Commercial Fraud is a Two Way Street – Middle East Companies Increasingly Fall Victim To Sophisticated U.S. Scams

online-fraud-scammer419By: Wassem M. Amin, Esq.

A recent disturbing trend that I have witnessed in my practice is the rising occurrences of fraud perpetuated upon Middle East businesses via sophisticated schemes in the United States.  Most, if not all, cases take place within the context of a sales agreement where a fictitious American supplier targets Middle Eastern import/export firm.  Sophisticated scams often involve official-looking documents, such as bills of lading, fake certificates of origins, and even letters of credit.  Most correspondence between the parties is done via email and the parties rarely meet in person.  In particularly sophisticated cases, the scam artist in the U.S. even invites a representative to meet at the American Company’s “headquarters,”–which turns out to be an office suite rented for the day.

After the purported agreement is reached, the purported supplier urges the Middle Eastern company to wire funds prior to shipment of the agreed-upon goods.  This is usually accompanied by fictitious emails from a fake freight or shipping agent to reassure the buyer of shipment.  Of course, once the buyer wires the money, they never hear from any of the parties again.  I have seen losses that range from a few thousand dollars to millions of dollars.

Middle Eastern companies are particularly susceptible to fraud by US scam artists due to several misconceived notions.  First and foremost, they believe that a US company cannot be fraudulent due to erroneous misconceptions about the U.S. laws and regulations.  Second, most commercial business transactions in the Middle East are very informal and do not involve extensive legal documentation.  They rarely ever involve legal counsel.  Therefore, most Middle Eastern buyers are unfamiliar with the requirements of any agreements and how to conduct due diligence to properly vet a potential supplier.

A Middle Eastern company can reduce the risk of such fraudulent transactions in several different ways.  First, it is always advisable to seek the professional counsel of an International Transactions Attorney or Business Consultant, particularly one who is familiar with the Middle East.  The expense incurred may protect against exponentially larger losses.  Second, international buyers should insist on using a Letter of Credit as the method of payment–especially if the parties do not have any prior transactional history.  A Letter of Credit will work as a safeguard to ensure that goods are shipped prior to the release of funds.  Third, international buyers should conduct their own extensive due diligence to ensure that the supplier or seller is a reputable company.  That may include steps such as retrieving the company’s corporate/business registration records, asking the company for prior buyers’ contact information as references, and search with local and national Better Business Bureaus to uncover customer complaints.

The extent of protective measures, of course, depends on the size and complexity of the transaction involved.  The bottom line is that once a buyer is defrauded, it is very difficult to recover the losses.  Consulting an international transactions attorney or consultant is an important investment for any party – whether a US supplier OR a international buyer.  As always, caveat emptor.

Disclaimer: These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice.  The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

Wassem M. Amin is an Associate Attorney at Dhar Law LLP in Boston, MA.  Wassem has extensive experience in the Middle Eastern region, having worked as a consultant in the area for over 9 years.  Wassem currently focuses his practice on Corporate Law and International Business Transactions.  For more information, please visit the About Us page or http://www.dharlawllp.com. 
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Record Growth Forecasted for Islamic Finance but Risks Remain

By: Wassem Amin

A new report published by Ernst & Young is forecasting a 17% annual growth in Islamic banking assets by the end of 2013, reaching nearly $1.8 trillion.  This confirms the recent trend of migrating from conventional finance to Shari’a compliant finance by many Middle Eastern markets.  In the beginning of January 2013, for example, the regulatory authority for Dubai’s financial markets published a proposed set of uniform standards for the securitization of sukuk (Islamic bonds) assets.  Sukuk represent, by far, the largest growing Islamic financial product globally.

However, interestingly, the E&Y report is forecasting that the majority of the growth in the Islamic finance to come from countries other than those in the Arabian Gulf and South East Asian region.  That indicates that conventional financial institutions are beginning to offer Shari’a-compliant financial products in an attempt to capture a share of the rapidly-expanding market.  China, in particular, has been noted as a strong prospect for future expansion of Islamic banking.  Numbering over 150 million, Chinese Muslims account for nearly 10.3% of the country’s population.

