UAE CONTRIBUTION TO 2005-2006 INCSR, FINANCIAL

UNCLAS SECTION 01 OF 06 ABU DHABI 005115

SIPDIS

STATE FOR NEA/ARPI, INL, EB/ESC/TFS
JUSTICE FOR OIA, AFMLS
TREASURY FOR FINCEN

E.O. 12958: N/A
TAGS: EFIN KCRM KTFN PTER SNAR
SUBJECT: UAE CONTRIBUTION TO 2005-2006 INCSR, FINANCIAL
CRIMES AND MONEY LAUNDERING

REF: STATE 210691


1. The United Arab Emirates (UAE) is an important financial
center for the Gulf region. The UAE is still a largely cash-
based society. However, the financial sector is modern and
progressive. Dubai, in particular, is a major international
banking center. There is also a growing offshore sector. The
UAE's robust economic development, political stability, and
liberal business environment have attracted a massive influx
of people and capital. Because of the UAE's geographic
location and 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 of proceeds of foreign criminal
activity. The large number of resident expatriates from the
above regions, many of whom are engaged in legitimate trade
with their homelands, or send remittances there, exacerbates
that potential. Approximately 80 percent of the UAE
population is comprised of non-nationals. The laundering of
proceeds from the illegal narcotics trade is known to occur
in UAE, and given the country's close proximity to
Afghanistan, where most of the world's opium is produced,
such narcotics-trafficking is a likely source. In addition,
the potential exploitation of the UAE financial system by
foreign terrorist groups is a serious concern.


2. Following the September 11 terrorist attacks in the
United States, and amid 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. Since 2001, the UAEG has
taken steps to better monitor cash flows through the UAE
financial system and to cooperate with international efforts
to combat terrorist financing. The UAE has enacted two laws
that serve as the foundation for the country's anti-money
laundering (AML) and counterterror finance (CTF) efforts:
Law No. 4/2002, the Anti-Money Laundering Law, and Law No.
1/2004, the Counter Terror Law.

3. The UAE' Anti-Money Laundering Law, Law No. 4 of 2002
criminalizes all forms of money laundering activities. The
law imposes 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. It
also provides safe harbor provisions for those who report
such crimes. Although the Anti-Money Laundering Law
criminalizes money laundering, it is Administrative
Regulation No. 24/2000 that provides guidelines for how
financial institutions are to monitor for money laundering
activity. This regulation requires banks, money exchange
houses, finance companies, and any other financial
institutions operating in the UAE to follow strict "know
your customer" guidelines. Additionally, financial
institutions must verify the customer's identity and
maintain transaction details (including name and address of
originator and beneficiary) for all exchange house
transactions over $545 and for all non-account holder bank
transactions over $10,900. The regulation delineates 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
Regulation 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.

4. On July 29, 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 (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.

5. 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 is punishable by "life or
temporary imprisonment," whether or not these acts occur.
Law No. 1/2004 grants 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.
There are no known criminal convictions under either the
2002 or the 2004 legislations.

6. Law No. 1/2004 also sets up a "National Anti-Terror
Committee" with representatives from the Ministries of
Foreign Affairs, Interior, Justice, and Defense, the Central
Bank, the State Security Department, and the Federal Customs
Authority. The Committee serves as a UAE interagency
liaison, implements UN Security Council Resolutions on
terrorism, and shares information with its foreign
counterparts as well as with the United Nations (UN).

7. The UAE's National Anti-Money Laundering Committee
(NAMLC) is responsible for coordinating anti-money
laundering policy. It is Chaired by the Central Bank
Governor, with representatives from the Ministries of
Interior, Justice, Finance, and Economy; the National
Customs Board; the Secretary General of the Municipalities;
the Federation of the Chambers of Commerce; and five major
banks and money exchange houses (as observers).

