On 13 September 2021, the Central Bank of the UAE (CBUAE) issued new guidance on transaction monitoring and sanctions screening for its licensed financial institutions (LFIs). As per the official press release, the Guidance aims to promote the understanding and effective implementation by LFIs of their statutory anti-money laundering and combatting the financing of terrorism (AML/CFT) obligations. LFI’s have until mid-October to demonstrate compliance with CBUAE’s new AML guidelines.
This move forms a part of a series of steps taken by the UAE government to strengthen their AML/CFT compliance regime, which will have a significant impact on the cryptocurrency industry as well. On 24 February 2021, UAE established an Executive Office to combat money laundering and terrorist financing. The Executive Office will oversee the implementation of the UAE’s National AML/CFT Strategy and National Action Plan (NAP), put in place to build a strong and sustainable AML/CFT structure. In addition, UAE introduced two additional measures in August. Firstly, a specialized money laundering court was set up in Dubai to tackle financial crimes, including money laundering, as part of the UAE’s wider endeavour to combat crime. Secondly, UAE’s Financial Intelligence Unit joined forces with China Anti-Money Laundering Monitoring and Analysis Centre to exchange relevant intelligence to crack down on global money laundering and combat the financing of terrorism.
These developments have been coupled with a stronger emphasis on enforcement. The Abu Dhabi Criminal Court recently convicted eight companies and 40 individuals of various nationalities of fraud and money laundering offences. The defendants (23 of whom are expatriates now facing deportation) have been sentenced to prison terms ranging between five and ten years, and have been collectively fined almost AED 860 million (approximately $234 million USD).
UAE Advancing Regulations to Become the Gulf’s Leading Crypto Hub
With the introduction of new measures, UAE closely followed Bahrain is spearheading cryptocurrency policy and regulation in the Gulf region. By introducing a progressive regulatory framework, the UAE government is encouraging technological innovation, promoting increased adoption of virtual assets, and providing crypto businesses a digital economy to thrive in. In May and June of 2021, Abu Dhabi’s Financial Services Regulatory Authority authority granted various cryptocurrency exchanges – such as HAYVN, BitOasis, MidChains, and Arabian Bourse – with in-principle approval to operate. Further, in August 2021, Matrix, a virtual assets trading platform serving investors around the world, was launched as the first regulated virtual asset Multilateral Trading Facility (MTF) and custodian under the Abu Dhabi Global Market (ADGM) virtual asset policy framework.
As a financial free zone, Abu Dhabi Global Market’s regulatory approach to cryptocurrencies diverges from the central bank-driven model in Bahrain. The Central Bank of Bahrain (CBB) has announced regulatory rules in the form of a Directive governing “crypto assets.” According to the directive, “no person may market or undertake the activities, by way of business, within or from the Kingdom of Bahrain, comprised of regulated crypto-asset services without obtaining a license from the CBB.” The directive includes rules governing licensing requirements, the conditions for the issuance and holding of the CBB license, minimum capital requirements, measures to safeguard client or customer interests reporting, notifications, and approval requirements amongst others.
Policymakers in other Gulf Arab locations have been more cautious regarding the integration of cryptocurrencies within their economies. On 26 December 2020, the Qatar Financial Centre Regulatory Authority (QFCRA) declared that all virtual asset services are banned in the Qatar Financial Centre (QFC) except for digital asset services concerning token securities. Exemptions were made for security tokens and other financial instruments regulated by the QFCRA, the Qatar Central Bank, or the Qatar Financial Markets Authority as these types of tokens were subject to full AML and KYC verification.
Similarly, Kuwait’s Ministry of Finance does not recognize cryptocurrencies for purposes of official commercial transactions. The Central Bank of Kuwait (CBK) prohibits the banking sector and companies under its control from trading in cryptocurrencies. The prohibition includes acceptance of cryptocurrency usage in e-payment transactions and mediation between the parties to cryptocurrency transactions.
Highlights from the UAE’s New AML Guidance
To mitigate money laundering and terrorist financing risks, licensed financial institutions (LFIs) have to develop robust internal policies, controls, and procedures in line with their size of business. These policies will have to be approved by the senior management of the LFIs.
LFIs now have to file “suspicious transaction and activity reports” with the UAE’s Financial Intelligence Unit. Therefore, they are required to put indicators in place in order to identify suspicious transactions and activities. Additionally, LFIs are also obliged to regularly screen their databases and transactions against names on lists issued by the United Nations Security Council and its relevant Committees (UN Consolidated List) or by the UAE Cabinet (UAE Local Terrorist List). LFIs also need to perform screening before conducting any transaction or entering into a business relationship with any client, whether it is individual or corporate.
As stipulated in the guidance, LFIs should establish and maintain effective transaction monitoring and sanction screening programs consisting of a well-calibrated risk-based framework, training and awareness of their employees and active oversight by their board Further, the guidance also states that LFIs should “ensure the ongoing enhancement of their transaction monitoring and sanctions screening systems based on their risks.” The systems, including monitoring and screening models, are to be subjected to independent testing, validation, and auditing.
Why Merkle Science
With the introduction of new AML guidelines, the UAE is adopting a more compliance centric approach, licensed financial institutions should proactively put compliance frameworks in place in order to mitigate AML/CFT risks.
Merkle Science provides a predictive crypto risk and intelligence platform, setting the standard for the next generation of financial safeguards and criminal detection. We are creating the infrastructure necessary so that a full range of individuals, entities, and services may transact safely with crypto. Merkle Science’s highly customizable platform and proprietary Behavioral Rule Engine is easy-to-use, allowing institutions to detect illicit activity beyond the blacklists and detected suspicious activity that could have previously been undetected.