The Dubai Financial Services Authority is proposing to make changes to its rules that govern money-laundering and terrorist finance. The aim is to bring them into line with the Financial Action Task Force's rule amendments of 2012.

The consultative document that heralds these changes has just been released. It makes reference to amendments that the Government of Dubai has made to Federal Law No 4 of 2002 (the federal anti-money-laundering law) and Cabinet Resolution No 38 of 2014. The Government has already changed the Dubai International Financial Centre's AML regime to accommodate the FATF's '40+9' recommendations of 2012 – this it completed in July 2013 – and now wants to fine-tune the changes in time for a looming international assessment.

Organisations the Government dislikes

The federal AML law now features a new concept of ‘unlawful organisations’ and has extended its definition of 'money laundering' to include transactions on behalf of these organisations. The DFSA is proposing to change its own definition of money laundering (found in a part of its rulebook called AML 3.1.1) accordingly.

Prescribed low-risk customers

The PLRC concept (explained in AML 3.2.1) was introduced during the DFSA’s AML review of 2013. It allowed a relevant person (i.e. a financial firm) to assign a low risk-rating to customers under certain circumstances without subjecting them to full risk-based assessments.

The DFSA has now come to regret the introduction of this category. The cabinet resolution of 2014 sets out minimum 'customer due diligence' requirements that are higher than it is, so the DFSA is going to remove it from the rulebook. It adds: "We will replace this with guidance in Chapter 6 to explain, firstly, that the assignment of a low-risk customer rating should not be automatic and, secondly, what is expected of those relevant persons who have previously relied on this categorisation."

International PEPs and domestic PEPs

"International politically exposed persons" are, in the DFSA's terminology, people who have been entrusted with prominent functions in international organisations. It is proposing to change the definition of 'PEP' in AML 3.2.1 and align it with the FATF's terminology, splitting PEPs into ‘domestic’, ‘foreign’ and ‘international’. It does not want to change its regulatory approach to PEPs.

The risk-based approach to money-laundering

AML 4.1.1(a) obliges firms to assess and address their so-called 'AML risks.' The DFSA now proposes to inject FATF jargon into the process. This is to be found in FATF recommendation 1, which is illiterately entitled "Assessing risks and applying a risk-based approach." In its interpretative note to R1, the FATF notes: "The general principle of a risk-based approach is that, where there are higher risks, countries should require financial institutions and DNFBPs to take enhanced measures to manage and mitigate those risks; and that, correspondingly, where the risks are lower, simplified measures may be permitted." This verbiage represents the FATF's stab at codifying its idea of 'proportionality,' the principle that (a) firms should concentrate their background-checking and transaction-tracking efforts on customers who are most likely to be laundering dirty money or providing terrorists with financial succour; and (b) that smaller firms ought to spend the same proportion of their income on compliance as larger firms. No regulator on earth takes (b) seriously, although they all pay lip-service to it, and compliance with regulations will always represent a barrier to entry for smaller firms in the financial sector. A careful reading of the recommendations, moreover, proves that the FATF does not even include (b) in its ideas about proportionality.

The DFSA agrees with this, at least in the AML/TF sphere. It goes on: "It is the measures to mitigate any risks that are intended to be proportionate under AML 4.1.1(a), not the review of the risks. We propose to...add further guidance to explain that the proportionality is applied to the mitigation of the risk exposure of the relevant person."

Shell banks

The DFSA's rules forbid firms to form banking relationships with shell banks (banks that lack a physical presence) or banks that allow shell correspondent banks to use their accounts (AML 9.2.2). The cabinet resolution, however, goes further than that by forbidding firms to deal with shell banks in any way. With this in mind, the DFSA is proposing to make up a new rule, AML 6.1.3 and issue guidelines to do with it, classifying a shell bank as: “a bank that has no physical presence in the country in which it is incorporated or licensed and which is not affiliated with a regulated financial group that is subject to effective consolidated supervision.” This is in accordance with the FATF's terminology.

Anonymous accounts

The DFSA has long banned firms from opening anonymous accounts in fictitious names with rule AML 9.5.1(a). The cabinet resolution goes further than this, however, banning the use not only of fictitious names but also of pseudonyms and numbered accounts without the names of accountholders. The DFSA is proposing to amend the rule accordingly.

Sources of wealth and funds

While surprising the reader with the intriguing possibility that it might be grammatically possible to 'establish a measure,' the DFSA complains in its paper about its firms failing to fuilfil their obligation to ascertain their customers' sources of wealth and funds during the onboarding process. The rule that they are declining to obey is AML 7.3(1)(1). The regulator proposes to attach further guidelines to it, with examples of the steps that firms should take to pinpoint these elusive sources. It does not intend to change its approach to the identification of beneficial owners as per AML 6.1.1(3)(a).

Simplified due diligence – or none?

In the interests of proportionality, the DFSA sometimes allows firms to skimp in their efforts to verify the identities of beneficial owners. Too many firms, however, have erroneously invoked rule AML 7.5.1(1) as an excuse to neglect their obligations to identify those beneficial owners - a very different proposition. This is not the case – the identification of a beneficial owner is still required in all cases by AML 6.1.1(5)(a). More guidance is therefore on the way.

Here and there

Also on the subject of issuing guidelines as a way of reminding people to obey existing rules, the DFSA proposes to draw firms' attention to their existing obligation to be on the lookout for the proceeds of foreign tax evasion. The DFSA has experienced confusion among regulated firms about the need for identifying documents from firms that are performing 'third-party' compliance services for banks and is proposing a slight rule-change to cover that. It has also decided to give firms a better idea of the checks they should perform to ensure that their 'third party' service providers are regulated in a manner equivalent to firms that it regulates itself. All the rules concerning 'reliance' are to be found in AML section 8.1.

Again, the DFSA proposes to issue further guidelines (or 'issue guidance,' as it puts it) to ram home the need for firms to obey already existing rules, this time in the sphere of sanctions issued by the United Nations Security Council. It evidently thinks that not enough firms have the requisite systems and controls in place, so it is amending AML 10.2(1)(1).

The consultation paper also proposes to remove the requirement that a registered auditor must appoint an MLRO who is a resident of the UAE. Registered auditors (unlike all other relevant persons) and their representatives do not have to be residents.

The cabinet resolution calls on all reporting entities to plan the training and qualification of employees in all matters relating to money laundering in co-ordination with the Anti-Money Laundering and Suspicious Cases Unit, the DIFC's financial intelligence unit (FIU) to which suspicious activity reports go. More guidelines are to follow.

DNFBPs

Chapter 10, the part of the DFSA's AML module that concerns sanctions and 'international obligations,' does not apply to dealers in precious metals and stones or dealers in any saleable item of a price equal to or greater than $15,000. These dealers are part of the FATF's wide category of DNFBPs or designated non-financial businesses and professions. The DFSA now proposes to apply that chapter to all relevant persons, including these dealers. It also proposes to oblige these dealers to appoint a money-laundering reporting officer and to send off SARs to the FIU. The fact that the DFSA is doing this rather than some other public body is interesting; in the United Kingdom, the DNFBP job is doled out among various bodies that have nothing (or, in the case of the Solicitors' Regulation Authority, little) to do with financial service regulation. This could be related to the fact that Middle Eastern economies depend more on gold than others.

Changes to the Regulatory Law 2004 will be recommended. The deadline for comments about the proposals from the regulated public is 21 August 2016.