Dubai Financial Services Authority Fines Abraaj Group Companies $315 Million for Unauthorized and Fraudulent Conduct

On July 30, the Dubai Financial Services Authority announced that it had fined two companies associated with the defunct Abraaj Group a total of $315 million for “serious wrongdoing,” including carrying out unauthorized activities in the Dubai International Financial Centre (DIFC) and misusing investors’ monies.  The penalties consisted of $299,300,000 against Abraaj Investment Management Limited (AIML) and $15,275,925 against Abraaj Capital Limited (ACLD).

These penalties, the largest that the DFSA has ever imposed, are the result of a DFSA investigation that began in January 2018.  That investigation, which reportedly extended to multiple jurisdictions, found with regard to AIML, a Cayman Islands company now in provisional liquidation, that it

• “carried out unauthorised financial services, including fund management, within and from the DIFC;”
• “actively misled and deceived investors in Abraaj funds over an extended period;”
• “misused investors’ monies in various funds to meet its own operating and other expenses, which included payments to entities connected to some members of AIML staff, and to meet ever-increasing cash shortfalls;” and
• “concealed this by providing misleading financial information to investors and making false statements about the use of money drawn down from investors and distributions.”

The DFSA stated that AIML used many methods to deceive investors, including

• “borrowing money just prior to financial reporting dates to produce temporary bank balances at a level expected by the investors;”
• “changing the reporting period for a fund to disguise shortfalls;”
• “deflecting demands from various parties to provide updated financial information and bank statements;” and
• “lying about delays in making distributions of exit proceeds to investors.”

Because of these activities, according to the DFSA, two funds that AIML managed had a combined shortfall of at least $180 million at the time that AIML entered into provisional liquidation.

The DFSA investigation found with regard to ACLD, a DIFC company also in provisional liquidation, that it

• “failed to maintain adequate capital resources;
• “deceived the DFSA about its compliance with various rules, including capital adequacy requirements;” and
• “was knowingly concerned in AIML’s unauthorised financial services activities.”

The DFSA further stated that as a result of this misconduct, ACLD also breached the Dubai Regulatory Law because it failed (1) “to observe minimum standards of integrity and fair dealing;” (2) “to ensure its affairs were managed effectively and responsibly;” and (3) “to deal with the DFSA in an open and cooperative manner.”

The DFSA cited internal company correspondence that showed that Abraaj Group’s compliance function raised concerns about the Group carrying on unauthorized financial services within the DIFC as early as 2009, but that ACLD’s senior management ignored those concerns.

Recognizing that AIML and ACLD are in provisional liquidation, the DFSA stated that “[b]efore taking any further action to enforce payment of the fines, the DFSA will consider the firms’ circumstances at that time and the corresponding implications of enforcing the fines for fund investors.”  In addition, Bryan Stirewalt, the DFSA’s Chief Executive, said that “[s]enior management rode roughshod over their compliance function and the misconduct and deceit were pervasive and persistent. We will pursue the persons or entities who perpetrated this activity, including those who allowed this to happen through major corporate governance breaches, to the full extent of our powers.”

Finally, the DFSA committed itself “to investigat[ing] individuals and entities connected with this matter, in respect of their culpability, to the full extent of its powers and considering all sanctions available to it.”

Note: This action by the DFSA is noteworthy for three reasons.  First, the fact that the DFSA imposed its highest-ever financial penalties indicates how egregious it considers the misconduct in this case.   At one time, Abraaj Group was reportedly “one of the largest emerging market investors with $13bn claimed under management.”  Its collapse in 2018 proved to be a devastating blow to private equity across the Middle East.  Bloomberg reported that “virtually no money has been raised by private equity firms based in the Gulf Cooperation Council despite strong performance almost everywhere else.”

Second, the DFSA’s action is the latest in a series of aggressive enforcement actions in several countries over the last four months to pursue those responsible for the collapse:

• April 5: United Kingdom authorities arrested Abraaj Capital’s founder and Chief Executive Ariq Naqvi at London’s Heathrow Airport.  Subsequently, Naqvi was denied bail and detained until May 28, when he posted £15 million security for a bail condition, and now faces extradition to the United States.
• April 11: Abraaj former Managing Partner Mustafa Abdel-Wadood was arrested in New York, and federal indictments were unsealed in New York charging Naqvi and Abdel-Wadood with securities fraud, wire fraud, and conspiracy.
• April 11: The U.S. Securities and Exchange Commission charged Naqvi and AIML under the Investment Advisers Act with “misappropriating funds from a private equity fund client.” Naqvi and AIML allegedly collected more than $100 million over three years from U.S.-based charitable organizations and other U.S. investors for Abraaj’s Growth health fund, but Naqvi allegedly misappropriated money from the Health Fund and commingled the assets with AIML corporate funds and its parent company and used it for purposes unrelated to the health fund.
• April 18: United Kingdom authorities arrested a third former Abraaj executive, Managing Director Sev Vettivetpillai.  Vettivetpillai was released after posting $1.3 million bail, and also awaits extradition to the United States.
• June 13: A federal indictment in New York charged three additional former Abraaj executives — Chief Financial Officer Ashish Dave and Managing Directors Rafique Lakhani and Waqar Siddique, with multiple counts that included wire fraud, securities fraud, money laundering and theft of public funds.
• June 28: Abdel-Wadood pleaded guilty to conspiracy, securities fraud, and wire fraud charges, and agreed to cooperate with U.S. authorities in their investigation of Abraaj.

Third, despite the size of the penalties, the fact that the DFSA took action after U.S. and United Kingdom authorities has prompted criticism by some institutional investors and the media of the speed of the DFSA’s public response.  Even though the DFSA previously stated that its supervision and enforcement teams in 2018 “devoted considerable time and effort” to investigating the conduct of the affairs of Abraaj Capital Limited and its related parties,” Some investors termed the penalties “too little too late,” and a Gulf News editorial asserted that the penalties “should have come earlier” and that the DSFA “should continue to look at what happened at Abraaj and find and prosecute the other individuals — beyond the corporate board room — that allowed these crimes to happen.”

There are indications that the DFSA intends to follow that course in its ongoing investigation.  The DFSA 2018 Annual Report stated that the DFSA is focusing its attention “on senior management responsible for the conduct of the affairs of the relevant companies and funds, and persons who may have failed in their responsibilities to identify or report irregularities.”

That latter statement — coupled with Stirewalt’s remark that “[s]enior management rode roughshod over their compliance function and the misconduct and deceit were pervasive and persistent” — indicates that the DFSA will likely target senior business and compliance executives in the Abraaj companies for further enforcement. Because U.S. authorities already have custody of El-Wadood and are pursuing Naqvi’s and Vettivetpillai’s extraditions, Dubai may need to focus on Dave, Lakhani, and Siddique, as well as other business and compliance managers outside the United States who may have been complicit in the criminal activity.

In its editorial, the Gulf News characterized the penalties as “a solid first step in restoring confidence in the region’s investment sections.” Dubai authorities, however, will need to make their next steps in the investigation more timely and surefooted if they are to restore public confidence in their oversight of the financial sector.