Category Archives: Finance and Compliance

In UAE Six exchange houses were fined a total of Dh17.311 million for “failures to achieve appropriate levels of compliance regarding their AML & Sanctions Compliance Frameworks by the deadline at the end of 2019. All financial institutions have a duty to ensure that they comply with applicable sanctions and embargo regimes. Failing to do so could lead to significant regulatory enforcement action, fines, criminal charges in the UAE or elsewhere, and serious reputational damage.

As per UAE law, non – compliance with the targeted financial sanctions for any natural or legal person will be subject to imprisonment or a fine of no less than AED 50,000 (fifty thousand dirhams) and no more than AED 5,000,000 (five million dirhams).

1. Understand the Types of Sanction:

International Sanctions are foreign policy instruments employed by States to protect their national interests by targeting certain individuals, companies, or countries. Economic sanctions impose certain restrictions against countries, such as trade embargoes or restrictions to the export of certain goods (e.g. aviation, military, nuclear technologies). On the other hand, financial sanctions target individuals or companies and entail the freezing and blocking of all property or interest in property of the sanctioned targets. On top of national regulations, the major sanctions regimes are the US, the European Union, and the United Nations Sanctions.

2. Jurisdiction issue:

The first challenge in Sanctions compliance is to delimitate the scope of applicable regulations: to comply with a law, you first need to know which law to apply. This depends on the following:

a. Are operations spanning across various countries? This will condition the different international regimes or national regulations to comply with. Compliance should be studied not only on the level of countries where activities are carried out but also at an international level as the EU and UN also manage their own sanctions lists.

b. Which currencies is business conducted in? For example, American regulators claim compliance with US Sanctions whenever a transaction is denominated in USD. Practically, this means that almost any financial institution conducting international business will need to keep an eye open on US Sanctions compliance.

c. What is the nature of operations conducted? The more complex financial operations are, the more intricate compliance scenarios should be considered. For example, A larger international institution will need to search through the financing of import-export transactions to detect if any sanctioned countries, ships, or restricted goods are involved.

d. De-Risking Business Sectors: Institutions tend to reduce their exposure to risked business sectors or countries to avoid potential sanctions violations. They, therefore, fix stricter compliance standards, often beyond the regulator’s requirements, and can even refuse to enter a legal business if it presents a considerable risk of sanctions violations.

3. Best Practices to ensure the Compliance of Financial Sanctions:

– Top and middle management should embrace the mindset that compliance efforts can be turned into an asset.

– Compliance should be integrated into the company’s strategy to reinforce commercial efforts. The better an institution knows its clients, their needs, and habits, the more personalized services it will be able to propose.

– A decentralized compliance setup is crucial to account for the particularities of different departments or branches. The nature of activities and their associated risks may vary significantly, and since compliance is gaining the power to limit or discontinue business, it should be in close contact with operational teams. Institutions with international branches should also appoint dedicated staff to monitor and enforce the respective regulatory requirements in each jurisdiction.

– Overall risk monitoring must ensure that all entities commit to equivalent compliance standards and that procedures are applied throughout all business branches and Reporting to regulators should ideally be centralized to ensure coherence of all documentation communicated to the authorities

– There should include regular training sessions for front- and back-office staff and targeted sessions for staff of certain business branches. All employees should understand compliance challenges and how their contribution to compliance matters to the whole setup rather than a separate watchdog function that harnesses business.

4. Industrialization and optimization of legacy compliance processes

– Depending on the size of the institution and the volume of clients and transactions, a certain level of automation and industrialization will be necessary. As a rule, incoming transactions should be filtered before entering, and outgoing transactions before leaving the internal systems.

– The identities of new customers must be checked before the opening of any service entailing payments or trades. Such compliance verifications at onboarding and throughout the customer relationship must be orchestrated in order not to interrupt the client experience, where any unjustified delay or request for unnecessary documents will result in customer dissatisfaction.

