A 12,000-tonne mobile offshore production unit constructed by Topaz Energy and Marine. The company is based in Dubai and does business in the Gulf, Central Asia, west Africa and Brazil. Courtesy Topaz Energy and Marine
A 12,000-tonne mobile offshore production unit constructed by Topaz Energy and Marine. The company is based in Dubai and does business in the Gulf, Central Asia, west Africa and Brazil. Courtesy TopazShow more

Topaz mulls price of transparency over fraud affair



The case of the London-based trader Kweku Adoboli seems to illustrate one basic fact of life in the complex world of international business - the threat of fraud is never far away.

The former UBS employee has been charged with fraud amounting to US$2 billion (Dh7.34bn) during a three-year period, and has yet to respond to the charges. Whatever the outcome of the case, once again the frailties and vulnerabilities of large cross-border corporations are highlighted.

In the Middle East, big-time fraud is still largely unquantifiable. Many who do business in the region suspect it goes on, but serious fraud on the UBS scale has not come to light.

A survey by the international accounting firm Deloitte found that last year about 35 per cent of executives said they had experienced at least one fraud, 14 per cent of which were worth more than $1 million and 7 per cent more than $10m.

Many said the incidence of fraud had increased since the global financial crisis began in 2008.

Dubai went public on the problem soon after, with a high-profile audit of government-related businesses, resulting in the imprisonment and prosecution of several executives accused of fraud, embezzlement or illegally obtaining funds.

Nonetheless, there is a suspicion that a great deal of fraud goes unreported and unrecovered.

"There is no incentive for a company to report that its internal systems have failed to the extent that they fell victim to organised fraud. They will usually try to deal with it internally, and take the financial hit," said one anti-fraud practitioner in the UAE, who declined to be identified. But a recent case involving a prominent regional business shows a new approach to the problem, and a new willingness to expose fraud, even when the impact for the company can be negative.

Topaz Energy and Marine is an oil services and engineering group that is based in Dubai and owned by the Omani conglomerate Renaissance. It does business across a range of locations, from the Gulf to Central Asia, to West Africa and Brazil.

Earlier this year,the future looked good for the company, headed by the Topaz chief executive Fazel Fazelbhoy, who had the highly regarded chief financial officer Richard Howes at his side.

In March, Topaz announced its intention to float shares on the London Stock Exchange in an initial public offering (IPO) that could raise up to $500m to fund future global expansion.

In particular, Topaz was praised by advisers and experts for its high ethical levels. "Levels of transparency and governance are gold standard," said one person close to the company. It also had blue-chip advisers in the shape of the heavyweight investment banks Merrill Lynch and JPMorgan Chase.

Then came two shocks: in May, the company announced it was pulling out of the planned IPO, citing global and regional volatility and a resulting fall in potential investor appetite.

But the real surprise came last month, when Topaz said it had uncovered a $2.9m fraud.

The chief executive and chief financial officer left the company, although there was no suggestion that the departures were linked to the fraud.

Stephen Thomas, the chief executive of the parent company Renaissance, took over as head of Topaz.

The events caused a buzz in Dubai financial circles. How could a company get to the verge of a London flotation, with all the due diligence and scrutiny that such a process involves, and be unaware of the $2.9m hole in its accounts?

Was the decision to abandon the IPO connected to the fraud?

Mr Thomas, conscious of the continuing investigations into the fraud and the damage the affair has already done to Topaz, is careful about what he can say on the subject.

"We believe it shows how good our corporate governance is. We picked up a fraud in a foreign subsidiary through our own internal systems," he says.

Investigations by an international accounting firm found the fraud was committed over a period of eight years by an individual outside the UAE or Oman.

With so much of its business in energy-rich but corruption-prone countries in Central Asia, the opportunities for criminality were rife.

Since the initial announcement, further reviews by investigators suggest the company might have lost $1.8m to fraud and not the original figure of $2.9m.

Turnover at Topaz in the period of the fraud amounted to billions of dollars, raising questions among some observers whether the company needed to disclose it at all.

"It was a policy decision, one we had not faced before," says Mr Thomas. "We want to behave to international standards of governance and therefore felt this should be disclosed regardless of materiality."

There was no linkage between the fraud and the aborted flotation, he insists.

"The IPO was pulled because of market conditions. Investor sentiment evaporated in the light of the Arab Spring, the Japanese tsunami and the euro-zone troubles. It had nothing to do with the fraud, which was discovered some weeks after the decision to postpone the IPO."

Corporate victims of fraud often begin an immediate hunt to find somebody to blame, but Topaz appears to be resisting that temptation.

"No blame attaches to the advisers. Having done an exhaustive review of how the fraud took place, I realise how difficult it was to have picked it up in the due diligence process," says Mr Thomas.

Nor does he blame the departed executives for the problems.

"The management changes were not as a result of the fraud or the postponed IPO," he says. "There was a difference of opinion about the priorities of the business and the role of executives within the reorganisation process. I've got the highest regard for the work of our former executives."

Nonetheless, the episode has been damaging for Topaz and its parent company, whose shares suffered in the aftermath of the revelations.

There is still the possibility the IPO could be relaunched before the one-year mandate expires next March, but it is unlikely to be in the same form, and if anything, market conditions have moved further against it since May.

So does Topaz regret going public on a minor fraud thousands of miles from its main operations? Should it have brushed the affair under the carpet? "We have paid a price for that with the initial negative reaction to the message itself, rather than appreciation that the message has been disclosed at all," says Mr Thomas.

"The positive is we are taking an unprecedented step in this part of the world in terms of open transparency and disclosure."

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Tips to avoid getting scammed

1) Beware of cheques presented late on Thursday

2) Visit an RTA centre to change registration only after receiving payment

3) Be aware of people asking to test drive the car alone

4) Try not to close the sale at night

5) Don't be rushed into a sale 

6) Call 901 if you see any suspicious behaviour

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