Damas case brings stiff penalties

Major oversight failures allowed the Abdullah brothers to make unauthorised withdrawals, the DFSA said in its report.

DUBAI // Record fines have been handed down to Damas International and its directors after the Dubai financial regulator compiled a dossier of corporate governance failings at the region's biggest jeweller. Major oversight failures allowed the Abdullah brothers, who are the majority shareholders, to make about 2,200 unauthorised withdrawals from the company in 16 months, according to a report released yesterday.

The brothers used the withdrawals to fund items ranging from petrol for their vehicles to a US$66.3 million (Dh243.4m) investment in a Turkish property venture, according to the report by the Dubai Financial Services Authority (DFSA). Lax risk controls and a lack of disclosure allowed the brothers to use the publicly traded company's bank accounts for their investments and expenses, the report said. The brothers owe Damas Dh365m in cash and nearly two tonnes of gold they withdrew from the company.

The details of the case came alongside unprecedented penalties from the regulator against Damas and the three Abdullah brothers: Tawhid, Tawfique and Tamjid. In addition to being banned from executive positions at any Dubai International Financial Centre company, including Damas, for between five and 10 years, the brothers were fined a total of Dh11,010,000 for violating DFSA regulations. They are required to pay Dh1,101,000 within 180 days, with the rest suspended unless they fail to uphold the DFSA's requirements in the case.

Damas as a company was fined Dh2,569,000, of which Dh367,000 was due within 30 days. The balance of that fine has also been suspended provided the DFSA requirements are fulfilled. The company's board of directors was also removed, with a new board to be elected by shareholders within a month. Ernst and Young, the external auditor, is being replaced on orders from the DFSA. "We want to make sure that the market knows that we consider the board a centre of governance - as a bridge between shareholders and management," Paul Koster, the chief executive of the DFSA, said in an interview yesterday. "The board needs to ensure that the interests of the shareholders are collectively protected."

Mr Koster said the DFSA's findings had been referred to the Dubai Police and Dubai Public Prosecution, as is the protocol in cases with a potential for criminal action. Dubai Public Prosecution declined to comment. The Abdullah brothers yesterday declined to answer questions but said in a statement they were working closely with the DFSA. At the core of the DFSA's findings is that Damas did not change its control systems after the family-owned company made a public offering of its shares in July 2008.

Contrary to DFSA regulations, the brothers continued to use money in the company's accounts as their own discretionary funds, borrowing directly from it or transferring money from Damas to their private companies, including Damas Hotels and Damas Real Estate. The practice was "well established and well known" among executives, the DFSA report said. "The audit committee failed at all material times to communicate or have any dealings with Damas International's internal audit team," the report said.

The audit committee of the board of directors met formally for the first time on July 26 last year but did not communicate with the company's internal audit team. This prevented audit committee members from finding out about the transactions from as early as February 8 last year, when the transactions were brought to the attention of the company's internal risk management committee. The board of directors learnt of the transactions only when Tawhid Abdullah disclosed them in a meeting on October 8. He resigned as the chief executive soon after. A lack of disclosure led to other transactions at Damas that have drawn the scrutiny of the DFSA, including one deal that helped Damas to be eligible for a public offering of its shares in the first place.

Mr Koster said the DFSA's action should help restore confidence in the local market. "It should not discourage companies with family-owned businesses to join the market," he said. "It should actually help companies that they can see the market with all its benefits. This might also be a learning curve, a helpful step." [e-mail]