– Indeed, most alerts generated by such systems are homonyms or obvious false positives without any risk from a sanctions perspective. This can be reduced in the following ways:

i. By adopting Machine learning. For Example, if you have considered blocking the customer named Mr. ABC and again in the future, you come across a similar or same transaction, the decision made in previous time will be accepted by the system i.e. block of funds and the same will be reflected in the screen to avoid re-due diligence.

ii. You can avoid false positives by using the Country and Date of Birth, removing the countries not applicable, removing the sanction list not applicable, use of different languages as Inputs. Periodic screening of the system is required. Also, include Bio recognition i.e. characteristics of the person.

If the sanction screening is not effective then there will be an enormous quantity of alerts will be generated and this must be sorted out to enable an in-depth analysis of the most complicated cases which will be a daunting task.

– As larger institutions rely on legacy systems to perform such checks, there is an immense potential for optimization. Introducing some layers of artificial intelligence into the process of filtering and analyzing transactions will significantly improve the system’s performance. A robotized semantical analysis can reduce the number of false alerts, while those generated can be classified according to the risk they present or their priority for immediate analysis. A risk-based generation and prioritization of sanctions alerts is today crucial for financial institutions to efficiently handle the changing regulatory constraints.

5. UAE Central Bank Guidelines

GUIDANCE FOR LICENSED FINANCIAL INSTITUTIONS ON TRANSACTION MONITORING AND SANCTIONS SCREENING

Sanctions screening systems and processes are essential but are also effective as the quality and completeness of customer and transactional information databases are used when comparing against applicable sanctions lists. Therefore, effectiveness depends critically on the completeness and accuracy of information obtained through the application of CDD/KYC measures and contained in payment instructions and other transactional data fields.

– Risk-Based: The risks LFIs face are dynamic and the transactions they carry out may be varied and high in volume. LFIs should therefore review and enhance their sanctions screening frameworks regularly and upon the occurrence of specified “trigger events,” such as material changes in the LFI’s business or risk profile or its legal and regulatory environment, to ensure that they remain tailored to the institution’s financial crime risks.

The outcomes of sanctions screening should include the application of enhanced scrutiny or additional controls to higher-risk customers or transactions, as warranted.

It should cover sanctions risks presented by the institution’s customers, products and services, delivery channels, and geographic exposure on their day-to-day transactional activity plus any changes to the UN Consolidated List and the Local Terrorist List are automatically updated.

– Testing: LFIs should have in place adequate processes to ensure that aforesaid data feeding into their sanctions screening program meets established data quality standards, that data is subject to testing and validation at risk-based intervals, and that identified data quality issues are remediated in a timely manner. Further Data validation should occur at minimum every 12 to 18 months, as per the risk profile

– Review: LFIs should document and track sanctions screening outputs in order to identify and address any technical or operational issues and understand key risks or trends over time. Irregularities in sanctions screening system performance, including significant changes in the volume of apparent matches to sanctions lists over time, maybe indicative of underlying data quality or data integrity issues.

– Training: LFIs should ensure that personnel with sanctions screening responsibilities have adequate experience and expertise and receive role-specific training

– Tone From Top: The board and senior management should also communicate clear risk appetites within their institutions and set a strong tone from the top that the implementation of targeted financial sanctions is a priority

Examples of automated Tools: Automated name screening tools that compare customer databases against applicable sanctions lists live payment, and other transaction filtering tools that screen payment message and transaction data against applicable sanctions lists prior to execution, including text analytics tools

Examples of manual tools: manual reporting and escalations of potentially sanctions-related activity by LFI employees manual reviews of document-based transactions (such as documentary trade finance transactions or loans), and periodic or event-based CDD reviews.

The Economic Substance Regulations require onshore and free zone companies in the UAE and certain other business forms that conduct any of the relevant activities to maintain and demonstrate “Economic Presence” in the UAE relative to the activities they undertake.

The primary purpose of the economic substance regulations has been to ensure that certain legal entities established in those countries with low or no corporate taxation such as the UAE, demonstrate that they are engaged in economic activities which meet or exceed an economic substance threshold. The Economic Substance Regulations serve as a means to eliminate financial crime as well. The purpose of the Economic Substance Report is also to provide the National Assessing Authority with information on the Licensee and the income, expenditure, assets, employees, and governance of the entities dealing in the below-mentioned Relevant Activities.

