Legal proceedings could be launched this week against an international bank in Bahrain after five families claimed they were duped out of $40 million.

The families claim they have been mis-sold complex financial products that they did not fully understand and were not made fully aware of the consequences, write Mandeep Singh and Rebecca Torr in a Gulf Daily News report.

They were allegedly told they would replace their usual standard currency transactions and they would benefit from a discount compared to rates they got from other banks.

However, they claim they were shocked to discover they were exposed to massive liabilities that could have caused bankruptcies if the market moved in the wrong direction.

'They also claim the highly-complex interest rate derivatives were sold without explaining to them the full extent of the risks involved,' said an official for the law firm, Almoayed Law, representing the families.

He described the case as the first of its kind in Bahrain, but added it might not be the last since there were other victims.

The families claim the bank told them they would make a profit of between one and four per cent on the exchange rate.

'However, they were not made fully aware of the consequences if the exchange rate was not in their favour,' said the official who would not be named.

He also said there was no upper limit on the amount the families could lose, meaning they were risking their entire fortunes. 'Worse, the bank would pay and the families would then end up owing to the bank,' he added.

He said the families signed an International Swaps and Derivatives Association (ISDA) Master Agreement based on the same clauses as the one signed by Greece before its economy crumbled.

'The contract is based on three clauses - English law will apply, families receive independent advice before signing and if the agreement is disputed, the bank could claim the full amount,' explained the official.

He said the families argued the bank failed to explain the difference between selling and buying a contract, which according to Central Bank of Bahrain (CBB) regulations must be differentiated.

'Nowhere in the contract does it state the word 'derivatives' apart from the title of the document, which says it is an 'ISDA Master Agreement',' he said. 'The agreement states the families had sought independent advice before signing, which they claim they had not.'

The families also want the CBB to offer more protection to investors by making it mandatory for clients to have a lawyer present to co-sign such agreements.

'There is a clause in the agreement that states the families have no legal right to dispute the contract and any attempt will mean they are obliged to pay the full amount,' added the official. 'This is unlawful.'

He said the agreements were made in Bahrain with the bank's Dubai-based marketing team, but argued the CBB should never allow this kind of product to be sold in the kingdom.

He also argued the bank acted irresponsibly by allowing this type of relationship to exist with representatives from outside of the country.

'If derivatives can destroy an entire economy such as Greece, what it can do to small family businesses is unimaginable,' he said.

He said it was imperative for such financial instruments to carry a statutory warning.

The bank, which cannot be named at this stage due to legal reasons, told our sister publication the Gulf daily News that it was unaware of the case. However, the lawyer claimed to have had several meetings with senior bank officials. – TradeArabia News Service