International Narcotics Control Strategy Report: Volume II: Money Laundering and Financial Crimes

Released by the Bureau of International Narcotics and Law Enforcement Affairs -2005
March 2005

The United Arab Emirates (UAE) is an important financial center for the Gulf region. The UAE is still a largely cash-based society. However, the financial sector is modern and progressive. Dubai, in particular, is a major international banking center. There is also a growing offshore sector. The UAE’s robust economic development, political stability, and liberal business environment have attracted a massive influx of people and capital. Because of the UAE’s geographic location and role as the primary transportation and trading hub for the Gulf States, East Africa, and South Asia, and with its expanding trade ties with the countries of the former Soviet Union, the UAE has the potential to be a major center for money laundering. The large number of resident expatriates from the above regions, many of whom are engaged in legitimate trade with their homelands, or send remittances there, exacerbates that potential. Approximately 80 percent of the UAE population is comprised of non-nationals. The laundering of proceeds from the illegal narcotics trade is known to occur in UAE, and given the country’s close proximity to Afghanistan, where most of the world’s opium is produced, such narcotics-trafficking is a likely source. In addition, the potential exploitation of the UAE financial system by foreign terrorist groups is a serious concern.

Following the September 11 terrorist attacks in the United States, and amid revelations that terrorists had moved funds through the UAE, the Emirates’ authorities acted swiftly to address potential vulnerabilities and, in close concert with the United States, to freeze the funds of groups with terrorist links, including the Al-Barakat organization, which was headquartered in Dubai. Both federal and Emirate-level officials have gone on record as recognizing the threat money laundering activities in the UAE pose to the nation’s security. They have taken significant steps in 2004 to better monitor cash flows through the UAE financial system and to cooperate with international efforts to combat terrorist financing, including the passage of a law that specifically criminalizes terrorist financing.

Law No. 4 of 2002 criminalizes all forms of money laundering activities. The law calls for stringent reporting requirements for wire transfers exceeding $545 and currency importation/exportation limits set roughly at $11,700. The law imposes stiff criminal penalties (up to seven years in prison and a fine of up to 300,000 dirhams ($81,700), as well as seizure of assets if found guilty) for money laundering. It also provides safe harbor provisions for those who report such crimes. Banks and other financial institutions (exchange houses, investment companies, and brokerage houses) are supervised by the Central Bank (CB) and are required to follow strict "know your customer" guidelines; all financial transactions over $54,000, regardless of their nature, must be reported to the CB. Financial institutions also are required to maintain records on transactions for five years.

In July 2000, the UAE established the National Anti-Money Laundering Committee (NAMLC), under the Chairmanship of the Central Bank’s Governor, with representatives from the Ministries of Interior, Justice, Finance, and Economy; the National Customs Board; the Secretary General of the Municipalities; the Federation of the Chambers of Commerce; and five major banks and money exchange houses (as observers). It has overall responsibility for coordinating anti-money laundering policy.

The supervision of the UAE banking and financial sector falls under the authority of the CB. The CB issues instructions and recommendations as it deems appropriate and is permitted to take any necessary measure to ensure the integrity of the UAE’s financial system. The CB issues licenses to financial institutions under its supervision and may impose administrative sanctions for compliance violations. The CB has issued a number of circulars requiring customer identification and providing for a basic suspicious transaction-reporting obligation. When suspicious activity is reported from a financial institution, the Central Bank is able to freeze suspect funds, make appropriate inquiries, and coordinate with law enforcement officials.

In an effort to consolidate and expand anti-money laundering requirements for the financial sector, the CB issued Circular 24/2000 in November 2000 to all banks, money exchanges, finance companies, and other financial institutions operating in the UAE. This circular delineates the procedures to be followed for the identification of natural and juridical persons, the types of documents to be presented, and rules on what customer records must be maintained on file at the institution. Other provisions of Circular 24/2000 call for customer records to be maintained for a minimum of five years, and further require that they be periodically updated as long as the account is open.

On July 29, 2004, the UAE strengthened its legal authority to combat terrorism and terrorist financing, by passing Federal Law Number 1 of 2004 on Combating Terror Crimes (Law No. 1/2004). The law sets stiff penalties for the crimes covered, including life imprisonment and the death penalty. It also provides for asset seizure or forfeiture. Under the law, founders of terrorist organizations face up to life imprisonment. The law also penalizes the illegal manufacture, import, or transport of "non-conventional weapons" or their components, with the intent to use them in a terrorist activity.

