UM Financial Receivership Ends, RMCP Investigation Continues

The UM Financial saga is almost over with the filing of a (likely) final report (PDF) from Grant Thornton, the receiver, to the court.  The final filing gives an update on the status of the mortgage portfolio as well as an estimate of the losses for Central 1 Credit Union, which financed the UM first mortgages and now owns the portfolio that remains.  For a description of the case up through this point, see my blog post from earlier this year. 

When UM Financial was placed into receivership, there were 172 mortgages outstanding.  During the receivership, 49 mortgages were refinanced (leading to a payout to Central 1), 20 were disputed and 2 were under third-party sales processes, leaving 101 mortgages which were sold (through a credit bit) to Central 1.  This resulted in payments of $22.9 million consisting of the value of the credit bid of $12.1 for the 101 mortgages, $0.8 million in first mortgage receipts, and $7.5 million in payout receipts.  With Central 1 estimating that they were originally due $31 million from UM Financial, this leads to losses of roughly $7.5 million.

Grant Thornton described:

 "On account of the Companies' outstanding indebtedness to Central 1 in excess of $7.5 million for principal, interest and costs exclusive of unbilled or unposted recovery costs which has yet to be accrued, the Receiver seeks an Order authorizing and directing the Receiver to (i) immediately distribute a further amount of $400,000 to Central 1; (ii) complete a further distribution to Central 1 without further Order of this Court of up to $2,000000; and, (iii) approving the distribution, in kind, of the Companies right title and interest in the Gold and related causes of action to Central 1.  The Receiver does not expect distributions to be $2,000,000, but even if $2,000,000 in additional distributions were made, Central 1 would still be owed over $3,000,000 (after taking into account the distribution of the Gold in kind.)

So, there are still substantial losses remaining, potentially as high as 25% of the total portfolio and likely to be at least 10% for Central 1.  As a resul, Grant Thornton reviewed the legal options, and determined that "there may be viable legal actions to pursue third parties in respect of the Potential Outstanding Claims.  However, there is very significant uncertainty regarding the ability to recover on any judgment ultimately obtained".

This would likely take the form of civil lawsuits against the former executives (in particular, former CEO Omar Kalair).  After discussing the potential legal actions with Central 1, "Central 1 has indicated that it shares the Receiver's concerns with regard to ultimately recovering on any judgment obtained and that, in its view, the cost/benefit of pursuing these actions at this time is not warranted".

This is likely disappointing to the clients of UM Financial who were harmed themselves in the collapse of UM Financial, but there remains an active criminal investigation by the Royal Canadian Mounted Police (RCMP) and the Office of the Superintendent of Bankruptcy (OSB) into the bankruptcy of UM Financial.  The RCMP and OSB provided a production order in June 2012 requesting documentation from Grant Thronton, and Grant Thornton additionally provided a sworn affidavit and the requested records to the RCMP/OSB on September 19, 2012 indicating that the investigation continues.

The requested documents were relating to the "precious metals" (the gold and silver withdrawn from UM Financial's bank account by Omar Kalair shortly before the receivership in 2011) and "in relation to mortgage payments allegedly misappropriated including [...] 20 disputed mortgages totaling approximately $3.4 million and unreported prepayments [received from mortgage clients] of $910,000". 

This investigation is looking into whether the following offences occurred:

• Bankruptcy & Insolvency Act - Fraudulent disposition of property
• Bankruptcy & Insolvency Act - Refusal to answer fully & truthfully
• Bankruptcy & Insolvency Act - Failure to keep proper books
• Bankruptcy & Insolvency Act - Failure to comply with duties
• Criminal Code - Bankruptcy Fraud over $5000
• Criminal Code - Conspiracy to defraud creditors

It will likely be a while before the result of the investigation is revealed and whether the RCMP/OSB eventually decide to bring charges against any of the former executives of UM Financial, including the former CEO Omar Kalair and former Chairman of the Shari'ah Supervisory Board Mufti Yusuf Panchbhaya.

In the meantime, the case has likely damaged the prospects for Islamic finance on the retail level in Canada, although there were many areas where, according to the previous reports from Grant Thornton, there were weaknesses in the governance systems of the company that could be improved by a new Islamic finance company in Canada.  

UM Financial receivership may be nearing an end

During my time writing for The Islamic Globe, one of the stories where I directed a lot of attention was the receivership and bankruptcy of UM Financial, Inc. (and its sister company UM Capital, with the two companies referred to as "UM Financial" for the rest of this post), which offered Islamic mortgages to consumers in the Toronto, Ontario area, funded by the Credit Union Central Ontario, which was later merged with Credit Union Central British Columbia, to become Central 1 Credit Union.  

The trigger for the receivership was the decision by the funder, Central 1 Credit Union, to decline to offer additional funding to UM Financial and then requesting the receivership on the basis that UM Financial was in non-monetary default on its credit facility with Central 1.  However, the situation moved from typical problems in a messy business separation after a breakdown of the relationship to the bizarre, when Grant Thornton, the receiver discovered $2.1 million missing, having been withdrawn by the CEO of UM Financial, Omar Kalair, in gold and silver in the months before the receivership. 

