Damas - The DFSA Report in Detail

In my previous post I made the comment that the DFSA enforcement actions revealed three themes:

1. An almost unbelievable  pattern of  disregard for the health of DIL and the rights of minority shareholders and other stakeholders by the Abdullah Brothers.  They treated the company as their personal "piggy bank" withdrawing funds when it suited them and then "repaying" the Draws by selling the company assets. 
2. A profound failure of corporate governance at the board, senior officer and auditor levels.   The Board seems to have failed to ask the most basic of questions and to have the most basic of procedures.  Senior management was aware of the Abdullah's practice of "Drawing" funds and other shortcomings, but did not advise the Board.  In March 2009, a DIL Internal Audit Report stated "a large scale diversion of funds from the company by the directors.  The total exposure stands at a whopping AED525.19 million as on 30th  September  2008".  The Report was only circulated to the DIL Managing Director (one of the Abdullah Brothers) and the CFO, but not to the Board or Audit Committee.  In both cases it's hard to understand why independent directors were not notified.
3. A transaction connected with Damas IPO which raises some troubling questions about the involvement of DIG and some of its affiliates, all of whom are part of Dubai Holding.

Given what went on at DIL, I think a detailed review of the DFSA's findings outlined in their Enforceable Undertakings is worthwhile.  Let's step through the Enforceable Undertaking with Damas International Limited ("DIL").  The one for the Abdullah Brothers repeats the same findings. 

Section 6.1:  Board Meetings 

1. Inadequate or no financial info given to Board to enable it to assess DIL's situation.
2. Board packs given to directors only at the Board meetings.  Not before.  Information in packs  insufficient to make decisions.
3. Board minutes poorly maintained and did not accurately reflect decisions and discussions.

Section 6.2:  Audit Committee

1. Did not meet formally during the 2008-2009 fiscal year. It's first formal meeting was 26 July 2009.
2. "Failed at all material times" to meet with Damas Internal Audit team.  Did not receive nor ask for any internal audit reports.  See no evil, hear no evil ...
3. The AC didn't set its own Terms of Reference or establish procedures for Internal Audit reporting to it or the Board.
4. Failed to monitor the Internal Audit function.  

Section 7:  Directors' Draws

1. The Abdullah Brothers treated DIL as their personal "piggy bank" and withdrew money from company accounts with apparent little concern for the impact on the company itself or shareholders even after they had taken the company public.  Only the Brothers were entitled to make such Draws.
2. DIL's Board, Finance Department, Internal Auditor and external auditor were all aware of this practice. More importantly there were no controls on the amounts or purposes for drawings until October 2009.  That is, until after the abuses had become so large they could no longer be ignored.. 
3. Between 1 July 2008 (sale of shares was ongoing at this point) until 27 October 2009, the Brothers made some 2,200 draws for relatively trivial amounts (fuel expenses) all the way to substantial  sums for personal investments, personal loan repayments, etc.  A total  AED 600 million was withdrawn and then retroactively settled by what appear to be questionable netting transactions, reducing the Directors' Draw to AED 365 million.  Tawhid Abdullah borrowed 1,940,250 grams of gold to repay his third party personal gold loan. DIL has yet to be repaid by Tawhid.

Section 9:  DVG Transaction (DIFX Listing)

1. When it was clear that DIL's IPO was not going to get enough investor take-up to secure the 25% free float required for a listing on the DIFC (now Nasdaq Dubai), Tawhid Abdullah arranged to create artificial demand.  He approached Dubai Investment Group, Dubai Ventures and Dubai Financial, apparently proposing that they buy shares in their own names but that the Brothers would provide the funding.  Either that or that they would "lend" their names and front for the Abdullah Brothers.  These three entities subscribed for some 100,000,000 shares in toto - roughly divided equally.
2. As a side note, this amount represented 37% of the total Offering.  Original Offer Circular here.
3. The three Abdullah Brothers withdrew a total of AED293,843,000 from DIL accounts during July 2008 and transferred AED275,480,000 to DIG and AED 18,363,000 to Dubai Ventures.
4. This transaction was documented as a US$100,000,000 personal loan from Tawhid Abdullah to Dubai Ventures dated dated 19 August 2008 (the "First Loan").  Unclear why the loan was for this amount as the cost of the shares was roughly US$80 million.
5. In March or April 2009, a series of subsequent documents were drawn up but backdated to August 2008 and some forward-dated to August 2009.  The purpose of these documents was to disguise the nature of the transaction and to reduce the Directors' Draws used to fund the share purchase.
6. The First Loan was assigned to Damas Jewelry in an assignment dated 20 August 2008.  Mr. Tawhid signed both on behalf of himself  as original lender and on behalf of Damas Jewelry to legally document the assignment!  That is, he signed for both parties in the transaction: assignor and assignee.  This assignment effectively reduced the Directors' Draw.  Note despite its date, it was actually signed in March/April 2009.
7. The First Term Loan was replaced by a Second Term Loan between Damas Jewelry and Dubai Ventures for US$80,000,000 via a document back dated 21 August 2008.  In a document dated 22 August 2008, the Second Term Loan was assigned from Dubai Ventures to DVG (a related company).
8. Then there was an exchange of letters actually signed in March/April 2009 but dated 19 and 20 August 2009 to convert the loan to an investment arrangement.

It's pretty clear that at inception this was a fraudulent transaction designed to trick the DIFX into believing  that the IPO had sold enough shares to the public to meet the Exchange's listing requirements. The subsequent  loan agreements, assignments, and investment management agreement were designed to cover up the draws by the Abdullah Brothers and provide "cover" for reducing their Director Draws.

Frankly, many out there reading this saga are going to have some pretty fundamental questions about the behavior of DIG and its subsidiaries - all entities owned by the Government of Dubai's Dubai Holdings.  How they came to be involved.  And what sort of business judgment and ethics they employed in participating in this transaction.

Section 10:  The Sharjah Transaction

1. Damas Real Estate ("DRE"), a company owned by the Abdullah Brothers, purchased land in Sharjah for AED5,141,700 in January 2005.  This predates the July 2008 share flotation. 
2. Between January 2005 through 25 March 2009, the Abdullah Brothers used an unspecified amount of Damas Company funds to develop the property including erecting a building.
3. Around 25 March 2009, Tawhid Abdullah, former Managing Director of DIL, proposed to the Board to sell DIL the land for AED70,000,000 to AED90,000.000.  The clear goal was to use the transaction to reduce Director Draws prior to the issuance of the year end financials.  The Board was not told that Damas funds had been used to develop the project. 
4. At least that's what the DFSA says. As I read this transaction and others, it's hard not to have the nagging suspicion that the Board may have realized that it was critical to regularize (reduce) the Directors' Draw situation as soon as possible. And was so delighted at any transaction that would lead to a reduction that they didn't look too closely. 
5. The Board agreed to the sale after a Cluttons valuation and paid some AED85,000.000.  Instead of paying cash Directors' Draws were reduced by an equal amount.
6. As part of the transaction, the project was supposed to be developed for staff to live in with investment opportunities offered to staff.  As per the DFSA up to 21 March 2009, Tawhid did not formulate or implement the employee residential property investment scheme.