Law No. 1/2004 specifically criminalizes the funding of terrorist activities or terrorist organizations. Article 12 provides that raising or transferring money with the "aim or with the knowledge" that some or all of this money will be used to fund terrorist acts is punishable by "life or temporary imprisonment," whether or not these acts occur. Law No. 1/2004 grants the Attorney General (or his deputies) the authority to order the review of information related to the accounts, assets, deposits, transfer, or property movements on which the Attorney General has "sufficient evidence to believe" are related to the funding or committing of a terror activity stated in the law. The law also provides for asset seizure and confiscation. Article 31 gives the Attorney General the authority to seize or freeze assets until the investigation is completed. Article 32 confirms the Central Bank’s authority to freeze accounts for up to seven days if it suspects that the funds will be used to fund or commit any of the crimes listed in the law. The law also allows the right of appeal to "the competent court" of any asset freeze under the law. The court will rule on the complaint within 14 days of receiving the complaint.

Law No. 1/2004 also sets up a "National Anti-Terror Committee" with representatives from the Ministries of Foreign Affairs, Interior, Justice, and Defense, the Central Bank, the State Security Department, and the Federal Customs Authority. The Committee serves as a UAE interagency liaison, implements UN Security Council Resolutions on terrorism, and shares information with its foreign counterparts as well as with the United Nations (UN).

Law 4/2002 provided for the establishment of the Anti-Money Laundering and Suspicious Case Unit (AMLSCU), which acts as the Financial Intelligence Unit (FIU) and is housed within the CB. Financial institutions under the supervision of the CB are required to report suspicious transactions to the AMLSCU, which is charged with examining them and coordinating the release of information with law enforcement and judicial authorities. It has the authority to request information from foreign regulatory authorities in carrying out its preliminary investigation of suspicious transaction reports. The AMLSCU—a member of the Egmont Group since June 2002—exchanges information with foreign FIUs on a reciprocal basis, and has provided information relating to investigations carried out by the United States and other countries. In June 2004, the AMLSCU hosted a joint training session in Abu Dhabi for the nations of South Asia that are taking steps toward setting up their anti-money laundering regimes, including FIUs. The seminar focused on building an effective anti-money laundering regime, information technology issues, bilateral cooperation and mutual assistance, regulatory issues, hawala, international initiatives, and basic intelligence analysis.

From December 2000 to November 30, 2004, the AMLSCU received 2259 reports of suspicious transactions; of that number, 2148 were investigated by either the AMLSCU, the Central Bank, or law enforcement officials. In 27 cases, the Central Bank issued freeze orders and referred the cases to the Public Prosecutor; 12 of those cases are currently in the process of prosecution for money laundering, and 9 are in the process of judgment for money laundering and confiscation of proceeds.

Some money laundering in the UAE occurs in the formal banking system, including the numerous money exchange houses, but it is more prevalent in the informal and largely undocumented hawala remittance system. The fact that hawala is an undocumented and nontransparent system, and is highly resilient in response to enforcement and regulatory efforts, makes it difficult to control and an attractive mechanism for terrorist and criminal exploitation. The UAE has begun to make progress in confronting its vulnerability to the unregulated use of hawala. New regulations to improve oversight of the hawala system were implemented in 2002, when the CB required hawala brokers to register, submit the names and addresses of senders and beneficiaries, and to file suspicious transaction reports. As of January 2005, the number of applicants to obtain a hawala dar (hawala brokers) certificate reached 151, of which 128 were issued and the remaining 23 are in the process of fulfilling the requirements. There is no accurate estimate of the total number of UAE-based hawala brokers.

The UAE hosted its second International Conference on Hawala in April 2004, which was attended by approximately 350 participants. Delegates included government officials, executives of supervisory institutions, banking experts, and law enforcement officials from the United States, Latin America, Asia, and Europe. The conference statement recognized the key role that hawala and other informal funds transfer systems play in facilitating remittances, particularly those of migrant workers, although such systems can be abused for illegal activities. The conference reaffirmed the "The Abu Dhabi Declaration on Hawala," which calls for the establishment of a sound mechanism to regulate hawala.

