Could the United Arab Emirates soon be joining countries such as Albania, Yemen and Zimbabwe on the Financial Action Task Force’s grey list of countries that represent an elevated risk of money laundering and terrorism financing? The FATF is not commenting publicly, but a Bloomberg report suggests it could make this move as soon as next month.
If so, it would be a significant moment. The grey list currently includes around 20 countries, but none have the economic stature of the UAE, one of the Middle East’s most important financial hubs. Putting the UAE on the list would create significant work for financial services businesses around the world that have dealings with individuals and organisations connected to the country.
As the global money laundering and terrorist financing watchdog, the FATF’s rulings are vital, with regulators in most jurisdictions abiding by its judgements and setting their own requirements accordingly.
The FATF maintains two separate registers of countries about which it has significant concerns. Its blacklist sets out the countries it considers to be deficient in their anti-money laundering and counter-terrorism financing regulatory regimes. Its grey list also includes countries that the FATF believes represent a much higher risk in these areas, but which have at least committed to working with the watchdog to resolve their problems.
In the UAE’s case, the FATF published a report in April 2020 warning that while the country had made improvements to its regulation, significant risks remained. Since then, the UAE has taken a number of steps, including the introduction of new guidelines, as well as the launch of courts focused specifically on financial crimes and the setting up of the Office for Anti-Money Laundering and Counter-Terrorist Financing. It submitted its latest work to the FATF in November, but Bloomberg’s report suggests the FATF does not believe it has moved far and fast enough.
We shall see, but if the report proves accurate, there will be significant implications for both the UAE and all those that have dealings with it.
For the country itself, this sort of sanction from the FATF would be highly embarrassing – indeed, one explicit aim of the FATF’s grey list is to embarrass countries that the watchdog thinks have fallen behind into cleaning up their act.
After all, the UAE continues to vie with Saudi Arabia as the economic powerhouses of the region. And while the country’s wealth is founded on its oil sector, it has become a huge financial centre. Sovereign wealth funds based in Abu Dhabi run more than $1 trillion worth of assets; Dubai is home to the regional headquarters of a string of multinational banks.
As for counterparties to UAE-based individuals and organisations, they will have to pay more attention to these customers in the event that the FATF puts the country on the grey list. Regulators in most jurisdictions require firms to have enhanced anti-money laundering (AML) and combating financing of terrorism (CFT) provisions in place to blacklist and grey list countries.
These require regulated firms to screen customers from such countries with great care, both at the onboarding stage and on an ongoing basis. Firms need stringent due diligence procedures to verify customers’ residence in grey listed countries, or their business with those on the list. They will need to have transaction monitoring measures in place to keep a close eye on the size, frequency and pattern of transactions involving high-risk countries.
Such work can be arduous and time-consuming. In many cases, firms do relatively little business with customers in FATF grey listed countries, but that is unlikely to be the case with the UAE. For those firms yet to automate AML and CFT work, the extra manual processing that could come from a UAE move on to the grey list will therefore be onerous.
For all these reasons, both the Government of the UAE and the country’s business partners will hope that the FATF can be persuaded to hold fire. Officials in the country are already pointing to the work that has been done.
The economic cost of grey listing certainly justifies that work. Research published by the International Monetary Fund last year suggested being placed on the grey list could seriously impact the short-term capital inflows of a country. It estimated that this impact would be the equivalent of a 3 per cent loss of gross domestic product, with additional reductions in foreign direct investment.
Such research underlines just how seriously banks and other financial services businesses take the grey list. The IMF suggests that some banks may simply decide to sever some of their relationships with customers in grey listed countries, such is the elevated risk – and workload – of continuing to work with such customers.
Indeed, while the fight against financial crime sometimes feels unending, the impacts of the FATF’s actions are a reminder that that this fight has very tangible effects. As regulators continue to try to confront financial crime, the financial services industry must work out how to manage its relationships with high-risk countries – and whether it even wants to maintain such relationships.
