The news in late August that the UKs Standard Chartered was looking to sell part of its business in the UAE having agreed to close some Emirati bank accounts as part of an anti-money laundering (AML) settlement with US authorities has forced the federal government to think afresh about the question of money laundering.
Under the settlement, which was announced on 19 August, the bank agreed to pay a $300m fine relating to failures in AML surveillance systems and exit high-risk relationships with small and medium-sized enterprises (SMEs) in the UAE. This comes two years after Standard Chartered had to pay a $340m fine to the New York State Department of Financial Services (DFS) over accusations of working with Iran to hide several transactions from US authorities.
The UAE itself has taken a dim view of the banks action to shut down accounts. The central bank warned in a statement that Standard Chartered could be liable to legal action from local firms facing the closure of their accounts following the settlement struck with the DFS. Affected companies may seek prosecution due to the material harm the closing of the accounts will cause, with between 1,400 and 8,000 Standard Chartered accounts in the country expected to be affected by the US settlement.
The Standard Chartered saga comes just a few months after the UAE beefed up its own AML laws, in an effort to clamp down on a practice that has wrought significant damage to the countrys international reputation.
A cash-based economy such as the UAE is highly susceptible to money laundering. The carrying of large amounts of cash is commonplace, which opens up the system to abuse. Large-scale cash activity can provide an effective disguise for money launderers to shift funds, whether by use of alternative remittance dealers, international funds transfer or cash couriers. The sizeable gold trade market is another potent source of money laundering and terrorist financing.
Professional launderers have frequently used the UAE the regions most open and trade-oriented economy to launder criminal proceeds. Russian mafia and drug cartels have channelled hot money through Dubai. Often this takes the form of individuals arriving in the UAE with suitcases stuffed with cash, intended to buy real estate, thereby laundering illicit proceeds.
Deep flaws have previously been exposed in the UAEs systems for monitoring both inward cash movements and inward wire transfers. An assessment of the country issued in 2004 by the Financial Action Task Force (FATF), an inter-governmental body that aims to combat money laundering and terrorism financing, identified a lack of recognition by the authorities as to the extent to which overseas criminal groups used the UAEs financial system to launder money. It also said there was a need for regulation of the large number of unregistered hawladars (informal remittance providers).
Its safe haven status makes it a magnet for foreign wealth from South Asia, Eastern Europe and the wider Middle East not all of it of a squeaky clean provenance, says Ian Gomes, partner and head of advisory and markets at KPMG Lower Gulf. The Arab unrest exacerbated the movement of wealth into the UAE as entrepreneurs upped sticks and moved their business headquarters and money to the UAE.
With that has come an uptick in property purchases, and significant money flows related to these. Theres a surfeit of liquidity in the economy, [theres] a lot of new money coming into the country and a significant proportion is cash, going into property and bypassing the formal banking system, says Gomes.
The existing apparatus of laws and regulations has not proved up to the task of staunching the tide of money laundering. An investigation by the Washington-based IMF in 2008 found that while a basic legal framework for combating money laundering and terrorist financing was in place, that framework needed further strengthening in several areas.
The UAE has lagged behind some other GCC states in bolstering its AML framework. In Saudi Arabia, Sama [the central bank] has stricter enforcement on the review of financial institutions, which the UAE has not yet achieved, says Tania Fabiani, Middle East forensic leader at the UKs PwC.
This assessment comes despite a series of laws in the past decade and a half aimed at tightening regulations. At the end of 2001, the UAE federal government passed comprehensive AML legislation (Federal Law No. 4 of 2002) that imposed strict documentary requirements on large wire transfers. Travellers entering the UAE have to declare currency amounts in excess of AED40,000 ($10,890) as part of these measures. In 2004, it strengthened its legal authority to combat terrorist financing, passing Federal Law No. 1 of 2004 on Combating Terror Crimes. In 2006, a Cybercrimes Law was enacted, including articles dealing with money laundering and terrorist financing.