The new attention on hawala is encouraging more people in the country to use regulated exchange houses. Representatives of money exchange business noted that their sector could transfer money anywhere, even to a private residence, for a fee competitive with hawala, persuading many to use the formal, and more secure, banking network.

In January 2002, the UAE CB published a declaration requirement for cash imported into the country above $10,900. The regulations provide customs services with the authority to seize undeclared cash; however, strict enforcement is still lacking. The UAE National Anti-Money Laundering Committee held its Second Annual Conference in December 2004 under the title "Customs Inspectors and the Implementation of the Cash Declaration Regulation" to look at ongoing implementation efforts.

The UAE Government (UAEG) also has admitted the need to better regulate "near-cash" items such as gold, jewelry, and gemstones, especially in the burgeoning markets in Dubai. The UAE has participated in the Kimberley Process Certification Scheme for Rough Diamonds (KPCS) since November 2002 and began certifying rough diamonds exported from the UAE on January 1, 2003. In 2004, the UAE was the first KPCS participant country to volunteer for a "peer review visit" on internal control mechanisms.

The Dubai Metals and Commodities Center (DMCC) is the quasi-governmental organization charged with issuing KP certificates in the UAE, and employs four individuals full-time to administer the KP program. Prior to January 1, 2003, the DMCC circulated a sample UAE certificate to all KP member states and embarked on a public relations campaign to educate the estimated 50 diamond traders operating in Dubai concerning the new KP requirements. UAE customs officials may delay or even confiscate diamonds entering the UAE from a KP member country without the proper certificate.

The Securities and Commodities Authority (SCA) supervises the country’s two stock markets. In February 2004, it sent out anti-money laundering guidelines to brokers and the markets, instructing them to verify client information when opening accounts and created a reporting requirement for cash transactions above $10,900. The SCA also instructed the markets and brokers to file suspicious transaction reports for initial analysis before forwarding them to the AMLSCU for further action. The instructions also provide for a five-year record keeping requirement.

Dubai’s booming property market might also be susceptible to money laundering abuse. In 2002, Dubai permitted three companies to sell "freehold" properties to non-citizens. Several other emirates (though not Abu Dhabi) have announced their intention to follow suit. The intense interest in these properties, and rumors of cash purchases, sparked concerns about the potential for money laundering. As a result, developers have stopped accepting cash purchases, alleviating some of the concerns about possible money laundering activities in this sector of the economy.

The UAEG monitors registered charities in the country and requires them to keep records of donations and beneficiaries. The Ministry of Labor and Social Affairs (MLSA) regulates charitable organizations in the UAE. The CB prohibits banks from opening accounts for charities, unless they are registered with the MLSA. The UAEG is much more sensitive since September 11 to the oversight of charities and the accounting of transfers aboard. In 2002, the UAEG mandated that all licensed charities interested in transferring funds overseas must do so via one of three umbrella organizations: the Red Crescent Authority, the Zayed Charitable Foundation, or the Muhammad Bin Rashid Charitable Trust. These three quasi-governmental bodies are in a position to ensure that overseas financial transfers go to legitimate parties. As an additional step, the UAEG has contacted the governments in numerous aid receiving countries to compile a list of recognized acceptable recipients for UAE charitable assistance.

The UAE is noted for its growing number of free trade zones (FTZs). Every emirate except Abu Dhabi has at least one functioning FTZ. There are over a hundred multinational companies located in the FTZs with thousands of individual trading companies. The FTZs permit 100 percent foreign ownership, no import duties, full repatriation of capital and profits, no taxation, and easily obtainable licenses. Companies located in the free trade zones are treated as being offshore or outside the UAE for legal purposes. However, UAE law prohibits the establishments of shell companies and trusts, and does not permit non-residents to open bank accounts in the UAE.

In March 2004, the UAEG passed Federal Law No. 8 Regarding the Financial Free Zones (Law No. 8/2004). The new law exempts FFZs and their activities from UAE federal civil and commercial laws, but subjects them and their operations to federal criminal laws including the Anti-Money Laundering Law No. 4/2002 and the Anti-Terror Law No. 1/2004. The new law and a subsequent federal decree also allowed for the establishment, in September 2004, of the UAE’s first financial free zone (FFZ), known as the Dubai International Financial Center (DIFC). Sheikh Mohammed bin Rashid Al-Maktoum, Crown Prince of Dubai and UAE Defense Minister, is the President of the DIFC, which is currently the only FFZ operating in the UAE.

