Legal commentary
James Tebbs
Partner – financial crime at Grant Thornton UAE

On 4 March, global financial crime watchdog the Financial Action Task Force (FATF) placed the UAE on its list of jurisdictions under increased monitoring, also known as its grey list.

The organisation also published an action plan that includes seven specific areas that the UAE will need to work on to enhance its anti-money laundering (AML) and combatting the financing of terrorism (CFT) framework.

The FATF carries out ‘mutual evaluations’ of its member countries through a peer process, employing teams of assessors from other countries to conduct a review of technical compliance and effectiveness against FATF standards. The FATF conducts its technical assessments against 40 recommendations that cover key focus areas for the prevention of money laundering, terrorist financing and the financing of proliferation.

There are three FATF categories: high-risk countries, which are placed on the watchdog’s black list and are subject to a call for action; grey list countries that require closer monitoring; and non-listed countries.

The FATF has recognised the progress that the UAE has made in recent years to enhance its AML and CFT framework

UAE progress

While there can be no guaranteed timeline for coming off the grey list, the FATF has recognised the progress that the UAE has made in recent years to enhance its AML and CFT framework.

The results of the FATF mutual evaluation bear this out – its ratings were significantly higher across the board than at the time of the previous assessment in 2008.

Actions already taken include reinforcing the UAE’s regulatory framework with updated laws, forming the Executive Office of AML & CFT, enhancing its system for implementing sanctions, producing a national risk assessment and creating public outreach programmes and publications from national bodies.

Key instruments of state regulation, including banking supervision, are involved in assessing compliance with state laws and regulations, and are increasingly active in enforcement and the levying of fines.

Business impact

Although the FATF does not assess institutions individually, the grey listing has implications for UAE-based businesses, not just in the financial services sector.

The system of AML and CFT in any country is, at least in part, an aggregation of what its private and public sector institutions are doing. As a result, those institutions are the subject of focus for the continued enhancement of the UAE’s AML and CFT framework, and they should be aware of the grey list’s potential impact on their own compliance obligations.

In addition, these institutions need to be aware of the changing views that international institutions based outside the UAE will now be required to take of those within the country’s borders.

--------------------------------------------------------------------------------------------------

ALSO READ: 

> UAE grey listing brings regulatory shift
> Law issued for Dubai digital services
> Ukraine conflict intensifies financial reform
> New UAE laws to diversify innovation cost

--------------------------------------------------------------------------------------------------

There are two immediate impacts that will affect businesses operating in the UAE.

First, institutions that are directly regulated will see increased scrutiny from their local regulators. This has been the case for some time, but the grey listing will continue the trend.

To date, the banking sector has seen the most direct impact, not least in greater engagement from supervisors. Other sectors, including insurance, asset management and exchange houses, are also in line in the near future.

Designated non-financial businesses and professions, including real estate agents, dealers in precious metals and stones, lawyers and accountants, will also be under greater scrutiny and need to take action to review their own levels of regulatory compliance with AML and CFT laws.

International scrutiny

Secondly, any business with a need to access international financial and other markets may see changes in the appetite of their overseas banks and other counterparts.

For example, the UK has reacted to the grey listing by adding the UAE to its Money Laundering, Terrorist Financing & Transfer of Funds (Information on the Payer) Regulations. This requires regulated businesses in the UK to conduct enhanced diligence on “any business relationships with a person established in a high-risk third country”, and specifically covers all grey listed countries, which now includes the UAE.

UAE-based businesses are already experiencing increased questioning from global institutions on their transactions, source of funds and so on

As a result, UAE-based businesses are already experiencing increased questioning from global institutions on their transactions, source of funds and so on. This will continue to grow. Even the de-risking of certain sectors by overseas banks, while unlikely, may reappear.

While many local businesses will have developed AML and CFT compliance controls, we have already seen clients having to respond to detailed questions over past transactions from both overseas and local banks. To get ahead of this, UAE-based organisations should consider the potential impacts straight away.

With all this said, there is certainly no need for panic. In addition to the recent strides taken by the UAE government, the level of compliance within local institutions has also come a long way.

That the UAE will come off the grey list is a certainty, but to get there will involve continued regulatory scrutiny and a pace of change. Make sure you and your business are fully prepared.