

First, this post is based on a newspaper article.  It is not an official statement issued by the Public Prosecutor or any other official body in Bahrain.  Reports in the press are not always complete or accurate.  "Informed sources" often aren't. And note that AW's article seems to be based on a single source.   

Second,  individuals named in this post (either directly as in the case of Mr. AlSanea or others by their titles) may have been accused of wrongdoing.  However, at this point, there have been no convictions by any competent courts of any criminal or civil offenses.  And it is only the courts that are competent to issue such judgments.

British Banks Negotiating With Saad and AlGosaibi

Okaz quotes the Lord Mayor of London, Nick Anstee not Boris, as saying that some British banks were in negotiations with Saad and AlGosaibi Groups over the settlement of outstanding debts.   He wouldn't name the banks nor the amounts involved.   But said that his country hoped for a speedy settlement.  The British banks should proceed in a just manner with the two groups and other banks so that the investigation of all of the documents used to obtain the loans could proceed.

His remarks were made during a visit to the Amir Muhammad bin Fahd University in Al-Dammam.

Having read the 5 February submission to the Supreme Court of New York, all I can say is "الله معهم".

The International Banking Corporation – Ernst and Young 2009 Investigative Report

Thanks to a reader of this blog I was shown how to obtain access to the 5 February filing by Ahmad Hamad AlGosaibi and Brothers ("AHAB") in the Supreme Court of New York relating to the case MASHREQBANK PSC vs. AL GOSAIBI, AHMED HAMAD Case # 601650/2009.

Among the many interesting exhibits to the filing (there will be at least two more posts on TIBC from this material) was what is purported to be the Ernst and Young Report on TIBC commissioned by the Central Bank of Bahrain (the "Report") in 2009.  After receipt of the Report, the CBB placed TIBC under Administration, replacing its existing management and assuming full control of the Bank.  

Let's start with an explanation for my use of the word "purported". The Report was not submitted to the Court by its author but by the defendant's (AHAB) counsel. That counsel has sworn under oath that the copy attached to the filing is "true and correct". By using the word "purported" I am not implying that counsel is misinformed or is misinforming the Court. However, I am acknowledging that I have no knowledge independent of his word that this is the E&Y Report.

The E&Y Report is contained in the 5 February 2010 filing by AHAB'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 #601650/2009.   The Report is Exhibit 10 in Document #83.  If you initially have difficulties, keep trying.  The site appears to be temperamental.

I'll quote directly from the Report and then follow-up with some observations of my own based on the Report being an accurate reflection of the facts.   I have redacted certain names from the description below.  If you want them, you can read the Report.  In a situation like this involving multiple parties who may be accused of wrongdoing, it's also difficult to sort out whose story to believe.   And we are too far away from the facts here to sort this out.

INTRODUCTORY COMMENTS

On the chance that a reader is not familiar with this case and the larger legal issue involved. Mashreqbank has sued AHAB for failure to honor a US$150 million / SAR563.4 million FX transaction. AHAB's counterclaim is that it has been the victim of a massive fraud perpetrated by Mr. Maan AlSanea. As I read the Court filings by AHAB's counsel, they are also claiming that Mashreqbank should have been aware that the transactions were improper.

NET ASSET POSITION

The first place to start is at the end of the Report where E&Y summarizes its findings on the assets and liabilities of TIBC. This is on Page 80 in Sections 3.7.1 and 3.7.2. Using TIBC's 31 May 2009 unaudited and unreviewed financials it estimates (note that word) the potential value of assets and liabilities not linked to AHAB, AHAB's Money Exchange, Awal Bank, or of other entities allegedly under the control of Mr. Maan AlSanea. The latter are captioned "Unlinked Assets" and "Unlinked Liabilities" in the tables below. All amounts are in millions of US Dollars.

ASSETS

	All Assets	Unlinked Assets
Due from Banks and Other Financial Institutions	US$ 544.145	US$190.000
Investment Securities	US$ 461.274	US$ 9.000
Loans and Advances	US$2,154.843	-
Due from Related Parties	US$ 583.817	-
Due from Customers	US$ 25.859	-
Other Assets	US$ 45.144	US$ 5.00
TOTAL ASSETS	US$3,815.082	US$204.000

 

LIABILITIES

	All Liabilities	Unlinked Liabilities
Due to Banks and Other Financial Institutions	US$2,065.591	US$1,900.000
Due to Customers	US$ 41.475	-
Other Liabilities	US$ 57.022	US$ 57.022
Term Loans	US$ 200.000	US$ 200.000
TOTAL LIABILITIES	US$2,364.068	US$2,157.022

E&Y comments: "We have estimated he potential shortfall within TIBC to be in excess of US$2 billion."
 

