US embassy cable - 04ABUDHABI2596

C O N F I D E N T I A L SECTION 01 OF 02 ABU DHABI 002596 
 
SIPDIS 
 
STATE PASS FEDERAL RESERVE 
 
E.O. 12958: DECL: 08/03/14 
TAGS: EFIN, ECON, ETTC, PREL, TC 
SUBJECT:  CENTRAL BANK GOVERNOR THINKS DIFC SET BACK BY 
FIRINGS 
 
REF: A) DUBAI 3527, B) DUBAI 3201, C) DUBAI 3095 
 
(U) Classified by CDA Richard Albright for reasons 
1.5 (B and D) 
 
1. (C):  Summary: In meetings over the last week with the 
Central Bank Governor and the American CEO of a local bank, 
Econchief had the opportunity to discuss the impact on the 
Dubai International Financial Center (DIFC) of the firing 
of its top two regulators DFSA Chairman Ian Hay Davison and 
DFSA CEO Phillip Thorpe (reftels).  Both stated that DIFC's 
reputation had been badly hurt with western financial 
institutions.  The governor speculated that the firings 
would set back DIFC's effective start date.  He also stated 
that the Central Bank would act to prevent any second tier 
banks from opening in the DIFC.  End Summary. 
 
2. (C) In an August 3 meeting with Central Bank Governor 
Sultan Nasser Al-Suwaidi, Econchief asked for his views on 
what the dismissal of Thorpe and Hay-Davison meant for 
DIFC.  Al-Suwaidi shook his head and said that he thought 
that DIFC had badly damaged its reputation the way it 
handled the firing.  He noted that a financial center 
relied on its reputation and stated that he thought that 
DIFC had set itself back "a few miles" in its efforts to 
actually attract any financial institutions.  He added that 
he doubted DIFC would actually "get started" soon, despite 
the decree allowing it to operate.  A few days earlier, 
Econchief had met with Abu Dhabi Commercial Bank (ADCB) CEO 
Eirvin Knox (protect).  Knox brought up the subject of 
DIFC.  He said that his sense was that DIFC hurt itself 
with western banks by the firings.  ADCB is not interested 
in participating in DIFC, but is concerned about the 
potential reputation risk to the UAE. 
 
3. (SBU) Al-Suwaidi noted that he had been at a conference 
in London when the story broke.  Long before the firing, 
DIFC had invited all of the conference attendees to a 
lunch.  After the news came out, the conference organizers 
and attendees wondered whether the lunch would still be 
held.  Al-Suwaidi said that the lunch was, indeed, held, 
but that DIFC Chairman Anis Al-Jallaf did not attend the 
lunch, claiming "a headache."  He also noted that the press 
had bombarded him with questions about the affair while he 
was in London and he implied to Econchief that DIFC 
officials, also in London, were dodging the press. 
 
4. (C) Econchief asked Al-Suwaidi what impact the firing 
would have on DFSA's real regulatory independence.  Al- 
Suwaidi said that he had some questions about whether the 
DFSA would be truly independent and said that the new 
chairman of the regulatory council, Habib Al-Mulla "is a 
lawyer, not a banker," questioning whether he could be an 
effective supervisor. Knox had earlier noted similar 
concerns about DFSA's real independence.  He said that Hay- 
Davison and Thorpe had some international credibility and 
opined that no local could be immune from potential 
conflicts of interest. 
 
5. (C) Econchief also asked Al-Suwaidi what he thought 
about reported DIFC plans to bring in regional second-tier 
banks and whether the Central Bank would need to more 
aggressively supervise the center.  Al-Suwaidi said that he 
wasn't worried about DIFC's accepting second tier banks, 
because the Central Bank would block any banks that were 
not good ones.  He said that DIFC had told him that it 
wanted top quality, well regulated, financial institutions 
and that he planned to hold them to their word.  He gave 
Econchief a Central Bank translation of the law and said 
that it gave him all of the authority he needed. 
 
5. (U) The Financial Free Zone Law confines banking 
licensing to "branches of companies and establishments, 
joint ventures, and companies wholly owned by any of them, 
provided it has a sound financial position, complete 
organizational and managerial structure, and is run by 
individuals of sufficient experience and knowledge of this 
type of activity."  It further states that "the criteria 
for licensing companies, branches of companies and 
establishments shall not be lower than those applied in the 
State."  The law also states that "the competent 
authorities in the federal government may conduct 
inspections of Financial Free Zones to ensure compliance 
with the provisions of this law, and present findings 
thereof to the Cabinet for appropriate action." 
 
6. (C) Comment: CG Dubai has extensively reported on the 
general concern Dubai based bankers have shown about DIFC 
post firing.  DIFC had undoubtedly hoped that the passing 
of the federal decree on July 6, and public affirmations of 
DFSA regulatory independence would help put the whole 
business in the past.  Al-Suwaidi (and Knox's) concerns 
strongly indicate that DIFC still has a way to go to 
recover its luster.  Post is struck -- and pleased -- by 
Al-Suwaidi's assertion that he will block DIFC from 
bringing in second- rate banks.  Although, Al-Suwaidi's 
definition of first tier banks will undoubtedly leave room 
for some regional players, there could be a conflict 
between DIFC and the Central Bank if they were to differ on 
their definitions of "sound financial position" and 
"sufficient experience and knowledge."  Al-Suwaidi is very 
protective of the UAE's reputation as a financial center 
and successfully had inserted a number of conditions 
"hemming in" DIFC into the law.  Over time, we had noticed 
that his initial skepticism had mellowed and that he was 
willing to give DIFC a chance.  Although he is still 
willing to give DIFC a chance, his skepticism has certainly 
increased and DIFC will again need to work to overcome 
this.  End Comment. 
 
Albright