For years the Gulf has attracted international business attention as an area where fortunes could be made. For the most part, they were fortunes made by bankers, businessmen and entrepreneurs acting on the right side of the law. However these days a less salubrious faction has infiltrated the region’s business community, as Julian Taylor reports from Dubai.

Legal loopholes have also made the UAE a target for swindlers

The growing number of commercial disputes and bad cheque incidents prompted Dubai’s police department to propose the licensing of specialised collection companies to handle debts arising from dud cheque transactions.

At present, creditors have no alternative but to seek police help in forcing debtors to honour bad cheques. But more often than not, things become increasingly complicated; financial disputes taken to court can take a long time to reach a settlement and, in most cases, payment then takes a long time to come through.

Legal loopholes have also made the UAE a target for swindlers. In fact, the number of fraud cases is growing each year, which, in turn, is said to be affecting the economy, trade and tourism. According to local press reports, 33 cases, involving 66 swindlers, were reported last year.

The conmen use a variety of methods to lure their prey. Some pretend they are leading businessmen prepared to share their ‘insider’ knowledge. Others claim to use black magic and pretend to communicate with alien forces.

Recently the counterfeiting of banknotes has proved an increasingly popular scam.

Such crimes have been rising since 1995, when six such cases were reported. In 1998, some 29 cases were reported, involving 61 swindlers.

Last September, Interpol was called in to investigate a number of alleged extortion rackets, which involved kidnappings. Local businessmen are believed to have been lured to a meeting place, where they were then captured and held for ransom. No precise details of the crimes were released but investigations are reported to have led Interpol officials to destinations in Africa.

Dubai police foiled an attempt to flood Bahrain with fake dinar notes

A warning to regional businessmen from the South African authorities was issued to governments and businesses through embassies, foreign ministries, and chambers of commerce.

At the end of last year, Dubai police foiled an attempt to flood Bahrain with fake dinar notes when they arrested a man, rumoured to be a member of Israel’s Mossad secret service, at Dubai Airport. The man, whose identity has not been revealed, was carrying 80 million forged Bahraini dinars (worth nearly $220 million) when he was arrested.

The plot to flood Bahrain with fake dinars, was believed to be part of an attempt by Mossad to undermine the Gulf Arab economies and force the UAE, Saudi Arabia and Kuwait to establish economic or diplomatic ties with the Jewish state, according to a statement issued by Dubai police.

In another incident, two men were sentenced to a year in a UAE prison followed by deportation for cheating a Gulf national out of $140,000. The victim told Dubai police he had been contacted by the two men, who claimed to have $12 million in badly soiled banknotes. They told him they needed $140,000 to buy a specific chemical liquid which would remove the stains, and that they would give him 12 per cent of the money if he gave them a loan.

The victim came to the UAE and met the two men in a hotel where they produced a big black bag that supposedly contained the millions. The men pulled out $800 in badly stained banknotes, which they proceeded to clean with an unspecified liquid. They then went to an exchange and changed the banknotes into dirhams.

The victim was convinced, and gave the men $140,000. They left the black bag along with a contract with the Gulf national, and went to buy the liquid. The next day they returned with a bottle and said it would have to be kept in the refrigerator for three days before it could be used. They took another $2,000 from the victim for hotel costs before leaving, never to return.

Suspecting he had been cheated, the victim opened the bag to find it contained only sheets of white paper.

For UAE banks, 1999 was a turbulent year, during which difficult lessons were learned

Such scams and other fraudulent activities, along with the theft of public funds, the accumulation of illicit profits and power, and an increase in the bureaucratic red tape which allows these problems to flourish, are constantly being reported in the local press. Even irregularities by ministries and other state institutions are being uncovered, with offences involving serious embezzlement, generating profits through illegal means, wasting products through long storage, and the payment of salaries to dead civil servants at a cost of billions of dollars. They also include some juicy tales of corruption and ineptitude.

Banking Fraud

For UAE banks, 1999 was a turbulent year, during which difficult lessons were learned by the financial community. A fraud amounting to nearly $360 million by Indian expatriate businessman Madhav Patel of the Solo Industries Group forced authorities to issue stringent directives on the corporate restructuring of locally registered banks, insist on international accounting standards by year-end, announce the imminent enforcement of a new banking law, propose an increase in bank capital and announce a steep hike in cash reserve ratios, beginning this year.

Patel, who fled the UAE with outstanding debts, had an unblemished relationship with banks for over 15 years. He then managed to glean nearly $237 million in loans plus an unspecified amount in letters of credit and guarantees from 14 banks, and flee.

