Bring­ing the DIFC model to the world

Af­ter more than a decade of de­vel­op­ing its le­gal sys­tem, the Dubai In­ter­na­tional Fi­nan­cial Cen­tre is help­ing oth­ers fol­low in its foot­steps

Gulf Business - - CONTENTS - By Robert An­der­son

Af­ter more than a decade of de­vel­op­ing its le­gal sys­tem, the Dubai In­ter­na­tional Fi­nan­cial Cen­tre is help­ing oth­ers fol­low in its foot­steps ROBERT AN­DER­SON

The Dubai In­ter­na­tional Fi­nan­cial Cen­tre (DIFC) has in many ways sym­bol­ised the me­te­oric rise of Dubai it­self. Since its es­tab­lish­ment in 2004, the fi­nan­cial free zone has helped trans­form Dubai into the Mid­dle East’s fi­nan­cial hub and at­tracted busi­nesses from across the world. And it is still ex­pand­ing rapidly.

Fig­ures for the first half of 2017 show 1,750 in­cor­po­rated com­pa­nies, a 6.2 per cent in­crease on the same pe­riod of 2016. This num­ber and the nearly 22,000-strong work­force are only ex­pected to in­crease as up­com­ing ex­pan­sion pro­jects in­clud­ing the Dh­s1bn ($272.2m) Gate Av­enue are com­pleted.

But the key to the free zone’s at­trac­tive­ness has not just been its al­lowance of 100 per cent for­eign own­er­ship and a guar­an­tee of zero taxes on cor­po­rate in­come and prof­its for 50 years.

Com­pa­nies have also flocked to the DIFC for peace of mind, of­fered by its com­mon law frame­work and in­de­pen­dent and in­ter­na­tion­ally reg­u­lated ju­di­cial sys­tem.

Now, af­ter more than a decade of build­ing the zone’s le­gal in­fra­struc­ture up from a tri­bunal to re­solve com­mer­cial dis­putes for en­ti­ties domi­ciled in the DIFC, to ar­bi­tra­tion ser­vices, me­di­a­tion, an academy of law and a wills and pro­bate reg­istry, the zone is ex­pand­ing its ge­o­graphic scope.

“Over the last few years we have seen more and more com­pa­nies vol­un­tar­ily and con­sciously choose the DIFC courts be­cause they know it’s quick, it’s re­li­able, it’s trans­par­ent and trust­wor­thy,” says An­dreas Baum­gart­ner, ex­ec­u­tive direc­tor at the Dis­pute Res­o­lu­tion Au­thor­ity (DRA) – an en­tity es­tab­lished in 2014 to over­see the DIFC Courts, Ar­bi­tra­tion In­sti­tute, Wills and Pro­bate Reg­istry and Academy of Law.

First half fig­ures from the DIFC Courts give some in­di­ca­tion of the pop­u­lar­ity of the zone’s le­gal in­fra­struc­ture, with the work­load of the Court of First In­stance, in­clud­ing ar­bi­tra­tion-re­lated cases and counter claims, grow­ing 57 per cent and the Small Claims Tri­bunal 90 per cent com­pared to the same pe­riod in 2016.

At the same time the value of cases at the Court of First In­stance grew to Dhs7.5bn ($2.04bn) up 118 per cent from Dhs3.44bn ($936.5m) in the first half of the pre­vi­ous year thanks to a par­tic­u­larly large ar­bi­tra­tion case, while data from law firm Clyde & Co showed the DIFC Courts were cho­sen by 76 per cent of re­gional clients for contracts deal­ing with merg­ers and ac­qui­si­tions.

Based on this grow­ing stand­ing, Baum­gart­ner sug­gests the next log­i­cal step is for the le­gal arm of DIFC to share its ex­pe­ri­ences and pro­vide con­sul­tancy and ad­vi­sory ser­vices to other

would- be fi­nan­cial hubs across the world, in much the same way the zone has ben­e­fit­ted from re­la­tions with in­ter­na­tional part­ners.

“Has it al­ways been on the map? Not in the sense that it was spelt out in writ­ing but its been a log­i­cal jour­ney in terms of ex­pand­ing the scope of the of­fer­ing and ge­o­graphic reach.”

Law and or­der

When it comes to es­tab­lish­ing a fi­nan­cial or trade hub, com­mer­cial dis­pute res­o­lu­tion is an of­ten-over­looked niche “but ab­so­lutely es­sen­tial for in­vest­ment de­ci­sions and trade de­ci­sions”, ac­cord­ing to Baum­gart­ner.

And no mat­ter the size of the project, he sug­gests a key les­son from Dubai’s tran­si­tion over the last decade is to be coura­geous, “think big”, and em­brace in­no­va­tion.

“No­body would have thought 10 years ago that the DIFC Courts or the DIFC over­all would be re­ferred to as a global role model in com­mer­cial dis­pute res­o­lu­tion.

“We have proven it’s pos­si­ble and it is pos­si­ble be­cause from the out­set we were not just go­ing for the best that was avail­able at that stage but al­ways ask­ing how could we move be­yond that.”

Be­yond this, Mi­haela Moldoveanu – as­so­ciate direc­tor at the DRA – says what sets the DIFC out the most from more es­tab­lished and his­toric le­gal sys­tems glob­ally is the pace of change and how re­cently the zone has tack­led many of the is­sues fac­ing those with sim­i­lar am­bi­tions today.

