Nevertheless, he sees the perception of the UAE as being problematic for money laundering as “overdone”. “Money laundering is an international problem. There are many countries in the wider region that have far less effective AML regimes, and this creates issues for the region as a whole. But the banks take this very seriously. For example, they simply don’t deal with Iranian transactions,” he said.
The results from this year’s FATF’s examination will be “critical for the image and reputation of the country’s financial services sector, as the outcome is likely to play a profound role in determining the way the UAE’s anti-money laundering regime is perceived globally,” said Katerina Pagoni, head of AML and sanctions at KPMG Lower Gulf.
The last examination took place in early 2007, and flagged up a number of issues, including low numbers of suspicious transaction reports (STRs) – a key aspect of an AML framework – a need for the Financial Investigations Unit (FIU) within the UAE Central Bank to increase its staff numbers, and the need for a more comprehensive legal framework. It also highlighted concerns about the monitoring of companies registered in free zones.
There has been a flurry of activity ahead of FATF’s arrival: last October a new AML law was announced, with a broad swathe of changes including more rigorous client due diligence requirements for banks and exchange houses, enhanced requirements around establishing ultimate beneficial ownership of companies, including UAE nationals within the category of politically exposed persons, and allowing undercover and sting operations.
Pagoni describes the law as “signalling a new era in compliance in the UAE, where [businesses] may expect a heightened level of regulatory scrutiny and enforcement, as well as zero tolerance for financial crime”.
The law is “in closer alignment with FATF Recommendations and international AML standards,” she said in emailed comments last month.
Last month, the Central Bank’s FIU also announced the introduction of a new AML platform called goAML, as well as announcing its intention to crack down on the real estate sector as part of its work to combat money laundering in the country, according to a report by Reuters.
Nevertheless, the UAE’s FATF examination process can be expected to be additionally stringent, said Rachel Woolley, global AML manager at Fenergo, a technology company that provides client lifecycle management processes for banks and other businesses.
“FATF are currently in their fourth round evaluations... which means they know what they’re looking for now,” said Woolley in a telephone interview last month. “The assessment process is more robust.”
The fact that the current AML law was passed just at the end of October 2018 also raises the question of “how effective those changes would have been in the space of a few months,” suggests Woolley. “I’m not sure there’s been enough time for those changes to be embedded within both the country structure and within financial institutions,” she said.
Scrutiny of banks
With the banking sector the gateway to the wider economy, and with “a concentration of significant international and local banks” in the UAE, the country’s banking network will be a key focus for FATF, Stuart Paterson, a partner at Herbert Smith Freehills said in an interview in April.
Despite the recency of the new AML law, Mazen Boustany, a banking and securities partner at Baker McKenzie Habib Al Mulla, believes that many banks were already operating at a level above and beyond what the old law required, in part due to the fact that UAE banks need to comply with the standards of international correspondent banks that they transact with.
De-risking, a process whereby major international banks shut out banks or regions deemed not to have adequate AML processes in place, remains a threat to the UAE and the wider region, creating a strong commercial incentive to operate at a global standard, said Boustany in a phone interview last week.
And since the last FATF report, the country’s financial institutions have invested significantly in improving their AML and CTF compliance, said Boustany. “AML compliance has been one of the largest cost centres for banks over the last 10 years,” he said.
Shanahan said in a telephone interview last month that “the big UAE banks have hired very carefully and got some very good people on board for their AML teams”.
“They take this very seriously,” he said.
Still, with the UAE over-banked, some smaller banks may be under-resourced, he suggests.
“No doubt the Central Bank will be seeking to address that.”
The UAE’s exchange houses also have to meet new thresholds for client due diligence under the new law, but Osama Al Rahma, the CEO of Al Fardan Exchange and the vice chairman of the Foreign Exchange and Remittance Group (FERG), said that the UAE Central Bank began giving directions two years ago on compliance, giving them sufficient time to adopt the new standards introduced in the 2018 law.
While investment in AML procedures for exchange houses might be expensive, Al Rahman said in a telephone interview last month that it is needed “to sustain your business, because you cannot afford the reputation damage or any other damages related to non-compliance – that can be catastrophic and take you out of business entirely”.
Indeed, in June 2018 the Central Bank downgraded the licenses of seven exchanges houses which had violated AML regulations, banning them from carrying out transactions related to remittances or wage payments.
Regulators in focus too
The effectiveness of the country’s main financial regulators, including the UAE Central Bank and the regulators at the Dubai International Financial Centre – the DFSA – and the Abu Dhabi Global Market – the FRSA will also come under the microscope.
In a global environment where international banks have been handed out billion dollar fines for AML violations, the DFSA has been the most active regulator in the Middle East when it comes to imposing fines, with five fines totalling $9.5 million between 2011 and 2015 according to a report by Fenergo. (Many of these fines aren’t for money laundering itself, but rather for a lack of correct processes and procedures in place, notes Woolley.)
Meanwhile, enforcement actions taken by the Central Bank are less visible – the bank is not known to make public any investigations as charges are sent to public prosecution; in the case of a prosecution, it would be the court that hands down the jail sentence and the fine not the Bank itself, said Paterson. “This was the case in November 2017, when three individuals were jailed and fined for money laundering and fraud. One of the defendants received a ten-year jail term for money laundering, three years for cheating and a fine of 500,000 dirhams,” he said in emailed comments last month.
Nevertheless, the Central Bank has also been given more teeth under the 2018 law, with much broader powers of enforcement, supervision and control that will allow it to go after financial institutions more directly. “We have heard that the UAE CB may now start imposing fines and other sanctions,” says Paterson.
Shanahan sees a sharp distinction between the position of the financial free zone regulators and that of the UAE Central Bank. Whereas the financial free zones have very high standards of AML supervision and enforcement, the UAE Central Bank is to some extent “playing catch up,” he said.
“I think that the DIFC and the ADGM will pass with flying colours. The federal regime is also far improved from where it was ten years ago, so they will do well in terms of the law.
“But the second aspect that the FATF team will be assessing is effectiveness [and there] the onshore regime may have a few issues,” said Shanahan in a phone interview last month. “While the Central Bank has made a lot of progress in terms of supervision, I think they’ll probably remark that there needs to be more done on the enforcement side.”
He singles out regulation supervision, and enforcement of designated non-financial businesses and professions (DNFBPs), in particular in the real estate and high-value goods sectors such as jewellery, as one area where “there is no proper centralised authority or level of control for companies in those sectors”.
Still, the UAE’s financial system and especially the country’s large banks are seen by the experts as performing at a good level.
“If you look at peers around the region, the UAE is doing extremely well,” said Paterson. “The system here is doing just as well as that of countries with financial markets that have been much longer established.”
The FATF’s findings are expected to be publicly released in April 2020.
(Reporting by Stian Overdahl; Editing by Michael Fahy)
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