By Rory Jones in Dubai and Margot Patrick in London
HSBC Holdings PLC has come under investigation by regulators in
Saudi Arabia for its role in a stock listing that has left
investors nursing heavy losses and the bank's chief executive
cleaning up a fresh mess.
Saudi Arabia's Capital Markets Authority, or CMA, in September
suspended HSBC from conducting some asset-management activities and
is investigating whether the bank's Saudi unit inflated the
valuation of a construction firm's listing in 2008, according to
three people familiar with the matter.
London-based HSBC's brush with the regulator in Saudi Arabia,
one of the world's most promising new frontiers for foreign
investors, marks another blow to a bank that has seen certain
business practices run afoul of global authorities in recent years
and its management criticized for a lack of oversight.
In June, HSBC reached a settlement with authorities in
Switzerland in which its Swiss private bank was accused of aiding
tax evasion by its customers. The bank paid 40 million Swiss francs
($42.3 million), acknowledging what it called "organizational
deficiencies" and saying it has improved its processes.
The bank still is being investigated by authorities in several
countries over the matter. HSBC Chief Executive Stuart Gulliver
told British lawmakers in February that the Swiss issue was under
control.
HSBC paid $611 million to global regulators last year over
attempts to rig foreign-exchange rates. The bank said it wouldn't
tolerate improper conduct by employees.
In 2012, the bank agreed to pay $1.9 billion in a settlement
with U.S. authorities related to criminal charges that Latin
American drug cartels laundered money through its U.S. bank. The
bank entered into a five-year deferred-prosecution agreement and
pledged to overhaul its compliance systems.
Mr. Gulliver met with CMA Chairman Mohammed Al Jadaan this
spring as the bank grappled with the probe into the listing of
Mohammed Al-Mojil Group, or MMG, according to a person familiar
with the matter. In a separate investigation by the CMA, some
high-ranking executives at MMG are charged with misleading
investors and face five years in prison if found guilty.
HSBC confirmed to The Wall Street Journal that it is cooperating
with both the CMA investigation into the MMG listing and a review
of its operations that the regulator launched last year. Mr.
Gulliver, who was head of the HSBC division overseeing listings
globally from 2006 to 2011, declined to comment through a
spokeswoman.
A lawyer for MMG founder Mohammed Al-Mojil said the CMA charging
document "names various defendants but fails to show what actions
they directly took that could be interpreted as a violation." The
CMA didn't respond to emails and phone calls for comment.
The regulator is monitoring remedial action being taken by
HSBC's Saudi unit to clear up compliance failings that go back more
than 10 years, the people familiar with the bank's operations
said.
The bank's Saudi unit has taken steps to restructure its board
and governance committees, and has hired new management at the
division, according to Majed Najm, chief executive of HSBC Saudi
Arabia. "The result of the reforms is a stronger, better managed
business," Mr. Najm said in a statement. Restrictions imposed by
the CMA on HSBC conducting some asset-management activities were
lifted last week, Mr. Najm said.
After the United Arab Emirates, Saudi Arabia is HSBC's
second-biggest profit generator in the Middle East and North
Africa. The region is the bank's second most profitable globally
after Asia and last year made up 9.8% of a total $18.6 billion in
profit, according to HSBC's annual report.
As part of the 2012 settlement with U.S. authorities, HSBC
embarked on a court-supervised cleanup of its anti-money-laundering
controls across 73 countries. To help counter the costs of
additional compliance, HSBC is focusing its global operations on
lucrative markets like Saudi Arabia, which last month opened its
$590 billion stock market to foreign investors for the first
time.
HSBC Saudi Arabia is 51%-owned by Saudi British Bank and 49% by
HSBC. The U.K. lender has a 40% stake in Saudi British Bank, with
the remainder owned by Saudi nationals.
HSBC's troubles in Saudi Arabia began last August when auditor
PricewaterhouseCoopers produced a 200-page report on the bank for
the CMA after complaints from customers about the performance of
some investment products.
The report, reviewed by the Journal, outlined 185
recommendations on how to improve compliance, risk and governance.
