2004-2005 INTERNATIONAL NARCOTICS CONTROL STRATEGY

UNCLAS SECTION 01 OF 05 ABU DHABI 004605

SIPDIS

DEPT FOR NEA/ARP AND INL
JUSTICE FOR OIA AND AFMLS
TREASURY FOR FINCEN

E.O. 12958: N/A
TAGS: KCRM PTER KTFN SNAR EFIN TC
SUBJECT: 2004-2005 INTERNATIONAL NARCOTICS CONTROL STRATEGY
REPORT (INCSR) MONEY LAUNDERING AND FINANCIAL CRIMES

Ref: State 254401


1. The body of the cable is the submission of the money
laundering and financial crimes section of the International
Narcotics Control Strategy Report (INCSR) for the United
Arab Emirates.


2. Begin Text

United Arab Emirates

The United Arab Emirates (UAE),which remains a largely cash-
based society, is an important financial center for the Gulf
region. The financial sector is modern and outward looking.
Dubai, in particular, is a major banking center. The UAE's
robust economic development, political stability, and
liberal business environment have attracted a massive influx
of people and capital. Approximately 80 percent of the UAE
population is comprised of non-nationals. Because of the
UAE's role as the primary transportation and trading hub for
the Gulf States, East Africa, and South Asia, and with its
expanding trade ties with the countries of the former Soviet
Union, the UAE has the potential to be a major center for
money laundering. The large number of resident expatriates
from the above regions, many of whom are engaged in
legitimate trade with their homelands, exacerbates that
potential.

Following the September 11 terrorist attacks in the United
States, and revelations that terrorists had moved funds
through the UAE, the Emirates' authorities acted swiftly to
address potential vulnerabilities and, in close concert with
the United States, to freeze the funds of groups with
terrorist links, including the Al-Barakat organization,
which was headquartered in Dubai. Both federal and emirate-
level officials have gone on record as recognizing the
threat money laundering activities in the UAE pose to the
nation's security and continue to take significant steps in
2004 to better monitor cash flows through the UAE financial
system and to cooperate with international efforts to combat
the financing of terrorism. In July 2004, the UAE passed an
anti-terrorism law, specifically criminalizing terrorist
financing. This law closes a potential loophole in the
UAE's anti-money laundering law.

While the laundering of narcotics funds may take place in
the UAE, given the country's close proximity to
Afghanistan-where 70 percent of the world's opium is
produced-the potential exploitation of the UAE financial
system by foreign terrorists and terrorist financing groups
is the primary concern.

In 2004, the UAE strengthened its legal authority to combat
terrorism and terrorist financing by passing Federal Law
Number 1 of 2004 on Combating Terror Crimes on July 29,

2004. (Law No. 1/2004). The law sets stiff penalties for
the crimes covered, including life imprisonment and the
death penalty. It also provides for asset seizure or
forfeiture. Under the law, founders of terrorist
organizations face up to life imprisonment. The law also
penalizes the illegal manufacture, import or transport of
"non-conventional weapons" or their components, with the
intent to use them in a terrorist activity, with up to life
imprisonment.

Law No. 1/2004 specifically criminalizes the funding of
terrorist activities or terrorist organizations. Article 12
provides that raising or transferring money with the "aim or
with the knowledge" that some or all of this money will be
used to fund terrorist acts will is punishable by "life or
temporary imprisonment," whether or not these acts occur.
Law No. 1/2004 gives the Attorney General (or his deputies)
the authority to order the review of information related to
the accounts, assets, deposits, transfer, or property
movements on which the Attorney General has "sufficient
evidence to believe" are related to the funding or
committing of a terror activity stated in the law. The law
also provides for asset seizure and confiscation. Article
31 gives the Attorney General the authority to seize or
freeze assets until the investigation is completed. Article
32 confirms the Central Bank's authority to freeze accounts
for up to seven days if it suspects that the funds will be
used to fund or commit any of the crimes listed in the law.
The law also allows the right of appeal to "the competent
court" of any asset freeze under the law. The court will
rule on the complaint within 14 days of receiving the
complaint.

Law No. 1/2004 also sets up a "National Anti-Terror
Committee" with representatives from the Ministries of
Foreign Affairs, Interior, Justice, Defense, the Central
Bank, the State Security Department and the Federal Customs
Authority. The committee will serve as an interagency
liaison, implement UN Security Council Resolutions on
terrorism and share information with anti-terror bodies in
other countries and the UN.
The UAE's Law No. 4 of 2002 criminalizes all forms of money
laundering activities. The law calls for stringent
reporting requirements for wire transfers exceeding $545 and
sets currency importation reporting requirements roughly at
$10,900. The law imposes stiff criminal penalties (up to
seven years in prison and a fine of up to 300,000 dirhams
($81,700),as well as seizure of assets, if found guilty,
for money laundering and also provides safe harbor
provisions for those who report such crimes. Banks and other
financial institutions supervised by the Central Bank
(exchange houses, investment companies, and brokerages) are
required to follow strict "know your customer" guidelines;
all financial transactions over $54,000, regardless of their
nature, must be reported to the Central Bank. Financial
institutions also are required to maintain records on
transactions for five years.

