Money Laundering Bulletin
Gulf states have responded to the global economic downturn, increasing international regulation and the “Arab Spring” by establishing new public authorities or extending existing mandates to curb financial crime. There is some notable progress, reports Paul Cochrane, but enforcement continues to lag.
When the recession hit the Gulf Cooperation Council (GCC) countries (Saudi Arabia, Bahrain, Qatar, the United Arab Emirates, Kuwait and Oman) in late 2008 it signalled the end of a decade of rampant economic growth. With governments closely tied to flailing real estate developers and other major sectoral players, accountability and auditing took on a renewed focus as economies contracted. At around the same time, regulators in the United States, Britain and elsewhere bolstered their focus on corruption abroad, and GCC states had to improve the regulatory environment to retain and attract foreign direct investment.
The ruling families dictated that oversight of public expenditure should no longer be left to trusted advisors in the royal circle, instead public watchdogs would be given a role in monitoring both the public and private sectors. Pressure in this direction increased as uprisings swept North Africa and the Middle East in 2011, accompanied by calls for an end to corruption and nepotism and demands for greater political freedom.
“Now more than ever governments are keen to tout anti-corruption campaigns to show that the state has the public interest in mind and is cleaning itself up,” said Nicholas Bortman, Head of Middle East Practice at the Dubai office of GPW, a corporate investigations and business intelligence firm. “But anti-corruption as a slogan is used for political leverage across the region. In Kuwait, virtually every candidate was campaigning (in the lead up to the February parliamentary elections) on a platform of anti-corruption.”
Existing public auditing bodies, like the UAE's State Audit Institution (SAI), set up five years after the country's independence in 1971, and Saudi Arabia's General Auditing Bureau (GAB), which was established in 1990, have started to raise their profile: earlier this year, SAI reported that some GBP171.5 million in misappropriated public funds, forgery, fraud and bribery cases were reported in 2010.
Saudi Arabia's GAB meanwhile came under fire from the Consultative Assembly, or Shura Council, for failing to do its job. The assembly highlighted alleged wastage of USD$29 billion in public money in 2010, while last year it noted that public projects worth USD$8.2 billion were not carried out in fiscal year 2008-2009 despite allocation of requisite funds to the relevant government departments. On the plus side, criticism of corruption is no longer taboo in the kingdom – a Saudi TV comedy show even hit out at the issue. In 2011, against the backdrop of toppling Arab leaders in North Africa, the King ordered the establishment of the National Authority for Combating Corruption in 2011.
The wealthy emirate of Qatar, too, is making progress. Buoyed by liquefied natural gas (LNG) revenues and new property development, in November last year it enacted the Administrative Control and Transparency Authority, which is chaired by the Deputy Prime Minister and accountable only to the Emir. The state aspires to be one of the 10 most transparent countries on earth.
In Bahrain, meanwhile, an anti-corruption drive spearheaded by the Crown Prince was set back by the 2011 uprising and its suppression by Saudi-led GCC troops. “The pendulum of influence of power has swung back to the prime minister's camp, the old guard that controls Bahraini businesses, and the Crown Prince's campaign has been sidelined. A reason for that is the (anti-corruption) campaign was in part a political strategy to wrest key institutions from the prime minister,” said Bortman.
The need to name and shame
Generally, the lack of track record makes it hard to assess how well many GCC watchdogs are working but observers believe the integrity initiatives to be more than public relations:
“I genuinely think it is more than lip-service, and we see that in the faces of the people we are training and the organizations we work with. Regulators also genuinely want to make progress, even if they are doing it at their own pace,” said Helen Langton, Managing Director of International Compliance Training Middle East (ICT Middle East), a provider of professional training in the field of compliance and anti-money laundering. “A lot still needs to be done further and it won't be sorted out overnight. While codes and regulations have been in place for years, it is only over the last two or three years that issues have merited more disclosure, transparency and cooperation between public and private bodies. I think the watchdogs' effectiveness is too early to call.”
Another source, who works in risk management and wished to remain anonymous, remarked that the authorities' success against financial mispractice have been uneven: “At the mid-level there's been more success as we've seen fairly senior people prosecuted or taken out of the system and make an example of without stepping in the political minefield of going for high level figures or those close to the royal family. There has been a level of success at that stratum of civil society. At the higher level we've not seen a lot of success as either foreigners take the brunt and get chucked out of the country, or figures are quietly moved aside to dampen public outcry or scrutiny.”
In the wake of the financial crisis in Dubai (which hit the trading emirates especially hard), the SAI opened cases against company executives and high level players, such as the former head of the Dubai International Financial Centre (DIFC), Dr Omar bin Sulaiman, who was arrested on charges of embezzling USD$14 million in public funds under the guise of “performance bonuses.” Bin Sulaiman was released in 2010 after paying the amount that was embezzled due to a amendment to UAE law in late 2009, which provides for prison terms of up to 20 years on conviction of misappropriated public funds unless the money is repaid.
Public sanction, however, is not common in the GCC. “In the UK, if a company is found to fail best practices, they get named, shamed and heavily fined to encourage better practice,” said a regional AML specialist, who did not want to be named. “But a lot of what goes on in the Middle East is not transparent. The regulator will have words (with a violator) or fine them, but does that get disclosed and disseminated widely? No.”
“Our aim over the next five years is to build our own in-house capacity for prevention and on the detection side, so fraud control frameworks, anti-corruption, an advisory role for the government and improved IT,” said Khalid Hamid, Executive Director of SAI. The institution also wants to expand beyond its current complement of 200, of whom 120 are in auditing and investigations. “We are going through an organizational programme to follow international auditing standards and we will get more staff in, so hopefully we'll grow,” Hamid said.