The final report of the Joint Investigation Team (JIT) into Prime Minister Nawaz Sharif and his family’s foreign assets (the “Panama Case”) is the ultimate Rorschach test of Pakistani politics. The PML-N supporters see a conspiracy to destroy their party. The PTI supporters see a chance to clean up national politics. The PPP supporters are wary of the influence of the anti-democratic element of the establishment in the JIT hearings, even if they are not directly sympathetic to the PM. And we at Profit, financial news aficionados that we are, see a chance to answer a question that has burning in our minds: how rich is the Sharif family and how did they get there?
Most elements of the JIT report have been already picked apart from the legal and political angles. The economic angle, however, has largely remained unanalyzed. We believe this is a pity: the JIT report is fundamentally an examination of a family business’ assets and finances. It is also a unique opportunity for the people of Pakistan to understand how the wealthy but un-corporatized elite of Pakistan actually manages their businesses. And much more interestingly, what is the exact mechanism through which political power or connections can be translated into financial wealth?
Our analysis digs into these and other relevant questions with respect to the nexus between power and money as it relates to the Sharif family. We would like to add the caveat that our analysis relies entirely on the data presented in the final JIT report. We have not independently examined financials from the Sharif family businesses or other related entities.
Specifically, our analysis examines the credibility (or lack thereof) of the Sharif family’s claims from a business perspective. We then try to understand the most likely scenario as far as the true source of the Sharif family’s wealth, leaning on data provided in the JIT report, but also adding our own independent analysis of the same data. We then examine what those insights – both the disputed and undisputed accounts of the Sharif family business – mean insofar as how wealthy, powerful families operate their commercial enterprises. Finally, we make estimates on what we think is the net worth of the prime minister and his family, and what their future is likely to be from a business perspective.
The undisputed facts
We start, however, by recounting what we know about the family and factors that are not in dispute. It is now accepted both by the Sharif family and the government’s investigators that the family owns four apartments on Park Lane in London’s tony Mayfair neighbourhood. The precise apartment numbers are not in doubt, neither that the family has had use of those apartments since at least the mid-1990s (the precise date from when the family owned the apartments initially is in dispute though.)
What is also not in dispute is that in addition to a paper mill, a textile mill, two sugar mills, and an assortment of small businesses inside Pakistan, the Sharif family owns a steel mill in Jeddah, Saudi Arabia as well as significant real estate holdings in London and possibly other parts of the UK. The family also owns a company based in the UAE. What is disputed, however, is which family members own exactly how much of what. And most crucially, how did they get the money to buy all of these assets in the first place?
Beyond this narrow set of facts, virtually everything else is disputed, with the Sharif family presenting one view – albeit a poorly documented one – and the JIT taking strong exception to the lack of documentation, or even allegedly fabricated documentation, to prove sources and uses of the family’s wealth.
The Sharif family version of the story
At stake are three separate but intertwined legal issues. The first is whether the source of income used to obtain the assets owned by the Sharif family is legitimate. The second is whether the funds to purchase those assets were legally repatriated. Both of these two issues are addressed in some detail in the JIT report. A third issue that is not as well discussed is how much of the income derived from the assets owned by the Sharif family is subject to taxation and whether they have been fulfilling their tax obligations.
The Sharif family has to prove that the answers to all three questions are above board: the source of wealth used to purchase the assets was legitimate, that the channels used to move money outside Pakistan were legal, and that they paid any and all taxes owed on income generated from those assets.
The first thing to know about the Sharif family version of the story is that there is no family version of the story. Each family member appears to state something different from all of the others, and while some family members agree on some matters, there is hardly any matter on which all family members can agree on a single version of the facts. To make matters worse, most family members have trouble agreeing with themselves, submitting one version of events in their written testimony and evidence submissions and then contradicting themselves when they appeared before the JIT in person.
Broadly speaking, however, the family appears to agree with a few basic statements. In a nutshell, the story as far as the Sharif family is concerned starts with Mian Muhammad Sharif, the prime minister’s late father, known fondly by the family as Abbaji, who was a mildly successful entrepreneur in Punjab in the 1960s and early 1970s, with a thriving steel business, prior to nationalisation. The family provided wealth statements from 1970 that state that Abbaji’s net worth in that year was over Rs1 million (about Rs54 million in inflation adjusted terms in 2017). That would make him comfortably upper middle class in Pakistan in that era and start to bump into the lower end of the country’s economic elite.
