Insights Report (Chatham House Rule) – FATF Roundtable

The Financial Action Task Force (FATF) was established in 1989 by the G7 to examine and develop measures to combat money laundering. It originally included the G7 countries, the European Commission and eight other countries. Its primary role is to set standards and promote effective implementation of legal and regulatory measures required to protect the financial system across the world. On 4 March 2022, the FATF decided to include the UAE on its “grey list”, placing the country under increased monitoring while it addresses strategic deficiencies in its anti-money laundering regime.

 The participants raised the following key points:

  • The official statement points to the country not doing enough to confront money laundering and terrorist financing.
  • The conversation with the UK government indicated their concern about the following: terrorist finance, money laundering, people trafficking, and drug trafficking – primarily in the key hotspot sectors – real estate, gold and diamonds, cryptocurrency, and money exchanges, with inflow of funds from suspect sources with lower levels of transparency. Another challenge for these same sectors is that they deal with large amounts of cash.
  • There is a legacy issue from the country being a massive trading hub and the numerous free zones that need to regulated better, integrated, monitored and rules enforced. There is also the negative narrative that this continues to be a haven for tax evasion.
  • However, the timing of this grey listing is also connected to a global bias and politics involved in this listing decision – the geopolitical issue related to UAE’s neutral stand on the Russia-Ukraine war.
  • Another important point raised in the listing was that the enforcement and judiciary prosecution and punitive action of the bad actors in the UAE was very low.
  • There are immediate implications in terms of increased monitoring by FATF, and a possibility of rating adjustments. The access to global finance becomes more difficult once in the grey list and then there are increased cost of compliance.
  • In the past, many countries on the grey list saw their FDI decrease by 3% almost every year. The overall impact is compounded.
  • Due to the increased monitoring of the UAE, there are additional scrutiny of fund flows which leads to higher cost of transactions, discouraging investors to move funds from UAE to other countries, including India (even though the two nations have signed the CEPA). In India, the RBI has put the UAE under stricter controls so the trade isn’t as free flowing as it could be.
  • Regarding SMEs in the region, there is a huge gap in terms of financial reporting, understanding the importance of getting their books audited, transparency, etc. There needs to be some sort of mechanism of a rating system, maybe at the economic department level when these companies are floated. What are the barometers needed to be fulfilled? Certain standards of financial disciplines, transparency, and corporate governance need to be mandated. This will have a huge impact for the entire economy and create the change.
  • One common theme here is the fragmentation of the regulatory regime – whether it’s SMEs or the licensing authorities. The Central Bank has its own enforcement regime; the IFC has a separate enforcement regime. There isn’t a level of uniformity across entities. A super committee has been formed in the UAE over the last 24 months, with the view to bring this to action.
  • Note that in the venture capital space, many of the incumbents are not regulated. In terms of monies under management in the VC space, about 60% to 70% is not regulated. And the problem is this deploy of capital are receiving non- institutional monies. Where is this money coming from? Where is it being deployed and are there now players in government? There are questions about the tech industry and where it is heading.  What is missing that really needs to get regulated?