Money Laundering Bulletin, 23 June 2022
The United Arab Emirates (UAE) was put on FATF’s grey list in March 2022. Since then, the Emirates government says it has striven to build out and strengthen its AML/CFT regime, but it window dressing or really dealing with the problems? Paul Cochrane investigates.
Performance measurement
FATF's grey-listing of the UAE over "strategic deficiencies" in its anti-money laundering (AML) and countering the financing of terrorism (CTF) laws, policies and programmes (1) surprised some in its government as while the global standard-setter had placed it under 12 month's observation following a 2020 mutual evaluation report (MER), the country had introduced a raft of new measures in 2021. (2)
But FATF judged the progress to be inadequate; it wanted to see practical advances, for instance, demonstrating through case studies and statistics a sustained increase in outbound requests to help facilitate investigation of terrorist financing, money laundering, and high-risk predicates.”
David Lewis, a former executive secretary at FATF, and now a managing director and global head of AML advisory, in the forensic investigations and intelligence practice at Kroll, the New York-based risk advisory firm commented: “The UAE was hopeful they wouldn’t be listed, as they invested a lot and did a big public awareness campaign about what they’ve done. The reasons for listing was mostly because the FATF needed to be persuaded that recent efforts made were not just a one-off to get off the list, and were in fact part of a long-term and sustainable effort to tackle ML and TF.” He stressed: “You can be fully compliant with FATF standards and still be grey listed. Countries are starting to understand the importance of that,” he told the MLB.
Lakshmi Kumar, Policy Director at Global Financial Integrity, a Washington-based think tank, said the listing was “significant and unexpected”. She said: “Due to the UAE’s strong relationship with the USA and the UK, there was strong expectation they would not vote against the UAE. This has happened despite the UK signing an agreement (with the UAE) to tackle illicit financial flows (in September 2021), and came at a time when the relationship with the US government was and is being tested by the situation with Russia.”
A long time coming
While the UAE has naturally felt slighted by FATF’s decision, it has been welcomed in many quarters. The Emirates, particularly Dubai, has long been considered a hub for illicit financial flows, as highlighted in recent exposes such as the FinCEN Files, the Luanda Leaks and Dubai property data leaks. (3)
The listing “is a great sign of FATF’s growing independence and operational capabilities. The Emiratis knew what they were expected to do (to not be on the grey list), and have suffered the consequences,” said Alex Zerden, a former official at the US Treasury Department, now founder of Capitol Peak Strategies, a Colorado USA-based risk advisory group, and adjunct senior fellow at the Center for a New American Security, a think tank, in Washington.
In the US and UK “there is private and public frustration with the UAE on illicit finance issues, which is why the FATF’s multinational and technical criticism has an impact. It is decades of frustrations coming together,” said Zerden.
Work in progress
In March (2022), FATF noted that the UAE has made “significant progress across its MER’s recommended actions to improve its system, including by finalising a Terrorist Financing Risk Assessment, creating an AML/CFT coordination committee, establishing an effective system to implement targeted financial sanctions without delay, and significantly improving its ability to confiscate criminal proceeds and engage in international cooperation. Additionally, the UAE addressed or largely addressed more than half of the key recommended actions from the MER.” (4)
At the FATF plenary on 17 June 2022, no further action was taken regarding the UAE’s listing. The plenary noted that the “UAE chose to defer reporting to focus on its efforts,” and that the (aforementioned) March 2022 statement “may not necessarily reflect the most recent status of the jurisdiction’s AML/CFT regime."
Lewis said that FATF had wanted action in four key areas: international cooperation, an increase in the number and quality of suspicious transaction reports (STRs), more prosecutions related to money laundering, and non-proliferation financing. “They also need to demonstrate and improve money laundering and terrorism financing risks in the non-financial sectors, where there’s clearly not a common understanding. Improvements in intelligence capacity at the financial intelligence unit (FIU) is another thing FATF wants to be assured is happening before the UAE comes off the list,” said Lewis.
