5 Fundamental Misperceptions about Transparency International’s Country Corruption “Rankings”

Plenty of Cake to Go Around: Eat Your Fill, Sleep Well

Probably the most well-known source for “rankings” of country corruption is Transparency International.

Well-known as the source, but less so for the contents.

AA believes that most people who use or quote TI’s rankings do not know what they mean and operate with some or all of the following misperceptions.

To be very clear upfront, this post is not arguing that we should not use TI’s CPI.  But rather than we should understand what it is, what are its limitations, and how to use it intelligently.

FIVE COMMON MISPERCEPTIONS ABOUT TI’S CPI

1. TI’s rankings assess the overall level of corruption in a country.
2. While not “facts”, the analytic process behind the rankings results in fairly accurate assessments.
3. TI performs the analysis behind the rankings or at the very least directs it.
4. Every country is rated using the same common set of standards.
5. The rankings are sufficiently precise that we can use them to distinguish the level of corruption in one country from the level in another.

TI provides extensive disclosure about the CPI at its Methodologies page.

Those who read this material carefully will not hold any of the first four misconceptions.  The problem is it appears that TI’s disclosures are infrequently read.

TI’s apparently precise ranking system does give the impression that Misconception #5 is correct.  It is not.

MISPERCEPTION #1 – Overall Level of Corruption in a Country

Here’s a quote from a TI FAQ that on its rankings:

“Is the country/territory with the lowest score the world's most corrupt nation?  No. The CPI is an indicator of perceptions  public sector corruption, i.e. administrative and political corruption. It is not a verdict on the levels of corruption of entire nations or societies, or of their policies, or the activities of their private sector.”

What does TI rank then?  What is its definition of “corruption”?

Why should we care?

It’s very important to understand TI’s focus if one is to use their rankings intelligently.

If you read the FAQs in the Methodologies material (page 2), you will find a list of what is included and what is not.

Money laundering, IFFs, informal markets, the private sector are NOT included.

Broadly speaking, TI’s CPI focuses on the public sector only.

TI is very clear on this but AA wonders how many users of TI’s CPI understand this.

What this means then is that a private sector member’s actions do not affect the ranking of its respective country.

This is very important because if one is using TI rankings to construct assessments of money laundering and terrorism finance, one might be mis-specifying the risk, if one assumes that TI rankings assess the overall level of corruption in a country.

Why?

Private sector enterprises are probably the major channels through which ML and TF take place in most jurisdictions.

MISPERCEPTION #2 – Rankings as “Facts”

TI’s annual ranking for 2018 is here.

The first thing to note is that this is described as the “Corruption Perceptions Index”.

The key word here is “perceptions”.    “Opinions” not “facts”.

That makes sense.

There are no formal reports filed on bribes paid or bribes accepted.

One has to infer the extent of corruption in a country from very limited hard data – corruption cases that have come to light—and other indirect indicators.

The first takeaway then is that a ranking for a specific country is an estimate. 

Likely a very rough estimate.

Similar to the 2% to 5% of global GDP (usually mis-stated as amounts from USD 800 billion to USD 2 trillion) estimate bandied about as the annual flows of money laundering, corruption rankings are often treated as scientific fact.  They are not and should not be treated as such. 

MISPERCEPTION #3 - The rankings are based on TI’s research.

TI uses the published assessments of 13 sources.

Each of these sources prepares reports for its own or its clients’ use using its own criteria and methodology.

TI does not do the research itself. It does not set the focus, criteria or methodology for these sources’ studies.

Rather TI repurposes the 13 sources’ reports to create the CPI.  In 2015, one source, IHS Global, stopped providing data to TI.  TI now accesses some IHS data via information published by the World Bank.

MISPERCEPTION #4 – Common Standards and Methodologies

Who are the experts? What are their methodologies?

For a detailed answer click on “Methodologies”. Here you will find a discussion about each expert and its methodology.

Click here to see the sources used in ranking a specific country.

