This article describes the high level legal and regulatory framework in relation to money laundering prevention in the DIFC including a definition of money laundering and the offences. It then highlights the five main elements of internal procedures necessary to develop effective and practical controls to satisfy AML/CTF requirements on an ongoing basis.
Money laundering, including the potential misuse of financial institutions to finance terrorist activity, is a problem of major concern for governments, regulators and financial institutions around the world. The effort to combat money laundering has produced a plethora of regulations and rules which represent a significant compliance challenge. Many financial institutions established in the Dubai International Financial Center ("DIFC"), or those seeking to apply, will have in place global policies, procedures and controls which apply Group-wide to detect money laundering. DFSA authorised or registered firms must be able to demonstrate that their anti-money laundering/counter terrorist financing ("AML/CTF") policies and procedures reflect the applicable AML/CTF requirements in the local DIFC jurisdiction.
DIFC Legal and Regulatory FrameworkThe DIFC is a Financial Free Zone created pursuant to the Financial Free Zone Law. As a result, the DIFC and all financial activities conducted within it are exempt from the provisions of UAE federal civil and commercial laws but are otherwise subject to federal laws including Federal Law No. 4 of 2002 Regarding Criminalisation of Money Laundering and Federal Law No.1 of 2004 Regarding Anti-Terrorism. Thus firms authorised or registered with the Dubai Financial Services Authority ("DFSA") must comply with the AML/CTF laws and regulations promulgated by the UAE Central Bank as well as the relevant rules prescribed by the DFSA.
Scope of AML/CTF set by FATF
Over the past 20 years, the Financial Action Task Force (FATF)³ has set the scope for AML/CTF requirements in the 100 plus jurisdictions which have committed so far to adhering to FATF Recommendations. The FATF scope was extended in 2001 to include designated non-financial businesses and professionals (so called "DNFBPs" when they carry out specified activities. In the DIFC, certain DNFBPs ie members of the legal, auditing and accounting professions, may register with the DFSA as Ancillary Service Providers ("ASPs"). ASPs are subject to DFSA oversight in relation to AML/CTF. All other DNFBPs established in the DIFC are subject to the AML/CTF requirements set by the Dubai International Financial Centre Authority ("DIFCA"). The DIFC Head Office of Al Tamimi & Company is registered with the DFSA and, therefore, is subject to and fully familiar with the details of the DFSA AML/CTF regime which applies to many of its clients.
What is Money Laundering?
Money laundering is the process of introducing into the financial system the proceeds of illegal activity and conducting transactions to try to conceal the criminal source of the money in order to make it appear legitimate. It also includes the potential misuse of financial institutions to finance terrorist activity.What are the offences?
It is important that the individual and institutional liabilities in relation to money laundering are well understood. The punishment for an offence on conviction is a fine or imprisonment or both irrespective of whether any money laundering has taken place.In summary, the offences are:
Assisting a money launderer/terrorist financier
Failure to report knowledge or a suspicion of money laundering/terrorist financing
Tipping off and
Inadequate internal procedures
The establishment and maintenance of robust internal procedures is required to guard against the use of a business for the purposes of money laundering or terrorist financing. The two objectives of specific policies, procedures and controls are 1) to enable suspicious clients and transactions to be recognised and reported to the authorities and 2) to ensure that if a client comes under investigation in the future the firm can provide its part of the audit trail.
Engagement of Senior ManagementAn effective AML/CTF control environment and compliance culture, however, relies fundamentally on the tone set by senior management who have ultimate responsibility for the firm. The engagement of senior management should be explicit and clearly stated in a risk management policy. The detail of AML/CTF systems and controls must be designed to reflect the nature of the risks the firm faces in relation to its client base, its services and products and the scale of its activities. Education and training
Effective AML/CTF controls also rely fundamentally on the awareness and regular training of all staff in both large firms and small. Irrespective of seniority, all employees should undergo initial and up-to-date refresher training. At minimum, the content should include the identity and responsibilities of the Money Laundering Reporting Officer ("MLRO"). The MLRO must be resident in the UAE and have sufficient seniority to act on his/her own authority.
Firms must establish that the customers with whom they are dealing are a real person (whether natural or legal). They must also obtain evidence which is sufficient to establish that the applicant for business is, indeed, that person.
KYC takes on a special significance in the context of AML/CTF. It is different from the "know your customer" principle embedded in the DFSA suitability rules. KYC due diligence protects the firm. Proper due diligence gives confidence in the reputation of customers, including the beneficial owners, and also the legitimacy of a customer's income, wealth, funds, investible assets and transactions. Suitability, by contrast, protects the customer. Knowing a customer's suitability profile aims to ensure that appropriate investments are made for that customer.
All employees are expected to be capable of recognising the circumstances in which they have knowledge or suspicion of money laundering. "Knowledge" includes actual knowledge, willfully shutting one's mind to the obvious and willfully and recklessly failing to make such enquiries as a reasonable person would make. "Suspicion" is personal and subjective. It has been defined by the courts as being a "degree of satisfaction, not necessarily amounting to belief but at least extending beyond mere speculation as to whether an event has occurred or not". In practice, suspicion is often a matter of gut feel and common sense in the light of experience and, if in doubt, any suspicion should be reported to the firm's MLRO.
Reporting of suspicious transactions
All suspicions of money laundering must be reported to the MLRO. This satisfies the obligations of the individual under the law and regulations. The suspicion must be recorded and investigated by the MLRO and, if necessary, reported to the appropriate authorities. In the DIFC, this is to the AntiMoney Laundering Suspicious Cases Unit ("AMLSCU") of the Central Bank and copied to the DFSA (if an authorised or registered firm) or to DIFCA (if a DNFBP).
Summary
The detection and prevention of money laundering remains a significant priority for governments and regulators globally. As a result, compliance with the specific AML/CTF requirements in each of the jurisdictions in which a firm operates poses a significant challenge. The FATF Recommendations have fostered convergence among the AML/CTF requirements in various jurisdictions. As always, however, the devil is in the detail. Firms established in the DIFC must be familiar with the prescription in the laws and regulations of the UAE Central Bank as well as the applicable rules of the DFSA or DIFCA in order to develop the framework outlined above into day-to-day operational internal procedures. Al Tamimi & Company is well placed and able to provide practical advice and assistance in this important area.
By Jane Coakley - Dubai Office
© Al Tamimi & Company 2009
