2006 INTERNATIONAL NARCOTICS CONTROL STRATEGY REPORT,

UNCLAS SECTION 01 OF 05 ABU DHABI 004479

SIPDIS

JUSTICE FOR AFMLS, OIA AND OPDAT
TREASURY FOR FINCEN & EB/ESC/TFS
STATE FOR INL, NEA/ARP, NEA/RA

E.O. 12958: N/A
TAGS: KCRM EFIN KTFN AE
SUBJECT: 2006 INTERNATIONAL NARCOTICS CONTROL STRATEGY REPORT,
UNITED ARAB EMIRATES: VOL. II: MONEY LAUNDERING & FINANCIAL CRIMES

REF: 157136


1. (U) The United Arab Emirates (UAE) is an important financial
center in the Persian 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 its 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, or send remittances there,
exacerbates that potential. Approximately 80 percent of the UAE
population is comprised of non-nationals. Given the country's
proximity to Afghanistan, where most of the world's opium is
produced, narcotics traffickers are increasingly reported to be
attracted to UAE's financial centers.


2. (U) 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. In close concert with the United States,
the UAE imposed a freeze on 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
UAE Government (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 counterterrorist financing (CTF) efforts: Law No. 4/2002,
the anti-money laundering law, and Law No. 1/2004, the
counterterrorism law. The UAE also enacted Law No. 2 of 2006 the
Cybercrimes law, which has articles dealing with money laundering
and terrorist finance.


3. (U) 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 currency imports above $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. 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.


4. (U) 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.


5. (U) 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.


6. (U) 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. Through 2005, there are
no reported criminal convictions for money laundering or terrorist
financing under either the 2002 or the 2004 laws.


7. (U) 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).


8. (U) The UAE's National Anti-Money Laundering Committee (NAMLC)was
established in July 2000 and was codified into law by Law No.
4/2002. It is the body responsible for coordinating anti-money
laundering policy. It is chaired by the Central Bank (CB) 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).


9. (U) In July 2006 there were several amendments to Regulation
24/2000. First, the phrase "terrorism financing" was added to
references to money laundering in the regulation. Terrorism
financing is specifically criminalized in Law No. 1/2004 but this
amendment added the term "terrorism financing" into the regulations.
Second, regulation 24/2000 was amended requiring financial
institutions to freeze transactions and notify the financial
intelligence unit in writing, "in case of doubt" that it may be
destined for terrorism, a terrorist organization or for terrorist
purposes. Finally, there was a change in the due diligence
requirements on charities which specifically required banks to have
a certificate from the Minister of Social Affairs to open or
maintain a charitable account.


10. (U) In 2006, the UAE also enacted Law No. 2 of 2006 -- the
Cybercrimes law -- which has articles dealing with money laundering
and terrorist finance. Article 19 of the law makes it a crime for
anyone to use the internet to transfer money or property traceable
to criminal proceeds, or to conceal the true sources of such assets.
Violations are punishable by a term of imprisonment of up to 7
years and a fine ranging between $8,174 - $54,495. Article 21 of
the law outlaws the use of the internet to finance terrorist
activities, promote terrorist ideology, disseminate information on
explosives or facilitate contact with terrorist leaders. Any
violation of Article 21 is punishable by a term of imprisonment up
to 5 years.


11. (U) 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 measures 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.


12. (U) Law 4/2002 provided for the establishment of the Anti-Money
Laundering and Suspicious Case Unit (AMLSCU),which is the UAE's
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 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-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 109 cases to foreign FIUs.


13. (U) From December 2000 to October 2006, the AMLSCU has received
and investigated 3954 suspicious transactions reports (STRs). From
December 2005 to October 2006, the AMLSCU received and investigated
829 STRs. One freeze order was issued in 2006 based on STR
submissions, and from December 2000 to October 2006, the CB has
issued 27 freeze orders based on AMLSCU and law enforcement
investigations. Nine 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 of suspected
terrorists and terrorist organizations. Since 2000, it has frozen
$1,348,381 in 17 accounts based on the UNSCR 1267 list.


14. (U) Some money laundering in the UAE occurs in the formal
banking system, including the numerous money exchange houses, but it
is likely 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 despite
enforcement and regulatory efforts, makes it difficult to control
and an attractive mechanism for terrorist and criminal exploitation.
The UAE issued regulations to improve oversight of the hawala system
in 2002, when the CB required hawala brokers to register with the
CB, submit the names and addresses of senders and beneficiaries, and
to file suspicious transaction reports on a monthly or quarterly
basis.


15. (U) As of November 30, 2006, the CB issued 201 licenses to
hawaladars and another 38 applicants for hawala licenses are in the
process of fulfilling Central Bank licensing requirements. The CB
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.
The UAE has hosted three international conferences on hawala, with
delegates including government officials, executives of supervisory
institutions, banking experts, and law enforcement officials from
the Middle East, United States, Latin America, Asia, and Europe.
Speakers discussed ways to ensure hawala is regulated, without
driving the system further underground. The Fourth International
Conference on Hawala is expected to be held in the UAE in March

2007. This attention to hawala may be 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.


16. (U) The UAE has set no limits on how much cash can be imported
into or exported from the country. However, the UAE Central Bank
requires that individuals declare cash imports above $10,900. The
regulations provide customs services with the authority to seize
undeclared cash. However, there are no reporting requirements for
cash leaving the country. UAE authorities have the authority to
seize undeclared cash and to investigate. However, the UAE lacks
any administrative procedure for cash forfeiture. All cases must be
dealt with through the courts. 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, police, and judicial authorities
tend to not regard large cash imports as suspicious or possibly
criminal.