· Banking Business

· Insurance Business

· Investment Fund management Business

· Lease – Finance Business

· Headquarters Business​​

· Shipping Business

· Holding Company Business

· Intellectual property Business

· Distribution and Service Centre Business​

For each financial period in which a Licensee earns income from a Relevant Activity, it will need to meet an Economic Substance Test in relation to that Relevant Activity. Generally, a Licensee must i) conduct the relevant core income-generating activities in the UAE and ii) be ‘directed and managed’ in the UAE.

Corporate Entities or a partnership that is not an Exempted Licensee and that derives Relevant Income from any of the above mentioned relevant activities should submit an Economic substance Report.

The Regulations apply to financial years starting on or from 1 January 2019. Entities within the scope of the Regulations should submit an annual Notification form to their Regulatory Authority, and complete an Economic Substance Report and submit to the same Regulatory Authority within 12 months from the end of their financial year.

Entities that undertake a relevant activity will need to submit an annual notification through the Ministry of Finance portal. All Notifications must be submitted within six months from the end of the Financial Year. Licensees that already submitted a Notification directly to their Regulatory Authorities are required to re-submit this Notification on the Ministry of Finance Portal. Entities that undertake a Relevant Activity and earn income from the Relevant Activity will also need to file an annual economic substance return, self-assessing whether they met the economic substance requirements, supported by additional information.

If an entity has not earned income from one of the relevant activities mentioned above in any Financial Year, or if it meets the conditions for being exempt, then it is not required to meet the Economic Substance Test or file an Economic Substance Report. Irrespective of which a Notification form will have to be submitted. Failure to comply with the Regulations may result in penalties and other administrative sanctions such as the suspension, revocation of trade license or permit.

Support from Vertex Compliance

Vertex Compliance will share trackers to assess if there have to be any filings under ESR

Each entity must assess whether it is a Licensee and carries out a Relevant Activity as follows:

The relevant Legal Department will first determine if the entity is a Licensee based on the classification set out in the questionnaire and complete the tracker and forward it to the CFO.

The CFO after the review of the tracker and, if the entity is a Licensee,

• The CFO should verify that the list entities that they oversee is complete and, if not, notify the Legal Department;

• If the entity is not a Licensee, confirm they have no further comments to the Legal Department; or

• If the entity is a Licensee, the CFO will need to assess whether the Licensee undertakes any Relevant Activities.

Once done, the CFO must send the completed trackers back to the relevant Legal Department. Vertex Compliance will then review the trackers.

Once Vertex Compliance has reviewed the completed trackers, the CFO will be notified as to whether any filings under the Economic Substance Regulations are required and arrange additional consultation for filing ESR with the Ministry of Finance.

Non-compliance with the obligation to file an ESR before the deadline is subject to a penalty of AED 50,000, and can result in the Licensee being revoked. Providing incorrect or false information in the Economic Substance Report or incorrectly claiming an exemption is also subject to a penalty of AED 50,000.

In the recent past, United Arab Emirates has taken various steps to curb money laundering and to make the financial sector of the country competitive and compliant with global standards. Around the globe, nations have spent significant time and efforts on combating money laundering and terrorist financing. As everyone knows the issue cannot be addressed in silos and a concerted effort is needed from all the nations to address the issue. Countries have formulated and implemented Prevention of money laundering laws and keep on introducing new regulations/obligations to the relevant Anti-Money Laundering (‘AML’) national legislation to align with international standards. The recent circulars of the Ministry of Economy on the application of AML/CTF Regulations with respect to Designated Non-financial Businesses and Professions(‘DNFBP’) is one such step forward to accomplish International Standards. With the support of compliance consultancy, organizations can better navigate these regulations and ensure full compliance with both local and global standards.

