Central Bank of Bahrain Compliance Enforcement Reports

In case you missed it, I certainly had until just recently, the CBB is publishing annual “Compliance Enforcement Reports” which provide information on actions taken by the CBB to enforce regulations.  

This is a good source of information on the types of violations that occur as well as trends year to year.  Of interest—AA certainly hopes—is the section that names violators and provides a generic description of the violation.  But this is only for some violations.  You’ll see some of the firms that have appeared on this blog as repeat offenders in the CBB’s  reports. 

Reports for 2018, 2017, and 2016 have been posted.  The 2016 report has some data on 2015.  If the past is any guide, reports for this year will be issued in January 2020. 

AA was particularly gratified by two items in the 2018 report both appearing on Page 9.  

First, the CBB levied a fine (which was upheld on appeal) on a BSE listed company that had provided a clarification to an overseas exchange, where it is cross-listed, regarding the content of a news article published in that overseas jurisdiction about the listed company’s operations.  This clarification was disseminated on the overseas exchange’s website without the same on Bahrain Bourse’s website, which was only published by the listed company, a day after, in response to the CBB’s instructions.   

Faithful readers of this blog (that would be AA) will recall a characteristic AA rant about a failure by GFH to provide the same information on its 3Q10 financials on the BSE as it did in the UAE.  

And AA’s appeal to the CBB to change disclosure rules to require the same. 

As outlined in the CBB’s  2018 report, this requirement exists as per Section OFS-5.1.19 of Rulebook Volume 6 Capital Markets.  It appears to have been imposed in January 2014, though it may have existed elsewhere in another rulebook.  

Here’s chapter and verse of OFS-5.1.19.  

For Bahraini issuers who made an offer or listed their securities outside Bahrain, and for overseas issuers who made an offer or listed their securities in Bahrain, all information of importance to shareholders made public about the issuer in other markets must be made public in Bahrain, whether or not disclosure of such information would otherwise be required by the CBB.    

Note that this requirement includes the "making of an offer" and not just listing on the BSE.

Second, the CBB sanctioned an unnamed individual investor for market manipulation during 2018. 

Awal Bank Chapter 11 Filing Update - Request for Extension of Time to Provide Information

Here's an update from Bell Pottinger Middle East on the case.  BPME is the PR company used by Charles Russell for the Awal Bank engagement.

Awal Bank files request for extension of time

Bahrain, 4 November 2010: Charles Russell LLP, acting as External Administrator and Foreign Representative (the “Foreign Representative”) of and for Awal Bank BSC (“Awal Bank”) has filed a request for an extension to the deadline to file schedules of assets and liabilities and statement of financial affairs (the “Schedules”) in the Chapter 11 Case commenced on 21 October 2010.

The request follows the first day hearing that took place on 26 October 2010 at which the Foreign Representative sought an order to establish a workable protocol to administer the Chapter 11 Case in cooperation and coordination with the Bahraini administration. After hearing from both the Office of the United States Trustee and counsel for the Foreign Representative, the Bankruptcy Court directed that the Motion be further considered at a later date in order to allow more time to assess the information provided and after giving opportunity for creditors to make representations regarding the relief requested in the Motion.

The Foreign Representative has determined that additional time is required to assess, among other things, creditor views in relation to the Chapter 11 Case. Upon this assessment being undertaken, the Foreign Representative will determine whether to further pursue the Chapter 11 Case. The Office of the United States Trustee has indicated it has no objection to the Foreign Representative’s request for additional time to file the Schedules.

In October 2009 the Foreign Representative obtained “foreign main proceeding” recognition from the Bankruptcy Court under Chapter 15 of the U.S. Bankruptcy Code for Awal Bank’s administration proceedings in Bahrain.

The Bahraini administration governed by the Central Bank of Bahrain and Financial Institutions Law (“CBBFIL”), continues to be recognised as the foreign main proceeding under Chapter 15. The U.S. based legal activities form part of a multinational litigation process, with court proceedings also currently underway in Bahrain, the Cayman Islands, the Kingdom of Saudi Arabia, Switzerland and the United Kingdom.

