ONGOING CORRUPTION CRACKDOWN IN DUBAI FINANCIAL AND REAL

S E C R E T SECTION 01 OF 03 DUBAI 000358

NOFORN
SIPDIS

E.O. 12958: DECL: 9/8/2018
TAGS: PGOV ECON EFIN ETRD KCRM AE
SUBJECT: ONGOING CORRUPTION CRACKDOWN IN DUBAI FINANCIAL AND REAL
ESTATE SECTORS

REF: DUBAI 296

DUBAI 00000358 001.4 OF 003


CLASSIFIED BY: Paul Sutphin, Consul General, Consulate Dubai,
UAE.
REASON: 1.4 (b),(d)




1. (S) Summary and Comment. Following the public disclosure of
a large real estate/financial scandal involving Dubai Islamic
Bank (DIB, in which the Dubai Government maintains a 35% stake)
and private property developer Deyaar in April, Minister of
State for Finance Dr. Mohammed Khalfan bin Kharbash, also
Chairman of DIB, hastily resigned from both positions. Several
senior sources told us that the resignations were directly
linked to the scandal. A subsequent series of reports of
scandals and investigations regarding graft in Dubai's booming
real estate and financial industries have appeared in the local
press (unusual in itself). The Dubai Police and Public
Prosecution investigations are being spun as a self-initiated,
focused, and transparent public attempt to reduce corruption -
putting the best face on what seems to us more likely the
ongoing disclosure of a large and complex web of dirty deals.
The office of Sheikh Mohammed bin Rashid al Maktoum (MbR, UAE
Vice President and Prime Minister, Ruler of Dubai) issued a
public statement proclaiming there will be "zero tolerance" for
corruption in the UAE - but only after the initial round of
disclosures. Local legend holds that senior UAEG officials and
businessmen involved in inequities in the past have often
avoided the public humiliation of trial by paying hefty fines
and withdrawing from public life. Whether the rhetoric matches
the reality will be an interesting test of Dubai's developing
culture of corporate governance. But the fact these
investigations are taking place and being discussed publicly is
bound to have some salutary effect on the excesses of the wild
and woolly local real estate market, a good thing. End Summary.

Arresting Real Estate Moguls and Banking Chiefs

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2. (U) Starting with the April l7th public disclosure that Zack
Shahin, former CEO of Deyaar (a large private real estate
developer),had been arrested under allegations of embezzlement,
there has been a widening investigation encompassing executives
from number of private, public, and parastatal Dubai companies.
(Note: Shahin, an AmCit, was actually arrested March 23 and is
still under arrest pending charges. ACS Dubai is actively
following his case and details are reported ref A. End note.)
Press reports have named executives currently or formerly
employed at Dubai Islamic Bank (as part of the Deyaar scandal),
mortgage finance company Tamweel, Dubai parastatals Istithmar
(investment),Nakheel (property development),Sama Dubai
(property development),as well as US investment bank JP Morgan.
Press reports indicate between 15 to 20 individuals have been
detained and/or questioned. Among those publicly named are a mix
of UAE nationals and expatriates, including several locally
prominent figures:

-- Adel Shirawi, currently Vice Chairman of Istithmar World (a
Dubai government investment fund and subsidiary of Dubai World)
and formerly CEO of Tamweel (one of the two largest mortgage
lenders in Dubai);

-- Feras Kalthoum, Istithmar's CFO and a former Tamweel
executive;

-- and Waleed Al-Jazirir, Nakheel's General Manager for Sales.

Others named in various investigations include:

-- Rafatul Islam Usmani, a "former senior executive" at DIB;

-- Karim Zawya, International Sales Manager at Nakheel (the
Dubai World development subsidiary famous for building the Palm
Islands),and former assistant director of sales at Damac
Properties (a large real estate developer);

-- and Omair Mooraj, J.P. Morgan's senior country officer in the
UAE.

The latest name to surface in ongoing investigations is Abdul
Salam al Merri, CEO of the Lagoons (a Sama Dubai/ Dubai Holding
real estate development subsidiary); three other Sama staff
members have reportedly been detained for questioning.

Don't mess with the government's money


DUBAI 00000358 002.4 OF 003


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3. (C) One press report speculated that the cases are an
outgrowth of the early 2007 reorganization of the emirate's
financial audit department, shifting its reporting authority
directly to MbR (versus a lower functionary). The department is
responsible for auditing all firms in which the government of
Dubai owns 25 percent or more. Given the financial/ownership
ties ultimately roll up in most of the reported cases to the
Dubai government, the speculation may be justified.


4. (U) Dubai Government ownership predominates among the many of
the firms with individuals reportedly under investigation:

-- Sama Dubai is a fully-owned Dubai Holding subsidiary;

-- Istithmar and Nakheel are under the Dubai World umbrella
(both Dubai Holding and Dubai World are owned, ultimately, by
MbR);

-- as noted the Dubai government has a large stake (35 percent)
ownership in the DIB.

A web of interrelationships link some of the firms, with DIB
owning a 41 percent stake in Deyaar, and DIB (at 19.98 percent)
and Istithmar World Capital (at 22 percent) maintaining
significant stakes in Tamweel.


5. (U) More than a week after the initial public disclosure of
the DIB/Deyaar investigation, and following the resignation of
Kharbash, MbR's office issued a widely publicized statement
proclaiming "fighting corruption is at the top of the [Dubai]
Government's priorities." It went on to note a "zero tolerance"
policy against "illegal profits" and "all aspects of corruption,
bribing and taking advantage of officials' positions." It noted
that "strict and prompt action" would be taken against public
and private sector corruption and was clearly aimed at alleged
white-collar financial improprieties.


