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Diana T Fritz  08/27/2006 04:59:07 PM  From  DB/Inbox:  Search Results

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UNCLAS        ABU DHABI 05115

SIPDIS
CXABU:
    ACTION: ECON
    INFO:   LEGAT P/M AMB DCM POL

DISSEMINATION: ECON
CHARGE: PROG

APPROVED: CDA: MQUINN
DRAFTED: ECON: ACURTIS
CLEARED: ECON: OJOHN, RLA: EFARR, ICE: WWALLRAP, CG: KMORRIS

VZCZCADI833
OO RUEHC RUEATRS RUEAWJA
DE RUEHAD #5115/01 3541124
ZNR UUUUU ZZH
O 201124Z DEC 05
FM AMEMBASSY ABU DHABI
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2844
INFO RUEATRS/DEPT OF TREASURY WASH DC
RUEAWJA/DEPT OF JUSTICE WASHDC

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