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  • 3. Highlights of Key Provisions Affecting Financial Institutions

    The AML-CFT Law and the AML-CFT Decision contain numerous provisions setting out the rights and obligations of supervised institutions, including Financial Institutions, as well as their senior managers and employees. This section highlights some of the key provisions affecting FIs that are of immediate concern. FIs are reminded that it is their sole responsibility to adhere to all provisions of the AML-CFT Law, the AML-CFT Decision, and all regulatory notices, rulings and circulars affecting them.

    • 3.2 Confidentiality and Data Protection

      (AML-CFT Law Article 15; AML-CFT Decision Articles 17.2, 21.2, 31.3, 39)

      Financial Institutions are obliged to report to the UAE’s Financial Intelligence Unit (FIU) when they have reasonable grounds to suspect a transaction or funds representing all or some proceeds, or suspicion of their relationship to a Crime (see Section 7, Suspicious Transaction Reporting). In reporting their suspicions, they must maintain confidentiality with regard to both the information being reported and to the act of reporting itself, and make reasonable efforts to ensure the information and data reported are protected from access by any unauthorised person.

      It should be noted that the confidentiality requirement does not pertain to communication within the FI or its affiliated group members (foreign branches, subsidiaries, or parent company) for the purpose of sharing information relevant to the identification, prevention or reporting of a Crime. However, under no circumstances are FIs, or their managers or employees, permitted to inform a Customer or the representative of a Business Relationship, either directly or indirectly, that a report has been made, under penalty of sanctions (see Section 3.9, Sanctions against Persons Violating Obligations). This is the so-called “tipping off” requirement. This also extends to any related information that might be provided to the FIU or information that is being requested by the FIU.

      FIs are not permitted to object to the statutory reporting of suspicions on the grounds of Customer confidentiality or data privacy, under penalty of sanctions. Moreover, data protection laws include provisions that allow the FI to report to the authorities. (see Section 3.9, Sanctions against Persons Violating Obligations).

    • 3.3 Protection against Liability for Reporting Persons

      (AML-CFT Law Article 27; AML-CFT Decision Article 17.3)

      The AML-CFT Law and the AML-CFT Decision provide Financial Institutions, as well as their board members, employees and authorised representatives, with protection from any administrative, civil or criminal liability resulting from their good-faith performance of their statutory obligation to report suspicious activity to the FIU. This protection is also applicable if they did not know precisely what the underlying criminal activity was, and regardless of whether illegal activity actually occurred.

    • 3.4 Statutory Prohibitions

      (AML-CFT Law Article 16.1(c); AML-CFT Decision Articles 13.1, 14, 35.4, 38)

      Financial Institutions are prohibited from the following activities:

      •Establishing or maintaining any Customer or Business Relationship, conducting any financial or commercial transactions, keeping any accounts under an anonymous or fictitious name or by pseudonym or number;
       
      •Establishing or maintaining a Business Relationship or executing any transaction in the event they are unable to complete adequate risk-based CDD measures in respect of the Customer for any reason;
       
      •Dealing in any way with Shell Banks, whether to open (correspondent) bank accounts in their names, or to accept funds or deposits from them;
       
      •Invoking banking, professional or contractual secrecy as a pretext for refusing to perform their statutory reporting obligation in regard to suspicious activity;
       
      •Issuing or dealing in bearer shares or bearer share warrants.
       

    • 3.5 Money Laundering

      (AML-CFT Law Articles 2.1-3, 4, 29.3, AML-CFT Decision Article 1)

      The AML-CFT Law defines money laundering as engaging in any of the following acts wilfully, having knowledge that the funds are the proceeds of a felony or a misdemeanour (i.e., a predicate offence):

      •Transferring or moving proceeds or conducting any transaction with the aim of concealing or disguising their Illegal source;
       
      •Concealing or disguising the true nature, source or location of the proceeds as well as the method involving their disposition, movement, ownership of or rights with respect to said proceeds;
       
      •Acquiring, possessing or using proceeds upon receipt;
       
      •Assisting the perpetrator of the predicate offense to escape punishment.
       

