The London High Court has ordered Ernst & Young (EY) to pay former EY Dubai audit partner Amjad Rihan $11 million compensation for loss of past and current earnings.
The details are revealed in its judgment dated April 17, 2020.
EY, one of the Big Four accounting firms, provides advisory, assurance, tax and transaction services globally. It operated under the name EY Dubai in the United Arab Emirates.
In 2013, Rihan, the whistleblower, became aware of serious irregularities in the business operations of an audit client, Kaloti Jewellery International DMCC (Dubai Multi Commodities Centre). The irregularities raised the possibility of money laundering.
Withstanding pressure from EY and the DMCC to sanitise his audit and compliance report of Kaloti, Rihan and his family felt compelled to temporarily leave Dubai for their own safety.
When EY tried to coerce Rihan into returning to Dubai in 2014, he was forced to resign. He says that over the next few years he was blacklisted and unemployable.
The court judgment is focused on whether Rihan was entitled to damages for negligence and conspiracy to injure and, if not, the damages he was entitled to – but the evidence led and the court’s findings are in my view a damning indictment of EY’s role in this matter.
Kaloti purchased and refined gold. The irregularities uncovered on the audit are briefly summarised below:
- Kaloti sourced gold from various regions, including Morocco. The Morocco gold had been painted silver to circumvent Morocco’s restriction on gold exports. In Dubai, on importation, the metal was declared as gold (this is referred to as the Morocco gold issue).
- Approximately 40% of the value of Kaloti’s transactions were in cash, hence the money laundering allegation. In addition, gold is classified as a “conflict mineral” as it may be traded for the purpose of financing terrorist activity or organised crime. For this reason, gold refining and trading requires heightened due diligence and regulation.
- In 2012, Kaloti’s cash transactions amounted to approximately $5.2 billion.
- In 2013, large cash transactions were identified involving gold supplied from Sudan ($52 million) and Ghana ($100 million).
- About two tons of gold had also been bought in cash from ‘call’ customers who had no account with Kaloti, and without adequate documents or ‘know your client’ procedures.
Rihan conveyed information about the irregularities to the DMCC, which then put “improper pressure” on him and EY Dubai to airbrush the irregularities, thereby misleading readers of the reporting documents.
Fearing for his and his family’s safety, Rihan located to the UK in 2013.
Senior EY officials “developed proposals that amounted to acquiescence and collusion” with DMCC’s plan to protect Kaloti from an adverse audit finding.
Rihan protested that this was unethical, amounted to professional misconduct, and should be reported to the London Bullion Market Association.
When Rihan refused to sign assurance audit reports, EY replaced him with a more malleable accountant, who duly sanitised Rihan’s audit findings.
EY’s name was thus lent to “a flagrantly misleading assurance reporting process”.
EY tried to force Rihan to return to Dubai. He refused on the basis of security concerns. He had previously privately disclosed the irregularities to the international NGO Global Witness, which, when it was clear Rihan had to resign, publicly released Kaloti’s businesses practices.
Getting ‘in’ by any means
Testifying in court, Rihan recalled a meeting held in London in 2013 with Hervé Labaude, EY general counsel for the region, at which Labaude applied pressure on him to sign the sanitised audit documents.
Labaude uttered a French quote, which translates as: “If we can’t get in through the door we get in through the window”. The court accepted this to mean that Labaude was accusing Rihan of preventing him from devising a means of avoiding disclosure of the real Kaloti audit findings.
A brief summary of the findings
- The court rejected EY’s arguments in regard to Rihan (EY had argued that Rihan is a liar and an opportunist who fabricated parts of his account and was not motivated by his professional conscience, but by his thirst for fame, publicity and compensation).
- The court found the evidence of EY global executive Mark Otty relating to the Morocco gold issue to be misleading, and that he twisted the truth by concealing the existence of documentary evidence.
- EY should have foreseen the damage that would be suffered by Rihan if he had to resign and that he could become unemployable.
- An employer has the duty to provide an acceptable work environment, including providing a safe place of work, a safe system of work, and an ethically acceptable work environment – free of criminal and unethical conduct.
- An auditor’s confidentiality is overridden by considerations such as the obligation to disclose possible criminal activity, including terrorist financing or money laundering.
- An auditor must comply with the IFAC (International Federation of Accountants) Code, even if the country in which they are carrying out an audit has less restrictive requirements.
- EY was required to perform the audit duty and avoid further breaching it by involving the claimant in further improper conduct. It should have made clear to the authorities in Dubai that the DMCC must cease trying to exert improper influence on it and cease its improper support for Kaloti. Instead, Otty tried to “persuade the claimant not to worry and that everything would be fine; and, through Mr Labaude, continued their efforts to persuade the claimant that he had better stop his protests if he knew what was good for him”.
- EY was in serious breach of the audit duty of care following on Labaude exerting improper pressure on Rihan, including threatening him with “consequences” for his partnership, and by accusing him of behaving unprofessionally, using the phrases “dropped the ball”, “personal credibility issue” and “you haven’t done your job and your duty”.
- EY was guilty of professional misconduct in suggesting to Kaloti that it should draft its compliance report in a manner that masked the reality of the Morocco gold issue, and that removing the reference to Morocco and changing the coating of gold bars with silver went “beyond documentary irregularities”.
- EY was also in breach of the principles of integrity and objectivity in the IFAC Code.
- It was also improper that the audit compliance report made no mention of the cash transactions issue and that the review period had been changed to June to December 2012, omitting the first half of 2012 and thus the Morocco gold issue.
- EY had compromised its independence, integrity, objectivity and professionalism.
The judgment includes a detailed analysis of how the court arrived at the total sum of damages payable to Rihan, finally determined at $10.8 million (R202 million) for loss of earnings and future loss of earnings, and £118 000 (R2.76 million) for medical and insurance cover.
This appalling treatment of a whistleblower, the consequences for any future employment, the dire consequences on his health and the attempted cover up of criminal activity is yet another huge blot on the accounting fraternity.
But do they care?
EY includes the EY network, the EY organisation, Ernst & Young Global Limited, Ernst & Young Europe LLP, Ernst & Young (Emeia) Services Limited, and EYGS LLP.