US embassy cable - 04ABUDHABI4605

UNCLAS SECTION 01 OF 05 ABU DHABI 004605 
 
SIPDIS 
 
DEPT FOR NEA/ARP AND INL 
JUSTICE FOR OIA AND AFMLS 
TREASURY FOR FINCEN 
 
E.O. 12958: N/A 
TAGS: KCRM, PTER, KTFN, SNAR, EFIN TC 
SUBJECT: 2004-2005 INTERNATIONAL NARCOTICS CONTROL STRATEGY 
REPORT (INCSR) MONEY LAUNDERING AND FINANCIAL CRIMES 
 
Ref: State 254401 
 
1. The body of the cable is the submission of the money 
laundering and financial crimes section of the International 
Narcotics Control Strategy Report (INCSR) for the United 
Arab Emirates. 
 
2. Begin Text 
 
United Arab Emirates 
 
The United Arab Emirates (UAE), which remains a largely cash- 
based society, is an important financial center for the Gulf 
region. The financial sector is modern and outward looking. 
Dubai, in particular, is a major banking center.  The UAE's 
robust economic development, political stability, and 
liberal business environment have attracted a massive influx 
of people and capital. Approximately 80 percent of the UAE 
population is comprised of non-nationals. Because of the 
UAE's 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. The large number of resident expatriates 
from the above regions, many of whom are engaged in 
legitimate trade with their homelands, exacerbates that 
potential. 
 
Following the September 11 terrorist attacks in the United 
States, and 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 and continue to take significant steps in 
2004 to better monitor cash flows through the UAE financial 
system and to cooperate with international efforts to combat 
the financing of terrorism.  In July 2004, the UAE passed an 
anti-terrorism law, specifically criminalizing terrorist 
financing.  This law closes a potential loophole in the 
UAE's anti-money laundering law. 
 
While the laundering of narcotics funds may take place in 
the UAE, given the country's close proximity to 
Afghanistan-where 70 percent of the world's opium is 
produced-the potential exploitation of the UAE financial 
system by foreign terrorists and terrorist financing groups 
is the primary concern. 
 
In 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 on July 29, 
2004. (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, with up to life 
imprisonment. 
 
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 will is punishable by  "life or 
temporary imprisonment," whether or not these acts occur. 
Law No. 1/2004 gives 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. 
 
Law No. 1/2004 also sets up a "National Anti-Terror 
Committee" with representatives from the Ministries of 
Foreign Affairs, Interior, Justice, Defense, the Central 
Bank, the State Security Department and the Federal Customs 
Authority.  The committee will serve as an interagency 
liaison, implement UN Security Council Resolutions on 
terrorism and share information with anti-terror bodies in 
other countries and the UN. 
The UAE's  Law No. 4 of 2002 criminalizes all forms of money 
laundering activities.  The law calls for stringent 
reporting requirements for wire transfers exceeding $545 and 
sets currency importation reporting requirements  roughly at 
$10,900. The law imposes stiff 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 and also provides safe harbor 
provisions for those who report such crimes. Banks and other 
financial institutions supervised by the Central Bank 
(exchange houses, investment companies, and brokerages) are 
required to follow strict "know your customer" guidelines; 
all financial transactions over $54,000, regardless of their 
nature, must be reported to the Central Bank. Financial 
institutions also are required to maintain records on 
transactions for five years. 
 
The supervision of the UAE banking and financial sector 
falls under the authority of the CB. 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 issues 
licenses to financial institutions under its supervision and 
may impose administrative sanctions for compliance 
violations. 
 
In July 2000, the UAE established the National Anti-Money 
Laundering Committee, under the Chairmanship of the Central 
Bank's Governor, with representatives from the Ministries of 
Interior, Justice, Finance, and Economy, the Federal Customs 
Authority, the Secretary General of the Municipalities, the 
Federation of the Chambers of Commerce, and five major banks 
and money exchange houses (as observers). It has overall 
responsibility for coordinating anti-money laundering 
policy. 
 
The UAE Central Bank has issued a number of rules and 
regulations regarding anti-money laundering that are 
generally applicable to those financial entities that fall 
under its supervision.  The Central Bank has issued a number 
of circulars requiring customer identification and providing 
for a basic suspicious transaction-reporting obligation. 
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. 
 
In November 2000 the CB issued Circular 24/2000, which 
consolidates and expands anti-money laundering requirements 
for the financial sector. The circular, which is applicable 
to all banks, money exchanges, finance companies, and other 
financial institutions operating in the UAE, provides 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 
Circular 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. 
Banks and financial institutions operating in the Dubai 
International Financial Center are covered under their own 
regulations, but are subject to the provisions of Law 4/2002 
and Law 1/2004. 
 