      Both the AML-CFT Law and the AML-CFT Decision define “funds” in a very broad sense as “assets in whatever form, whether tangible, intangible, movable or immovable including national currency, foreign currencies, documents or notes evidencing the ownership of those assets or associated rights in any forms including electronic or digital forms or any interests, profits or income originating or earned from these assets.” They likewise define “proceeds” as “funds generated directly or indirectly from the commitment of any crime or felony including profits, privileges, and economic interests, or any similar funds converted wholly or partly into other funds.”

      Therefore, in order to be considered money laundering, it is not necessary for any of the above-stipulated acts to involve only money or monetary instruments per se, but any number of tangible or intangible assets such as, but not limited to:

      •Funds bank or other financial accounts, including so-called virtual or crypto currencies;
       
      •Financial instruments or securities, such as shares, bonds, notes, commercial paper, promissory notes, IOUs, share warrants, options, rights (including land rights), or other transferrable securities or bearer negotiable instruments;
       
      •Contracts, loan instruments, titles, claims, insurance policies, or their assignment;
       
      •Intellectual property (including but not limited to patents or registered trademarks), royalties, licenses, or the rights thereto;
       
      •Physical property, including but not limited to commodities, land, precious metals and stones, motor vehicles or vessels, works of art, or any other goods exchanged as payment-in-kind.
       

      The size or monetary value of the financial or commercial transaction, the timeframe during which it took place, and the nature of the funds or proceeds (whether in liquid funds or some other tangible or intangible asset) are irrelevant to the suspicion and reporting of a suspicious transaction.

      The AML-CFT Law designates money laundering as a criminal offence. Its prosecution is independent of that of any predicate offence to which it is related or from which the proceeds are derived. The suspicion of money laundering is not dependent on proving that a predicate offence has actually occurred or on proving the illicit source of the proceeds involved, but can be inferred from certain information, including indicators or behavioural patterns.

      According to the 2018 National Risk Assessment, professional third-party money laundering has been identified as one of the top ML/FT threats in the UAE.

    • 3.6 Predicate Offences

      The AML-CFT Law defines a predicate offence as “any act constituting an offence or misdemeanour under the applicable laws of the State whether this act is committed inside or outside the State when such act is punishable in both countries.” A predicate offence is therefore any crime, whether felony or misdemeanour, which is punishable in the UAE, regardless of whether it is committed within the State or in any other country in which it is also a criminal offence.

      FATF has designated 21 (twenty-one) categories of predicate offences. Each of these categories of predicate offences has been criminalised in the legislative framework of the State. FIs are reminded that this is not an exhaustive list of predicate offences, but simply a convenient categorisation, since in the UAE according to the AML-CFT Law, even crimes that do not appear on this list, whether felonies or misdemeanours, can be predicate offences to money laundering.

      Based on expert analysis of these categories conducted on behalf of the UAE’s Competent Authorities for the 2018 National Risk Assessment, the top (highest) threats to the State in relation to money laundering have been identified as: fraud, counterfeiting and piracy of products, illicit trafficking in narcotic drugs and psychotropic substances, and professional third-party money laundering.

      Similarly, other (medium-high) threats of particular concern to the UAE in relation to money laundering have been identified as the categories of: insider trading and market manipulation, robbery and theft, illicit trafficking in stolen and other goods, forgery, smuggling (including in relation to customs and excise duties and taxes), tax crimes (related to direct taxes and indirect taxes), and terrorism (including terrorist financing).

      While FIs should pay special attention to the most serious threats identified in the NRA and any topical risk assessment when performing their own ML/FT business risk assessments, they are reminded that their risk assessment operations should consider all categories of risk for applicability to their own particular circumstances.

    • 3.7 Financing of Terrorism

      (AML-CFT Law Articles 3.1, 4, 29.3, AML-CFT Decision Article 1)

      The AML-CFT Law designates the financing of terrorism as a criminal offence, which is not subject to the statute of limitations. It defines the financing of terrorism as:

      •Committing any act of money laundering, being aware that the proceeds are wholly or partly owned by a terrorist organisation or terrorist person or intended to finance a terrorist organisation, a terrorist person or a terrorism crime, even if it without the intention to conceal or disguise their illicit origin; or
       
      •Providing, collecting, preparing or obtaining proceeds or facilitating their obtainment by others with intent to use them, or while knowing that such proceeds will be used in whole or in part for the commitment of a terrorist offense, or committing such acts on behalf of a terrorist organisation or a terrorist person while aware of their true background or purpose.
       