With regard to banking activities in the FFZs, Law No. 8/2004 limits licenses to branches of companies, joint companies, and wholly owned subsidiaries, provided that they "enjoy a strong financial position and systems and controls, and are managed by persons with expertise and knowledge of such activity." The law prohibits companies licensed in the free zone from dealing in UAE currency (dirham) or taking "deposits from the state’s markets." It further stipulates that the licensing standards of companies "shall not be less than those applicable in the state." The Law empowers the Emirates Stocks and Commodities Authority to approve the listing of any company listed on any UAE stock market in the free zone and the licensing of any UAE licensed broker. The law limits any insurance activity in the UAE carried out by a free zone company, to reinsurance. It further gives competent authorities in the Federal Government the power to inspect financial free zones and submit their findings to the UAE cabinet.

DIFC regulations provide for an independent regulatory body, the Dubai Financial Services Authority (DFSA), which reports to the office of Dubai Crown Prince and an independent Commercial Court. Observers called the independence of the DFSA into question in the summer of 2004, even prior to the inauguration of the DIFC, with the high profile firing of the chief regulator and the head of the regulatory council (the supervisory authority). Subsequent to the firing, Dubai passed laws which appear to give the DFSA more regulatory independence from the DIFC, although these laws have not yet been tested. The DFSA, whose regulatory regime is generally modeled after the United Kingdom system, is the only authority responsible for licensing firms providing financial services in the DIFC. There are currently two banks and three other financial firms operating in the DIFC. The DFSA’s rules prohibit offshore casinos or Internet gaming sites’ operating in the UAE. The DFSA requires firms to send suspicious transaction reports to the AMLSCU (along with a copy to the DFSA). Although firms operating in the DIFC are subject to Law No 4/2002, the DFSA has also issued its own anti-money laundering regulations and supervisory regime, creating some ambiguity as to the authority of the CB and AMLSCU within the DIFC.

The UAE is a party to the 1988 UN Drug Convention. It signed the UN Convention against Transnational Organized Crime in 2002, but has not yet ratified it. It has yet to sign the UN International Convention for the Suppression of the Financing of Terrorism. It has entered into a series of bilateral agreements on mutual legal assistance. The CB has circulated to all financial institutions under its supervision the UNSCR 1267 Sanctions Committee’s consolidated list. To date, the CB has frozen a total of $3.13 million in 18 bank accounts in the UAE since September 11, 2001. The UAEG has also frozen other financial assets under Law 4/2002. Additionally, the AMLSCU has provided international organizations and its counterpart FIUs information on cases related to terrorist financing and anti-money laundering. In April 2004, the CB Governor announced that the CB had frozen all accounts related to a company suspected of trying to smuggle nuclear materials.

The UAE was very active in supporting the creation of the Middle East and North Africa Financial Action Task Force (MENAFATF) that was inaugurated in Bahrain in November 2004; the UAE was one of the original charter signatories. MENAFATF is a FATF-style regional body. The creation of the MENAFATF is critical for pushing the region to improve the transparency and regulatory frameworks of its financial sectors.

The United Arab Emirates Government has begun constructing a far-reaching anti-money laundering program. The United Arab Emirates has sought to crack down on potential vulnerabilities in the financial markets and is cooperating in the international effort to prevent money laundering, particularly by terrorists. There has been a substantial improvement on behalf of the AMLSCU in the area of information sharing with other countries. However, there remain areas requiring further action. The Central Bank and AMLSCU should clarify and assert their jurisdiction in enforcing federal laws with respect to the DFIC. Law enforcement and customs officials should begin to take the initiative to recognize money laundering activity and proactively develop cases without waiting for referrals from the AMLSCU. United Arab Emirates officials should give greater scrutiny to trade-based money laundering in all of its forms. The Central Bank should be more diligent in its efforts to encourage hawala dealers to participate in the registration program. The AMLSCU should take a more active role in participating in international anti-money laundering gatherings and increasing its ties with other FIUs. The United Arab Emirates should ratify both the UN Convention against Transnational Organized Crime and the UN International Convention for the Suppression of the Financing of Terrorism.