 Section 11:  AlWasl Transaction

1. AlWasl DMCC (owned by Tawhid and Tamjid Abdullah and a third party) bought two plots of land in the DMCC free zone in June 2007, again well before the DIL IPO.
2. In December 2008, Tawhid Abdullah proposed to the Board that DIL buy the plots, but did not inform the Board of the Brothers' interest in AlWasl.
3. No reasonable due diligence was done.   Board approved the purchase.
4. DIL acquired the land by paying AED46,200,000 - though again there was no cash outflow.  The asset was put on the books and the Directors' Draws reduced by an equivalent amount.

Section 12:  DRE Transaction

1. In December 2007, Damas placed an AED150,000,000 deposit with United Arab Bank ("UAB")  to secure a loan of an equivalent amount made by UAB to DRE.  In January 2008, the deposit was legally pledged as collateral.  The Board was not advised.  This was before the IPO.
2. In October 2008, UAB used the deposit to repay the loan.
3. Presumably, but not mentioned, this was also treated as a Directors' Draw. 

Section 13:  Mashreq Bank Loan

1.  On 13 July 2008 (after the IPO), DRE received an AED70,000,000 loan from Mashreq.  The loan was drawn on 14 July with proceeds transferred to a personal account of the Brothers at First Gulf Bank.
2. On 11 September 2008, Tawfique Abdullah authorized the transfer of AED70,000.000 from a Damas account at UAB to Mashreq to pay off the loan.
3. Again presumably treated at DIL as a Directors' Draw though this is not specified.

Section 14:  Gayrimenkul Transaction

1. In August 2008 (after the IPO) in a series of transactions the Brothers withdrew AED66,301,560 from a Damas account at UAB and transferred it to Gayrimenkul to buy real estate in Turkey.
2. These withdrawals were not advised to the Board until October 2009.

Section 15:  AED42.5 Million Directors' Draw

1. On 18 July 2008, Tawfique Abdullah authorized the transfer for AED42,500,000 from a Damas account to a bank account held by the Brothers.
2. The withdrawal was not disclosed to the Board. 

Section 16:  Gold "Borrowing"

1. In December 2007, Tawhid Abdullah borrowed 2,000 kilograms of gold from a third party.
2. On 1 September 2009, he allowed the lender to take 1,940250 grams of gold from DIL to repay his personal "gold loan".  No disclosure was made to the Board.
3. Tawhid has not yet restored the gold to DIL.

This is a damning report on the Abdullah Brothers and many others involved in the running and monitoring of the company.

I had posted this back in December.  The DFSA Report only re-emphasizes the importance.

When investing in a family company make sure you've got adequate control  at the Board over the family members' management of the company and signature authorities (enhanced requirements for Board approval is one technique), robust corporate governance actually implemented, and of course detailed disclosure of company affairs.

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

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

Abdullah Brothers (Enforceable Undertaking)

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

 Damas International Limited (Enforceable Undertaking)

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

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

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

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

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

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

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

AlAhli Bank v AlSanea – Did ABK Miss the “Red Flags” on the LC Approval?

This is a follow-up to my earlier post on this topic. There I looked at the case AlAhli Bank Kuwait brought against Mr. AlSanea and his company Saad Trading Contracting and Financial Services ("STCFS) in the Supreme Court of New York. While ABK has made allegations, there has not been a court ruling. Mr. AlSanea continues to deny any wrongdoing.

Today I'd like to take a closer look at some "red flags" that ABK should have noticed when asked to  issue the letters of credit.  Here I am presuming that if AlAhli believes these are fraudulent transactions, then they should have noticed some things at the inception of the transaction.  Of course, as far as I know, Mr. AlSanea vigorously defends these transactions as proper.

Even after acknowledging that hindsight is usually 20/20, I think there are some really obvious points that ABK should have noticed at the time.  And which should have given them pause about these transactions and their client.  And thus sparked a review.  Perhaps, they did. Perhaps, they resolved them to their satisfaction. The Court documents (which are all that I have to go on) do not discuss this as it is not particularly relevant to ABK's case.

Some background.

Prior to the issuance of the LCs, ABK had already made a decision that STCFS was creditworthy. Based on its analysis the bank set an overall limit of US$100 million and established the type of facilities it would was prepared to extend: (a) US$80 million of that amount for letters of credit for the import of building materials for STCFS and (b) US$20 million for a "clean" working capital loan. A "clean" loan is a term bankers use to describe a loan that is not tied to a specific project or type of transaction. Under this facility, STCFS could borrow for whatever purpose it wanted. It's unclear to me from the filings if STCFS had already drawn down under the "clean" loan facility. If it had, that would be an important fact supporting ABK's allegation of fraud. That is, they had to resort to the LCs to get money.  Otherwise they could have simply drawn down on the loan facility.

But that's not the end to the credit process. In addition to reviewing subsequent financial information (financial statements and other such data), a bank should monitor usage of a client's line to determine if there is anything in the pattern of usage that indicates distress or other behavior that should be cause for concern.  With all such concerns to be examined and resolved.

Let's look at STCFS's request for the four letters of credit.  There were several "red flags" that should have raised questions about the transactions and about their client.

Before we get to that analysis, a few words about letters of credit ("LCs").

A LC is a financial instrument issued by a bank on behalf of its client (the applicant or buyer) to a beneficiary (the seller) in which the bank promises that it will pay the beneficiary a certain amount of money if the beneficiary presents certain prescribed documents within a certain time period. Most LCs are now irrevocable which means that the beneficiary has the bank's absolute commitment to pay if the right documents are presented in time. In effect the LC substitutes the credit of the bank for that of the applicant. 

LCs are used when the seller is not certain that the buyer will pay for the goods if shipped. This generally occurs when the buyer and seller are located in two different countries. If the seller is comfortable with the buyer's creditworthiness, it would not ask for the LC because the LC costs money and imposes documentary requirements – the documents have to be right and the group of documents have to be internally consistent.  Precise wording is very important.

It's also important to note that the bank does not check the actual goods shipped. It checks the documents. There have been many a case where the documents were in order but the actual goods shipped were not.

