1. What steps should be taken to close off the options for terrorist financing?

Strict enforcement of AML/CFT LawsCustomer Due Diligence (CDD) and Enhanced Due Diligence (EDD) measuresFines and Penalties on violatorsFiling of STR (Suspicious Transactions Report) with the FIU

2. What actions should be taken in order to enhance financial intelligence in the battle against terrorist financing?

Here are a few actions that must be taken to enhance the overall financial intelligence in the battle against terrorist financing:By introducing whole new centralized banking and payment account registersBy aligning the rules of Financial Intelligence Units with the latest international trends

3. What is the difference between money laundering and terrorist financing?

a. Intention or purpose of crime: Money laundering: To hide the source of illegal funds and integrates such funds into the legit financial systemTerrorism financing: Collating funds to carry out terrorist activities to threaten the peace and integrity of the society b. Source of funds involved: Money laundering: As the definition suggests, the source of funds involved in laundering is always illegalTerrorism financing: Funds collected for terrorist activities may not always be illegally obtained, as sometimes genuine profits are also diverted for terrorist activities c. Driving force for conducting crime: Money laundering: Generating more profits through illegal activitiesTerrorism financing: Driven by ideologies and emotions to adversely affect the society d. Stages & Process Money laundering: This is a cyclical process, where profits generated through illegal activities are-invested back into illegal activities. Involving 3 stages – Placement, Layering, and IntegrationTerrorism financing: This is a straight/linear process where funds are consumed for carrying out the terrorist activities e. Stages Money laundering: 3 stages – Placement, Layering, and IntegrationTerrorism financing: 4 stages – Collecting, Storing, Moving, and Using

4. Why is detecting terrorism financing difficult?

The following elements make the tracing of terrorism financing challenging: Terrorism financing hardly follows any pre-determined pattern, and that too is not fixed all the time,Terrorist groups are aware of countermeasures being deployed. They identify the loopholes to avoid the attention of authorities and evade these measures,Terrorism financing involves other criminal activities like smuggling, narcotics, money laundering, etc., which complicates the terrorism funding process,Involvement of multiple countries and high-profile individuals,Counterfeiting and increased use of cash instead of digital/bank transfers do not leave any trail to identify the source of such funding

What is trade-based money laundering?

Trade-based money laundering is one of the most common forms of money laundering. It is an easy way exploited by criminals to launder money between different countries, wherein they misrepresent the quality, value, or amount of goods traded through various channels.

Trade financing processes are misused to facilitate the flow of illicit funds. Trade is conducted across different jurisdictions subject to different regulations, making detecting suspicious transactions difficult. Also, the complexity of trade transactions and the volume of goods traded are the loopholes these launderers exploit to their advantage.

Let’s understand trade-based money laundering, related red flags, and how businesses can mitigate the risk arising from trade-based money laundering.

What is trade-based money laundering?

Trade-based money laundering (TBML) cleans dirty money through trade transactions and activities. The trade transactions are exploited to transfer and convert illicit money into legitimate cash or commodity, avoiding the suspicion from regulatory authorities disguising the process as legitimate trade.

For example, importing and exporting goods is just a cover for the movement of illegal funds, making the trade transaction appear legal between two countries.

It is also a way to evade taxes. Companies show different amounts in invoices, thereby reporting reduced profits and taxes decrease. Alternatively, they show multiple payments for only one set of goods received from the exporter, increasing their procurement expenses.

Why do criminals engage in trade-based money laundering?

Lack of regulations

There are no standard regulations for trading transactions. Import and export of goods are regulated by the agreement between a buyer and seller and the respective countries’ regulations. No global regulator controls these transactions; the two parties entering the contract govern the trade terms.

A rise in the amount and volume of trade

Globalization has resulted in increased trade activities across the world. Countries engage in multiple import and export transactions with several countries. These transactions have increased in number and value over the years. It allows criminals to bypass commercial rules during these humongous trade transactions, avoiding the attention of the authorities.

Increase in free trade zones

Businesses are attracted to free trade zones for their ease of conducting business, as there are fewer regulatory constraints in these zones. The absence of rules is better than circumventing rules. The number of TBML transactions has also increased with a rise in free trade zones.

Use of open account payment method

Open account transactions are the ones where payment is due after a specified time of the occurrence of the trading activity, i.e., the goods are delivered to the party, and the payment is made after 30/90 days. This time gap minimizes the connection between the actual trade and the related payment. These transactions are subject to less oversight from financial institutions; hence, criminals increasingly use these methods.

How is trade-based money laundering conducted?

