Saudi Arabia’s multibillion corporate collapse: Al-Gosaibi exec on his role in 8-year saga

Simon Charlton
Updated 02 July 2017
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Saudi Arabia’s multibillion corporate collapse: Al-Gosaibi exec on his role in 8-year saga

The collapse of the Saudi Arabia-based Al-Gosaibi business in 2009 was a seismic event in the financial world, and in Middle East business history.
As much as $20 billion was put at risk as a result of the collapse of two banks in Bahrain, which in turn sparked the financial downfall of the 70-year-old business, based in Alkhobar, and the Saad Group empire, run by Maan Al-Sanea, an entrepreneur who married into the Al-Gosaibi family.
The debacle was one of the biggest collapses of the global financial crisis, and it prompted a fierce war of words between the Al-Gosaibi family and Al-Sanea, waged in courtrooms and boardrooms across three continents. Eight years on, there is still no final resolution to the bitter disputes that have raged amid allegations of fraud, forgery and theft.
More than 100 banks — in Saudi Arabia, the wider Arabian Gulf region and the rest of the world — are still owed billions of dollars in unpaid loans to what they thought was a respected and creditworthy business dynasty, the Al-Gosaibis, and a hotshot financier, Al-Sanea.
Simon Charlton has lived every moment of those eight years, first as a corporate finance expert at the global accounting firm Deloitte, brought in to sort out the mess; then as acting chief executive and chief restructuring officer of Ahmad Hamad Al-Gosaibi & Bros. (AHAB), the partnership that owned the businesses and was practically bankrupted by the collapse.
The 51-year-old Englishman recently reflected on the past eight years. “It’s been a long, tough time. I was a father when it happened. Now I’ve got four grandchildren,” he said, assessing the large chunk of his life that has been taken up by the affair.
He has lived in the region since he was a child, the son of a British Royal Air Force officer who served in Oman. As a young executive, Charlton worked for Deloitte on the 1990s collapse of Bank of Credit and Commerce International (BCCI), the part-UAE-owned bank, which until the Al-Gosaibi downfall had the dubious honor of being the biggest financial scandal affecting the region.
“I thought I’d never see anything like that again but I soon realized after Deloitte was called in that the numbers were even bigger, twice the size,” Charlton recalled.
“My job was to find out what had gone on and I quickly saw that billions of dollars had been borrowed in the family name and had disappeared. In the first couple of months, we got a pretty good idea of the amounts borrowed and the status of those loans. It was obvious that if all those liabilities were left to the family, there was no way they could repay,” he said.
The Al-Gosaibi family faced legal action by creditors to recover the missing cash from the family assets. Family members had their assets frozen, and a travel ban was imposed to stop them leaving Saudi Arabia. These restrictions are still in place today.
The blame, Charlton decided in consultation with an army of lawyers and consultants, lay with Al-Sanea. They alleged that he had siphoned off billions of dollars into ghost companies that amounted to a gigantic Ponzi scheme and that he had forged the signatures of family members to do so.
Al-Sanea has consistently denied these allegations and has fought legal actions in Saudi Arabia, London, New York and the Cayman Islands, where his Saad Group was registered. Some of those are still ongoing today. (Email requests for comment in the preparation of this article to Al-Sanea family members and legal representatives went unanswered.)
Charlton immediate task in 2009 was to try to reassure his clients, the Al-Gosaibi family. “The family had no idea who they could trust. It was shock, panic, fear. They didn’t see it at first as being bust, they just didn’t understand what was happening,” Charlton said.
It was an unprecedented event in Saudi business history, where the practice of “name lending” — approving bank loans on the strength of a family’s reputation rather than its credit rating — was long established.
The situation was complicated by the lack of a bankruptcy code that could have smoothed the liquidation and repayment process. A law is currently being prepared, which leans heavily on the lessons learned from the Al-Gosaibi case over the past eight years.
“The other problem was that there was no center. It began in Bahrain, spread to Saudi Arabia and then went all over the world — Geneva, the Cayman Islands, New York and London. So there was a problem about finding a regulator that would take (the) main responsibility,” Charlton said.
“We took the view early on that we had to try and negotiate a settlement. It was the honorable thing to do. The family always said they want to return the money, as far as they are able,” he added.
But it was a tortuous process, made even more complicated by the attitude of the Saudi creditors who were owed about one-third of the total debts. They declined all invitations to get involved in the negotiations regarding a settlement, preferring litigation, and have still not been involved in any of the series of creditor meetings that have taken place over the last eight years.
