The Dubai Financial Services Authority (DFSA) has today imposed financial penalties of US$299.3 million (1 billion dirham) and US$15.276 million (56 million dirham) on Abraaj Investment Management Ltd and Abraaj Capital Ltd, respectively. This is its highest fine ever.

Interestingly, this must be one of the first times the DFSA has awarded its new maximum settlement discount of 30% - to Abraaj Capital, with no discount going to Abraaj Investment Management - as a reward for settling its claims at a very early stage. The old maximum was 20%.

The DFSA's investigation, which it began in January last year, was complex and spanned several jurisdictions. It found that Abraaj Investment Management, a Cayman-Island company now in provisional liquidation:

• carried out unauthorised financial services, including fund management, within and from the Dubai International Financial Centre or DIFC, which the DFSA regulates;
• 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 its 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 Abraaj Group collapsed last year, asking the Cayman courts for a provisional liquidation. It used to be the Middle East’s biggest buyout company, had an estimated US$14 billion in AuM and occupied two office floors in the DIFC's Gate Village. Its debt is estimated at US$1 billion and its collapse has had such a traumatic effect on the DFSA that its CEO, Bryan Stirewalt, said in his business plan for 2019/20 in March that his organisation would "be reviewing our risk-based approach to supervision to ensure that it properly captures some of the features of this particular case."

He went on to say that it "will influence our thinking on corporate governance, on the allocation of responsibilities among the senior management of firms, and on the best way to assign responsibility for compliance within regulated firms.”

Abraaj Investment Management: the details

The swingeing fine for the investment management operations is broken down into two parts: US$115.4 million in respect of its unauthorised activity (it had no DIFC commercial licence and lacked regulatory authorisation to  execute financial services in or from the DIFC) and US$183.9 million in respect of its misleading and deceptive conduct after 21 August 2014 (the date when Article 41B Regulatory Law 2004, which prohibits misconduct, came into force) in relation to the funds it managed. Both types of misconduct lasted up to 18 June 2018, the date when the provisional liquidators were appointed.

In respect of the first part of the fine, the DFSA says that the business performed financial service in and from the DIFC from 2007 onwards, managing a Collective Investment Fund as defined in GEN Rule 2.12.1. Alternatively, it managed assets in the manner described in GEN Rule 2.10.1. The general partners of the funds signed Investment Management Agreements or deeds which appointed Abraaj Investment Management to act as their manager.

These were Abraaj Growth Markets Health Fund; Abraaj Private Equity Fund IV; The Infrastructure and Growth Capital Fund; Abraaj AfricaFund III; Abraaj Global Growth Markets Aggregator Fund; Abraaj Global Growth Markets Fund; Abraaj Global Growth Markets Fund (B); Abraaj Global Growth Markets Strategic Fund; Abraaj Latin America Fund II; Abraaj Pakistan Fund I; Abraaj Turkey Fund I; Aureos Latin America Fund II; and Abraaj Private Equity Fund VI. Abraaj Investment Management's misuse of investors' money mainly occurred in the first two of these funds.

Funds delegated to Abraaj Capital Ltd (the only entity in the Abraaj Group incorporated in the DIFC and authorised or regulated by the DFSA) as recorded in financial statements for the years ending June 2012-June 2017 were: Abraaj Buyout Fund; Abraaj Buyout Fund II; Abraaj Real Estate Fund; and ASAS Fund. The DFSA does not consider that this was tantamount to Abraaj Capital acting as the manager of those funds.

Abraaj Investment Management is a wholly-owned subsidiary of Abraaj Holdings, another Cayman-Island exempted company. Both companies' registered offices were in the Cayman Islands, but these were mere paper offices; neither firm had any staff there, according to the decision notice. Everything was done in Dubai, as a member of the Abraaj Group compliance department admitted in an internal memo dated 10 November 2016.

Abraaj Investment Management directed the use of Abraaj Fund monies to meet Abraaj Investment Management's operating expenses and to meet cash shortfalls in other Abraaj Funds. AIML concealed the fact that it was doing so by providing misleading financial information to investors and making untrue statements about the reasons for delays in making investments and distributions. These cash shortfalls were due to its high investment costs and to operating expenses that far exceeded its fee revenue, as a result of Abraaj Holdings's habit of taking large stakes in its own funds, building up a "warehoused commitment," its working capital, lavish expenditure on the promotion of new funds, and interest and capital repayment on borrowings which, as we have said, reached $1 billion.

The investors or limited partners (silent partners) were oblivious. They were not informed that their monies were being transferred from the funds and used for Abraaj Group working capital purposes or to fill shortfalls in other Abraaj Funds. Rather, Abraaj Investment Management actively and deliberately misled them through quarterly reports, the Abraaj Funds’ financial statements, meetings of the Limited Partners' Advisory Committee, and further correspondence, to ensure that they did not discover the transfers to and from the Abraaj Investment Management bank accounts.

One has to wonder how, over a period of almost 11 years, Abraaj Investment Management performed financial services in and from the DIFC without authorisation under the DFSA's nose. It exercised control over its subsidiary, Abraaj Capital Ltd (the only entity in the group that the DFSA regulated), to make it look as though all relevant activities were being carried out by an authorised firm. The firm has the right to appeal to the Financial Markets Tribunal.

Abraaj Capital Ltd

Abraaj Capital has agreed with the DFSA not to contest the regulator’s findings on the relevant facts and matters.

Abraaj Capital contravened the following legislation administered by the DFSA.

• Since 9 December 2012, it failed to maintain adequate capital resources at all times, breaking PIB (Prudential – Investment, Insurance Intermediation and Banking Module) Rule 3.2.2 and PIB sections 3.5 and 3.6.
• It provided false information to the DFSA relating to its capital resources and the activities of its employees in quarterly and annual PIB returns.
• It knowingly gave its auditor false information relating to its capital  resources and knowingly failed to hand over information relating to transactions with its parent, Abraaj Investment Management Ltd and that company’s parent Abraaj Holdings, contrary to Articles 103(3) and (before 21 August 2014) 103(1)(b) Regulatory Law.
• It prepared financial statements that contained information about its financial position which failed to present a true and fair representation, as required by International Financial Reporting Standards (IFRS), contrary to GEN Rule 8.2.2.
• It was knowingly concerned in the activities of its parent, Abraaj Investment Management Ltd, in performing financial services in the DIFC, managing a Collective Investment Fund and/or assets, when Abraaj Investment Management was not regulated, contrary to Article 4(1) Regulatory Law.