Showing posts with label Financial Crimes. Show all posts
Showing posts with label Financial Crimes. Show all posts

Friday 26 March 2021

Wirecard: More Missing Money - This Time Real Money

Recommended Not Only for Its Fine Weather
But Also for Its Banking Facilities and "Discretion"

The FT reported 24 March that sources told them that Oliver Bellenhaus, late of WireCard and Al Alam, informed investigators that in 2011 he and Jan Marsalek, Wirecard’s former CF), began a scheme to shift money out of WC into “an array” of offshore accounts of shell companies in Hong Kong and the British Virgin Islands. Said account opened in 2010.

As I read this account, I suspected that many readers would think that this is where WC’s missing Euros 1.9 billion had gone.

I don’t think that this is the case.

Why?

Because it’s hard to steal what doesn’t exist.

If press reports are correct and WC was loss making, then the Euros 1.9 billion never existed. And couldn’t therefore be stolen.

These “shifted” funds would have had to be derived from other sources. And while no doubt significant, nothing close to the former amount.

Earlier I posted a detailed explanation why fiddling with the income statement requires fiddling dollar for dollar with the balance sheet (and vice versa) in my earlier post here.

Let’s look at WC’s financials from FY 2004 though 3Q19 to see if there was evidence of income above the imaginary Euros 1.9 billion. That may have produced actual cash to be stolen.

Why that period?

Prior to 2004 Wirecard was InfoGenie, a rather small call center with negative retained earnings.

There wasn’t much to fiddle with before 2004.

As the table below shows, during that period WC reported Euros 1.919 billion in net income, paid dividends of Euros 165 million, and had other adjustments to retained earnings of Euro 15 million. The dividends were likely funded via increased liabilities rather than cash flow from operations.


So, if there were transfers of “millions” as Mr. Bellenhaus is reported to have said, where did they come from?

Two likely possibilities.

Overstatement of  Expenses/Costs

Either those recognized through the income statement (expenses) or capitalized (costs).

For the former, professional services are a frequent favorite as they don’t generate a hard asset. Or business acquisition/referral fees, processing fees. 

Perhaps, imaginary fees on the imaginary transactions with the difference here is that the latter were paid in cash.

A particularly fertile ground for the latter might be the creation of intangible assets.

What is the proof of the cost of new software, other than the bill for development, particularly if outside vendors were contracted?

In its FY 2018 annual report, WC discloses it spent some Euros 86 million in FY 2018 and Euros 98 million in FY 2017 in cash for “investments in intangible assets”.

Over the period 2016 through 2017, WC’s internally created and other intangible assets increased from Euros 181 million to Euros 252 million.

Could some of these be the result of shifting funds? We don’t know.

Overpayment for Acquisitions

Acquisitions by their nature are “chunky” unless there are periodic payments, e.g., if the newly acquired company performs above a benchmark, the sellers may be entitled to a payment reflecting the greater value of the company they sold. That of course will depend on the terms of sale.

Another possibility would be fees to those who sourced acquisitions for WC, provided WC financial advice, performed due diligence, etc. This presumes such charges were capitalized as part of the cost of the acquisition rather than expensed.

Expense fiddling would a better “cover” for frequently recurring transfers than acquisitions which tend to be lumpy, particularly if the same accounts were used again and again.

It’s not clear from the FT article whether the same accounts were used over and over. 

Does “array of accounts” mean a single group of accounts created in 2010? 

Or could it mean repeated creation of new accounts?

Acquisitions would allow for larger payments in a single transaction. But it would seem that these would be handled by using a different (new) account for each acquisition rather than the same accounts. 

It would (should?) look a bit suspicious to auditors –at least I hope so—if acquisitions from different sellers and in different part of the world went to the same account.

So, if I’ve read the FT article correctly, my best guess would be expense fiddling.

With Mr. Bellenhaus’ co-operation and access to WC’s accounting records, investigators should be able to calculate the amount “shifted” and what transactions were used for cover.

Presumably, the stolen amounts were used to fund the costs associated with running the income fraud as well as to compensate the key players (like Mr. Bellenhaus) for their role.

Saturday 30 July 2016

1MDB Scandal: The Curious Case of PetroSaudi International

If You Were Owed $700 Million, What Would You Do?