To support this growth, the report highlighted the need for reform in three areas: Regulatory reform, Risk reform, and Retail banking reform.  Regulatory oversight of Islamic banking institutions remains fragmented and lacks integrated compliance and capital optimization.  Shari’a governance, in particular, represents an important, yet widely unacknowledged risk.  As discussed in in my comparative analysis of Saudi Arabian and Malaysian markets, there are relatively few Shari’a scholars who specialize in Islamic banking.  That results in significant conflicts of interests when the same scholar sits on the board of several, if not dozens, of Islamic banks.

In order to support the future infrastructure of Islamic finance, universities in the Middle East and globally need to develop degrees focused on educating the future generation of Shari’a scholars that are well-versed in global finance.  Islamic finance is unlike conventional finance in that its identity its tightly woven with religious principles.  Islamic finance scholars need, in essence, to study two concurrent areas: Islamic law & theology and banking & finance.  There are relatively few universities that teach courses on Islamic finance and even fewer ones that offer degrees specializing in that area.

US Citizenship Through Islamic Finance Compliant Investments: The EB-5 Investor Visa Program

By: Wassem M. Amin, Esq.

ImageThe United States is one of the largest recipients of foreign direct investment from the Middle East, particularly from Saudi Arabia, Kuwait, Qatar, and the United Arab Emirates.  Despite the economic recession, investors from these countries continue to diversify within the U.S. financial and real estate markets.

Unbeknownst to many foreign investors, however, is that a collateral, or perhaps primary, benefit of investing in the United States may be the ability to obtain permanent residency and eventual citizenship.  A foreign investor who makes a qualifying investment can apply to obtain a green card (permanent resident card) and, eventually, United States citizenship if they meet all the criteria of the EB-5 immigrant visa program.

However, a challenge for many Middle Eastern investors is the ability to procure an EB-5 qualifying investment that will also adhere to the principles of Islamic Finance.  There are several methods to structure an EB-5 investment to be Islamic-finance compliant, one of which is discussed in this post.

The EB-5 Program

The United States Congress created the employment-based EB-5 immigrant visa category in 1990 for immigrants who invest in and manage U.S. commercial enterprises that benefit the economy.  To qualify, investments must create at least 10 full time jobs for U.S. workers.  The minimum investment required is $1 million, although that amount is reduced to $500,000 if the investment is made in a high unemployment area or a qualifying rural area.  Immigrant investors who successfully qualify would obtain a permanent resident card with the opportunity to apply for citizenship after 2 years.

In 1992, to stimulate interest, Congress enacted the EB-5 Regional Center Pilot Program.  The program allowed public and private entities to apply to the United States Citizenship and Immigration Services (“USCIS”) to be designated as a regional center.  The regional center would, in turn, develop qualifying investments for foreign investors under the EB-5 program.  Regional centers provide a structure for focusing foreign investment in a specific U.S. geographic area and for promoting economic growth in such area through increased export sales, creation of new jobs, and increased domestic capital investment.  For an immigrant investor, the benefits of investing through a regional center are numerous.  Typically, a regional center investment has already been evaluated for feasibility.  Similarly to a real estate developer who is raising capital, a regional center would already have prepared business plans, private placement memorandums, feasibility studies, and other offering documents.  In the case of an EB-5 investment, the regional center would have also completed economic impact studies to demonstrate to USCIS that it meets the job-creation criterion. In addition, most regional centers hold an immigrant investor’s funds in an escrow account pending USCIS approval of the investor’s EB-5 application.   Therefore, if the application is denied for any reason, the investor recovers his or her principal investment.

Most Regional Center investments are in large real estate development projects.  For example, a recent example of a regional center I have advised was structured as a partnership to invest in the expansion of an established ski resort in the state of New Hampshire.  The partnership was structured as a limited partnership, with the foreign investors designated as the limited partners and the real estate developer as the general partner.  Such a partnership can also comply with Islamic finance principles, subject to the requirements discussed below.