8. The supervision of the UAE banking and financial sector
(including banks, exchange houses, and investment companies)
falls under the authority of the CB. The CB issues licenses
to financial institutions under its supervision and can
impose administrative sanctions for compliance violations.
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 has issued a number of circulars outlining the
requirements for customer identification and providing for a
basic suspicious transaction-reporting obligation. To
educate banking officials responsible for implementing these
requirements, the CB hosts frequent training programs and
workshops. For example, in September 2005, the CB conducted
a training session for money exchange house compliance
officers. The training focused on compliance issues
specific to money exchanges, and it covered how to
effectively implement the CB's KYC policies and suspicious
transaction reporting requirements. 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.

9. Law 4/2002 provided for the establishment of the Anti-
Money Laundering and Suspicious Case Unit (AMLSCU),which
acts as the Financial Intelligence Unit (FIU) and is housed
within the CB. Financial institutions under the supervision
of the CB are required to report suspicious transactions to
the AMLSCU, which is charged with examining them and
referring inquiries and information to 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-a member of the Egmont Group since June
2002-exchanges information with foreign FIUs on a reciprocal
basis, and has provided information relating to
investigations carried out by the United States and other
countries. Since December 2000, the CB has referred 108
cases to foreign FIUs.

10. From December 2004 to December 2005, the AMLSCU received
and investigated 772 suspicious transaction reports (STRs).
No freeze orders were issued in 2005 based on STR
submissions, but since 2000, the CB has issued 27 freeze
orders based on AMLSCU and law enforcement investigations.
Twelve of those cases are in the process of prosecution for
money laundering and confiscation of proceeds. The CB
circulates to all financial institutions under its
supervision the UNSCR 1267 Sanctions Committee's
consolidated list. Since 2000, it has frozen $1,348,381 in
17 accounts based on the UNSCR 1267 list.

11. Some money laundering in the UAE occurs in the formal
banking system, including the numerous money exchange
houses, but it is believed to be more prevalent in the
informal and largely undocumented hawala remittance system.
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. The UAE has begun to make progress in
confronting its vulnerability to the unregulated use of
hawala. New regulations to improve oversight of the hawala
system were implemented in 2002, when the CB required hawala
brokers to register, submit remittance reports, and to file
suspicious transaction reports. As of November 30 2005, 184
hawala brokers (hawaladars) have applied to register with
the CB. The CB has issued Hawaladar Certificates to 163 of
the applicants, and the remaining 21 applicants are in the
process of fulfilling CB registration requirements. The
Central Bank conducts one-on-one training sessions with each
registered hawaladar to ensure the dealer understands the
record-keeping and reporting obligations. There is no
accurate estimate of the total number of UAE-based hawala
brokers, and there is no penalty for failure of hawaladars
to register.

12. Anecdotal information indicates the new attention on
hawala is encouraging more people in the country to use
regulated exchange houses. Representatives of money exchange
business noted that their sector could transfer money
anywhere, even to a private residence, for a fee competitive
with hawala, persuading many to use the formal, and more
secure, banking network. Recognizing that the continued
existence of their exchange houses is dependent on carefully
abiding by national and international KYC standards, many of
the large exchange houses in the UAE have implemented
"membership" schemes that give customers quicker service and
allow the institutions to conduct a high level of KYC and
transaction monitoring. The systems involve providing
repeat customers photo identification cards that contain
account and identification information. Additionally,
beneficiary names and account details are embedded in the
card data files.

13. There are no limits on how much cash can be imported or
exported into the country. However, the UAE CB requires
individuals declare cash imports above $10,900. The
regulations provide customs services with the authority to
seize undeclared cash; however, enforcement is still
lacking, and the declaration requirements are not well-
publicized. The UAE is a cash-based economy, and it is not
unusual for people to carry significant sums of cash around.
As such, customs officials tend to not regard large cash
imports as suspicious or possibly criminal. In September of
2005, the United States Immigration and Customs Enforcement
within the Department of Homeland Security conducted a week-
long training session on detecting and investigating bulk-
cash smuggling. The session was attended by officials from
Dubai Police and Customs.

14. 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 has participated in the Kimberley Process
Certification Scheme for Rough Diamonds (KPCS) since
November 2002 and began certifying rough diamonds exported
from the UAE on January 1, 2003. In 2004, the UAE was the
first KPCS participant country to volunteer for a "peer
review visit" on internal control mechanisms.

