Dubai regulator to review supervisions in wake of Abraaj collapse

DFSA says folding of private equity firm will “influence our thinking” in the year ahead

New employment law will come into effect on August 28. Courtesy DIFC

Dubai’s financial regulator pledged to tighten controls if necessary following the collapse of Abraaj Group last year, in its strongest comments yet to address the unravelling of what was once the Middle East’s biggest buyout company with nearly $14 billion of assets under management.

The Dubai Financial Services Authority, which regulates entities operating out of the Dubai International Financial Centre, will "be reviewing our risk-based approach to supervision to ensure that it properly captures some of the features of the particular case", DFSA chief executive Bryan Stirewalt said in his preface to the DFSA's 2019-2020 business plan, released on Sunday. "In addition, we will examine whether our regime addresses correctly the situation where firms locate legal entities providing services to each other in different locations, which can complicate supervision."

The DFSA commenced investigations last year after Abraaj filed for provisional liquidation in the Cayman Islands, proceedings for which are still ongoing. One of the company's legal entities, Abraaj Capital Limited, is registered in the DIFC. The DFSA has not made public the conclusions of its investigations.

“Given the importance of the Abraaj Group as a large private equity group in the Middle East and its connections with Dubai – if the DFSA concludes, following our investigations, that there are lessons to be learned, we will take steps to strengthen our supervisory oversight going forward,” Mr Stirewalt said.

The DIFC banking sector comprises 33 commercial banks located in the DIFC, with total assets reaching $155bn as of the end of fourth quarter of 2018. The DIFC is also home to 20 reinsurers and 60 insurance intermediaries.

"As part of the DFSA's review of our risk-based approach to supervision the regulator will examine whether its regime addresses correctly the situation where firms locate legal entities providing services to each other in different locations, which can complicate supervision,” Mr Stirewalt said.

In the case of Abraaj, the company operated from 20 offices across the Middle East, Africa, Europe, Asia and South America, including its Dubai headquarters, but each office was subject to the rules governing its respective jurisdiction.

The DFSA therefore, has no authority to impose restrictions on any Abraaj operation apart from the DIFC-registered ACL. The regulator has restricted the activities that ACL is allowed to undertake, including barring it from securing new clients and work, or transferring money to other entities and affiliates.

The collapse of Abraaj "will influence our thinking on corporate governance, on the allocation of responsibilities among the senior management of firms, and on the best way to assign responsibility for compliance within regulated firms”, Mr Stirewalt said in the report.

The DFSA "will continue to emphasise the importance of strong corporate governance across all facets of the financial services community, as an underlying principle in promoting the integrity and transparency of the financial services industry," Mr Stirewalt told The National on Sunday.

He also urged other DIFC businesses to communicate with the DFSA in an “open and co-operative” manner, and said the regulator “will not hesitate to conduct investigations and take enforcement action to ensure the protection of investors and the reputation and integrity of financial services conducted in or from the DIFC".

Last February, four investors in Abraaj’s $1bn Growth Markets Health Fund – including the Bill & Melinda Gates Foundation, the World Bank’s International Finance Corporation, the UK’s CDC Group and Proparco Group of France – alleged mismanagement of funds and hired Ankura Consulting to find out where their money had gone.

The company remains in provisional liquidation working to pay down an estimated $1bn of debt by selling funds and other parts of the business. Investigators are trying to locate investors’ money, with reports of co-mingling funds (taking money allocated for a particular purpose and using it elsewhere) to help Abraaj meet its cash flow needs.

Abraaj and its founder Arif Naqvi have denied any wrongdoing.