The story gets murkier from there. At some point in the late 1970s, Abbaji decided to set up a steel mill in Dubai and started the business in 1978 called Gulf Steel Mill. The family claims that the entirety of the start-up capital for that business came from a loan from the Dubai branch of the Bank of Credit and Commerce International (BCCI). This seems like a particularly convenient explanation since it would mean that no money ever left Pakistan and the Sharif family would not have to explain how they got around Pakistan’s then-highly stringent capital control regulations which made it all but impossible to legally move money out of the country. It is also a proposition so unlikely as to border on the absurd and the JIT regards it as such.
No bank in their right mind – not even one as crooked as the BCCI – would provide a loan to start a business when the owners of the business are putting up none of their own money into it. That is a surefire way to start losing money. The family does not offer any documentary evidence that such a loan ever existed.
The story, however, only gets more fantastical from there. The Sharif family then claims that they were able to sell their stake in that business for a profit of AED 12 million within two years. When asked about what happened to the loans on the business, the family and its surrogates admit that part of the amount was used to pay off loans, meaning that the profit – if such a sale happened at all – was far less than that amount. The JIT used the Sharif family’s own declarations of Gulf Steel Mills’ liabilities and calculated that the AED 12 million amount would not even cover all of the debt the Sharifs had taken on to set up the business (itself a questionable assertion). The Sharifs admit the company did not earn a profit during the two years they owned it, which means the loans could not have been paid off through the profits either.
So to recap so far: Mian Sharif set up a steel mill in Dubai in 1978 with 100% borrowed money from the BCCI. The steel mill did not make any profits during the time the family owned it, and they sold it in two years for a price of AED 12 million, yet despite not having paid off any of the loans through the company’s operating cash flow, the family was left with the full AED 12 million as a profit.
Sounds ridiculous? Oh, we have only just begun.
That AED 12 million was then reinvested in the real estate business run by a member of the extended Qatari royal family, Hammad Bin Jassim bin Jaber Al-Thani. Now, that assertion unto itself would not sound so unbelievable, but the family produced no hard evidence that such a transaction ever happened, except two letters from Al-Thani himself, which appear to contradict each other, at times within a span of two paragraphs.
That is not even the most astounding assertion. What gets interesting is the reason they used those letters as proof: because the family claims that AED 12 million ($3.3 million in 1980 or about the equivalent of $9.7 in 2017, adjusted for inflation) was transferred in cash and no written documentation was kept by either party. This is chalked up to “cultural traditions in the Middle East at the time” despite the family admitting that they used cheques for transactions exceeding a few thousand dollars even in the 1970s in the UAE.
This is the point where the math starts to get fuzzier. According to the Sharif family’s assertions before the JIT, that AED 12 million investment grew so rapidly that they were able to buy high-end apartments for themselves in London, set up a much larger steel mill in Saudi Arabia, and launch a huge real estate investment business in the UK. The Sharif family’s investment in Al-Thani’s business is either one of the most successful investments in Pakistani business history, or they are fabricating this story to cover up the true source of funds used by the family for their asset purchases and investments outside Pakistan.
The JIT appears to be utterly convinced it is the latter and they offer some evidence to back up that assertion.
The JIT report’s version of events
The JIT does not explicitly state what it believes happened in reality, largely because it does not have sufficient direct evidence on the matter. The investigators have just been able to establish that much of what the Sharif family is stated is false, but that does not mean they know yet what is true.
(It does not help that the JIT report appears to be written by somebody who clearly does not know how to read financial documents. They keep referring to needing to ascertain the source of each of the Sharif family companies’ “working capital” even though they are obviously referring to “paid in capital”. The distinction may not sound meaningful, but a financial inquiry should involve financial experts who do not make elementary mistakes like that. There are also other instances where the JIT appears to not fully grasp the
importance of certain financial terms or tactics.)
There is, however, some compelling circumstantial evidence as to how the Sharif family may have actually financed their investments abroad. And this is where the story gets highly complicated.
Since this is the part where the JIT does not offer explanations, we have applied our own analysis on the JIT’s data to come up with what we believe is a plausible – and perhaps even the most likely – picture of what happened.
To understand how the Sharif family’s assets build-up, it is first necessary to look at how the family transfers money between companies and between family members: they almost always use the term “gifts” for transfers between family members (or more recently, “remittances”) and they use inter-corporate loans to transfer money between companies. This is highly significant, not just because it explains how the family runs the business but provides a clue into how they might have acquired the money to build those businesses in the first place.