The first thing you will notice is that not every source rates every country.

In a situation where some countries are rated by some experts and other countries are rated by other experts should we automatically assume that all the experts use an identical single common standard and methodology?

Clearly we need to look a bit deeper because if the experts don't have a single common standard, then which experts rate a country will impact that country's rating.

AA has read this material and encourages everyone who uses TI’s CPI to read it as well.

Why?

First, this is quite a heterogeneous group.

It includes multi-lateral institutions (2), NGOs/Foundations (5), companies selling country risk or business information services (4), university affiliated entities (2).

Each of these has a specific purpose for its study motivated by its stated “mission” or, in some cases, perhaps by its ideology.

That is not meant as a pejorative remark. But as a practical one.  We need to be sensitive to conscious and unconscious factors that may influence a rating, particularly in the case where “perceptions” play a key role in determining rankings.

AA argued in another post that the collapse of Abraaj seemed to be treated in some circles as evidencing a more serious failure by regulators and markets than scandals in certain OECD countries that had a much greater impact on the world economydid.

Are there other geographical biases? Is corruption in African Country G more heinous than Baltic Country L?

Without taking a stand on the issue, AA would note that there is some controversy about the independence of Freedom House from US foreign policy. The FH study that TI uses rates former Soviet bloc states.

Second, the experts’ focus is also heterogeneous.

Not all of these sources focus on corruption itself: bribes paid, bribes taken.

Rather a number of them focus on legal/institutional capacity.  Whether the country has an adequate framework to prevent/punish corruption, e.g., legislation, staffing and independence of investigative and legal bodies, administrative practices, e.g., professional independent civil service, open bidding, whether information is available to the public, etc. 

These indicators by themselves are not indicators of corruption but rather perhaps indicators of opportunities for corruption.

Very big difference.

Laws and frameworks are fine but as experience shows repeatedly they do not prevent crime from occurring.

That’s not to say that these elements aren’t important.

They are necessary but not sufficient elements.

The question is how much weight they should be given when assigning corruption perceptions to a particular country.

AA would be in the camp where actual corruption rather than opportunities for corruption would be given more weight in “rankings”.

Third, the experts’ methods are not identical.  Some use in-house experts to make assessments.  Others reach out to local contacts, and other outside experts, e.g., academics, lawyers, accountants, etc.  In some cases like EIU they use in-country free-lancers at least in part.

Some of the experts appear to ask a single or a couple of questions as part of a larger study on more than just corruption.

Others have a more robust set of questions on corruption.  Or survey a wider set of contacts.

For example, in 2018 The World Economic Forum Executive Opinion Survey (WEF-EOS)--one of TI’s sources—received 12,274 responses from executives in 140 countries in 2018 about corruption.

Fourth, some of the experts—primarily the 3 firms that sell political risk and country assessments to businesses -- assess all levels of corruption from the petty to “grand” corruption.  Varieties of Democracy, another of TI's expert sources does as well. 

As a practical matter, their 3 firms' clients (businesses) are likely to be most interested in the need to pay ongoing bribes to ensure their daily operations run unhindered if they invest in Country X.

So smaller recurring cash payments to facilitate clearance through customs of imports and exports, to secure connection to and maintenance of utilities, to deal with tax authorities, to obtain licenses, etc. are of prime concern.

Finding out about them is fairly easy.  One can ask businesses in the country. They will be more likely to report such occurrences because they are imposed on them as opposed to grand corruption where they may be a willing participant.

Because it’s harder to find out the true level of grand corruption, there is a risk that corruption ratings based on petty or moderate corruption may skew the rating for a country.

Fifth, unlike the countries in the CPI, the 13 experts are unranked.  Their perceptions are accorded equal weighting.  Each expert’s score is added and a simple arithmetic mean is calculated.

They are all presumed to be all equally smart and informed and use equally valid methods to evaluate corruption.  It doesn’t matter whether an expert asked a single question or sent a questionnaire and got 12,274 responses.

