During recent travel in the Middle East, we met with senior executives at leading banks, exchange houses and regulators across the region. Top of mind, in many of the meetings, were two things:
i) the demise of Abraaj Capital; and
ii) the impact of increasing pressure on Iran in the region.
Both are significant and have longer term consequences for the region.
Let’s take them in turn.
For the uninitiated, Abraaj Capital is a Dubai-based, Gates Foundation-affiliated private equity firm that loomed large for over a decade. At its peak, Abraaj managed some $14 billion, mostly focused on returns in higher risk emerging markets. Hailed as an “indigenous fund” that often punched above its weight alongside industry titans KKR, Carlyle and TPG, the outfit was, for some time, a local source of pride. Abraaj generously sponsored Art Dubai, lavish gatherings in Davos and served as a sort of pit-stop for the who’s who stopping through Dubai on way to London, New York or Hong Kong.
Governance issues plagued the fund and ultimately, brought down the brand and its founder-leader seemingly overnight. Despite being regulated by the Dubai Financial Services Authority, widely regarded as a top-tier regulator in the region (and globally), Abraaj faltered and with it people’s confidence in a region plagued by broader perception issues.
So, how does this connect to Iran?
Directly it doesn’t. Indirectly it does. The link, again, is the broader perception of regional risk.
Throughout the year the U.S. Government has stepped up pressure on Iran. In May, for example, Treasury implicated the Central Bank Governor of Iran, citing his role in moving money for the Iranian Revolutionary Guard Corp (IRGC). Moreover, Secretary Mnuchin called the Iran Central Bank Governor’s actions, “…appalling, not surprising,” hinting at the Administration’s unguarded thoughts on the matter.
On June 5, 2018, the Under Secretary of the Treasury for Terrorism and Financial Intelligence urged the private sector to “do more to make sure your compliance programs are airtight” with regard to Iran. And just this week, as part of a high-level delegation to the United Arab Emirates (with side trips to Saudi Arabia and Kuwait), Treasury announced that it broke up a network of currency exchanges funneling millions of dollars for terrorism and the IRGC.
These cases – Abraaj and Iran – raise important questions for management boards running regional financial institutions, as well as those on the outside looking to invest and operate in the region.
i) How well do I understand my internal control environment and its effectiveness and how do I ensure that my compliance program in this new environment is “airtight?”;
ii) Do I really know and can I dynamically monitor my counter-parties?