“We have that in­sti­tu­tional mem­ory of re­cent items, of all the chal­lenges and hur­dles that we had to over­come.” she adds.

It was per­haps due to this fac­tor that the DRA’s ad­vi­sory plans took a dra­matic step for­ward last year af­ter the DIFC Courts was se­lected to ad­vise Kaza­khstan’s Cen­tral Bank on es­tab­lish­ing a com­mer­cial court sys­tem and arbi- tra­tion cen­tre in the planned As­tana In­ter­na­tional Fi­nan­cial Cen­tre (AIFC).

“That for us was the proof point that what we were do­ing was go­ing in the right di­rec­tion, and also recog­nised by other en­ti­ties abroad,” says Moldoveanu.

The tim­ing of the deal is of par­tic­u­lar sig­nif­i­cance for the Eurasian na­tion, which shares a num­ber of sim­i­lar­i­ties with Dubai and the UAE.

From June to Septem­ber the coun­try hosted the 2017 World Expo in its cap­i­tal As­tana, an event Dubai it­self will host in 2020. Kaza­khstan is also un­der­tak­ing its own di­ver­si­fi­ca­tion plan sim­i­lar to the UAE and is ex­pected to play a key part in China’s One Belt One Road ini­tia­tive hav­ing been the lo­ca­tion where the idea was first mooted by Chi­nese President Xi Jin­ping in 2013.

As part of th­ese ef­forts, the AIFC shares many of the same ob­jec­tives as the DIFC in want­ing to cre­ate a fi­nan­cial hub for the Cen­tral Asian re­gion in which it is based.

Its of­fi­cials recog­nised early on that it would need a Com­mon Law le­gal sys­tem to match, with Kaza­khstani com­pa­nies rep­re­sent­ing the sec­ond largest num­ber of lit­i­gants in the courts of Eng­land and Wales due to the lack of a sim­i­lar le­gal frame­work back home.

“There was a ten­dency to ba­si­cally ex­port lit­i­ga­tion and ju­di­cial func­tions to other coun­tries out­side their re­gion,” says Moldoveanu.

“It’s much cheaper, more ef­fi­cient

“We have proven it's pos­si­ble and it is pos­si­ble be­cause from the out­set We Were not just go­ing for the best that Was avail­able at that stage but al­ways ask­ing how could We move be­yond that.”

and more re­sult driven if you have your dis­putes close to where the ac­tual con­tract is be­ing im­ple­mented – where the busi­ness is run.”

The DIFC’s con­sul­tancy work be­gan in Jan­uary with an anal­y­sis of the le­gal in­fra­struc­ture and by June a team pre­sented their rec­om­men­da­tions, which are now be­ing rolled out.

The coun­try is aim­ing to launch a new civil and com­mer­cial court and an ar­bi­tra­tion cen­tre func­tion­ing in­de­pen­dently from each other within the AIFC by Jan­uary 2018.

Be­yond this deal, the DRA is also in ac­tive dis­cus­sions with other au­thor­i­ties around the world, on a na­tional and free zone level, with many of the in­ter­ac­tions mim­ick­ing the UAE’s for­eign re­la­tions, ac­cord­ing to Baum­gart­ner.

This means a par­tic­u­larly strong fo­cus on African coun­tries and other re­gions within Dubai’s ra­dius, in­clud­ing the In­dian sub­con­ti­nent and Southeast Asia. The or­gan­i­sa­tion has also hosted del­e­ga­tions from as far afield as Cen­tral and South Amer­ica.

“We have a lot of ex­cit­ing pro­jects in the pipe­line and we’d love to share the in­for­ma­tion with you but un­for­tu­nately they are still con­fi­den­tial right now,” Moldoveanu says.

And the or­gan­i­sa­tion is po­si­tion­ing it­self to pro­vide a range of con­sul­tancy ser­vices from the com­pre­hen­sive – as with Kaza­khstan – to spe­cific le­gal ar­eas. Th­ese could in­clude pro­cesses and pro­ce­dures, or­gan­i­sa­tional set-up, IT sys­tems, train­ing and skill-build­ing for le­gal com­mu­ni­ties, and even in­ter­na­tional per­cep­tion.

“Re­forms only work and only suc­ceed in achiev­ing the ul­ti­mate ob­jec­tive of eco­nomic devel­op­ment and more trade and jobs if you’re not only do­ing the right thing but also seen and per­ceived as do­ing the right thing,” Baum­gart­ner says.

DRA’s in­ten­tion is for the con­sul­tancy arm to be a “sig­nif­i­cant part” of its fu­ture op­er­a­tions, with Baum­gart­ner cit­ing his join­ing the or­gan­i­sa­tion as a sig­nal of its in­ten­tions.

But he does in­sist the en­tity will re­main fo­cussed on its goals as a pub­lic sec­tor au­thor­ity rather than be­come a “profit max­imis­ing com­mer­cial en­tity”.

“It is not our ob­jec­tive to be­come a large con­sul­tancy or­gan­i­sa­tion. We are a pub­lic sec­tor en­tity – so linked to the govern­ment of Dubai – that has the core role of be­ing one of the glob­ally lead­ing com­mer­cial dis­pute res­o­lu­tion en­ti­ties. This is the man­date that we fo­cus on,” he says.

That said, if the ef­forts in As­tana are any­thing to go by, it might not be long be­fore we see a new wave of fi­nan­cial hubs emerge based on the DIFC’s suc­cess­ful model.


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