      There are numerous risk factors that FIs should consider important when assessing their exposure to the risk of terrorist financing (see Section 4.1.1, Risk Factors), including geographic-, sector-, channel-, product-, service- and customer-specific risks.

      In a 2019 report by MENAFATF, an assessment of the global threat posed by the financing of terrorism stated:

       “The number, type, scope, and structure of terrorist actors and the global terrorism threat are continuing to evolve. Recently, the nature of the global terrorism threat has intensified considerably. In addition to the threat posed by terrorist organisations such as ISIL, Al-Qaeda and other groups, attacks in many cities across the globe are carried out by individual terrorists and terrorist cells ranging in size and complexity. Commensurate with the evolving nature of global terrorism, the methods used by terrorist groups and individual terrorists to fulfil their basic need to generate and manage funds is also evolving.
       
       Terrorist organisations use funds for operations (terrorist attacks and pre-operational surveillance); propaganda and recruitment; training; salaries and member compensation; and social services. These financial requirements are usually high for large terrorist organisations, particularly those that aim to, or do, control territory. In contrast, the financial requirements of individual terrorists or small cells are much lower with funds primarily used to carry out attacks. Irrespective of the differences between terrorist groups or individual terrorists, since funds are directly linked to operational capability, all terrorist groups and individual terrorists seek to ensure adequate funds generation and management.”1
       

      1 Social Media and Terrorism Financing: A joint project by Asia/Pacific Group on Money Laundering & Middle East and North Africa Financial Action Task Force, APG/MENAFATF, January 2019, p.4.

    • 3.8 Financing of Illegal Organisations

      (AML-CFT Law Articles 3.2, 4, 29.3, AML-CFT Decision Article 1)

      Like the financing of terrorism, the AML-CFT Law designates the financing of illegal organisations as a criminal offence that is not subject to the statute of limitations. The Law defines the financing of illegal organisations as:

      •Committing any act of money laundering, being aware that the proceeds are wholly or partly owned by an illegal organisation or by any person belonging to an illegal organisation or intended to finance such illegal organisation or any person belonging to it, even if without the intention to conceal or disguise their illicit origin.
       
      •Providing, collecting, preparing, obtaining proceeds or facilitating their obtainment by others with intent to use such proceeds, or while knowing that such proceeds will be used in whole or in part for the benefit of an Illegal organisation or of any of its members, with knowledge of its true identity or purpose.
       
      •When assessing their risk exposure to the financing of illegal organisations, FIs should pay special attention to the regulatory disclosure, accounting, financial reporting and audit requirements of organisations with which they conduct Business Relationships or transactions. This is particularly important where non-profit, community/social, or religious/cultural organisations are involved, especially when those organisations are based, or have significant operations, in jurisdictions that are unfamiliar or in which transparency or access to information may be limited for any reason.
       

    • 3.9 The ML Phases

      To identify, understand and accurately assess the ML/FT risks to which FIs are exposed at both the enterprise and business relationship levels, FIs should be aware of the three phases of money laundering. By determining for which ML/FT phase a certain product can be misused or the FI itself can be misused, will help the FI understand its specific inherent ML/FT risks. The paragraphs below describe the crime of money laundering as consisting of three distinct (though sometimes overlapping) phases:

      Placement. In this phase, criminals attempt to introduce Funds or the Proceeds of Crime into the financial system using a variety of techniques or typologies (see Section 3.10, ML/FT Typologies).

       Examples of placement transactions include the following:
       
      •Blending of funds: Commingling of illegitimate funds with legitimate funds, such as placing the cash from illegal narcotics sales into cash-intensive, locally owned businesses.
      •Foreign exchange: Purchasing of foreign exchange with illegal funds.
      •Breaking up amounts: Placing cash in small amounts and depositing them into numerous bank accounts in an attempt to evade attention or reporting requirements.
      •Currency smuggling: Cross-border physical movement of cash or monetary instruments.
      •Loans: Repayment of legitimate loans using laundered cash.
       

      Layering. Once the Funds or Proceeds are introduced, or placed, into the financial system, they can proceed to the next phase of the process; often, this is accomplished by placing the funds into circulation through formal financial institutions, and other legitimate businesses, both domestic and international.” In this layering phase, criminals attempt to disguise the illicit nature of the Funds or Proceeds of Crime by engaging in transactions, or layers of transactions, which aim to conceal their origin.