Much has been written following the US Department of Justice’s 20 July 2016 filing of (at least) sixteen complaints to seize assets alleged to have been purchased with the proceeds of an alleged misappropriation of $3.5 billion from 1MDB, Malaysia’s state-owned strategic investment and development fund.
List of Cases:  CV 16-05362; CV 16-05363; CV 16-05364; CV 16-05366; CV 16-05367; CV 16-05368; CV 16-05369; CV 16-05370; CV 16-05371; CV 16-05374; CV 16-05375; CV 16-05376; CV 16-05377; CV 16-05378; CV 16-05379; CV 16-05380.
Not one to be left behind, I’ll be contributing my own thoughts.
Given the focus of this blog, my initial posts will deal with GCC entities that were involved in transactions with 1MDB and thus may have wittingly or unwittingly participated in the misappropriation.
Unless otherwise noted, the primary source document I’m using is the DOJ complaint against Red Granite, producers of The Wolf of Wall Street (the “Red Granite Complaint” or “Complaint”).  I will cite sources paragraph numbers rather than page numbers as “sourcing” for various points.
Before I begin one very important note.
The US DoJ has filed complaints.  The parties mentioned in the complaints have not been convicted of any crime, nor have they had a chance to neither respond to the charges made against them, nor have their responses and the original complaints tested by the judicial process.  At this stage all that can be said is that allegations have been made.  Please bear that in mind as you read this post.
Let’s start with PetroSaudi International (“PSI”), a privately owned Saudi company founded in 2005, its CEO and founder and a Saudi royal prince described as the “PSI Co-Founder” in the Complaint.  While their names were not disclosed in the Red Granite Complaint, enough information was supplied so that they could be separately identified. 
  • PSI’s website identifies Mr. Tarek Essam Ahmed Obaid as CEO and founder. 
  • Press reports identify Amir Turki Bin Abdallah Al Saud as the co-founder of PSI.  But note he is not mentioned on PSI’s website.  The second link contains copies of documents from a variety of sources that purport to confirm Amir Turki’s role in the company.
The Complaint alleges that the misappropriation of funds took place in three phases: the Good Star Phase ($1 billion); the Aabar BVI Phase ($1.367 billion) and the Tanore Phase ($1.2 billion).
While I want to focus on what appears to be curious behavior by PSI and its principals in this post, let’s start with some details about the alleged misappropriation to provide context.
The Good Star Phase - Overview
Para #8 - In the Good Star Phase (2009-2011) more than $1 billion was illegally transferred to an account in Switzerland belong to Good Star Limited, which is alleged to have been under the control of LOW Taek Jho instead of to accounts of PSI or the 1MDB/PSI JV.  The transfers were in two tranches: $700 million (2009) and then $330 million (2011) as detailed below.  
First Tranche - $770 Million
Paras #40-112 contain a detailed analysis of the Good Star Phase including the alleged diversion of funds and use of the funds for asset acquisitions and payments to parties involved.
Para #60 – On 30 September 2009 1MDB issued two payment orders to Deutsche Bank Malaysia to pay: (a) $700 million to RBS Coutts Switzerland for the account of Good Star (the alleged fraud) and (b) $300 million to JP Morgan Suisse for the account of 1MDB/PSI JV (the “JV”).  This latter payment appears to be in line with the JV agreement and so is not described as fraudulent in the Complaint.  Note that 1MDB’s instructions did not specify the names of the beneficiary accounts only their account numbers.   
Paras #60-77 detail the compliance questions that Deutsche raised with 1MDB and Malaysia’s central bank and those RBS Coutts raised with Deutsche.  Both banks request the names of the beneficiaries of the payments not just account numbers as identifiers.  As per standard payment protocols, any compliance questions that Coutts had would have to be routed to/through Deutsche, not directly to 1MDB.  1MDB advises the names and that Good Star is owned by PSI.
Paras #81-90 detail questions raised by 1MDB’s Board about the $700 million transaction’s conformity with the JVA, including an unacted upon request that the $700 million be returned and paid “through the originally agreed channel” (Para #85).  This request was apparently turned aside by a 1MDB officer’s statement that funds had been paid to PSI.
Second Tranche - $330 Million
Para#94 – Between 20 May 2011 through 25 October 2011, 1MDB made five payments totaling $330 million to Good Star’s account for drawdowns by the 1MDB/PSI JV under a loan facility provided by 1MDB to the JV in June 2010 (Para #92).  A 1MDB official told 1MDB’s board that the JV had instructed that the payments go to PSI.  Once again the payments went to Good Star.
Curious Behavior by PSI and the PSI Co-Founder
Without prejudging their eventual responses to the Complaint, AA found two incidents of “curious” behavior by PSI and the PSI Co-Founder.
An apparent lack of follow-up on the $700 million shortfall initial JV payment due in September 2009.
