Although the UAE remains on the FATF’s grey list (which is the organisation’s list of jurisdictions under increased monitoring) the Report indicates that various enhancements to the UAE’s AML and CTF regulatory regime since 2020 are bringing it closer in line with international expectations and standards. The relevant enhancements are in the areas of: (i) the UAE’s risk assessment for AML and CTF; (ii) dealing with higher risk countries; and (iii) the functioning of the UAE’s Financial Intelligence Unit (FIU).
The findings of the Report align with the flurry of AML and CTF related enforcement activity by the UAE since late 2022.
Background
The FATF issues a set of international standards to promote effective implementation of legal, regulatory and operational measures for combating money laundering and terrorist financing. These are known as the FATF Standards, which are comprised of 40 recommendations for countries to implement in order to demonstrate an effective AML and CTF regime.
In early 2022, the FATF placed the UAE on its ‘grey list’ of jurisdictions and under enhanced monitoring due to “strategic deficiencies” in its efforts to counter money laundering and terrorist financing. Removal from the grey list requires the UAE to fully implement the recommendations set out in the FATF’s action plan that was issued following the FATF’s 2020 Mutual Evaluation of the UAE.
Key areas of UAE progress in complying with FATF Standards
In June 2023, the FATF issued the Report, which recognized continued improvement in the UAE’s level of compliance with the FATF Standards. The key findings of the Report are as follows.
A better risk based approach to managing AML and CTF risk
The FATF Standards recommend that a country should identify, assess, and understand the money laundering and terrorist financing risks for the country, and apply a risk-based approach to ensure that measures to prevent or mitigate money laundering and terrorist financing are commensurate with the risks identified (Recommendation 1).
The FATF’s Mutual Evaluation originally identified deficiencies in the UAE’s compliance with Recommendation 1, noting a “lack of depth with data and information sources, to develop a collective understanding of risk” and that the UAE’s national action plan “does not specifically address the allocation of resources or implementation of measures to address priority ML/TF risks”.
In upgrading the UAE’s rating for Recommendation 1 from partially compliant to largely compliant, the FATF noted that, in order to address prior shortcomings in respect of Recommendation 1, the UAE had:
- conducted eight sectoral assessments to gauge risks, threats and vulnerabilities in each sector, which included the banking sector, the money transfer sector and the precious metals / stones sector; and
- made efforts to address risks presented by virtual assets through amendments to Federal Decree Law No. 26 of 2021, Cabinet Decision No. 24 of 2022 and Law No. 4 of 2022 which strengthened the legal framework for virtual assets and updated measures designed to mitigate risks presented by financial institutions, Designated Non-Financial Business Providers (DNFBPs) and Virtual Asset Service Providers (VASPs).
Dealing with higher risk countries
The FATF Standards recommend that a country applies enhanced due diligence measures to business relationships and transactions involving higher risk countries (Recommendation 19).
The FATF initially rated the UAE as partially compliant with Recommendation 19 due to the lack of an obligation on the part of financial institutions to “follow up on changes to the lists of non-compliant countries on an ongoing basis”.
The FATF has now upgraded the UAE’s rating for Recommendation 19 from partially compliant to compliant. This is on the basis of the UAE’s implementation of National Committee Decision No. 1 (9/2021) which requires financial institutions, DNFBPs and VASPs to follow up on updates on the Committee’s website, which sets out weaknesses in the AML/CFT systems of higher risk countries (identified by the FATF and the National Committee).
UAE Enforcement activity
The Report’s findings about the progress of the UAE’s AML and CTF regime are consistent with the position in practice. Since late 2022, the UAE has engaged in an increased level of AML and CTF related enforcement activity within its enhanced regulatory regime. According to Hamid Al Zaabi, Director General of the UAE’s Executive Office for AML and CTF (which is working closely with the FATF):
- In the first quarter of 2023:
- the UAE issued fines of more than AED115 million to combat money laundering, a significant increase against the AED76 million issued in 2022;
- the UAE Central Bank conducted 464 off-site and 128 on-site inspections, issuing fines worth nearly AED70 million;
- the UAE Ministry of the Economy conducted 4,344 off-site inspections and 3,360 on-site inspections, and issued fines amounting to AED16.5 million; and
- the UAE signed 44 bilateral Mutual Legal Assistance Treaties and sent out 327 requests for information to foreign counterparts through various channels.
- From November 2022 to February 2023, the UAE seized assets of more than AED925 million.
- In the first two months of 2023, the FIU received nearly 7,000 suspicious transaction reports and suspicious activity reports (STRs/SARs) from financial institutions and DNFBPs, representing an 81% increase from 2022. STRs/SARs from DNFBPs were up 91% from 2022.
Comment
The statistics described above demonstrate that the UAE is continuing to take steps, in both structural and practical terms, to bring its AML and CTF regimes closer in line with international expectations. The FATF has acknowledged this progress.
There are likely to be further AML and CTF structural regulatory developments in the UAE, and a corresponding further increase in enforcement activity, in order to satisfy the FATF Standards and ultimately achieve removal from the grey list.
A key point to note from the Report is that, in conducting its assessment, the FATF did not measure the effectiveness of the enhancements implemented by the UAE. Notwithstanding the heightened enforcement activity that the UAE is already carrying out, testing the effectiveness of these enhanced controls as they are embedded is likely to become a priority for the UAE and the FATF.