It doesn’t matter if the expert is expert in a limited geographical area or covers the world.  The Economist Intelligence Unit who use in-country free lancers in part to do their assessments and rated 131 countries in 2018 are presumed to know as much about each of those countries as the African Development Bank which uses in-house economists knows about the 54 African countries it rated. Or PERC which contacts a wide range of potential respondents to ask a single question and rated 15 Asian countries.

As you might expect, not every country is rated by all 13 experts.  Some of this is because of geographical specialty. The experts from the African Development Bank don’t rate Switzerland, the USA, or France. PERC’s focus is a slice of Asia.

It’s not unreasonable to say then that the rating standards across all countries are not uniform given the diversity of focus, methodology, level of detail, etc. of the 13 experts and the fact that the same 13 experts do not rate each country.

The full data set shows the score, the standard error (think standard deviation but for a sample), the Upper CI and Lower CI.

There is a wealth of information here.  If you use the TI CPI, then you should be familiar with this information so you can use it intelligently.

For example, should we treat a rating with only 3 experts (the minimum required for a rating) as being as valid as one with 10?

If the standard error is large, should we assess that the rating is less accurate than one which has a smaller standard error?  For example, the SE for Switzerland is 1.57, Bahrain and the Philippines are at 1.81, Saudi is at 6.34, Qatar at 8.08, and Oman at 9.46.

MISPERCEPTION #5 - Ratings are Precise Measures

TI ranks some 180 countries.  100 is the theoretical “best” score.  0 the worst.

Denmark in the first rank with 88.

New Zealand is at 87.

Then four countries follow at 85.

All the way down to Syria (13) and Somalia (10).

This is some very precise parsing of differences in corruption.

Let’s stop and reflect for a moment.

We started with “perceptions” but we seem to have wound up with “precision”.  AA would argue “false” precision.

On a hundred point scale, NZ would appear to be 1% more corrupt than Denmark.

Can we really parse gradations this fine?

More importantly is there really a practical difference in corruption between Denmark (ranking #1 with 88) and Germany (ranking #11 with a score of 80)?

The answer to both questions is no. 

TI agrees with this at least in part.

In their FAQs, they answer a hypothetical question from a reader about changes of 1 or 2 points in a specific country’s rating year-on-year with:

“It is unlikely that a one or two point CPI score change would be statistically significant.”

AA would argue that even larger differences among countries are not significant either.

Let’s look at an endeavor that has more data and more rigorous mathematical analysis of the data, though one which is not devoid of opinion:  credit ratings. 

S&P, Moody’s, and Fitch rank issuers.

But they don’t assign them individual ranked ratings.  Rather they group them into categories of similar risk.

Those issuers least likely to default are rated (placed in category) AAA.  If distinctions are made, a “+” or “–“sign is used.

AA doesn’t think it’s a sensible proposition that corruption analysis is more scientific than credit analysis and hopes you do too.

AA suggests that TI adopt a similar approach in an effort to prevent misunderstanding and misuse of its rankings.  That is, divide countries into broad categories of risk of corruption like credit ratings or S&P's BICRA.

This will have the immediate effect of preventing users from plugging the current “precise” ratings into their models and coming up with equally imprecise results in theirs.

Some even more impressive with results to two digits to the right of the decimal point, though admittedly not on a 100 point scale.

Insolvency of PrivatBank Ukraine: Euphemisms Abound

Моя Україно,За що тебе сплюндровано, За що, мамо, гинеш?

Would his anger be tempered today by knowledge that the perpetrators are Ukrainians? 

AA doubts it.

Now to the post.

AA prides himself on his skill in using euphemisms to describe financial weaknesses and ethical slips. 

This Tuesday The Bloomberg lit up with news that The National Bank of Ukraine—the country’s central bank—announced it had declared PrivatBank insolvent and that Ukraine’s Government would assume complete ownership. 

