Mashreqbank v AlGosaibi - Motion by Mashreqbank to Consolidate Its Two Legal Cases

Mashreqbank's original legal strategy was to pursue two cases:  one against the partnership and a separate case against the heirs.

 

You'll recall earlier that earlier this month Judge Lowe ruled against Mashreqbank in its case against the heirs of Ahmad Hamad Al Gosaibi.  And if you don't remember this, here's the link to an earlier post.

Judge Lowe had stated that since Mashreqbank (a) had not joined the general partners to the suit against the partnership and (b) had not alleged  alleged that the partnership was insolvent or otherwise unable to pay its debts, it had no legal basis for pursuing a judicial order against AHAB's general partners.  

His ruling was "without prejudice" meaning that Mashreq's lawyers had the opportunity to attempt to remedy the legal shortcoming.

On 24 March Mashreq's lawyers, Cleary Gottlieb, filed a motion for consolidation of NYSC Case 601650/2009 (against AHAB) and 602171/2009 (against the general partners of AHAB).   If accepted this will apparently neatly resolve the legal issues cited in Judge Lowe's ruling.  The documents are filed at the NYSC website.  For Case 601650, it is Document  117.  For Case 601171, it's Document 47.

You'll find instructions on how to access the Supreme Court of New York's website in the earlier post linked above.

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.

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

Mashreqbank v AlGosaibi Heirs: Ruling Against Mashreq

Last week the Supreme Court of New York updated its website for filings in two cases brought by Mashreqbank against the AlGosaibis.  AlGosaibi heirs refer to the 20 individuals who are the partners in Ahmad Hamad AlGosaibi and Brothers.

To put what follows in context, Mashreqbank has filed three cases in the Supreme Court of New York.

1. A case against The International Banking Corporation which has been effectively stayed by a filing under Chapter 15 of Title 11.  This effectively "ended" Mashreq's case in NY.
2. A case against Ahmad Hamad al Gosaibi and Brothers (the partnership as an entity).  In its response AHAB added Maan AlSanea as a Third Party Defendant.  This is NY Supreme Court Case Index #601650/2009.
3. A case against the twenty individuals comprising the AHAB partnership.   This is NY Supreme Court Case Index #602171/2009.

I printed out a massive stack of documents from the latter two cases and have been merrily reading away the AHAB case documents.  I noticed that the stack of documents from Case #3 above was much smaller.  So I've turned my attention temporarily to that case.

Two developments.

First, as noted above, Justice Richard Lowe III has ruled against Mashreqbank's motion for the Court to order an attachment of defendants' assets, personal property, funds and electronic funds transfers that are located in New York.   He has done so "without prejudice" meaning that Mashreqbank can attempt to remedy the defects in its pleading and file again to obtain the order.  The ruling is dated 25 February 2010 but was only filed on the Supreme Court website on 8 March.  If you want to look yourself, this is document #46.  Instructions on how to access the Supreme Court Website are here.  Be sure to use the right Case Index Number 602171/2009 when you search.

What was the problem?  

The lawsuit concerns two FX deals that Masreqbank undertook.  One with AHAB (the US$150 million which is the subject of Case #2 above) and one with TIBC (which is the subject of Case #1 above).  The transactions themselves were not directly with the partners in AHAB.  

Mashreqbank's lawyers failed to "join" the two contracting parties (AHAB and TIBC) to this lawsuit.  

And in the words of Justice Lowe:  

"To state a contractual cause of action against the individual partners where the partnership is not joined, the complaint must allege that the partnership is insolvent or otherwise unable to meet its obligations."

Mashreqbank has not done this in this case.

Perhaps equally or more important (since Justice Lowe is also on the "bench" for Case #2 above), Mashreqbank has not joined the partners as defendants in Case #2 above. This seems a potentially "fatal" flaw.

Speaking about precedent case Vets North, Inc v Libutti 9278 AD2d 406, 407 [2d Dept 2000]) in which Vets North had not joined the partners and then tried to enforce a judgment against the partners:

The Court determined that plaintiff could not enforce the judgment, because the partners had not been named in the proceeding against the partnership.  "Resort to the personal assets of individual partners is possible only as to those general partners who were named individually as defendants and personally served with process in the proceeding which resulted in the judgment." (id; see also Tally v 885 Real Estate Associates, 11 AD3d 242, 242 [1st Dept 2004])

It looks like Mashreqbank's counsel has some filing to do in both cases.  Since their motion was denied without prejudice they get a second bite at the apple.  (Sorry, I couldn't resist the pun).

The second was that earlier Mashreqbank (14 January 2010) had agreed to drop Mr. AlSanea's wife (Sana Abdulaziz Hamad alGosaibi) as a defendant.  The stipulation (Document #45) is  rather short and gives no reason for this move.  It would seem to me that Mashreqbank would be looking to line up as many pockets  as it could to ensure that it retrieves all the money owed it.   And that amount is not inconsiderable.  Beyond the cases in New York, Mashreqbank has filed a case in the UAE for a total amount of AED1,457,164,610.14 (US$397,047,577.70).

Given all that is at stake, letting Ms. Sana off the hook is a rather curious move indeed.

Mashreqbank v AlGosaibi – Analysis of FX Deals

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

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

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

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

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

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

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

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

Credit Risk Management

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

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

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

Two conclusions. 

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

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

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

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

OPERATIONAL REQUIREMENTS – DISPARITY OF WORKING DAYS

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

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

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

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

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

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

RATIONALE FOR THE SPLIT VALUE TRANSACTIONS

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

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

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

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

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

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

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

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

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

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

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

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

Based on the above. 

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

Kuwaiti Banks to Provision 100% for Saad and AlGosaibi?

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

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

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

TIBC Administrators to Pursue Debtors

 

The Gulf Daily News reports that TIBC's Administrators,  Trowers and Hamlins, advised creditors that they had secured funding from a group of major creditors and were preparing to go after major debtors of the Bank to secure repayment.

This is an interesting development.  

You'll recall that the Ernst and Young Report on TIBC certainly left the impression that there had been massive fraud at the Bank with the implication that there was little prospect for recovery.

Clearly, creditors wouldn't be putting in more money if there wasn't a real prospect of a reasonable recovery.

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

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

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

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

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

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

A couple of observations. 

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

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

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

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

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

British Banks Negotiating With Saad and AlGosaibi

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

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

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

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.