The Anti-Money Laundering and Suspicious Case Unit (AMLSCU) 
is located within the CB and acts as the financial 
Intelligence unit (FIU) for the UAE.  The Central Bank 
requires financial institutions under its authority to 
report suspicious transactions to the AMLSCU, which is 
charged with examining them and coordinating the release of 
information with 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 
exchanges information with foreign financial intelligence 
units on a reciprocal basis. The AMLSCU also shares 
information with other Egmont group members AMLSCU has 
provided information relating to investigations carried out 
by the United States and other countries. The Central Bank 
continues to conduct workshops on money laundering and 
terrorist finance for banks and other financial 
institutions.  It conducted a joint training session with 
the U.S. government for South Asian nations that 
concentrated on the "nuts and bolts" of setting up a FIU. 
 
The Securities and Commodities Authority (SCA) supervises 
the country's two stock markets.  In February 2004, it sent 
out anti-money laundering instructions to brokers and to the 
two markets.  The SCA instructed the markets and UAE 
stockbrokers 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 send suspicious transaction reports 
to it for analysis and forwarding to the AMLSCU.  The 
instructions also provide for a five-year record-keeping 
requirement. 
 
Money laundering may take place within the formal banking 
system, including the numerous money exchange houses, but is 
believed to be largely confined to the informal and largely 
undocumented "hawala" remittance system.  The hawala 
remittance system is an effective and inexpensive way for 
workers in the UAE to remit funds to their home country. 
However, 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.  There is no accurate estimate of the 
number of UAE-based hawala brokers. 
 
New regulations to improve oversight of the hawala system 
were implemented in 2002.  The Central Bank requires hawala 
brokers to register and to  submit sheets containing names 
and addresses of transferors and beneficiaries to the 
Central Bank and to complete suspicious transaction reports. 
The Central Bank now supervises 119 hawala brokers. 
 
The UAE hosted the second International Conference on Hawala 
in April 2004, which was attended by approximately 350 
delegates.  Delegates included government officials, 
executives of supervisory institutions, banking experts, and 
law enforcement officials from the U.S., 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, but recognized that these informal 
systems can be abused.  The conference reaffirmed the "The 
Abu Dhabi Declaration on Hawala," (from the May 2002 Abu 
Dhabi Conference on Hawala) which calls for the 
establishment of a sound mechanism to regulate hawala. 
 
The new attention on hawala is encouraging more people to 
use regulated exchange houses in the UAE.  The 
representative of one money exchange business noted that his 
company could transfer money anywhere, even to a private 
residence, for a fee of $6.82 and that other money 
exchangers were equally competitive with hawala, persuading 
many to use the formal, and more secure, banking network. 
 
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 acceded to the Kimberley Process (KP) in November 
2002 and began certifying rough diamonds exported from the 
UAE on January 1, 2003.  In 2004, the UAE was the first 
Kimberly Process participant country to volunteer for a 
"peer review visit" on internal control mechanisms. 
 
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 KP certificate. 
 
In January 2002, the UAE Central bank published a cash 
declaration requirement for cash imported into the UAE above 
$10,900.  The regulation provides customs authorities the 
authority to seize undeclared cash. The UAE National Anti 
Money Laundering Committee held its Second Annual Conference 
in December 2004 under the title "Customs Inspectors and the 
Implementation of the Cash Declaration Regulation" to look 
at ongoing implementation efforts. 
 
Some observers also believe that Dubai's booming property 
market is subject to money laundering abuse.  In 2002, Dubai 
permitted 3 companies to sell "freehold" properties to non- 
citizens in 2002.  Several other emirates (though not Abu 
Dhabi) have announced their intention to follow suit.  The 
intense interest in these properties and rumors of cash 
purchases, sparked concerns about the potential for money 
laundering.  As the Dubai freehold property market has 
developed, the developers have stopped accepting cash 
purchases, alleviating concerns about money laundering 
somewhat. 
 
The UAE has extended full support and cooperation to the UN 
and U.S. authorities in their efforts to track the accounts 
of terrorists. The CB has circulated to all financial 
institutions under its supervision the lists of individuals 
and entities suspected of terrorism and terrorist financing, 
included in UN Security Council resolutions 1267/1390. To 
date, the Central Bank has frozen a total of $3.13 million 
in 18 bank accounts in the UAE since 9/11. Additionally, the 
AMLSCU has provided international organizations and its 
counterpart FIUs data on cases related to terrorist 
financing and anti money laundering.  The UAEG has also 
frozen other financial assets under law 4/2002.  In April 
2004, the Central Bank Governor announced that the Central 
Bank had frozen all accounts related to SMB computers, which 
press reports linked to the alleged smuggling of nuclear 
materials. 
 