15. 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 certificate.

16. The Securities and Commodities Authority (SCA)
supervises the country's two stock markets. In February
2004, it sent out anti-money laundering guidelines to
brokers and the markets, instructing them 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 file suspicious
transaction reports for initial analysis before forwarding
them to the AMLSCU for further action. The instructions also
provide for a five-year record keeping requirement.

17. Dubai's booming property market might also be
susceptible to money laundering abuse. In 2002, Dubai
permitted three companies to sell "freehold" properties to
non-citizens. Several other emirates have announced their
intention to follow suit. Abu Dhabi has passed a property
law, which provides for a type of "lease hold" ownership for
non-citizens, although by the end of 2005 it had not yet
identified any areas where expatriates can invest. The
intense interest in these properties, and rumors of cash
purchases, sparked concerns about the potential for money
laundering. As a result, some developers have stopped
accepting cash purchases, alleviating some of the concerns
about possible money laundering activities in this sector of
the economy.

18. The UAEG is much more sensitive since September 11 to
the oversight of charities and the 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 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
Ministry of Labor and Social Affairs (MLSA) licenses and
monitors registered charities in Abu Dhabi and the northern
emirates. These charities are required to keep records of
donations and beneficiaries and submit annual reports to the
MLSA. Charities in Dubai are licensed and monitored by the
Dubai Department of Islamic Affairs.

19. The UAE is noted for its growing number of free trade
zones (FTZs). There are 17 operating free zones, and eleven
more in the works. Every emirate except Abu Dhabi has at
least one functioning FTZ. The zones are monitored by
emirate-level (as opposed to federal) authorities. There
are 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. However, UAE law prohibits the
establishments of shell companies and trusts, and does not
permit non-residents to open bank accounts in the UAE. The
larger FTZ's in Dubai (such as Jebel Ali Free Zone) are well-
regulated. Although it is not impossible that some trade-
based money laundering occurs in the large FTZs, there is a
higher potential for it in some of the smaller FTZs in the
northern emirates.

20. In March 2004, the UAEG passed Federal Law No. 8
Regarding the Financial Free Zones (Law No. 8/2004). The new
law exempts FFZs and their activities from UAE federal civil
and commercial laws, but subjects them and their operations
to federal criminal laws including the Anti-Money Laundering
Law No. 4/2002 and the Anti-Terror Law No. 1/2004. The new
law and a subsequent federal decree also allowed for the
establishment, in September 2004, of the UAE's first
financial free zone (FFZ),known as the Dubai International
Financial Center (DIFC). 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 FFZ
operating in the UAE. In September of 2005, the DIFC opened
its securities market - the Dubai International Financial
Exchange (DIFX).

21. DIFC regulations provide for an independent regulatory
body, the Dubai Financial Services Authority (DFSA),which
reports to the office of Dubai Crown Prince and an
independent Commercial Court. Observers called the
independence of the DFSA into question in the summer of
2004, prior to the inauguration of the DIFC, 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, whose
regulatory regime is generally modeled after the United
Kingdom system, is the only authority responsible for
licensing firms providing financial services in the DIFC.
The DFSA has licensed 21 financial institutions and 13
ancillary service providers to operate within the DIFC. The
DFSA's rules prohibit offshore casinos or Internet gaming
sites' operating in the UAE. The DFSA requires firms to send
suspicious transaction reports to the AMLSCU (along with a
copy to the DFSA). Although firms operating in the DIFC are
subject to Law No 4/2002, the DFSA has also issued its own
anti-money laundering regulations and supervisory regime,
creating some ambiguity as to the authority of the CB and
AMLSCU within the DIFC. Discussions with the UAE Central
Bank on a formal bilateral arrangement are ongoing. The
DFSA has undertaken a campaign to reach out to other
international regulatory authorities. It has signed MOUs
with Turkey and the Isle of Man, and in December 2005 the
DFSA signed a regulatory protocol with the CFTC. The DFSA
has also signed MOUs with the UAE Securities and Commodities
Authority and Dubai Police.

