Banks in the United Arab Emirates may face greater scrutiny of their anti-money-laundering measures, and thus pressure to improve compliance, following a report by a global watchdog that identified weaknesses in the country's anti-money-laundering efforts.
The UAE's high volumes of cash transactions and foreign remittances, coupled with a large number of politically exposed persons and ultrahigh-net-worth individuals and its geographic proximity to a number of countries destabilized by conflict, "all expose the UAE to significant money-laundering and terrorist-financing risks," Chris McLeese, strategic account director at Dow Jones Risk and Compliance in Dubai, told S&P Global Market Intelligence.
The April 2020 report from the Financial Action Task Force, or FATF, an intergovernmental body that sets standards to prevent money laundering and terrorist financing, detailed low levels of prosecutions and convictions for money laundering, a high risk of criminals being able to obscure company ownership details, and a lack of routine cooperation with international investigations by UAE authorities — effectively making the country more attractive for criminals.
"Fundamental and major improvements are needed across the UAE in order to demonstrate that the system cannot be used for money laundering/terrorist financing and the financing of proliferation of weapons of mass destruction," it said.
Consequently, banks may face increased compliance requirements in order for the country to address the key findings and recommended actions defined in the report, said Katerina Pagoni, head of anti-money laundering and sanctions at KPMG Lower Gulf, though this will vary between banks based on their compliance maturity level.
"We may see increased regulatory expectation for more sophisticated risk assessments that demonstrate analysis and understanding of trade-based, third-party, cross-border and organized crime risks and identify effective mitigating measures that are at the same time commensurate with both the country's and the banks' individual risk profiles," Pagoni said.
Banks' sanctions screening systems, their levels of automation and immediacy in taking appropriate action, especially considering the country's geographic position in relation to countries subject to sanctions regimes, may also be under scrutiny, she said.
UAE banks have bolstered compliance operations in recent years, though larger banks are generally seen as being in a better position than smaller ones. Compliance costs are one pressure point driving consolidation within the banking sector, KPMG has said previously. The country's largest banks include First Abu Dhabi Bank PJSC, Emirates NBD Bank PJSC, Abu Dhabi Commercial Bank PJSC and Dubai Islamic Bank (PJSC).
The FATF report noted concerns about the quality of suspicious transaction reports submitted — a key pillar in any anti-money-laundering system — including those filed by UAE banks, which submit around 85% of them.
And while the report commended the UAE on its efforts to tackle terrorism financing, noting high levels of prosecutions, terrorist financing is simpler to monitor and enforce and is "far less multi-dimensional than money laundering," said Matthew Shanahan, head of regulatory and investigations practice, Middle East and Africa, at law firm Clyde & Co.
"Money laundering is far more complex to supervise and enforce."
Maíra Martini, a research and policy expert on anti-money laundering at anti-corruption nonprofit organization Transparency International, said the report revealed a "worrying lack" of prosecutions of serious money-laundering schemes.
"[The UAE authorities] have been spending quite a lot of time investigating fraud and smaller-scale crimes, but there seems to be zero political will to investigate more sophisticated cross-border crimes," she said.
Aside from financial institutions, there will likely be a higher hurdle to overcome for designated nonfinancial businesses and professions, such as dealers in precious metals and stones, trust and company service providers and in the real estate sector, Pagoni said.
Some improvement, but work to do
The FATF report followed an on-site visit in July 2019 and showed a big improvement for the UAE for its technical compliance with the watchdog's key recommendations, compared with a previous evaluation, carried out more than 10 years ago. Crucial to this was a major update on its anti-money-laundering law, which was adopted just months before FATF's assessment team was on the ground, as well as previous work.
However when it came to effectiveness — including whether existing laws are properly enforced — the UAE failed to make the grade, and therefore falls into the enhanced follow-up process. Effectiveness was not scored in the 2008 report and so cannot be similarly compared.
FATF has given the UAE 12 months to make further improvements, with an additional four months because of disruption caused by the coronavirus pandemic.
With the UAE described by FATF as meeting technical compliance standards, the recency of the anti-money-laundering law change is seen by some observers as a significant factor in the shortcomings identified in the report.
"It's obviously not a glowing report, but it's better than potentially was expected given that there was such a short time frame in terms of being able to introduce those laws and actually test them," said Rachel Woolley, global anti-money-laundering manager at technology company Fenergo.
Fragmentation of company ownership information was one particular problem highlighted in the report. There are 39 separate company registries in the UAE, including those in commercial free zones, creating opportunities for regulatory arbitrage.
Dow Jones Risk and Compliance's McLeese said that, while there is a lack of consistency globally around ultimate beneficial ownership identification, it is "particularly acute in the UAE, where the fragmented system of registries increases the risk of criminals being able to conceal beneficial ownership information via very complex ownership structures."
The implementation of a national economic register will ensure a common standard around beneficial ownership, and also enable greater sharing of information across all industries, he said.
Shanahan said problematic issues included a lack of effective coordination at a national level, and the need for a better understanding of the money-laundering risks within the relevant federal regulatory bodies.
He believes the UAE authorities will be eager to address the shortcomings identified.
"The impression that I get is that they're taking this very seriously, so I think we will see an intensification of their activities," he said.