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Dubai Financial Services Authority issues counter-money laundering consultation paper

BIScom Subsection: 
Nigel Morris-Cotterill

Titled "PROPOSED CHANGES TO THE DFSA’S ANTI MONEY LAUNDERING, COUNTER-TERRORIST FINANCING AND SANCTIONS REGIME," the consultation paper was issued on 18 February 2018 and the consultation period ends on 24th March 2018.

Notes by Nigel Morris-Cotterill, The Anti Money Laundering Network

(a) adding a clear objective for the DFSA to monitor compliance by Relevant Persons (defined in draft Article 70(5)) with anti-money laundering legislation and to prevent, detect and restrain conduct that amounts to breaches of such legislation – draft Article 8(3A);
(b) setting out that the DFSA is the exclusive AML regulator for all Relevant Persons in the DIFC – draft Article 70(3). This proposal is to clarify more precisely the boundary of responsibility for AML matters in the DIFC in accordance with the Federal AML Legislation;
(c) replacing references to person with Relevant Person – draft Articles 70(3), 70(5) and 71 - to clarify the DFSA’s role as the AML regulator for all Relevant Persons in the DIFC; and
(d) a high-level requirement that Relevant Persons should maintain AML records – draft Article 71(5) - which is required by the 2012 Recommendations to be referenced in primary legislation.

What is missing here is the question criminal conduct and the investigation and prosecution of such conduct.

Designated Non-Financial Businesses and Professions (DNFBPs)

The consultation paper proposes to weaken its controls over "Single Family Offices" (a closely held investment company popularised in the USA) and dealers in high-value goods. The rationale behind this is that, albeit as a consequence of a transfer of authority from the DIFCA to the DFSA, those business areas became subject to a higher standard of supervision than the FATF's 2012 Recommendations called for and the change of status will bring DIFC in line with the regulatory system in other jurisdictions.

There is a precedent for this kind of action and it did not turn out well. In the UK, solicitors were brought under the same counter-money laundering regulatory regime as banks, etc. It was, to an extent, an accident and arose because of two Acts that, when read together, produced what was almost certainly an unintended result. The effect, however, was that UK solicitors were subject to a higher-standard of counter-money laundering regulation than their professional equivalents elsewhere in the world. Frantic lobbying by lawyers all over the world eventually resulted in an extraordinarily weak set of laws and regulations. In relation to Regulations, many practice areas were excluded altogether (many lawyers seem blissfully unaware that the primary law, as distinct from the Regulations made under it, apply to them in exactly the same way as to anyone else). UK lawyers lobbied equally hard and due to a change in the UK's law relating to the financial sector the previous accidental linking was undone. Since then, the scandals of money laundering that law firms should have identified and stopped has been a constant problem that has been, in significant part, caused and expanded by the reduction of the applicable regulatory regime.

DIFC should, therefore, be particularly careful about removing from maximum supervision two of the areas that are front line opportunities for money laundering both as vehicles and as principles. This publication strongly recommends that, instead of weakening its own position, DIFC should actively lobby the FATF to bring its Recommendations in line with current DIFC policy.

However, it has to be noted that the DIFC is not proposing that dealers in high-value goods should be excused money laundering compliance and risk management: the change proposed is that they would fall within the federal (i.e. UAE not DIFC) counter-money laundering regime and that they would be required to register as companies and businesses with the UAE authorities.

In relation to Single Family Offices, the proposal is that they should not be directly supervised but that those who deal with them should be. History shows why this is a terrible idea: FinCEN, the USA's federal counter-money laundering regulator, had long been under pressure to require so-called "hedge funds" for money laundering purposes. Years after the USA PATRIOT Act came into force, FinCEN published, in the Federal Register, a Draft Final Order. That was never brought into force. Instead, FinCEN announced that it would be withdrawing the Order and would rely on those regulated businesses which dealt with "hedge funds" to assess and manage the risk. The FinCEN statement expressly said "we have eyes on the money through the banks." A matter of days later, the fallacy of relying on the banks to identify suspicious transactions was laid bare by the bombshell of the Madoff débacle.

Also, there is a significant point to make about the USA and some other jurisdictions: they have a system of cash transaction reporting which includes reporting of all but the smallest inter-bank (and in particular international inter-bank). DFSC and the UAE do not have cash transaction reporting. CTR is, in our view correctly, not a requirement of the FATF 40 Recommendations. That cash transaction reporting provides intelligence that can be analysed by the FIU without regard to suspicious transaction reports. What the DFSA proposals actually do is to create a hole in reporting by relying solely on the banks of suspicious transactions. It is self-evident that this is unreliable because it requires the banks to know their customers' customer. It is always preferable to place the obligation to make STRs as close to the parties (as distinct from the money per se) as possible.

In our view, therefore, the UAE does not, to an adequate degree, "have eyes on the money" in the two sectors concerned.