Please contact David J. Molton, Esq. from Brown Rudnick LLP, counsel to the Foreign Representative, at 00 1 212 2094822 with any inquiries.

Gulf Finance House 3Q10 Financials: A Train Wreck

Studio Lévy & fils  1895
When You Turn the Corner Make Sure the Track Goes There

Get out your magnifying glasses and join me in reading the full 3Q10 financials that GFH submitted to the Dubai Financial Market Wednesday morning. Since I've got my soapbox out for a later tirade, I might as well take this opportunity to suggest to the  DFM that they invest a few dirhams in upgrading their electronic imaging system for faxes they receive. There really is no good reason in this day and age that the output cannot by A4 size.

Looking at the financials we see from Note 12, that GFH's US$115 million loss was primarily caused by provisions. Some US$101 million of them. But not provisions for investments. Rather US$60.5 million for an investment banking service receivable. And US$36 million from the sale of investments. I guess if one sells assets of "volatile" quality, one might expect some "volatility" in the receivables from the sales.

That being said, GFH has continued to maintain in its Other Assets the US$134 million "magical asset provision" and US$161.8 million in "Financing to Projects".

Another unfortunate trend is operating income which is running US$60.7 million negative for the first nine months of 2010 as compared to US$36.7 million for the comparable period the previous year. This is due to a collapse in revenues. On the cost side GFH has actually done quite nicely in bringing costs down.  But, if one can't pay the light bills from operations, it's hard to see a bright future.

As a result of the net loss, GFH's CAR has slipped below the 12% minimum set by the CBB. In the financials, KPMG coyly states in Note 2: 

"Further, the capital adequacy ratio of the Group as at 30 September 2010 was below the minimum required by the regulatory ratio …"

No quantification is given. We don't know if GFH just missed the ratio and has a CAR of 11.99%. Or, if it's CAR is 1.9%. You might think that the auditors would consider it important to quantify this shortfall. It certainly is a bit of "material" information that stakeholders would like to know. And more importantly should know.

If like me that's what you think, you're disappointed by KPMG's apparent lack of action on this point. They were silent on this topic. And they did not force GFH to disclose this information in a note to the financials. It's unclear if this is due to desire not to embarrass its client. Or slavish adherence to some accountant's taqlid as to the wording used for "emphasis of matter".

Note to Central Bank of Bahrain: It might be a good idea to specify in Module PD that when the CAR regulatory threshold is breached, the Licensee state the resulting ratio with details of the calculation. And if anyone from the CBB is reading this, I'd reiterate my earlier suggestion that Module PD be amended to require that Licensees report on the BSE the more detailed of (a) what Module PD requires and (b) what they are required to report on other exchanges. There is no reason that Bahraini investors should get second rate incomplete information which is available to investors in Dubai or elsewhere.

We don't have all the information required to calculate GFH's CAR at 30 September 2010. But we can make some estimates which should give a pretty good directional sense of the CAR.

The Table below summarizes these:

	30-Jun-10	Case A	Case B
Regulatory Capital	US$   363,220	US$   248,220	US$   114,229
Total RWA	US$2,811,417	US$2,683,417	US$2,549,417
CAR	12.92%	9.25%	4.48%

Notes & Assumptions:

1. 30 June 2010 CAR is as per GFH's Basel II Pillar 3 Disclosure. 
2. The key assumption is that there is no real significant change in Regulatory Capital or Total Risk Weighted Assets (Credit, Market and Operational Risk) except for the adjustments specified in the two "cases". These adjustments are made from the 30 June figures reflected above. This is a simplifying assumption so the ratios derived will not be exact but should be "close enough" to get a good sense. 
3. Case A: US$115,000 (the 3Q10 loss) is deducted from Regulatory Capital and US$128,000 is deducted from Total RWA at 100%. 
4. Case B: US$134,000 (the "magical asset" provision) is deducted from both Regulatory Capital and Total RWA. And again at 100%.