Two payments made from the PSI Co-Founder’s account to a high ranking Malaysian official’s account at a Malaysian bank.
Apparent Lack of PSI Follow-Up on the $700 Million JV Payment
Para #52 – As per the JV Agreement 1MDB was to contribute $1 billion to the JV.  As per the Complaint the JV only received $300 million.  I didn’t see anything in the Complaint that PSI, its CEO, or any other PSI official ever contacted 1MDB about the shortfall.  AA finds it rather remarkable (hence this remark) that PSI did not press for the funds, perhaps contacting 1MDB’s Board or as a last resort going public.   A seventy percent shortfall and no apparent complaint.  AA will be mighty interested to read PSI’s response to learn what he’s missing.
Para #96 – In May 2011, the CEO of PSI requested that 1MDB inform Coutts that the first two payments (totaling $95 million) made to Good Star earlier that month were for Good Star and not PSI.  However did the CEO learn about these transfers to an account over which he had no control or ownership?  Even more remarkable at this juncture is that still short a “cool” $700 million from the initial JV payment, he apparently did not ask about the missing funds.  Or perhaps he did. Could it be that the DoJ didn’t consider that relevant to its case?  That seems unlikely because that would provide the DoJ another argument that the $700 million was “misappropriated”.
For the sake of completeness there is perhaps another reason why there was no complaint. Alleged internal PSI documents that were leaked/sold to a Malaysian website opposed to the current Malaysian Prime Minister purport to show the project had zero value. 
See the section below about blackmail.
Alleged Payments from PSI Co-Founder to Private Bank Customer in Malaysia
Para #101 on 18 February 2011 Good Star transferred $12.5 million to the account of the PSI Co-Founder at Riyad Bank.  On 23 February 2011, the Co-Founder’s account transferred $10 million to a private banking account at AM Bank Malaysia for Malaysian Official 1.  On 10 June 2011 Good Star transferred $12 million to the PSI Co-Founder’s same account.  On 13 June 2011 that account made a similar transfer to AM Bank Malaysia.  This formulation is meant to cover the possibility that another party was operating the account under a POA and that the PSI Co-Founder was unaware of and did not approve the transfers.
Para #102 the holder of the account at AM Bank is identified by the DoJ as Malaysian Official 1 who the Complaint alleges was the recipient of a $681 million transfer from Saudi Arabia in 2013.   That would appear to identify the holder as the current Prime Minister of Malaysia.  The Wall Street Journal
The reason for the payments from the PSI Co-Founder’s account is not specified in the Complaint.  Perhaps they were gifts as Malaysia’s Attorney General said was the case with the 2013 $681 million. 
Saudi royals would appear to be quite a generous lot.  Perhaps, this as well explains the apparent lack of follow-up by PSI on the “missing” $700 million JV payment.  AA definitely should cultivate more Saudi royal clients, though it would be just my luck that their innate generosity has been tempered by recent and no doubt unwarranted accusations of unethical behavior.
Perhaps like the famous Devonia transaction, the Saudi shaykh bought something from the holder of the AM private bank account and sold it to Good Star.  Shares in Sibneft?
For the sake of considering all the possibilities and not because AA has a suspicious mind, perhaps, it was a kickback of some sort.  Seems a rather meager commission on such a large amount.   Also it seems rather strange to one’s kickback payment transferred to an account in one’s own country easily identifiable.
If indeed it was a kickback, then the roughly 20% “commission” for making the payment is in line with Devonia precedent for the use of “shaykhly” accounts. 
Not Relevant But Too “Good” to Omit:  The Independent article claims that at a meeting among Shaykh Sultan, Mr Abramovich and Mr Berezovsky a bank compliance officer asked the good shaykh for a copy of his passport and proof of residence, the shaykh handed him some UAE dirhams and said “my face in on these”.  The article notes a hearty burst of laughter by the participants but is silent on whether other KYC documents were produced.    
Blackmail by Former PSI Employee
Just about one year ago (17 July to be precise), Singapore’s Straits Times reported on the apprehension of a former PSI employee who was arrested by the Royal Thai Police and charged with attempted blackmail of his former employer and the sale of PSI documents to opposition figures in Malaysia. Apparently the individual had secured an earlier payment from PSI.  The payments don’t necessarily prove any wrongdoing by PSI. The earlier payment may have been made for other reasons, e.g., to avoid a scandal that would tarnish one’s name and business opportunities even if it’s not true.
These would appear to be some of the alleged PSI documents sold by the former PSI employee.  Note the SR is part of the opposition in Malaysia.

