UAE’s Major Breakthrough: Officially Removed from FATF ‘Grey’ List

On February 23, 2024, the United Arab Emirates (UAE) was officially removed from the Financial Action Task Force’s (FATF) “Jurisdictions under Increased Monitoring” list, commonly known as the “grey list.” The UAE had been placed on this list on March 4, 2022, after the FATF identified strategic deficiencies in its anti-money laundering (AML) and counter-terrorism financing (CTF) measures. This decision underscores the country’s dedication to enhancing its global financial standing.

The UAE is a key international and regional financial center and trading hub, home to a comprehensive array of financial institutions and a substantial number of designated non-financial businesses and professions (DNFBPs) that drive its financial and business activities. The country’s diverse range of sectors – encompassing finance, economics, corporate, and trade – adds considerable complexity to its money laundering (ML) and terrorist financing (TF) risk landscape. This complexity is further compounded by the UAE’s jurisdictional structure, which includes seven Emirates, two financial free zones, and 29 commercial free zones.

The UAE’s inclusion in the grey list followed the FATF’s 2020 Mutual Evaluation, which identified several areas needing substantial improvement to align with international AML/CFT standards and come into force in 2022.

During this period (2022 – February 2024), UAE authorities implemented a broad range of reforms aimed at strengthening their AML and CTF frameworks. These reforms included more stringent customer due diligence (CDD) procedures, enhanced transaction monitoring systems, and the adoption of risk-based strategies to assess and mitigate potential financial risks. Additionally, the UAE increased collaboration with international partners, improving information-sharing mechanisms and fostering greater cooperation with other nations in the fight against financial crime.

Since 2022, the UAE has increasingly demonstrated its commitment to combating financial crimes through decisive enforcement actions. These actions include imposing substantial fines, conducting thorough inspections, and leveraging its authority to seize assets connected to illicit activities. This approach is not merely reactive but forms part of a broader strategy marked by the passage of significant legislation designed to enhance oversight and operational effectiveness.

Key to this strategy has been the establishment of specialized bodies and mechanisms, such as the Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) courts and the Executive Office to Combat Money Laundering and Terrorist Financing. These institutions, coupled with new guidelines for financial institutions and Designated Non-Financial Businesses and Professions (DNFBPs), are clear indicators of the UAE’s proactive approach to reinforcing its regulatory framework across critical sectors of its economy.

The UAE authorities undertook a series of detailed and technical reforms to address the FATF’s identified strategic deficiencies:

• to strengthening legal and regulatory framework – the UAE authorities made substantial revisions to its existing legal and regulatory framework, enacting new legislation to ensure comprehensive compliance with FATF standards. This included updates to laws governing AML/CFT activities, ensuring that they are robust and up-to-date with international best practices.
• to improve understanding of ML/FT risks – supervisory bodies overseeing Designated Non-Financial Businesses and Professions (DNFBPs) have developed a deeper understanding of specific ML/FT risks in their sectors by applying criteria and procedures consistent with Recommendations 22 and 23 of the FATF. This improved understanding has enabled them to apply more effective, risk-based sanctions for non-compliance with AML/CFT both within financial institutions (FIs) and DNFBPs, ensuring proportionate responses to identified risks.
• enhanced the filing of suspicious transaction reports (STRs) – the UAE took significant steps to increase the volume and accuracy of Suspicious Transaction Reports (STRs) being filed, particularly in sectors identified as high-risk, such as DNFBPs. This effort improved the overall detection and reporting of potentially illicit financial activities.
• risk-based mitigating measures: the UAE authorities developed a more nuanced understanding of the risks related to the potential misuse of legal persons, such as shell companies or trusts, for illicit activities. In response, the UAE implemented targeted, risk-based measures designed to mitigate these vulnerabilities, ensuring that the legal and regulatory framework is resilient against such abuses. In this regard, procedures have been adopted and implemented to better understand the risk of abuse of legal persons and to apply risk-based mitigating measures to prevent such abuse.
• enhanced data collection and analysis – the mechanisms for collecting, analyzing, and sharing financial data, has been improved, the UAE authorities ensuring that relevant body have access to timely and accurate information. This enhancement supports more informed decision-making and more effective enforcement actions in the fight against financial crime.
• public-private sector collaboration: the UAE authorities fostered stronger collaboration between public authorities and private sector entities, including financial institutions and DNFBPs. This collaboration has been key in sharing intelligence, best practices, and ensuring a unified approach to AML/CFT compliance across the country.
• measures have been established to ensure the effective implementation of Targeted Financial Sanctions (TFS) by sanctioning noncompliance among reporting entities and enhancing the private sector’s understanding of UN sanctions evasion.