And if you have any doubt about the realisable value of any of GFH's other assets, like those Project Financings which may very well be to the same firms whose financial condition caused their bankers to pull the GFH guarantee, it's not too much of a stretch before the CAR is negative.

The results are to say the least not encouraging. It's hard to see how even the "Prettiest" words could convince even the "wisest" of investors to put equity into this firm.

The Gulf Daily News is reporting that they've seen a GFH "Investor Presentation" in which GFH states it intends to sell assets to raise cash to pay back some US$90 million in debt maturing next year or restructure that debt. In further discussions with GFH, the GDN was told that other options being considered were an IPO of some of its mega projects (North Africa and India) or perhaps giving creditors land, shares or other of GFH's highly valuable assets. There is a danger with the latter for creditors. As the choice assets are stripped from GFH's balance sheet, remaining creditors are left with lesser ones to settle their debts. The only option not mentioned here was putting a brick from one of these projects under EJ's pillow in the hopes that the Real Estate Jinn would put US$500 million under his pillow.

It's hard to imagine a "wise" creditor putting funds into GFH. 

And it takes a bit of "optimism" to see a real future for GFH. 

You can find more posts on GFH by using the Label "Gulf Finance House".

All in the Family: UGB to Seek Central Bank of Kuwait Permission for Additional Three Months to Buy Burgan Bank Shares

(Readers are invited to select the photo they believe 
most appropriate in the context of this news item.)

You'll recall that motivated by impeccable almost geometric logic, UGB had decided earlier that it was a wise investment indeed to acquire a large chunk of Burgan Bank's shares. (Additional posts can be accessed using the tag "UGB").

UGB had obtained Central Bank of Kuwait approval which expired  4 September. It now reportedly will seek a three month extension as we learn from Al Watan citing informed sources.

To help the two parties consummate this "marriage", KIPCO will manage the contract which could include it kindly selling some of its own shares to UGB or "collecting" shares (presumably from the market).

There are no values like family values. 

Bahraini Regulatory Quiz: When Do Bahraini Banks Have to Publish Their 30 June Basel II Pillar 3 Disclosures?

As if there weren't enough excitement here at Suq Al Mal with compelling analyses of zakat payments, magical provisions, we're going to have a contest to liven things up a bit more.

My understanding was that locally incorporated banks in the Kingdom of Bahrain are required to publish their Basel II Pillar 3 disclosures concurrent with their 30 June financials.

But one firm noted for its unwavering verbal commitment to disclosure and transparency has yet to do so.  That obviously means that my understanding is wrong.

Hence, this competition.  

The first one to post the chapter and verse from the CBB's Rulebook will receive the grand prize --  a slightly worn "proven business model" formerly the property of a self-proclaimed world class "Islamic" investment bank.  Early responders may be eligible for a bonus prize - a half baked business plan for a US$4 billion energy city/financial and day care center.

Multiple entries are permitted.

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 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.
   

The International Banking Corporation - Trowers and Hamlins Sues AlGosaibi

Not a good week for the AlGosaibis.

Trowers and Hamlins, the Central Bank of Bahrain Administrator for TIBC, announced through its public relations firm, Hill and Knowlton, that on 16 June, it had "filed a US$720 million foreign exchange claim against Ahmad Hamad Algosaibi & Brothers (AHAB) at the Saudi Arabian Monetary Agency (SAMA) Committee in the Kingdom of Saudi Arabia, following referral of the claim by the Council of Ministers."

There are a couple of telling points in the press release.  The first is the comment that the claim was filed "following referral of the claim by the Council of Ministers".

The second is a quote from Abdullah Mutawi, the T&H Partner handling this case:

“The claim we have launched with the SAMA’s Committee follows unsatisfactory responses from AHAB and their representatives to questions relating to the assets of TIBC that we have repeatedly asked them."  

