Investor Kickback Scam in Dubai

20 Nov 2012
Posted by The Free Zone

Investor scams happen everywhere round the world, but the absence of a State Tax Authority provides excellent breeding ground for fraud such as a kickback scheme. Here’s an example of a recent 2012 kickback scam in tax free Dubai – UAE, leading to a brand new but technically bankrupt company.
 

The kickback business plan

A CEO and CFO present a booming business concept to attract investors. Nothing new, it happens all the time in the Gulf region.  The sky is the limit, future investors can even work in the company for a very attractive salary.

Investor scam in Dubai - UAE
The Sky is the Limit - Investor scams in the UAE through kickbacks

The CEO / CFO crew works hard to convince investors to make a start-up deposit. Skeptical investors are quickly abandoned and replaced by new investors, the more inexperienced the better. Draft contracts are shown but not signed – key is to lure investors into making a deposit with a truck load of promises and huge return on investment without signing paperwork.

A nice business location is presented – the building already exists and is empty. Brand new empty buildings are very easy to find in the UAE. The landlord gets a rental contract proposal too good to be true. The 1 year rental contract is almost double the market value.

The CEO / CFO management team proudly take no salary, but get a nice cut in future shares. That’s all they ask for the idea, nothing more. They work “for free” in the meanwhile.

Once investors deposit their investment reaching the minimum investment threshold, the kickback scam starts rolling.
 

Dubai kickback business

A free zone company is registered in name of the CEO or CFO and a limited company is established with 51% emirate ownership and 49 % in name of the new free zone company.

The first stage is to transform the empty building into a nice looking business location. The landlord gets paid for 1 year with investors money, for a kickback – a thank you for the awesome deal. Then construction companies start building the interior on very good contracts, again for a handsome kickback. Everybody is still smiling.

Personnel is hired and investors who want to work in the company get a great salary. The rest of the investors become silent participants. They are all kept on a leash, the paperwork and shares will come soon. Nobody complains, business should start as soon as possible.

IT infrastructure is delivered, again with good kickbacks paid from investor money. A junior accountant is hired for the lowest salary possible, to deal with the financial administration. No experience is absolutely key – the accountant should not be capable to remotely understand what’s happening.

The company is there – people hired and tools delivered – the business opens its doors. The CEO and CFO are only part-time available after opening, their office is elsewhere. Their key involvement from here is structural absence.
 

Brand new bankrupt company in Dubai

The brand new company is launched, the first revenue starts to appear with still everybody happy and smiling. In the beginning the CEO and CFO are only at the company  1-2 hours / week – outside they are unreachable by default.

The junior inexperienced accountant is already struggling in the first 2 months.

Bankrupt through kickback scams in Dubai - UAE
End of the road - Technically bankrupt through kickbacks in Dubai - UAE

Financial accounts are inaccurate, filing is a mess and people start asking how the company is doing. Nobody knows, the fresh accountant can’t produce accurate numbers and the CFO doesn’t answer.  Luckily there’s no state tax department – demanding accurate numbers for tax revenue collection.

The bottom of the company bank account comes within reach, investor money is almost gone, 6 months after launch. Then the CFO appears again. The company is going bankrupt, investors money is gone because the business doesn’t generate the cash envisioned.

People get angry and demand the departure of the CFO / CEO. They acknowledge their mistakes and offer their shares for sale to other investors.
 

Kickback business end-game

Investors try to save their investment and are forced to re-invest to avoid going bankrupt.  They buy the shares from the CEO – CFO in face of loosing everything. The share transfer price is handsome and the original shareholders are left with a nice furnished business but technically bankrupt.



The company needs immediate restructuring by a financial specialist in order to sort out the mess. Investors reluctantly hire an expensive ad-interim CFO to try and steer away from going bankrupt.  Handsome salaries are drastically lowered, high service contracts are renegotiated and the extremely steep rent is discussed with the landlord. 

Any return of investment is out of reach for several years – money in the bank has much higher yields.
 

Looking back - The investor kickback scam

Key in this kickback scam example is to gain trust from inexperienced investors and the absence of a state tax authority. Normally both demand an accurate financial administration from start exposing inflated invoices leading to a trail of kickbacks.

Kickback scam in Dubai - UAE
UAE - Dubai has no state tax authority - making accurate book keeping optional

Most of the kick back fraud in this example happened in the first 3 months. The setup is to bankrupt the new company through inflated invoices hidden by the absence of an accurate financial administration. Once the company opens its doors, most of the harm is already done.

Seasoned investors always get their paperwork done upfront. They use escrow accounts to trickle fund the startup business based on accurate monthly reporting.  When there is a State Tax Authority, the Serious Fraud Office (SFO) does not hesitate to haunt CEO’s / CFO’s and contracted companies with their kickbacks dealings even years after the scam. With this the creator of a kickback scheme have little chance of making serious money and most of all a clean get-away.



In tax free business environment it’s crucial to establish absolute accuracy and transparency in the financial administration. Trustworthy experienced CFO’s with a good track record are expensive – making the CFO salary and CV the first benchmark for experienced investors.
 

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