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New Frontiers of Money Laundering

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The Italian Chamber of Commerce in the UAE organized a free webinar on April 19, 2021 at 4.30 pm (2.30 pm in Italy) in Italian held by the lawyer Paola Petti and the lawyer Silvia Rosa entitled:

New frontiers of Money laundering: legality and business operation

 

Lawyer Silvia Rosa: Unfortunately, sometimes unwittingly behavior can be implemented which can be serious and can lead to measures taken in this case by banks, for example, as a precautionary measure, they may resort to extremely annoying and uncomfortable measures such as the freezing of the current account or even its closure, which for an individual, and especially for a company represents an apocalyptic scenario because they find themselves unable to pay his employees and suppliers. The bank in these cases offers very limited time to operate the transfer of funds. This worries the user but also the professionals who find themselves using this system, due to their mandate, and sometimes they can be called to carry out transactions that can arouse suspicion on the part of the bank, and therefore create considerable problems for the profession itself as well as for the final customer. Moreover, opening a current account in the emirates, in the light of the new regulations, is more and more complex and may require months of work.

The main legislative sources in the UAE are:

Federal Decree no. (20) of 2018 on anti-money laundering and the fight against the financing of terrorism and the financing of illegal organizations.

Implementing Regulation No. (10) of 2019.

The regulatory structure of the UAE is composed of a series of federal, civil, commercial, and criminal laws and regulations, which are linked to the regulations issued by the authorities responsible for the implementation and enforcement of the regulations. As criminal law is part of federal law, the UAE regulates money laundering and terrorist financing crimes and illegal organizations under federal criminal law, the Criminal Code. Consequently, federal legislation and its implementing regulations are in force in all the emirates, including in the free zones. The federal Decree no. (20) of 2018 was issued to develop and extend the legislative structure of the emirates to ensure compliance with international standards on money laundering and the fight against terrorist financing. In fact, the emirates actively cooperate in the international framework to fight money laundering and the fight against the financing of terrorism together with various international organizations, including also the UN. In particular, the implementing regulation requires financial institutions located in the emirates to create and implement their own procedures of anti-money laundering unitarily to the adoption of training programs of personnel aimed at combating criminal activity within the country.

The decree-law defines the perpetrator of a money laundering crime as any person who is aware that the money is derived from a crime, and intentionally transfers the revenue of the crime with the aim of hiding or masking their illicit origin; it hide or conceals the true nature, origin, location, the way of disposing of the revenue or ownership thereof; acquires, holds or uses such revenue; help the offender escape punishment. The law states that money laundering crime is independent from the alleged crime and the condemnation of the person who committed the alleged crime does not protect against being punished for money laundering.

The standard recycling model, adopted by the central bank of the Emirates, describes the standard stages of this crime. In order to identify, understand and assess the money laundering risks, financial intermediaries should use the classic money laundering model. This model describes the crime as consisting of three distinct phases that can sometimes overlap.

The first stage is the placement, at this stage, the criminal introduces the funds or the revenue of the crime into the financial system using a variety of techniques;

The second stage is the stratification, which means that once the funds are introduced, criminals try to disguise the illicit nature of the funds or the revenue of the crime by engaging in transactions or layers of transactions that seek to hide their origin.

Finally, integration is the phase in which criminals try to return or integrate the recycled funds into the economy or to use them to commit new crimes through transactions and activities that seem to be legitimate. A key objective for criminals involved in the money laundering process and therefore underlying the specific risks faced by financial intermediaries is the exploitation of situations or factors such as products, services, facilities, transactions that promote anonymity by facilitating the breaking of the paper trail and the concealment of illicit sources of funds.

The central bank of the emirates is the one that regulates all banks, the changes of currencies, it regulates financial corporations and other financial institutions in the UAE. Instead, the DFSA authority regulates the licensed companies that include banks, insurance companies, investment banks that provide services within the free zone of DFSA. The functions of the central bank include imposing administrative sanctions in cases of non-compliance, issuing instructions and recommendations, it takes all necessary measures to ensure the integrity of the financial system in the UAE and it put in place a series of circulars that outline in particular the requirements for identifying the customer by financial institutions and provide for the reporting obligation of suspicious transactions.

