By Simon Clark From Financial News

Firm had complex structure with entities in Mauritius, the Cayman Islands and other jurisdictions

The collapse of Abraaj Group, the world’s largest insolvent private equity firm, has exposed a gap in oversight of the global financial system.

Abraaj created companies and funds in jurisdictions including Dubai, the Cayman Islands, London, Singapore, Mauritius and the US. But no single regulator was responsible for supervising the entire firm. This allowed regulators to absolve themselves of blame for not identifying any mismanagement.

At least $660m of investor money was moved from Abraaj’s investment funds without the knowledge of most investors, The Wall Street Journal has reported. Before it collapsed the firm said it managed almost $14bn.

“The demise of Abraaj shows that it is possible for overly structured groups to still game the global regulatory system,” said Matthew Hudson, founder of MJ Hudson, a London-based law firm and investment adviser specialising in private equity.

“Increasingly it will become disingenuous for a lead regulator of a fund manager to ignore funds created outside of its jurisdiction,” Hudson added. He said regulators are working together to close loopholes.

Abraaj was headquartered in Dubai, where founder Arif Naqvi was based. Some investors believed the Dubai Financial Services Authority was overseeing the entire firm. Naqvi created a network of companies and funds in at least seven worldwide jurisdictions to operate Abraaj.

The firm’s two main units filed for provisional liquidation in a Cayman Islands court in June after investors including the Bill & Melinda Gates Foundation questioned whether their money was being misused.

Before its collapse, Naqvi and other Abraaj executives frequently stated in conversations and documents that they had high governance standards and were regulated in many jurisdictions.

A marketing document designed for potential investors stated “our choice was to operate in a regulated environment” and that “Abraaj” was licensed by the DFSA since 2006. “Abraaj has adopted a holistic framework that embraces corporate governance, regulation and compliance,” the document said.

Three Abraaj investors said in interviews that they had believed the DFSA was the firm’s overall regulator before it failed. The collapse will make investors more vigilant about jurisdiction risk, said the investors, who declined to be identified.

After Abraaj collapsed, the DFSA said it licensed Dubai-based Abraaj Capital but wasn’t responsible for the firm’s main units — Abraaj Holdings and Abraaj Investment Management — or its main investment funds because they were “domiciled in the Cayman Islands”.

The Cayman Islands Monetary Authority said it wasn’t responsible either. “The entities referenced are not registered with or licensed by the Authority and therefore do not fall under its regulatory remit,” a spokeswoman for the Cayman Islands regulator said.

The companies in the Cayman Islands weren’t regulated, Abraaj’s liquidators at PricewaterhouseCoopers and Deloitte told the Journal.

Naqvi didn’t respond to a request for comment on Abraaj’s regulatory arrangements. His spokesman referred questions to the firm’s liquidators.

Cayman Islands-registered Abraaj Investment Management was “dependent” on Dubai-registered Abraaj Capital, its wholly owned unit, for staffing and services, according to a liquidator’s document.

“It is not possible to separate most of the day-to-day activities” of the units, the document said. Abraaj’s Dubai and Cayman Islands units were “essentially managed as a single unit,” according to another liquidator’s document.

The UK’s Financial Conduct Authority said it only authorised Abraaj Advisers UK, a London-based unit. “The vast majority of the Abraaj Group’s activities were undertaken overseas in jurisdictions outside the FCA’s regulatory remit,” spokesman for the British regulator said in an interview.

The Monetary Authority of Singapore said it oversaw a local unit. “Abraaj Capital Asia Pte is the Singapore entity under Abraaj Group and holds a Capital Markets Service License for the regulated activity of fund management in Singapore,” a spokeswoman said.

In the US, two Abraaj units — Abraaj Investment Management and Abraaj Mauritius — were listed as “exempt reporting advisers.” This status means the units were required to disclose some information to the Securities and Exchange Commission but weren’t registered as investment advisers with the regulator.

Some employees of Delaware-registered Abraaj North America were registered with the Financial Industry Regulatory Authority, which regulates broker dealers in the US. The Abraaj staff appear on Finra’s register as employees of Blue Sand Securities and disclose Abraaj as “other business activity,” a Finra spokesman said. Blue Sand didn’t respond to requests for comment.

“Blue Sand Securities LLC is a broker dealer and is therefore Finra-regulated,” the Finra spokesman said. “Abraaj is not a broker dealer; therefore Finra does not have jurisdiction over the firm.”

Write to Simon Clark at [email protected]

This article was published by the Wall Street Journal

For more on this story go to: https://www.fnlondon.com/articles/how-abraaj-slipped-between-global-regulators-cracks-20190403