Other alternatives are to ship the goods and send the documents, including title documents for collection. Documents are released against payment. Or if the parties have some level of trust, documents are released against the buyer's acceptance of a draft.  In effect that creates a promissory note.  The seller then has a legally enforceable document it can sue on if needed. Where there is complete trust, the seller ships on open account with payment at some mutually specified time.

Now to the analysis.

Red Flag 1: The Transaction Itself

The first red flag - and the major one - was the transaction itself.   This should have perked up the credit officer's antennae and made him or her extremely sensitive to another further "red flags' in the transaction.

ABK should have asked itself why on earth apparently very small companies were asking for a payment guarantee for a company of the stature of STCFS. Both buyer and seller are in AlKhobar.   In AlKhobar/Dammam, Mr. AlSanea is سمك كبير (big fish).  He and his companies are very well known. At that time he was on the Forbes list of richest people in the world.

A second relevant question would be why a company of STCFS' stature would entertain such a request. It would seem a likely bet that companies would be falling all over themselves to deal with STCFS. So, it could just simply say "no" and there would be another potential seller knocking at its door.

Perhaps, STCFS was doing a bit of charitable work to help develop local small and medium enterprises in the Kingdom? And so it would be willing to entertain a request that many large companies would find insulting.  Maybe it was helping out these companies.  A lot of small companies don't have access to credit  - especially for amounts in the millions of US$.  So when they don't already have the goods, then they ask their buyers to open an LC in their favor (the Original LC) and then use this LC with a bank to issue another LC (the Back to Back LC). The Back to Back LC is then used to acquire the goods from a third party to be sold to the buyer on the Original LC.  

However, the goods for these LCs are not being imported. According to the LC applications completed by STCFS, they are being shipped from the beneficiary's warehouse to STCFS's warehouse. It seems highly likely that the beneficiary already has the goods. So the LC appears to be serving as a simple payment guarantee for the obligations of a very major Saudi company.

We seem to be left with two main explanations.

First, that local companies didn't want to take STCFS's credit. And that STCFS has no other option (no other suppliers) so it must grant the request for the LC. If true, that should be an extremely troubling sign to ABK. Something is really wrong at their client. I remember reaming one of my subordinates who approved (interesting coincidence) four domestic LCs for a client. Prior to that all of the client's LCs had been for foreign imports. The domestic LCs were therefore a change in pattern. A couple of them were for trivial amounts (US$100,000) which was a sign that the domestic trade would not take the client even for such a small amount. Yes, the client later hit the wall. Recovery was, if I remember correctly, five cents on the dollar.

Second, that the transactions themselves are not what they appear to be. That they are disguised financing. Several banks got "stuck" with such transactions between (Mainland) Chinese Red Chip Companies in Hong Kong and their affiliated companies on the Mainland.

Red Flag 2: No Title Documents

Generally, among the documents required under an LC are title documents. These are various forms of these, bills of lading etc, that represent ownership in the underlying goods shipped. The shipping company is only supposed to release the goods upon presentation of the B/L. 

At every financial institution I worked at the absence of title documents under an LC transaction was an exception and required special approval.

There were two reasons for this. 

First, the title documents gave reasonable evidence that there was an underlying trade transaction. The carrier was certifying that it took a certain number of crates or boxes on board its vessel or truck. And thus there was a third party – besides the applicant and the beneficiary – testifying to there actually being a trade transaction. 

Second, as long as the documents were in the bank's possession the bank could seize the goods. This provides the bank some collateral though usually for only a short time.

Without title documents, ABK essentially is issuing a standby letter of credit or guarantee. These transactions (if properly recorded in a bank's books) call for a higher risk weight for capital adequacy purposes and should therefore be priced higher than a commercial LC. Also given the credit implications, such transactions should be reviewed in detail to determine if their occurrence is an adverse sign.

Red Flag 3: Outside the Terms of the Facility

ABK's facility letter to STCFS states that the purpose of LC's is "to import building materials for SAAD Construction business". You'll find a copy as NYSC Document #18 which is Exhibit 7 to the Serio Affirmation of 22 December 2009 (NYSC Document #17). Mr. Serio is Mr. AlSanea's counsel in this case and others.

A domestic shipment is not an import.

This should have triggered a review by a credit officer. Again, the principle being that if a transaction does not meet the facility conditions, it is not under the facility.  Therefore, it requires special approval. There might have been good reasons to allow this transaction, though based on all the "red flags" present it seems to me that an approval should have had quite a steep hill to climb. Or perhaps  a mountain.

Red Flag 4: Troubling "Coincidences"

All the beneficiaries on these four LCs just happen to be clients of The International Banking Corporation, a company with a connection to Mr. AlSanea. What are the probabilities of this happening? 

A credit officer might also wonder why these rather small Saudi companies are banking with a foreign bank (TIBC) and not with a Saudi bank with an office the Kingdom. That would certainly seem to make more sense in terms of making their daily operations easier.  Nip around the block to do banking.  Rather than deal by phone, fax and courier with a bank in Bahrain. Or shlep across the Causeway to Manama.

Two of the beneficiaries had account numbers one digit apart. So our probabilities are getting even smaller. Not only are the beneficiaries customers of one foreign bank, but they appear to have opened their accounts one after the other. Of course, TIBC may have a very small number of customers. And, thus, the probability is not as small as it appears. 

To digress on a similar topic I remember the look of amazement when I pointed out to one distraught investor troubled by thought of losses on a "wise" investment in APP Holding Company bonds (Just how does one value air?) that the Singapore companies whose receivables Asia Pulp and Paper had just written off (a rather small sum of a couple of billion US dollars) were all from the Virgin Islands. And just by coincidence their Commercial Registration numbers were all in sequence. And all established by the same  local law firm.  And a check with the local Singapore "D&B" revealed these companies had no assets -- unless you count the equivalent of a folding table, two chairs and a phone line as assets. And that they apparently had received some administrative support from APP in the form of seconded personnel, etc. One explanation is, of course, that APP was helping aspiring small businessmen to get ahead. That it had extended them credit in the form of shipping paper products against deferred payments well in excess of what their financial condition warranted. And what better way to give them a leg up than to ship two or so billion dollars of paper products to them. That would give these small businessmen the clout to undertake major transactions. To literally transform their businesses. Unfortunately, this experiment which began with no doubt the best of intentions the year that APP hit the proverbial credit wall – but before it actually did - did not succeed. After selling the paper products, these companies for some reason didn't have the cash to settle their payables with APP. Perhaps some overhead that wasn't immediately apparent in their modest financials. So APP had to write off these receivables. No doubt reluctantly. But I suppose at least we should commend APP for its effort to give small businessmen a hand.

