With Money Laundering and Terror financing becoming a major menace and cause of concern in the world, the international community is trying to work towards combating them in all possible ways. Money Laundering and terror financing are inherent examples of illicit funding. Money laundering involves the process of disguising illegally obtained funds and projecting them to be legal money. These funds are acquired by individuals or groups out of criminal activities such as drug trafficking, smuggling, human trafficking, corruption and others. Being well aware of the risks of being subjected to criminal prosecution, these individuals or groups use various layers to conceal the origin of these funds.
Terror financing similarly involves acquiring funds for terrorist activities. These funds can include a mix of funds raised from legit sources such as personal donations and business profits and funds obtained from criminal sources such as drug trafficking, smuggling of weapons and other goods, fraud, kidnapping and extortion.
Terrorists use techniques to evade authorities’ attention on their activities and protect the identity of their sponsors and the ultimate beneficiaries of the funds. Terrorist financing, in many instances, can have direct associations with money laundering if the proceeds of crime are used to fund terrorist activities. Detection and tracking of funds become especially more complex when these funds are raised from legitimate sources.
The international community has made the fight against money laundering and the financing of terrorism a priority by exerting efforts to protect the integrity and stability of the international financial system, cutting off the resources available to terrorists, and making it more difficult for those engaged in crime to profit from their criminal activities.
However, the complexity of the issue is still challenging to keep up with and global cooperation still remains stalled in addressing risks in many countries.
The 11th Public Edition of the Basel AML Index, which is an independent ranking that assesses countries’ money laundering and terror financing risks along with their capacity to counter them, reveals that the average global risk remains stuck at 5.25 out of 10, where 10 is the maximum risk level.
However, it is noteworthy to appreciate the efforts being taken by nations to eradicate this menace. This article by well-known financial lawyers in UAE will focus on the efforts of the United Arab Emirates in the fight against money laundering and terror financing.
UAE’s own law in this regard is reflected in federal decree no. 20 of 2018 on anti-money laundering and countering the financing of terrorism, which was issued to develop the legislative and legal structure of the nation to ensure compliance with international standards on anti-money laundering and countering the financing of terrorism. The law aims to:
The decree law defines a perpetrator of a money-laundering offence as “any person who is aware that the money was derived from a crime, and intentionally commits one of the following acts:
Moreover, UAE’s central bank has been proactive in its attempts to protect its financial integrity against becoming a payment gateway to criminal proceeds. One such effort is the most recent guidance issued by it on August 1, 2022, to the payment sector, specifically to financial institutions licensed by the CBUAE, including UAE banks, exchange houses, branches of foreign banks, finance companies, retail payment service providers, stored value facilities and card schemes (LFIs). Under the guidance, the payment sector includes both traditional as well as new payment products and services.
Briefly defining, traditional payment services and products are those which primarily involve cash such as cash itself, cheques, COD, demand drafts, letters of credit, etc.
On the other hand, new payment products and services refer to new and innovative payment products and services such as prepaid cards that offer an alternative to traditional financial services.
The guidance issued by the UAE Central Bank aims at enabling LFIs to understand and manage key risks and highlights the type of transactions that require special scrutiny. The guidance is drafted as per standards mentioned by the Financial Action Task Force (FATF), which is an inter-governmental policymaking body whose purpose is to establish international standards, develop and promote policies at national and international levels, to combat money laundering and the financing of terrorism.
Financial institutions are expected to honour compliance within one month from the date of issue of the guidance.
It is pertinent to note that the guidance is to be read in consultation with the existing central bank rules and does not in any manner intend to amend or replace the existing central bank requirements.
As new payment products and services have evolved, there is rapid movement of funds between payment participants involving a streak of intermediaries within the fund transfer chain. The presence of such intermediaries enables a smoother and quicker transfer leading to added convenience to users and poses a challenge to payment sector participants in ensuring complete access and control over the visibility of the details and authenticity of persons involved in the fund transfer chain. In general practice, payment participants only keep a check on their immediate customers, or counterparties and depend on their subsequent counterparties to control and check other persons in the fund transfer chain.
Moreover, direct or indirect global exposure to other LFIS or even third parties not necessarily licensed by the CBUAE or any other regulator poses higher risks to the LFIs.
Therefore, LFI’s need to keep good sight over transactions especially involving:
This is where the guidance holds importance and intends to educate LFIs about the key risks as mentioned above and mitigation strategies.
As a part of risk mitigation strategies, LFIS under the guidance issued suggested making regular risk assessments in relation to all the payment products, services, relationships and exposure to domestic and foreign payment sector participants.
Further, the institutions are advised to implement a sanctions compliance programme with operational systems that appropriately screen transactions and transmit required information throughout the payment cycle.
This step should in respect of retail services include customer due diligence, use of location indicators, imposing limits on certain types of dealings (e.g., maximum storage values), and merchant due diligence. It should also include sanctions screening.
With respect to corporate customers, LFIs are required to identify beneficial owners owning 25% or more of shares and if no person satisfies this criterion, persons holding senior management positions in the entity. LFIs should ensure they have contractual rights to obtain such information and should consider terminating the relationship if no access is provided.
LFIs are required to conduct an analysis of the materials pertaining to payment sector participants, including reviewing their promotional materials, and website, identifying key merchants, and evaluating policies, and controls.
The financial institutions are directed not to process payments for a correspondent unless they are entirely confident that the correspondent conducts appropriate screening.
The guidance sets forth specific requirements with respect to the due diligence of correspondent banks such as collecting information on the nature of the business and evaluating the regulatory status, policies, and controls.
It also includes obtaining senior management approval before establishing a new correspondent banking relationship, reviewing reports and audit results, and understanding and documenting the scope of responsibilities relating to anti-money laundering.
In cases such as providing payment services, LFIs should undertake complete responsibility for customer due diligence.
The guidance suggests that LFIs providing retail services should consider the use of geolocation to prevent customer access from high-risk countries, implement transaction limits, impose a requirement for customers to only fund accounts and withdraw funds via regulated domestic financial institutions, and use multi-factor authentication.
Appropriate and regular training should be given to employees and agents, including agents of delivery, onboarding, and cash acceptance. Additionally, periodical testing of the employees’ and agents’ knowledge in these areas should be conducted.
LFIs are directed to maintain transaction monitoring systems that identify patterns of unusual or suspicious activity in relation to money laundering, terror financing or any other criminal offence and to report them to UAE’s Financial Intelligence Unit using the “goAML” portal.
To conclude, this guidance in addition to the existing central bank rules is a welcomed step towards raising a more secure financial channel in turn also raising a safer world.