The office within the central bank that filters and analyzes these reports of suspicious transactions coming from financial institutions, is the financial intelligence unit (FIU) of the central bank that is dedicated to this purpose. It has launched an anti-money laundering platform called goAML, which has also been developed by the United Nations office to report and stop this type of organized crime. The platform runs as an integral part of those of the FIU improving its computer structure and strengthening cooperation at the national level against criminal activities. Companies must register through this platform, all financial entities and non-financial professions designated as AUDIT and tax consulting and financial and management consulting have the obligation to register by 31/03. There will be penalties for those who fail to comply with this record, which allows the situation to be monitored and the plague of money laundering to be controlled. Those who do not comply can face serious consequences, even up to the suspension of licenses and closure. In addition to the sanctions, there are 2 more platforms on which companies must register in addition to the normal platform that ate devoted mainly to import and export companies.

As far as money laundering is concerned, professionals are subject to a huge magnifying glass because of the activity they carry out. Money laundering by third-party professionals has been identified as a major threat in the UAE due to the nature of the business they conduct. This leads the professionals themselves who in turn have a current account with UAE banks to be considered for their high-risk nature, so every transaction that is put into effect must be well thought out. We also recommend to always maintain an open communication with your credit institution in order to verify the possibility of carrying out certain financial transactions, because in the emirates, especially because of this new regulation and the consequent bite that it is trying to tighten in order to avoid this type of crime, the operation of the same professional is rather limited. Therefore, in order not to be the victim of certain measures by the institutions it is the best option to maintain open communication with your institution and verify how to implement certain transactions.

The expression Money Laundering actually includes not only money itself or monetary instruments per se, but also a number of other entities such as bank funds, other financial accounts, cryptocurrencies, financial instruments, securities, shares, bonds, bills, rights or other transferable rights, contracts, insurance policies, intellectual property, licences, immovable and movable property, and ownership of goods, land, metals, precious stone, vehicles and engines, ships and works of art. The size or monetary value of the commercial financial transaction, the period during which it takes place, the nature of the funds or revenue are irrelevant for the institutions to suspect the reporting of a money laundering offence. That is why we must be extremely cautious in making financial transactions precisely because the bank itself has a certain freedom of action in establishing its protocols. The central bank has indicated guidelines but de facto institute will then adopt its protocols and programs in order to also detect what are all suspicious or exceptional transactions that usually do not lead to that kind of nature or activity performed by the professional or by the company and therefore can trigger a whole series of procedures that if they arrive at the central bank and be confirmed will lead to particularly serious consequences.

Lawyer Paola Petti: Financial institutions, banks, are required to identify and assess the risks of money laundering and fight against the financing of terrorism to which they are exposed on the basis of a number of risk factors some of which are related to the size and complexity of the operational environment of the customer’s business. So you’re never really sure, even if a client has a good relationship with the bank, that doesn’t mean that the bank won’t have to be on alert because the banks themselves will assess with extremely advanced computer technology, and will be alerted where a transaction is categorized as unusual or may become aware as a result of a renewal of a license that the corporate structure has become more complex for example. Therefore, the implementing regulation also provides for enhanced due diligence in the cases where the risks are high and legal advisers and lawyers are automatically classified as high risk as well as other companies that are open, such as the free zone, whereas, on the other hand, where the risk is lower, the bank may have less stringent criteria and measures which are therefore more reasonable and proportionate according to the nature of the risk.

Some of the many risk factors at the company level that financial intermediaries should consider are, first of all, marked targets, so when there is a company trading with countries that are a big-no, for example, with Iran. It is possible in Dubai to make transactions with Iranians because they have been present for years on national territory but certainly not with Iran itself, there are methods of triangulations but I remember that in some cases the bank recalled a customer for having made a transaction from Iran. In fact, the customer had simply connected using a VPN that unfortunately had chosen Iran, the IP of his computer reported to the banking system was an IP that allowed him to identify a connection from Iran itself for an online transaction.

As for the size and complexity of the corporate legal structure, we can make references to offshore companies, the same companies in free zones where the more the structure is complicated the more the bank wants to verify who is the last beneficiary (OBO) and it puts the structure under a magnifying glass to fully understand who they are, who is hiding behind the screen of a society.

In addition, customer base growth rates, business Model, geographic area, consistency with customer profile, and finally IT infrastructure and management information systems capabilities. Very often there are clients that we follow who are small in size and who refuse to have non-enforceable information systems recognized by the UAE and our concern is always to convince them because it is important to be able to demonstrate at any time in light of any requests from the authorities or the banks themselves that you fill with the guidelines and avoiding the risk of running into situations of money laundering.