Two of the beneficiaries' (AlGamea and AlDelijan) description of the goods were identical down to the date of their pro-forma advices. Perhaps, 14 December was a particularly auspicious Feng Shui day for selling A/C goods. Or perhaps just another remarkable coincidence in a transaction with many. On the other hand, if STCFS were acquiring A/C equipment for a project, it would use one description for the goods. Sellers would necessarily parrot back this in their quotes to show they were supplying what the buyer wanted.

A strange saga.

AlAhli Bank Kuwait v Maan AlSanea - Allegations and Analysis

This post reviews documents e-filed at the Supreme Court of New York website in connection with the case brought by Ahli Bank of Kuwait ("ABK") against Mr. Maan AlSanea and Saad Trading Contracting & Financial Services ("STCFS") (Case Index #602847/2009). As before I'd encourage you to take a look at the original documents yourself as this is the best way to form your own opinion. To that end you need to visit the Supreme Court of New York's website  and use the Case Index Number above to search for documents.

We'll use the plaintiff's allegations since the defendants' counsels' argument is more of a technical one - that New York is a forum non conveniens  and thus the suit should be dismissed to be tried in Saudi Arabia or Kuwait.  On that basis then they would not answer the charges but focus solely on dismissal.

You will find ABK's description of the transaction as well as their basic allegations in NYSC Document #1 pages 7-18.

ABK claims to have granted STCFS a US$60 million facility in September 2007 with US$50 million for letters of credit for building materials for Saad Construction business only and US$10 million for a working capital loan. In April 2008 the facilities were amended to increase them to US$100 million with US$80 million again for letters of credit for building materials for Saad Construction and US$20 million for a "clean" loan.

The court case is about four letters of credit ("LCs") that STCFS asked ABK to open in favor of three beneficiaries in the Kingdom of Saudi Arabia in an aggregate amount of US$24,999,545.00. The LC's were to be advised through The International Banking Corporation to the beneficiaries and called for the delivery of certain equipment. ABK is asserting the transactions were fraudulent. That the beneficiaries of the LCs were "front men" for Mr. AlSanea, that no shipment of goods took place and that the funds were not paid to the beneficiaries but were paid to STCFS.

In its allegations in the Complaint pages 7-18 in Document #1, ABK states that: 

1. Paragraph 8: Mr. Delijan "has since been discovered to be the General Manager of Saad Travel Tourism & Cargo Co, an affiliate of the Defendants, and not in the business of selling air conditioning and waterjet cutting machine systems". 
2. Paragraph 10: "The address for Safar stated by Defendants on the L/C application actually is the address for the Saad National School for Girls – another affiliate of the Defendants and not in the business of selling air conditioning equipment". 
3. Paragraph 11 D: During January 14-17, the beneficiaries submitted drafts. 
4. Paragraph 11 E: TIBC confirmed the signatures on 19 January. 
5. Paragraph F: Defendants presented ABK with commercial invoices supposedly signed by authorized signatories of beneficiaries along with signed delivery receipts including defendants' confirmation.   (AA:  Under UCP the beneficiary not the applicant submits documents to the bank.  And documents generally are submitted through the advising bank - though this is not a requirement).
6. Paragraph 11 G: ABK advised STCFS of discrepancies in the documents.  (AA:  Frankly, this boggles the mind.  As you'll see from below the documentary requirements were extremely simple - an invoice and a signed delivery note.  Hard to see why these wouldn't be in apple pie order).
7. Paragraph 11 H: ABK receives letters from STCFS approving discrepancies and requesting ABK to honor the LC and make payment to beneficiaries' accounts at TIBC. 
8. Paragraph 11 I: ABK makes payment of US$24,999,545 on 26 January.

Let's start with the four LC's. For that purpose we'll use the documents submitted by Mr. AlSanea's counsel Robert F. Serio, Esq., of Gibson, Dunn & Crutcher as part of his Affirmation dated 22 December 2009 (NYSC Document #17). That way we are using a source that is not hostile to Mr. AlSanea or STCFS. 

The LC applications are his Exhibit #9. As filed on the Supreme Court's website, Mr. Serio's Exhibit 9 only contains three of the LC's. For the fourth LC, we'll use Exhibit 1 to the 19 January 2010 Affidavit of Charles H. Camp, one of ABK's two counsel, (NYSC Document # 20-1). (The Exhibits in Documents 20-1, 20-2 and 20-3 appear not to be in the same order as in the Camp Affidavit. Unclear why this is.  Filing problems at the NYSC?)   Copies of the LCs applications are in his Exhibit #2 and the LCs actually issued are in Exhibit #7 (SWIFT format). 

Based on a review (and yes the LC applications match - at least three of them), here are some common details.

1. All four are dated 12 January 2009. 
2. All call for payment against commercial invoices and delivery notes. No shipping documents such as bills of lading are required as these are being shipped from the beneficiary's warehouse to the applicant Saad's. 
3. All are domestic LCs.  The LCs do not finance imports from outside the Kingdom.
4. All four LCs are to be advised through The International Banking Corporation with funds to be remitted to the beneficiaries' accounts at TIBC. 
5. All four LC's expire 12 March 2009 in Bahrain (at TIBC's counters).
   

First LC. 

1. Amount: US$7,825,815. 
2. Beneficiary: M/S Emad Youssef AlGamea Trading Establishment. AlKhobar. 
3. Goods: Air Horizontal Units, Chilled Water Fan Coil Units Thermostats and Accessories for Airconditioning Systems as per the Beneficiary's Proforma Invoice Dated December 14, 2008. 
4. Beneficiary Bank and Account: TIBC A/C #001-200010.
   

Second LC. 

1. Amount: US$8,194,830. 
2. Beneficiary: M/S Walid Ahmed Safar Trading Services Est. AlKhobar. 
3. Goods: Supply of 30GTN Series – Dual Refrigerant, Multicompressor, A/C Equipments as per beneficiary's proforma invoice dated 11 December 2008. 
4. Beneficiary Bank and Account: TIBC A/C #001-200033.
   

Third LC. 

1. Amount: US$3,003,700. 
2. Beneficiary: M/S Delian Fahed Al Delijan Est. –Trading AlKhobar. 
3. Goods: Supply of Waterjet Cutting Machine Systems as per beneficiary's Proforma Invoice dated 29 November 2008. 
4. Beneficiary Bank and Account: TIBC A/C #001-200009.
   

Fourth LC. 