The supervision of the UAE banking and financial sector
falls under the authority of the CB. The CB issues
instructions and recommendations as it deems appropriate and
is permitted to take any necessary measure to ensure the
integrity of the UAE's financial system. The CB issues
licenses to financial institutions under its supervision and
may impose administrative sanctions for compliance
violations.

In July 2000, the UAE established the National Anti-Money
Laundering Committee, under the Chairmanship of the Central
Bank's Governor, with representatives from the Ministries of
Interior, Justice, Finance, and Economy, the Federal Customs
Authority, the Secretary General of the Municipalities, the
Federation of the Chambers of Commerce, and five major banks
and money exchange houses (as observers). It has overall
responsibility for coordinating anti-money laundering
policy.

The UAE Central Bank has issued a number of rules and
regulations regarding anti-money laundering that are
generally applicable to those financial entities that fall
under its supervision. The Central Bank has issued a number
of circulars requiring customer identification and providing
for a basic suspicious transaction-reporting obligation.
When suspicious activity is reported from a financial
institution, the Central Bank is able to freeze suspect
funds, make appropriate inquiries, and coordinate with law
enforcement officials.

In November 2000 the CB issued Circular 24/2000, which
consolidates and expands anti-money laundering requirements
for the financial sector. The circular, which is applicable
to all banks, money exchanges, finance companies, and other
financial institutions operating in the UAE, provides the
procedures to be followed for the identification of natural
and juridical persons, the types of documents to be
presented, and rules on what customer records must be
maintained on file at the institution. Other provisions of
Circular 24/2000 call for customer records to be maintained
for a minimum of five years, and further require that they
be periodically updated as long as the account is open.
Banks and financial institutions operating in the Dubai
International Financial Center are covered under their own
regulations, but are subject to the provisions of Law 4/2002
and Law 1/2004.

The Anti-Money Laundering and Suspicious Case Unit (AMLSCU)
is located within the CB and acts as the financial
Intelligence unit (FIU) for the UAE. The Central Bank
requires financial institutions under its authority to
report suspicious transactions to the AMLSCU, which is
charged with examining them and coordinating the release of
information with law enforcement and judicial authorities.
It has the authority to request information from foreign
regulatory authorities in carrying out its preliminary
investigation of suspicious transaction reports. The AMLSCU
exchanges information with foreign financial intelligence
units on a reciprocal basis. The AMLSCU also shares
information with other Egmont group members AMLSCU has
provided information relating to investigations carried out
by the United States and other countries. The Central Bank
continues to conduct workshops on money laundering and
terrorist finance for banks and other financial
institutions. It conducted a joint training session with
the U.S. government for South Asian nations that
concentrated on the "nuts and bolts" of setting up a FIU.

The Securities and Commodities Authority (SCA) supervises
the country's two stock markets. In February 2004, it sent
out anti-money laundering instructions to brokers and to the
two markets. The SCA instructed the markets and UAE
stockbrokers to verify client information when opening
accounts and created a reporting requirement for cash
transactions above $10,900. The SCA also instructed the
markets and brokers to send suspicious transaction reports
to it for analysis and forwarding to the AMLSCU. The
instructions also provide for a five-year record-keeping
requirement.

Money laundering may take place within the formal banking
system, including the numerous money exchange houses, but is
believed to be largely confined to the informal and largely
undocumented "hawala" remittance system. The hawala
remittance system is an effective and inexpensive way for
workers in the UAE to remit funds to their home country.
However, the fact that hawala is an undocumented and
nontransparent system, and is highly resilient in response
to enforcement and regulatory efforts, makes it difficult to
control and an attractive mechanism for terrorist and
criminal exploitation. There is no accurate estimate of the
number of UAE-based hawala brokers.

New regulations to improve oversight of the hawala system
were implemented in 2002. The Central Bank requires hawala
brokers to register and to submit sheets containing names
and addresses of transferors and beneficiaries to the
Central Bank and to complete suspicious transaction reports.
The Central Bank now supervises 119 hawala brokers.