Concerning the geographical area, Iran or other areas such as Cyprus are not favorably viewed by the emirates and every transaction must be consistent with the customer profile. In these cases, it is always the license that has to speak, the simplest case is the one of those who leave a license to become investors in this country and have a visa as investors or as pensioners. When you have a visa of this kind, and a connected bank account, the bank will monitor your transactions and verify that all transactions are in line with the type of license as well as regarding our company as business or legal consultants. What is expected are payments against invoices for fees, so the bank sees the payment of a supplier suspicion, especially if it is an international supplier. In all these cases it is necessary to refer in advance to your contact person within the bank by explaining the case in advance and then receiving approval of what will be the transaction. The money laundering and terrorist financing risk profile of each client is dynamic and therefore varies according to several factors including the discovery of new information or the change of behavior. A case that we have followed is the one of a client that at a certain point stumbled into criminal proceedings in Italy and the echo of this criminal proceedings was given in a secondary magazine “il resto del Carlino”. The powerful social media web that now connect us globally made the bank aware of this situation despite the complication since it was written in Italian and it was in a minor magazine.

We learned information that we should have not known because for the banks is not possible the so-called “tipping of”, for example, you cannot warn the customer that an “investigation” arose following a transaction. This is in order to avoid that the customer can be exculpated, which is why it is important to be shielded from a close relationship with a relationship manager. Unfortunately, banks today in order to have a dedicated relationship manager, require a very important account deposit, for example the FAB are 500,000 dirhams and so the Arab Bank, while other banks demand 200,000 dirhams. So, it is between over 200,000 and over 100,000 euros which for a small reality can be a substantial sum. If you do not have a relationship manager, it is important to have a consultant with a relationship manager in such a way that even if the protection will be less, at least you can constrain certain questions.

How can we protect ourselves? First of all in our business it is appropriate to carefully identify the customer and make a screening of the customer’s background to verify the applicability of international financial actions rather than in particular situations where the risk is higher and we identify potentially contrary information such as a criminal record. Not in all cases it is necessary to do the work-check, which is an expensive procedure, but very often surfing the net is enough. In all this, the monitoring of the relationship with the customer must be continuous if the relationship with the customer is continuous. Consistency must always be ensured between the transactions conducted and the information collected and the behaviour expected.

Based on the KYC (know-your-costumer) principles and risk-based customer due diligence, the identification and verification of the identity of the customer is a fundamental component for an effective program of management and reduction of the risk of money laundering and terrorist financing but also of reduction of the risk of being unconsciously harmless of the operation at banking level. The key components of the identification of a customer, are personal data that can be collected by asking the customer to send his ID card, passport, visa if resident in the emirates, the license regarding the company’s head office.

In the case of a higher risk customer, in addition to the type of information, personal data and address, more detailed information on their activities may be considered, such as expected size and/or turnover and balances of accounts or transactional activities, expected types and volumes of transactions, such as known or expected counterparties or third party intermediaries with whom the client conducts transactions.

With regard to the legal persons, financial institutions are obliged to identify any natural person who owns or controls a participation of the 25% or more, identifying those who hold senior management positions or other supervisory positions. If you are affected in the closing of a personal bank account and if you have a percentage of more than 10% in a company, the bank account of the respective company will also be closed automatically, compromising not only the activity of the company but also the interests of the other partners even more unaware of the activity of the negligent partner.

In the continuous monitoring that is carried out by the banking institutions, the operations must be normal, for example the transactions must be typical for the customer and for the parties involved, it must be reasonable, so it must always have a clear logic and be compatible with the types of activities that the customer and the counterparties are used to perform, and must be legitimate. If the customer and the counterparties are allowed to engage in such transactions, such as when specific requirements, permissions or official authorisations are required.

Questions

User 1: Is there an exact blacklist of these countries?

