ASSESSMENT OF UAE TOOLS FOR USE AGAINST IRANIAN

S E C R E T SECTION 01 OF 03 ABU DHABI 001864 SIPDIS NOFORN SIPDIS STATE FOR NEA/ARP, EEB/ESC/TFS, ISN E.O. 12958: DECL: 11/07/2017 TAGS: EFIN ETTC KTFN KNNP AE SUBJECT: ASSESSMENT OF UAE TOOLS FOR USE AGAINST IRANIAN FINANCIAL INSTITUTIONS REF: A. SECSTATE 149523 ¶B. ABU DHABI 1734 ¶C. ABU DHABI 1389 ¶D. ABU DHABI 1388 ¶E. ABU DHABI 761 ¶F. ABU DHABI 1823 Classified By: Ambassador Michele J. Sison for reasons 1.5 (b) and (d). ¶1. (S/NF) Summary. In response to ref A, Embassy provides the following assessment of UAE tools that could be used against Iranian financial institutions. Responses are keyed to reftel, to the extent possible. End summary. Regulatory Regime -------------- ¶1. (S/NF) Question. Which governmental agencies govern banks? What actions can the government take against banks, especially in penalizing activities such as proliferation or terrorism financing and money laundering. (SBU) The supervision of the UAE banking and financial sector falls under the authority of the Central Bank. It issues licenses to financial institutions and can impose administrative sanctions for compliance violations. The Dubai Financial Services Authority (DFSA) has supervisory authority for financial institutions operating in the Dubai International Financial Center (DIFC) a financial free zone exempt from UAE civil, but not criminal laws). (SBU) The two laws that serve as the foundation for the UAE's anti-money laundering (AML) and counter terror finance (CTF) efforts are the Anti-Money Laundering Law (Law No. 4/2002), and the Counterterrorism Law (Law No. 1/2004). Law number 4/2002 criminalizes all forms of money laundering activities and provides for criminal penalties up to seven years in prison and fines up to $81,000 as well as seizure of assets. Although the anti-money laundering law criminalizes money laundering, it is administrative regulation Number 24/2000 (as amended) that provides guidelines for how banks and financial institutions are to monitor money laundering activity. Law Number 1/2004 on Combating Terror Crimes sets stiff penalties for crimes covered, up to life imprisonment and the death penalty. It specifically criminalizes the funding of terrorist activities or terrorist organizations. (SBU) In August 2007, the UAE passed Law Number 13/2007 regarding export and import controls. This law provides for controls on the export and import of "strategic goods." Although the law does not specifically refer to financing, Article 10 of the law prohibits any person to "undertake brokerage, negotiation, or any act that facilitates the conclusion of the following contracts" including those for the acquisition or disposal of commodities on the UAE's control list or a contract in which the person is informed, knows or has a "well founded" reason to suspect will be used for the "development, production, presentation, operation, maintenance, disclosure, identification, or proliferation of any nuclear, chemical, or biological weapon, or to the development, production, maintenance, or storage of missiles capable of carrying such weapons." The UAE is in the process of drafting implementing regulations for this law. ¶2. (S/NF) Question: Can the host government revoke the operating license for foreign financial institutions; which government agency can do so and on what grounds; what is the legal standard for revoking a license? (SBU) Under Union Law No 10 (1980),the Central Bank Board of Directors must license banks. The Board of Directors may delete a commercial bank's name from the Register of Banks (revoking its license) for several reasons under Article 88: These include: C) "if the bank has suspended operations for one year;" F) "if the bank's liquidity or solvency is endangered;" G) "if the bank has seriously contravened the laws, by-laws, regulations decisions or instructions governing its operations under the provisions of this Law." For both F and G, the Board of Directors must give the bank an opportunity to respond to the reasons for revoking the license. Article 112 of the law refers to administrative penalties, should a bank violate the provisions of its articles of association, the banking law, or regulations issued by the Central Bank. The Central Bank has the authority to issue a number of penalties, ranging from warnings, to prohibitions or restrictions on certain operations to revoking the bank's license (removing its name from the Register of Banks). Prohibitions on activities and ABU DHABI 00001864 002 OF 003 license revocations require the full Board of Directors of the Central Bank to make the decision. In all cases, the bank has the opportunity to answer the charges about its violations. Although these rules apply specifically to commercial banks, the Central Bank has the authority to extend the rules of the law to other types of restricted license banks (Investment Banks and other financial institutions). Post believes that it has done so. (S) Although the law gives the Central Bank the authority to revoke banking licenses for both domestic and foreign banks operating in the UAE, the Central Bank would need some legal basis to so do. If the UNSC were to designate Bank Saderat and Bank Melli (the two Iranian banks resident in the UAE), we believe that the UAE would take the required action, and it appears as if the banking law would give the Central Bank the