The United Arab Emirates has long been a magnet for illicit funds, for a whole host of often deep-rooted geographical, economic, historical and cultural reasons. But with the Financial Action Task Force calling for urgent action, the Gulf state has recently shown signs of flexing its regulatory muscles, but can it really adequately tackle financial crime?
“Corrupt and criminal actors from around the world operate through or from Dubai. Afghan warlords…Russian mobsters, Nigerian kleptocrats, European money launderers, Iranian sanctions-busters, and East African gold smugglers, all find Dubai a conducive place to operate.” said a hard-hitting report last year by the Carnegie Endowment for International Peace (CEIP).
The report entitled, Dubai’s Role in Facilitating Corruption and Global Illicit Financial Flows, is certainly not for the faint-hearted. It is not for nothing that one financial crime expert that GRC World Forums talked to jokingly likened the Jebel Ali free trade zone to Mos Eisley, the spaceport town in Star Wars filled with unsavoury characters.
Could all this be about to change though?
A critical Mutual Evaluation Report last year from the Financial Action Task Force warned UAE in the clearest possible terms that “as a major global financial centre and trading hub, it must take urgent action to effectively stop the criminal financial flows that it attracts. “
While recognising progress has been made, FATF criticised the country’s lack of money laundering prosecutions, questioned its use of sanctions and its supervision of Designated Non Financial Businesses & Professions (DNFBPs) and the effectiveness of its international co-operation efforts.
The challenge for AML/CTF
Dubai along with Abu Dhabi and the other five emirates, has a multitude of challenges when it comes to tackling anti-money laundering (AML), counter terrorism financing (CTF) and fraud.
As the Financial Action Task Force has noted, the UAE’s culture of a cash-intensive economy exposes it to certain “inherent” AML/CTF risks.
It has a large open financial sector, including a large amount of remittances and cash transactions. It has 37 free zones, which offer a range of exemptions from usual tax and regulatory requirements in order to boost trade. These include the possibility of 100% business ownership by foreign nationals, no corporate and personal income taxation, no customs duties on imported goods and simplified registration procedures.
According to CEIP, these free trade areas are a “haven for trade-based money laundering.”
“Operating with minimal regulatory oversight or customs enforcement, these zones allow businesses to disguise the proceeds of crime via the over- and under invoicing of goods, multiple invoicing, and falsifying of other trade documentation,” said CEIP
There also appears to be significant regulatory complexity in a state that has seven different Emirates, two types of free zone with different supervision and no less than 39 different company registries.
The role of luxury real estate being used to facilitate money laundering and sanctions evasion, particularly in Dubai, has also been the subject of column inches.
The non-profit Centre for Advanced Defense Studies (C4ADS) traced seven sanctioned individuals and organisations and their real estate holdings in Dubai. It found the seven, who had had been sanctioned for offences by the US including conflict financing, drugs trafficking, nuclear proliferation, terror financing and corruption, held 44 properties worth around $28million, while their expanded networks held 37 properties worth $78.8m.
If that wasn’t enough, UAE also has an active trade in gold and precious metals, oil, along with a large proportion of foreign residents and has proximity to several countries destabilised by conflict or terrorism or subject to sanctions.
Another factor, according to one financial crime analyst with extensive banking sector experience in the country, is a culture that admires people with wealth where there is a strong taboo about asking about people’s sources of finance.
“Culturally, it is extremely sensitive. It is sensitive enough in the West asking someone where they got their money from. But in that society, it is just not done”, he said.
What has FATF said?
Before we come on to what the UAE is doing to meet its AML challenges, it is worth us taking a look at what FATF said about the country in its most recent Mutual Evaluation Report (MER) published last year. Several experts have told GRC World Forums that the main driver behind a recent spate of AML regulatory activity in UAE is directly related to the FATF report.
It should be pointed out that FATF is complimentary about much of the work UAE has done to improve its AML/CTF framework and systems, saying it has strengthened laws in recent years. It said: “The elements of an effective framework to detect and prevent criminals and terrorists from misusing the financial system are mostly in place”. However the big problem, as pointed out repeatedly the report, is a lack of effective results.
