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With the UAE potentially looking at being grey listed by FATF, the country’s fight against its biggest money laundering problem has come back into the spotlight – gold smuggling. Preetam Kaushik investigates.

In 2020, a report published by the Financial Action Task Force warned about the significant risk of “money laundering, terrorist financing and funding of weapons of mass destruction” posed by the rampant illicit industry of gold trade in the UAE.

In the blog post, we will look at the reasons which make the UAE a conducive space for illegal gold trade. We will also examine the authorities’ response to this rampant illegal market as the nation attempts to shed its global reputation as an illegal gold haven.

What Makes UAE so Attractive for Illegal Gold and Money Laundering?

One major reason for UAE being a paradise for smuggled gold is its weak custom regulations, especially for hand carried gold. Traders have been able to bring in gold through customs without having to show proof of origin, or payment documentation.

Another reason is the weak due diligence policy followed by traders at the gold souks. Dealers buying gold to sell in the souk have no obligation to verify the origins of the gold, regardless of the circumstances of production.

An advisory by The Sentry found that a large number of gold refiners in the UAE have not undergone independent third party audits, and are sourcing their gold from traders and jewelers in the gold souks.

The FATF report in 2020 found that a cocktail of reasons contributed to making the UAE particularly vulnerable to risks posed by large scale money laundering. These include the largely cash-intensive nature of the economy, the rampant illicit gold trade, and the large proportion of foreign residents present in the UAE.

Illegal gold can be used both as a means to generate proceeds of crimes (for instance through predicate offences like cheating and fraud), as well as a vehicle to launder such proceeds.

UAE’s Attempts at Reforming Their AML Policy

In 2018, the UAE introduced a new set of AML laws, aimed at regulating the services provided by sectors including the trade of gold. The new laws introduced, among other things, a set of obligations upon actors in the supply chain to report suspicious transactions and conduct necessary due diligence.

However, despite the new and regulatory AML regime introduced in 2018, the UAE continued to remain a flourishing hotspot for illegal gold trade from African countries. A Bloomberg report points out that the United Nations trade data for 2020 show a discrepancy of at least $4 billion between the United Arab Emirates’ gold imports from Africa (declared) and what African countries say they exported.

The Growing Global Pressure on the UAE

A number of incidents over the last two years have contributed to a growing international pressure on the UAE to clean up its illicit gold market and stem the money laundering tide.

In July 2020, Indian authorities unearthed an elaborate gold smuggling ring in the state of Kerala, when it found 30 kg of illegal gold in the diplomatic baggage of the UAE Consulate General office in the state. Further investigations revealed huge amounts of money laundering from the proceeds of the gold, and implicated the highest diplomatic authorities of the UAE, including the Consul General.

In November 2020, the world’s premier gold market authority, the London Bullion Market Association (LMBA) threatened countries including the UAE to adhere to their standards of gold sourcing and AML measures, or face blacklisting from mainstream international bullion markets. The UAE promptly responded by pledging its support to the LBMA’s initiative. It promised to improve its AML regulations and policies on ethical gold sourcing. It also promised to create a committee to oversee its national AML and anti-terror strategy.

The global Covid-19 pandemic also saw an upsurge in money laundering activities in the UAE, with restrictions on moving funds and goods leading traders to turn to illicit networks in the absence of strict AML regulations.

A New and Reformed Regulatory AML Regime

Responding to the global pressure, the UAE is again introducing a new set of reforms to strengthen its AML and gold trade regulatory framework. Following up on its commitment earlier in 2020 to the LBMA, the UAE established the Executive Office of the Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) in February of 2021.

The Executive Office has announced the introduction of procedures for reporting suspicious bank transactions, a unified electronic customs platform and regulations relating to the movement of cash and gold. The Executive Office has also overseen the setting up of Special Courts, for exclusively conducting money laundering and financial crime trials by specialist judges.

The UAE is also enforcing its regulations more rigorously, with penal consequences for offenders. In March of 2021, the authorities in Abu Dhabi announced the successful prosecution of a ring of money launderers which included a jewellery trader, using the gold industry to launder its funds.

More reforms are in the pipeline- the authorities have said that they will bring in new AML regulations that will require gold refineries to source only from responsible suppliers and to undergo annual audits. These new reforms are to be introduced from February 1, 2022.

Parting Thoughts

The UAE has a global reputation for being a haven for illegal gold based money laundering, especially for gold coming in from Africa. However, both domestic and global pressure over the last few years has led to a change in the seriousness with which the authorities are now viewing the problem.

Stricter due diligence and KYC regulations, stronger customs checks and improved law enforcement strategies have ensured that the authorities are finally taking the fight to the gold mafia within the UAE. It still remains to be seen if they are successful in cleaning up the gold market and helping the UAE shed its dubious tag.

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