Patel left the UAE in April 1999 when his post-dated cheques began bouncing. On 4 May, the Central Bank declared him an absconder. ‘The Patel Group has been exposed to losses and the Indian partner has fled the country. All affected banks have necessary reserves and provisions to cover the net loss after liquidating assets and guarantees available with banks,’ the Central Bank said in a statement.

For the 20 banks in the Gulf involved with the metal trader, Patel’s disappearance was no laughing matter. In the UAE alone, more than a dozen institutions had extended loans worth $131 million to his companies. According to local reports, add-on facilities such as letters of credit (LCs), letters of guarantee and the like could see the banks facing potential losses of more than $215 million.

Patel was no fly-by-night trader. For the previous 20 years, he had built up what appeared to be a highly profitable metal trading empire in the UAE through Solo Industries, the Zeeba Metal Company and the Suminco Metal Trading Establishment. Business was conducted across Europe and Asia in a range of alloys including aluminium, lead and some precious metals. Although low profile, his stock was high.

Despite the 1997 slump in commodity prices and reports filtering out of India that his father’s business ? Hamco Mining & Smelting, previously known as Hindustan Alloys Manufacturing Company ? was facing difficulties, Patel’s reputation remained unblemished. Banks continued to offer him credit facilities and loans. Even as late as early 1999, the Dubai branch of one international bank was celebrating after having reached an agreement to double its credit line to Solo.

In Patel’s case, banks have been the victims of a massive fraud. The central allegation is that much of Patel’s trading activities were undertaken only on paper. Some LCs are alleged to have been raised against goods never shipped. Others were reportedly established against high-value metals, when the actual content of containers was scrap. One industry estimate concluded that of 3,000 recent transactions, only 19 were bona fide.

The Patel case will have long-term implications on the UAE banking sector. According to analysts, banks now accept the need for frank, regular dialogue between them. If they had shared information before May 1999, the warning signs about Mr Patel’s activities would have come to light much earlier.

The Patel affair was not the first financial scandal to rock the UAE. A year earlier, Dubai Islamic Bank had to be rescued after the discovery of a $200 million hole in its accounts.

Other stories are perhaps less high-profile, but equally damaging. In January, one of the federal appeals courts in the UAE upheld a one-year jail term imposed on an unnamed local bank official after the bank failed to pay $90,000 compensation due to a client involved in a loan dispute. The court handed down the sentence after the unnamed bank had falsely accused a UAE national of failing to repay several loans.

The UAE national had taken the Dh80,000 (about $22,000) loan, but had paid it off with the interest. However, the bank told him that he would have to continue making payments because several loans he had obtained earlier had not been settled. The man was shocked when he was shown a document bearing his signature for a Dh156,000 (about $42,700) loan. He paid the bank Dh10,400 each month until he had paid four times the amount of his original loan.

When he discovered that the bank was cheating him and that his signature had been forged, he sued and hired an auditor. When the auditor asked the bank to provide him with the UAE national’s loan documents, the director refused. But when the auditor obtained the documents from the bank’s head office they showed that although the national had taken more than one personal loan he had paid back all of them.

In neighbouring Saudi Arabia, the branch manager of a Saudi bank was arrested for the embezzlement of SR13 million (approximately $3.46 million) last September. Bank staff discovered that a large sum of money was missing from the branch’s accounts. It is alleged that the manager disappeared following the discovery. Subsequent investigations, led to his capture and arrest.

The same bank was also searching for an employee alleged to have taken advantage of his post as financial supervisor. The supervisor, an Egyptian, used the manager’s computer codes to open several bogus accounts. Before leaving on vacation to Egypt, he withdrew a large amount of cash using the accounts’ ATM cards. The bank later cancelled the cards and filed a petition against him with the Egyptian authorities; it also initiated legal proceedings against two Saudi staff members in connection with the fraud.

Because of these and other incidents, calls for greater government action to regulate the GCC banking sector have been made. As a result, a bankruptcy law is being drafted in the UAE.

In Bahrain, computer credit checks on bank customers could soon be introduced

Omani banks, also the target of organised crime, are also cooperating to put an end to fraud. In December, the banks announced that they were considering setting up a joint commission to look into increasing attempts at fraud and embezzlement. The aim of establishing such a commission would be to bring top bank officials together to combat criminal acts, which are on the rise within local banks.

In Bahrain, computer credit checks on bank customers could soon be introduced, making the island the second GCC state to do so. A credit reference bureau for personal finance has been found to be feasible, in principle. Banks are now looking at ways to establish such a bureau.