Recent results
The UAE has certainly been more active over the past year, with its Executive Office of AML and CTF releasing a factsheet in March (2022) touting its achievements in 2021, which include USD625 million in confiscated assets; USD64 million in fines for AML/CFT non-compliance; USD10.8 million in penalties imposed on several individuals found guilty of a tax evasion and money laundering scheme, in addition to seven years in prison; and USD109 million confiscated as preventative measures for CTF in 2021. There were over 6,300 supervisory inspections for AML/CFT last year, up from 2,812 in 2019. The factsheet stated that 1,000 professionals are to be trained in AML/CFT in the coming five years, and that there had been a 200% increase in staffing in the FIU’s international cooperation unit since 2019. (5)
Companies and charities – beneficial ownership and due diligence
Also in 2021, the ministry of economy released requirements for non-financial businesses to be registered to enable monitoring and transaction reporting, (6) and initiated a process to identify beneficial ownership of all such legal persons, which covers the 39 UAE free trade zones (FTZs), updating its registry of companies in this way. (7) The law, however, excludes companies operating in the two Financial Free Zones (in Dubai and Abu Dhabi) and government-owned entities. A new fundraising law for non-profit organizations (Federal Law No. 3 of 2021) was also passed, which includes requirements to carry out enhanced due diligence and fines of AED200,000-AED50,000 (USD54,458-USD136,147) on anyone illegally profiting from donations. (8)
The question is if such efforts are enough to warrant removal from the grey-list given the FATF focus on effectiveness. Kumar said there is a long way to go. “The challenge with the UAE has always been it is a black hole of information, and is designed to be so. If you look at the biggest exports and imports, 50% is uncharacterised, and what really grabs the attention is the big figure dual-use items like oil, gold and diamonds,” she said.
The UAE’s federal system also poses challenges, as noted in the US State Department’s International Narcotics Control Strategy Report 2022: “The overlapping yet distinct jurisdictional regimes for supervision and enforcement across the seven emirates and disparate commercial and financial free zone systems within the UAE create exposure to regulatory arbitrage.”
The country’s 39 FTZs also pose risks, despite the new beneficial ownership law. “Instead of one beneficial ownership registry, you need to get information from 39 registries. It makes it easier for a criminal to conceal illicit assets,” said Kumar.
International relations – Ireland, South Africa, Russia
At the international level, the UAE has been more active, establishing a partnership to tackle illicit financial flows with the UK, and freezing the assets of an Irish drug gang in April 2022. “Ten years ago international cooperation was difficult, now there are some good examples,” said Lewis.
Moreover, in June 2022, Dubai arrested the Gupta brothers, who are wanted in South Africa in connection with fraud and money laundering during the presidency of Jacob Zuma. “This certainly appears to be a reaction to the greylisting where Dubai wants to be seen to be cooperating on high profile money laundering charges. However, at this stage this is only an arrest, no decision appears to have been made on extradition,” said Kumar. “On the one hand, extradition sends a positive signal to the FATF. However, Dubai has been and continues to be a magnet for the criminally wealthy. It has to balance the signal this would send members of the Russian political elite that are now flooding into Dubai and other high profile political elites that hide money or keep assets in the UAE on the risks of continuing to use the UAE as a base.”
How the UAE handles US sanctions on Russia may be a particular sticking point with Washington, amid reports of Russian funds flowing into Dubai. “With respect to secondary sanctions, the major live issue in the US administration is how to handle these key jurisdictions – like the UAE and India – that haven’t signed up to this global coalition, and have strong economic ties with Russia,” said Zerden.
Lawyers yet to learn
As for UAE efforts to improve compliance by designated non-financial businesses and professions, it appears to be uneven, particularly among law firms. “The big firms are taking this seriously and have very strict onboarding processes, as they do not want any scandals. The small firms could not care less. I was shocked by what some law firms offer, including the falsification of documents. The criminal spirit is still in the market,” said a Dubai-based lawyer on condition of anonymity.
Even if the UAE is taken off the grey-list at FATF's October 2022 plenary, the country will still be considered a high risk jurisdiction. “Taking the UAE off the list doesn’t make a big difference from a private sector US risk standpoint, as the UAE was already in a risk category due to its geography and other factors, based on OFAC and other public guidance and reporting. That may be a bit unfulfilling for the Emiratis, as it does matter reputationally, but if I were advising a private company, the UAE would be in the high risk bucket due to all the known risks – sanctions evasion, money laundering, corruption, terrorist financing. It has it all,” said Zerden.
The UAE FIU did not respond to MLB’s interview requests for this article.
Notes
1) https://www.fatf-gafi.org/publications/high-risk-and-other-monitored-jurisdictions/documents/increased-monitoring-march-2022.html
3) https://www.occrp.org/en/investigations/dubai-uncovered-data-leak-exposes-how-criminals-officials-and-sanctioned-politicians-poured-money-into-dubai-real-estate
Also see - https://carnegieendowment.org/2020/07/07/dubai-s-role-in-facilitating-corruption-and-global-illicit-financial-flows-pub-82180
5) file:///home/paul/Downloads/UAE%20progress%20on%20AML%20CFT.pdf
6) This includes brokers and real estate agents, dealers of precious metals and stones, auditors, and corporate service providers.
7) UAE government-owned companies are excluded from beneficial ownership reporting requirements.
8) https://www.state.gov/wp-content/uploads/2022/03/22-00768-INCSR-2022-Vol-2.pdf
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