You'll recall (and if you don't here's the link) that earlier there were complaints from some of the Kuwaiti banks that AHAB (as well as Saad) were not responding to requests for information or to hold meetings.   T&H notes in the press release that it has has "filed an application in the Courts of New York under Chapter 15 of the US Bankruptcy Code for an Order pursuant to Bankruptcy Rule 2004 authorising discovery.  The application seeks to obtain an Order from the Court compelling the disclosure of key financial information which the Administrator has been requesting from AHAB since August 2009 and which has not been forthcoming."  

The third is that AHAB is the "single biggest debtor owing US$3.2 billion."

In its press release T&H notes 

In addition the Administrator recently filed cases with the Negotiable Instruments Committee (NIC) in Saudi Arabia against Saad Trading (US$ 117 million), which is part of the Saad Group, as well as Abdulaziz Al Sanea (US$54 million) for defaults on loans advanced by TIBC.   Hearing dates have been set for early 2011 in relation to those cases and the administrators are currently working to expedite these hearings.

And that it will be pursuing other cases in an attempt to recover monies owed TIBC.

Finally, there is a quote from an unnamed representative of the Central Bank of Bahrain

“We are pleased that litigation has been launched less than 12 months after the CBB placed TIBC into Administration. This is a positive step forward in what is clearly a very complex case and reflects the CBB’s commitment to maintaining a well regulated and stable investment environment in Bahrain.”

Frank Kane over at The National has some additional information.

Two quotes. 

The first.

“Trowers and Hamlins’ rhetoric simply ignores [the Al Gosaibi group’s] multiple offers to enter into a co-operative information sharing agreement …”said Jim Courtovich, the spokesman for Al Gosaibi, said in a statement to The National.

The second.

In a letter to Mr Mutawi dated May 26 obtained by The National, a lawyer for Al Gosaibi said the group was advised not to hand over documents to Trowers and Hamlins because the firm was planning to use them as evidence in cases against Al Gosaibi.
“We could not responsibly advise our clients to proceed in this manner,” the letter, from Eric Lewis at the firm of Baach Robinson and Lewis, said.

In the letter, Mr Lewis also advised Trowers to join Al Gosaibi in the fight against Mr al Sanea, asserting that filing lawsuits against the group would be unproductive for creditors to TIBC.

As always, it's a good way to end a post on this topic to note that Mr. AlSanea vigorously denies the AlGosaibi allegations against him.

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.

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?

BrokenSphere /WikiCommons 

Creative Commons Attribution ShareAlike 3.0

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.

Manifest Absurdity: To Each His Own Dire Threat: Flag Burning or Sorcery

Copyright Sean McGrath from Quispamsis, NB, Canada

Creative Commons Attribution 2.0 Generic license.

Bahrain has made its choice between two clear and manifest dangers to its way of life.  And, if I may venture an opinion, it seems to me that the Legislature has clearly chosen "wisely".

No doubt after careful weighing of the relative dangers to Bahrain, the legislature gave this issue the high priority they thought it deserved.    Next session perhaps they can begin the process for a constitutional amendment on flag burning.  One never knows if a witch or wizard might burn a national flag.

Since Bahrain long ago adopted the concept of a single regulator for its financial sector, I guess the Central Bank of Bahrain will be in charge of policing the banks where as far as I can tell the majority of sorcery on the Island takes place.  

There are quite some wizards who are capable of  turning lead into gold as they create impressive financial statements and flashy press releases from thin air.  Eye of newt, blood of a bat,  an honest man's tear, a dash of balderdash and one might just conjure up a proven business model.  There is also a highly effective potion that causes the appearance of demonstrable confidence of one's bankers and clients, in one's business plan and future though I'm keeping that secret for now as I don't want to find myself on the wrong end of this law.  I will, however, risk disclosing one key ingredient - two "non core" assets.    

How will the CBB enforce the new law?

Will it be a series of additions to existing Modules in the CBB's quite excellent Rulebook?  A specific penalty for sorcery added to Module PD ("Public Disclosure").  Another for Module BC (Business Conduct).  And so on.

Or an entirely new Module WS (Witchcraft and Sorcery)?