Thursday 28 October 2010

Damas - New AED 614 Million Agreement with Abdullah Brothers


Damas announced on Nasdaq Dubai that it had revised its agreement with the Abdullah Brothers regarding the amounts they owe to Damas.

One key item is the fixing of the price of the 1,840,250 grams of gold the Brothers stole from the Company at AED 256 million.

Presumably, this has been set so that Damas is not disadvantaged.

Setting the amount owed is a key step.  Collecting it may prove a bit more difficult.

Monday 18 October 2010

Saudi Capital Markets Authority Levies Fines and Penalties in Excess of SAR102 Million

On 12 October the Saudi Capital Markets Authority levied another set of record fines and penalties but not as high as its all time record of SAR278 million last January.  If you look closely, you'll see that many of those cited today were also involved in that fine.

The CMA levied SAR800,000 in fines and SAR99,434,098.10 in penalties (disgorgement of illegal gains) against seven individuals (two of whom were apparently not involved in illegal activity but received gains from that activity).  The fines and penalties concern trading in the shares of Al Baha Investment and Development Company between 23 July 2006 and 27 September 2006 as follows:

A.  Mr. Jarrallah Bin Muhammad Bin Nassir Al-Jarrallah
  1. Return of SAR28,923,826.57 in illegal trading earnings on the trading.
  2. A fine of SAR 300,000.
  3. Prohibition from purchasing traded shares for seven years.
  4. Prohibition from working in a securities firm for seven years.
  5. Prohibition from acting as a broker, portfolio manager or investment advisor for seven years.

B.  Messrs. Sa'id Bin Muhammad Bin Nassir Al-Jarrallah, Fa'iz Bin Salih Bin Abdullah Bin Mahfouz, Nabil Bin Mu'id Bin Yahya AlQahtani
  1. Sai'd to return illegal trading gains of SAR2,119,935.00
  2. Nabil to return illegal trading gains of SAR24,896,213.23
  3. Each of the three of them fined SAR100,000.
  4. Prohibition from purchasing traded shares for five years.
  5. Prohibition from working in a securities firm for five years.
  6. Prohibition from acting as a broker, portfolio manager or investment advisor for five years.
C.  Mr. Abdulrahman Bin Abdulmuhsin Bin Sulayman AlMoajil
  1. A fine of SAR200,000.
  2. Prohibition from purchasing traded shares for five years.
  3. Prohibition from working in a securities firm for five years.
  4. Prohibition from acting as a broker, portfolio manager or investment advisor for seven years.
D.  Mr. Muhammad Bin Nasser Bin Jarallah Al-Jarallah
  1. Return of illegal trading gains in his account of SAR38,293,835 caused by actions of Jarallah, Said and Fa'iz.   No fine as he apparently was not involved in the activities just a beneficiary.
E.  Mr. Nasser Bin Muhammad Bin Nasser Al-Jarallah
  1. Return of illegal trading gains in his account of SAR5,200,288.30.  Like Mr. Muhammad immediately above, a fine was not levied against him, presumably because he was not involved in the illegal activities.
I'm guessing our friends above just didn't trade two stocks back in 2006 so we may be seeing more enforcement actions from the Saudi CMA.

    Wednesday 29 September 2010

    AlGosaibi v Maan AlSanea - New Venue The US Congress


    If you've been following the continuing dispute between AHAB and Mr. Al Sanea, you know from reading Frank Kane over at The National that the latest "round" is scheduled for a new venue - the US Congress. As a side comment, if you're not reading The National already, you should.

    As per the schedule, the hearing was held on September 28th at 4:00PM.  The prepared testimony of the four witnesses can be found here at the US House of Representatives' Financial Services Committee.  The listed topic is terrorism finance.

    Among those giving testimony was Eric L. Lewis, Esquire, of the Washington DC office of Bachman Robinson & Lewis.  As you'll see from the attached biography, he has an extensive background in investigating financial crimes.

    His prepared remarks are here.

    Interestingly in his description of his experience and current assignments (page 1 paragraph 2), he does not mention his current assignment and that of his firm for AHAB - though it is clear later in the testimony that there is this link.  I'm confident this was an oversight and was corrected when he read his statement this afternoon.

    His comments do not deal with terrorism per se, but with what he feels are serious defects in the provision of correspondent bank accounts which terrorists might exploit.  I am sure that just by perhaps a fortuitous coincidence his remarks might also help the case of his client, AHAB, in their legal battle with Mr. Al Sanea.

    In that regard he focuses on what he alleges to be criminal activity by Mr. Al Sanea.  As always, let's stop to note that to this day Mr. Al Sanea continues to deny any improper or illegal behavior.

    His argument is that there were repeated critical failures of know-your-customer due diligence ("KYC") by the American Bank that opened  the main US Dollar clearing account for AHAB's Money Exchange Division in NYC.   He notes that the Money Exchange advised the American Bank that it anticipated a volume of US$15 billion per year through its account.  As Mr. Lewis notes, this amount was out of proportion to the business conducted by the Money Exchange - which he places at US$60 million per year.  He also comments that the total of remittances from the Kingdom were about US$21 billion in 2008.  Therefore, it would be unrealistic for the bank to make the assumption that AHAB Money Exchange had the preponderant a share of the remittances business in the Kingdom as it operated from a single office in the Eastern Province.