By way of background, Privatbank is the largest bank in the country.  It is privately owned with two biznesmen—described by some as “oligarchs” but always as “pro-Western”—holding over 90% of the bank’s shares. Besides his many business ventures, one of them, Mr. Kolomoiskyi, has been accused of funding the Azov Battalion.

As I read the speech by the Governor of The National Bank of Ukraine and other news, I was in utter awe at her and her colleague’s command of euphemisms. 

Professional honor compels me to acknowledge their skill.  Frankly my own efforts seem rather small and paltry in comparison.  Therefore, I offer a humble tip of AA’s enormous tarbush to Governor Ms. Gonatraeva and to NBU First Deputy Chairman Yakiv Smoliy.  

First, to the Chairman’s 19 December speech reported at The NBU website in English.  Strangely, AA was unable to find the Ukrainian language version. Italics courtesy of AA.

Inspections and stress tests carried out by the NBU revealed that PrivatBank had capital shortages. As of 1 April 2016, the bank had capital shortages amounting to UAH 113 billion, which, apart from crisis-related factors, were caused by imprudent lending policies pursued by the bank. As of 1 November 2015, related-party loans accounted for 97% of the bank’s loan portfolio, totaling UAH 150 billion.

Now for the comments: 

1. Capital “Shortage”:  As per its 3Q16 financials, Privatbank had some UAH 30 billion in capital and total assets of UAH 271 billion.   Given those amounts, calling a UAH 113 billion capital deficit— which is equivalent to 380% of equity or 42% of total assets—a “shortage” is like calling The Grand Canyon a “river valley”.  Or 2008 a “recession”.  Technically correct to be sure, but somehow the full picture is lost.
2. “Imprudent” lending policies:  When a bank needs to raise new capital equal to 380% of existing capital or equivalent to 42% of total assets, one doesn’t need a lot of financial analysis to figure out that lending standards left quite a lot to be desired.  The good folks at Bloomberg had a slightly different translation “ill-considered loan policy” which is an even better euphemism. 
3. “Related Party Loans”:  When related party loans are 97% of loans and 4 times the maximum limit set by The NBU, such behavior seems to rise to a level well above “imprudent” or “ill-considered”.  AA might apply descriptors such as “patently immoral” and perhaps even “criminal”.   That being said, AA is not familiar with the legal status of Ukrainian banking regulations.  It may be that they only rise to the level of “suggestions” sort of like the Pirates’ Code, which seems apt given the location.  On a positive note, lending to oneself has certain advantages in streamlining the underwriting process.

But at SAM we never fail to be “fair and balanced”. 

So let’s let Privatbank speak for itself.

As per its unaudited 3Q16 financials, Note 13 shows the bank’s related party exposure as minimal only UAH 8 billion down from about UAH17.8 billion at 31 December 2015.    

One note, there is no auditor’s review statement in the 3Q16 financials and so it’s impossible to know if they were reviewed (but not audited) and whether these are IFRS statements. I believe they are not.  

Privat’s IFRS AR for 2015 shows a higher figure for related party loans roughly twice the UAH 17.8 billion above (see note 31) but quite a long way from 97%.  PWC’s local firm did qualify its audit report but related to collateral seized on past due loans and the economic/security situation in the country. 

Beyond that Interfax Ukraine reported that

“Oleksandr Dubilet, who had headed PrivatBank (Dnipro) for a long time prior to the decision on its nationalization, has said the National Bank of Ukraine's (NBU) statement on 97% of insider loans in PrivatBank's portfolio of corporate loans is exaggerated.”

Also that

"At the same time, NBU First Deputy Chairman Yakiv Smoliy said the share of loans to related parties in PrivatBank exceeds 90%.  At the same time, he stressed this cannot be classified as withdrawal of funds from Ukraine."

What FDC Smoliy appears to be saying is that the related party lending scheme cannot be “classified” as a ruse to loot the bank and transfer the loan proceeds offshore.  This may be the biggest “euphemism” (one last attempt by AA to score a point) in the story. 

