4.1.6. Counterparty Risk

Effective from 11/11/2021

As required by Article 25 of the AML-CFT Decision and Paragraph 16.2.3 of the Standards LEH must identify, assess, understand, and mitigate counterparty risk prior to establishing business relationships with counterparties, and on an ongoing basis once the relationship is established. Counterparty relationships include the following types:

	•	Domestic and Foreign correspondent banking arrangements, such as those with banks, exchange houses, or any other financial institutions for the purpose of money transfer services.
	•	Money transfer arrangements with instant money transfer service providers.
	•	Hedging arrangements with local or foreign institutions.
	•	Arrangements to import or export banknotes from/to foreign institutions, such as Banks, exchange houses, or other financial institutions outside the UAE.
	•	Arrangements with local or foreign entities to offer special products/services.
1.	IDENTIFY: LEH should identify all counterparties that fit the description above, including with affiliates and other members of the same group.
2.	ASSESS: The LEH should assign an inherent risk rating to each counterparty. The determination of the counterparty’s risk should include a consideration of all characteristics and attributes that make the counterparty more or less susceptible to abuse by illicit actors, as well as characteristics and features of the counterparty relationship that could increase or decrease risk. This could include for example:
	•	The risk of the country in which a counterparty is registered;
	•	The products and services it offers and the risks of the counterparty’s customer base overall;
	•	Its reputation in the sector and any adverse media;
	•	Its ownership (including links to PEPs or persons associated with adverse media);
	•	The counterparty’s experience in this sector and its overall sophistication;
	•	The quality and intensiveness of the counterparty’s AML/CFT program, including whether the program’s requirements are consistent with minimum requirements imposed in LEH by the legal and regulatory framework in force in the UAE;
	•	The quality and rigor of supervision applied to the counterparty;
	•	Any regulatory or criminal enforcement actions taken against the counterparty; and
	•	The nature and purpose of the counterparty relationship, including the risk of the products and services involved and the types of customers who use the relationship.
3.	CALCULATE EXPOSURE: LEH should determine the proportion of counterparties that are rated higher risk, both in terms of actual numbers and in terms of the volume and value of the transactions involving that counterparty. Because counterparty relationships may involve rapid, large changes in the volume of transactions, LEH should continuously monitor their exposure to counterparties and update their risk assessment whenever exposure changes substantially.
4.	DOCUMENT: A LEH’s approach to categorizing risk should be clearly documented. The LEH should keep detailed records of its assumptions, statistics used to complete this process, and the resulting analysis and outcomes.