Scandals from Abraaj to KGL have investors hankering for better regulation in the Gulf

The collapse of mammoth investment fund Abraaj Group has made headlines again as Dubai’s regulator imposed its largest-ever fine—a whopping $315 million—on two of the Group’s companies, while founder Arif Naqvi was sentenced in absentia to three years in prison.

Once one of the largest private equity firms in emerging markets, Abraaj investors included the likes of the World Bank. Now the firm may not even be able to pay the penalty imposed on it by Dubai’s regulator, following a spectacular implosion which shocked the international private equity industry from Toronto to Tokyo.

Abraaj’s remarkable fall from grace is likely to have legal and financial ramifications for years to come. For one thing, it’s sure—particularly in combination with another scandal involving Kuwaiti private equity firm KGL Investment’s alleged misuse of public funds—to strengthen calls for more thorough oversight of the industry throughout the Gulf.

Siphoning going straight to the top

The Abraaj affair has implicated a number of the former private equity giant’s top executives, who have been indicted for everything from wire and securities fraud to stealing public funds. Founder Arif Naqvi is under house arrest on £15 million bail, and faces extradition from London to the US.

The sheer scale of the alleged abuses is nothing short of remarkable. With Naqvi at the helm, senior executives at the firm siphoned off millions of dollars to pay for personal expenses as well as trying to stave off the company’s liquidity crisis.

Apparently, Abraaj’s legitimate business operations were unable to produce the cash flow and reserves necessary to keep the company afloat. Instead, executive racketeering at the firm included a “variety of strategies to misappropriate cash from investors and to use it to fund cash shortfalls,” according to the indictment, “thereby concealing Abraaj’s true condition from investors, potential investors, creditors, and regulatory authorities.”

Abraaj executives apparently routinely attempted to plug shortfalls by taking money from a $1 billion health fund. When this graft became insufficient, they planned to establish a $6 billion fund, known as Fund Six, to smooth over the firm’s liquidity crunch. Even this fund didn’t seem likely to stave off disaster for long—an anonymous email was sent to several potential investors in September 2017. The email, titled “Abraaj Fund 6 Warning," claimed that Abraaj was overvaluing holdings to mislead potential investors about its profitability and artificially boost its track record. Most of the deals in the pipeline for planned fundraising, the email indicated, were “dead”—and Abraaj knew it.

An indication of broader problems in the region?

Abraaj’s implosion has severely shaken the financial world in the Middle East, and threatens to undermine confidence in the nascent financial services sector in the UAE and surrounding capital markets. Indeed, the firm’s very public downfall has raised new questions about the quality of regional oversight.

Though one expert has suggested that “most investors see Abraaj as a standalone issue” in the Gulf, there are further, more worrying, indicators that this is not the case. In another high-profile recent case, business partners Marsha Lazareva and Saeed Dashti, the executives of troubled firm Kuwait and Gulf Link (KGL) Investment Co., stand accused of misappropriating nearly $500 million of proceeds from an asset sale in the Philippines controlled by the Port Fund private equity vehicle.

It’s hardly the first controversy KGL has been embroiled in. While holding as much as $1 billion in contracts with the U.S. armed forces, the company apparently built a “ghost structure” to enable it to circumvent American sanctions against Iran. American policymakers including Senator Marco Rubio (R-FL) have recommended that the U.S. Department of Defense carry out a full investigation into KGL to ascertain whether it had violated the Iran Sanctions Act, as well as into reports that KGL executives had been involved in the illegal sale of aircraft parts.

KGL has tried everything to put the allegations to rest, even suggesting in a U.S. defamation lawsuit that they were concocted by a competitor—but the Pennsylvania Superior Court recently ruled against the Kuwaiti firm, arguing that there was no genuine issue over whether the “factual assertions […] relating to KGL’s ties with Iranian entities were substantially true”.

High-dollar lobbying campaign

If KGL has reacted aggressively to the suggestions that they violated sanctions against Iran, they have intervened even more vigorously in the Lazareva-Dashti case. Perhaps because this latest bout of legal hot water directly involves KGL’s top executives, the firm has spared no expense trying to put out the flames of scandal. In the first quarter of 2019 alone, KGL spent a staggering $2.5 million on a slick lobbying campaign to get Lazareva off the hook by painting her as “the most successful businesswoman in the Middle East” and a victim of a corrupt Kuwaiti judicial system.

As part of this campaign, KGL has hired a motley crew of prominent Washington lobbyists and political figures stretching from Neil Bush—brother of George W. Bush—to former FBI Director Louis Freeh and controversial former U.S. Representative Dana Rohrabacher.

Kuwaiti officials do not seem cowed by the heavy lobbying, however. MP Ryad Ahmed Aladasani stated that he has handed evidence of the “thefts and blatant encroachments against the country and its funds” to relevant ministers. Sheikh Yousef Abdullah Al-Sabah, the director of the Kuwait Ports Authority, has been adamantthat Kuwait will not give in to “fabricated pressures that will not have any impact on our continuous efforts to defend public property” and will continue trying to recover its misappropriated funds.

The one-two punch of the Port Fund’s missing money and Abraaj’s wide-ranging fraud should have investors with interests in the Gulf calling for greater oversight on the managers of these funds. In one report by S&P Global, analysts warned that “corporate governance continues to be a critical weakness” for Gulf companies. Strengthening oversight practices, then, can only be a good thing, inevitably improving capital market access while cutting the cost of rising regional debt.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.