When we talk about international standards, it is pertinent to mention the Recommendations of the Financial Action Task Force (FATF). FATF has identified sectors, in addition to direct financial sectors, which significantly contribute movement of funds and identified them as Designated Non-Financial Business Professions which are also termed Gate Keepers. Guidelines on these sectors are also issued by FATF. The interpretations and guidelines clearly mention the applicability of the FATF Recommendations both with the financial institutions and DNFBPs.

The United Arab Emirates had expanded the scope of AML/CTF Regulations to DNFBPs in UAE through Federal Decree-law No. (20) of 2018 On Anti-Money Laundering and Combating the Financing of Terrorism and Illegal Organisations. The activities categorized as DNFBP has been detailed under article 3 of the cabinet Resolution No. 10 of 2019 Concerning the Implementation of the AML Law in accordance with the FATF’s recommendations.

The scope of DNFBPs includes certain activities involving the sale and purchase of real estate, dealers in precious metals and precious stones, trust and company service providers, auditors, accounting service providers, and lawyers.

Supervisory Authorities

In accordance with the Federal Law and Implementing Regulations, the UAE Ministry of Economy which is vested with the duty of regulating and supervising the DNFBPs in UAE in certain sectors has prepared comprehensive plans for implementation and compliance and issued guidelines vide the circular dated 19th March 2020. The sectors for which the Ministry of Economy is designated as Regulator are:

• Real Estate Brokers and Agents
• Dealers in precious metals and stones
• Independent Accountants
• Company Service Providers

Pursuant to Article 3 Cabinet Decision No. (10) of 2019, Law firms also fall under the nomenclature of a DNFBP. The supervision of law firms is vested with the Ministry of Justice.

The circular issued by the Ministry of Economy further gives clear guidelines as to the activities of the Sectors covered under DNFBP and why they are prone to money laundering risks. As per the circular, some of the activities of DNFBPS include the sale and purchase of the real estate, dealers in precious metals and precious stones, trust and company service providers, auditors, accounting service providers. These categories of DNFBPs conduct specific financial activities on behalf of their clients that may be used to obscure the ultimate beneficiaries or source of funds behind transactions.

It is also mentioned that DNFBPs’ practices are exposed to several risk areas relating to money laundering and terrorist financing activities. Accordingly, The Federal decree by Law No (20) of 2018 concerning AML CFT and financing of illegal organizations and the implementing regulations are applicable to these sectors also.

The rationale behind these restrictions is that criminals use the service of DNFBPs in both the second and third stages of money laundering like layering and integration. For example, the sale and purchase of real estate can be an attractive way to conceal ‘dirty’ funds and can safely be placed in an investment. Where real estate is purchased through a real estate broker through a proxy actor or associate, the ultimate beneficial owner will remain obscure and this can add an additional layer in the transaction which makes it complicated and difficult to follow the trail.

Purchasing precious metals and stones is another method of investing illicit money to camouflage the origin and make it legal, Creating and establishing companies in offshore and other places with the help of DNFBPS without proper disclosure on the ultimate beneficial owner which will later become shell companies which will be used for moving proceeds of crime.

One clear area of risk, for example, is where DNFBPs may be involved in assisting individuals or corporate entities to establish companies that, unbeknownst to the DNFBPs, are intended to be used as a conduit for the proceeds of crime. Another area of risk would be assisting clients in transferring assets/funds, for example, in the purchase of real estate or other precious commodities using illicit funds. Accountants and lawyers conduct transactions on behalf of their clients which can be dealing with illicit funds. In short, DNFBPs can be utilized in many ways by the culprits for obscuring and transferring illicit funds and DNFBPS will become a party to the process unknowingly.

Obligations of DNFBPs under the Regulations

These provisions basically suggest a risk-based approach and below are some of the points to take note of while implementing the new guidelines. Circulars issued by the UAE Ministry of Economy broadly spell out certain obligations with respect to DNFBP as under.

• To follow certain provisions of the Federal AML Law No (20) of 2018 and its implementing regulations.