The first clue was buried deep inside the JIT report on page 133, where the JIT notes that the Hill Metals Establishment (the family’s steel mill in Saudi Arabia, set up in 2006, in Jeddah) repeatedly sends payments to Prime Minister Nawaz Sharif in amounts that very much look like regular dividends, despite the fact that HME was set up using loans that have covenants explicitly restricting dividends to far lower than the amounts paid out. That led us to believe that the Sharif family, much like many other family businesses
around the world – were mixing personal expenses with business expenses.
HME called its payments to the prime minister “gifts” because it could not call them dividends without running afoul of the loan covenants it had signed to finance part of the business. A more likely scenario is that the “gifts” likely appear on HME’s financial statements as some sort of business expense, which would make them tax-exempt and lower the company’s overall tax liability.
That little bit of circumstantial evidence gives us insight into potentially one way the Sharif family extracts money from its businesses while minimising tax liability: make payments to its principal investors into something that resembles a business expense on the company’s financial statements. That may sound unsavoury and unethical, but it is not necessarily illegal, depending on how those payments are structured.
The second way appears to be intercorporate loans, which have two big advantages, the first of which is taxes. Say Company A invests money in Company B. If the money is an equity investment, the only way to move money back to Company A would be through dividends, which are, by definition, a post-tax transfer of funds. However, if the same amount of money is moved as a loan, the interest can move back to Company A as a tax-exempt payment (though the principal repayments would still have to be post-tax).
A clue into the how this might be a preferred methodology for the Sharif family business comes in page 140 of the JIT report, which describes how Hasan Nawaz, the prime minister’s son, uses loans to invest in his real estate business rather than making equity investments. Mind you, his business is not providing debt financing for real estate. He raises that separately through British banks and financial institutions. He just structures even his equity investments in those properties as a debt transaction. This use of debt comes up again and again throughout the report.
The ominous part
Again, the use of intercorporate loans between group companies is not necessarily illegal, or even immoral for that matter. There can be many legitimate uses of this technique. However, taken together with another JIT insight about the Sharif family’s businesses, this can start to look more ominous, while at the same time providing a picture of the true source of the family’s spectacular increase in wealth.
The most ominous part of the report comes in pages 209 through 228, when the JIT lays out documentation about the prime minister’s involvement in the family business and utilises annual accounts of the companies the family owns as well as the prime minister’s income tax and wealth tax (now defunct) statements.
The businesses seem ordinary and – frankly – not very well run. Most of them seem like relatively small businesses when you consider their total revenues or net income, but that is not the part one needs to focus attention on. The most relevant detail from those financials is the total amount of debt outstanding in those companies, specifically the size of the debt relative to paid-up capital, how that debt changes over time, and when exactly that debt rises.
The most glaring example of this is Ittefaq Brothers (Pvt) Ltd (described on page 212 of the JIT report). A company with a paid-up capital of Rs1.15 million, Ittefaq Brothers had loans outstanding of Rs2 million in 1980, shortly before the family started coming to the fore inational politics. A Rs2 million loan on a company with that kind of paid-up capital is normal and perfectly acceptable. By 1981, however, just as the Sharif family started getting close to the corridors of power, that loan number shot up to Rs15 million. By 1990, at which point Nawaz had been Punjab chief minister for five years, the amount of loans outstanding were Rs236 million (approximately $11 million based on the exchange rate at the time and worth approximately $20 million today, adjusting for inflation). Miraculously, however, in 1991, the year Nawaz took office as prime minister for the first time, the loans vanished from the company’s books.
One of two things is possible: either the company is horrendously bad at keeping its books, or, more likely, the family used Nawaz’s newfound political influence to get itself loans far in excess of what might be
considered normal for a business that size. And once he reached the peak of his political influence, he may have “persuaded” the banks to write-off the loans.
Ittefaq Brothers may be the most egregious example, but it is by no means the only one. In company after company, the Sharif family saw their ability to borrow from banks dramatically increase as their political stature grew. And in more cases than one, the loans had a tendency of being written off or otherwise vanishing from the companies’ balance sheets. And shortly thereafter, the family would be seen to be in possession of assets outside Pakistan. Within three years of the Ittefaq Brothers’ loans disappearing, the Sharif family were seen using their Park Lane apartments in London.