So FATF recognises that the UAE has improved its AML/CFT system by developing a National Risk Assessment (NRA), addressing deficiencies in legislation, strengthening and coordinate mechanisms across the Emirates, strengthening the Financial Intelligence Unit and supervising previously non-covered sectors. However, crucially it says the “effectiveness of the system was not fully evident” during the FATF’s MER visit.
This contrast, between impressive-looking systems in theory, contrasted with an apparent lack of effectiveness on the ground, is a running theme through the Mutual Evaluation Report
Similarly, it says the NRA and other changes are a good starting point but “it is too early to assess their impact in mitigating sophisticated risks posed by, for example, professional money laundering networks or trade-based money laundering.”
This contrast between impressive-looking systems in theory, contrasted with an apparent lack of effectiveness on the ground is a running theme through the MER. For instance, FATF describes the fact that UAE authorities have access to a broad range of financial information sources as a “strong feature” of the country’s financial intelligence framework. However, it says this intelligence is not fully exploited.
And even though the UAE has a “sound statutory” money laundering offence, law enforcement authorities are “not routinely identifying and targeting significant money laundering cases”.
Between 2013 and 2018 there were just 50 prosecutions and 33 convictions for money laundering offences in the UAE. FATF says: “The low number of ML prosecutions in Dubai is particularly concerning considering its recognised risk profile.”
What is UAE doing?
Following the FATF report, predictions were made that UAE, in order to avert the potential embarassment that a FATF grey-listing would cause, would move pretty swiftly to tackle, or at least appear to tackle, the points raised by FATF. “Authorities and regulators throughout the UAE are likely to decide to take immediate action to fill these holes. It would therefore be prudent for entities and persons across the UAE, in all sectors, to re-visit and evaluate their financial crime risk frameworks,” wrote Ibtissem Lassoued and Benjamin Jones of the law firm Al Tamimi & Company last July.
Followers of global financial crime news will have seen numerous activity since, including several high-profile cases, perhaps intended to counter the FATF criticism of a lack of prosecutions.
Earlier this month the Abu Dhabi Criminal Court sentenced a former Chairman of an Abu Dhabi Government-owned company, as well as its Chief Executive Officer (CEO), to 15 years’ imprisonment for money laundering. The court heard that the two individuals had misappropriated funds to conceal their origin and location and had layered these funds into several companies.
This judgment was, according to Samir Safar-Aly of Baker McKenzie, “The latest in a string of recent money laundering cases, demonstrating the strong commitments of law enforcement agencies and public prosecution authorities in the UAE to address such financial crimes.”
It followed a case on 24 November where nine individuals and nine companies were found guilty by the Abu Dhabi Criminal Court in an $83 million laundering case.
The UAE has also moved to pass new regulations in several key areas.
From 27 October, registered entities including those in commercial free zones, have been required to maintain a register of beneficial owners.
In November, Sultan bin Saeed Al Badi Al Dhaheri, Minister of Justice, issued ministerial resolutions on setting up specialised courts for money laundering crimes, based in existing courts in Sharjah, Ajman, Umm Al Qaiwain and Fujairah. This followed the passing of a resolution earlier that month established a money laundering and tax evasion court in Abu Dhabi.
The same month, the UAE Ministry of Economy announced the establishment of a dedicated AML Department, including an investigation and enforcement sub section which according to Safar-Aly adds to a “more robust AML infrastructure for Designated Non Financial Businesses and Persons” (DNFBP). UAE’s cabinet also announced just last week it is establishing an executive office to tackle money laundering and terrorism financing.
Earlier this month it was the turn of the banks to be penalised with the Central Bank of the United Arab Emirates fining 11 financial institutions a combined total of $12.5 million for failing to meet a deadline to improve their AML and CTF frameworks. Maya Braine, Managing Director for the Middle East & Africa at FINTRAIL, said the fines were “not insignificant” and were a good first step. However she said: “It doesn’t seem they were investigating anything suspicious, it is more about ensuring people stick to the letter of the law and register and file what they are supposed to on time.”
The UAE also made headlines in October when its Ministry of Justice, which has been given much more of a role in regulating AML, suspended the licenses of 200 law firms for failing to meet new regulations. Although 193 of the firms subsequently had their licences re-instated it did allow the ministry to state the penalties “reflect the strong commitment of the Ministry of Justice towards strengthening its AML and CTF supervisory role over legal professionals.”