The UAE hosted the second International Conference on Hawala
in April 2004, which was attended by approximately 350
delegates. Delegates included government officials,
executives of supervisory institutions, banking experts, and
law enforcement officials from the U.S., Latin America,
Asia, and Europe. The conference statement recognized the
key role that hawala and other informal funds transfer
systems play in facilitating remittances, particularly those
of migrant workers, but recognized that these informal
systems can be abused. The conference reaffirmed the "The
Abu Dhabi Declaration on Hawala," (from the May 2002 Abu
Dhabi Conference on Hawala) which calls for the
establishment of a sound mechanism to regulate hawala.

The new attention on hawala is encouraging more people to
use regulated exchange houses in the UAE. The
representative of one money exchange business noted that his
company could transfer money anywhere, even to a private
residence, for a fee of $6.82 and that other money
exchangers were equally competitive with hawala, persuading
many to use the formal, and more secure, banking network.

The UAE Government (UAEG) also has admitted the need to
better regulate "near-cash" items such as gold, jewelry, and
gemstones, especially in the burgeoning markets in Dubai.
The UAE acceded to the Kimberley Process (KP) in November
2002 and began certifying rough diamonds exported from the
UAE on January 1, 2003. In 2004, the UAE was the first
Kimberly Process participant country to volunteer for a
"peer review visit" on internal control mechanisms.

The Dubai Metals and Commodities Center (DMCC) is the quasi-
governmental organization charged with issuing KP
certificates in the UAE, and employs four individuals full-
time to administer the KP program. Prior to January 1, 2003,
the DMCC circulated a sample UAE certificate to all KP
member states and embarked on a public relations campaign to
educate the estimated 50 diamond traders operating in Dubai
concerning the new KP requirements. UAE customs officials
may delay or even confiscate diamonds entering the UAE from
a KP member country without the proper KP certificate.

In January 2002, the UAE Central bank published a cash
declaration requirement for cash imported into the UAE above
$10,900. The regulation provides customs authorities the
authority to seize undeclared cash. The UAE National Anti
Money Laundering Committee held its Second Annual Conference
in December 2004 under the title "Customs Inspectors and the
Implementation of the Cash Declaration Regulation" to look
at ongoing implementation efforts.

Some observers also believe that Dubai's booming property
market is subject to money laundering abuse. In 2002, Dubai
permitted 3 companies to sell "freehold" properties to non-
citizens in 2002. Several other emirates (though not Abu
Dhabi) have announced their intention to follow suit. The
intense interest in these properties and rumors of cash
purchases, sparked concerns about the potential for money
laundering. As the Dubai freehold property market has
developed, the developers have stopped accepting cash
purchases, alleviating concerns about money laundering
somewhat.

The UAE has extended full support and cooperation to the UN
and U.S. authorities in their efforts to track the accounts
of terrorists. The CB has circulated to all financial
institutions under its supervision the lists of individuals
and entities suspected of terrorism and terrorist financing,
included in UN Security Council resolutions 1267/1390. To
date, the Central Bank has frozen a total of $3.13 million
in 18 bank accounts in the UAE since 9/11. Additionally, the
AMLSCU has provided international organizations and its
counterpart FIUs data on cases related to terrorist
financing and anti money laundering. The UAEG has also
frozen other financial assets under law 4/2002. In April
2004, the Central Bank Governor announced that the Central
Bank had frozen all accounts related to SMB computers, which
press reports linked to the alleged smuggling of nuclear
materials.

The UAEG monitors registered charities in the country and
requires them to keep records of donations and
beneficiaries. The Ministry of Labor and Social Affairs
regulates charities and charitable organizations in the UAE.
The Central Bank prohibits banks from opening accounts for
charities, unless the Ministry of Labor and Social Affairs
has registered them. The UAEG is much more sensitive post-
9/11 to the oversight of charities and accounting of
transfers aboard. In 2002, the UAEG mandated that all
licensed charities interested in transferring funds overseas
must do so via one of three umbrella organizations: the Red
Crescent Authority, the Zayed Charitable Foundation, or the
Muhammad Bin Rashid Charitable Trust. These three quasi-
governmental bodies are properly managed, and in a position
to ensure that overseas financial transfers go to legitimate
parties. As an additional step, the UAEG has contacted the
governments in numerous aid receiving countries to compile a
list of recognized, acceptable recipients for UAE charitable
assistance.

The UAE is noted for its free trade zones (FTZs). Every
emirate, except Abu Dhabi has at least one functioning FTZ.
There are well over a hundred multinational companies
located in the FTZs with thousands of individual trading
companies. The FTZs permit 100 percent foreign ownership, no
import duties, full repatriation of capital and profits, no
taxation, and easily obtainable licenses. Companies located
in the free trade zones are treated as being offshore or
outside the UAE for legal purposes.