The UAEG monitors registered charities in the country and 
requires them to keep records of donations and 
beneficiaries. The Ministry of Labor and Social Affairs 
regulates charities and charitable organizations in the UAE. 
The Central Bank prohibits banks from opening accounts for 
charities, unless the Ministry of Labor and Social Affairs 
has registered them.  The UAEG is much more sensitive post- 
9/11 to the oversight of charities and 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 properly managed, and 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 is noted for its free trade zones (FTZs). Every 
emirate, except Abu Dhabi has at least one functioning FTZ. 
There are well 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. 
 
UAE law prohibits shell companies and trusts and does not 
permit nonresidents to open bank accounts in the UAE.  In 
September 2004, the Dubai International Financial Center 
(DIFC) opened as a "financial free zone" immediately 
following the issuance of a Dubai law setting up the DIFC. 
The UAE passed "Federal Law No. 8 Regarding the Financial 
Free Zones (Law No. 8/2004)" in March 2004, and followed 
with a federal decree permitting Dubai to open DIFC in July. 
Law No. 8/2004 provides for the exempts financial free zones 
and their activities from federal civil and commercial laws, 
but subjects them and their operations to federal criminal 
laws including Law No. 4/2002 on Money Laundering and Law 
No. 1/2004 on terrorism.   With regard to banking 
activities, 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."    It prohibits 
companies licensed in the free zone from dealing in UAE 
dirhams or taking "deposits from the state's markets."  It 
further provides that the licensing standards of companies 
"shall not be less than those applicable in the state."  It 
provides that the Emirates Stocks and Commodities Authority 
must 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 authority to inspect financial free zones and 
submit their findings to the UAE cabinet. 
 
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 financial free zone operating in the 
UAE. 
 
DIFC regulations provide for an independent regulatory body, 
the Dubai Financial Services Authority (DFSA) reporting to 
the office of Dubai Crown Prince Sheikh Mohammed bin Rashid 
and an independent Commercial Court.  Observers called the 
independence of the DFSA into question in the summer of 
2004, before the DIFC even opened, 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 is the authority responsible for licensing firms 
providing financial services in the DIFC.  The DIFC 
authority licenses other firms operating in the DIFC.  There 
are currently two banks and three other financial firms 
operating in the DIFC.  DFSA rules prohibit nominee 
(anonymous) directors and trustees.  They also prohibit 
"shell" banks and bearer shares.  There are no offshore 
casinos or internet gaming sites operating in the UAE. 
 
Although firms operating in the DIFC are subject to Law No 
4/2002, the DFSA has also implemented a very comprehensive 
set of anti money laundering regulations.   For example, the 
DFSA requires firms to establish and verify the true 
identity of any customer and other person on whose behalf a 
customer is acting (including that of the beneficial owner) 
before the firm effects any transaction on behalf of the 
customer, to conduct due diligence in respect to the opening 
of a correspondent account, and to have systems in place to 
determine whether a customer is a "politically exposed 
Person" and to address the risks associated with corruption. 
DFSA rules further require that firms establish effective 
anti-money laundering controls.  The DFSA requires firms to 
send suspicions transaction reports to the UAE AMLSCU (and 
to send a copy to the DFSA). 
 
 The UAE is a party to the 1988 UN Drug Convention, and it 
has entered into a series of bilateral agreements on mutual 
legal assistance. The UAE is a member of the Gulf 
Cooperation Council, which is a member of the Financial 
Action Task Force (FATF). The UAE has been generally 
receptive to U.S. Government overtures to cooperate on money 
laundering issues, and has been very cooperative on anti- 
terrorist financing issues.  The UAE has welcomed money 
laundering-related training and visits by U.S. officials. 
 
The United States and the UAE continue to share information 
on exchanging records in connection with terrorist financing 
and other money laundering cases on an ad hoc basis. In 
early 2005 the U.S. and the UAE will start negotiations on a 
Mutual Legal Assistance Treaty (MLAT), which would codify 
that cooperation. 
 
The UAE Government is constructing a far-reaching anti-money 
laundering program. The UAE government 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. However, there 
remain areas requiring further action. 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. UAE 
officials should give greater scrutiny to trade based money 
laundering in all of its forms. The Central Bank should to 
be more diligent in its efforts to encourage hawala dealers 
to participate in the registration program. 
 
Sison