As two of the region’s most prominent family firms prepare to battle it out in a New York court, Claire Ferris-Lay examines what this will mean for family-owned companies in the Gulf.

When one of Saudi Arabia’s richest men, Maan Al Sanea first had his accounts frozen back in May after another prominent Saudi family-owned bank, The International Banking Corporation (TIBC) in Bahrain defaulted on one of its payments, no one outside of the Gulf took a great deal of notice.

Weeks later, however, the story escalated as it emerged that Ahmed Algosaibi & Brothers (AHAB) had filed a lawsuit against Al Sanea in New York, accusing him of embezzling $10bn from the company, which is owned by his wife. The claim, filed after Dubai-based Mashreq bank sued the Algosaibi family for $150m in unpaid loans, alleges that Al Sanea used his position as a senior executive at one of the Algosaibi subsidiaries, Money Exchange, to loot the company using inflated spreads on short-term foreign transactions.

“As a result of Mashreq’s participation in fraudulent foreign exchange transactions, such as the [$150m] one at issue in this proceeding, Al Sanea was able to continue looting AHAB and to conceal the massive scope of his thievery from AHAB and its board,” said court documents filed by Algosaibi in the New York Supreme Court.

The accusation has shaken Gulf family firms, considered the cornerstone of business in the Middle East, not least because of the prominence of each of the families involved.

Al Sanea, a former air force pilot, was Arabian Business’ third richest Arab in its annual Rich List, with an estimated fortune of $9.3bn. Al Sanea’s firm, a huge investment company, was last year said to hold over $30bn in assets worldwide, including $7.1bn in cash and $10bn in liquid securities. The Saad Group also owns stakes in HSBC, Berkley, a British homebuilder and 3i, a private equity firm. The Algosaibi family owns Saudi-based AHAB, a huge conglomerate, which includes the Saudi distribution rights for American Express Gold Card and Amex Travellers Cheques. The industrial firm, which was founded by Hamad Ahmad Algosaibi, first made its fortune in the pearling industry before moving onto filling Pepsi bottles in the 1950s. Today the family are said to be worth an estimated $3.8bn.

Neither family’s wealth is unusual in the region where family-owned companies are said to control around 90 percent of all commercial activity in the GCC, according to a report by private equity firm Ithmar Capital. The report adds that these 5,000 firms hold combined assets of more than $500bn and employ 70 percent of the workforce.

“Many of them are of a size as such that they are larger than many companies that are listed on the exchanges,” Dr Nasser Saidi, chief economist at Dubai International Financial Centre (DIFC) tells CEO Middle East.

Despite the size of these companies, they are well-known for being exceptionally secretive and almost always opt to settle any disagreements behind closed doors. The Algosaibi’s decision to file this suit is considered highly unusual, says Eckart Woertz, programme manager of economics at the Gulf Research Centre in Dubai. “It’s a first and unusual for this region. The guys are basically relatives, so you would expect some kind of amicable solution,” he says.

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Local and international banks are estimated to have around $10bn in exposure to the beleaguered Algosaibi Group and Saad Group. Although credit ratings agency Standard & Poor’s released a statement claiming that the significant exposure is manageable, the systemic impact to the Gulf’s economy has left international lenders questioning the safety of their assets and analysts calling for an end to name lending and greater transparency for all family firms.

“I don’t think… going ahead a family enterprise [will] easily borrow from banks that it does not know very well or neighbouring countries. I think they will now only lend to family enterprises they really know well,” says Woertz.

Saidi agrees that the culture of name lending, in which established Gulf companies are able to borrow money from creditors on the sole basis of their name rather than transparent due diligence, will be less apparent following the Algosaibi case. “Certainly I think all banks will review their procedures [and] the due diligence they undertake... I think name lending will be less preponderant,” he says.

Greater due diligence is unlikely to be the only impact this case will have on the way Gulf family firms will have to conduct business in the future. Analysts have called it a catalyst for change to increase transparency. Although both Algosaibi and Al Sanea were both covered by two international credit rating agencies, Standard & Poor’s and Moody’s, both have since ceased their coverage, citing lack of information. Most family owned conglomerates, however, are highly secretive and conduct the majority of their affairs outside of the public eye.

Saidi, a keen advocate for great transparency in the Gulf region as a whole, has called an end to business being conducted behind closed doors, as this case highlights the severe impact these huge companies have on the entire region’s banking system. “It is true that these are family businesses that are privately owned. That’s fine, however, the implication, as we have seen, of distress at the level of these companies has the economy in what we now call systemic risk implications,” he says.

“Enough has been done behind closed doors, more needs to be done in the open so that creditor rights in particular are well-protected... It is not sufficient to say these are just private or family-owned and [we] can therefore leave them on their own, that is not true... We need to have reporting by these companies.”

While he accepts that privately owned companies have some rights to certain levels of secrecy, he adds that their sheer size and level of exposure to the financial system as a whole calls for greater corporate governance.

“[There might be some] reluctance towards divulging information but I think one also has to be clear that we are not talking trade secrets.”

Woertz believes it is too early to tell what type of impact this case will have on the region’s conglomerates. While he accepts that it is likely to increase transparency as banks increase their due diligence, he predicts the next generation of family owners will have far less responsibility than their current owners. “Maybe [they will] streamline some of the conglomerates, in the wake of inheritances there might be an occasion to split the business amongst several brothers and focus on key competencies.”

Whatever the outcome of the case, it is likely to be the beginning of a new chapter for the way in which Gulf family firms conduct their business.

View Saudi Rich List