    Mr. Lewis identifies four red flags which he asserts were missed by the American Bank: (a) a high risk region and country (b) a money remittance business which accepts business from "walk in" customers where he asserts the Money Exchange's KYC would be non existent or weak, (c) massive transactional volume, and (d) a transactional volume vastly disproportionate to the customer's ostensible business.

    As a side comment, I'd note that these requirements reflect the due diligence standards established by the FATF in its 40 Recommendations.  Recommendations 5, 7 and 11 are the relevant ones.

    The Financial Action Task Force is an inter-governmental organization set up  by to combat money laundering and the financing terrorism.  It does not have any legal enforcement powers.  Rather it sets global standards, monitors individual countries' compliance therewith, including naming and shaming non compliant jurisdictions (which triggers additional AML procedures under the 40 Recommendations).  It also serves as a clearing house for the exchange of expertise and information on money laundering. The FATF has also issued Nine Special Recommendations on Terrorism Finance.

    Summing up what he sees as a failure of due diligence, he states (page 3 paragraph 4):
    "Yet, in this case, our investigation revealed no evidence of any significant due diligence or AML investigation by [American Bank] of the Money Exchange in connection with the opening of the [American Bank] account in 1998, or really at any time after the opening of the account - even after the imposition of much more strict anti-money laundering  and know-your-customer requirements after the tragedy of 9/11."
    On page 4 paragraph 2 he levies another serious charge:
    "Literally at the same time it was under investigation and was negotiating this settlement with the DA’s office, [American Bank] was in communication with the Money Exchange, which was running about a $20 billion  annual volume at that time. [American Bank] asked the company to change its name to something without the words “Money Exchange,” which might be a red flag to [American Bank's] auditors or compliance officials. [American Bank] also asked the Money Exchange to cease engaging in walk-in money remittance business. But this aspect appears to have been perfunctory and not to have been followed up. The Money Exchange simply proffered a new name not suggestive of money remittance services—it went from “Ahmad Hamad Algosaibi Brothers Money Exchange, Commission and Investment” to “Ahmad Hamad Algosaibi Brothers Finance, Development and Investment.” It went right on doing walk-in remittance business. Its enormous movement of funds through its account at [American Bank] remained unchanged. The truth is that if [American Bank] had done its due diligence, it would have been immediately obvious that the throughput in the account actually had nothing to do with any money remittance business. And even the $15 billion a year predicted transaction volume was substantially exceeded. So [American Bank] failed to ask why a money exchange would need to process $15 billion per year and went it started to process in excess of $20 billion or $30 billion per  year, it failed to ask why there was an additional $5 or $15 billion per year in transactions. On a per  transaction fee basis, this was all good, no-risk business for [American Bank].”
    As we look at the issue of the American Bank's requirement that the Money Exchange change its name, the major pieces of public evidence in that regard - of which I am aware - are from the submission by AHAB's counsel  (by an attorney from Mr. Lewis' firm) in NY Supreme Court Case 601650/2009 - Mashreqbank v AlGosaibi.  These are exhibits #16 (Document #93) and #19 (Document #96).  You can read these for yourself by going to the NY Supreme Court's website at http://iapps.courts.state.ny.us/webcivil/FCASMain.  Perform an Index Search using the CRN 601650/2009 and follow through until you find a tab for e-filed documents (at the lower right hand of a screen).

    Exhibit #19 (pages 7-8) contains a memo dated 12 June 2006 from Mr. Mark Hayley to Mr. Al Sanea relaying his account (I haven't seen any document which purports to relay the American Bank's account) of a meeting with the American Bank:
    "The Money Exchange must not act or be perceived to act as a money service business.  Accordingly, no walk in business can be accepted, even if the customer is well known to us (e.g., Saad, AlGosaibi and Aramco staff).

    Instead we must have a full account relationship with every customer requiring to transfer money and every account relationship requires full KYC documentation and compliance.

    According to [American Bank], perception is also important and the words "Money Exchange" in our name could be seen by the regulators as an indication of money service activities.  Therefore we need to change our name."
    This document can be read in two ways.

    In the first - favorable to the American Bank - they are telling AHAB that the Money Exchange can no longer operate as a money exchange.  That it must terminate business of that nature.  And as a result should change its name so that there is no suggestion that it is engaged in that business.  Presuming that it did of course eliminate this business, then it would be highly appropriate for the entity to change its name.

    In the second - unfavorable way - the document can be read to imply that the change in name is cosmetic designed to circumvent the bank's internal audit and controls.   That the entity would continue to perform money transfer services but for account holders.  Under this theory, since the ME was not licensed as a bank or investment company, it would remain a money exchange.

