Law Office Management
May 2, 2008
Latham of Arabia
California law firms may be late to the party, but there's still big money to be made recycling petrodollars in the Persian Gulf.
With oil at more than $100 a barrel, it's really good to be the sheik. A quarter of all the construction cranes in the world, it is estimated, are busy in the oil-rich United Arab Emirates (UAE) on the Persian Gulf. Dubai boasts the world's tallest building, palm-shaped artificial islands, and a ski slope. And Abu Dhabi, which claims the world's most expensive
hotel, is opening branches of the Guggenheim and Louvre museums, and an overseas campus of the Sorbonne.
"We are seeing a transfer of wealth from the Western world to the petro producers," says William H. Voge, a partner in the New York office of Latham & Watkins and global chair of the firm's finance department. "For every $1 per barrel increase in the price of oil, the country of Qatar increases its oil revenue by a million dollars a day. There is no alternative to this wealth transfer, unless oil drops to $50 or $60 a barrel."
Where petrodollars flow, can global law firms be far behind? Latham is among the newest entrants to the Middle East's legal market. It joins more than 20 other firms with offices in the UAE, Saudi Arabia, Kuwait, Qatar, and Bahrain. Some of those firms-Patton Boggs, Shearman & Sterling, and the Magic Circle firms of the United Kingdom-have been in the Gulf since the 1970s. They came primarily for the energy work. But the firms now moving in offer services ranging from project finance to M&A, as well as commercial real estate and structured finance for the Islamic capital markets.
"We've represented Middle Eastern clients, especially in Qatar, for years, but until recently we didn't want to put people on the ground," Voge says. "That changed last year. We held a firmwide conference in April and created an ad hoc Middle East strategy committee to gather macroeconomic data. We interviewed our institutional-investor clients, and we talked to competitors-including the Magic Circle firms, Shearman & Sterling, and Vinson & Elkins. We concluded that while there may be too many firms at the low and middle markets, firms capable of high-end work are underrepresented in the region."
Latham's strategy committee-which Voge chairs-presented its findings to the firm's executives, and then to all its partners, in November. "Our 475 partners were enthusiastic- there wasn't a single 'no' vote," says Voge. The firm decided that to be successful, it needed to be bold. So it opened three Gulf offices at once: in Abu Dhabi, Dubai, and in Doha, Qatar.
But recycling petrodollars is not without hazards. The sovereign wealth funds (SWFs) of the Persian Gulf tired long ago of investing in U.S. treasuries. Today, the various emirates shop for hard assets, such as Sony; J Sainsbury PLC, the British supermarket chain; the London Stock Exchange; and most recently, 7.5 percent of Citigroup. Six Gulf states-Dubai, Abu Dhabi, Kuwait, Oman, Qatar, and Saudi Arabia-control some $1.7 trillion, which is about half of the entire world's sovereign wealth assets.
For the targets of outbound investment, however, the catch in selling hard assets is twofold: Sovereign wealth funds, by definition, have strategic as well as financial ambitions, and the accounting at many of the government-owned funds is remarkably opaque.
Those twin concerns prompted a Republican-controlled Congress to scuttle a deal in 2006 that would have given operating control of port facilities along the U.S. Eastern seaboard to a subsidiary of Dubai World. Since then, national-security concerns have only been made worse by a lack of transparency at Middle Eastern SWFs. Using the academic grading system, the Peterson Institute for International Economics in Washington, D.C., this year gave "F" grades for the transparency of SWFs in Saudi Arabia, Abu Dhabi, and Qatar.
For those with long memories, the hazards of black-box banking in Abu Dhabi are all too real. "It's a completely lawless environment, without any form of regulation or taxation," says Jack A. Blum, of counsel to Baker Hostetler in Washington, D.C. In 1986 Blum served as chief investigator for Sen. John Kerry's Subcommittee on Terrorism, Narcotics and International Operations as it attempted to unravel allegations of fraud and money laundering at the Bank of Credit and Commerce International (BCCI). The Luxembourg-based bank-by 1990 wholly owned by the Abu Dhabi Investment Authority (ADIA)-collapsed in July 1991, with estimated losses of $4 billion. A rogue's gallery of depositors included Manuel Noriega, Charles Keating, Marc Rich, the CIA, and operatives of the Carter and Reagan administrations, who used the bank to launder funds for the Iran-Contra affair as well as the war against the Soviets in Afghanistan.
"There's a building boom now in the Persian Gulf, fueled by oil money," Blum says. "Abu Dhabi is a magnet for all kinds of people-the Russian mafia, arms dealers, the sellers of parts for nuclear weapons. It's sort of like the pirate cantina in Star Wars, and American law firms are offering to give you a stool at the bar."
Blum is particularly caustic about the Dubai International Financial Centre (DIFC), created by the emirate in September 2004 as an investment haven. According to the center's website, companies inside the 110-acre business zone enjoy "zero tax rate on profits, 100 percent foreign ownership, no restrictions on foreign exchange or repatriation of capital, operational support, and business continuity facilities."
"Using transfer pricing, goods come into the DIFC at one price and go out at another, with no sense of who is reaping the profits," Blum says. "I don't think it's healthy-some countries shouldn't be allowed to act like black boxes." The emirate recently granted Latham's DIFC license application.
John W. Moscow, a partner at the New York office of Baker Hostetler, began investigating Abu Dhabi's connection to BCCI in 1989 as head of Manhattan District Attorney Robert M. Morgenthau's white-collar fraud section. "The fund managers in Abu Dhabi today are very smart, very well-advised, and pursue the best interests of their country," Moscow says. "They've jumped from the 15th century to the 21st century, but missed the intervening steps in thinking and the standards currently accepted worldwide."
Moscow says that compared to the sophistication of Dubai, Abu Dhabi is still largely a Bedouin society. "To quote [columnist] Thomas Friedman, 'Inshallah ["God willing"] means the same as mañana, only with less urgency,' " he says. "Be prepared for a culture clash."
The specter of strategic investing by the UAE in U.S. assets-coupled with a lack of financial transparency-has set off alarm bells among would-be regulators. Sen. Evan Bayh (D-Ind.) visited Abu Dhabi for high-level discussions with ADIA's managers shortly after its Citigroup investment last November. The Group of Seven, the IMF, the World Bank, the European Commission, and the Organization of Economic Cooperation and Development all are working on proposed safeguards for SWF investments.
In March, Abu Dhabi sent a three-page letter to U.S. Treasury Secretary Henry Paulson and the international regulators, spelling out a set of principles that would guide its funds. "These investments are good for the global economy-providing increased liquidity, injecting capital for growth, expanding market access, creating jobs, and encouraging a common interest and commitment to mutual prosperity," wrote Abu Dhabi's director of international affairs. The United States then joined Abu Dhabi in a declaration that "investment decisions should be based solely on commercial grounds, rather than to advance, directly or indirectly, the geopolitical goals of the controlling government."
As for the tough neighborhood, Latham's Voge acknowledges that "rubbing shoulders with the mob" is a possibility. "We don't want to take any risk," he says. "We subject potential clients to close scrutiny, and turn away those we wouldn't want to represent. Indeed, there are entities in the Middle East who will never be our clients. So intake gives us concern, but not a lot of pause."
Such assurances don't comfort Blum at Baker Hostetler. "The oil-rich Arab states own us, but with a total lack of transparency," he says. "There is just no way to regulate financial institutions globally in an effective way."
Alexandra Brown
For reprint rights or to order a copy of your photo:
Email
jeremy@reprintpros.com
for prices.
Direct dial: 949-702-5390
Send a letter to the editor:
Email: letters@dailyjournal.com