17. (U) The 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.


18. (U) The Dubai Metals and Commodities Center (DMCC) is the
quasi-governmental organization charged with issuing Kimberly
Process (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.


19. (U) 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.


20. (U) Dubai's booming property market is also susceptible to money
laundering abuse. In 2002, Dubai began to allow three real estate
companies to sell "freehold" properties to non-citizens. Several
other emirates have followed suit. Abu Dhabi has passed a property
law, which provides for a type of lease-hold ownership for
non-citizens. Citizens of GCC countries can own and trade land
within designated investment areas. Other expatriates can invest on
a 99-year leasehold basis. The intense interest in these properties,
and rumors of cash purchases, has sparked concerns about the
potential for money laundering. As a result, developers have stopped
accepting cash purchases, alleviating some of the concerns about
money laundering activities in this sector of the economy.


21. (U) The UAEG is much more sensitive since September 11 to the
oversight of charities and accounting for transfers abroad. 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.


22. (U) Oversight over charities has occurred on either a federal or
emirate level. The UAE Ministry of Social Affairs licenses and
monitors registered charities in Abu Dhabi and the northern
emirates. Charities are required to keep records of donations and
beneficiaries and submit annual reports to the Ministry. Charities
in Dubai meanwhile are licensed and monitored by the Dubai
Department of Islamic Affairs and Charitable Activities. However,
there were charities, particularly in the Northern Emirates which
registered with their local emirate and not the federal MSA. In July
2006 Regulation 24/2000 was amended requiring charities from all
emirates to obtain a certificate from the Minister of Social Affairs
to open or maintain bank accounts in the UAE, effectively requiring
all charities to be registered federally. In November 2006 the UAE
hosted a UK/GCC conference on charities and proposed holding
biannual meetings with the UK and GCC on charities oversight. .


23. (U) The UAE has both free trade zones (FTZs) and financial free
zones (FFZs). There are a growing number of free trade zones (FTZs),
with 26 already in operation in Dubai and 6 other free zones in the
other emirates. Every emirate except Abu Dhabi has at least one
functioning FTZ. The free trade zones are monitored by emirate-level
(as opposed to federal) authorities.


24. (U) There are over five thousand 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 FTZs 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.


25. (U) In March 2004, the UAEG passed Federal Law No. 8 Regarding
the Financial Free Zones (FFZs) (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). In September 2005, the DIFC
opened its securities market-the Dubai International Financial
Exchange (DIFX).


26. (U) Law No. 8/2004 limits licenses for banking activities in the
FFZs 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 financial 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 financial free
zone and the licensing of any UAE licensed broker. The law limits
any insurance activity in the UAE carried out by a financial free
zone company to that of 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. According
to DFSA regulators, the DFSA due diligence process is a risk-based
assessment that examines a firm's competence, financial soundness,
and integrity.


27. (U) 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, even 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.


28. (U) The DFSA has licensed 94 financial institutions to operate
within the DIFC. The DFSA's rules prohibit offshore casinos or
internet gaming sites in the UAE. The DFSA requires firms to send
suspicious transaction reports to the AMLSCU (along with a copy to
the DFSA). To date, there have been 9 suspicious transaction reports
issued from firms operating in the DIFC (8 in 2006). 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. As of December 2006, the DFSA has MOU's with 16 other
regulatory bodies, including the UK's Financial Services Authority
(FSA),the Emirates Securities and Commodities Authority, and the
U.S. Commodity Futures Trading Commission (CFTC). The UAE is a
party to the 1988 UN Drug Convention. The UAE has signed and
recently ratified the UN Convention against Corruption, but has not
ratified the UN Convention against Transnational Organized Crime. It
has entered into a series of bilateral agreements on mutual legal
assistance. The UAE is a party to all 12 UN conventions and
protocols relating to the prevention and suppression of
international terrorism. The UAE 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.


29. (U) The UAEG has begun constructing a far-reaching anti-money
laundering program, and it is considered a regional leader in these
efforts. The UAE 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.



30. (U) 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. There
needs to be closer cooperation between the Central Bank and the
DFSA. Additionally law enforcement and customs officials should
conduct more thorough inquiries into large undeclared cash imports
and required the declaration of exports from the country. UAE
officials should give greater scrutiny to trade-based money
laundering in all of its forms. The Central Bank should continue its
efforts to encourage hawala dealers to participate in the
registration program. The UAE should follow up with financial
institutions and the MSA on recent tightening of the charities
regulations to be sure that all the charities have registered, and
it should continue its efforts to regionally promote sound
charitable oversight and engage in a public campaign to ensure all
local charities are aware of the requirements. It should ratify the
UN Convention against Transnational Organized Crime.

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