Ernst and Young face legal challenge after 'forcing out' partner following Dubai gold audit

Law firm Leigh Day is representing a former Ernst & Young partner in his legal claim following allegations he was forced out of the accountancy firm when he refused to acquiesce with an allegedly unlawful approach to a ‘conflict minerals audit’ of the Dubai-based Kaloti Jewellery International DMCC (Kaloti).

Amjad Rihan was a partner within the Middle East and North Africa (MENA) region for Ernst & Young. His role was Leader of Clean Energy and Sustainability Services.

The gold industry is one of the most important industries in Dubai, worth over $70 billion per year. Kaloti is responsible for the management of all aspects of the Kaloti group’s physical precious metals business.
Kaloti was an Associate Member of the London Bullion Market Association (LBMA), a standard-setting body for the global wholesale precious metals market. It was also accredited by the Dubai government-run Dubai Multi Commodities Centre (DMCC). In order to obtain DMCC and LBMA accreditation, Kaloti was required to conduct periodic independent assessments to verify its compliance with LBMA and DMCC standards regarding responsible sourcing of gold.

The LBMA accreditation system is intended to assure investors and consumers that all London gold stocks are conflict free. The LBMA standards are also used by other markets and exchanges for defining the acceptable brands within their jurisdiction. The attainment of LBMA accreditation was therefore particularly significant for Kaloti because it would confirm Kaloti’s compliance with the minimum standards for trading on the London market.

Ernst & Young Dubai was tasked to assess Kaloti’s compliance with LBMA and DMCC responsible gold standards. Its findings were to be set out in a ‘management report’. Kaloti was then to produce a ‘compliance report’ for publication, which was supposed to accurately reflect the contents of the management report. Ernst and Young would then publish an assurance report confirming the extent to which the compliance report accurately reflected the results of its independent assessment.

Mr Rihan and his team undertook the investigation into Kaloti’s compliance and claims to have found a number of anomalies, including that Kaloti had imported from Morocco into Dubai around 4-5 tons of gold bars which were coated in silver, and which were worth over USD$200m.

The bars were declared as silver to the Moroccan authorities and as gold to the Dubai authorities. Mr Rihan claims that according to Kaloti this was done so as to disguise the gold bars for the purpose of evading Moroccan restrictions on gold exports.

Mr Rihan also alleges that the investigation uncovered dealings with organisations which had been listed by the US Office of Foreign Assets Control, which administers US economic and trade sanctions against regimes and organisations which, among other things, are considered to be supporters of terrorism or trafficking in narcotics. It is claimed that in addition, Mr Rihan and his team discovered cash transactions totalling over 5.2 billion US dollars.

In the management report Mr Rihan and his team concluded that these findings amounted to a zero tolerance breach of protocol, which is the most serious form of violation of DMCC and LBMA standards. It is described by the LBMA as a non-compliance which ‘puts the integrity of the LBMA system at risk’.

It is claimed that Kaloti and the DMCC were very concerned about the impact of the findings for Kaloti and for the image of the Dubai gold industry. Shortly afterwards the DMCC made changes to its compliance standards which Mr Rihan contends were inconsistent with international standards and designed to protect Kaloti.

In view of the gravity of the findings, Mr Rihan expressed concern that Ernst & Young had an obligation to report them to the local authorities in Dubai, as well as international authorities and bodies, including the LBMA.

The matter was escalated to Ernst & Young’s global office in London. Mr Rihan travelled to London to meet with senior Ernst & Young executives, but he contends that they were determined not to act upon or publicise his findings. He refused to sign an assurance report which he considered to be misleading. He was subsequently removed as the engagement partner and replaced by someone who Mr Rihan claims had no prior knowledge or experience of conflict metals.

Mr Rihan claims that Ernst & Young subsequently assisted Kaloti to water down the information contained in its September 2013 compliance report. Mr Rihan felt unable to return to Dubai because of concerns for his and his family’s personal safety, after he put himself at odds with the Dubai government on a critical issue for its economy and failed to receive the support of Ernst & Young.

After initially accepting Mr Rihan’s safety concerns, Mr Rihan claims that Ernst & Young reneged on its agreement to find him a position outside of Dubai and insisted that he return there. Mr Rihan felt compelled to resign from Ernst & Young in January 2014 and decided to blow the whistle on the Kaloti audit which he believed to be a cover up.

He decided to take legal action against Ernst and Young alleging that their conduct in relation to the audit was unlawful, unprofessional and unethical and in breach of the applicable industry standards.

Paul Dowling, the lawyer in Leigh Day’s international claims team who is representing Mr Rihan, said:
“We all rely on organisations like Ernst & Young to be independent and transparent. This is particularly important in an area such as conflict minerals, where protecting those who violate standards helps perpetuate a brutal industry which claims the lives of so many.

“Our client’s case is that he was forced out of the firm simply because he tried to do the right thing. He claims that he was left fearing for his and his family’s safety but Ernst & Young provided him with no assistance or protection whatsoever.”