Just for the official record in the Kingdom, I ask this question because I'm not (definitely not) a wizard and so cannot predict the future.  Nor do I own a crystal ball.

BIS Issues Consultative Document on Corporate Governance

Apparently, it's the season for corporate governance.  The BIS has just released a consultative document on the topic.  Text here.

The Central Bank of Bahrain is pretty well known for its practice of incorporating international standards into its regulations.  It will be interesting to see how they deal with this development given the release yesterday of Bahrain's much labored over Corporate Governance Code (which applies to all joint stock companies in Bahrain not just those regulated by the CBB.

Bahrain Issues New Corporate Governance Code

Copyright Gulf Daily News Bahrain

 

Today the MOIC and Central Bank of Bahrain officially announced the new corporate governance code which will be become applicable 1 January 2011.

Here is the text of the CGC as per the CBB website.

While the CGC has been a while in the making (and involved some co-ordination "issues" between the MOIC and CBB as well as the usual consultation process and objections by industry), the struggles to get the text finalized will pale next to securing effective implementation at the company level.

That being said it's a step in the right direction.

GDN article here.

Gulf Finance House - Board Meets with CBB Governor

Update 18 February:  Here's link to GFH Press Release which is source for the news articles.

The Gulf Daily News reports that the Board of GFH and some of its senior officers met with HE Rashid AlMaraj, Governor of the Central Bank of Bahrain and other senior officials of the CBB.

There are several possible interpretations as to the reason for this meeting.

My take is that the CBB is concerned about GFH and wants to make sure that GFH is fully engaged and has a proper strategy to extricate itself from its current constrained position.  Boards aren't generally invited to tea at the CBB.  And certainly not if everything is going swimmingly.

I think it's also telling that one of the indirect quotes attributed to Mr. AlMaraj related to the "importance of of updating the central bank with the latest developments at GFH".   One presumes this comment was made because of a perceived shortcoming in this area.  Otherwise, there would be no reason to mention it.  And of course those of you who read this blog will know that I've expressed a concern about this area more than once in the past.

The word "debated" is used in relation to discussions on GFH's strategy.  This could either be significant - in that the CBB raised some serious questions about the strategy.  Or just a poor choice of words by the journalist or even perhaps a less than artful translation of an Arabic word (if the story is from the GDN's Arabic "parent" paper).  On that score I'd note that the article on the meeting in AlBilad Newspaper does not use the term "debated".  The thrust of that article was a presentation by GFH of various elements of its strategy.  The term "debate" was not used.

Clearly, one would expect that during the presentation the CBB would ask questions and on certain points probably challenge the bank - at least to see how well thought out its plans were.  And perhaps to point out areas it thought were weak areas.  Since we don't have a transcript of the meeting, we don't really know the nature of these discussions.

Hopefully, GFH will find an exit and a path to a profitable future.

Central Bank of Bahrain Proposal To Tighten Limits on Large Credit Exposures

On the theory that regulators often craft regulations to deal with problems that have emerged, the 11 February Consultation Paper by the CBB on "Large Exposures"  indicates the Bahraini authorities' concerns with related party exposures.

The CBB's proposals are for the following.  As indicated these revisions have not yet been implemented but are being discussed with banks in Bahrain.

1. Loan and security underwriting where a strict 30% of capital rule is to be applied.  Amounts over this limit will not be allowed.  After an up to 90 day underwriting period, any remaining amounts will be subject to the normal large exposure limits, including the requirement to deduct from capital any amount over 15% of capital.   This underwriting limit is not available for transactions with connected counterparties.
   