1. Amount: US$5,975,200. 
2. Beneficiary: M/S Delian Fahed Al Delijan Est. –Trading AlKhobar. 
3. Goods: Supply of Air Horizontal Units, Chilled Water Fan Coil Units Thermostats and Accessories for Airconditioning Systems as per the Beneficiary's Proforma Invoice Dated December 14, 2008. 
4. Beneficiary Bank and Account: TIBC A/C #001-200009.
   

(I'll post something on ABK's "approval" of these transactions in due course.  This looks like a strong entry for the NBP "Credit War Chest" Award Contest).

Now let's turn to the flow of the payments. As part of the discovery process, ABK's counsel obtained information from Bank of America NY on the clearing account they hold for TIBC.   Exhibit 4 to the Camp Affidavit (in Document 20-1) consists of material provided by BoA.  In an accompanying certificate a BoA officer attests under oath to the accuracy of the documents.  The certificate is notarized. This information shows that TIBC's account at BoA received four credits from ABK on 26 January 2009.   Each credit is in the full amount of the four LCs above. 

Exhibit 1 (in Document 20-1) contains copies of additional information provided by BoA  – again sworn and notarized. This is even more interesting.  This submission contains the details of four payments made by TIBC from its account on  27 January 2009.  Each one is in the exact amount of one of the four letter of credit payments received the previous day from ABK.  Each of the  27 January debits from TIBC's account is directed to HSBC for credit to Saudi British Bank for credit to the account of Saad Trading and Contracting. 

But what I did not see mentioned in the Affidavit are two very curious things. 

1. The By Order Party and the Originator are identified as Saad Trading and Contracting.  That means that TIBC is saying that its customer Saad Trading is remitting the funds.  Under normal banking procedure this means the funds came from an account belonging to Saad Trading and Contracting. 
2. The Originator to Beneficiary Information says "Intercompany Funds Transfer"! Again this means that the owner of the funds is Saad.

Putting the best face on this on this information, it is a rather remarkable coincidence that STCFS just happens to have its own funds which exactly (to the penny) match the funds owed the beneficiaries on the four LC payments made by ABK the day before. And that it transfers them in the exact same four amounts the next day.  

As before a legal note.  At this point, as far as I am aware, no Court has issued a verdict in this or any other case against Mr. AlSanea or his companies.  Mr. AlSanea continues to maintain his innocence of any wrongdoing.

AlGosaibi v Maan AlSanea - Other Information

(This is the fourth of a series of posts which look at more detail at recent filings in New York Supreme Court Case #601650/2009 - Mashreqbank v AlGosaibi with Mr. AlSanea as a Third Party Defendant.  More detail here on this series).

Here's a list of some other items that might be of interest.

1. Exhibit 32 (NY Supreme Court Document #108):  A dual language copy of the "Law of Procedure Before Shari'ah Courts" which deals with procedures in Saudi Arabia.
2. Exhibit 33 (NYSC Doc #108-1):  AHAB's Counsel's Argument about Mashreqbank's alleged culpability in what is alleged to be Mr. AlSanea's fraud.  On page 9, it's stated that the Money Exchange's volume of remittances during the period January 2008 through April 2009 was approximately US$66.67 million while the volume of FX transactions between Mashreqbank and the ME was approximately US$4.97 billion.
3. Exhibit 34 (NYSC Doc #108-2: Review by Jamal Al-Muzein (Mr. AlSanea's Saudi lawyer) of the legal system in Saudi Arabia.  As noted in an earlier post, one of Mr. AlSanea's arguments for forum non conveniens in New York is the robust nature of the Saudi legal system. So factor that in as you read this paper.  Also be aware that the King currently has a project ongoing to "modernize" the Saudi Court system - which may give you an idea of his view on its state.

As you read these documents - and all others related to this case - bear in mind that at present there has been no judicial determination made or verdict issued.  Mr. AlSanea is vigorously denying any allegations of wrongdoing on his part. 

AlGosaib v Maan AlSanea: Special Saudi Committee& Legal Procedures in the Kingdom

(This is the third of a series of posts which look at more detail at recent filings in New York Supreme Court Case #601650/2009 - Mashreqbank v AlGosaibi with Mr. AlSanea as a Third Party Defendant.  More detail here on this series).

This is another of Appendices to the Supplemental Affirmation of Robert F. Serio, Esq., of Gibson, Dunn & Crutcher (NY Supreme Court Document 107) , who represent Mr. AlSanea in these proceedings.  He is arguing in his submission in support of the contention that New York is a forum non conveniens.

The Appendix is Serio Exhibit #29 (NY Supreme Court Document 107-6).  It is expert witness testimony by Ian David Edge, Esq., who is the founding and present Director of the Centre of Islamic and Middle East Law in the Law Department at SOAS at the University of London.  He was hired as an expert witness by counsel for Mr. AlSanea. He also provided a similar brief regarding Saudi and Kuwaiti law in support of Mr. AlSanea's similar forum non conveniens argument in Ahli Kuwait's suit against Mr. AlSanea in the Supreme Court of New York.

Before we proceed any further, the usual caveat about looking at the sources of information and realizing that they are not completely disinterested parties.  They are working to promote the interests of their clients.  So as usual have your saltshaker in hand as you read.  Bear in mind that the goal of Mr. AlSanea and his attorneys would be to convince the London Court that the Saudi Committee and other legal procedures were robust and capable of dealing with this case in a professional manner resulting in the administration of true justice.  From what I've seen AHAB and its counsel are arguing that the Committee has limited powers and is not adjudicative (i.e., does not have the power to issue a legally binding judicial verdict).

It is probably a fair statement that counsel for Mr. AlSanea are presenting this testimony because it advances their contention that the trial should be held in Saudi Arabia.  One would be hard pressed to imagine them calling a witness to support AHAB's interests.  And the same can be said for AHAB.  They are likely to call witnesses who support their arguments.  Ever wonder how attorneys find witnesses who just happen to hold views congenial to their clients from among all the witnesses out there?  "An unexplained mystery of the law" as one of my buddies who took the "legal holy orders" and labored for an appeals court once told me.