The gold was purportedly in partial payment of an invoice drafted by Kalair and Mufti Yusuf Panchbaya, for Shari'ah advisory services provided by the board, headed by Mufti Panchbhaya since the inception of UM Financial.  The timing of the payments immediately before the receivership--when at least Kalair was aware was pending--raised red flags for Grant Thornton, based on statements in a number of court filings.  The transfer of the gold, according to Kalair's sworn testimony, occurred in a dark pharmacy parking lot, with $1.8 million and $300,000 in silver being transferred from Kalair's trunk to the trunk of Joseph Adam's car, a shopkeeper who ran an Islamic clothing and bookstore (Adam is also known as Gamal Hegazy).

Shortly after, Adam departed Toronto for his native Egypt with the gold, having returned the silver to Kalair who then gave it to Panchbhaya, who later turned it over to the receiver (it was then sold with a $90,000 loss due to the fall in silver prices).  There is considerable confusion on who the gold was intended to be paid to, the local Shari'ah board, Adam, or other consultants who worked with the domestic Shari'ah board.  The final story given was that it was paid to unnamed Egyptian scholars who had issued a fatwa for UM Financial, who were introduced through a relative of Adam's, though the only evidence is a one page document with a number of unidentified signatures.  Adam admitted in a deposition via Skype that he had taken the gold bars in his suitcase to Egypt, and distributed them, but would not reveal to whom he gave the bars.  The gold has still not been located.


During the entire process, many of the homeowners who received financing were left in limbo as the receiver sorted through the paperwork, uncovering second mortgages along the way that increased the confusion about how much had been paid on each property.  From the initial 172 clients, a number of mortgages were discharged after being refinanced and 20 were discharged after the customers demonstrated that they had paid UM Financial the remaining balance, which was then not passed along to Central 1. 

In the process, the receiver was collecting fees according to the "Musharaka Home Financing Agreement", which included annual 'renewal' fees and prepayment fees of profit for the full year in which the refinance occurred.  The receiver has decided to keep the annual fees, but rebate the prepayment penalties on a pro rata basis (based on when the refinance took place), and has asked for court approval to do so. It has also asked for approval to sell the portfolio to Central 1, after bids for the portfolio received during a sales process were rejected because they offered a price that was at a discount to the amount owed by UM Financial to Central 1. 

The sale is being done through a credit bid, where Central 1 is bidding the amount it is owed by UM Financial, in exchange for the debt being extinguished, in effect, receiving the portfolio in lieu of any payment by UM Financial.  The purchase and sale agreements were signed on June 15th and the court will consider the offer on June 29th, which will likely end the UM Financial saga, although the homeowners affected (through the first and second mortgages) will continue to be impacted, just with a new servicer on the first mortgages, Central 1. 

Kalair, Adam and Panchbhaya, according to court filings, face a continuing investigation.  Adam told the lawyer for Grant Thornton that he had spent several weeks in the hospital due to stress and the flu.  He is seeking a way to return to Canada for medical treatment, but will be arrested and jailed for 6 month for contempt of court unless he can provide the receiver with a return of the gold bars and answer the receiver's questions. 

The fate of Kalair and Panchbhaya are murkier still since Grant Thornton reported an ongoing investigation by the Office of the Superintendent of Bankruptcy and the Royal Canadian Mounted Police into alleged Bankruptcy and Insolvency Act and Criminal Code offenses, relating to the receivership and bankruptcy of UM Financial.  The investigation also includes allegations of offenses relating to the transfer of gold, which brings the Multicultural Consultancy Canada Ltd, a company formed by Panchbhaya to receive the gold, into the picture.  Among the alleged offenses are fraudulent disposition, bankruptcy fraud and conspiracy to defraud creditors, according to a production order served on Grant Thornton as receiver of the 2 UM Financial companies. The investigation does not mention Kalair or Panchbhaya by name, but they are likely to be included in the target of the investigation, "the Debtors [UM Financial Inc and UM Capital Inc] and the operating minds behind the Debtors and MCC". 

Whatever the eventual fate of the parties involved with UM Financial, it serves as a reminder that even in Islamic finance, there can be breakdowns of trust between businesses and between a company and its customer and the fact that a business represents itself as being 'Islamic' does not mean that everyone involved will act ethically. 

There are specific examples in the UM Financial saga where the management of a company may not be fully independent of its Shari'ah board, which dulls the effectiveness of the Shari'ah board as an independent check for investors and customers.  There were also instances where too much control over the handling of money occurs without oversight by either customers, creditors, internal personnel besides management and regulators (UM Financial was unregulated). 

At the end of the day, the worst part of the UM Financial saga is that it harmed homeowners, and will limit trust in Islamic financial institutions in Canada, likely for many years to come.  It should remain as a lesson for the industry as a whole to remain vigilant to protect the entire industry's reputation, which is much easier lost than it is rebuilt. 

Related Documents:
Latest court filing (PDF)
List of all court filings released by Grant Thornton, the Receiver