It must be stated categorically that there is no direct evidence that the Sharif family abused their political power to get loans or have them written off, and government investigations have lasted almost two decades trying to prove that case and have thus far not succeeded. There is also no proof that the amount of money written off was sent abroad, or constitutes the source of funds for the family’s foreign assets, and once again, this would be a nearly-impossible case to prove.
The bad news buried in the evidence
If, however, the circumstantial evidence is pointing us in the right direction, then we as a nation face a problem. The problem is that the crime allegedly committed by the prime minister and his family is the abuse of power and bank fraud, two cases that would be extremely difficult to prove.
It would have to be proven beyond a reasonable doubt (and not just using circumstantial evidence) that the prime minister made an active effort to exert pressure on bank officials to extend loans to companies owned by his family.
It would be equally hard to prove that the loans were then written off under political pressure, and not, say because the businesses went bankrupt because the family that supposedly runs them is too busy running the country.
It seems difficult, if not outright impossible, to prove intent in both of those cases because they are both fundamentally crimes of intention. That leaves the prosecutors with the somewhat more manageable, but still not easy, the task of trying to prove that the money was moved outside the country illegally. And while Pakistan still imposes some restrictions on citizens moving money out of the country, it is not a law that the government is particularly enthusiastic about and even the JIT does not seem to endorse going down that path. The logic here is this: “if I earned my money legally, and paid taxes on it, I should then be allowed to invest it wherever I want, including outside the country.”
In short, the prosecutor must either try to make the impossible – but morally defensible – case for abuse of power, or else try to put people behind bars for a different crime by choosing to prosecute on the basis of a law that the government is already weakening and may soon abolish. It is not an easy choice and we do not envy the JIT or the Supreme Court.
So how much is the prime minister’s net worth?
Leaving aside the legal questions of how the case might proceed, it is interesting to try to determine just how much wealth the prime minister actually has. In order to estimate this, we will rely on the two companies that the PM and his family have the most documentation about – Hill Metals Establishment, and Flagship Investments Ltd (the UK real estate company). Both companies produce about $2-3 million in cash flows each year, according to the limited financial data made available to the JIT. Assuming the high end of that for each year for both companies, and applying a multiple of 10 for the total company valuation (high for most types of companies), we get a valuation of approximately $60 million.
Add in the value of the family’s real estate at around $25 million, and one gets a number of $85 million. The family’s Pakistani companies are harder to value since they frequently do not produce reliable financial
statements, but one cannot imagine them being worth much more than the real estate, suggesting that the prime minister and his immediate family have a net worth perhaps just north of $110 million. This, of course, is a very rough estimate since so much of the data that we would need to produce a more precise
calculation is simply not available.
A bleak outlook
Notice how, in the beginning of this article, we stated that a look at the Sharif family represents a look at the “un-corporatised” economic elite of Pakistan. That is because many of the wealthiest Pakistanis are increasingly turning to creating more professional corporate structures for their businesses, even as they choose to retain many of the seth-like culture of management.
The Sharif family is different in that they appear to have not made any effort to corporatize their businesses at all. Indeed, the fact that the family cannot agree on who owns which part of the business (there is a
document that outlines the split after Abbaji died, but the details get murky for businesses that were built after his passing) suggests that they have not thought a lot of details through.
That can be fine so long as a strong patriarch like Abbaji is around to keep his sons in check. But Abbaji passed away over a decade ago, in 2004, and the family is already splitting up. For instance, Shahbaz Sharif and his sons have completely separated their businesses from Nawaz and his children since at least 2009.
(Interestingly, the JIT seems to go out of its way to go soft on Shahbaz Sharif: on at least eight occasions, it chooses to either believe Shahbaz’s version of a story if there is a contradiction with another family member, or else not admonish him for any failure to produce documentation, a crime for which it viciously lambasts everyone on the Nawaz side of the family.)
And if Nawaz and his children do not choose to adopt a more professional management style soon, their family business may face even greater risks than their family’s political prospects.
The wrongheaded focus on Maryam Nawaz
One last bit: the recent focus on Maryam Nawaz as a potential culprit appears to be misguided: the Sharif family appears to practice the sexist Pakistani tradition of forcing female family members to “voluntarily surrender” their inheritance in the family business to their male relatives. Female family members are compensated for this loss of economic control by being given ownership over the urban real estate, which is most likely why Maryam’s name appears on many of the ownership documents for the London apartments.
Just because her name is on record there, however, does not mean she has any idea where the money came from. She is from a family that actively goes out of its way to economically disempower women. Holding her responsible for the money trail of those apartments seems misguided.