A side note on the dickering over percentages.  

Corporate loans comprise some 74% and 84% of total gross loans as of 3Q16 and 4Q15 so the key question is whether the percentage is of “total” loans or “corporate” loans and of course whether the percentage is being figured against net or gross loans. 

But when a bank is in this range, the exact figure is in some sense meaningless. 

What’s the practical difference between 75% and say 97%?   The bank is bust and its management and board have some explaining to do at the very least.

Stunning Revelations of Apparent Corruption in Ukraine

Imagine How Shocked He'd Be by Corruption in Ukraine

On 31 October The Guardian reported “Ukraine stunned as vast cash reserves of political elite are made public”.

Two years after angry Ukrainians deposed Viktor Yanukovych and broke into his vast, opulent residential compound outside Kiev, revelations thrown up by a new system that requires government officials to declare their wealth and property online have led many to suspect the new elite are no better.

Cash hoards, collections of expensive watches, a Faberge egg or two, a Nazi SS dagger (what sort of Eastern European politician has Nazi souvenirs – oh, sorry this is Ukraine), a church, lists of offshore companies.  And laughable declarations by some politicians that they were living off their government salaries.

AA was stunned as well though for a different reason. 

It’s almost as if The Guardian published the article “Ukraine stunned as sun rises in East”.

Corruption in Ukraine is as commonplace as rain in London or the sun rising in the East. 

It is the one policy that the “pro-Western” and pro-Russian politicians in the country agree on, though of course they remain in sharp competition over the spoils of depredation of the country.  Both share an apparently unbounded kleptocratic avarice that exceeds the usual “beak wetting” by elites.  An avarice that destroys the wealth of the country and inhibits development.      

Given the damage that the previous “pro-Western” Orange government visited upon the country– the wrecking of an already fragile banking system and the sweetheart deal given to Gazprom by the braided hair lady—are Ukrainians really stunned by corruption among the current crop of self-proclaimed pro-Western politicians? 

AA is stunned.

Damas - New AED 614 Million Agreement with Abdullah Brothers

Damas announced on Nasdaq Dubai that it had revised its agreement with the Abdullah Brothers regarding the amounts they owe to Damas.

One key item is the fixing of the price of the 1,840,250 grams of gold the Brothers stole from the Company at AED 256 million.

Presumably, this has been set so that Damas is not disadvantaged.

Setting the amount owed is a key step.  Collecting it may prove a bit more difficult.

Dubai Escrow Law: Exemptions Fueled Boom and Left Buyers High and Dry

 Credibility - Now You See It, Now You Don't

A very good piece of investigative reporting by Asa Fitch at The National.

In 2007 with great fanfare Dubai passed a law requiring that developers set up escrow accounts to ring fence buyers' funds so they would only be used for construction and related costs on the projects that the buyers invested in. 

Rather quietly and quickly the Dubai Land Department gutted the law by granting exemptions to certain master developers. Among this select group were Nakheel and Emaar as well as other Dubai World entities.  The latter two have recently (three years later!) disclosed this fact.  Apparently, neither they nor the DLD considered it material information an investor/buyer might be interested in knowing or have a right to know.

A couple of quotes:

The developers of multiple projects in Dubai that are stalled spent money in this way, and now homeowners find that their investments were spent but that the projects cannot continue without new funding.

But having to comply with escrow laws could be burdensome for developers such as Nakheel and Emaar because of their obligation to build expensive infrastructure in their master developments. Emaar said in its prospectus last week that if it had to comply with escrow laws, its "business model may be significantly impaired as it would only be able to finance the construction of projects with corresponding purchase price instalments once certain construction milestones are met".

Poof, there goes the last illusion of Dubai as a world class financial center.

