How Fraud at a Dubai Resort Could Signal Global Economy House of Cards

Under CEO Jack Welch GE always hit earnings estimates. Dead on. Or they beat estimates. By a penny. That doesn’t just happen, it’s suspicious. Indeed years after Welch’s departure GE settled accounting fraud charges with the SEC. Underfunding re-insurance reserves allowed GE to inflate earnings.

Starwood Preferred Guests pays hotels a lot more on award nights when properties are fully booked. So the Parker Meridien hotels were sued alleging they had inflated occupany numbers to bilk SPG out of $1 million.

I generally believe there’s a lot more fraud in the economy than comes to light. It hides in plain site until it isn’t hiding anymore. Most of it is pretty bald faced, but people are lazy and don’t question what they’re told and don’t want to look stupid asking questions of others who are presumed to know what they’re talking about. Less than 2/3rds of CFOs, CEOs, and COOs can correctly finish a test of financial literacy. (HT: Tyler Cowen)

So this tale of a Dubai luxury hotel that’s landed in Los Angeles court serves as a microcosm for me of what’s likely replicating itself — not everywhere, but far more broadly than most people suspect — because no one is minding the store and instead simply believing whatever numbers they’re given as gospel.

The Viceroy Palm Jumeirah Dubai opened in March and cancelled its management contract with Viceroy Hotels in June and rebranded it FIVE Palm Jumeirah Dubai.

“Investigations by two respected accounting firms into the operations of the hotel have revealed fraudulent accountings, breach of trust, self-dealing, doctored invoices, phony budgets, unapproved budget overruns, and concealment of mismanagement by Viceroy Dubai,” Five Holdings said in the complaint.

Credit: FIVE Palm Jumeirah Dubai

The owners of the property contend that in retribution Viceroy “told dozens of travel agencies that it was deemed by a Dubai court to be the rightful manager of the hotel and that they could be fined or imprisoned if they booked rooms at the resort.”

And they claim to have lost over $100 million as a result. Expedia, for instance, “refused to book the hotel until its legal team has evaluated whether Viceroy’s claims were true.”

The entire legal status of the property is unclear as a result of 3 overlapping lawsuits in Dubai. And by the way the hotel was funded by a Chinese construction enterprise. In the case of the Baha Mar resort project in the Caribbean Chinese financing led to self-dealing which played a role in its bankruptcy and completion delays. The developer has a checkered past as well,

In 2009, the businessman spent 140 days in jail before the Dubai Land Department cleared him of fraud and embezzlement charges brought in the wake of the collapse of the local real estate market.

Stories like these, if they’re indeed more common and popularly realized, make me wonder if there are more bubbles to pop in the economy, whether we aren’t as wealthy as we think we are, and whether this is in part a cause of long-term secular stagnation. On the other hand, I have to approach this question with humility — asking myself if indeed there’s so much fraud out there why it hasn’t been discovered yet and whether it ever actually will be?

File Under: Controversial Things I Believe (In Some Cases Based on Only Limited Evidence)

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. You have hit on a point that indeed so few people are aware of, or, even care to know about the details. As you threw your net widely across the economy, than it is apropos to identify Medicare fraud as a significant hit to our economy-raising the cost of health care without commensurate benefits, except to those physicians who focus on perpetuating the fraud. Such action has been estimated to cost us each year over 20% of Medicare’s total annual budget (around $620 Billion).

    Historically, the federal government has been reluctant to attack unless it was “low-hanging fruit;” CMS has always declared the lack of resources to prevent fraud. Although the commercial insurance carriers in health care have created their own problems increasing costs, they have sealed themselves off from taking hits in fraud. Rather than the honor system of Medicare which only encourages fraud, insurance carriers clinically adjudicate requests for services prior to those services being rendered. Medicare just pays; despite its claim of algorithms and task forces; is typically unable to trend fraud unless alerted by whistleblowers.

    Another reason Medicare fraud remains a growth industry, particularly now in neighborhood medical specialty group practices, e.g., Oncology, is due to the fact that neither Sarbanes-Oxley nor the Dodd-Frank Acts protect whistleblowers unless in public companies. So, whistleblowers in physician groups and most hospitals are not protected from the multi-level acts of retaliation financed by the culprits. Attorneys are only too happy to take the money from the guilty party to destroy the life and career of the whistleblower. Unlike the form of legal court governance in the UK, the guilty do not even have to pay the legal costs for the whistleblower they subjected to total hell until the case went to trial.

    Overall, health care is a classic case of an economic “house of cards,” when you look at unrelenting fraud, the vast majority of cost directed towards marketing and profits, and how the pharmaceutical industry has evidenced itself in the purest sense of a monopolist with a federal license. Congress, as influenced by the well-funded lobbyists representing the pharmaceutical industry, has tolerated this well-oiled business to defy anti-trust regs; push their prescribed products to the unknowing public through tax-deductible advertising; to influence physician behavior with all-paid conferences and dinners; and throttle generic competitors.

    Only in health care have we witnessed how competition has only increased costs, as insurance networks have required duplication of services and technologies. In major urban areas, small community hospitals continue to exists serving a religion or neighborhood no longer there; yet, running up excessive costs with poor quality, debt from requisite technologies, and high labor costs from agency staffing.

    Within this scenario, Medicare fraud flourishes.

  2. The American economy is a house of cards. Hello, it is all based on low interest rates. That is why stock prices are so high. Raising rates isn’t the problem. The big problem is that the Fed would have to use negative interest rates to stimulate the economy if something bad happens. Let the Chinese do stupid stuff like these hotels, they have money to burn!

  3. John B name me one state economy in the World that is not a ” house of cards’ ? Forgetting individual politics for a moment each administration used and abused the Treasury and the Fed, and if one thinks the Fed is totally independent then there is no use reading this. One of the main reason rates are so low is that should they rise above 5% which by the by is needed for a healthy economy the US Treasury could not fund the interest on all it’s obligations, incurred by both parties so let’s not go down the path of D v R. Inflation is coming and it will be bad when it hits. I only hope there is another “Volker” and a President that has the balls to do what is needed. I remember 21% prime

    On point this I think could the “canary” in the mine as the world economy slows your going to see many of these not so traditional deals failing. Oil is down and will continue to stay down as consumption slows. What has been built in the Emirates China etc were built poorly, as things slow so will be the maintenance along with the shoddy construction defects.

  4. Pot, meet frying pan.

    A guy who makes a good living off promoting travel hacking really has to be supremely myopic to think he’s somehow not encouraging people to game the system. (Sign up for biz cards “anyone can be a business” etc etc). Of course, the banksters he works for are even bigger scammers, so it’s not just tolerated, it’s rewarded. Smh

  5. ghostrider –

    I wonder if the surge in asset prices the last 5 years is the manifestation of the inflation from easy money, rather than traditional wage / consumer price inflation.

    In other words – we already saw the ill effects from an asset price standpoint.

  6. Buy Buttcoin if you are worried. It’s a store of value.

    Heck, the guarantee on the dollar is only backed bu the full faith and credit of the United States.
    Butttcoin is at least backed by the full faith and credit of my hard drive.

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