The normalization agreement between Israel and the United Arab Emirates (the “UAE”) is certainly one of the major recent developments that has potential to open up new opportunities for business and investments between the two countries. The future investment activity will also likely raise additional cross-border compliance and investigation challenges, particularly in the anti-money laundering (“AML”) area. This is something that Israeli companies looking for the UAE funding need to keep in mind.
From the compliance perspective, the UAE is considered to be a higher risk jurisdiction, as the most recent Financial Action Task Force (“FATF”) evaluation report highlights.
[1] The US Department of State has also categorized the UAE as the jurisdiction with systemic vulnerabilities that can be exploited by illicit actors in the context of money laundering and financial crimes.
[2] Inherent jurisdictional risks are especially apparent in the AML and counter-terrorist financing (“CTF”) areas. As FATF report summarizes, (1) the UAE is a cash-intensive economy with highly active trade in precious metals and stones; (2) it has large number of foreign residents, including from countries de-stabilized by terrorism or subject to sanctions;(3) it’s system of company registries is fragmented and beneficial ownership information can be concealed through complex structures and use of nominees. All this contributes to the UAE financial system being exposed to trade-based and cash-based money laundering risks, laundering of proceeds of crime and terrorist financing risks and abuse of legal persons.
Israeli financial institutions and regulators are generally aware of those issues, but more guidelines are needed to ensure proper risk assessment and mitigation measures. The Bank of Israel (the “BoI”) has issued a communication to the Israeli banking institutions acknowledging that promotion of economic ties between the two countries requires a thought through infrastructure enabling direct bank transfers in accordance with international AML/CTF standards. Taking into account the high level of complexity of the UAE financial system and the risks outlined above, the BoI urges banks to engage in careful risk management with the involvement of senior management. Some of the transaction diligence focus points are: (1) verifying the foreign party involved and making sure that it is not incorporated in one of the financial free zones or free trade zones (that are part an extensive offshore sector of the UAE); (2) understanding the holdings structure and identity of the ultimate beneficial owners of the entity; and (3) understanding the business rationale behind the transaction and source of funds.
More thorough understanding of UAE-specific AML/CTF risks is needed in order to efficiently manage financial flows between the countries that hopefully will result from economic cooperation and cross-border investments. Israeli companies exploring UAE investment opportunities should proceed with caution and diligence ultimate beneficial ownership and source of funds of their potential counterparties.
[1]The Financial Action Task Force (FATF), Mutual Evaluation Report United ArabEmirates 2020, https://www.fatf-gafi.org/publications/mutualevaluations/documents/mer-uae-2020.html
[2]US Department of State, Bureau of International Narcotics and Law EnforcementAffairs, International Narcotics Control Strategy Report, Volume II, Money Laundering, March 2020,pp.196-198, https://www.state.gov/wp-content/uploads/2020/03/Tab-2-INCSR-Vol-2-508.pdf