And, no, it's not a matter of professionalism  as one "expert" has it.  It's much more basic.  It's a matter of running a fair, honest market.  When the games are rigged, one is well advised to go to another casino.  When one doesn't get a fair shake (or a fair Shaykh), it's time to look to another market.

To be very clear, the central issue here is not that an exemption was given.  It was that the granting of the exemption was not disclosed.  Neither by the Government or the companies.  There may have been what were considered at the time very good reasons to give an exemption.  The problem was that buyers had no way of knowing.  They should have.  

Lost in Transmission: AlBoom's US$20 Million

Boom!

Abid al Boom's slow moving US$20 million lands him in jail.

International Leasing and Investment - The "Fix" is in? Central Bank Trying to Stop?

The 16 August issue of AlQabas has an intriguing article on ILI: "Supervisory Reservations About Return of AlHomoud to International Leasing."  KSE page on ILI here.

The article states that:

1. The regulatory authorities, among them the Central Bank of Kuwait, have reservations about the return of Fuad AlHomoud to ILI especially after his membership to the Board and appointment as Managing Director.  
2. One of the largest creditors of ILI has joined in these reservations on the basis that he has been following the company for years and knows its "ins and outs".
3. PWC who the creditors had engaged  issued a report that accused the previous executive management of taking loans and using them for other than the purposes for which they were obtained.  
4. And PWC had recommended that court action be taken against previous executive management.  
5. The article quotes an unnamed source in Munshaat (a Kuwaiti Real Estate company) that Mr. AlHomoud is facing a court case related to the time he was at both Munshaat and ILI.  
6. After an examination, the Central Bank of Kuwait found that the previous management guilty of a number of violations and excesses and levied a fine of KD200,000.

What's apparently troubling some is the sudden "understanding" between Mr. AlHomoud and Mr. Bassam AlMutawa, the investor who has proposed a plan to save ILI.  The question is whether they have joined forces to save the company or for another reason.

At this point, AlQabas speculates (and note that word) that legal cases relating to ILI could be very uncomfortable for a variety of people and that having  control over the Company's "files" related to such cases could be a powerful motive for some to seek to obtain control over ILI.

ILI is currently suspended from KSE trading due to failure to provide financials.  It has not yet provided its 31 December 2008 financials or any subsequent ones.

And finally, while not stated in the article, I am going to presume that Mr. AlHomoud like a prominent expatriate Kuwaiti  businessman denies all allegations of wrongdoing.

Heard at the FT: HP Board Overreacted (?)

My favorite financial newspaper weighed in today on HP's Board's dismissal of Mark Hurd via this comment in the Lex column:

But the safe decision is not always the right one. Mr Hurd was, by most accounts, a superb executive. HP’s shares had outperformed the technology-heavy Nasdaq Composite ninefold since he took over in 2005 and net income grew handsomely. There is no evidence that Mr Hurd cut any ethical or legal corners while presiding over this success. Indeed, his transgressions appear minor enough to have warranted little more than a slap on the wrist at most American companies.

Indeed, one is tempted to say.  Yes, there is a culture of toleration of "mistakes" at most American and most other companies.    Or perhaps a cutting of a corner on a rule.   All as long as the concerned employee is generating the revenue.

After all imposing small minded constraints might limit the creativity and motivation of such corporate high fliers.    Expense rules can be safely ignored.  Dealing limits.  Restrictions on the use of recreational drugs.  How many of out there can recall seeing a "golden" boy or "girl"  on the trading room floor with "talcum powder" on his or her shirt after a trip to the rest room?  Like the athlete on the parallel bars, a little talcum keeps your hands from slipping!

Indeed all minor.  A gentle slap on the wrist and back to revenue generation. 

Of course, for the not so golden or high ranking members of staff,  understanding is a bit more constrained.  And justice more swift.

As it's known out there, checkbook morality:  "If it pays, it plays".

One can always find the small minded (like AA) out there.  Here are couple of more from the FT .