Nearly half the issues were identified as "critical" or "high
risk." A companywide filter to fight financial crime wasn't being
applied "in any way or form" as of June 2014, the report said, more
than a year after Mr. Gulliver said the filter was crucial and that
HSBC would pull out of countries where it couldn't uphold global
standards.
An HSBC spokeswoman said in a statement: "HSBC has provided HSBC
Saudi Arabia Limited, which is a joint venture between HSBC and
Saudi British Bank, with HSBC Global Standards. As we do not have a
controlling interest in HSBC Saudi Arabia Limited, we cannot compel
them to implement."
The report also highlighted five cases of potential misconduct
by HSBC's Saudi unit over a 10-year period, one of which was
related to MMG. It noted a number of "optimistic" and "aggressive"
forward-looking assumptions in the MMG valuation by HSBC that it
said weren't in line with historical trends, such as the estimated
value of future projects and potential win rate for projects on
which the firm would bid. Three of the five cases examined
real-estate investment products that had lost the majority of their
value and in which clients alleged mis-selling of investment
products. PricewaterhouseCoopers declined to comment.
In 2005, HSBC was hired by MMG as underwriter and lead financial
adviser for the firm's initial public offering. The bank led due
diligence and received a fee based on the value of the deal,
according to the report. At the IPO in 2008, Mr. Mojil sold 30% of
his stake to the public, reaping 2.1 billion Saudi riyals ($560
million).
The investment community hailed the listing as a success. Osama
As'ad, the investment-banking director at HSBC Saudi Arabia who led
the IPO, joined Mr. Mojil's investment company, Al-Mojil
Investment, soon thereafter and is now chief executive. Ammar
Qadumi, an auditor at Deloitte & Touche who worked on MMG's
books during the listing process, joined the construction
contractor in 2009 as deputy chairman for financial affairs.
In 2010, investors began questioning MMG's financial health as
the firm began writing down the value of money it was owed for
contracts while costs on projects ran over budget. MMG's shares
were priced at 65 riyals ($17.33) at the listing, but they
plummeted to 12.55 riyals by July 2012 when the Saudi regulator
suspended trading.
In December 2014, Mr. Mojil, his son Adel Al-Mojil, Mr. Qadumi
and nine other individuals were named in a formal charging document
issued by the CMA to the Committee for the Resolution of Securities
Disputes, a Saudi judicial body. Mr. Mojil, his son and Mr. Qadumi
all face charges of misleading investors by allegedly inflating the
value of fixed assets, recognizing unearned revenue and declaring
inaccurate estimates for costs, some of which are tied to its IPO,
according to the document reviewed by the Journal. Their assets are
frozen and they are banned from travel, according to the
document.
Mr. As'ad hasn't been accused of any wrongdoing.
Mr. Mojil and his son filed a claim last month in Dubai
International Financial Centre courts against consulting firm
Protiviti Inc.'s Middle East affiliate, the firm that produced a
report for the CMA investigation into MMG in the aftermath of the
suspension of share trading. They allege the CMA issued its
charging document based on the Protiviti report, which they claim
misrepresented facts and defamed them with unproven
accusations.
"It is unfortunate that one could see such lack of clarity and
total reliance by the CMA on a Protiviti report that we have
proven, on numerous occasions, is materially erroneous," the lawyer
for the Mojils said.
A lawyer for Mr. Qadumi, who left MMG in 2012, said his client
hadn't violated any of the Saudi regulator's securities rules.
U.S.- based Protiviti said it was aware of the case against its
Middle East affiliate but declined to comment.
The CMA also suspended Deloitte starting last month from
offering audit services to any new listed companies because of the
investigation at MMG. Deloitte previously confirmed the suspension
but declined to comment further.
Meanwhile, authorities in the U.S. and U.K., including U.K.
regulators the Prudential Regulation Authority and Financial
Conduct Authority, have been notified of the investigation into
HSBC's Saudi unit, people familiar with the matter said.
Ahmed Al Omran contributed to this article.
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