I've read through Mr. Edge's comments and extracted some points about the Committee and what it has done to date: 

1. In late May 2009 in response to a personal complaint from Yousef AlGosaibi (Chairman of AHAB) the King of Saudi Arabia issued a "High Order" ("amr saami") establishing the Committee.  Its goal is to study and the matter and recommend to the King how this dispute should be resolved.
2. The Committee is composed of 12 members appointed by the King, including three judges from the Ministry of Justice, representatives from SAMA, the Saudi Capital Markets Authority, the Ministry of Interior and the Ministry of Commerce.  The Committee is chaired by the equivalent of the Saudi Attorney General.
3. On 28 May 2009, the King issued another "amr saami" freezing various of Mr. AlSanea's assets and those of his wife and his children as well as of Saad Trading Contracting and Financial Services Company.  
4. Around 8 June 2009, a High Order was issued to freeze all assets held in the name of AHAB and its partners in Saudi Arabia.
5. On 1 September 2009, upon further hearings from the Committee and requests from some of AHAB's Saudi Arabian creditors to SAMA, the King imposed further restrictions on AHAB by extending the SAMA freezing order to include assets held in the names of spouses and children of prominent AHAB partners.  
6. On 4 October 2009 AHAB's lawyer sent a petition to the Committee asking them to order that Mr. AlSanea return some 58.4 million shares of SAMBA Finance Group and previous dividends amounting to SAR 975 million. The Committee rejected this request.  AHAB is reportedly appealing in one of the Kingdom's courts.

While I'm not an expert witness in Saudi law, my opinion (which I like to think is reasonably informed) is that there will be strong inclination on the Committee to look for a way to achieve a compromise between the two parties.  This is the general approach in this part of the world as opposed to the West where I think we can safely characterize the judicial system as more adversarial.  It's not uncommon in the region for an individual to be found guilty of murder and then released when the relatives of the victim forgive him.  There's a lot more "gray" in this judicial system than in the more "black and white" world in the West.

And I'll close with my usual caveat which is that as far as I know as of today no Court has ruled in this case or issued any judicial finding.  Mr. AlSanea is vigorously denying any wrongdoing on his part. 

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: UK Proceedings Witness Statement of Andrew John Ford - Allegations Against Mr. AlSanea

(This is the second in a series of posts which reviews documents filed on the Supreme Court of New York's website in connection with Mashreqbank v AHAB to which AHAB has added Mr. AlSanea as a Third Party Defendant. NY Supreme Court Case Index # 601650/2009.  More details here).

The document in question is one of the Appendices to the Supplemental Affirmation of Robert F. Serio, Esq., of Gibson, Dunn & Crutcher (NY Supreme Court Document 107) , who represent Mr. AlSanea in these proceedings.  He is arguing in his submission in support of the contention that New York is a forum non conveniens.

The Appendix is Serio Exhibit #25 (NY Supreme Court Document 107-2).  What's interesting is that this document is a Witness Statement given in London by AHAB's lawyers.  Mr. Serio has introduced it because he believes it shows that in this document  AHAB (a) "acknowledges the burden of transporting those witnesses from the Middle East to testify", (b) it intends to present in evidence in England "expert evidence on 'Saudi law ... in relation to issues of authority'" and that (c) AHAB further admits "some of the factual evidence will require an interpreter". 

What's interesting are some of the other bits in Mr. Ford's statement.  Before we delve into these, it's very important to note that Mr. Ford represents AHAB and just as Mr. Serio has the interests of his client foremost in his mind so does Mr. Ford.   So as you read both documents, make no mistake that we are dealing with impartial disinterested parties in either case.   Also with respect to Mr. Ford's Witness Statement, he makes several assertions, observations and interpretations.  We need to be very clear of the distinction between an assertion - even one made in the most rigorous good faith - and a proven fact. 

Let's go to his Witness Statement.  The following are direct quotes from that statement:

1. "Paragraph 13. 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 document number: LN65977/1-EU-5542569/2 3 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."
2. "Paragraph 14. The scale of the alleged fraud is enormous. A large team of forensic accountants from Deloitte has been investigating the fraud on behalf of AHAB since the end of May 2009. Their work is continuing, but their analysis to-date shows that over US$5.2 billion has been paid out from the Money Exchange to Mr AI Sanea or to companies controlled by him. The outstanding total of  unauthorised borrowing arranged by Mr AI Sanea, including accrued interest, commitment fees and related charges, appears to exceed US$9.2 billion, sourced from some 118 banks around the world."

And just to end where we began.   The above are allegations by the counsel for AHAB against Mr. AlSanea.  As you might expect, both Mr. AlSanea and his counsel vigorously deny any wrongoing.  As far as I know, no Court has rendered a judgment in this matter yet.  And so these remain allegations.

New York Supreme Court: Mashreqbank v AlGosaibi - 9 March 2010 Documents

Last week a new batch of  documents relating to the legal case between Mashreqbank and Ahmad Hamad AllGosaibi and Brothers ("AHAB")  (NY Supreme Court Case Index # 601650/2009) and  the legal case between Mashreqbank and the Partners of AHAB (NYSC Case Index # 602171/2009) was published on the Supreme Court of New York's website.  You can go to that link to read these documents in their entirety - which I highly recommend.  There's no substitute for the original source documents. 

In addition to the usual partisan pleadings common to such cases, these documents contain some interesting information.  And you might find some of the assertions in the documents submitted by both sides a source of hilarity.  I still get a chuckle about the guy who ran a multi-billion dollar empire in English but suddenly can barely understand the language.

We'll largely ignore the former and concentrate on the latter in a series of posts to follow. 

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.)

The Investment Dar Court Case with BLOM Undermines Islamic Banking

 

One of the reasons that many people prefer to deal with Islamic Banks is that they claim to hold themselves to a higher standard of behavior than conventional banks.  In fact many Islamic Banks emphasize this claimed distinction in their marketing literature.

Recent developments in a court case brought by Banque du Liban et d'Outre Mer ("BLOM") Beirut against TID prove sadly that you can't always believe what you're told.  Or sold.  

Seems that BLOM advanced some US$10.7 million to TID under a Wakala structure.  TID got into financial difficulty and did not repay.  Happens all the time.  Or frequently enough so that it shouldn't be a shock.  What happens next is what separates the ethical from the unethical.

As reported in The Guardian, TID is now arguing in an English court that it shouldn't have to pay any profit (interest) to BLOM because the deal did not comply with Sharia law and was therefore void.  A small point: TID's Shari'a Board had approved the deal at the time it was concluded.

This tactic speaks volumes about TID's ethics or perhaps more precisely lack thereof.  

Bankers are generally expected to conduct their affairs with the interests of their clients foremost - regardless of the religion they claim to profess.  That is, one deals ethically and fairly with one's clients. 

When bankers engage in Trust arrangements, they are held to an even higher standard.  A wakala is an Islamic trust arrangement.  

When one professes that on top of these normal banker virtues one's business is guided by a religion, then the standard of behavior it seems to me should be even higher.

