Grey listed UAE: fair or unfair play!

Anti Financial Crime

February 16, 2024

The authors

Negin Ajam Senior Legal Officer

Leila Hosseingholizadeh Senior AML Consultant

Schedule a meeting with Leila Hosseingholizadeh

Introduction

In recent years, the United Arab Emirates has found itself at the forefront of international scrutiny following being grey listed by Financial Action Task Force (FATF). The UAE is known as a trade hub in the Gulf region and the country has appeared to be determined to uphold its reputation as a business center. In the following paragraphs, we aimed to explore the UAE´s grey listing case from various perspectives.

FATF grey listing process

The FATF continually reviews countries regarding their strategic AML/CFT deficiencies and provides guidance and criteria that they use to evaluate a country’s AML/CFT efforts. The assessment has two focuses called Technical Compliance and Effectiveness. Technical compliance aims to highlight the progress of countries in meeting technical requirements of 40 recommendations, while effectiveness assessment demonstrates the effectiveness of countries’ efforts in 11 key areas of combating ML/TF [1].

According to FATF official website, deficiencies in fundamental AML/CFT requirements will subject a country to extra scrutiny from FATF, leading to categorization under two categories: High-Risk Jurisdictions subject to a Call for Action (Blacklist) and Jurisdictions under Increased Monitoring (Grey list).

According to the FATF, a jurisdiction will be Specifically reviewed when:

“It does not participate in a FATF-style regional body (FSRB) or does not allow mutual evaluation results to be published in a timely manner; or
It is nominated by a FATF member or an FSRB. The nomination is based on specific money laundering, terrorist financing, or proliferation financing risks or threats coming to the attention of delegations; or
It has achieved poor results on its mutual evaluation, specifically:

It has 20 or more non-Compliant (NC) or Partially Compliance (PC) ratings for technical compliance; or
It is rated NC/PC on 3 or more of the following Recommendations: 3, 5, 6, 10, 11, and 20; or
It has a low or moderate level of effectiveness for 9 or more of the 11 Immediate Outcomes, with a minimum of two lows; or
It has a low level of effectiveness for 6 or more of the 11 Immediate Outcomes.” [2]

UAE History in combating Money Laundering

In April 2008, the UAE received its first Mutual Evaluation Report (MER) and since then, as a member of FATF, has been under several rounds of follow-up assessments. The UAE passed the “Federal Decree-Law No. (20) of 2018 On Anti-Money Laundering and Combating the Financing of Terrorism and Financing of Illegal Organizations,” which was subsequently amended in 2021. Another milestone in the country´s progress was the establishment of the Executive Office of Anti-Money Laundering and Counter Terrorism Financing (EO AMLCTF) by Cabinet decree in 2021, which is charged with overseeing the implementation of the National AML/CFT Strategy.

In April 2020, FATF published UAE´s MER and identified several key areas of deficiencies in the country´s AML/CFT system, including limited supervision of certain OEs, inadequate risk assessment, lack of international cooperation and insufficient implementation of financial sanctions. Consequently, on March 4, 2022, the UAE was added to the list of jurisdictions under increased monitoring (grey list).

This report analyzed the UAE’s efforts to address the deficiencies outlined in the Mutual Evaluation Report (MER) and in the first and second Enhanced Follow-up Reports (EFURs). Specifically, it focused on recommendations 1, 19, and 29, which the country had requested to be re-evaluated. Typically, countries are expected to have addressed most, if not all, technical compliance shortcomings by the end of the third year after adopting the MER. In the third EFMER, upgrades in recommendations 19 and 29 from “Partially Compliant” to “Compliant” and from “Partially Compliant” to “Largely Compliant” for Recommendations 1 were approved [3]. With these improvements, the UAE is now expecting to come off the grey list shortly.

Despite concerns about being placed on the grey list, the UAE continued with business as usual, leveraging its economic strength and stability to weather potential challenges. The booming price of oil at the time provided a buffer against any potential negative impacts that might have arisen from increased scrutiny or regulatory measures. Since then, the main concern for the UAE has been the stigma of being grey listed. The country serves as a regional trade and business hub and being grey listed could tarnish its reputation.

Debates on FATF Ranking system

FATF publishes a color-coded list of countries, comparing their progress in combating Money laundering and terrorist financing, and keeps it updated based on countries’ regular evaluations. The FATF ranking is proven to have significant economic implications for countries, like reputation, access to international financial markets, ability to attract foreign investment, and overall economic stability, which highlights the critical nature of the ranking system.

There are valid concerns about the transparency and methodology of ranking countries for money laundering issues like how countries are placed on grey list when FATF does not estimate and publish transparently the amounts of money laundering these countries are contributing internationally [4]. No need to mention that inherently, reliable and comprehensive data on money laundering activities are often scarce and difficult to obtain.

Additionally, not all countries on the grey list exhibit similar levels of AML deficiencies. Some countries may have made significant progress in addressing these deficiencies but still have certain areas where improvements are needed. Others may have more systemic or pervasive issues that require more extensive reforms. The inclusion of specific countries on the grey list has raised questions about the consistency and transparency of the evaluation process. The UAE’s inclusion on the grey list appeared to be controversial and triggered a global debate regarding the quality of the FATF ranking system.

Has UAE made real progress?

According to the latest FATF evaluation, the UAE has progressed in implementing AML infrastructures. On October 27th, FATF confirmed that the United Arab Emirates (UAE) had met its requirements outlined in the action plan. Provided a successful onsite inspection [5], the UAE is set to be removed from the ‘grey list’ of monitored jurisdictions during FATF’s next plenary meeting in February 2024.

While the UAE has shown progress in implementing AML/CFT measures, its trade ties with heavily sanctioned countries like Iran and Russia have raised doubts about its adherence to international standards and regulations. Notably, in the period from 2022 to 2023, relations between the UAE and Iran have witnessed improvement. With Saudi Arabia relaxing restrictions on business activities between the UAE and Iran, the two neighboring countries have experienced a significant rise in trade and commerce over the past year [6]. Similarly, during the timeframe from 2017 to 2022, trade between the UAE and Russia has surged, growing nearly sixfold. In 2022 alone, the overall trade volume spiked by approximately 68%, totaling US$9 billion. Of this figure, exports from Russia to the UAE amounted to US$8.5 billion, marking a notable 71% increase [7]. In conclusion, despite FATF acknowledgement, there remain certain suspicious facts and figures that raise questions about how the UAE could be fully compliant with international standards yet engaging in such risky alliances. It brings us back to the effectiveness of FATF’s qualitative ranking system, which may not consider other relevant factors either in favor of or against the UAE’s benefit.