FATF mutual evaluation report on the UAE released

What's new?

The FATF Mutual Evaluation Report on the UAE is out. The report analyses the country's level of compliance with the FATF 40 Recommendations and provides recommendations on how the system could be strengthened going forward.

Key takeaways

Sound regulatory framework – In the past few years, the UAE has made significant improvements to its AML/CFT system.

DIFC/ADGM lead the way – two of the leading Global Financial Centres worldwide, DIFC and ADGM, were praised for having developed a detailed understanding of ML/TF risk in the areas they supervise and apply an effective risk-based approach to supervision.

Work in progress – The UAE fragmented system of registries gives rise to a wide divergence across sub-jurisdictions in the levels of understanding, implementation, and application of regulatory measures, the report says. Homogeneity in practices and increased supervision outside of financial free zones are expected going forward to cement the UAE's position as a leading global financial center.

The Financial Action Task Force (FATF) has made public the findings of its Mutual Evaluation Report on the UAE.

The report analyses the level of compliance with the FATF 40 Recommendations and the level of effectiveness of the UAE's anti-money laundering and counter-terrorist financing (AML/CFT) system and provides recommendations on how the system could be strengthened.

FATF is an independent inter-governmental body that develops and promotes policies to protect the global financial system against AML/CFT.

The full report – 288 pages (!) – is available HERE.

Key Findings

The Good

Sound regulatory framework

In the past few years, the UAE has made significant improvements to its AML/CFT system.

These related regulatory enhancements have had a positive impact on the UAE's technical compliance ratings: the UAE is deemed 'Compliant' or 'Largely Compliant' in 34/40 of the rating factors (and 'Partially compliant' in the six remaining ones).

Financial free zones lead the way

The report praises the Dubai Financial Services Authority (DFSA) and the Abu Dhabi Financial Services Regulatory Authority (FSRA) for having developed a detailed understanding of ML/TF risk in the areas they supervise and apply an effective risk-based approach to supervision.

This comes as no surprise: the DIFC and ADGM rank as respectively 8th and 25th in the Global Financial Centres – a ranking of the competitiveness of financial centers worldwide – and a robust AML/CFT system is a key criteria in the assessment process.

Other key positive indicators

The UAE – the report notes - has a sound statutory ML offense, which a policy shift in 2018 is prioritizing.

One of the strong features of the jurisdiction's framework is that authorities have access to a broad range of financial information sources to aid financial investigations. The UAE has a robust array of tools, data sets, and capabilities it can employ to investigate and analyze TF-related activity, which the jurisdiction identifies and investigates to a large extent.

Work in progress

As is customary, the report points out material matters on which the jurisdiction has to improve going forward.

Implement now, assess tomorrow

While many of the enhancements to the UAE system have had a positive impact on the UAE's technical compliance, a number of these measures – and the results of their implementation – are at an early stage. Their impact on the effectiveness of the system will have to be reassessed going forward.

Substantial changes expected outside of ADGM/DIFC

The UAE has substantial and diverse financial and non-financial support services sectors, and a vastly fragmented system of registries (39 different company registries) spread between highly regulated financial free zones, non-financial free zones, and the UAE mainland.

This gives rise to a wide divergence across registries in the levels of understanding, implementation, and application of regulatory measures.

Outside of the afore-mentioned financial free zones – the report notes – supervision will have to increase, and the full range of sanctions be used to create a dissuasive environment.

Standards currently in place in DIFC and ADGM will rapidly and inevitably trickle down to other jurisdictions, leading to homogeneity in practice across the financial and non-financial support services industries, irrespective of the jurisdiction.

Monitoring of operators in the UAE mainland and non-financial free zones is likely to dramatically increase too, driving bad operators out of business and forcing consolidation of smaller ones.

Real estate and precious metal operators: look out!

Drastic changes are on the horizon for the real estate market and dealers in gold and other precious metals as well; two sectors deemed "higher risk," which are key contributors to the UAE economy. Operators in these sectors – look out!

Conclusions

There is no doubt that the UAE is taking AML/CFT very seriously. Substantial resources have been put towards the topic, which is at the top of the policy agenda.

In a short time, the country has taken significant steps in strengthening its framework. In many respects, the elements of a robust AML/CFT system are in place. The rapid rise of DIFC and ADGM as global financial centers are clear evidence of this strategy.

But the required framework is relatively new and – like many other jurisdictions – its overall effectiveness will have to be tested going forward.

The UAE is a major international financial center and trading hub. Continuous commitment to monitoring, coordination between the country's vastly fragmented system of registries and homogeneity of practices across the full range of financial and non-financial support services institutions are required to cement its position as one of the most competitive structuring centers worldwide, now and going forward.