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