Structuring the Investment to be Islamic Finance (Shari’a) Compliant

Islamic Finance products and instruments set out to achieve the same business goals as conventional finance products and instruments, but within the constraints of Islamic rulings.  Islamic-compliant financial solutions range from profit-and-loss sharing mechanisms, consumer finance, trade finance, working capital finance, and project finance.  Broadly speaking, Islamic finance prohibits excessive risk or speculative investments and the payment or receipt of interest.  In addition, risks in any transaction must be shared between the parties, so that the provider of capital (investor) and the entrepreneur share the business risk in return for a share in the profits.

A Regional Center may qualify as an Islamic-finance compliant investment by structuring the entity as a partnership.  A permissible method of Islamic financing is a musharaka, which, in Arabic, literally means “sharing.”  A musharaka is a joint enterprise formed for a business purpose in which all partners share profits according to a predetermined ratio.  However, the key difference is that losses must be divided exactly in accordance with the pro rata share of capital invested by each partner.  In the context of real estate and project financing, the foreign investor, as a limited partner, would contribute capital while the real estate developer, as the general partner, would contribute either real estate assets or additional capital.

To ensure compliance with Islamic finance principles, the agreement between the partners would need to describe the capital contributions and the allocation of profits and losses, as well as the management responsibilities (which would normally be undertaken by the real estate developer as general partner).  The real estate developer would then undertake the project using the capital and other contributed assets in the construction and operation of the project.

Disclaimer: This article is for informational purposes only and does not constitute an offer or solicitation to sell shares or securities. None of the information or analyses presented are intended to form the basis for any investment decision, and no specific recommendations are intended. This article does not constitute investment advice or counsel or solicitation for investment in any security.  These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice.  The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

Demystifying the Saudi Arabian Market: Investment Options and Establishing a Presence (Part 2)

doing-business-in-saudi-arabia_mainBy: Wassem M. Amin

Saudi Arabia’s Foreign Investment Regulations give foreign investors a variety of options in determining how to conduct business operations in the Kingdom.  However, regardless of the option chosen, if a physical commercial presence is established, foreign investors must first obtain a foreign capital investment license from the Saudi Arabian General Investment Authority (SAGIA).

Establishing a Physical Presence

Investments in Saudi Arabia may be through the formation of a new business entity or through the acquisition of assets or equity in an existing company.  Commercial enterprises by foreign companies may be structured as any of the following: (1) joint ventures, (2) wholly owned subsidiaries, (3) local branches of a foreign company; or (4) representative or agent offices.

The principal body of law governing commercial enterprises in Saudi Arabia is the Companies Regulation, which is enforced and regulated by the Ministry of Commerce and Industry.  In some circumstances, an enterprise may be subject to the rules and regulations of additional regulatory bodies such as the Saudi Arabian Stock Exchange (Tadawul), the Saudi Arabian Monetary Agency (SAMA), or the Capital Market Authority (CMA).

In terms of the legal type of entity established, foreign investors have several options to consider–depending largely on the scope and type of the proposed enterprise as well as the investor’s exit strategy.  The types of entities are: (1)  Joint Stock Company; (2) Limited Liability Company; (3) Joint Venture; (4) Branches of foreign companies; and (5) Technical and Scientific offices of foreign companies.

Joint Stock Company (JSC): JSCs are the most analogous entity to a C-Corporation in the United States.  They may be wholly foreign owned and are typically established with the intent towards a future public offering and listing on the Saudi Stock Exchange (Tadawul).  A minimum of 5 shareholders and 3 directors on the board of directors is required.  The minimum initial capitalization required is 2 Million Saudi Riyals (SR), which rises up to SR10 Million if the JSC will issue publicly traded shares.

Limited Liability Company (LLC): As with JSCs, Saudi law permits an LLC to be wholly foreign owned and managed.  LLCs must have at least 2, but not more than 50, member-investors. Each member owns a pro-rata equity share equal to the uniform nominal value.  Liability of individual members, under most circumstances, is limited to the member’s paid-in capital.  Minimum initial capitalization for an LLC with any foreign members is typically SR500,000.  However, for certain industries, such as agricultural or industrial projects, the minimum capital may be much higher.  Unlike JSCs, LLCs do not issue shares and cannot be publicly traded on the Saudi Arabian Stock Exchange.