    There are really two fundamental issues here:
    1. What is the business this entity is engaged in"  Is it a money exchange firm?   Is it operating as an unlicensed and unregulated bank?  Is is something else?  
    2. What is the legal status of the entity?  When I was a rookie banker (who dealt with the Money Exchange and other AHAB entities), I knew that it was a division of the AHAB Partnership.  That it did not have a separate legal identity.   That's a critical matter for a banker as it affects one's rights under the law.  Important as well in determining who had the right to sign to commit the entity to a legal document, to sign a payment order.  And important for issues like ultra vires defenses.
    The memo is crystal clear.
    "Since we call National Bottling a "company" it would not be inconsistent to call the Algosaibi Investment Division a "company".  By calling ourselves Algosaibi Investment Company we could explain that this is the first step towards eventual incorporation following the grant of a bank of investment company license.

    This new name will not change our constitutional position as a division of Ahmad Hamad Algosaibi & Brothers Company -- Partnership.  Our letterhead should continue to disclose this -- see attached.”
    The memo then notes that they should obtain a CR for the Investment Company.  Another key point:  one does not need to be a separate legal entity to obtain a CR in the Kingdom.  Caveat banker.

    Exhibit #16 contains a memo from Mr. Hayley to Mr. Al Sanea dated 14 July 2006 which contains Mr. Hayley's account of a 3 July  meeting with the American Bank.  That memo notes that:
    1. KYC Anti Money Laundering procedures must be revised to eliminate any "walk in" business and that a draft (apparently incorporating same) was sent to the American Bank. 
    2. The account name must be changed to Ahmad Hamad Algosaibi & Brothers Company.  (Note that's the Partnership name - a legal entity unlike the Money Exchange.) 
    3. The Money Exchange name must be changed.  "This is necessary even if our account with [American Bank] is maintained in the Partnership name."
    Again it is possible to read this document in a manner favorable to the American Bank.  The client has told  it banker that it has ceased walk in business and has provided that banker a draft internal document. which reflects this.  Thus, meeting the American Bank's requirement.  The account is to be registered in the name of the Partnership - a legal entity.  References to "money exchange" are being removed to conform to the facts and thus to avoid raising false issues.

    We don't have the full set of information that Mr. Lewis does so there may be other documents and evidence he has which enable him to draw his conclusion.  So at this point from what we have here the jury is out.  But the American Bank at this point does appear to have a reasonable case.

    There are a couple of other points from his testimony.
    1. The American Bank advised that the original account opening records were lost in the 9/11 tragedy.  Rather poor form in record retention and security.   Certainly not in compliance with FATF Recommendations, but then as is pretty well known the US was fairly relaxed about these matters prior to 9/11.
    2. On page 5 Mr. Lewis asserts that "Awal Bank was a creature of Al Sanea's fraud and was, further, the bank of choice for the children of a foreign head of state who appeared to be using Awal Bank to launder funds."  The BD64,000 question here is whether his bank was an active conspirator.  Or whether it was being taken advantage of by these third parties.  I cannot think of a single major USA bank or UK bank that has not been fined by a regulator for lapses in implementing proper AML procedures.  If that's the case with Awal - a lapse in procedures, then they are in the company of many household name financial institutions from the "Developed" West.  If they were an active participant, the company they keep is a much much smaller circle of banks.
    One last bit to cover and we're done:  the presumed profitability of the account that caused the American Bank to short circuit due diligence (taking Mr. Lewis allegations at face value).

    How do correspondent banks (like our American Bank) make money on an account?

    Generally, it's through a combination of per item charges (debits, credits, payments, account statements, etc) plus some fixed charge for maintaining the account (a required minimum balance or a yearly fee).

    Let's look at the item which drives the overwhelming bulk of the per item charges:  payment charges.

    The per item charge is independent of the amount of the payment.  A payment for $100,000 costs the same as one for $100,00,000 - all other things being equal.

