Fighting fraud

Paul Koster, the chief executive of Dubai Financial Services Authority talks to Claire Ferris-Lay about fraud and increasing regional transparency.
Fighting fraud
Paul Koster is DFSA’s third CEO since it set up in association with the DIFC in 2004.
By Claire Ferris-Lay
Tue 08 Dec 2009 04:00 AM

Paul Koster, the chief executive of Dubai Financial Services Authority talks to Claire Ferris-Lay about fraud and increasing regional transparency.

When Paul Koster first took over the helm of the Dubai Financial Services Authority (DFSA), almost a year to the day he meets with CEO Middle East, he was dubbed by the regional press as a ‘fraud fighter'. Having already conducted a six month investigation that uncovered a series of violations in his home country, the Netherlands, there were high hopes for the new chief executive of the DFSA, Dubai International Financial Centre's (DIFC) regulatory authority.

Koster has certainly lived up to his name. In addition to introducing a series of new initiatives to tackle corruption for the 300 plus companies working within DIFC, he has also ramped up the number of firms under investigation during 2009 to 130. "Our approach as a regulator is very proactive [and] risk-based, which means we try and asses potential risks and risky areas in our evaluation," he explains.

"We do risk assessments at the firms, we advise firms to adjust their procedures or set-up and we do onsite visits... We also do thematic reviews and look at how all firms deal with a particular issue. We also have a SWAT team [that we use] when there is an unfolding situation." So far his proactive stance has led to 11 companies being identified for immediate rather than longer term investigation, he tells CEO Middle East.

Although Koster has increased regulation, he does note that there can be such a thing as too much regulation. "Yes, I have increased supervision," he admits. "[But] we are of the opinion that [introducing additional regulation] should not be done too lightly because rules and regulations are not going to stop people from doing the wrong things.  Increased supervisionary activity offsite actually stops people from doing it because you catch them in the act and you can actually do something at that very moment."

He asserts that the introduction of ‘living wills' or contingency plans (which enables a company to be wound down quickly if it get into trouble to minimise the disruption to markets) would be an "administrative nightmare". "[Living wills] will bring a whole host of administrative requirements that would be seriously costly and would also involve administrative nightmare so to speak."

Koster, previously a commissioner for the Autoriteit Financiële Markten, the Netherlands Authority for Financial markets, is the DFSA's third chief executive since it set up in association with the DIFC in 2004. DFSA's team of 120 staff currently regulates 323 entities including registered auditors, authorised firms, ancillary service providers and one of Dubai's stock markets, Nasdaq Dubai - all of which are based in DIFC. Although the regulator has its own set of rules and regulations and follows international best practices, it refers to British laws if an issue is not covered by the current regulations.

Although in the year since his appointment Koster has made his own mark on the authority, he admits he has been forced to take a slightly different approach to regulation amid the downturn.

"The crisis bought on a whole new set of circumstances," he explains. "As a result of the crisis we have really changed some of our approaches so we try to be even more proactive. We have, for instance, increased the number of onsite visits [and] we do more transactional testing, which is key."

And yet despite the difference in approach, Koster adds that his two biggest challenges remain this region's bugbears; transparency and corporate governance. "Two key elements in this region [that need to be changed] are transparency and governance. Both I feel are in the development stage but I see it as my role to participate as much as possible to promote that."

Not that he sees transparency in a region, which is generally known for its discrete family owned businesses, as an easy sell. "Transparency is something that you need to sell because it's not in the genes here. It's been family business orientated - ‘why would I tell my neighbour what I'm doing?'... It's something that needs to be taken step by step," he explains, all too aware of the series of cases that have come to light in Dubai as well as the rest of the Gulf amid the global economic downturn.

Although Koster sees it as part of his job to promote the benefits of increased transparency, he believes that the biggest difference can be made by private equity firms who buy up stakes in family owned firms and demand less transparency than the strictly regulated bourses.

"Private equity will help to allow firms to get used to a little bit more of transparency; it's not the full blown transparency that you need when you are on the stock exchange, it is a more one to one basis."

He is also only too aware of the difficulties family owned firms face when they list on stock exchanges. During our interview we discuss the recent resignation of Tawhid Abdullah, the CEO of Dubai-based Damas International. Abdullah quit the firm after admitting he made $165m of "unauthorised transactions." A Damas board member anonymously blamed the transactions on the company's difficulties grappling with transparency following its listing on Nasdaq Dubai 18 months previously. "The transition is difficult," notes Koster. "It comes from centuries of having done this business model and now suddenly you hear that you should do things differently."

But he is, however, under no illusion that if Gulf-based companies intend to become part of the global economy, they need to adhere to international rules and regulations. "Ultimately, you have to accept as a local firm that if you want to play in the international arena with money flowing to your business, that you have to meet the levels of transparency. I think the events in Saudi Arabia have also bought to the fore that banks are asking more questions so I think everything points to the benefits of transparency.

"It is my firm belief that when you are transparent and there is something that needs to be disclosed, disclose it, speculation is rife and as long as you try to cover things up, it will only blossom and it will only become worse."

Despite the huge challenges that lie ahead Koster remains ever impressed with the region's willingness to learn. "I really think they want to learn in this region, they want to benefit from the knowledge available elsewhere, they are optimistic - which is a real wonderful treat for me to experience - and they are willing to look to the positive side as a result of that of what might happen in the future."

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