Joint Ventures – LLCs and JSCs may both be wholly owned or established with a Saudi business partner.  The decision to establish a Saudi partner may be mandatory in some fields, such as establishing a branch of international law firm.  However, in other cases, a foreign investor may benefit from a Saudi partner’s expertise and familiarity of the local market, customs, and traditions.  The risks and benefits of doing so must be carefully analyzed after thorough due diligence is conducted.

Branches of Foreign Companies – Branch offices are set up to represent foreign companies in Saudi Arabia.  Similarly to JSCs or LLCs, branch offices are allowed to engage in direct business activities.  However, their scope of business is limited to that of the parent company.

Technical and Scientific Offices (TSOs) – TSOs are easily set up in Saudi Arabia and are usually established when a foreign company enters into long-term distribution or agency arrangements with local companies.  However, their scope of allowed commercial activity is limited to providing technical support and assistance to local distributors, agents, and consumers.  TSOs are prohibited from engaging in any direct business activities.

Other Commercial Arrangements – Distribution arrangements may be done through a joint venture with a Saudi partner or by appointing a local distributor or agent on your behalf.  Other options, such as franchising or a direct international sale, may also be available, depending on the type of service or product the foreign company offers.

Demystifying the Saudi Arabian Market: Opportunities and Challenges (Part 1)

By Wassem M. Amin

doing-business-in-saudi-arabia_mainThe Kingdom of Saudi Arabia unveiled a record budget for the 2013 fiscal year.  According to Fitch Ratings,  overall spending has been increased by nearly 20% over the past year.  In fact, spending in every sector will increase between 20-30%.  For example, the budgeted capital spending is 28% higher in FY13, while spending on the Education and Healthcare sectors will increase by nearly 36%.  Saudi Arabia’s increased spending is part of the its policy to create economic diversification and reform, in turn decreasing their dependence on oil revenue and creating new jobs for the local population.

In tandem with aggressive economic growth and spending, the government has been seeking to boost local and private foreign investors in the Kingdom.  Over the past few years, it has overhauled previously restrictive foreign direct investment laws to allow businesses to be wholly-owned by foreigners.  At the same time, it has significantly increased the availability of resources to foreign investors through its investment arm, the Saudi Arabian General Investment Authority (SAGIA).  In addition, despite the political unrest in the Middle East and worldwide global recession, the Kingdom has remained relatively stable and, thus far, unaffected.

The Kingdom’s expansionary policy has created significant opportunities for foreign investors.  However, although many multi-national corporations have penetrated the market, individual investors and small to medium enterprises (SMEs) still find it difficult to do so.  This is due to a combination of factors.  First, individual investors and SMEs often lack the access to global consulting firms that assist many larger businesses.  Second, the Kingdom, unlike its neighbor the United Arab Emirates, has not engaged in aggressive advertising to advocate foreign investment.  Third, although the government has implemented significant reform, its complex legal system, based on Shari’ah law, is confusing to outsiders.

Finally, and perhaps most critically, the Saudi culture and society remains extremely conservative.  Those unfamiliar with cultural norms and customs are often shocked upon their arrival in the Kingdom.  On a few cross-border transactions that I have consulted on, that lack of awareness has typically been the most likely precipitator of frustration between either party.

Saudi Arabia is perhaps one of the most attractive foreign investment economies in the world.  Investment opportunities exist in virtually every sector.  But, as with any investment, it is necessary to be fully informed.  A thorough knowledge, either through professional consultation or self-education, of the risks, laws, traditions and customs is a critical prerequisite.

Over the next couple of weeks, I will be writing a series of blog posts that address the most important differences and similarities of doing business in Saudi Arabia.  I will focus on different investment vehicles, setting-up a business, regulatory laws (including IP protection), locating resources, and customs and traditions.

If you have any individual questions, feel free to contact me.