2.  A new rule that limits placement of investments with clients or securitization of such assets to 25% of capital again for up to a 90 day period.  A Board approved written due diligence and procedures policy for such transactions must be in place to be eligible for this limit.
3. A reduction in the aggregate exposure limit for a Conventional Bank's exposure to both directors and associated companies and unconsolidated subsidiaries to 25% from 40%  (currently it's 20% each thus equalling 40%).  As well as a reduction in all exposure to connected counterparties (including management) from 40% to 25% of the bank's consolidated capital base.
4. A reduction in the aggregate exposure limit for an "Islamic Bank's" direct balance sheet exposure to directors to 10% from 15% and establishment of a new separate limit of 15% for  associated companies and unconsolidated subsidiaries.  Previously the limit for both categoties taken together was a total of 15%.   And the aggregate limit for all connected counterparties is proposed to be reduced to 25%  (This mirrors the limits on Conventional Banks).
5. A reduction in the aggregate exposure limits for an "Islamic Bank's" off balance sheet exposures to an individual connected counterparty funded by client Restricted Investment Accounts  to 15% of the RIAs and in aggregate to all connected counterparites to 25% instead of 35% of the bank's consolidated capital base.
6. A reduction in the aggregate exposure limit for an "Islamic Bank's" direct balance sheet and off balance sheet exposures (this second category funded by RIAs) to 20% of the bank's consolidated capital base down from 25% and in aggregate to all connected counterparties from 60% to 50%.

Comments.

1. Clearly, there are problems in Bahrain with connected counterparty exposures as well as banks taking on inordinate "placement" risks with investments.  Serious problems I'd guess.  The CBB is not engaged in this endeavor - which I suspect will raise fierce opposition from both Conventional and Islamic Banks - just for theoretical reasons.
2. I hadn't realized that an "Islamic Bank" was allowed by the regulations to have such concentrations of risk exposure including RIAs. At first look this seems high. Not sure what I'm missing.

And for those interested the CBB's definition of a  Restricted Investment Account.

Gulf Finance House - US$728 Million Loss for 2009 Does This Equal A Critical Covenant Breach in US$1 Billion Sukuk Program? APPARENTLY NOT

Update:  The US$728 million loss in 2009 apparently does not result in a breach of the US$1 Billion Sukuk program covenant because GFH issued shares during 4Q09.  Resulting year end shareholders' equity is US$433 million as per financials released.   At 30 September 2009, GFH had only US$17 million in Goodwill which would take them to US$416 million - unless of course this number changed.  This post has been accordingly amended to reflect this new information.

GFH has issued a press release on its 2009 results stating that it had a loss of US$728 million for 2009 and pointing out that a major cause of the losses was due to non cash provisions of US$656 million as if that somehow made the loss less onerous.  

Some quotes and then some comments.

Gulf Finance House Chairman Dr. Esam Janahi commented today saying “While 2009 proved challenging, it is important to view our results in the context of what prudently managed banks must do in tough economic times. We have closely reviewed all of our assets, made provisions where appropriate and have also begun to dispose of those which are non-core. We have asked management to review our cost base and also to ensure that we have a strategy to grow revenues. It is my strong view that as we achieve these objectives GFH will return to profitability and I am personally focused on this objective.”

Acting CEO Mr. Ted Pretty added “2009 was a year which presented unprecedented challenges to banks in both the global and GCC markets. All institutions have been impacted by declining asset values and by the tightness in liquidity.

And now for the comments.