The Saudi authorities, conscious of the potential damage the affair could do the Kingdom’s reputation in international financial markets, early on appointed the so-called “King’s Committee” — a body of senior policymakers and financial officials — to find a resolution, and by 2012 it had reached a decision: The two parties were ordered to find a solution, but there was no possibility of a bailout from public money. It was, to all intents and purposes, a family affair.
“We tried to negotiate with the Saudi banks. The disputes committee of the Saudi Arabia Monetary (Agency) began to issue judgments in favor of international banks as well as Saudis, so it was obvious there was no favor in any one direction. The biggest challenge was, and remains, how to get all the banks around the table,” Charlton said.
By the end of 2014, a new approach to the whole affair was beginning to materialize. The oil price decline that year prompted some serious reassessment of the Kingdom’s financial status; Saudi Arabia wanted to raise debt in the international capital markets but found its ability to do so impaired by the fact that billions of dollars in debt had been effectively reneged.
It also marked the beginning of the process of transforming and modernizing Saudi business that was to culminate in the Vision 2030 plan to diversify the economy away from oil dependency. The country needed international banks on side for this crucial plan.
A year ago, the authorities set up a special enforcement tribunal in Alkhobar to force through a settlement of the outstanding loans “because these debts can harm the reputation of the local economy and relations with local and foreign banks,” according to an official announcement.
“In some ways, AHAB was a ‘petri dish’ for how Saudi Arabia should deal with a bankruptcy and insolvency. The Enforcement Law came in in 2014, and I’m not saying that our situation was directly responsible for that, but AHAB/Saad was part of the process of evolution of this kind of legislation,” Charlton said.
“I got the feeling the authorities were learning as they went along, how to work through a restructuring process, and we were the testing ground. There is a draft insolvency law being considered, and I’m sure that AHAB was on people’s minds as they considered how to do that in practice. So now there is enforcement law, arbitration law and soon there will be an insolvency law. That’s progress,” he added. The practice of “name lending” has been greatly reduced too.
Simultaneously, Charlton and other advisers had been conducting negotiations with AHAB’s own international creditors, and by last summer was able to announce a deal with creditors over $6 billion of debts.
Under the terms of that deal — which is still being finalized — creditors will get a guaranteed 25 cents on the dollar, which could rise to more than 50 cents if legal action against Al-Sanea is successful in recovering further assets, mainly in the Cayman Islands. There, the biggest legal case in the islands’ history is considering the fate of about $1 billion of assets.
Charlton is keen to point out that the Al-Gosaibi family has done its best to stand by contractual agreements. “Throughout the whole process, we have continued to meet our liabilities toward our employees, the tax authorities and suppliers. The only people who have not been paid are the banks, and we’re hopeful of reaching a final agreement with those.”
The alternative to a deal is a fire sale of assets, the closure of businesses and big job losses at Al-Gosaibi companies, he said. “Just recently we reached a significant threshold on our settlement terms. Some 61 claimants representing 74 percent of all claims have signed up,” he added. None of those are Saudi banks, however.
Meanwhile, the Al-Sanea side of the affair has been struggling to meet its commitments, which run into billions of dollars but which have not been definitively quantified.
Earlier this year, the Alkhobar authorities announced via media notices that they were hiring professional advisers to enforce judgments against Al-Sanea and the Saad Group, in a move that could be the start of a liquidation process of his remaining assets. Representatives of Al-Sanea did not respond to requests for comment on this matter.
So, the long tortuous process appears to be entering endgame. If it is resolved on the current terms, the Al-Gosaibi family will have to hand over its share portfolio, worth around SR2 billion, and real estate estimated at around SR3.5 billion. They will be left with some operating businesses — some joint ventures, small-scale manufacturing, a hotel and a mall in Alkhobar — and personal assets like their homes.
When the final calculations are done, the big winners will be the professional advisers — lawyers, bankers, accountants, investigators and lobbyists — who have been involved in the deal since the beginning, and who have been clocking up enormous fees all along. “I would not be surprised if the total fees come to more than $500 million, even as much as $1 billion, by the end of it,” Charlton said.
And what does he do after that? Some of the participants in the affair are believed to be writing their own accounts of the saga, and there is even talk of a Hollywood movie being prepared.
Charlton is unlikely to take the show business route. “If we get the deal done, I’d like to help the family rebuild. And maybe advise other families who find themselves in trouble,” he said.


