White-collar crime developments and trends in the UAE

The risk of white-collar crime in the UAE is high, but authorities are increasingly proactive in taking steps to prevent, detect and prosecute crime and thereby to enhance the country’s profile as a safe investment destination.

Since its formation in 1971 the UAE has undergone rapid growth. Its economy is evolving at a fast pace, as are its laws and regulations. As this development has happened so quickly, gaps in legislation and the infrastructure needed to ensure effective enforcement, can arise and present opportunities for criminals to exploit.

Risk arises from the non-centralised system of law enforcement and regulation across the UAE. With a population of 10 million, the UAE is made up of seven emirates which have (to varying degrees) their own laws and regulations, subject to an overarching federal system. It is also home to over 35 commercial or financial ‘free zones’ which allow businesses in specified industries to operate with greater freedoms than those established elsewhere. Typically each free zone has its own company registry although no public access to company information is available. Lack of centralised record keeping makes the use (and misuse) of corporate entities as tools to commit crime and to conceal the proceeds of crime or its owners a high risk. It also makes investigating wrongdoing a major challenge for private parties and for prosecuting authorities alike. As the legal and regulatory environment evolves, greater collaboration across the free zones (and the seven emirates) would reduce the risk of criminal exploitation.

Historically, enforcement of foreign judgments and collaboration with foreign law enforcement authorities has been perceived to be limited. This has changed materially in recent years.

The UAE’s population is 90% expatriate and workers must hold a visa to remain in the country. This creates an environment where many workers do not see the country as their long-term home (although this is changing, with longer visas being introduced to encourage expatriates to invest in the country on a longer-term basis, particularly in real estate). However, the transient population and the corresponding turnover of staff within the private sector, combined with a lack of investment in knowledge and training results in relatively low standards of corporate governance and capability in areas such as risk management and fraud detection. This has been a major factor in some of the most high-profile financial scandals in the UAE in the last few years.

The UAE (Dubai in particular) has emerged as the region’s leading centre for financial services, with many global financial institutions including investment banks, funds and asset managers serving mostly Middle Eastern, African and South East Asian companies, wealthy individuals and family businesses from a regional base in the UAE, in particular the Dubai International Financial Centre (DIFC) free zone (there is also a similar free zone in Abu Dhabi: the Abu Dhabi Global Market). The scale of financial services business, combined with corporate governance weaknesses and other issues raised above creates significant opportunity for white-collar crime. Many clients often lack the awareness to protect themselves against sophisticated fraud, with investment scams and cybercrime being significant problems.

The UAE is close to Iran and other countries that are subject to international sanctions and, inevitably criminal activity intended to avoid such sanctions is significant. Informal money transfer systems, outside of the ordinary banking system, still exist and enable illegal fund flows to occur without effective scrutiny.

During 2020, economic downturns caused by Covid-19 have been witnessed around much of the world and in the UAE. The ‘fraud triangle’, the three key factors that determine fraud risk, rings loudly in these circumstances – (1) motivation (fear of loss of employment or income) (2) opportunity (management distraction dealing with Covid-19, weak corporate governance exacerbated by the transition to remote working and less scrutiny of employee conduct) and (3) rationalisation (such as a lack of other options to obtain funds) are all prominent factors which will have increased the level of actual fraud committed in recent times in the UAE even if much of this has yet to be discovered. The insurance industry also expects to see a surge in fraudulent claims as unscrupulous policy holders look to fabricate or inflate claims to obtain necessary funds – with the industry beset with Covid-19 claims and with travel restrictions and remote working requirements in place, investigating and detecting fraud in this area will be all the more challenging.

The UAE is aware of the unique challenges it faces and has made significant efforts to combat them. This has included enhancements to statutory and regulatory regimes, a significant focus on anti-money laundering (AML) and combating the financing of terrorism (CFT) compliance by regulated firms, as well as increased governmental and regulatory co-operation with foreign authorities.

The UAE amended its previous Anti-Money Laundering Law and introduced the new Federal Law No 20 of 2018 on Anti-Money Laundering, Combating the Financing of Terrorism and Financing of Illegal Organisations (the AML Law). This brings digital currencies into the scope of the law for the first time, which will help to address money laundering conducted online involving the use of cryptocurrencies.