6. (C) Other than releasing names and general allegations of
bribery, embezzlement, breach of trust and corruption, Dubai
Public Prosecution and the Police are keeping a tight hold on
details about the alleged misdeeds. Senior Emirati contacts, as
ever focused on maintaining Dubai's reputation, have been unable
or unwilling to discuss details of any ongoing case. While
details remain scarce, several very senior Dubai contacts --
including two federal ministers -- have clearly intimated to us
that Kharbash's downfall flowed directly from the DIB/Deyaar
mess, and that this "purging of bad elements" as one federal
minister put it, is needed for Dubai's continuing development.

Shahin: Accusations Against Emirati Former Colleagues

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7. (S/NF) However, detained former Deyaar CEO and AmCit Zack
Shahin has alleged in a document released to Post that several
highly placed UAEG officials and businessmen have managed to
avoid public disgrace by simply paying hefty fines. (Note: The
following allegations are made in Shahin's statement and have
not/not been corroborated by any other evidence. End Note.)
According to Shahin, Kharbash was involved in a 10 percent
kick-back scheme on a Saudi deal (totaling more than 47 million
AED/ $12.8 million). Additionally, Shahin alleges prominent
Dubaian Saad Abdul Razak, a Board member of Deyaar and the CEO
of the Investment Corporation of Dubai (ICD, the stated
sovereign wealth investment vehicle for Dubai) in collaboration
with Abdulrahim Zarooni (a prominent businessman and real estate
developer),embezzled 117 million AED/$31.88 million from
Deyaar. Shahin also alleges that Nasser Al Dabal, the former
Director of Investments at Deyaar and currently CEO of Diera
Investments (a Dubai government-owned real estate company headed
by Ahmed bin Saeed Al Maktoum, MbR's uncle, President of Dubai
Civil Aviation and Chairman of Emirates Group/Emirates
Airlines),embezzled 30 million AED/ $8.17 million. All of the
noted individuals, according to Shahin, repaid the embezzled
sums to the Ruler's Court, but they were never brought to trial
(Comment: None of these names have surfaced in the press, and we
are unaware of any court cases against them. End Comment.)

Crime and Punishment -- Differing Standards for Emiratis vs.
Expats?

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8. (S/NF) Long-time Dubai resident expatriate contacts have
indicated to us that they doubt whether any of the named high

DUBAI 00000358 003.4 OF 003


profile Emiratis will actually be brought to trial. Local legend
among many expats holds that senior UAEG officials and
businessmen involved in past incidents of corruption or other
misuse of official positions have often avoided the public
humiliation of trial by paying hefty fines and withdrawing from
public life.

The bigger problem is corporate governance

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9. (C) An underlying problem in many Dubai companies, both
public and private, which has contributed to the current set of
scandals is the general lack of developed corporate governance
principles and practices. Inter-linked board memberships,
family and tribal ties provide ripe opportunities for insider
trading and market abuse. According a recently released
Hawkamah (a regional institute for corporate governance) study,
regional companies do not really understand the concepts of good
corporate governance: while roughly 2/3rds of publicly-listed
companies in the region ranked corporate governance as either
"important" or "very important", 53 percent of these same
companies couldn't even define corporate governance properly and
few recognized why it is good for business. The statistics
corroborate comments made to Pol/EconOff by David Nicholson
(protect),General Counsel for Nakheel (and formerly with Damac)
on "the utter lack of good corporate governance" in most Dubai
business, such as a limited number of external board members,
and the lack of internal audit or checks and balance procedures.

Comment

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10. (S/NF) Our sense is that there is an element of trying to
make a silk purse out of a sow's ear in how Dubai is publicly
presenting the ongoing investigations, i.e. painting the
uncovering of a widening scandal as a pro-active, focused effort
to uproot corruption. Whether the corruption cases against both
UAE nationals and non-nationals ever make it to trial will be a
test of the Dubai Government's willingness to combat senior
white-collar crime - it is worth noting that while Shahin
remains in custody that Kharbash, while most definitely
disgraced, seems to have faded from the seminal DIB/Deyaar
investigation, despite his central role at DIB. Despite this,
UAE Minister for Cabinet Affairs (and top aide to MbR) Mohammed
Gergawi, when asked point-blank by the Consul General if senior
Emirati figures who may be involved in the various scandals
would be tried publicly or allowed to pay fines and step back
from their positions, said that wrongdoers would be prosecuted
publicly.


11. (S/NF) In a culture known for its abhorrence of public blame
and shame, especially of its own citizens, the Dubai leadership
realizes it has a lot riding on the stability of its real estate
and financial services sectors (two of the six core sectors
targeted in the Dubai 2015 Strategic Plan). Since the
allegations about corrupt leaders and staff members went public,
DIB shares fell 17 percent, Deyaar is down 18 percent and
Tamweel is down 28 percent. While obviously many factors impact
stock prices, the allegations of embezzlement have clearly had
an impact on the companies' share prices. With so much of the
Dubai economy riding on the continued health of real estate (and
real estate financing) the government has to carefully weigh the
benefits of protecting the reputations of wrong-doing citizens
against the longer term impact to its economic goals and
ambitions. Gergawi concluded that while the scandal probes might
"have a short term negative impact", in the long term improved
corporate oversight and the clear message corruption will not be
tolerated is "essential" to the continued development and
financial health of Dubai. End comment.
SUTPHIN