Sadly, it's hard to avoid drawing the conclusion that TID's sudden "religion" in this case is a matter of selective application of the Shari'a.   And therefore the religious scruples on display are more feigned than real. I'm willing to bet that BLOM is not the only financial institution in a Wakala structure like this.  And if it were inside the restructuring, TID's objection would vanish.  This episode probably also provides an explanation why TID's creditor banks insisted on certain things during the negotiations and incorporated certain requirements in the rescheduling agreement - steps generally above those taken by banks in  most restructurings.  When one is forced to deal with those whose ethics appear questionable,  the wise person  prudently implements many safeguards. Let's hope the restructuring is sufficiently so equipped.

A failure to live by the creed it professes is the least of TID's offenses in this case.  More importantly, through its behavior TID is doing fundamental damage to the good name of Islam and  concept of Islamic banking.  All for expediency. And for a rather small price.  A pretty clear indication of the value it ascribes to both.

More importantly, this case introduces a new risk for those who do business with "Islamic" banks.  A risk that is difficult to evaluate.  And therefore difficult to mitigate.  That an "Islamic" bank will seek to abrogate contracts or major elements of contracts based on retroactive re-interpretation of their compliance with Sharia.  Or perhaps more precisely what they claim Sharia is based on what's currently convenient for them.  What's surprising as well is that a court in London has apparently agreed to entertain TID's argument.  One hopes that the court is merely allowing TID to raise this claptrap, but will render a just verdict.

This sort of legal risk fundamentally relates to the ethics of one's business partner.  Generally, it's hard to know this for sure until one's partner is in a difficult or inconvenient situation.

The problem a potential creditor or depositor faces then is distinguishing between an Islamic Bank and  an "Islamic" Bank.  The latter being a bank that merely professes Islam as a marketing slogan.  (Sura AlBaqara Ayat 8 would seem the appropriate scriptural reference.) 

There is an ironclad law of finance.  Or at least there should be.  If you cannot adequately assess a risk, do not do the deal.  The danger is that market participants will apply that principle across the board and simply refuse to deal with Islamic Banks.

This is a very serious matter.  One wonders what the Central Bank of Kuwait and TID's Shari'a Board think of TID's legal strategy.  Do they think that it is in the interest of the Kuwaiti banking sector or true Islamic banking?  I guess we'll know by the action they take.  Or don't take.    

Kuwaiti Businessman's Assets Frozen for Bouncing KD 1.1 Million Check

AlQabas reports that a prominent (but unnamed) Kuwaiti business has had all his assets frozen for writing a KD 1.1 million check that had insufficient cover and was rejected for payment by his bank.

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".

لا تدع زوج ابنتك يقود سيارة عائلتك

AlBilad's take on the AlGosaibi/Maan Al Sanea issue.

Interestingly, the article gives the name of the former CEO of The International Banking Corporation but not the name of the son in law.   Much of the article is a walk through of main points from the Ernst & Young article.

Awal Bank – Hibis Europe 2009 Investigative Report

This post presents the findings of the Hibis Europe entitled "Report to the Public Prosecutor Bahrain Review of Awal Bank" dated 6 August 2009 (the "Report").

The Hibis Report is contained in the 5 February 2010 filing by Ahmad Hamad AlGosaibi & Brother'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 Number 601650/2009 MASHREQBANK PSC vs. AL GOSAIBI, AHMED HAMAD.   The Report is Exhibit 11 in Document #83.  If you initially have difficulties at the SCNY website, keep trying.  The site appears to be somewhat temperamental.

 

As I noted in my post about the Ernst and Young Report on The International Banking Corporation, I have no independent way to verify that this is indeed a true and correct copy of the Report except for the sworn testimony of the counsel of Ahmad Hamad AlGosaibi. This caveat should not be read as implying any lack of faith in his certification, but merely as a factual statement of the limitations of my knowledge.

 

As before I will quote from the report and make some comments based on the assumption that this is the Hibis Report and that its conclusions are accurate. 

A bit of housekeeping.  Paragraphs and pages in the Report filed with the SCNY do not bear numbers. I have numbered the pages starting from the "INTRODUCTION SECTION". On that basis the Report comprises 47 pages.  In some cases I have redacted the names of staff at AB.   You should also be aware that the Report also includes some excerpts of interviews Hibis conducted with senior managers of Awal Bank.  You might want to read the report itself to see those as I have not transcribed them here.  And it's good practice to take a look at the original sources and not solely rely on tafsir.

 

The report begins with a summary and then a more detailed discussion of eight cases.

