Business | Investment
Keeping the fraudsters at bay
The UAE's booming economy and the promise of attractive returns on all asset classes are drawing investors from around the world.
- By Babudas Augustine, Banking Editor
- Published: 00:05 May 3, 2008
The UAE's booming economy and the promise of attractive returns on all asset classes are drawing investors from around the world. But, owing to its wealth and open economic policies, the country is also becoming a target for fraudsters.
Attractive valuations of the local stocks have encouraged foreign institutional investors, hedge funds and pension funds, gradually and steadily to invest here. In fact, DFM data indicate that foreign investors have become the prime movers on the market, suggesting that they see value in what is happening here.
Despite fears of overheating, robust demand and relative supply shortages are expected to keep property rental yields near double-digit territory ensuring high returns in real estate sector. According to a recent report by Al Mal Capital, property values have quadrupled since 2002, when the property market was opened to foreign investment.
Investor confidence is key to keeping the good times rolling. In that light, recent news reports emanating from the local financial and property markets are disturbing, and call for urgent action from all concerned.
While Deyaar, Dubai's third-biggest publicly-traded property company, is being investigated for possible fraud, Abu Dhabi police said last week they were investigating a case of alleged swindling of investors of hundreds of millions of dirhams through an unlicensed investment company that promised monthly returns in the range of 30 to 40 per cent.
Although illegal, unlicensed fund management business is quite rampant in the UAE. Investor exuberance and overconfidence can create fertile ground for fraudsters and fly-by-night operators. It is, then, no surprise that the UAE investors who are used to doubling their investments in the property sector are becoming easy prey to such outlandish promises of 40 per cent a month (480 per cent yearly) return on their investments.
Trend
A recent study by the University of Minnesota links fraud generally with conditions of economic boom. Fraud is most likely to occur in relatively good times, and the link between fraud and good times becomes stronger when a gung-ho atmosphere blunts the critical faculties of regulators and auditors.
According to this study, fraud peaks towards the end of a boom and is then revealed in the ensuing bust. When investors, intermediaries and regulators fail to ask pertinent questions about gains that seem too good to be true, greed takes precedence over prudence, while standards are allowed to slip and swindles go unnoticed.
Vigilance at all levels can help limit such instances. Improved 'Know Your Client' standards at banks and brokerages can provide vital clues to law enforcement agencies, market operators and regulators on potential fraud.
The fight against fraud and corruption should not be isolated or event-driven, but rather a continuing battle, across business and industries with the participation of all stakeholders in the economy.
The UAE with its ambitions to become a global financial centre has no choice but to deal with it from all angles and nip such tendencies in the bud.
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