The Dubai Financial Services Authority, the regulator of financial services conducted in or from the Dubai International Financial Centre, has announced the suspension of the licence of Morgan Gatsby Limited for a period of 12 months. Most of its multifarious complaints are related to compliance and money-laundering controls.

The firm has a long history of brushes with the regulator, starting in April 2016 with a "supervisory concerns letter" in which the DFSA berated it for an unmentioned shortcoming that could have been related to inadequate capital stocks; this was the subject of a letter in September 2016 in which the DFSA called off a restriction of the wealth manager's business activities subject to strict conditions, including monthly financial reporting and the maintenance of 'capital adequacy' (originally a European Union term) in compliance with PIB (a part of its rulebook called the Prudential Investment, Insurance Intermediation and Banking Business Module).

Another regulatory letter, issued in June 2017, lambasted the firm for its bad corporate governance, plus the systems and controls it used to organise risk management, compliance and money-laundering control.

Also in 2017, MGL's breach register recorded some rulebreaking regarding the handling of clients' money, along with bad transaction recordkeeping, bad documents related to a certain fund, bad "know your customer" controls and the mis-classification of clients.

On 9 April last year, in the light of this potpourri of failings, the DFSA sent the firm a "supervisory concerns letter" of the kind that it had originally sent in April 2018. For some reason, the firm itself then asked the regulator to impose certain prohibitions on its business and dealings with relevant property. The DFSA obliged on 2 May, issuing a prohibition notice.

Some of the DFSA's concerns, according to the decision notice which it issued to the firm in November but has just published now, are still standing and MGL's status has declined further since the summer. The regulator is still worried about MGL's inadequate way of managing its financial resources, its lack of competent people to sustain its business, its questionable way of classifying and dealing with its clients, its AML controls and - in apparent contravention of an agreement with the regulator - its soliciting of business and 'onboarding' of clients.

The DFSA's press release summarises this by saying that it suspended MGL’s licence because of "serious concerns related to the adequacy of its human and financial resources, its non-compliance with DFSA rulebook requirements, and its failure to deal with the DFSA in an open and co-operative manner."

The DFSA brought these concerns to MGL’s attention formally in April last year but the firm failed to remedy matters to the regulator’s satisfaction. The DFSA’s public register has been updated to show the suspension of the licence and a decision notice has been issued on its website.

Bad accounting, with no compliance officer at the helm

Regarding the firm's handling of its financial resources, the regulator has found fault with its failure to proactively identify and provision for doubtful receivables, instead waiting for its auditor to instruct it to do so in the annual audit. It has also berated MGL's lack of formal processes for tracking past due invoices and chasing debtors.

GEN rule 7.5 dictates that every firm must have in place at all times an authorised individual (the DFSA's equivalent of the British Financial Conduct Authority's 'approved person') to carry on the respective licensed functions of a compliance officer and a money-laundering reporting officer; this it has not done since early last year. It told the regulator in September that it was planning to hand over the reins to an external consultancy, but the regulator no longer believed what it was hearing.

Point 15 of the decision notice states: "Most, if not all, of the DFSA's concerns raised in the supervisory concerns letter and elsewhere are compliance- and AML-related matters, for which a CO and MLRO, respectively, would normally be responsible."

At one of the times when the firm 'onboarded' a customer in contravention of the regulator's ban on new business, it failed to apply "know your customer" controls to find out the source of funds. It also mis-classified him as a professional client, even though all the evidence suggested to the regulator that he did not have the right net assets or experience to fall into that category.

The DFSA updated its client classification rules in 2015 and these are to be found in chapter 2 of its conduct-of-business (COB) module. Under COB 2.3.7 an individual is 'assessed' to be a professional (as opposed to a retail) investor if he has net assets of at least US$1 million and either is in a relevant professional position at a financial institution or seems to have the requisite understanding of (and, usually, track record in) financial markets.

When, as the regulator claims, the firm marketed its fund badly, it neglected to send out a prospectus on at least one occasion.

Fresh problems

Other problems have reared their heads in the last year. The UAE Government has recently upgraded its AML laws and now requires DNFBPs or Designated Non-Financial Businesses and Professions ('gatekeepers' such as law firms, accountancy firms, single family offices, corporate service providers, real estate developers, dealers in precious metals and stones and dealers in any saleable items worth US$15,000 or more) to be registered. The DFSA says in its decision notice that it is "concerned that MGL may be carrying out activities which require its registration as a DNFBP. MGL is currently not registered as a DNFBP and has not sought to be so registered." The regulator is also weary of being promised reform that never arrives, concluding that this is a breach of its "authorised firm principle 10" (found in GEN rule 4.3.10) which calls on firms to deal with it openly and co-operatively.

The CIA World Factbook says of the UAE's AML controls: "Illicit drugs...the UAE is a drug transshipment point for traffickers given its proximity to Southwest Asian drug-producing countries; the UAE's position as a major financial centre makes it vulnerable to money laundering; anti-money-laundering controls improving, but informal banking remains unregulated."