The AML Law also included a requirement for Designated Non-Financial Business and Professions (DFNBPs), in addition to financial institutions, to put in place adequate systems and controls to assess their risk exposure to financial crimes. This law also requires the preparation and submission of Suspicious Activity Reports to the Financial Information Unit, which is an independent entity within the UAE Central Bank; and introduced the concept of controlled delivery, whereby authorities are granted discretion to permit a suspected money laundering activity to continue in order to better investigate and arrest persons suspected of conducting such acts.

In addition, the recent UAE Cabinet Resolution No 10 of 2019 contained a number of provisions necessary for implementing the AML Law, and introduced further significant improvements to the UAE AML framework. Both financial institutions and DFNBPs are not only required to assess a client’s money laundering risk but also to conduct customer due diligence at the start of each business relationship for all transactions above AED55,000 (or wire transfers above AED3,500). These changes to the UAE’s AML/CTF have brought the UAE’s AML/CTF legislation to a standard equivalent to that found in other advanced jurisdictions in this area. The UAE also maintains a National Risk Assessment, an internal assessment of counter terror financing and money laundering threats, weaknesses and risks in the UAE, much of which addresses white-collar crime-related risks.

In 2020, the Financial Action Task Force (FATF) and Middle East and North Africa Financial Action Task Force issued its Mutual Evaluation Report on the UAE. The FATF report identified a number of significant white-collar crime risks the UAE is exposed to given its status as a cash-intensive economy with active markets for trading golds, precious metals and stones.

The FATF Report stated the UAE had an ‘emerging understanding’ of its risks related to money laundering and terrorism financing, and a ‘high level of commitment’ to better understand and mitigate them. We expect that UAE will further strengthen its position in light of these FATF findings.

UAE financial service regulators are taking a robust approach when responding to, investigating, and addressing incidents involving financial crime. For example, the UAE authorities took such a stance in light of the regulatory scrutiny of UAE-based but UK-listed NMC Health following the company falling rapidly into administration amid allegations of multi-billion US dollar fraud. The UAE Central Bank instructed financial institutions to freeze bank accounts held by the former chairman and his family members in order to protect affected stakeholders. The affair also has other indicators of fraud risk – family members and friends in positions of authority, interconnected companies operating in different sectors and alleged lending of group money to family members and shareholders.

Another notable example was in the case of Abraaj. In 2019 the DFSA issued a record fine of $315m against Abraaj Investment Management and Abraaj Capital for carrying out unauthorised fund management related activities in the DIFC, misusing investors’ monies in various funds to meet its own operating expenses and deceiving the DFSA about its compliance with various rules.

An additional concern these and other cases gives rise to, and which has been made more troubling during the Covid-19 pandemic, is the role of external auditors and the risks they are exposed to should their clients experience internal fraud. This is a universal risk, but in the region it is arguably a greater one, given the lack of access to independent reliable sources of information to verify data provided by management, as well as varying standards of internal audit capability and risk management within businesses. Auditors face increased difficulty in accessing original documentation and testing information provided to them when, due to the current pandemic, face–to-face, onsite meetings are more difficult to arrange.

Further recent enforcement activity has included a series of high-profile arrests and extraditions of white-collar crime offenders. This included Ramon Abbas, who has been accused of leading a transnational network of cybercriminals and conspiring to launder $14.7m from a foreign financial institution, and Afzal Khan who was featured on the FBI’s most wanted list and was returned to the United States to face wire fraud charges after defrauding dozens of customers and lenders out of $1.5m. The UAE closely collaborated with the FBI in apprehending both individuals.

These actions have been welcomed and have enhanced the UAE’s profile for combatting financial crime and for collaborating with foreign authorities. However, the UAE authorities will now need to fortify the national AML framework where necessary in light of the recent FATF assessment. We expect the UAE authorities will be enhancing further co-operation with foreign law enforcement authorities and raising domestic awareness accordingly to tackle such white-collar crimes. We expect the continued rise in cybercrime activity to compel the UAE government and law enforcement authorities to make greater use of existing cybercrime legislation in addition to working with foreign enforcement authorities. There is also an urgent need for the private sector to enhance its investment in high-quality corporate governance.