UAE law prohibits shell companies and trusts and does not
permit nonresidents to open bank accounts in the UAE. In
September 2004, the Dubai International Financial Center
(DIFC) opened as a "financial free zone" immediately
following the issuance of a Dubai law setting up the DIFC.
The UAE passed "Federal Law No. 8 Regarding the Financial
Free Zones (Law No. 8/2004)" in March 2004, and followed
with a federal decree permitting Dubai to open DIFC in July.
Law No. 8/2004 provides for the exempts financial free zones
and their activities from federal civil and commercial laws,
but subjects them and their operations to federal criminal
laws including Law No. 4/2002 on Money Laundering and Law
No. 1/2004 on terrorism. With regard to banking
activities, Law No. 8/2004 limits licenses to branches of
companies, joint companies, and wholly owned subsidiaries
provided that they "enjoy a strong financial position and
systems and controls, and are managed by persons with
expertise and knowledge of such activity." It prohibits
companies licensed in the free zone from dealing in UAE
dirhams or taking "deposits from the state's markets." It
further provides that the licensing standards of companies
"shall not be less than those applicable in the state." It
provides that the Emirates Stocks and Commodities Authority
must approve the listing of any company listed on any UAE
stock market in the free zone and the licensing of any UAE
licensed broker. The law limits any insurance activity in
the UAE, carried out by a free zone company, to reinsurance.
It further gives competent authorities in the Federal
Government the authority to inspect financial free zones and
submit their findings to the UAE cabinet.

Sheikh Mohammed bin Rashid Al-Maktoum, Crown Prince of Dubai
and UAE Defense Minister is the President of the DIFC, which
is currently the only financial free zone operating in the
UAE.

DIFC regulations provide for an independent regulatory body,
the Dubai Financial Services Authority (DFSA) reporting to
the office of Dubai Crown Prince Sheikh Mohammed bin Rashid
and an independent Commercial Court. Observers called the
independence of the DFSA into question in the summer of
2004, before the DIFC even opened, with the high profile
firing of the chief regulator and the head of the regulatory
council (the supervisory authority). Subsequent to the
firing, Dubai passed laws which appear to give the DFSA more
regulatory independence from the DIFC, although these laws
have not yet been tested.

The DFSA is the authority responsible for licensing firms
providing financial services in the DIFC. The DIFC
authority licenses other firms operating in the DIFC. There
are currently two banks and three other financial firms
operating in the DIFC. DFSA rules prohibit nominee
(anonymous) directors and trustees. They also prohibit
"shell" banks and bearer shares. There are no offshore
casinos or internet gaming sites operating in the UAE.

Although firms operating in the DIFC are subject to Law No
4/2002, the DFSA has also implemented a very comprehensive
set of anti money laundering regulations. For example, the
DFSA requires firms to establish and verify the true
identity of any customer and other person on whose behalf a
customer is acting (including that of the beneficial owner)
before the firm effects any transaction on behalf of the
customer, to conduct due diligence in respect to the opening
of a correspondent account, and to have systems in place to
determine whether a customer is a "politically exposed
Person" and to address the risks associated with corruption.
DFSA rules further require that firms establish effective
anti-money laundering controls. The DFSA requires firms to
send suspicions transaction reports to the UAE AMLSCU (and
to send a copy to the DFSA).

The UAE is a party to the 1988 UN Drug Convention, and it
has entered into a series of bilateral agreements on mutual
legal assistance. The UAE is a member of the Gulf
Cooperation Council, which is a member of the Financial
Action Task Force (FATF). The UAE has been generally
receptive to U.S. Government overtures to cooperate on money
laundering issues, and has been very cooperative on anti-
terrorist financing issues. The UAE has welcomed money
laundering-related training and visits by U.S. officials.

The United States and the UAE continue to share information
on exchanging records in connection with terrorist financing
and other money laundering cases on an ad hoc basis. In
early 2005 the U.S. and the UAE will start negotiations on a
Mutual Legal Assistance Treaty (MLAT),which would codify
that cooperation.

The UAE Government is constructing a far-reaching anti-money
laundering program. The UAE government has sought to crack
down on potential vulnerabilities in the financial markets
and is cooperating in the international effort to prevent
money laundering, particularly by terrorists. However, there
remain areas requiring further action. Law enforcement and
customs officials should begin to take the initiative to
recognize money laundering activity and proactively develop
cases without waiting for referrals from the AMLSCU. UAE
officials should give greater scrutiny to trade based money
laundering in all of its forms. The Central Bank should to
be more diligent in its efforts to encourage hawala dealers
to participate in the registration program.

Sison