JOHANNESBURG — Emerging market private equity fund Abraaj last made headlines in South Africa in 2016 as a potential suitor in the battle for Barclays Africa. That sizzled out, and it seems it may have been for the better for Barclays Africa, as Abraaj makes headlines for what look like more sinister practices, as the company goes through liquidation proceedings. The Dubai-based firm is accused of taking money from its funds and using it for purposes that weren’t sanctioned. But what may not come as a surprise to many is that the Middle East affiliate of KPMG is drawing attention for the role it played as the group’s auditor. – Stuart Lowman
KPMG was key witness as investment firm Abraaj unraveled
By Simon Clark, William Louch and Nicolas Parasie
(The Wall Street Journal) – The unraveling of Abraaj Group, a once-highflying champion of emerging-markets investing, is drawing attention to the role played by its auditor, a Middle East affiliate of KPMG.
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KPMG International, the firm’s global umbrella organisation, is now working with law firm Linklaters LLP on an independent investigation of its Dubai-based affiliate’s work for Abraaj, according to Brian Bannister, KPMG’s London-based global head of communications.
Investors have accused Dubai-based private-equity firm Abraaj of taking money from its funds and using it for purposes that weren’t sanctioned. The firm, which attracted money from governments and private investors around the world, has filed for a liquidation proceeding in the Cayman Islands. Under pressure from investors and creditors, the firm has agreed to sell several parts of its business.
KPMG audited Abraaj and at least nine of its biggest funds, public records show, including funds where investors say money was used for purposes other than intended. KPMG also audits companies Abraaj invested in, such as Air Arabia Group, an airline which was a recipient of Abraaj money and invested $336 million with Abraaj.
“The close relationship between KPMG and Abraaj raises red flags,” said Sabah al-Binali, an Emirati management consultant and former chief investment officer of investment bank Shuaa Capital.
Mr. Binali said he isn’t an investor in Abraaj, but has observed the firm and met with several of its employees.
“We take the questions raised in relation to Abraaj very seriously,” Mr. Bannister said in an emailed response to questions.
The ties to Abraaj run deep. KPMG Lower Gulf Ltd., the Dubai-based affiliate, is led by chairman and chief executive Vijay Malhotra. His son has worked at Abraaj. An executive named Ashish Dave alternated between stints at KPMG and as Abraaj’s chief financial officer, a job he held twice. At least two other members of Abraaj’s finance team in Dubai also previously worked for KPMG.
Mr. Malhotra and Mr. Dave didn’t respond to requests for comment. A spokeswoman for KPMG Lower Gulf declined to comment.
KPMG International declined to comment on the hiring practices. Abraaj spokeswoman Mitali Atal said it is normal for a financial company like Abraaj to hire people with experience at accounting firms like KPMG.
U.S. institutions including the Bill & Melinda Gates Foundation, investment company Hamilton Lane and the U.S. government’s Overseas Private Investment Corp. and U.S. Agency for International Development collectively pledged hundreds of millions of dollars to Abraaj. The World Bank and the British, French and Dutch governments also backed Abraaj.
The controversy at Abraaj is the latest to involve KPMG, a network of independent firms in some 150 countries. KPMG International licenses the KPMG trademark and sets standards for all member firms, including KPMG Lower Gulf.
In the U.S., KPMG fired employees over an information-stealing scandal. KPMG said it promptly notified authorities when it learned of the employees’ conduct.
In South Africa, KPMG’s affiliate is under fire over issues including its ties to a politically connected family. KPMG has said its work for the Gupta family fell short of its standards but that there was no criminal wrongdoing.
In the UK, regulators said last month that the quality of audits by KPMG’s British affiliate was “unacceptable.” The affiliate has been investigated by regulators over its auditing of a construction company that collapsed in January. KPMG has said it conducted the audits appropriately.
Audit quality is KPMG’s “number one priority,” Mr. Bannister said. KPMG doesn’t “hesitate to take decisive action when individual behavior or events occur that do not meet the high standards to which we operate,” he said.
Regulators and investors are scrutinizing Abraaj’s management of assets, which peaked at nearly $14 billion this year. Dubai Financial Services Authority officials visited Abraaj in recent weeks and took computers and documents, people familiar with the visit said. Ms. Atal said Abraaj has offered “full cooperation” to regulators and is in “regular dialogue” with them.
Abraaj founder Arif Naqvi faces an arrest warrant in the United Arab Emirates for allegedly writing bad checks to a former business partner for a total of at least $48 million. Abraaj has said that “settlement discussions are ongoing with the intent to arrive at a satisfactory solution for all parties.”
Abraaj filed for provisional liquidation last month in the Cayman Islands amid mounting questions about its management of funds. Deloitte, appointed by Abraaj’s board of directors to investigate the firm, told Abraaj creditors in June that money in Abraaj’s $1 billion health-care fund and another fund was used for purposes other than intended and that Abraaj lacked adequate governance, according to notes of a Deloitte presentation reviewed by The Wall Street Journal. KPMG audits both funds.
After investors in the health-care fund including the Gates Foundation and World Bank last year started questioning whether their money was being mismanaged, Abraaj said it appointed KPMG Lower Gulf in January to “verify all receipts and payments made by the fund.” Abraaj said in a Feb. 7 statement that KPMG’s review found the fund was “in line with the agreed upon procedures.”
Abraaj’s selection of KPMG to review a fund that it audits was a “conflict of interest,” Mr. al-Binali said. Ms. Atal, the Abraaj spokeswoman, said it wasn’t for Abraaj to say if KPMG was conflicted. KPMG declined to comment.
KPMG’s description of its review of the health-care fund differs from Abraaj’s. While Abraaj said in the February statement that the review found “unused capital was returned to investors,” KPMG’s Mr. Bannister said it “did not extend to confirming that all unused capital was returned.” Abraaj said the review verified “all receipts and payments.” Mr. Bannister said it “involved limited procedures on certain cash receipts and payments.”
A forensic audit of the health-care fund by advisory firm Ankura Consulting Group LLC, hired by investors including the Gates Foundation and World Bank, found that money was moved out of the fund, according to people familiar with the audit.
Money originating from Air Arabia was used to replenish the health-care fund, according to people familiar with the situation. KPMG’s review of the fund didn’t mention this, one of those people said. KPMG, Abraaj and Air Arabia declined to comment.
KPMG also audited Abraaj Private Equity Fund IV LP, a $1.6 billion fund, according to a Securities and Exchange Commission filing. In May, Abraaj told investors it used money from the fund to finance its business rather than to invest in companies, the Journal has previously reported. KPMG declined to comment on the fund.
KPMG Lower Gulf was responsible for identifying “fraud or error,” according to a 2016 annual report for the fund, reviewed by the Journal. “In our opinion, the financial statements present fairly, in all material respects, the financial position,” KPMG Lower Gulf wrote in the report.
Write to Simon Clark at [email protected], William Louch at [email protected] and Nicolas Parasie at [email protected]
