Dubai shows teeth on corporate impropriety

The emirate will take decisive action against wrongdoers,as was seen in the case surrounding unauthorised transactions at Damas.

Embezzlement. Bribery. Fraud. In most jurisdictions, these words keep directors awake at night. However, despite being the commercial centre of the Middle East, Dubai, in common with the rest of the region, has not kept pace with international standards in terms of regulating corporate governance. This is now changing.

In April last year, Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, declared that there "is no room for corruption and the corrupt" in Dubai and that closing any administrative and legal loopholes was equally as important as pursuing those who exploit them. A year has passed since Sheikh Mohammed's battle cry and the past 12 months have signalled a gradual turning of the screws on those involved in financial and corporate impropriety, resulting in a series of high-profile court cases.

In particular, the case of Damas International, the jewellery retailer, demonstrates that Dubai's fight against corruption is more than just words. In March, the Dubai Financial Services Authority (DFSA) found Damas's founders and majority shareholders, the three Abdullah brothers, guilty of making in excess of 2,200 debit transactions from company accounts for personal use, with one of the brothers making "unauthorised transactions" exceeding US$165 million (Dh606m).

The brothers were collectively fined $3m, suspended from directorships at any Dubai International Financial Centre (DIFC) company for 10 years and ordered to repay $99.4m plus the value of approximately two tonnes of gold to Damas (worth more than $62m). They were also forced to resign their Damas directorships and disclose details of and grant security over high-value personal assets until the jewellery retailer is repaid in full.

The fine, the largest imposed by the DFSA, sent a clear message to corporate Dubai: impropriety will no longer go unpunished. Damas was also required to provide undertakings, which almost exclusively relate to international corporate governance principles, such as establishing a code of conduct and risk management strategies, appointing a compliance officer and apportioning responsibilities across its board and senior management.

The sub-text to the case was unmistakeable: that DIFC companies should ensure they consider and implement corporate governance structures, systems and controls to ensure proper management, both ethically and in the best interests of the company and its shareholders. Dubai's perceived laissez-faire attitude regarding corporate governance stems from the historic lack of legislation with any real bite on the issue.

The anti-bribery and corruption provisions of the UAE Penal Code are not extensive and are limited to the bribing of public officials. However, the Dubai Law No 37 of 2009 on the Procedures for the Recovery of Illegally Obtained Public and Private Funds, effective from December 31 last year, created a broad prohibition relating to unlawfully acquired "public funds" (usually funds owned by or directly or indirectly connected to the Government) and "illicit monies" (funds acquired, directly or indirectly, due to an action that constitutes a punishable crime) or both.

The Law 37 imposes sentences of up to 20 years for those convicted of such offences, subject to provisions regarding the repayment or settlement of funds before sentencing or during imprisonment. Importantly, those convicted remain liable for any outstanding sum and the punishments under Law 37 are without prejudice to any penalties enforceable under any other law. Law 37 and the steady increase in high-profile convictions in Dubai demonstrates that the emirate is proactively seeking to establish a more robust corporate governance framework through which to minimise the occurrence of corporate impropriety.

In addition, the Federal Government of the UAE has already expressed its support for strict corporate governance requirements, by virtue of the Ministerial Resolution No (518) of 2009, Concerning Governance Rules and Corporate Discipline Standards, which became effective on April 30. The resolution focuses upon the prevention of, rather than the punishment for, ultra vires - acts attempted by a corporation that are beyond the scope of its charter - activity and attempt to introduce standardised corporate principles across the UAE.

Given that such regulation and the requirement of companies to have robust internal corporate governance controls will only increase as governance principles in the Middle East begin to align with those of international best practice, companies in the UAE should act now to: ensure that they have sufficient corporate governance procedures in place; protect their professional reputation; and ensure compliance with local law and Federal requirements going forward.

Simon Stubbs is a trainee solicitor with Trowers & Hamlins in Dubai. Daniel Page is a solicitor with Trowers & Hamlins. This article first appeared in Trowers & Hamlins's Middle East Business Law Review of Summer, 2010