Lawyer Paola Petti: There is no precise list because it would be a very broad and varied subject, it depends on what type of activity you carry out with the reference country, so it is very difficult because the emirates often change attitude towards different countries. From bank to bank the situation changes, for example we were frightened because we were told that the funds held in the Man Islands could no longer touch the Emirates and we were told that all the islands in fact to be sure it was better not to touch them. Many of those who are resident in the emirates, have an offshore account in the Isle of Man and therefore the thought of no longer having access to their funds or in the case of any operation, for example buying a property, was devastating. The other bank has disavowed this situation, which is why in case of unusual transactions you should refer to your relationship manager. If you make a suspicious transaction, the bank may feel that that customer does not respond to his appetite for risk and then close the account even if the customer has carried out an absolutely clear operation. Another anecdote was that of an Italian client who wanted to buy a property and the owners of the property were Italian. These Italians had not declared the property, so they made sure not the origin of the funds but where the customer was resident. The customer is fiscally resident in the emirates and I did not say that the customer transferred the funds from Italy to the emirates and the emirates would transfer them to the seller. The seller, had to dispose of this money in a different way, then he accepted a cash transaction, an absolutely important transaction. They were not yet in a suspicious environment, the emirates had not yet issued the 2018 regulations and so, since the transaction had to be completed in some way, I convinced the customer to return the cashier’s cheques to the bank. The bank felt that there was a suspicion of money laundering and the transaction went well, he does not know what happened to the Italian sellers my client had to submit to a very heavy due diligence and the account was blocked there for a year.

User 1: My company that I built here in Dubai in 2016, only last year managed to open a bank account with a local bank because the Italian partner who owns 100% of the entity in Dubai, had done some operation with Iran and therefore just for this reason they did not allow us to open in a local bank and we had to operate in UniCredit or Intesa bank that already know us from Italy in their branch of Abu Dhabi. The KYC that now ask the banks is ranting, the law would say up to 25%, in reality I have bigger problems because some partners who have 20% of 100% of a company that owns the Gulf, so compared to that of the Gulf it has just the 2,5% and they are not allowing us to have the passport because they do not recognize the Italian identity card and that create a series of problems of members who have an infinitesimal part of the company.

Lawyer Paola Petti: many years ago, when we opened our legal consulting company, we had a partner who held a minimum stake, under 10%. We wanted to change banks because we were not extreme happy, but we were not allowed because he had no residence. So, he gave the passport and all the possible credentials imaginable, but it was not possible and only with extreme effort we were able to understand the reason. Very often you do not have a dialogue with the banks, there are cases in which the bank closed the account and the interested party was left with a check that he did not even know where to take, but if you go deeper and understand why they had closed the account, we managed to have more knowledge. In that case it was a very large single transaction on which the bank had decided that it could be a non-legitimate transaction, but they are always allegations as the banks actually move and sometimes it is ranting.

Lawyer Silvia Rosa: The interlocutor is missing many times; we need to build a relationship with those who go beyond the first line. We recommend in these cases, to overcome, because you can create these situations in which the bank decides to freeze accounts by limiting the operation. I recommend if possible, to have an additional bank account for emergencies where you can transfer if necessary, considering that opening a bank account in the emirates takes a lot of time and work and therefore this could actually be the best solution. We have also recently advised customers by opening an additional account, if compatible with their business activity, for example to rely on licenses. The licenses have a considerable cost if they are consulting or management or business licenses. The business department of Abu Dhabi recently introduced the possibility of obtaining Freelancer licenses at a minimal cost, obviously the littler the cost the littler the effects, and allows you to obtain a visa for yourself and for your family. It has a cost of 530 dirham for 2 years of license, cancellation of the license has an equally derisory cost of 500 dirham. This Abu Dhabi license allows you to find this loophole, this emergency network, because it allows you to open an account.

User 1: Would bringing certain inconsistencies to the Dubai court lead to any results?

Lawyer Paola Petti: On the portal of the central bank there is the possibility to bring this situation however with regard to the banks is very difficult because when you sign a bank account, one of the conditions could be that the bank can reserve to throw you out whenever it wants. If you have accepted this condition, it is difficult to then go to syndicate its behaviour because the banks do not tell you the reason so you cannot oppose the unilateral decision.

Lawyer Silvia Rosa: However, it is also understandable the banks fear because in fact the implementing regulation can put them in a dramatic light since they can be subject to very important sanctions. In January 2021, 11 banks were fined a stratospheric amount of money because they did not comply with anti-money laundering legislation. With this fear, they sometimes prefer to lose the customer even if on the basis of a suspicion rather than having to pay staggering penalties.