Money-laundering has been defined by the UAE Central Bank as “any transaction aimed at concealing and/or changing the identity of illegally obtained money, so that it appears to have originated from legitimate sources, where in fact it has not”.
For the man in the street the covert operations of money-launderers are not likely to be of immediate interest or concern. For governments and regulatory authorities around the world, on the other hand, the question of how to staunch the flow of contaminated money through the arteries of their country’s financial system, is a major and continuing preoccupation.
In this respect, the UAE Government is in no different position from other governments. Indeed given the UAE’s strategic location and its rapid development during the past few years as an international entrepôt and financial centre, the task facing the UAE Government, when it comes to controlling illicit financial transactions, is probably greater than most. In the event the UAE has taken its responsibilities with regard the suppression of money-laundering very seriously. In particular it has actively supported the Financial Action Task Force (“FATF”) and other such international anti-money laundering agencies, and has sought to implement the FATF Forty (+Nine) Recommendations for the combating (respectively) of money-laundering and the financing of terrorism, with the necessary policy initiatives and legislative controls.
The UAE’s first significant counter-measure took the form of a circular issued by the Central Bank to all banks and other financial institutions (“banks”) in November of 2000. Recognising that, as a consequence of technological innovation, financial markets had become “globalised” and drawing attention to the ease and rapidity with which funds could now be moved across borders to facilitate the concealment of crime the circular imposed new duties on all licensed banks in the UAE. It was made obligatory for all banks to obtain detailed information about their customers (by implementing the so-called “Know Your Client” (or “KYC”) procedures) and to appoint dedicated “compliance officers”. In addition, the circular required banks to file “suspicious transaction reports” (“STRs”) in relation to any questionable fund or asset transfers and gave examples of the kind of transactions the banks should watch out for.
The next step was the enactment in 2002 of Federal Law No. 4 regarding the Criminalisation of Money-laundering (in Arabic, “Ghasl Al Amwal” or “Asset Washing”) (the “AML”). Besides creating the new offence of “money-laundering” (for which severe penalties were prescribed), the AML also established a National Anti-Money laundering Committee (consisting of representatives from the Central Bank, Ministry of Interior, Ministry of Justice etc.), with responsibility for formulating anti-moneylaundering regulations for the UAE and representing the UAE in and/or coordinating with international anti-moneylaundering forums and bodies (in particular FATF). In addition, the AML formally constituted an anti-moneylaundering unit – the Financial Information Unit (“FIU”) (also known as the Anti-Moneylaundering and suspicious cases unit) within the Central Bank, the role of the FIU being to gather in STRs from the banks and pass on prima facie evidence of AML contraventions for further investigation by the enforcement agencies.
The introduction in 2004 of Federal Law No. 1 relating to the Combat against Terrorism Offences (“CTOL”) represents the UAE Governments latest initiative in its anti-money laundering campaign. In the present context, the significance of the CTOL is that it expressly outlawed the financing of terrorist organisations and the abuse of the banking system for this purpose.
What impact has the disclosure regime, imposed by the AML and the CTOL, had on the finance industry in the UAE? There is little doubt that the effect has been considerable. The larger banks (whether international or locally established) were, in most cases, already subjecting potential clients to stringent KYC procedures, even before the introduction of the new legislation. The difference is that, in a part of the world where privacy is jealously guarded and there is some aversion to making any disclosure with regard to personal or business affairs, banks are now able to justify legally their request for detailed account opening information by pointing out their obligations under AML and CTOL provisions.
In short, the anti-money laundering regime now in place in the UAE has created an environment where the need to “disclose” is generally accepted and one in which most bankers in the UAE (whether retail or investment) are able to say: “We know all about our clients and about their transactions”.
There is nevertheless a perception, within the UAE finance industry, that there are still certain “fringe” institutions which do not necessarily observe the scrupulous standards in regard to the opening of new accounts that the law requires of them. It has also been noted that, hawaladars (i.e. money transfer agents) remain outside the formal banking system, having been merely “invited” to register with the Central Bank on a voluntary basis. Given the unregulated status of such agencies, it would be hardly surprising if hawalas were not occasionally used as a conduit for the transmission of suspect funds.
A similar perception exists in relation to the brokerage and insurance sectors, regulated by the Emirates Securities & Commodities Authority and the Insurance Authority respectively. The suggestion is that, while the vast majority of brokerage and insurance companies in the UAE are well-managed and strictly compliant, a certain number of smaller concerns in each sector, have failed to develop a culture of compliance. Hence, brokerage and insurance business is still being accepted in cases where there are sufficient “warning signals” to have deterred a broker or insurer acting in good faith and in this way illegally sourced funds are able to enter the UAE financial system, despite the legislative defences that have been put in place.
Quite apart from the money-laundering possibilities offered by “sub-prime” banks, brokers and insurance companies and the hawala mechanism, the emergence of a UAE real estate market, whereby non-nationals can purchase freehold property in certain development areas, is also thought to be another likely point of entry of “hot” money into the banking system. Cash is not an acceptable means of payment on a property transaction, but there is a suspicion that some vendors in the UAE ignore this rule of prudence. They could not afford to do so unless they were confident of being able to “bank” the resultant cash proceeds by some means or other.
Notwithstanding certain weaknesses, the UAE Government’s anti-money laundering regime is generally agreed to be as effective as that of any comparable state, if not more so. The question is – can its perceived defects be remedied?
Given the diverse nature of the crime of money-laundering and the ingenuity of “launderers”, the solutions are not likely to be simple or quick. However, perhaps the traffic in hawalas and sales of real estate can be brought under tighter control, and, given time, it may be that the regulatory bodies will acquire the necessary resources to “police” the activities of banks, brokers and insurers more intensively than they can present. The introduction of a VAT scheme, currently under discussion by the UAE government, could also have a deterrent effect. The disclosure and accounting disciplines that such schemes entail, would be bound to make it harder for the “rogue” element in the trading community to conceal money-laundering ventures.
It remains to be seen how the UAE Government will continue to counter the corrosive effects of money-laundering in the future. However, in its short history, this country has contended successfully with greater challenges.
(Note: The Dubai International Financial Centre operates under a separate legal regime from the UAE as a whole, although the provisions of the criminal law are applicable within the DIFC).
Alex McGeoch: firstname.lastname@example.org