      Examples of layering transactions include:

       
        
      •Electronically moving funds from one country to another and dividing them into advanced financial options and/or markets;
      •Moving funds from one financial institution to another or within accounts at the same institution;
      •Converting the cash placed into monetary instruments;
      •Reselling high-value goods and prepaid access/stored value products;
      •Investing in real estate and other legitimate businesses;
      •Placing money in stocks, bonds or life insurance products; and
      •Using shell companies to obscure the ultimate beneficial owner and assets.
       

      Integration. In this phase, criminals attempt to return, or integrate, their “laundered” Funds or the Proceeds of Crime back into the economy, or to use it to commit new criminal offences, through transactions or activities that appear to be legitimate.

      A key objective for criminals engaged in money laundering—and therefore a key generic risk underlying the specific risks faced by FIs—is the exploitation of situations and factors (including products, services, structures, transactions, and geographic locations) which favour anonymity and complexity, thereby facilitating a break in the “paper trail” and concealment of the illicit source of the Funds.

      Although the sizes of transactions related to the financing of terrorism and illegal organisations can be (much) smaller than those involved in money laundering operations, and some of the typologies and specific techniques used may differ, the overall principles and generic risks are the same. The terrorists and criminals involved in these acts attempt to exploit situations and factors favouring anonymity and complexity, in order to obscure and conceal the illicit source of the Funds, or the illicit destination or purpose for which they are intended, or both. FIs should remain careful that their services are not being used either directly or indirectly to facilitate Money Laundering or the Financing of Terrorism or Illegal Organisations in any of the three stages described above.

    • 3.10 ML/FT Typologies

      The methods used by criminals for money laundering, the financing of terrorism, and the financing of illegal organisations are continually evolving and becoming more sophisticated. It is therefore critical in combating these crimes for FIs to ensure that their personnel are kept up-to-date on the latest ML/FT trends and typologies.

      There are numerous useful sources of research and information related to ML/FT typologies, including by the Supervisory Authorities, the FATF, MENAFATF and other FSRBs, the Egmont Group, and others. FIs should incorporate the regular review of ML/FT trends and typologies into their compliance training programmes (see Section 8.2, Staff Screening and Training), as well as into their risk identification and assessment procedures.

      Examples of some of the key ML/FT typologies with which FIs should be familiar include (but are not limited to):

       
        