1. The comment about non cash provisions is quite amusing.  Generally that's the way the provisions work.  The money for the assets is already gone.  It was spent when they were acquired.  So when the assets turn out to be worth less than one paid for them or worthless one takes a non cash charge.  In fact if a firm takes a cash charge for assets already paid for, it's probably a very clear sign that you need to engage forensic accountants.
2. This focus on the non cash character of provisions is also remarkable in another sense.  How many of you out there have seen a company make the statement "We earned $1 billion this year but only 60% was realized in cash"?  This reminds me of the comment attributed to Mr. Abbas who apparently only sees rating agency mistakes occurring when they downgrade an obligor. 
3. Come to think of it.  This announcement rather neatly demolishes the argument that S&P didn't know what it was doing when it downgraded GFH.  And in a remarkable coincidence was released on the same day that S&P was chastised for its lack of skill and understanding.
4. Sorry, Mr. Janahi, but it's hard to understand how one can call a company that starts the year with US$967 million in equity and loses US$728 million "prudently managed".  That's a loss of 75% of equity.  Wouldn't the "prudently managed" bank have much lesser or no losses?  The National Bank of Kuwait would fit the "prudently managed" description.   Note:  To be fair a 75% loss of equity is my estimate. GFH has not released its financial statements.  There may  well be some positive offsets to the  2009 net loss of which I am not aware. Though I note that starting with 30 September 2009 equity and allocating the 4Q09 loss of US$607 million, the decline in equity is 80%.
5. Yes, indeed all banks were affected by the Global downturn, but, Mr. Pretty, not all lost 75% of their capital.  So I'm afraid I'm finding it hard to see GFH's performance as the result of global or other external factors.  I'm presuming that if GFH made US$728 million this year management would not be crediting the market as being responsible.  But rather we'd be hearing about the vision, hard work and leadership of management. Selective responsibility where problems are the fault of others are about as credible as Mr. Abbas' apparent belief that rating agencies only make mistakes when they downgrade an obligor.
6. GFH's US$1 billion Sukuk Program requires that GFH maintain Consolidated Tangible Net Worth of no less than US$400 million. Otherwise 25% of its Sukuk certificate holders may accelerate repayment of the transaction.  And thus trigger GFH's Purchase Agreement.  The quotes below are from Page 112 of the Offering Circular.

Consolidated Tangible Net Worth Covenant
GFH irrevocably and unconditionally agrees and undertakes that until the Sukuk Certificates  have been redeemed in full in accordance with the Conditions, it will at all times maintain a  minimum of Consolidated Tangible Net Worth of not less than US$ 400,000,000 (or its  equivalent in Bahraini Dinars).

"Consolidated Tangible Net Worth” means, the aggregate of the amount for the time being  fully paid up or credited as fully paid up on GFH’s issued share capital, advance towards  share capital, share premium, any subsidiary company share grant, statutory reserves,  investment fair value reserves, and retained earnings, of the Group, but deducting any treasury shares, and deducting any amounts attributable to goodwill or other intangible assets.

Central Bank of Bahrain Regulations: Disclosure Standards

A new feature here at Suq al Mal.  We'll look at various CBB Regulations and see how the banking community is implementing them.

Back in October 2007, the CBB issued "Disclosure Standards" - a comprehensive and well thought out set of regulations which set forth requirements for listed companies and for the offering of securities in the Kingdom of Bahrain.  The full text of the regulations is here.

The particular text I'd like to focus on today is the following:

42.1 Immediate disclosure should be made of any information regarding an issuer's affairs, or about events or conditions in the market that will affect the issuer's securities, which meets either of the following standards:

Where the information is likely to have a significant effect on the price of any of the issuer's securities.

Where such information (after any necessary interpretation by securities analysts or other experts) is likely to be considered important, by a reasonable investor, in determining his choice of action.

Now, it would seem to me as a casual observer that if a firm were listed on the Bahrain Stock Exchange and it was say downgraded to below investment grade or perhaps even to Selective Default a reasonable person would expect that such a development would have a "significant effect" on the price of the issuer's securities.  And as an investor, AA would certainly like to have such information in "determining my choice of action".  That is, if a company's debt were considered highly risky, and given that debt has priority of repayment over equity, then it would seem that the equity was even more risky.  And riskier equity should have a higher return and therefore sell cheaper.

One might argue that the best course of action was a formal announcement on the Bahrain Stock Exchange where all might see it.  Second best would of course be posting such information on its website, though that approach assumes that investors will search for information.

With that as background, what are we to make of the following facts:

1. GFH has not published any such announcement at the BSE except in response to a BSE request as happened today.  And you will note that the BSE has been actively pursuing GFH for additional information on a regular and timely basis.
2. GFH has apparently not yet had the opportunity to update the ratings information on its website, though to be fair only a scant 80 days has passed since it was downgraded to BB+.  Currently, the rating is SD.