Understanding the standard techniques of conducting trade-based money laundering is essential to combat the same. The following are the most used TBML techniques:

Over-invoicing of goods

The exporter inflates the price of the goods in the invoice compared to their market value. In this case, exporters receive higher payments from the importer, allowing the importer to launder money and convert/transfer through import/export transactions.

Under-invoicing of goods

The exporter prepares the invoice for the goods at a price lower than the fair market value. Importers get goods at a lower value, resulting in the evasion of import duties.

Multi-invoicing

Exporters create multiple invoices for the same set of goods to be shipped. They can receive multiple payments for the same shipment, using different payment methods adding layers of complexity. Thus, launderers legitimize their illicit money through multiple invoicing.

Changing the quantity of goods

Launderers can also change the quantity or weight of goods being traded. They may report the quantity as more than the actual or less than the actual. In the case of over-quantity, they receive illicit money as payment and convert it to legitimate money. While in the case of under-quantity, they launder money by avoiding the payment of actual import duties.

Alternatively, they might report a specific quantity of goods while there is no shipment done. It is called phantom shipping or ghost shipping. Importers and exporters collaborate to create false invoices and other documentation without the actual shipping of goods. The illicit money is moved from the importer to the exporter without actual trade transactions.

Misrepresentation of goods

The exporters may represent the goods as expensive, though in reality, the goods are cheap. Thus, the invoice and customs documents show a high price while the actual value is less.

It is common in the gems and jewellery sector, where the invoice says raw diamonds and the shipment is of polished diamonds or artificial ones.

Non-documentary trade

For some trading transactions, there are no documents available for investigation. It is not that no documents are prepared for the transaction, but these are not accessible. The regulators have access to only the name, account number, and address of the buyer and seller.

In non-documentary trade transactions, regulators are unaware of the underlying flow of goods and trade activities. It is difficult for them to validate transactions. The absence of due diligence on the volume, type, quantity, and value of goods makes it easier for launderers to launder money.

What are the red flag indicators of trade-based money laundering?

The best option for individuals, companies, and countries is to observe the red flags of trading transactions. With the identification of suspicious transactions, you can investigate them further. Following is an illustrative list of TBML indicators:

Differences in the descriptions of items to be traded in the invoice and the shipping bill.
Differences in the market value of the items and the value mentioned on the invoice.
Involvement of trading entities with registered addresses in residential buildings.
The shipment size does not match the customer’s profile and regular business activities.
Trading of an item from one jurisdiction to another or from one subsidiary to another, whose business activities are in no way related to each other or without logical economic reason.
Involvement of trading entities with no physical presence or an online presence that does not align with its business activities.
The type of goods traded does not align with the regular shipment of customers or the client’s profile and business activities.
Trading transactions involving a third party with no relation to the transaction (either receiving cash payments or managing documents); offshore front companies or shell companies may be involved in such transactions.
Trade deals involve complex trade routes that do not make geographical sense.
Goods are exported from or imported into high-risk jurisdictions or countries with poor AML regulations.
Missing trade documents or false documents.
A sudden increase in trade transactions from or to a company that was dormant for a long time.
Sudden high volumes or value of trade from an entirely new company.

What is the way out for businesses from trade-based money laundering?

Know Your Customer (KYC) and customer due diligence (CDD) are the best solutions for reducing trade-based money laundering. Businesses must implement policies to collect details on all their customers and transactions. Further, ongoing monitoring of the customer’s profile and the transaction is necessary to identify any unusual patterns. If they see any red flag, deeper scrutiny is essential to identify money laundering risks.

Using advanced technology systems or artificial intelligence is also an excellent solution to reduce money laundering risks. These systems can help businesses identify money laundering threats and send alerts. It allows the entities to report the TBML activities to the authorities promptly.

About the Author

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a Chartered Accountant with more than 26 years of experience in governance, risk, and compliance. He helps companies with end-to-end AML compliance services, from conducting Enterprise- Wide Risk Assessments to implementing the robust AML Compliance framework. He has played a pivotal role as a functional expert in developing and implementing RegTech solutions for streamlined compliance.

Reach Out to Pathik

Article UAE

High-Risk Country Reporting – HRC and HRCA

With increased monitoring emphasized on transactions with persons or entities hailing from high-risk countries, the Ministry of Economy provides for filing of a separate report capturing details about such transactions. These reports are:

High-Risk Country Report or High-Risk Country Transaction Report (HRC)
High-Risk Country Activity Report (HRCA)

The reports mentioned above are to be filed by both – Financial Institutions and Designated Non-Financial Businesses and Professions (DNFBPs).

When is HRC/HRCA to be filed?

