Fake firms exploit economy of trust

Authorities are tightening up regulations to prevent fraud by foreigners attempting to exploit the UAE's willingness to encourage commerce.

The authorities are tightening up regulations, carrying out unannounced inspections and doubling fines to prevent fraud by foreigners who set up companies to exploit the UAE's willingness to encourage commerce. Mohammed Hilal Muroushedi, director of the compliance division at the Department of Economic Development (DED), said Dubai offered businesses "one of the most conducive environments to grow and prosper".

However, he said it was unfortunate that certain investors "took advantage of the business-friendly climate of the emirate to indulge in fake businesses". As we report below, one typical victim of the scam was defrauded of more than Dh250,000 (US$70,000). A foreign business wishing to set up a limited liability company (LLC) must be partnered with a local company, which retains no less than 51 per cent of the operation. But it is common practice for power of attorney to be assigned to an expatriate stakeholder, in effect ceding control of the company but also relieving the sponsor of legal responsibility for its subsequent activities. It is under these circumstances that so-called "brass plate" companies are free to perpetrate frauds.

According to one lawyer, who declined to be identified, sponsors might become more selective when choosing companies and individuals if they were made more accountable. "If the law is changed in such a way that local sponsors are not fully exempt from the activity of the foreign companies, I certainly think they would practise a lot more caution," he said. The DED, said Mr Muroushedi, had "initiated several steps to curb the problem of fake companies".

These included a strict surveillance programme, involving "site visits and inspection of offices to ensure that the company's activities are as per the licence issued". Furthermore, details of offenders have been posted on his department's database. "This will ensure that their licences are not renewed the next year and all transactions based on the current licence are made null and void," he said.

Any complaint about a company would trigger an immediate investigation. "If the complaint is true, we immediately suspend the company and co-ordinate with jurisdiction authorities to take measures to protect the individuals or companies dealing with it." According to Mr Muroushedi, "the number of offending companies has come down drastically due to the intense monitoring campaign, surprise inspections and continuous follow-up. DED is also taking steps to double the fine to discourage businesses from resorting to fake business practices."