Dubai’s Kaloti Case Highlights Business Culture Clash - Middle East Real Time - WSJ

Dubai’s Kaloti Case Highlights Business Culture Clash - Middle East Real Time - WSJ:

The revelation this week that a Dubai-based gold refining company did more than $5 billion in cash transactions two years ago and imported several tons of Moroccan gold disguised as silver has ruffled feathers among regulators and auditors that oversaw the firm during that period. Yet it isn’t the first time a Dubai company has come under criticism for lack of compliance with global standards. It isn’t even the first time a local gold company has faced this kind of scrutiny.

The latest case centered on Kaloti Jewellers, which auditors at Ernst & Young last year found to be non-compliant with standards in the Dubai Multi Commodities Centre, where it is based, according to a report Wednesday by Global Witness. Global Witness found fault with Kaloti, but also with E&Y for not reporting the breaches to authorities in London and with the DMCC for changing rules covering disclosure of audits while E&Y was carrying out its examination. Kaloti responded by saying it had taken corrective action and was now in full compliance with rules, while E&Y defended its “highly professional work” and the DMCC rejected any suggestion that it acted improperly.

Wherever the truth lies, the Kaloti case speaks to something auditors, regulators and companies in Dubai and other wealthy-but-still-emerging economies have dealt with before: a many-sided corporate culture. Large foreign companies have been active here for decades, bringing with them western governance and accounting practices. Yet many local traders – even large ones that do billions of dollars of business each year – still operate according to older rules. The world of compliance and know-your-customer documents and supply chain due diligence and corporate governance is still largely foreign to the merchants in Dubai’s gold souk, for example, where trust, relationships and a profitable deal are the operative parameters of business.

Kaloti was in some sense still enmeshed in this traditional business culture. It has offices in the gold souk, where thousands of people come every day to buy or sell gold, often for cash. These days, cash deals are frowned upon because they can obscure the origin of the metal. Knowing the origin is important because of the existence in the supply chain of conflict gold from unstable areas of eastern Congo.

People in the auditing business say the disconnect between traditional and modern ways of operating often become apparent when global firms come to check the books. A Dubai-based executive at one of the major accounting firms said there was sometimes a tension in emerging markets between the need for auditors to sustain business relationships with companies and the need to do their jobs up to international standards.

Nicolai Tillisch, an executive coach and author of a book on doing business in the Gulf, said all kinds of international advisory firms have these problems. “It is a trade-off: one of the reasons why people buy their services is the global brand but on the other there are regional ways of doing business,” he said. “Audit and other firms need to be careful – the way of doing business here is simply different. “

Kaloti acknowledged in a compliance report that an initial review revealed “deviations” in that the company “did not identify risks in cash settlement transactions which was the typical modus operandi in the Dubai wholesale gold market.” It went on to say the company took steps last year to move suppliers away from cash settlements and was now fully compliant with regulations. It has also ceased dealing in Moroccan gold. No evidence was uncovered by the company or its auditors that it ever dealt in conflict gold.

The thematic background of the Kaloti case is in some ways reminiscent of the Damas International case five years ago. Damas, a jewelry retailer that unlike Kaloti was publicly traded, fell into difficulties after one of the three brothers who held a majority stake made about $165 million in transactions that weren’t authorized by its board of directors. Regulators fined the founders and replaced its board in 2010. The company restructured its debts and was taken private in 2012.

Some observers saw the problems at Damas partly as the result of a conflict between modern corporate governance and an older M.O. where owners extracting money from companies without board approval – if a board even existed – was common. As the Gulf’s business culture edges further toward modernity, more clashes between old and new could be on the horizon.

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