1. Page 1 and Page 3 : "Awal Bank is managed on a day to day basis by Maan Al Sanea, who is based in AlKhobar in Saudi Arabia. Al Sanea operates with an autocratic and dictatorial management style suppressing any form of entrepreneurial spirit. Maan Al Sanea makes the decisions relating to any and all transactions that take place at Awal Bank; for example the Chief Executive Officer can only authorize payments of under BDH 12,000." 
2. Page 3 "Many of Awal's transactions with third parties involve entities owned by the AlGosaibi family, such as The International Banking Corporation [TIBC], AlGosaibi Trading Services [ATS} and AlGosaibi Money Exchange [ALGME]." 
3. Page 3: Summary of Findings. "In June 2009 Hibis Europe Limited [Hibis] was retained by the Central Bank of Bahrain [CBB] to conduct a review of the Awal Banking operation. Following the review Hibis prepared eight Evidence Case Files outlining the various criminal and regulatory breaches. The supporting evidence has been obtained as a result of reviewing bank records, recovering data from the bank records and interviews with bank employees. There are many other transactions at the bank that we have not yet reviewed." 
4. Page 3: "Evidence Case Files. For the purposes of this summary file, each identified criminal offense and regulatory breach has been catalogued and exhibited separately in a series of Evidence Case Files- Volumes 1 to 8."  
5. AA: These include: Evidence Case File 1 Fraudulent Land Deals; ECF 2 Foreign Exchange Transactions with ALGME; ECF 3 Redacted (However, the case diagram on page 26 remains. It is labeled "Money Laundering"); ECF 4 Fraudulent Foreign Exchange Deal with SAAD Group, ECF 5 Unsupported Foreign Exchange Deal, ECF 6 (Unlabeled, but detailed later in the report as breach of trust in accepting a deposit); ECF 7 Letters of Credit and ECF 8 Regulatory Issues. 
6. Page 4 "Hibis has identified approximately US$2 billion of suspicious and fraudulent transactions involving criminal offenses and regulatory breaches." 
7. Page 4 "Hibis would like to point out that all the evidence that we have gathered indicates that the Chairman of Awal Bank, Maan Al Sanea, is the central figure in the conspiracy and the main beneficiary of the frauds. Al Sanea's management style has allowed him to control all of the transactions at the bank and use the senior management of the bank to assist him in these frauds." 
8. Page 4: "The common theme that Hibis has seen for most of the frauds discovered and investigated to date is that AlGosaibi assets have been used to the benefit of Maan Al Sanea. Examples of this include land in the name of AlGosaibi being used as collateral to create a profit for Maan Al Sanea through fictitious land deal and the profit for these deals being transferred from ALGME to Awal Bank when the bank is losing money. It is the opinion of Hibis that Maan AlSanea has either disadvantaged the AlGosaibi family for his own personal benefit or used their resources to benefit Awal Bank." 
9. Page 4: "As a result of the preliminary 20 day review completed by Hibis it is our opinion and proven beyond reasonable doubt that senior management of Awal Bank have colluded and conspired together to commit criminal acts and significant breaches of banking regulations and CBB Law." 
10. Page 5: "New Finding. At the time of preparing the Evidence Case Files evidence allegations were made that on the 26^th and 27^th May 2009 all the Commercial Loan files were removed from Awal Bank and sent to the Chairman's office. At this time, Awal Bank was in serious financial trouble and it appears the Chairman wanted the documentation removed from the bank and although senior management were advised against it they allowed the complete files to be removed." 
11. Page 6: "Hibis believes the removal of these files was a breach of CBB law and was done with the objective of removing evidence of a fraud." 
12. Page 6: "In 2007 and 2008 Awal Bank made about 50 commercial loans to entities in Saudi Arabia. All the loans were arranged by the Chairman, Maan Al Sanea, and no one at Awal Bank was involved in meeting or communicating with the alleged "borrowers". Hibis has not investigated these loans but are very suspicious of who the real beneficiaries are. At the end of 2008 these commercial loans were paid up or converted in to the land deals that a reported in Evidence Case File 1." 
13. Page 12: Evidence Case File 1. "The investments in land shown on the Awal balance sheet (AA: US$1.5 billion) are the result of 8 unusual transactions which were recorded from 2008-2009. Seven of the transactions are supported instructions from Maan Al Sanea or his representative from the Saad Group." 
14. Page 13: "Hibis believes that Maan Al Sanea does not in fact own the properties that are described in Awal bank's documentation and that the fair value of the properties is far less that what is on the Awal balance sheet and the figures have been grossly inflated." "Hibis believes that the USD$200 million of reported profits represents False Accounting on behalf of Awal Bank". "Hibis believes that Maan Al Sanea is not entitled to USD$ 461 million nor the USD$ 543 million of cash and assets transferred to him as a result of these land deals." 
15. Pages 15 -16: Evidence Case File 2 "Awal anticipated substantial losses for the year end of 2008, engaged in the transfer of profits from ALGME to Awal through the use of fraudulent FX transactions. Identified sixty transactions entered on the records of Awal Bank that were entered after the event. All positions closed during 2008 and 2009 resulted in Awal making a profit and ALGME being disadvantaged". 
16. Page 20: "To conduct 60 foreign exchange transactions where one party always wins and the other party always loses is not possible and is against the laws of probability. The backdated foreign exchange transactions have been used to justify the transfer of profits from ALGME to Awal." 
17. Pages 22- 26 Evidence Case File 3. Redacted but from Page 26 apparently involving an allegation of money laundering. 
18. Page 27: Evidence Case File 4. "The purpose of preparing this Evidence Case File 4 – Foreign Exchange Deal with SAAD Group is to illustrate is to describe how false accounting was used to treat three deposits totaling USD$44 million on 21^st and 23^rd April 2009 from Singularis Holdings as a Foreign Exchange profit in May 2009." 
19. Page 30: Evidence Case File 5: "The purpose of preparing this Evidence Case File 5 – Unsupported FX deals between Awal & ALGME is to outline an allegation made by an employee of Awal Bank [name redacted by AA] who is employed as an FX Trader with Awal. [Name redacted] alleges that Awal Bank entered in to an unsupported Foreign Exchange Deal for GBP 60 million. This allegation is supported by his colleague [name redacted by AA]. "
20. Page 40: Evidence Case File 6. "The pending liquidity crisis was identified and known to Awal and the CBB aat the time that the first deposit was taken from [name redacted for filing]. While the investigation has not identified evidence of intent to defraud [name redacted for filing] by knowingly entering into a transaction that the bank might be able to honour, the issue of a Breach of Trust arises, given the extent of the liquidity crisis known within Awal Bank from May 12^th 2009 onwards." AA: This ECF relates to two US$1 million deposits taken by Awal – one on 14^th May and the other on 21^st May 2009. 
21. Page 41: Evidence Case File 7 – Letters of Credit. "To date Hibis has not discovered fraud in the Letters of Credit transactions. The evidence is that the Letter of Credit transactions have been structured to the disadvantage of AlGosaibi Trading Services [ATS] and to the advantage of Awal Bank." 
22. Page 44: "The preliminary analysis of these transactions conducted by Hibis estimates that Awal has obtained an unjustified benefit of more than USD$20 million during 2007, 2008, and 2009. Further analysis has yet to be done to establish if fraud has taken place."   AA:  This refers to Point #21.
23. Page 45: Evidence Case File 8 – Regulatory Breaches. "Within the limited time allotted to this Phase 1 review "Quick Wins" Hibis Europe Limited [Hibis] have established the following: Misleading the CBB about cash flow on the 14^th May 2009; The Excom approved land deals after the transaction had been completed by the Chairman, Maan Al Sanea; Shredding of Awal documentation by [name redacted by AA], Chief Financial Officer on the 25^th June 2009; the role of Awal Bank's Chief Internal Auditor in [personal pronoun redacted] employment at TIBC."
    

Comments:

Here are some personal reactions to the Report which are based upon the assumption that it is Hibis' report and accurately reflects the situation at Awal Bank.

1. This Report differs from that issued by Ernst and Young in that it alleges criminal activity and fraud. (Note  that word "alleges".  An allegation is a charge not a conviction or judicial proof).  
2. I was surprised to read that the CEO of the bank had such a modest payment approval limit, i.e. BD 12,000.  
3. Assuming the accuracy of this Report and the E&Y Report, I'm also wondering what the reaction of external auditors including CBB examiners was to what appear in both the case of Awal Bank and TIBC to be a high level of related party transactions. Or were the relations of these parties so cleverly disguised so that they were hidden? If these allegations are true, then a rather sophisticated mechanism would have been required to respond to auditor confirmations to avoid creating suspicion. But in that case how were E&Y and Hibis able to penetrate the veil in rather short time? One would expect external auditors to spend more than 21 days in an institution during the entire year. And for CBB examiners to spend at least that time. 
4. Was it that when the cash ran out that it became a case of staff speaking up?

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.