The International Banking Corporation - Arrest of CEO

Rupert Bumfrey had a post today that AlBilad Newspaper in Bahrain reported that the former CEO of The International Banking Corporation had been arrested after being charged with fraudulent transactions in excess of US$ 2 billion.

That really caught my eye so I decided to take a look at AlBilad's account, figuring it might have additional interesting details.  It does.  As well, it suggests some potential answers to the question as to why the recovery rate on TIBC debt is expected to be so low.

First, a look at the article and then the usual comments.

Here's a quick translation of AlBilad's article.

Nawaz Hamza, Head of Public Prosecution Department, ordered the detention of the (former) Chief Executive of TIBC for a period of six days or the payment of a bond of BD10,000 (US$26,500).  The charge is breach of trust and misappropriation of funds/embezzlement.

Reportedly, the accused chose prison and after a two day investigation, was charged with fraud  involving in excess of US$2 billion. 

Earlier the Prosecutor had determined that the signature of Sulyaman Ahmad AlGosaibi on numerous documents connected with loans and money transfers had been forged through computer imaging of Sulayman's signature.  Once scanned, the signature's appearance had been enhanced by using blue color to make it appear to be an original signature.  And presumably the discovery of forgery prompted the investigation of the CEO.

(An earlier AlBilad article here from 17 January has a bit more detail on the forsensic investigation that determined that Sulayman's signature had been forged on various agreements - presumably loan and similar agreements - as well as certificates of board decisions.  Interestingly, this article asserts that TIBC was under the administration of Mr. Al Sanea.  In fact it makes that statement twice.  It's unclear what the basis for this statement is,  that is, how Al Bilad knows this to be the case.  As you'll recall if you've been following this case,  this is AlGosaibi's complaint: that Mr. AlSanea not they are responsible for the financial distress in their companies).

The article notes that in a meeting  last year in August with regional, Arab and international creditors AlGosaibi had presented a number of documents which it asserted were forged and which established that there had been a widespread forgery of documents and certificates used to obtain loans, bank guarantees, and to make transfers of funds in the name of TIBC and AlGosaibi entities.  As the article notes, this was an attempt by AlGosaibi to prove its innocence from involvement in these transactions.  As well, it  requested creditors to submit documents for transactions with TIBC and the money exchange firm in Saudi so that it could reply on them - presumably whether they were genuine or forged.

Now to the analysis.

1. First a bit of context, TIBC's 31 December 2008 financials (the last issued) showed total assets of roughly US$3.8 billion.  So in excess of US$2 billion is quite a large sum even when considering that some of the transactions also involved AlGosaibi entities in Saudi Arabia, such as the money exchange firm.
   
2. The assertion of widespread fraud suggests some possible reasons for the very low anticipated recovery rates on TIBC.  On that topic, the Governor of the Central Bank of the UAE is on record as telling his banks to provision 100%.   Earlier I had analyzed TIBC's financials and was left scratching my head about the decline in asset values that would be required to cause the apparent loss.  I was focused on duff investments and loans resulting from poor business judgment not fraud. Two potential explanations surface from this assertion of fraud. First, that not all liabilities are recorded.  Thus, assets may be roughly close to the US$3.8 billion in TIBC's financials but real liabilities may be US$2 billion  or so more.   Second, if one is going to forge documents to secure funds, then one is probably not going to have  any scruples about forging documents for assets, though this involves a bit more than scanning one person's signature and changing its color. Just to be clear:  the article does not explicitly state that there are unrecorded liabilities or fraudulent assets.  But that seems a logical conclusion.
   
3. It's important to note that the former CEO has not been convicted. And all we have is a press report that he has been accused.  It's important to note that under Bahrain's Law #47 of 2002 ("Press Law") disclosure of the identity of those accused and press reports on trials are limited so this is at present an uncomfirmed press report.
   
4. It's hard to understand how BD10,000 in bail is adequate security in a case allegedly involving over US$2 billion.  But then again the courts of Bahrain move in the most mysterious of ways.  One can be fined BD1,000 for hitting someone with a fish.  And BD50 for sexual assault.