One sure sign of an advanced economy is whether and how its financial services are regulated. The authorities in Dubai are keenly aware of criticism levelled at other emerging economies and they are particularly – some would argue justifiably – sensitive to allegations that anti-money laundering and general corporate governance fall short of international best practice.
In an effort to ensure that men in large stetsons do not overtake the Dubai International Financial Centre (DIFC), the government created the Dubai Financial Services Authority (DFSA) to coincide with the DIFC’s launch in 2004.
And it has not been without its own controversy as, in a high-profile dispute just before the centre awarded the first licences, the DIFC hierarchy sacked the original chief executive, New Zealand lawyer Phillip Thorpe. He and another expatriate colleague, who was also dismissed, were reported to have been deeply concerned about the regulator’s independence, specifically in relation to a range of property deals at the time.
Subsequently, the man who gave them the boot, the then DIFC chief executive Naser Nabulsi, was himself shown the door by Dubai’s ruler, Sheikh Mohammed. The point was firmly made that no wrongdoing was alleged, but many viewed that move as an attempt by the government to restore Western confidence in the centre and its regulatory body, as the sheikh, who is also deputy president and prime minister of the United Arab Emirates (UAE), virtually gave a personal undertaking guaranteeing the DFSA’s independence.
Thorpe went on to take up the reins at the DIFC’s main regional competitor in Qatar and a new team was brought into Dubai. Another southern hemisphere lawyer, David Knott, leads them. The Australian-qualified solicitor has a long pedigree in financial regulation: after having completed a 15-year stint as a commercial law partner at the Melbourne office of what is today Allens Arthur Robinson, he moved on to chair the Australian Securities and Investments Commission (ASIC).
At Knott’s right hand is another Australian lawyer, although this time via Scotland, Ian Johnston, the DFSA’s managing director of policy and legal. Johnston, the former executive director for financial services regulation at the ASIC and a special adviser to the Securities and Futures Commission of Hong Kong, is adamant that the DFSA is back on track. He maintains that the authority, which is one of the region’s single biggest employers of lawyers, having more than 60 on its books, has moved rapidly to mirror the position of its opposite numbers in more mature jurisdictions.
“We’re now seeing some enforcement work come through,” he explains. “Most of that’s been protecting the integrity of the DIFC – in other words, acting against people who are outside the DIFC and in some cases from another country, pretending that they’re regulated by the DFSA and that they’re part of this jurisdiction. That’s happened quite a few times and we’ve taken court action to obtain injunctions and other orders to stop that.”
Some of the attempted frauds have been fairly sophisticated, with one scheme involving the replication of a market institution that was then taking money from investors in various countries.
The authority has also recently had to deal with a couple examples of product mis-selling and some cases of dishonesty. “You’d find this anywhere,” comments Johnston,
“but for us this has been a relatively new development. We investigated the matters and carried out enforcement action as quickly as we could. We recognise that, if you build a nice regulatory regime, you’ve got to make sure that you enforce it at the sharp end.”
On the supervisory side, the authority is beginning to deal with the type of issues that are commonplace in more advanced markets, such as how its registered companies are bearing up in the current environment of tighter credit. According to Johnston, “we haven’t seen any real problems within our jurisdiction”, although the recent demise of US-based investment bank Lehman Brothers provided a stark reminder that, while the Dubai economy may be booming, it is not totally insulated from global economic waves.
The UK branch of Lehman had been authorised by the DIFC and, with the company put into administration, it had to cease trading at the Dubai centre.
“There aren’t any particular local issues,” comments Johnston. “They weren’t acting for any retail clients, they were all institutional clients, and there were no client monies actually being held. Still, we can’t pretend that the DIFC will be immune from what’s happening around the world, and Lehman is an example that things do flow through.”
Having said that, DFSA chief executive Knott maintains that the overall economic forecast for the region remains robust. “This region, on any reasonable scenario, will be a major exporter of capital,” he says. “And therefore the financial firms, in connecting that capital to the rest of the world, will play a very important part. When people are struggling to find investment opportunities they’ll go to where the opportunities lie. At the moment the emerging markets, and the Middle East in particular, provide those opportunities.”
Nevertheless, in the West there are still perceived difficulties with the Gulf markets. Not least is the notion that Dubai and other Gulf Cooperation Council countries are vast financial washing machines – either for corrupt money coming out of India or, more sinisterly, for terrorism financing.
But Johnston is adamant that the DFSA is keeping the centre clean. “We’ve done DIFC-wide audits in respect of anti-money laundering and I’m confident that the standards at the DIFC are very high,” he insists.
He points to a recent inspection by the International Monetary Fund that measured the DIFC against the yardstick of recommendations made by the Financial Action Task Force on Money Laundering.
“It was a thorough review of the financial services firms at the centre regulated by us, and we came out of that very positively,” says Johnston. “We’re in an unusual situation in that it’s a young market, but the firms that come in know that from day one they’ll be regulated to the highest standards and that they have to meet those obligations. And that’s quite unusual for this region.”
Corporate governance is another area that has caused some doubt in the past. The Gulf economies have developed in the short span of a couple of generations (50 years ago, Dubai, Doha and Manama were little more than pearl fishing villages), so there will be growing pains. Historically, most businesses were family-owned and operated, with the senior members of those families accountable only to themselves for the business practices.
That model has had to change now that the Gulf economy has moved to the global stage. “The concept of being accountable to a wider group of people, and in particular a group of shareholders, is something that’s still developing,” comments Johnston. He points to the DIFC’s Hawkama Institute, which was launched recently to promote global standards in corporate governance, as a positive sign that the emirate’s leadership takes the issues seriously.
In a related move, the DFSA itself is attempting to bring Emiratis into the regulatory regime. Indeed, demographics is one of the most contentious social and commercial issues currently facing Gulf society. Only 19 per cent of the five-million or so population of the UAE are actually nationals, and there is a risk that they will be marginalised in their country’s own economic success story.
For its part, the DFSA has launched a programme called ‘Tomorrow’s Regulatory Leaders’, which is a graduate training scheme exclusively for UAE nationals. Chief executive Knott explains the rationale: “What we want to do as Western expats who have come to help with the regulatory structure in Dubai is leave a legacy of Emiratis who have the competence and training to take the leadership on in future years. It’s more than a job creation scheme.
We could easily deliver that type of scheme, but it wouldn’t leave a lasting, sustainable legacy of educated and trained regulators.”
Clearly, for Knott and Johnston, the ultimate marker of success will be when they have made themselves redundant from their top roles, handing over the regulatory baton to the homegrown talent.
Jonathan Ames is editor of Dubai-based The Brief