      •Currency exchanges / cash conversion: used to assist with smuggling to another jurisdiction or to exploit low reporting requirements on currency exchange houses to minimize risk of detection – e.g., purchasing of travellers cheques to transport value to another jurisdiction.
      •Cash couriers / currency smuggling: concealed movement of currency to avoid transaction / cash reporting measures.
      •Structuring (smurfing): A method involving numerous transactions (deposits, withdrawals, transfers), often various people, high volumes of small transactions and sometimes numerous accounts to avoid detection threshold reporting obligations.
      •Use of credit cards, cheques, promissory notes, etc.: Used as instruments to access funds held in a financial institution, often in another jurisdiction.
      •Purchase of portable valuable commodities (gems, precious metals, etc.): A technique to purchase instruments to conceal ownership or move value without detection and avoid AML/CFT measures – e.g., movement of diamonds or gold to another jurisdiction.
      •Purchase of valuable assets (real estate, race horses, vehicles, etc.): Criminal proceeds are invested in high-value negotiable goods to take advantage of reduced reporting requirements to obscure the source of proceeds of crime.
      •Commodity exchanges (barter): Avoiding the use of money or financial instruments in value transactions to avoid AML/CFT measures - e.g., a direct exchange of heroin for gold bullion.
      •Use of wire transfers: to electronically transfer funds between financial institutions and often to another jurisdiction to avoid detection and confiscation.
      •Underground banking / unlicensed remittance services: Illegal mechanisms based on networks of trust used to remit monies, without the proper license or registration. Often work in parallel with the traditional banking sector and exploited by money launderers and terrorist financiers to move value without detection and to obscure the identity of those controlling funds.
      •Trade-based money laundering and terrorist financing: usually involves invoice manipulation and uses trade finance routes and commodities to avoid financial transparency laws and regulations.
      •Abuse of non-profit organizations (NPOs): May be used to raise terrorist funds, obscure the source and nature of funds and to distribute funds for terrorist activities.
      •Investment in capital markets: to obscure the source of proceeds of crime to purchase negotiable instruments, often exploiting relatively low reporting requirements.
      •Mingling (business investment): A key step in money laundering involves combining proceeds of crime with legitimate business monies to obscure the illegal source of the funds.
      •Use of shell companies/corporations: a technique to obscure the identity of persons controlling funds and exploit relatively low reporting requirements.
      •Use of offshore banks/businesses, including trust company service providers: to obscure the identity of persons controlling funds and to move monies away from interdiction by domestic authorities.
      •Use of nominees, trusts, family members or third parties, etc: to obscure the identity of persons controlling illicit funds.
      •Use of foreign bank accounts: to move funds away from interdiction by domestic authorities and obscure the identity of persons controlling illicit funds.
      •Identity fraud / false identification: used to obscure the identity of those involved in many methods of money laundering and terrorist financing.
      •Use “gatekeepers” professional services (lawyers, accountants, brokers, etc.): to obscure the identity of beneficiaries and the illicit source of funds. May also include corrupt professionals who offer ‘specialist’ money laundering services to criminals.
      •New Payment technologies: use of emerging payment technologies for money laundering and terrorist financing. Examples include cell phone-based remittance and payment systems.
      •Virtual assets: (VA) and related services have the potential to spur financial innovation and efficiency, but their distinct features also create new opportunities for money launderers, terrorist financiers, and other criminals to launder their proceeds or finance their illicit activities. FIs may refer to the FATF Recommendations that place AML/CFT requirements on Virtual Assets (VA) and Virtual Asset Service Providers (VASPs). The FATF has also issued a document on Guidance on Risk Based Approach to VAs and VASPs. FIs should be familiar with the AML/CFT risks of dealing with VAs and VASPs in accordance with the FATF guidance.
      •Life insurance products can be for instance be used for money laundering when they have saving or investment features which may include the options for full or partial withdrawals or early surrenders.
      •General insurance product: there are several cases where the early cancellation of policies with return of premium has been used to launder money.
       ○A number of policies entered into by the same insurer/intermediary for small amounts and then cancelled at the same time;
       ○Return premium being credited to an account different from the original account;
       ○Requests for return premiums in currencies different from the original premium;
       ○Regular purchase and cancellation of policies.
      •Overpayment of premiums: arranging for excessive numbers or excessively high values of insurance reimbursements by cheque or wire transfer to be made, in this method, the launderer may arrange for insurance of the legitimate assets and ‘accidentally’ but on a recurring basis, significantly overpay his premiums and request a refund for the excess.
       

      The UAE FIU releases reports on Trends and Typologies of Money Laundering which is an analysis based on the information extracted from the suspicious transaction reports (STRs) filed by reporting entities. This is a very useful resource for FIs for understanding the prevalent typologies of ML and FT crimes as well as getting information on the latest trends on these crimes in the country. This report is released on the FIU’s GoAML System for STR reporting and therefore, is accessible to registered users of this system.

      Links to some other official sources, which may be useful in keeping up-to-date with regard to ML/FT typologies, may be found in Appendix 11.2.

    • 3.11 Sanctions against Persons Violating Reporting Obligations

      (AML-CFT Law Articles 15, 24, 25)

      The AML-CFT Law provides for the following sanctions against any Financial Institutions, their managers or their employees, who fail to perform, whether purposely or through gross negligence, their statutory obligation to report a suspicion of money laundering or the financing of terrorism or of illegal organisations:

      •Imprisonment and fine of no less than AED100,000 and no more than AED1,000,000; or
       
      •Any of these two sanctions.
       

      According to Article 15 of the AML-CFT Law, the requirement to report is in the case of suspicion or reasonable grounds to suspect a Crime. It should also be noted that the transactions or funds that are the subject of the suspicion may represent only part of the proceeds of the criminal offence, regardless of their value.

      Likewise, the AML-CFT Law provides for sanctions against anyone who warns or notifies a person of a suspicious transaction report or reveals that a transaction is under review or investigation by the Competent Authorities, as follows:

      •Imprisonment for no less than six months and a penalty of no less than AED100,000 and no more than AED500,000; or
       
      •Any of these two sanctions.