Identify the crime risks within its scope of activity, document all findings, and continuously assess, and update the results of the assessment based on the various risk factors. It is also mandated to establish a risk identification and assessment analysis process which needs o be provided to the Supervisory Authority upon request with any supporting data,

Refrain from opening or conducting any financial or commercial transaction under an anonymous or fictitious name or by pseudonym or number, and maintaining a relationship or providing any services to it,

Take necessary due diligence measures and procedures and define the scope, taking into account the various risk factors and also the results of the National Risk Assessment on money laundering and terrorist financing, and retain the records. The Regulations specify the cases in which such procedures and measures should be applied, and the conditions for deferring the completion of customer or real beneficiary identity verification;

Develop internal policies, controls, and procedures approved by senior management which enable to manage the risks identified and mitigate them, and to review and update the policies and controls periodically on a continuous basis, and apply this to all subsidiaries and affiliates in which they hold a majority stake;

• Apply the directives of the competent authorities for implementing the decisions issued by the UN Security Council under Chapter (7) of United Nations Convention for the Prohibition and Suppression of the Financing of Terrorism and (Proliferation of Weapons of Mass Destruction) and other related directives;(This particular guideline is from the sanction angle ).Circular 3 of 2020 issued by the Ministry of Economy gives further guidelines regarding sanction compliance.

• Maintain all records, documents, and data for all transactions, whether local or international and make this information available to the competent authorities promptly, upon request, as stipulated in the Implementing Regulations;

• Reporting of any suspicious transactions to the supervisory authorities, through the portals provided to the Financial Intelligence Unit of the government. This will help the government to gather information, detect illicit activity and take the necessary preventative action.

Registration under goAML system

Ministry of Economy issued Circular no: 5/2021 dated 03.03.2021 and sets out the requirement and time frame for Registration in ‘goAML’ . The initial deadline set for the registration was 31.03.2021 which is now further extended to 30.04.2021.

It also includes penal clauses for violation of the guidelines contained in the Decree-law as under:

“Pursuant to Article 14 of the Federal Decree-law No. (20) of 2018, MOE being, the Supervisory Authority for DNFBPs, may impose administrative penalties on DNFBPs for any violation to the Decree-Law and its Implementing Regulation. Administrative penalties may include, but is not limited to, a financial penalty of AED 50,000 and no more than AED 5,000,000 for each violation”

The various circulars issued by the Ministry of Economy starting from March 19, 2020, to the latest circular on 3rd March 2020 give out a clear indication and guidelines on the compliance angle to be followed by the DNFBPs as mentioned in the circular with respect to Anti-money laundering and Sanctions compliance.

Implications

In effect, DNFBPs that were previously not covered under the scope of regulated entities are now brought under the scope and will be supervised by two different ministries. DNFBPs will need to understand and get in grips with at least the basic elements of effective compliance as per the AML regulations or face punitive measures by the UAE authorities.

In particular, DNFBPs must be familiar with the risks associated with transferring funds without verifying the identity of the client and/or a legitimate source for those funds. Also, DNFBPs should be well prepared to respond to any suspicious transactions by reporting to the competent authorities and maintaining diligent records of all client-related activity. which certainly have negative impacts on the global financial system. Those risks vary according to the money laundering methodology related to such professions and take different forms depending on the profession itself.

The Way Forward

• Ensure that each of the DNFBP falling under the regulation has successfully registered with the goAML portal of the FIU within the stipulated period – 30 /4/2021.
• DNFBPs should perform a business risk assessment to ascertain whether the existing policies and processes are in tune with the present guidelines.
• Redefine policies and processes to ensure that it is compliant to the full extent of legal requirements under the regulations and appropriate defense and mitigation processes are available as per the risk envisaged.
• Ensure the employees are provided with appropriate training and awareness to enable them to perform as per the standards and regulations and the response process.
• The employees are aware of the risks posed in the respective sectors and able to handle the red flags appropriately and ensure reporting within the timeframes wherever needed.

The tone from the top as evident from the recent circulars issued by the Ministry of Economy is indicative of strong and vigilant supervision in protecting DNFBPS from becoming a part of the system which is conducive for transferring illicit funds. Enhancing the Compliance Framework and improving employee awareness are the key to attaining the goals. Compliance advisory services play a crucial role in guiding businesses through these complex regulations.