UAE Added to Global Watchdog’s ‘Gray List’ Over Dirty Money

(Bloomberg) -- The United Arab Emirates has been added to a global watchdog's list of countries subject to greater oversight for shortcomings in tackling illicit finance, potentially complicating local operations for Wall Street banks and multinationals that use Dubai as their Middle Eastern hub.

The Paris-based Financial Action Task Force placed the UAE on its “gray list,” one of two classifications used by the intergovernmental body for nations determined to have “strategic deficiencies.”

The designation is potentially the most significant step taken by the FATF in its three-decade history given the UAE's position as a regional financial center. The organization, set up by the Group of Seven major economies, has some two dozen countries under closer scrutiny.

Following its latest review, FATF said Zimbabwe will no longer be subject to increased monitoring and Pakistan will remain on the gray list. Iran and North Korea, meanwhile, are on the highest-risk “black list.”

The organization noted that the UAE “has made progress” in strengthening anti-money laundering measures but nonetheless will require the UAE to implement an “action plan” to demonstrate “a sustained increase in effective investigations and prosecutions of different types of money laundering cases consistent with UAE's risk profile.”

The UAE's anti-money laundering arm, for its part, reiterated its commitment to working with the FATF on seeing the action plan through.

“The UAE takes its role in protecting the integrity of the global financial system extremely seriously and will work closely with the FATF to quickly remedy the areas of improvement identified,” the UAE's Executive Office of Anti-Money Laundering and Countering the Financing of Terrorism said in a statement.

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The watchdog was leaning toward adding the UAE to its gray list, Bloomberg reported in January. Some FATF members expressed the view that the country hadn't done enough to exit the review process, people familiar with the matter said this week.

For the UAE, being gray-listed is a setback at a time when it faces greater competition from neighboring Saudi Arabia, which is growing its financial markets and taking steps to lure more investment.

A report by the International Monetary Fund last year found that gray-listing by the FATF resulted in “a large and statistically significant reduction in capital inflows.” The potential fallout in the UAE could be difficult to quantify, though, as financial firms may already approach the country as a higher-risk area.

The decision is “very bad,” said Karen Young, senior fellow at the Middle East Institute in Washington D.C., “and the ‘neutrality' with Russia begs the question of continued financial ties.”

The UAE -- one of Washington's top Middle East allies -- abstained on a United Nations resolution condemning Russia's invasion of Ukraine on Saturday. It said the vote was a forgone conclusion and urged an end to the violence through dialog.

Affirmative Steps

“Whilst being added to the gray list will be viewed by many as a major blow for the UAE, since the FATF's warning in 2020, the UAE government has taken numerous affirmative steps to better align with global standards on anti-money laundering and counter terrorist financing,” said Ibtissem Lassoued, the Dubai-based head of advisory in financial crime at law firm Al Tamimi & Co.

The government set up courts focused on financial crimes, established an entity that ensures better collaboration between the central bank and other authorities and even announced a 9% corporate tax starting in 2023.

The central bank recently imposed penalties on some lenders for breaching anti-money laundering regulations and regulated new rules on hawalas, charities often alleged to enable terrorism-related money flows.

“Given the agility of the country to pivot in such situations, I have no doubt that it will swiftly reverse its status as a gray-list country,” Lassoued said.