Keeping off the FATF grey list

The amount of money entering the UAE is huge. Since the Russian invasion of Ukraine in 2022, Russian investments have surged, especially in real estate. Russians are said to have invested around $6.3 billion in Dubai properties. Much of the money has been invested in both existing and under-construction properties, with many Russians viewing Dubai as a place of financial refuge. Overall, the movement of money between Russia and the UAE is projected to exceed $10 billion by the end of 2024.

It is not only Russian investors seeking to escape the bite of economic sanctions who have been investing. In recent months a group of Asian wealth managers have been assisting high net worth individuals in China to invest in the UAE.

The figures are dramatic. An estimated $1.11 trillion is reported as having been held by the UAE banks, of which $500 billion is represented by offshore wealth invested in the Emirates in total.

The concern is that some, even if not much, of this money represents the proceeds of crime. In April 2020, FATF required the UAE to take urgent action to stop the criminal financial flows it was attracting. With the UAE’s extensive financial, economic, corporate and trade activities, including as a global leader in oil, diamond and gold exports, the risks of money laundering were thought to be high.

It was against this background that the UAE was added to the grey list of countries. When FATF places a jurisdiction on the grey list for increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed time frames. It took nearly three years for the UAE to rectify the position. In February 2023, after substantially tightening its anti-money laundering procedures, the UAE was removed from the grey list.

Today, the key challenge for the UAE is to ensure there is no regulatory slippage, and the risk of increased money laundering does not develop. The UAE’s vulnerability is clear, and risk is heightened by concern that the UAE’s removal from the grey list was premature. No sooner was the UAE removed from the grey list than discussion began as to whether the FATF had acted too quickly.

The highly influential Organised Crime and Corruption Reporting Project announced that, contrary to FATF Recommendations, real estate agents were encouraging clients to pay cash when they purchased property and asking little about the source of funds. According to figures released by a leading estate agency, there were 133,300 property sales in Dubai in 2023. Only 33,700 were funded through mortgages transactions, suggesting the remainder were financed by other means such as cash transactions.

These concerns were echoed in May 2024 by a group of European Union Parliamentarians who expressed the view that Dubai remains a hub for money laundering. The concern was that alleged criminals from around the globe had been flocking to Dubai, where they could benefit from low tax rates, financial opacity, and a luxurious quality of life.

A couple of months earlier, another NGO, the Sudan Transparency and Policy Tracker, warned that money laundered in the UAE also fuels conflict. It regarded the removal of the UAE from the FATF grey list as perplexing, in light of reported evidence that smuggled gold from Africa into Dubai is utilized to finance ongoing civil wars in Sudan as well as other Sub-Saharan countries.

With monies originating from Russia, there are obvious concerns to ensure that movement of funds are not part of an arrangement to circumvent economic sanctions or acquired by corrupt arrangement or fraud. If large Russian capital flows continue into sensitive areas like finance, real estate, or banking, the UAE will need to ensure that its desire to attract investment does not conflict with the need to maintain strong anti-fraud and anti-corruption mechanisms. Without rigorous checks on the source of funds, exposure to money laundering is great, as individuals seek to hide assets or move them through the financial system with less scrutiny.

In some instances, “know your customer” checks will be difficult to apply, especially where international trade and financial flows do not follow established routes. Business conducted through the remote port in Fujairah has been rapidly rising and besides legitimate trade, vulnerabilities include informal trade and smuggling along the Iranian coast and operating through Ras al-Khaimah and Khasab. Due diligence procedures need to be agile to ensure that money laundering practices do not flourish at the UAE’s back door. With significant wealth looking for safe havens, there is always a temptation for public or private sector actors to engage in illicit practices, especially if they can capitalize on weak oversight in certain areas.

As the UAE strives to strike a balance between the desire to attract foreign investment and a strong commitment to transparency and regulation, the challenge is great. The UAE can avoid returning to the FATF grey list, but only if they continue to manage capital flows, with rigorous regulatory oversight and robust enforcement.

Jonathan Fisher KC practices in financial crime cases from Red Lion Chambers in London. He is a registered practitioner in the Dubai International Financial Court.