Additionally, UAE authorities implemented substantial regulatory reforms aimed at strengthening their AML/CFT framework.:

• the legislative framework has been strengthened to align with international AML and counter-terrorism financing standards through the adoption of Federal Decree No. 20 of 2018 on AML/ CFT, Federal Decree-Law No. 26 of 2021 on AML/ CFT, Law No. 4 of 2022 Regulating Virtual Assets, all those new pieces of legislation has been adopted in part to mitigate risks for supervisory authorities of financial institutions, DNFBPs and virtual assets service providers.
• a new Penal Code – Federal Decree-Law No. 31 of 2021 has been adopted, further strengthening existing regulations against money laundering, bribery, and corruption by ensuring stricter penalties and enhanced enforcement measures
• New AML/CFT Guidelines has been adopted for financial institutions and designated non-financial businesses and professions to enhance compliance standards.
• implementation of the ‘goAML’ platform by the Central Bank of the UAE, a sophisticated tool developed by the United Nations Office on Drugs and Crime (UNODC). This platform is designed to streamline and enhance the reporting of suspicious financial activities by financial institutions and designated non-financial businesses and professions (DNFBPs).

The ‘goAML’ platform serves as a centralized reporting system that enables these entities to efficiently submit Suspicious Transaction Reports (STRs) and other relevant data directly to the UAE Financial Intelligence Unit (FIU). The platform’s advanced capabilities allow for the effective analysis of reported data, facilitating the detection of potential money laundering, terrorist financing, and other organized crime activities.

By adopting the ‘goAML’ platform, the UAE has significantly improved its ability to monitor and respond to illicit financial activities. The system not only strengthens compliance with international standards but also enhances the UAE’s capacity to collaborate with global partners in the fight against financial crime. This initiative underscores the UAE’s commitment to maintaining a robust and transparent financial system, capable of identifying and mitigating the risks associated with money laundering and terrorism financing.

• the Financial Services Regulatory Authority of the Abu Dhabi Global Market [ADGM] announced in December 2023 the revisions to its AML sanctions rules and guidance.
• the Dubai Financial Services Authority (DFSA) published its business plan for 2023 to 2024. The plan focuses on monitoring companies’ compliance systems and controls, assessing financial crime risks in digital assets, and pursuing firm-but-fair enforcement to uphold market integrity.

Data from the Ministry of Economy, released in March 2023, underscores the impact of these efforts, with fines totalling AED 22.6 million imposed on 29 DNFBP companies for non-compliance. This demonstrates not only the UAE’s intensified enforcement but also the effectiveness of its updated systems. Moreover, revisions to the Anti-Money Laundering and Counter-Terrorist Financing law (Federal Decree Law No. 26 of 2021), the Penal Code, and the regulatory framework for virtual assets (Law No. 4 of 2022 Regulating Virtual Assets) have aligned the UAE’s legislative structure with international standards.

The tangible outcomes of these measures include fines exceeding AED 115 million in Q1 2023 and the seizure of assets valued at over AED 925 million between November 2022 and February 2023. These results, combined with strengthened bilateral legal assistance treaties and a notable increase in suspicious transaction reports, highlight the UAE’s enhanced defensive capabilities against financial crime. This multi-faceted approach underscores the country’s growing effectiveness in protecting its financial system from illicit activities, reflecting a sophisticated and well-coordinated national strategy.

In June 2023, the MENAFATF adopted the Enhanced Follow-up Report for the United Arab Emirates, assessing the country’s progress. The ratings for the following recommendations were updated:

• Recommendation 1 was re-rated from Partially compliant to Largely compliant
• Recommendation 19 was re-rated from Partially compliant to Compliant
• Recommendation 29 was re-rated from Partially compliant to Compliant.

The report also highlights additional legislative measures implemented to protect businesses from illegitimate actors. Key elements of the report include the UAE’s deployment of comprehensive risk assessments, its approach to managing relationships with higher-risk countries, and the effective use of the Financial Intelligence Unit (FIU) to analyze sectors vulnerable to money laundering and terrorist financing.

IMPACT ON THE FINANCIAL SECTOR

These changes have been implemented across the UAE’s key financial jurisdictions, specifically within the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM).