    So what drives the per item price for a payment?
    1. The manner in which the instructions are delivered to the correspondent bank. Payments delivered in machine readable form (through SWIFT or the correspondent's proprietary payment system - often PC based) are preferred because they do not require as much effort to process as those which are not in machine readable or electronic form.  In the latter case, the correspondent has to employ staff to take the non machine readable instructions from the client, input them into the payment system with of course the obligatory checking of the payments by a second employee to make sure they've been entered properly.  So pricing for manual payments is much higher than electronic ones.  
    2. There is a further distinction for electronic payments - whether they are straight through or need to be repaired.  To go "straight through" the payment system, payments need certain codes for the receiving bank, the beneficiary etc.  If the client (here Algosaibi) inputs all this information correctly, then the NY correspondent has little to no operational work.  If not, then a member of the correspondent bank's operations staff has to enter this information. Note that with a straight through payment if sufficient funds are in the client's account, the payment is released without any manual intervention by the correspondent.  If there are insufficient funds, a credit officer may have to make a decision whether to release the payment or not.  Generally, there is no charge for credit approval.  So as you'd expect, straight through payments not requiring any "repairs" are priced lower than electronic payments requiring repairs.
    Let's make some assumptions and see what sort of revenue (note revenue not net profit) the American Bank may have been making on the Money Exchange account.
    1. $20 billion in payments through the account per year.  Since Algosaibi did not start out with $20 billion in the account, they'll need to arrange cover for these payments by having credits of US$20 billion. 
    2. Each payment and credit at US$25 million.  That's 800 of each.  We'll also look at the highly unlikely scenario where each is US$1 million.  That means 20,000 of each. 
    3. US$5 per payment and per credit.   We'll also look at higher levels.  A not very likely US$10 per item.  And a totally unrealistic US$50 per item.   One further fussy note.  Generally, credits are not priced the same as payments.  They're priced lower because they come to the correspondent in  electronic form.  And if there's a problem with applying the payment, the correspondent charges fairly hefty "investigation" fees.  What's the point you ask?  There's a lot of excess in my pricing. Credits are probably much much less than the payment price.
    4. Other charges of $1,000 per month.  This should more than cover the miscellaneous per credit, per debit, account statement mailing, etc. 
    5. A fixed charge of US$100,000 per year.  This should be well above what the American Bank required. 
    6. Since Mr. Lewis mentioned that the same bank had been fined US$7.5 million for running a Latin American account through which over US$3 billion was transferred during 4.5 years,  we'll use that as the minimum fine.
    What are the results?

    Scenario 1:  Payment and Credit Size US$25 million

    Per Item Charges$5 Per Item$10 Per Item$50 Per Item
    800 Payments$4,000$8,000$40,000
    800 Credits$4,000$8,000$40,000
    Sub Total $8,000$16,000$80,000
    Fixed Charges
    Account Fee$100,000$100,000$100,000
    Miscellaneous $ 12,000$ 12,000$ 12,000
    Sub Total$112,000$112,000$112,000
    GRAND TOTAL$120,000$128,000$192,000

    Comments:
    1. Here we're using $25 million per item which is realistic for the sort of business the Money Exchange was conducting.  And this certainly fits with the data in the account statements disclosed as part of Mashreqbank case. 
    2. With this assumption the accounts have fairly modest total revenues, even at the completely unrealistic price of US$50 per item.  
    3. If you think my assumptions are too low, double the results.  It's still hard to see a rational businessman running the risk of a US$7.5 million fine - which might be much larger given the amounts transferred through the accounts.  And not only is there the fine but also the damage to one's business reputation.  The dangers to one's franchise can be very serious.  Riggs Bank is a cautionary tale.
    But maybe I'm being too generous.  So let's look at another scenario.

    Scenario 2:  Payment and Credit Size US$1 million

    Per Item Charges$5 Per Item$10 Per Item$50 Per Item
    20,000 Payments$100,000$200,000$1,000,000
    20,000 Credits$100,000$200,000$1,000.000
    Sub Total $200,000$400,000$2,000,000
    Fixed Charges
    Account Fee$100,000$100,000$100,000
    Miscellaneous $ 12,000$ 12,000$ 12,000
    Sub Total$112,000$112,000$112,000
    GRAND TOTAL$312,000$532,000$2,112,000

    Comments:
    1. Frankly, this is a highly unrealistic scenario.   I've included it to show that even an outlier like this does not generate sufficient revenue to take risk. 
    2. Only if one combines it with the even more improbable US$50 per item charge do we get anywhere near a risk taking point. 
    3. But the simple fact is that when the account was being used banks were fighting to get a piece of business from AHAB - then one of the Kingdom's most prestigious groups as was Mr. Al Sanea's companies.  So US$5 per item is probably the high point for payments.  The pricing per item may even have been lower.  Hard to see this account being so lucrative that a bank would take a risk like this.
    Conclusion: 
    1. Correspondent accounts just aren't that lucrative .  
    2. Many of the major correspondent banks are feeling the pressure of AML regulations  and are highly sensitive not just to regulatory fines but to the risks of lawsuits by third parties (as happened to the Arab Bank's New York Branch).  And so they are reducing exposure by throwing marginal customers out.
    3. That being said, bankers often do very stupid things. And sometimes bankers don't work for the best interest of their firms.

    Sunday 26 September 2010

    US Congress to Investigate Middle East "Money Laundering"

    For A Cleaner Clean

    Frank Kane at The National reports that the US Congress will hold a hearing tomorrow on US$1 billion of money transfers from the Middle East through the USA over the past six years in connection with claims of money laundering.  
     
    As you'll note from the article, a central part of the claims seems to relate to the dispute between AHAB and Mr. Al Sanea.  
     
