UAE gets Greylisted by the Financial Action Task Force

On March 4, 2022, the Financial Action Task Force (FATF), in its plenary session, added the United Arab Emirates (UAE) to its grey list due to strategic deficiencies in its framework to counter money laundering, terrorist financing, and proliferation financing. The UAE has joined 22 other jurisdictions on the list including Malta, Turkey, Syria, the Caymen Islands, Yemen, and more.

UAE, which is home to major crypto businesses such as BitOasis, HAVYN, and MidChains was poised to become the crypto hub of the Gulf region owing to its crypto-friendly environment. In fact, understanding that the crypto businesses require regulatory certainty, the UAE is planning to issue a federal crypto license by the end of this year’s first quarter. In December 2021, prominent crypto exchange Binance announced that it had signed a Memorandum of Understanding (MoU) with the Dubai World Trade Centre Authority (DWCTA) to establish a comprehensive zone for crypto in Dubai. Binance also stated that it will assist crypto exchanges and businesses to become licensed in Dubai in cooperation with the local government. Further, to strengthen their AML/CFT compliance regime, UAE also issued new guidance on transaction monitoring and sanctions screening for its licensed financial institutions (LFIs)

Commenting on the country’s ongoing efforts to fight financial crime, the FATF noted that, though the UAE has made significant progress in meeting a number of Mutual Evaluation Report Recommendations, including improving its ability to confiscate criminal proceeds, creating an AML/CFT coordination committee, and enhancing cooperation with investigators from other jurisdictions; however, the FATF also stated that UAE still needs to make improvements and take significant steps to enhance its AML/CFT regime. To this end, UAE needs to strengthen its ability to pursue high-risk money laundering threats and demonstrate a sustained increase ineffective money laundering investigations and prosecutions.

In response to the listing, UAE’s Executive Office of AML/CFT stated that “the UAE ​takes its role in protecting the integrity of the global financial system extremely seriously and will work closely with the FATF to quickly remedy the areas of improvement identified.”

Potential Implications of UAE being greylisted

Post its addition to the grey list by the FATF, the UAE faces increased regulatory scrutiny. The FATF grey list is a list of jurisdictions that are placed under what the FATF calls “increased monitoring.” When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolving swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring. 

The International Monetary Fund (IMF), in its 2021 report analyzing the impact of the grey list, observed that grey-listed jurisdictions experience a large and statistically significant reduction in capital inflows. One of the possible reasons for capital disruption is de-risking. As a part of de-risking mechanism banks exit relations with customers that are based in high-risk countries to reduce compliance costs.

Further, investors, especially financial institutions (FIs), may use grey-listing as a heuristic for evaluating the risk of doing business with jurisdiction and, as a result, may reallocate resources to reduce their exposure to the country. For instance, greylisting could force Wall Street banks, which use Dubai as their regional headquarters to dedicate additional resources to compliance in order to avoid future penalties from international regulators. Alternatively, they may also decide to shift the headquarters to other Gulf countries such as Saudi Arabia and Bahrain.

Oftentimes, greylisted countries also face difficulties in obtaining loans from international organizations such as IMF or World Bank. Additionally, some jurisdictions, such as Germany, also impose additional due diligence obligations on the greylisted jurisdictions.

On the contrary, according to a recent report by a prominent American credit rating agency, S&P Global Ratings, UAE may not suffer a significant blow to its economy, since, it has promised to promptly resolve the shortcomings in its AML/CFT/PF framework, within an agreed time frame. Additionally, because the UAE is the net exporter of capital to the rest of jurisdictions it is not dependent on external funding and, therefore, difficulty in obtaining loans may not hinder its economy. However, S&P also agreed to the fact that additional checks and compliance requirements can increase the cost of foreign funding and potentially make financial transactions more onerous”

What should the UAE do to get out of the grey list?

The UAE has made a high-level political commitment to work closely with FATF and the Middle East and North Africa Financial Action Task Force (MENAFATF)  to strengthen the effectiveness of its AML/CFT regime. The UAE will be removed from the list during its assessment next year if the FATF finds the country has taken enough steps to combat illicit cash flows.

According to the FATF announcement, to get out of the grey list, UAE has to  improve upon the following areas:

• Demonstrate through case studies and statistics a sustained increase in outbound mutual assistance requests (MARs) related to facilitating the investigation of TF, ML, and high-risk predicates
• Identifying and maintaining a shared understanding of the ML/TF risks between the different non-financial sector businesses (DFNB) and institutions.
• Evidencing an increase in the number and quality of suspicious transaction reports (STRs) filed by FIs and DFNBs.
• Achieving a more granular understanding of the risk of abuse of legal persons and, where applicable, legal arrangements, for ML/TF.
• Providing additional resources to the financial intelligence units (FIUs) to strengthen their analysis function and enable them to pursue high-risk ML threats.
• Demonstrate a sustained increase in effective investigations and prosecutions of different types of ML cases consistent with UAE’s risk profile.
• Proactively identifying and combating sanctions evasion

How Merkle Science Can Help

With the grey list looming over them, regulatory authorities in UAE should take steps to not only enhance the AML/CFT compliance requirement but also to effectively enforce them. Merkle Science provides a predictive crypto risk and intelligence platform that enables regulators to understand the crypto-related risks within their jurisdictions so that they can implement sound regulations without stifling innovation.