The DIFC and ADGM are special economic zones in Dubai and Abu Dhabi, respectively, that operate under their own independent regulatory frameworks, separate from the broader UAE legal system. Both jurisdictions are designed to attract international businesses by providing a robust, transparent, and internationally aligned regulatory environment.

The changes to the UAE’s regulatory and legal framework are expected to have a substantial impact on the country’s financial sector, particularly in key financial hubs such as the DIFC (Dubai International Financial Centre) and ADGM (Abu Dhabi Global Market):

1. Enhanced regulatory compliance – the introduction of stricter regulations, particularly in Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF), will compel financial institutions and Designated Non-Financial Businesses and Professions (DNFBPs) to adopt more rigorous compliance measures. This includes more thorough customer due diligence, enhanced transaction monitoring, and stricter reporting requirements for suspicious activities. As a result, businesses operating in the UAE will need to invest in compliance infrastructure, including technology and training, to meet these higher standards.

2. Increased confidence among international investors – the UAE’s commitment to aligning its financial regulations with global standards will likely boost confidence among international investors and global financial institutions. By demonstrating a robust framework that mitigates the risk of financial crimes, the UAE positions itself as a safer and more transparent environment for investment and business operations. This can attract more foreign direct investment (FDI) and encourage multinational companies to establish or expand their presence in the UAE.

3. Strengthened global reputation – the UAE’s proactive approach to regulatory reform, especially in the DIFC and ADGM, will enhance its global reputation as a well-regulated and secure financial hub. This is particularly important in the context of global financial networks where compliance with international norms is essential. As a result, the UAE could see an increase in its role as a key player in global finance, with more companies choosing it as their base for operations in the Middle East and beyond.

4. Impact on business operations – financial institutions and businesses will need to adapt their operations to meet the new regulatory requirements. This might involve restructuring internal processes, adopting new technologies for compliance and reporting, and possibly re-evaluating business models to ensure they are aligned with the stricter regulatory environment. While this could initially increase operational costs, in the long run, it will likely lead to more sustainable and secure business practices.

5. Deterrence of illicit activities – the enhanced legal framework, coupled with the creation of specialized bodies like the Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) courts, will act as a strong deterrent against illicit financial activities. By increasing the penalties for non-compliance and enhancing the ability of authorities to detect and prevent financial crimes, the UAE is likely to see a reduction in money laundering and terrorist financing activities. This creates a more stable and secure financial environment, which benefits all legitimate businesses operating in the region.

6. Increased scrutiny and accountability – with the establishment of new oversight bodies and stricter enforcement mechanisms, financial institutions and businesses will face increased scrutiny. This could lead to more frequent inspections and audits, as well as a higher likelihood of penalties for non-compliance. While this increases the responsibility on businesses to maintain high standards of operation, it also ensures that the entire financial ecosystem is held to account, promoting greater integrity and transparency.

7. Greater cross-border collaboration – the UAE’s strengthened legal and regulatory framework, especially the revisions to international cooperation agreements like bilateral legal assistance treaties, will facilitate greater collaboration with global counterparts. This could enhance the UAE’s ability to participate in international investigations and share critical information, further integrating it into the global financial regulatory community. Such collaboration is crucial in addressing the cross-border nature of financial crimes and ensuring that the UAE remains a trusted partner in global finance.

8. Potential for new market opportunities – as the UAE becomes more aligned with international best practices, new market opportunities could emerge, particularly in sectors that value high levels of compliance and security, such as fintech, insurance, and asset management. Businesses that are adept at navigating and leveraging these regulatory changes may find themselves at a competitive advantage in the region.

These changes have contributed to a more robust and effective AML/CFT regime in the UAE, ultimately benefiting the country’s financial sector and its reputation as a reputable financial hub.

AS A CONCLUSION: these regulatory modifications are set to have a profound and largely positive impact on the UAE’s financial sector. While they will require businesses to adjust and potentially increase their compliance efforts, the overall result will be a more secure, transparent, and globally respected financial environment. This will not only safeguard the UAE’s financial system but also position it for continued growth and success on the international stage.

https://www.centralbank.ae/media/05mli3jt/federal-decree-law-no-20-of-2018.pdf

https://www.menafatf.org/sites/default/files/Newsletter/UAE-MER-en.pdf

https://mof.gov.ae/financial-institutions-and-activities/