OTHER FINDINGS

These are presented in the order in which they appear in the Report. Paragraph numbers as in the Report.

1. Paragraph 10:1: "Management alleged that Mr. AlSanea directed the day to day management of TIBC and we could find no evidence that Mr. Al Sanea was appointed as a delegated officer through a power of attorney to act on behalf of Ahmad Hamad AlGosaibi & Brothers Partnership." 
2. Paragraph 10:2: "We found no evidence of any formal business links between the Saad Group and TIBC, although transactions were of a related party nature". 
3. Paragraph 10:3: "We could find no evidence, nor could TIBC management provide documentary proof of Mr. Al Sanea's appointment to the Excom, no could we find any delegation of authority issued to him by the AlGosaibi family to act on their behalf as representative of the Excom or any other decision making forum." 
4. Paragraph 10.4: "We found evidence suggesting that the CEO had significant business interests outside of TIBC and was remunerated through a compensation based upon the amount of credit he was able to secure for TIBC, the Ahmad Hamad AlGosaibi & Brothers Co Partnership and Saad entities." 
5. Paragraph 10:5: "We found evidence that the final Swift authorization for the release of payments was controlled and managed by persons or a company other than TIBC. In addition we found that the SWIFT transfer authorizations were effected by individuals not employed by TIBC and from a premises outside of Bahrain. It was also confirmed by our Technology Security Risk Services that the application was accessed through the utilization of "PcAnywhere" software."  AA: See Point 23 re Paragraph 86.  
6. Paragraph 11: "TIBC at first alleged that all loan documents were created and provided by or via the Exchange ("Ahmad Hamad AlGosaibi and Brothers Co. Partnership – Finance, Development & Investment") for verification and administration at TIBC. It was however established hereafter that the Exchange and/or the Saad Group provided only the CR's, identities and passports from which the loan applications were created. We found no prior correspondence relating to the loan values and other requirements". 
7. Paragraph 12: "The signatures contained in the loan files of the executive chairman are questionable, and additional investigation in this regard will be required". 
8. Paragraph 13: "We obtained documents allegedly removed from the TIBC premises by an employee out of fear of the CBB investigation, and that these documents included official information regarding the signing of the Bank reference letters and e-mail correspondence". 
9. Paragraph 14: "We were unable to verify the existence of the borrowers listed with TIBC through telephonic interviews and physical verification. In the spirit of co-operation Deloitte provided us with a draft of their "drive by" visits to the addresses listed with the Exchange related to the loan clients, which indicated that the premises were not occupied by the borrowers or used for trade purposes". 
10. Paragraph 15: "We could verify or authenticate the deeds of property provided as collateral by alleged prospective borrowers. It is alleged that these documents were inspected by [COO/CRO] and [TIBC External Auditors] at some time, but this could not be verified as fact, and further thereto it is our assumption that these deeds were not authenticated by these entities through the First Notary Public Department". (AA: I have removed the names of the two parties and replaced with generic descriptions of their roles) 
11.  Paragraph 16: "TIBC were well aware of their cash flow problems by October 2008, but that they failed to call on matured loans, and that they instead affected additional loans and roll overs to the detriment of the Bank." 
12. Paragraph 17: "Loan applications were created on behalf of some AlGosaibi family members, and we could find no evidence that they have applied for loans or signed application forms." 
13. Paragraph 18: "We could find no evidence of any application for loans being made by any customer directly through TIBC or indirectly through the Exchange. From evidence it would seem that even the client applications were created at TIBC in most instances and that these were created by [name removed of TIBC Officer]." 
14. Paragraph 19: "The evidence contained herein could be indicative that internal collusion to commit an offense had taken place in the loan book process, and that [TIBC Officer name removed], [TIBC Officer name removed], [TIBC Officer name removed] and [TIBC Officer name removed] must reasonably have known that the loans created for this transfer of excess capital to the Exchange were irregular in that no application was made to them by any client for those amounts paid and the funds were not received by the clients intended." 
15. Paragraph 21: "We could find no evidence to confirm the existence of the Saudi Investment portfolio valued at circa $400 million as at 31 May 2009." 
16. Paragraph 22: "TIBC last obtained a confirmation of the existence of the equity investments as at 31 December 2007 as part of the year end audit process. We noted that the correspondence was sent by [name of officer at a Saudi Bank and name of bank removed by AA] and in this regard found that it is similar to the signature used on the loan documentation reviewed by Ernst and Young. We also note that the confirmation was sent "with [AA: presumably without} any responsibility on the part of [acronym of Saudi Bank removed] or its officers." However, it is alleged that [acronym of Saudi Bank removed] are the appointed custodians. We were told by [TIBC officer name] that no confirmation was sent to [name of External Auditors of TIBC] for the 31 December 2008 audit."
17. Paragraphs 24 through 26 deal with alleged deficiencies in reconciliations of nostro accounts. Paragraph 24 (nostro records did not accurately reflect all transactions). Paragraph 25 (a Saad entity reconciled TIBC's account at Citibank). Paragraph 26 (certain accounts were not reconciled though there were not copies of bank statements or balance confirmations). 
18. Paragraphs 27 through 33 deal with failed trades. 
19. Paragraphs 34 -35 deal with access to electronic records. E&Y alleges "resistance from TIBC's IT vendor to provide technical assistance" and "significant stalling from TIBC management" (Paragraph 34). 
20. At this point we are at page 10 in an 88 page report. 
21. Paragraph 53 deals with Board meetings. It's divided into six subsections. 53.6 reads "[CEO – name removed by AA] stated that he had no interaction with any of the directors since the inception of the Bank, except for Mr. AlSanea, and to his knowledge none of the AlGosaibi family ever attended a Board meeting in person in Bahrain". 
22. Paragraph 59: "It is alleged by [name of CEO removed] that major decisions and his day to day actions were directed by Mr. Al Sanea and that this had been ongoing since the inception of the Bank through the use of memoranda addressed to either Mr. Al Sanea directly or to the Excom. 
23. Paragraph 86: "We were informed by [name of CEO removed] that to his understanding all SWIFT approvals were made from the SAAD Group Offices." 
24. Paragraphs 110 through 119 detail Service Level Agreements between TIBC and the Exchange. Paragraph 119 states "From the contents of these three SLA's it is evident the SLA dated 1 July 2003 was applicable to the loan book which was intended to be managed and maintained by the Exchange. As such the content also creates the impression that the documents related to the application, and complete client relation should have been managed by the Exchange, without excluding TIBC's responsibility to perform proper due diligence". 
25. Paragraph 170: "Deloitte provided us with a draft of their relationship analysis of the loan clients to TIBC, the Exchange, Mr. Al Sanea and Saad Trading. The analysis alleges that the majority of the loan clients are either known to Mr. Al Sanea or employed by his business enterprises." 

