The Financial Action Task Force (FATF) UAE Mutual Evaluation Report 2020

The Financial Action Task Force (FATF) UAE Mutual Evaluation Report 2020:Time to Play Ball for Businesses in the UAE

In a country as fast-paced and dynamic as the UAE, a lot can happen in 12 years. In the time that has elapsed since the last Mutual Evaluation Report of the Financial Action Task Force (FATF) on the UAE’s Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) framework, published in 2008, significant strides have been made to strengthen defences against illicit flows of funds. This was one of the clear conclusions of the UAE’s new Mutual Evaluation Report, released on 30th April 2020 after more than a decade of adjustments by the UAE authorities to the developing threat landscape and morphing methods of international best practice. Charged with setting global standards for tackling illicit financial flows, however, and compelling countries to adopt ever higher defences, the new FATF report also states that the UAE is still required to make “fundamental and major improvements” to ensure its systems are more effective in the global battle against money laundering. Of the 11 key areas rated by the FATF, the UAE is considered to have a “substantial level of effectiveness” in only one area: the investigation and prosecution of terrorist financing offences. In the remaining ten areas, it is deemed to have only moderate or low levels of efficacy. As such, all businesses and persons operating in the UAE, regardless of their sector, have a collective responsibility to ensure they are doing their bit to win this fight.

More Accountability and Cooperation Required and Expected from Businesses Operating in the UAE

The UAE over recent times has experienced virtually continuous expansion of its economic activity. Parallel to this, it has seen a rise in the complexity and volume of commercial transactions, resulting in massive investment and wealth into the country, all supported by the “Ease of Doing Business” in the country and recognition of such by the World Bank (WB) and the International Monetary Fund (IMF). Sadly, this success naturally attracts and encourages criminal activity, particularly financial crimes such as money laundering into the UAE’s unique but fragmented structure (with the seven Emirates that make up the country, 29 commercial free zones, two financial free zones, and 39 company registries).

In light of the above, the FATF identifies that the UAE has a number of key risk areas and low ratings in the following areas:

  • International cooperation;
  • Access to beneficial ownership information;
  • Investigation and prosecution of money laundering offences; and
  • Targeted financial sanctions and prevention of raising funds for the proliferation of weapons of mass destruction / terror financing.

Particular sectors, including financial services and notably, Designated Non-Financial Businesses and Professions (DNFBPs), were highlighted as areas of heightened concern due to the systematic use of large cash transactions and potential to facilitate financial crime offences.

Examples of DNFBPs include:

  • Real estate (e.g. estate agents and developers);
  • Commodities dealerships (in particular precious stones and metals (gold being a major commodity); and
  • Professional firms (e.g. accountants, lawyers etc).

All were considered to be potential ‘gateways’ for financial crimes, where a lack of adequate regulatory oversight and on the ground supervision was identified. Dubai, in particular, was singled out due to the high concentration of foreign investment in the above sectors. Further, the general shortage of enforcement actions and penalties against perpetrators by some supervisory bodies was also recognised, which the FAFT reported was lower than expected given the UAE’s unique position and susceptibility to financial crime activity.

Businesses Should Be Prepared to Adapt and Change to Help with the Fight

Notwithstanding the points for improvement that the UAE will no doubt immediately set to addressing, it is clear that considerable progress has been made in the national fight against money laundering and terrorist financing in recent times. When it comes to taking further and achievable steps to alleviate the FAFT’s concerns, the key will be to strike the correct balance between continuing to attract investment and growth into the country, whilst also adhering to the highest possible standards already set by the current laws and regulations. A collective effort by entities across all sectors to strengthen their individual AML and CFT frameworks will pay dividends, and the UAE will remain as one of the leading and most attractive countries to conduct business globally.

Further progress in this area is reliant on greater dialogue between public and private sectors, and more oversight and supervision from the regulators across the UAE but also increased investigation, confiscation and fines from the public prosecutors and law enforcement agencies. In turn, this will support the significance of falling foul of the laws and regulations.

Leading on from this, the FAFT report recommends that the UAE take a number of preventive actions. The list is long and the detail too extensive for this alert, however, in particular they pressed upon the following:

  • Authorities should more closely supervise and regulate DNFBPs and the real estate and precious metal/stones sectors;
  • Increasing the use of financial intelligence and investigations as tools to better probe and prosecute money laundering offences;
  • Intensifying the focus on reporting obligations and the filing of Suspicious Activity Reports (SARs); and
  • Within the private sector, entities should strengthen their financial crime frameworks and also use targeted financial sanctions in relation to terrorist financing and proliferation financing.

Where progress on specific targets set by the FATF falters for any reason, everyone stands to lose out. Countries that are seen as higher-risk may be subject to inclusion on the FATF grey-list, made up of countries whom represent a greater risk of money laundering and terrorism financing and are subject to increased monitoring by the FATF on progress being made towards AML/CFT goals. In some cases, countries that are added to the Grey List may face economic sanctions from institutions like the IMF and the WB, and may experience adverse effects on trade. Whilst the UAE is still some way from inclusion on the Grey List, it is not impervious to the risks associated with high-risk jurisdictions, and will need to do its utmost to join the collective fight against illicit flows of funds to avoid any associated unwelcome economic challenges going forward.

Time to Regroup and Prevail

Given the failings reported by the FATF and the potential consequences of not implementing their recommendations, authorities and regulators throughout the UAE are likely to decide to take immediate action to fill these holes. It would therefore be prudent for entities and persons across the UAE, in all sectors, to re-visit and evaluate their financial crime risk frameworks (including their policies and procedures) and remain highly cognisant of the current environment. Clearly from the FATF report, even if we all believe we are up-to-scratch, the fact is, we may not be. That said, if we all strive to employ the highest of anti-money laundering standards that meet both current and any new regulatory requirements, we can collectively keep criminals at bay, and positively add to the success story of the UAE.

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