Austria was the latest country to freeze assets linked to the Libyan Investment Authority on Friday. Or more specifically — assets tied to Mustafa Zarti, who is the LIA’s deputy chief.
And a close friend of Saif Gaddafi.
Which tells you exactly why an asset freeze initially targeted at the Gaddafi family has now also brought down a sovereign wealth fund. (As widely expected, the UK finally froze LIA assets on Thursday.)
Given the LIA’s size, liquidity, and counterparty exposure to several western companies, this is a big deal — and so far as we still know, an unprecedented occurrence in the land of SWFs.
The Saif-Zarti-LIA connection was made abundantly clear in a BBC Radio 4 report last night — or as one Libyan banker described Saif’s power over the LIA, “It is as if it is his own private farm. This was almost like a mafia operation.” Deals were apparently made at Saif’s private parties and rubber-stamped by the LIA’s formal trustees.
This is not exactly what you’d call an excellent advertisement for Middle Eastern SWF transparency.
If you’re in the UK,* you can listen to the report here (click the image):
*(Update: a commenter points out that this broadcast is available to international listeners. Many thanks!)
It’s only half an hour long and really should be required listening for asset managers, regulators — and anyone else who deals with SWF exposure.
First, because the findings underline that effective control was the criterion for bringing the LIA under the asset freeze.
It was right there in UN Security Council resolution 1970, establishing the asset freeze and ordering member states to comply:
“17. Decides that all Member States shall freeze without delay all funds, other financial assets and economic resources which are on their territories, which are owned or controlled, directly or indirectly, by the individuals or entities listed in Annex II of this resolution or designated by the Committee established pursuant to paragraph 24 below, or by individuals or entities acting on their behalf or at their direction, or by entities owned or controlled by them…
And the importance of effective control was made plain to us by a person familiar with the UK Treasury’s preparations for freezing Gaddafi assets even before the UN resolution was made.
Even allowing for the difficulties of establishing which assets can be found where, some jurisdictions seem to remain relaxed about the status of LIA holdings — such as Italy, where Libyan investments proliferate across the corporate and banking sectors.
Secondly, the Saif-LIA link matters, since it is still far from clear just what counterparty exposures and risk now arise from the progressive freezing of the fund’s various stakes, one country at a time.
The LIA was often a partner in oil production contracts with western companies within Libya itself, for instance. In addition, note the LIA’s holdings in Tamoil, a very active European refiner and supplier. More on that particular connection in a later post.
Ironically, of course, Libya’s sovereign wealth fund isn’t even that diversified compared to other SWFs. Having been set up relatively recently, most of its assets remain in cash or other liquid assets like deposits — either in UK and US banks or with banks in Libya itself.
Beyond this possible cascade of counterparty exposures, there are of course plenty of institutions which are hoping to get away from ties to the LIA with nothing more than egg on the proverbial face.
The London School of Economics will be hoping so on Friday after its director Howard Davies resigned over links to training LIA officials –training that may have done little, given Saif’s influence.
But in general, it becomes very difficult when control of a SWF is demonstrated to be personal, and not actually ‘sovereign’.
Remember the rating agencies treated the LIA’s holdings as assets supporting Libya’s sovereign credit, once.
That may be the least of the ramifications from the LIA’s freezing, we suspect.
Gaddafi’s sovereign fund — FROZEN – FT Alphaville
Freezing Gaddafi’s billions – FT Alphaville
Global vigilance urged over politicians’ cash – Reuters
The self-denying sovereign wealth fund – FT Alphaville