authority to act. Absent a UNSCR or specific violations of UAE law, it is not clear that the Central Bank would wish -- or be able to -- revoke the license of banks. ¶3. (S/NF) Question: Does the host government have any way to mandate that banks close correspondent accounts with Iranian banks, on proliferation or other grounds? (SBU) Article 94 states that the Central Bank may "issue to banks the instructions and recommendations that it deems appropriate for the attainment of its monetary or credit policies, and it may take any measures necessary to ensure the sound functioning of the banking system." (S) The UAE Central Bank, after receiving a copy of UNSCR 1747 from the UAE MFA, sent a "search and freeze" order to all banks and financial institutions to freeze all accounts of Bank Sepah. According to the Central Bank, most of the frozen accounts related to trade finance. It is possible the Central Bank could issue a similar order, should the UAEG decide that Iranian banks pose a proliferation risk. The exact legal mechanism for that action is unclear. (SBU) Under DIFC Law No. 1 of 2004 (as amended),the Dubai Financial Services Authority (DFSA) may by written notice prohibit a financial firm operating in its jurisdiction from entering into certain specified transactions or types of transaction or from soliciting business from certain specified persons or types of person. ¶4. (S/NF) Question: Other than revoking operating licenses, are there other host government legal mechanisms which could be used to cut off Iran-related financial transactions? (S/NF) Both the Anti-Money Laundering Law and the Counter Terror Law give the Central Bank the authority to freeze accounts for up to seven days. The Attorney General has the authority to freeze accounts for the duration of an investigation. The UAE Central Bank has used this authority to freeze accounts indefinitely, and has sometimes seemed to "freeze first and ask questions later." However, if the Attorney General's office does not have sufficient information to justify the freeze to a judge, the Central Bank risks being forced to release the accounts by the courts. The Central Bank continues to freeze accounts related to the AQ Khan proliferation network on USG request. The Central Bank has, however, told us that it does not have the evidence to justify continuing the freeze and has come under legal pressure to release the accounts. Post is aware of one occasion (related to fraud),where the Central Bank froze an account based on a USG request/information and was eventually forced to release the assets. ¶5. (S/NF) Question: Are there ways other than legal authorities in which the host government can induce or encourage financial institutions to cut off Iran-related financial ties? (S/NF) The UAE Central Bank can issue advisories and circulars to banks and financial institutions. The Central Bank issued a circular, implementing UNSCR 1747, which instructed banks to freeze Bank Sepah accounts. According to Central Bank officials, the circular also contained strong wording on the need for caution in dealing with Iran in order to be sure that the relevant UNSCRs were not violated. We have anecdotal reporting that this circular has had a chilling impact on some financial institutions. During Treasury U/S McCormick's October 28-31 visit to the UAE, he noted the recent Financial Action Task Force announcement on Iran and the recent U.S. domestic designations of certain Iranian entities and encouraged the UAE Central Bank to take similar steps. ABU DHABI 00001864 003 OF 003 (S/NF) The UAE also has significant financial assets invested outside the country, especially those controlled by the Abu Dhabi Investment Authority (ADIA). We have shared two lists of banks with Abu Dhabi officials and encouraged them to pressure any financial institution which handles ADIA's money to cut its business with Iran. In August, UAE Foreign Minister Sheikh Abdullah bin Zayed Al-Nahyan (AbZ) told Treasury U/S Stuart Levey that Abu Dhabi had conducted quiet outreach to banks doing business with Iran and requested a list of other banks. Post provided a second list to AbZ and to ADIA and received a commitment that ADIA would continue its quiet outreach efforts. (S/NF) The UAE is also home to an informal money remittance system, known as hawala. The UAE issued regulations to improve oversight of the hawala system in 2002, when the Central Bank required hawala brokers to register with the Central Bank, submit the names and addresses of senders and beneficiaries, and to file suspicious transaction reports as well as regular reports. As of August 2007, the Central Bank has registered 240 hawala dealers and had another 63 pending application. So far, no hawala dealer has submitted a suspicious transaction report, but hawaladars have submitted bundles of information including names of senders and recipients, amounts transmitted, etc. Central Bank officials have told Emboffs that recipient countries include India, Pakistan, and Somalia, as well as countries such as Syria. This network can also be used to move funds to and from Iran. The Central Bank is very protective of information about hawala dealers and will not release it absent evidence of illegal activity, arguing that it does not want to drive the system underground. Unfortunately, there are also no penalties for non-compliance with the regulations. SISON