Damas: A Gem of Loss AED1.9 Billion for Fiscal 2010

You may have seen the news articles on the loss.  Here in the Gulf News.  Or Khaleej Times.  As usual, if you're looking for more content, you'll find it at The National.

Hopefully, this post will expand the discussion.

For this excursion, here are Damas' Press Release and its Audited Annual Report for 2010 (inexplicably missing the audit report).  Presumably a technical issue because ASDA'A - Burson Marsteller was involved in distributing this. I've sent NasdaqDubai an email to note the oversight.  If you live in the Emirate, you might give them a call. 

The first thing that becomes obvious is that the new board and management are  "taking an accounting bath" - writing down everything they possibly can.  This associates the loss with the previous board and management.  And then when there are recoveries in these same items in the future, they (the new "team") will look like "blooming business geniuses". 

The second thing is that the number of areas where writedowns or provisions have taken place give an idea of the extent of the corporate rot.  There seems scarcely an asset category  or company activity that was not touched.  In cases like this one has to be quite a charitable soul to ascribe the lowest possible level of intelligence and competence to those involved.  Otherwise one would be forced to conclude that they were complicit in the Abdullah Brothers' crimes.  That would, of course, include Damas' Accounting and Finance Department, its internal auditors, its Board Audit Committee and its then external auditors. 

Let's step through the charges.

First "impairments" of AED 790.6 million.   Note 11.

1. AED457 million against the AED767 million due from the Abdullah Brothers (Note 26).  A provision of 59.6%.  This is composed of the AED606 million  in unauthorized withdrawals plus AED150 million in a lost deposit - lost as a bank seized it for a gold loan to the Abdullah Brothers.  Less AED3.3 million in Board fees for fiscal 2010 - we'll file that  under "insult added to injury".  Seems Damas has a soft spot for the Abdullahs and still believes it needs to compensate them for the wise and highly beneficial services they provided to the Company during fiscal 2010.  We can be sure of one thing.  The Company will recover at least AED150 million from the Abdullahs by offsetting the AED150 million subordinated loan the Abdullahs made to the Company.
2. AED106.1 million against real estate due to a downturn in the market values.
3. AED54.7 million for investments in persistent loss making jointly controlled entities which are impacted by a change in the role of the Abdullah Brothers.  Since the losses were incurred while they were running the Company, is the assumption that now that they are not, the situation will change for the worse?
4. AED28.4 million for certain associates due to uncertainty of future cash profits.
5. AED84.4 million for long term loans and receivables from related parties.  Apparently wisely made by Damas with no fixed repayment tenors, no interest applicable and no collateral.  
6. AED14.1 million for available for sale investments.
7. AED16.0 million for intangible assets.
8. AED29.8 for receivables.

Now to Provisions - AED572 million.  Note 12.

1. AED434 million for Inventories (Note 22 (ii)).  Seems Damas gave gold from its inventory to certain "consignment vendors, ventures, debtors, associates, and jointly controlled entities without any margin and to certain parties against cash margin."  Some AED618.2 million (of which AED613.5 was gold) against which it had AED183.8 million in collateral.  It has fully provisioned the remaining amount AED434.4 million.  Once Damas "lent" gold or other inventory, then those assets should have been separated from the rest of inventory.  Especially since the amount is significant - 30% of total inventory.
2. AED121.1 million for doubtful receivables - in very rough numbers 37% of gross receivables.  There's one proven business way to increase sales and that's to sell on very easy terms.  Selling to people who can't or won't pay back works every time.  We are told that this provision is motivated by the change in the role of the Abdullah Brothers in the Company. It seems that the Abdullah Brothers originally approved the extension of these receivables. Which is perhaps why they weren't collected.  Now that they are no longer in control we are to conclude that the receivables won't be collected and must be written off? Frankly, I'm not following the logic here.
3. AED16.6 million for "slow moving inventories".  Since a jeweller's inventory turns really slowly these have to be some "real gems", no doubt.