22. With regard to banking activities in the FFZs, 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." The law prohibits companies licensed in the
free zone from dealing in UAE currency (dirham) or taking
"deposits from the state's markets." It further stipulates
that the licensing standards of companies "shall not be less
than those applicable in the state." The Law empowers the
Emirates Stocks and Commodities Authority to 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 power to
inspect financial free zones and submit their findings to
the UAE cabinet. Companies within the DIFC are not allowed
to issue bearer shares, and the DFSA does not allow
anonymous directors or clients. DFSA conducts due diligence
on institutions and individuals wishing to conduct financial
or ancillary services in the DIFC before granting a license
to operate. According to DFSA regulators, the DFSA due
diligence process is a risk-based assessment that examines a
firm's competence, financial soundness, and integrity.

23. In September of 2005, the UAE ratified four of the 12 UN
conventions and protocols relating to the prevention and
suppression of international terrorism. These included the
1999 Convention for the Suppression of Terrorist Financing,
the 1997 Convention for the Suppression of Terrorist
Bombings, the 1988 Convention on the Safety of Maritime
Navigation, and the 1988 Protocol on the Safety of Fixed
Platforms. The UAE was already a party to the other eight
conventions and protocols. The UAE is a party to the 1988
UN Drug Convention, and in August of 2005 it became a party
to the UN Convention Against Corruption. It signed the UN
Convention against Transnational Organized Crime in 2002,
but has not yet ratified it. It has entered into a series of
bilateral agreements on mutual legal assistance.

24. The UAE, which adheres to the guidelines and standards
recommended by the Financial Action Task Force, was very
active in supporting the creation of the Middle East and
North Africa Financial Action Task Force (MENAFATF) that was
inaugurated in Bahrain in November 2004; the UAE was one of
the original charter signatories. MENAFATF is a FATF-style
regional body. The creation of the MENAFATF is critical for
pushing the region to improve the transparency and
regulatory frameworks of its financial sectors.

25. The UAE is a regional leader in its efforts to regulate
the formal and informal financial systems, and it frequently
hosts international conferences, trainings, and symposia.
In March of 2005, the UAE Central Bank hosted a GCC/EU
Seminar on Combating Terrorist Financing. During this
seminar, delegations from all of the GCC countries and from
17 EU countries discussed best practices for implementing
AML/CTF laws and regulations. In April, the UAE hosted its
third International Conference on Hawala, which was attended
by over 400 participants from 74 countries. Delegates
included government officials, executives of supervisory
institutions, banking experts, and law enforcement officials
from the United States, 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, although
such systems can be abused for illegal activities. Speakers
discussed ways to ensure hawala is regulated, without
driving the system further underground. In November of
2005, the UAE hosted - in conjunction with the U.S.
Department of Justice's Office of Overseas Prosecutorial
Development Assistance and Training and with the MENAFATF -
a GCC-wide training on Advanced Financial Crimes.
Representatives represented a wide cross-section of GCC
government agencies, including the Ministries of Justice,
Interior, Finance, and Economy, Central Banks, Customs, and
private financial institutions. The delegations discussed
the legal frameworks for detecting, investigating, and
prosecuting financial crimes.

26. The United Arab Emirates Government has begun
constructing a far-reaching anti-money laundering program,
and it is considered a regional leader in these efforts. The
United Arab Emirates 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. There has been a substantial
improvement on behalf of the AMLSCU in the area of
information sharing with other countries. However, there
remain areas requiring further action. The Central Bank and
AMLSCU should clarify and assert their jurisdiction in
enforcing federal laws with respect to the DFIC. 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. Additionally law enforcement and customs
officials should conduct more thorough inquiries into large
undeclared cash imports and exports from the country.
United Arab Emirates officials should give greater scrutiny
to trade-based money laundering in all of its forms. The
Central Bank should be more diligent in its efforts to
encourage hawala dealers to participate in the registration
program. The UAE should implement a uniform system to
monitor all charities active in the UAE, and it should
engage in a public campaign to ensure all charities are
aware of the requirements.
QUINN