Once Billed as a Financial Haven in the Middle East, Dubai Turns Inves…


DUBAI—Investors are questioning whether Dubai’s young financial center can police itself as the meltdown of its marquee private-equity firm highlights broader concerns about placing money in the region.

This emirate’s top regulator, the Dubai Financial Services Authority, has been close to silent since allegations emerged that Abraaj Group misused hundreds of millions of dollars in investors’ money, including that of the Bill and Melinda Gates Foundation and the World Bank. It has issued two short statements, seized some laptops from Abraaj and is in talks with at least one of the firm’s auditors.

Investors and executives here say the authority’s response has made them nervous about the regulatory environment in Dubai, which built a financial district of gleaming skyscrapers from scratch more than a decade ago. Dubai was supposed to be a rules-based haven in the Middle East’s opaque financial world, but fears about corporate governance and conflicts of interest are rising to the surface.

The region suffers from a shortage of independent directors to serve on corporate boards, according to ratings firm Standard & Poor’s. Some companies are headquartered in Dubai but legally based in offshore havens like the Cayman Islands, creating uncertainty about which jurisdiction’s laws matter. Even in a city that hosts the regional headquarters of most major global banks, the finance world often resembles a small clubhouse of members who look the other way at wrongdoing, say lawyers who work here.

“Governments and regulators need to step up support to encourage the industry’s development so that investors can regain trust,” said Tarek Fadlallah, chief executive of Nomura Middle East, the regional asset-management arm of the Asian investment bank.

Standard & Poor’s said Persian Gulf companies’ “Achilles’ heel” is a lack of governance standards. With better practices, companies could improve their access to capital markets and reduce their debt costs, S&P said in a report last year.

“The problem is the concentration of power within most companies,” said Alissa Amico, a Paris-based former executive at the Organization for Economic Cooperation and Development, who now runs her own advisory firm, Govern. Unlike in the West, where corporate executives are often held accountable by supervisory boards, “there are no checks and balances in the Middle East,” she said.

The Dubai Financial Services Authority declined to comment for this article. In its statements about the Abraaj case, the DFSA has said it was aware of “various matters involving Abraaj Group” and it will work toward “safeguarding the interests of investors.”

Abraaj has denied any wrongdoing and said all missing money had been returned to investors. Abraaj’s provisional liquidator didn’t respond to a request for comment.

The Dubai International Financial Center boasts its own English common-law court separate from the rest of the United Arab Emirates, where Islamic law is observed. Its regulator is the DFSA, which oversees about 629 companies and whose enforcement arm is led by a former U.K. investigator who probed Libor misconduct.

The DIFC also declined to comment for this article.

The DFSA has never faced the demise of a firm as big as Abraaj, which once controlled up to $14 billion. Until now, the regulator’s highest-profile case was the jewelry firm Damas, a family-run company where three brothers were accused of improperly taking money from the company after it went public. The authority fined the company and the brothers $2.9 million in 2010.

Arif Naqvi,

Abraaj’s founder, faces prosecution in the U.A.E. again for writing bad checks to a regional businessman with whom he last month failed to reach a debt settlement with, attorneys involved in the case said. Mr. Naqvi wasn’t immediately available to comment. Mr. Naqvi’s lawyer said both parties were working to finalize a settlement in advance of a court hearing.

The Abraaj group’s legal setup, while not entirely unusual for Dubai-based entities, has likely contributed to the complexity in regulating the firm, said people familiar with its corporate structure. The firm’s holding company is incorporated in the Cayman Islands, out of sight from Dubai regulators.

Abraaj is accused of commingling funds, a term used to describe using money from investors for other purposes than originally agreed for. The company filed for a court-led winding down process after it couldn’t repay its debts.

Former Abraaj employees said the DFSA didn’t perform some of their regular customary supervisory visits in recent years. These former employees say suspicious money flows could have been detected at an earlier stage. But some of the same employees questioned whether supervisory visits would have achieved any results.

Most of the publicly disclosed probes of Abraaj have been conducted by private investigators hired by investors or by Abraaj itself.

Since 2006, the DFSA has taken action 74 times—about six times a year—in relation to entities or individuals who were in breach of the financial center’s rules, according to its website. The vast majority of those cases have been against smaller firms or individuals, with the exception of fines on two international banks,

ABN Amro Group

NV and

Deutsche Bank

. ABN Amro admitted to irregularities while Deutsche Bank said it had reviewed and upgraded its systems for accepting new clients following the fine.

The DFSA’s enforcement arm may still take action against Abraaj, said people familiar with the matter. Out of the public eye, the DFSA has been receiving updates from one of the company’s audit firms.

The longer it waits, the more Dubai’s ability to attract foreign capital could be at risk, said

Oliver Schutzmann,

chief executive of Iridium Advisors, an investor-relations firm.

“How many Abraajs are out there when things here tend to be swept under the carpet?,” he said.

Write to Nicolas Parasie at [email protected]


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