    The Al Gosaibis continue to accuse him of wrongdoing and he just as steadfastly denies any impropriety.

    It will be interesting to follow the testimony to see what emerges.

    Those who follow other blogs may recall the February 2009 reports of the discovery of US$ 5 million  in a Dubai laundromat.  If anyone out there has an update, I'd be interested in hearing.

    Sunday 22 August 2010

    Monday 16 August 2010

    International Leasing and Investment - The "Fix" is in? Central Bank Trying to Stop?


    The 16 August issue of AlQabas has an intriguing article on ILI: "Supervisory Reservations About Return of AlHomoud to International Leasing."  KSE page on ILI here.

    The article states that:
    1. The regulatory authorities, among them the Central Bank of Kuwait, have reservations about the return of Fuad AlHomoud to ILI especially after his membership to the Board and appointment as Managing Director.  
    2. One of the largest creditors of ILI has joined in these reservations on the basis that he has been following the company for years and knows its "ins and outs".
    3. PWC who the creditors had engaged  issued a report that accused the previous executive management of taking loans and using them for other than the purposes for which they were obtained.  
    4. And PWC had recommended that court action be taken against previous executive management.  
    5. The article quotes an unnamed source in Munshaat (a Kuwaiti Real Estate company) that Mr. AlHomoud is facing a court case related to the time he was at both Munshaat and ILI.  
    6. After an examination, the Central Bank of Kuwait found that the previous management guilty of a number of violations and excesses and levied a fine of KD200,000.
    What's apparently troubling some is the sudden "understanding" between Mr. AlHomoud and Mr. Bassam AlMutawa, the investor who has proposed a plan to save ILI.  The question is whether they have joined forces to save the company or for another reason.

    At this point, AlQabas speculates (and note that word) that legal cases relating to ILI could be very uncomfortable for a variety of people and that having  control over the Company's "files" related to such cases could be a powerful motive for some to seek to obtain control over ILI.

    ILI is currently suspended from KSE trading due to failure to provide financials.  It has not yet provided its 31 December 2008 financials or any subsequent ones.

    And finally, while not stated in the article, I am going to presume that Mr. AlHomoud like a prominent expatriate Kuwaiti  businessman denies all allegations of wrongdoing.

    AlJoman: Cross Holdings on KSE Equal KD3 Billion or 9.4% of Market Value

    AlJoman issued another interesting analytic piece.  This one on cross holdings on the KSE.

    A bit of initial tafsir:
    1. It's based on information from the KSE on shareholders of listed companies.  
    2. As per KSE rules, shareholdings 5% or more are to be reported. 
    3. Data is as of 5 August 2010.
    Here's a quick summary.
    1. 84 listed companies have cross shareholdings spread across 132 companies.
    2. The amount is KD3.035 billion which represents 9.4% of the total market capital of KSE listed companies (KD32.4 billion).
    3. It also is 21% of the disclosed investments by KSE listed firms (KD14.7 billion).  
    4. Al Joman estimates that aggregate cross holdings (including those below the 5% threshold) equal 20% of the market capital of KSE listed firms.  It doesn't detail its rationale.
    5. It ascribes this motive for this cross holding essentially as market manipulation.  Companies cross hold, inflate demand (sometime fictitious) for their partners' shares, and thus create bubbles.  When the downturn came, this mechanism which had been so powerful in creating the updraft was powerless to stop the downdraft.  Not the manipulators, nor the market makers, nor even the Government with its National Portfolio.   Al Joman refers to it as like a snowball rolling downhill, getting bigger as it goes and crushing all in its path.
    6. As it has done before it faults the regulator and the weakness of the existing system, noting that many companies violated their corporate charters by investing in economic activities outside of the one listed in their Articles.   There's a biting comment about some real estate companies that own no real estate - not even a single apartment or shop.
    7. In closing it notes that some out there may say that Al Joman is "beating a dead horse" on this topic.  But that it's intent is to remind the Kuwait CMA of the necessity of ending such "deviant" practices.
    Here's an abbreviated version of the chart in the report.
    Sector# w Cross HoldKD Millions% Total
    Banking  6   836 27.5%
    Investment311,237 40.8%
    Insurance  4     44   1.4%
    Real Estate17   286    9.4%
    Industry  9   371  12.2%
    Services11   108    3.6%
    Food  2       4    0.1%
    Non Kuwaiti  3   148    4.9%
    Parallel Market  1       2    0.1%
    TOTAL843,035100.0%

    One final note, an appeal actually for some linguistic help.  There are two expressions that Al Joman uses in the report, the precise translation of which elude me.  Appreciate it if someone will post to give me not only a translation but a  ذوق of the expression.
    1. الضحك على الذقون       
    2. طاح الفاس بالراس