Bad Debt Problem

According to experts, the GCC’s traditional reliance on expatriates to start and operate businesses is at the root of the bad debt problem. ‘In most Gulf states, all that is required from an expatriate is that he or she forms a limited liability company with a national, borrows substantial sums of money to finance the undertaking and, when the business turns sour and the heat is on from creditors and unpaid suppliers, the expatriate simply runs away,’ said one local magazine. Since expatriates cannot own freehold property in the GCC, loans cannot be secured against fixed assets such as buildings. That leaves moveables, such as business equipment and vehicles, yet these are usually worth only a fraction of the amount borrowed. A personal guarantee from a national partner in the enterprise is often regarded as sufficient collateral.

According to the Dubai-based publication Gulf Business, international accountancy firms are preparing to lobby GCC governments for the introduction of internationally recognised credit-scoring standards to reduce the likelihood of default.

Earlier this year, an Indian financier disappeared leaving Gulf investors broke. About 4,000 investors, including hundreds of Gulf-based non-resident Indians, have been duped out of Rupees (Rs)3 billion (about $82 million) by a businessman based in Hyderabad, India. Rup Chand Pardesi of the Pardesi Group escaped with more than Rupees (Rs)3 billion which had been invested in his company, much of it by widows and retirees recently returned from the Gulf.

Pardesi lured investors by offering a 24 per cent monthly return. Those who were willing to lock themselves into a fixed three-year investment were offered a 100 per cent return. Dividends were actually paid for many years until the number of investors exceeded 4,000 and the amount invested hit Rs3 billion.

Credit card fraud

Laws preventing credit card fraud in the GCC are also inadequate.

In January, a man was arrested in the UAE for obtaining 32 credit cards from several local banks under false pretences. He used the credit cards to go on a Dh280,000 (nearly $77,000) spending spree.

In Saudi Arabia, studies have shown that the total loss to cardholders ran into SR10 million (nearly $2.67 million) during 1999. Customers had their money stolen either directly by the theft of their cards or by cheating at the point of sale. Increasing reports of fraud, both domestic and internationally, have been received with enormous concern by banks.

Tourists often fall victim to credit card fraud at restaurants and hotels. The fraud is only discovered once statements are examined when they return home.

More than one million cards have been issued to customers in the kingdom. The Saudi American Bank has issued more than 250,000 Mastercards and Visa cards, the Saudi British Bank, 100,000. Al-Rajhi Banking & Investment Corp has issued 30,000.

Bank authorities recently warned about a new method of cheating. Duplicate credit cards, known as ‘white plastic’, are used to withdraw large amounts of cash at the expense of unsuspecting cardholders. Two such cases have been reported in Jeddah and the Eastern Province. The white plastic cards contain magnetic tape on which necessary information about any customer’s genuine card can be copied at the point of sale.

Money Laundering

Last April, the 28-member Financial Action Task Force (FATF) on money laundering announced that some 31 countries were under investigation for possible inclusion on the first official ‘hit list’ of global money-laundering centres. The GCC states, which are FATF members, have proved vulnerable to laundering.

In its 1998 report, the US State Department described the UAE as being of ‘primary concern’, and in the highest of three categories in its assessment of states most vulnerable to laundering. Because of its proximity to key smuggling routes, large expatriate population, economic success, active remittance system, stable currency and thriving banking community, the UAE has for some time now attracted money launderers, mainly from the former Soviet Union, India and Pakistan.

Millions of dollars in laundered cash have been linked to criminal activities in the UAE. Among the most serious of these activities, and one which is causing increasing concern, is international drug trafficking.

To some, fraud is the price that has to be paid for having a relatively open economy

The UAE’s re-export business, worth about $10 billion a year, is also being abused by launderers. Another Gulf state, Bahrain, has also been labelled ‘of concern’ in the US report. As the Gulf’s main financial and banking hub, Bahrain is trying to keep money laundering out of its financial markets and is in the process of revising its existing legislation to bring the various aspects of the fight against money laundering under a single law. Once enacted, the new law would make money laundering a crime and oblige banks and financial institutions to report any suspicious transactions.

To some, fraud is the price that has to be paid for having a relatively open economy. However, the problem in the GCC is that the region provides an opportunity to make or lose money on a monumental scale. The argument in some quarters is that the only method of stamping out fraud would entail such severe clamp-downs that the legislation involved would stifle enterprise. This, they argue, would be unthinkable, especially when the GCC economy has so richly benefited from the hands-off approach. Others say this is a simplistic approach; laissez faire is one thing, but wantonly turning a blind eye to fraud, corruption and deception would be to strike at the very foundations of the region’s banking and business communities and an action which, ultimately, will only damage its long-term commercial future.

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