Some comments. These are predicated on the assumption that the Report is reasonably accurate as to its description. 

Here are a few things that deviate from the banking practice I am familiar with. Of course, sometimes there is a sound reason why there is a deviation. If we were given the reasons for these practices, we might be able to better understand why they were adopted. 

1. Generally CEOs are not involved in the mechanics of releasing payments. That is, the operational step of inputting a password into a funds transfer system like Swift which then transmits the payment instructions to the bank's correspondent. Depending on the size of a transaction and a bank's internal control system a CEO might sign the approval for a payment, but then the bank's Operations Department would input the payment into the funds transfer system and release the payment. The procedure E&Y describes at TIBC would be to give greater control to executive management. What would be interesting to understand would be why such control was needed. 
2. According to the internal control principles I've been taught one never allows another person to use one's password. Each authorized party should have his or her own unique password. It's unclear to me why there was this alleged departure from this standard. 
3. While I had understood from TIBC's 2008 Annual Report that the Exchange acted as collateral management agent and nominee for the Saudi Investment Portfolio, I was surprised to see the role ascribed to them in the Report with respect to credit origination and relationship management.  TIBC seems to have been operating more as an investor than a commercial bank.
4. I was also surprised to read the statement attributed to one of TIBC's officers that no confirm for the Bank's Saudi Investment Portfolio was obtained for Fiscal 2008 by the Bank's external auditors. It would be interesting to know if this is true. And if true, what the reason was? 
5. Just a short "end note".   What is quoted above is a report.  It is not a judicial determination of guilt or innocence.  Merely a report. 

 Post on Hibis Europe Limited Report on Awal Bank here.