The central bank has led efforts to clamp down on money laundering, with its own division the Anti-Money Laundering and Suspicious Cases Unit performing the functions of a financial intelligence unit. In the Dubai International Financial Centre, the Dubai Financial Services Authority (DFSA) has responsibility for tackling financial crime. The DFSA is committed to keeping its regulatory rules on money laundering in line with FATF standards.
However, the biggest change to the legal framework only arrived earlier this year. The 2002 law was amended on 30 April, when the UAE Federal National Council passed a draft law amending the AML Law, in response to FATF recommendations issued two years ago. This has now become Federal Law No. 4 of 2002 on the Confrontation of Money Laundering Offences and Combating the Financing of Terrorism.
The new AML Law brings harsher penalties with the aim of combating money laundering and addressing terrorism and unlawful organisation financing. According to local law firm Tamimi & Co, the legislation constitutes a step forward for the UAE as money laundering is often closely linked to the financing of terrorism or unlawful organisations.
Tougher punishments are promised. Any person who commits, or attempts to commit, a money laundering offence faces imprisonment of up to 10 years and/or a fine of between AED100,000 and AED500,000. Any establishment that commits an offence of money laundering, financing of terrorism or financing of unlawful organisations faces a fine of between AED300,000 and AED1m. Failure to report a suspicious transaction is punishable by imprisonment and/or a fine of between AED50,000 and AED300,000.
According to Tamimi & Co, the main distinction between this new iteration of the law and the 2002 law is that the latter confined the crime of money laundering to dealings with the proceeds of certain crimes specified in that law (for example drugs, bribery or fraud), while the new AML Law expands its scope to include dealings with the proceeds of any felony or misdemeanour with no restrictions.
The authorities have adopted a carrot and stick approach, offering incentives for people to volunteer information in some instances. In cases of multiple perpetrators, the court may exempt them from imprisonment if they take the initiative and report the crime to the competent authorities.
The new AML Law expands the supervisory and regulatory role of the central bank, requiring it to oversee and monitor the operations of financial institutions and to ensure they comply with and properly apply the law and its regulations.
The net effect of the new legislation is deemed positive. The law has been strengthened and a lot of offences previously not treated as criminal have been criminalised, says KPMGs Gomes. So as far as the statutes go, they are now on par with what one might expect to see in OECD countries.
The question, however, is one of implementation as bank monitoring systems lack best practice. The proof of the pudding is in the eating, says Gomes. We still have to see if the authorities will implement the laws and mete out punishments in the way they are meant to be.
Lack of coordination is one obstacle that will have to be overcome if the new law is to prove effective. For example, enforcement and clarifications made at the DFSA are sometimes in conflict with those of the central bank.
The new model does show a greater appreciation that some individuals are not high-risk, and that companies can be more flexible in applying so-called know-your-customer (KYC) rules. According to PwCs Fabiani, there is a need to help financial institutions become smarter in monitoring their clients. Most financial institutions in the UAE dont have the right technology for monitoring, which can make it similar to looking for a needle in a haystack, she says. Also, there are additional standards on KYC requirements; this simply adds an additional layer of accountability for customers identified as high-risk.
Greater capacity building is needed if the authorities are to meet their target of clamping down on money laundering. More information sharing would be welcome, along with more resources devoted to investigations, both at federal and emirate levels. This would create a broader system that could limit the scope for money laundering. Improved training is also needed to enable staff to identify fraud.
Stronger background checks, such as for those doing business in free zones, is another recommendation. In addition, Fabiani says the UAE authorities may want to take measures to discourage cash transactions. Its a strong cash culture here and if you limit such transactions, such as by setting upper limits, that will help, she says. Better monitoring of intermediaries such as money-changers is also needed.
The latest manifestation of the UAEs AML strategy has yet to be properly tested. But the news in August of problems associated with UAE-based bank accounts of Standard Chartered has reaffirmed the growing risk that financial crime poses to the countrys expanding status as a regional financial centre.
Ensuring the new rules are properly implemented must be top of the agenda. The days of turning a blind eye to all-comers, even those carrying suitcases stuffed with cash, are coming to an end. The net effect could be a deeper change in the UAEs business culture. The pay-off in the shape of a sustained reduction in illicit financial transactions will do much to boost the countrys reputation as a good place to do business.