The investment guru Warren Buffet once said that it is only when the tide goes down that we discover who has been swimming naked. On Wall Street, being caught with your pants down can get you 150 years in prison. Ask Bernard Madoff.
In the Middle East, it is low tide and skinny dipping was clearly in fashion during the last few years. But it seems that being caught naked is not always a crime. Businessmen caught naked seldom pay the same price as (say) a naked couple cavorting on a public beach in Dubai.
Since the beginning of the global financial crisis, there have been several high profile frauds in the oil rich gulf kingdoms comprising the Gulf Cooperation Council (GCC). Of late, frauds have skyrocketed across the Gulf according to a survey conducted by KPMG late last year.
In recent times, several prominent locals and expatriates have been arrested or detained in the UAE. But the arrests have only served to highlight the weak legal infrastructure prevalent in the Gulf kingdoms.
Persons are often detained for long periods without any charges and seldom produced before a court until long investigation periods are completed. There are few transparent reviews of the evidence or charges pertaining to the arrests and detentions.
The latest fraud is alleged to be worth USD ten billion and involves one of Saudi Arabia's most prominent families, the Gosaibis. (The numbers are large enough to have gone beyond the pages of the Gulf media and into the international press.)
Many regional banks claim to have suffered losses as a result of the alleged fraud. Court proceedings are currently taking place not in Saudi Arabia, but in a US court. A US (or other international jurisdiction) court may provide banks with their best hope of recovering some of the money by having relevant corporate assets attached.
These same banks may fear that the impartiality of the Gulf's legal systems will be sacrificed at the altar of political influence. Or it may simply be a case that there is no legislation in place in the Gulf to tackle (possible) frauds associated with complex financial transactions.
The UAE is trying to address these legal weaknesses by building a parallel financial legal system through the Dubai International Finance Center. However, if confidence in a nation's primary legal system is lacking, participation by the private sector in economic activity will never realize its full potential.
Modern capitalist societies, such as those envisioned by the GCC rulers, demand that transparent, predictable and impartial legal structures are put in place. Until then, the public sector will continue to bear a disproportionate burden of the Gulf's economic development.