More diligence on fraud in the GCC is due

Analysis: News of Dubai's campaign to weed out corruption has been replaced in the public's attention by the global economic turmoil.

Kroll, an international risk consultancy, said last week the Middle East was the world's only region to see a rise in fraud in the past year. It singled out corruption and bribery as the single largest threats.Show less

It is more than a year since Dubai launched a highly publicised clampdown on corruption, which led to the arrest of several executives from some of the emirate's top property developers and financial institutions.
But while Dubai grabbed the international headlines, it represented just the tip of the iceberg in a region that has been identified as a hot spot of corruption. Kroll, an international risk consultancy, said last week the Middle East was the world's only region to see a rise in fraud in the past year. It singled out corruption and bribery as the single largest threats. "For seven out of 10 cases of fraud, it had the highest incidence of any region, including bribery and corruption," Kroll said. Average financial losses from corruption doubled to US$11.5 million (Dh42.2m) this year from $5.6m last year, it said.
Other analysts point to what could be much larger losses. KPMG said last year fraud had risen to "alarming" levels within the six-nation GCC and estimated that losses from financial crime are likely to exceed several billion dollars a year. Bribery and corruption may no longer be receiving the same attention since the arrival of the global financial crisis in the Gulf, but momentum is now building across the region to improve corporate governance, disclosure and auditing practices.
"In a crisis you look to stabilise things," says Simon Charlton, the managing director of forensic and dispute services at the auditing and consulting firm Deloitte. "Everybody's energy is focused just on that." Now the drive for more accountability is returning with a vengeance, helped by the recent debt defaults at the Saad Group and Ahmad Hamad Al Gosaibi and Brothers, two Saudi family-run conglomerates.
While financial institutions around the world are still counting the cost of their exposure to the two groups, regional lenders have already radically changed their approach to "name-lending", applying far greater scrutiny to loans involving families that previously traded on their reputation. "Lenders also appear to be doing much more due diligence now but it does not finish there," says Mr Charlton. "Investors are asking far more about companies' anti-fraud policy, their governance structures, the way they manage their risk, and seeking more transparency and accountability.
"Previously there was this perception that if you have a problem, it is best swept under the carpet. But now people are prepared to talk about bribery, fraud, mismanagement and government failure." According to information collected by The National, there are at least 11 court cases under way involving allegations of fraud in Dubai, while 34 company executives have either appeared in court to answer charges or are due to do so.
About $950m is alleged to have been stolen or used as bribe money, according to files from public prosecutors that give the first overview of the anti-corruption campaign. Since March last year, lawyers appointed by the Dubai Government have been investigating executives from some of the emirate's leading property and financial firms. The first round of last year's high-profile arrests and charges included top executives of three listed firms: Deyaar, Dubai Islamic Bank and Tamweel, the Islamic home lender. A second round concentrated on property developers.
Sama Dubai, a part of the government-owned Dubai Holding, was the focus of an investigation last August, when four of its executives were detained. In a separate case, a top executive of a developer was charged with allegedly defrauding 3,700 investors of more than Dh900m. And two Australian executives of the Dubai Waterfront project are accused of defrauding the Sunland Group, obtaining Dh44m in illegal profits and giving false information about the ownership and value of a plot of land. The two were granted bail in Dubai last week.
But for many analysts the problem of fraud within the Gulf is broader than the various corruption investigations before the courts. "They are a test for the whole corporate governance and legal system," says Wadah al Taha, an independent analyst and certified fraud examiner who was involved in the investigation into one of Dubai's listed companies. Mr al Taha says corporate governance is yet to be developed as the first line of defence for government or the private sector within the region, but it would help prevent fraudulent activity.
"Companies think compliance and corporate governance ends with audit," Mr al Taha says. "In fact, it goes way beyond people's perceptions and what corporations have been practising in this part of the world." Dubai's highly publicised attempts to hunt down corruption within the ranks of some of its largest companies has raised local awareness of the issue, but do high-profile arrests help to deter others?
"Putting one guy in jail hopefully acts as a deterrent, but history has shown that there will always be greed and fraud," says Mr Charlton. "You cannot eradicate it. You can only build a structure and educate all stakeholders to make it less likely, and introduce early warning systems." That should also address existing ways of doing business such as the historical reliance on post-dated cheques. Under UAE law, bouncing a cheque can lead to a jail sentence. This has been identified as one of the factors behind the exodus of indebted expatriates, known to bankers as "skips", over the past year.
Several property developers and brokers have been jailed on cheque fraud charges. Abid Ali, the owner of an outdoor exhibition company, lost more than Dh500,000 in a deal involving post-dated cheques when his client fled the country leaving a Dh4m trail of debts. "Once a working relation is established and a credit cycle is in place, people can easily defraud firms of their payments which is evident in our case," Mr Ali says, adding that a financial shock such as this makes it hard for a small business to survive.
Ultimately, the need to attract and retain foreign investment may become the biggest incentive for regional governments to ensure that anti-fraud measures remain a top policy priority. "Abu Dhabi and Dubai see themselves as part of the global fabric," says Mr Charlton. "They want to attract foreign investment and have top rankings in terms of places to do business. They want to be known as a clean place to do business and to get there things like enhanced corporate governance, transparency and accountability are important."
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