EU privacy law heralds new era in online data protection

Updated 25 May 2018
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EU privacy law heralds new era in online data protection

  • Extensive new privacy regulations halied by privacy advocates worldwide
  • But critics say rules create a burden for small businesses, with advertisers and publishers impacted

BRUSSELS: New European privacy regulations that went into effect on Friday will force companies to be more attentive to how they handle customer data, while bringing consumers both new ways to control their data and tougher enforcement of existing privacy rights.
The European Union General Data Protection Regulation (GDPR) replaces the bloc’s patchwork of rules dating back to 1995 and heralds an era where breaking privacy laws can fetch fines of up to 4 percent of global revenue or €20 million ($23.48 million), whichever is higher, as opposed to a few hundred thousand euros.
Many privacy advocates around the world have hailed the new law as a model for personal data protection in the Internet era and called on other countries to follow the European model.
Critics, though, say the new rules are overly burdensome, especially for small businesses, while advertisers and publishers worry it will make it harder for them to find customers.
The GDPR clarifies and strengthens existing individual privacy rights, such as the right to have one’s data erased and the right to ask a company for a copy of one’s data.
But it also includes entirely new mandates, such as the right to transfer one’s data from one service provider to another and the right to restrict companies from using personal data.
“If you compare the GDPR with the data protection directive you can really compare it with a piece of software upgrading from 1.0 to 2.0,” said Patrick Van Eecke, partner at law firm DLA Piper.
“It’s a gradual and not a revolutionary kind of thing ... However for many companies it was a huge wakeup call because they never did their homework. They never took the data protection directive seriously.”
Activists are already planning to leverage the right to access one’s data to turn the tables on large Internet platforms whose business model relies on processing people’s personal information.
That means companies are having to put in place processes for dealing with such requests and educating their workforce because any non-compliance could lead to stiff sanctions.
Studies suggest that many companies are not ready for the new rules.
The International Association of Privacy Professionals found that only 40 percent of companies affected by the GDPR expected to be fully compliant by yesterday’s deadline.
It is unclear how many provisions of GDPR will be interpreted and enforced. A patchwork of European regulatory authorities, many of whom say they are under-funded, will oversee the new law, with a central body to resolve conflicts.
One key provision of GDPR, the right to data portability, is causing particular confusion.
Lawyers and experts say it is not clear how far the right for individuals to move their data from one service provider to another will stretch.
“I think the data portability rights are pretty significant and are going to take a while for people to figure out what the bounds of them are and how to go about complying with them,” said David Hoffman, Director of Security Policy and Global Privacy Officer at Intel.
For example, music streaming services like Spotify create playlists for users based on their music preferences. While a user seeking to exercise the data portability right would be able to move playlists he or she created, the situation becomes fuzzy if the playlists are created by the streaming service using algorithms.
EU data protection authorities said individuals should be able to transfer data provided by them but not “derived data” created by the service provider such as algorithmic results.
Tanguy Van Overstraeten of Linklaters said the data portability right could raise issues of intellectual property.
“It’s not obvious that you can necessarily migrate the data from your system to somebody else’s system,” he said.
On the business side, companies are rushing to renegotiate contracts with suppliers and service providers because GDPR increases their liability if something goes wrong.
Under the current rules it is generally the company that determines the purposes of data collection that is directly liable for any breaches.
GDPR changes that, and data processors which only process or store the data on behalf of their clients, for example cloud computing providers, will be directly liable for sanctions and could face lawsuits from individuals, and that needs to be reflected in contracts.
Companies can have hundreds, thousands or tens of thousands of agreements which need to be revisited to ensure they comply with GDPR.
“After 20 years of data protection legislation in place, it’s only now with the GDPR they (companies) start to think about ‘what’s my role in the whole story? Am I a data controller or data processor?’” Van Eecke said.