DUBAI: The Dubai Financial Services Authority (DFSA), the emirate’s main financial regulator, is not certain that it can enforce payment of the record $314 million fine it imposed on two entities at the heart of the collapse of private equity group Abraaj.
In response to questions from Arab News, the DFSA, the watchdog for the Dubai International Financial Centre (DIFC) where some of the Abraaj business was registered, said: “Abraaj Capital and Abraaj Investment Management (AIM) are still in provisional liquidation so the question of whether the DFSA will ever recover any of the fines imposed on them is not clear, for the time being.”
The DFSA indicated that the huge fine — by far the largest it has imposed in its 15 year history — was partly meant to prevent further cases like Abraaj.
The firm — once the biggest emerging market private equity investor in the world, with assets of $14 billion — collapsed last year after “serious wrongdoing” in two of its business units.
“The purpose of imposing a fine is not only to punish the offenders but also to deter others by indicating the seriousness of the misconduct and the consequences if others commit similar wrongdoing,” the DFSA said.
The authority recognized that such a big financial penalty might take cash away from investors who are trying to recover some of their funds from Abraaj entities. “The DFSA is conscious of its duty to protect the direct and indirect users of DIFC financial services, which includes investors in the Abraaj funds.
“We would not take any action that conflicted with that duty. We do not wish to dilute the interests of unsecured creditors in the liquidation of the companies, particularly the interests of the investors in Abraaj funds,” the DFSA said.
Abraaj’s liquidators have already sold some of the firm’s assets, and are in negotiations to sell more, in order to repay some investors.
FASTFACT
Abraaj was the Middle East’s largest private equity group before its collapse.
When it announced the fines earlier this week, the DFSA said: “Before taking any further action to enforce payment of the fines, the DFSA will consider the firms’ circumstances at that time and the corresponding implications of enforcing the fines for fund investors.”
Some financial experts have questioned the wisdom of imposing such a big penalty on a firm that is effectively bankrupt. Tarek Fadlallah, chief executive of Nomura Asset Management in the Middle East, tweeted after the fine was announced: “Is there any money left to pay the fine? Hopefully this draws a line under the whole saga.”
However, it looks certain that the Abraaj scandal, which dealt a blow to Dubai’s reputation as a financial hub, will continue to reverberate. Arif Naqvi, the founder of Abraaj, and five other former executives of the company are facing criminal action in the US on fraud charges in relation to the collapse. Naqvi is fighting a bid to have him extradited from London to the US to face the charges.
The DFSA fined AIM, a company registered in the Cayman Islands, $299 million for deceiving investors, misusing investor money and carrying out unauthorized activities in the DIFC. It fined Abraaj Capital, a DIFC firm licensed by the DFSA, $15 million for not keeping adequate capital and lying to the regulator.
DFSA officials have argued that their job of supervising Abraaj activities was made more difficult because many of its operations were in other jurisdictions, like the Cayman Islands.
In its recent Business Plan 2019/20 the DFSA set out what is called “areas of greater focus” for the future.
“These include the corporate governance of regulated firms, together with business models where firms have entities in different jurisdictions, which includes intensifying our review of regulated firms with significant unregulated activities,” it said.
Asked whether there were any investigations currently under way comparable to the ongoing Abraaj probe the DFSA said: “We cannot comment on current investigations.”
Bryan Stirewalt, the DFSA chief executive, said the alleged crimes were “pervasive and persistent” at Abraaj.
“We will pursue the persons or entities who perpetrated this activity, including those who allowed this to happen through major corporate governance breaches, to the full extent of our powers,” he added.