Third, an AED79,6 million loss on settlement of bank liabilities (Note 13). 

1. AED73.3 million:  Damas couldn't meet margin calls against gold loans.  Wonder where the gold went? Borrowed by an Executive Director?  So the Company had to give Inventory with a cost of AED140.1 million for which the bank gave them AED66.8 million.  That led to an AED73.3 million loss.  Damas is buying back the inventory in a phased manner at the purchase price originally paid to the bank.  
2. AED6.2 million loss on a jewellery for debt exchange.

Provision for Dubai Ventures Loan AED311.5 million (Note 21).

1. You'll recall this transaction was part of the fraud perpetrated by the Abdullah Brothers at the time of the IPO.   They gave Damas funds to Dubai Ventures - part of the Dubai Group - to buy a portfolio of Damas shares to meet the minimum "free float" requirements.  This portfolio became a loan in Fiscal 2008.  And now "poof" it's provisioned.  Though management asserts it will do everything to collect the loan.  Since DV is holding highly valuable Damas shares, I guess it will be a matter of a few trades on DFM/NasdaqDubai.

 Other matters.

1. There are AED94.7 million in losses on Discontinued Operations.  A glance at Notes 15, 38 and 39 discloses a rabbit's warren of companies.  It's unclear to me how any lender could keep either an eye or control on his money once it enters a "black box" like this. That's not to say that there was any malfeasance at Damas on this score.  Just that this is a "tricky" situation for an unsecured lender.
2. Damas' Press Release refers to AED1.9 billion in one off expenses and provisions.  I think that's overstated.  Damas appears to be considering net interest expense of AED132 million as a one off expense as well as some of the losses on subsidiaries.
3. Damas is showing AED775.2 as Cash and Banks classified as a Current Asset.  Some AED392 million of this amount is pledged as security for loans (Note 29).  It seems a real stretch to consider these Current Assets.
4. Rescheduling:  There's a bit of cognitive dissonance between the Annual Report MD&A and the Press Release.  Presumably, the Press Release is the later document so we'll use that information on the structure.  The Press Release states there will be three tranches: Tranche 1 an amortising debt.  Tranche 2 a working capital facility probably "revolving" (not reducing).  Tranche 3 a term loan (presumably with no or a very pushed out amortisation schedule).   Note 2 to the Financials discloses that the proposed tenor is 6 years.   And that recovery from the Abdullah Brothers is not required to repay the debt.

Finally, as always with announcement like this, we at Suq Al Mal are on the look out for contributions to distressed debtors' rhetorical spin.  I'm happy to report that Damas has advanced this art significantly.  Here are some of their contributions:

1. A "difficult, if not unfortunate year".  (Chairman's Statement).  AA:  Unfortunate indeed.
2. "Unfortunate in that the problems which the Group now confronts are of its own making, through the failings of the then Board of Directors and, in particular, the actions of the Executive Directors, the Abdullah Brothers". (Chairman's Statement).  AA:  We can probably explain this statement by two facts.  It's true.  And there's a new team with no reputation at stake.
3. Operating performance "reconfirms the value proposition of the Group's core business"  (Chairman's Statement).  And from the MD&A:  "The robustness of the underlying business model was tested under actual stress conditions ..."   AA:  Much better than a "proven business model".
4. "The Group’s difficulties and the continued involvement with the Abdullah Brothers have raised a number of concerns, publicly. While recognising these concerns and putting in place the appropriate governance structure to mitigate against any potential issues, the continued involvement of the Abdullah Brothers is of strategic importance.  Fundamental in this regard is their knowledge of the  industry, in the areas of product design, quality, but more importantly their involvement in the  recovery of accounts receivables and the inventory given on consignment. In their role as Advisors,  the Group will be able to secure a knowledge transfer and an expedited, if not enhanced, recovery of  its receivables and consignments."  AA:  One certainly hopes so.  Wonder what the compensation is?  And if it's cash or reduction in their payable?