The UAE is also seeking to open more dialogue with compliance professionals in the region
Braine says this action against law firms was unusual and a good step. She said: “Globally, people focus on the banking sector and even though real estate companies and law firms have all got reporting obligations and are supposed to have Know Your Customer processes , they are much less likely to be targeted by enforcement.”
Another eye-catching move was the announcement that Hawala providers failing to register with UAE’s Central Bank would risk fines or face imprisonment. Hawala is an alternative remittance system that originated in India. It is an informal value transfer system used primarily among south Asians that relies on trust and networks. It is often quicker and cheaper to send money abroad via Hawala brokers than through traditional banking services.
However, the informal nature of the Hawala system and its apparent popularity for import/export, foreign exchange and travel-related services has led to concerns over its role in facilitating money laundering. Indeed, FATF cited ‘hawaladers’ (Hawala brokers) as one of several areas of “particular weakness” that supervisors should examine.
In addition to the enforcement actions and new legislation, the Central Bank of the UAE is also seeking to open more dialogue with compliance professionals in the region. In January it held its first Compliance Officers Forum, at which the governor of the Central Bank discussed the compliance framework with officers from more than 100 banks. There were also plans discussed for a new, digitised Know Your Customer system intended to ensure consistent standards across the banking sector.
While the UAE has started to wield sticks to ensure better AML compliance, could there also be a carrot? In February the country announced it will open up citizenship to select foreigners for the first time with select professionals being selected UAE royals or officials.
The announcement co-incided with the fines for banks. One banker in the region speculated: “Perhaps this is a quid pro quo, You will be asked where your money comes from but in return for heightened disclosure you will be able to get citizenship.”
There is no evidence at this stage that AML compliance and transparency will be used as a condition of getting a UAE passport, but the UAE has said the pathway to citizenship will include “investors” and the measure seems to be aimed at encouraging people with money to deepen their ties with the Gulf state.
Bare minimum or a new dawn?
So the UAE has strengthened AML legislation and regulations over DNFBPs, set up new specialist courts. brought more enforcement actions in the past year and is taking steps to ensure banks, law firms and hawala providers register and provide certain information.
The real question though is the extent of the country’s determination to fight financial crime in the long term, as opposed to merely avoiding FATF ‘grey-listing’, which could affect the appetite for lending to the region. It would also, of course, cause diploamtic embarassment and risk affecting the region’s reputation as one of the financial service centres of the world.
“My guess is they are trying to do just do enough to get through the FATF consultation period”, said our unnamed banker.
In the past, says Braine, the low number of prosecutions may have been because the UAE “wants to be open to the world and give the impression that everyone’s money is welcome.”
The country has certainly benefited from ‘capital flight’ by being seen to be an open safe haven for investment, particularly during periods of instability in nearby nations, such as the Arab Spring uprisings in 2011 and 2012.
”The regulators want to be seen to take a firmer line but without jeopardising that open reputation and putting off legitimate people,” Braine adds.
So the suggestion is that UAE is trying to maintain its reputation as a haven for capital while simultaneously clamping down on money laundering sufficiently to alleviate growing international concern.
Is it really committed to tackle the myriad cultural, economic and geographic challenges of preventing money laundering and terrorism financing?
It is a tough job and only time will tell if the measures announced in recent months are merely intended to keep FATF on side and prevent a grey listing, or whether it is the start of a more fundamental drive to reform.
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FATF’s priority actions for the UAE in full
a) Deepen and refine the UAE’s understanding of ML/TF residual risk at both a national an individual Emirate-level by assessing how threats are exploiting AML/CFT system vulnerabilities, while taking into account the impact of mitigating measures. In particular, enhance the UAE’s understanding of the most immediate and pressing ML risks complex. Deepen private sector outreach
b) The National Committee and NRA Sub-Committee should use evolving risk analysis and stakeholder insight to inform the application of mitigation measures.
