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Authorities in the United Arab Emirates (UAE) are facing criticism for their “minimal” implementation of UN sanctions and lacklustre efforts to tackle trade-based money laundering.

The accusations are made by the Middle East and North Africa division of the Financial Action Task Force (FATF), a highly influential standards-setting body, following a major review of the UAE’s economic crime controls.

The review warns that doing business in the country carries a substantial risk of exposure to illicit funds. It says: “The risks are significant, and result from the UAE’s extensive financial, economic, corporate and trade activities, including as a global leader in oil, diamond and gold exports.

“The UAE’s strategic geographical location between continents, in proximity to conflict zones and its own jurisdictional complexity of seven Emirates, two financial free zones and 29 commercial free zones further increase the UAE’s risk of attracting funds with links to crime and terror.”

The country’s effectiveness in investigating and prosecuting money laundering, penalising firms for facilitating financial crime and co-operating with authorities in other countries were all deemed “low” – the FATF’s lowest score.

“As a major global financial centre and trading hub, it must take urgent action to effectively stop the criminal financial flows that it attracts,” the task force adds.

If its failings are not addressed within a year, the country could be added to the FATF’s so-called greylist of high-risk countries. Transactions linked to listed nations are not formally subject to tougher requirements, but the task force says businesses should take their status into account as part of their risk analysis.

Representatives from the UAE’s Ministry of Finance have not yet issued any statement following the report’s publication last week, and did not respond when contacted by GTR.

 

Sanctions controls found lacking

Some of the report’s most damning conclusions relate to the UAE’s implementation of UN Security Council sanctions. Several countries are currently subject to the UN regime, including Iran, Iraq, North Korea and Libya, alongside a small number of terrorist groups such as Al-Qaeda and Isis.

Despite the UAE’s threat and vulnerability profile – not least due to its proximity to conflict zones – the FATF concludes that its “response has been relatively minimal”.

It has historically been slow to implement UN sanctions domestically, the report says, and though a new mechanism has been put in place recently there is “little to no awareness among the private sector or even some authorities” of any new obligations or procedures.

Within the financial sector, the task force identifies “a lack of meaningful enforcement action” despite finding “a large percentage of deficiencies found in examinations regarding basic sanctions screening for mainland domestic banks”.

And though the task force’s on-site inspections found evidence of co-operation between different UAE enforcement agencies around export controls, there was no effort to uncover how those transactions were being financed nor whether there was a connection to UN restrictions.

“Awareness of sanctions evasion methods or typologies from authorities and private sector entities is extremely low,” the report adds.

Despite that, there have already been high-profile cases where sanctioned trade was facilitated using entities based in the UAE.

In the case of Iran – subject not only to UN restrictions but also to the notoriously tough US sanctions regime – exports of prohibited fuels have been known to be funnelled through UAE companies.

The US Department of the Treasury identified five such companies in March, accusing them collectively of purchasing “hundreds of thousands of metric tons of petroleum products” from Iran’s national oil company.

One of the companies – Petro Grand FZE, which has little internet presence and could not be reached for comment – allegedly used falsified documents to disguise the cargo as of Iraqi origin. All five are now subject to US sanctions.

The UN is also currently investigating the export of jet fuel to Benghazi in eastern Libya, which could constitute a breach of an international arms embargo. The Financial Times reported in April that the three companies involved are all registered in the UAE.

Even in dealings with North Korea, subject to the world’s most comprehensive set of sanctions, the FATF says weaknesses were identified. It gives the example of two North Korean diplomats who were not subject to asset freezing measures despite being “potentially implicated in cash smuggling”.

 

Treating money laundering like credit risk

Financial institutions operating in the UAE are expected to carry out customer due diligence to assess the risk of exposure to illicit activity, including sanctioned trade, but the report warns that can prove difficult in practice.

Some of those difficulties stem from the country’s use of free zones. For instance, efforts to promote economic growth in commercial and financial free zones – the latter category referring to global financial centres Dubai and Abu Dhabi – have led to the development of 39 separate company registers, widening the opportunity for criminals to conceal firm ownership.

“The expansion of the [free zones] to reposition the country as an international financial centre and major international and regional trading hub also exposed the country to inherent risks such as trade-based money laundering and laundering of foreign proceeds of crime,” the task force says.

Trade-based money laundering, where groups use fraudulent invoicing techniques to launder the proceeds of crime, is singled out as one of the “main risks” facing the UAE.

In the case of Dubai, which has its own Financial Services Authority (DFSA), efforts have been made in recent years to clamp down on the practice.

A DFSA review of the trade finance sector in 2016, which included visits to around half of the 26 banks active in trade finance at that time, found several areas of improvement related to trade-based money laundering.

The regulator demanded that banks should treat trade-based money laundering “with the same importance as credit risks”. But despite an improvement in supervision by the DFSA, the task force says the required changes are not yet apparent within the banking sector.

The report also identifies sector-specific risks, highlighting the UAE’s lucrative precious metals and stones sector. After oil, gold and diamonds are its largest exports, and the country was ranked as the world’s third-largest gold exporter in 2016 with transactions worth a total of US$25.4bn.

The FATF says authorities should be vigilant around those transactions, many of which pass through Dubai and the Jebel Ali Free Zone around 40km further south. But despite reliable reports of gold being smuggled from West Africa to the UAE, plus a string of convictions, there was no record of seizures or confiscations.