Introduction
The UAE’s well-developed legal and regulatory system, alongside its geographical location, is fundamental to its role as a global trade and transport hub. However, the system is complex – comprised of federal and emirate-level laws and enforcement agencies operating differently across jurisdictions including on-shore UAE and the country’s freezones. Many of the advantages and attractions of the UAE as a financial and business centre have also made it attractive to those involved in financial crime or as a location to invest its proceeds, perceiving that by doing so they are beyond the reach of international law enforcement. However, this is changing. In its efforts to attract further investment, the UAE has enacted new laws and systems for identifying and taking legal action against financial wrongdoing, with an increased emphasis on international cooperation and penalising wrongdoers.
FATF Grey List
In March 2022, the UAE was placed on the Financial Action Task Force’s (‘FATF’) list of jurisdictions with weak systems in place for combatting financial crime (the ‘Grey List’). Inclusion carries several negative consequences, such as the possibility of ratings adjustments, challenges in obtaining finance, and reputational consequences. In response, the UAE identified the need to combat money laundering as a national strategic priority and committed to accelerating implementation of the National Action Plan (‘NAP’) addressing AML, countering terrorist financing, data protection, and virtual assets. The UAE Federal and Freezone financial regulatory authorities have also increased their scrutiny of financial and professional services firms since the Grey Listing. The real estate market, given its reputation as a destination for laundered funds, has also been a major focus. The UAE’s efforts have been received positively, with FATF noting in its June 2023 report that the UAE has boosted its regulations and mechanisms to improve its compliance with international standards. Consequently, the UAE is widely expected to be removed from the Grey List following FATF’s next review in April/May 2024.
Virtual asset regulation
The increased use of cryptocurrencies and blockchain technology heightens the risk of money laundering and financial crime, given the secrecy with which transactions may be conducted. As discussed, the UAE’s legal and regulatory systems are complicated by the existence of a multitude of federal, emirate-level, and freezone-specific laws and enforcement bodies. The Securities & Commodities Authority (‘SCA’) is the UAE’s federal regulator for virtual assets. In the emirate of Dubai, the Dubai Virtual Assets Regulatory Authority (‘VARA’) serves a similar regulatory function. Virtual asset service providers (‘VASP’) may therefore require approval from both the SCA and VARA to operate in Dubai. VASPs in Dubai may need to make reports on money laundering related issues to the UAE Financial Intelligence Unit, in addition to the SCA and VARA, and await a response regarding which authority will lead any subsequent investigation. The regulatory position is also different in the UAE’s freezones. For example, the Dubai Financial Services Authority and the Financial Services Regulatory Authority regulate VASPs present in the DIFC and ADGM, respectively. Managing these multiple regulatory obligations is a challenge for market participants. It also presents a risk that information may not be shared effectively across the relevant regulatory bodies which would be relevant to mitigate financial crime risk.
Tax
The introduction of corporate income tax on 1 June 2023 marked a significant development for the region. The corporate tax rules are more complex than those governing VAT introduced in 2018. As this is a new form of tax in the UAE, there is an increased risk of tax evasion. To counteract potential tax avoidance, Federal Decree-Law No 47 of 2022 (the ‘Corporation Tax Law’) has implemented general anti-abuse rules. This is likely to trigger internal and external investigations into businesses that may not have accurately evaluated their tax liabilities under the new legislation. It remains to be seen how tax authorities, prosecutors, and the courts will approach enforcement of the new regime, both in terms of accidental underpayment of tax and deliberate avoidance or evasion.
Enforcement and international cooperation
The UAE’s commitment to combatting financial crime is evident in recent enforcement examples, including the:
- DFSA’s USD$135m fine imposed on the founder and former CEO of the Abraaj Group in December 2022 for his involvement in the deception of investors and the misuse of their funds;
- UAE Ministry of Economy’s suspension of 50 companies for three months in the third quarter of 2023 for their failure to register with the FIU’s AML system; and
- UAE Ministry of Economy’s imposition of administrative penalties on 225 companies in 2023 for money laundering and other financial crime related violations, totalling over AED75m.
The UAE has also taken steps to bolster its international cooperation. The UAE is a signatory to the Riyadh Arab Convention on judicial cooperation in addition to having signed several bilateral treaties for judicial cooperation with countries including the United Kingdom, India, China, France, Denmark, and South Africa.
The extradition treaty with South Africa was recently signed, with South Africa seeking the extradition of the Gupta brothers from the UAE in connection with the alleged misappropriation of state funds and assets. In April 2023, the UAE informed South Africa that the Dubai Court of Appeal had rejected the request citing a failure to provide the requisite legal documentation as prescribed under the extradition agreement. South Africa has criticised the UAE’s rejection of the request and said that it intends to further pursue the brothers’ extradition.
The treaty with Denmark was put in place in connection with a Danish request to extradite Sanjay Shah, a British national resident in Dubai, in connection with a Danish criminal case regarding allegedly fraudulent tax claims in respect of trading in Danish shares. Mr Shah was extradited to Denmark in December 2023.
Conclusion
The UAE is modernising its laws and regulations to keep up with the ever-evolving area of white-collar crime, effectively deterring wrongdoers from operating out of the UAE and to bring the country in line with international standards. These changes should ensure that the UAE remains competitive as a hub for international commerce.