c) Enhance the use of financial intelligence in the UAE by: identifying how it can identify and address significant ML threats; continuing to support the development of the FIU to ensure that it can provide complex operational analysis as well as strategic analysis in line with operational needs; mandating the systematic use of financial intelligence and financial investigations to better investigate ML, associated predicate offences, TF and trace assets across all LEAs; improving STR reporting awareness among new reporting entities, and improving and targeting intelligence on cross-border movements of cash and precious metals and stones.
d) The ML Investigation Sub-Committee should refine its prioritisation criteria and embed these principles into any national and Emirate-level tasking and coordination process to ensure timely identification and significant ML risks and closely monitoring key cases to ensure they address the most pressing ML risks. The Ministry of Interior and Federal Customs Agency should agree a consistent referral mechanism to ensure suspicions of ML via cash or precious metals and stones movements are identified and assessed for investigation. All Public Prosecutions, but especially Dubai PP given its risk exposure, to prioritise the pursuit of money laundering charges, including complex or standalone prosecutions in cases of foreign predicate offending. Without compromising the independence of the judiciary, the National Committee, in coordination with relevant competent authorities, should establish a dialogue with judges to communicate the aims of the national AML/CFT strategy.
e) Continue to embed the high-level policy objective of routinely pursuing confiscation in all agency actions plans and procedures, with oversight provided by the ML Committee, who can coordinate and disseminate best practice to reinforce the policy objective. Improve the collection of confiscation statistics across the UAE, in order to assess these initiatives are addressing ML/TF risks. Build Customs intelligence capability, including profiling and detection resource, focused on cross-border currency, bearer negotiable instruments and precious metals and stones movements.
f) Implement TFS for TF and PF without delay, including by conducting further awareness raising and outreach to both authorities and private sector entities on the mainland and the FFZs to make them aware of their obligations with respect to TFS and the Import/Export Committee’s new website and mechanism. Work to build a better understanding of TFS and sanctions evasion among authorities and the private sector. Take more dissuasive enforcement or remedial action with respect to TFSrelated deficiencies. Finally, rectify the key technical deficiencies in Recommendations 6 and 7 to help ensure better implementation.
g) Enhance the monitoring of sectors’ awareness of risk, mitigation measures and compliance, most notably ensuring that all DNFBPs are aware of their obligations. Supervisors should conduct full-scope examinations of institutions in line with the risk cycle and through the conduct of thematic reviews. This should notably focus on areas of particular weakness (TFS, EDD, hawaladars and high risk DNFBPs). This should be accompanied by enhanced guidance, education and outreach, to urge non-bank FIs & DNFBPs to strengthen their transactionmonitoring systems and ensure timely and quality reporting of STRs by all reporting entities.
h) All supervisors should ensure the full implementation of RBAs and carefully monitor their implementation (particularly noting some are recently implemented) – focus should specifically be given to adequacy of supervisory resources to ensure they are sufficient. Meetings of the recently established Sub-Committee for FI supervisors should occur regularly to ensure alignment of the supervisors in the UAE and also to coordinate through regular meetings with the DNFBP supervisors. There should be regular discussion of High-level principles of AML/CFT supervision for FIs and DNFBPs with the outcomes communicated to the industry. Sanctions should be urgently reviewed to move to a position where they are used in an effective, proportionate and dissuasive manner.
i) The UAE authorities should expedite the full and effective implementation of the requirements of the AML Law and AML By-Law across all company registries. The UAE should expedite the implementation of the NER across all registries in relation to basic information and the authorities should look to develop the understanding of beneficial ownership across the Registries through | guidance and training. The UAE should determine policy at a national level, there is an effective policy to ensure effective on implementation of sanctions for failing to comply with information requirements. The authorities should look to monitor this implementation to ensure that it is applied in a uniform manner effectively across all 39 registries.
j) Make significantly greater use of formal international legal assistance processes (MLA, extradition and asset freezing and confiscation), prioritising Dubai given its increased exposure to ML/TF risks such as the laundering and placement of foreign proceeds. Conclude integration of the MOJ’s new case management system and review current resources in the Ministry of Justice, Public Prosecutions and Police Forces to achieve this outcome. Increase international cooperation by the Federal Customs Agency on cross-border cash/precious metals & stones smuggling and TBML and increase resources available to the FIU to ensure that it can better seek and provide (on request and spontaneously) cooperation at a level commensurate to the UAE’s ML/TF risk profile