High-Risk Country Transaction Report: If at the time of establishing or in the course of the customer relationship or when conducting transactions on behalf of a customer, a reporting entity observes transactions related to high-risk countries subject to a Call for Action (access the list of jurisdictions here), then the entity is required to submit an HRC.

High-Risk Country Activity Report: If during the establishment or course of the customer relationship or when conducting an activity on behalf of a customer, a reporting entity identifies activities related to high-risk countries subject to a Call for Action (access the list of jurisdictions here), then the entity should submit an HRCA.

What activities or transactions are to be reported in HRC/HRCA?

Any cross-border transaction involving the transfer of funds through a banking channel or any remittances, either originating from, destined to, or passing through a high-risk country, would be subject to reporting in HRC/HRCA.

It does not necessarily require the physical presence of the person (transferor or transferee of funds) in the high-risk country at the time of remittance or receipt of funds. Instead, association by nationality or place of residence in high-risk countries would also be considered in the case of a natural person. While in the case of a corporate entity, the company’s place of incorporation or operation, as well as the association of the UBOs or authorized signatory or senior management with high-risk jurisdictions, must be considered.

Accordingly, any transaction or activity about transferring funds into or from high-risk countries would be subject to reporting to FIU. Please note that such reporting is irrespective of the amount involved or the currency.

How and to whom is HRC/HRCA to be filed?

As the Financial Intelligence Unit (FIU) is the reporting authority for all AML matters in the UAE, the HRC and HRCA must also be filed with FIU.

Like all other AML reports (such as STR, SAR, DPMSR), HRC and HRCA are also reported through the goAML Portal. While submitting the reports on goAML, the appropriate report type must be selected by the reporting entity. FIU does not accept any report either through physical mode, via email, or as a message on the Message Board available on the goAML Portal.

In the case of a transaction with a person from a high-risk country, if the reporting entity does not have the necessary details related to the transactional attributes mandatory to be captured on goAML, then the reporting entity may choose to file an HRCA. Here, the reporting entity must ensure that all the adequate details of parties, value involved, etc., are adequately captured.

What is the Financial Institution’s and DNFBP’s obligation post-filing HRC/HRCA?

Once HRC or HRCA has been filed with FIU, reporting entity must withhold the execution of the transaction for three (3) days from the date of reporting to FIU, as the FIU is expected to respond to such HRC/HRCA during these days. If, during these three (3) days, FIU does not object to or respond to filed HRC/HRCA, then reporting entity can conduct the transaction basis the due diligence performed for the subject party and the transaction. Such transaction execution will be at the judgment of the reporting entity only.

If the FIU issues any instructions concerning filed HRC/HRCA within the prescribed time, the same needs to be adhered to by the reporting entity.

Transactions and the parties reported in HRC/HRCA should be subject to frequent ongoing monitoring by the reporting entity

Is there any exemption from filing HRC/HRCA?

HRC/HRCA reporting requirement is applicable only in cases of cross-border transfers.

Accordingly, transactions like domestic cheques, payment of domestic utility bills using a card issued in UAE or cash by a person hailing from a high-risk country, etc. are exempted from HRC/HRCA reporting requirements, as no banking or remittance channels have been used for the international transfer of funds.

Illustration:

A. Assume you are a TCSP and a corporate entity with a place of incorporation in the high-risk jurisdiction approaches you for assistance in setting up a branch in UAE. For such a transaction, the person has traveled to UAE from another country. The payment for the said services would be remitted to your account from the company’s account with a bank in another high-risk country.

Since there is cross-border movement of funds by bank transfer, the proposed transaction must be reported in HRC/HRCA. Here, DNFBP shall ensure that the reported transaction shall only be executed if the FIU does not object to the transaction and after three working days after filing an HRC.

B. An individual from high-risk jurisdiction has visited a non-banking financial institution in UAE to get the US Dollars converted to AED. Here, the currency exchange transaction occurs in UAE without any funds transferred through banks. Accordingly, the financial institution would be exempt from reporting this transaction with FIU.

About the Author

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a Chartered Accountant with more than 26 years of experience in governance, risk, and compliance. He helps companies with end-to-end AML compliance services, from conducting Enterprise- Wide Risk Assessments to implementing the robust AML Compliance framework. He has played a pivotal role as a functional expert in developing and implementing RegTech solutions for streamlined compliance.

Reach Out to Pathik

FAQs About High-Risk Country Reporting

Yes, DNFBPs and Financial Institutions are required to file HRC with FIU.

The DNFBPs and the Financial Institutions must file HRC or HRCA using their goAML registration credentials. Third parties can assist you in filing these reports with FIU, using the reporting entity’s credentials for the goAML portal.

While establishing business relationships or conducting business activities, if you identify any activity or transaction with a person or entity having an association with high-risk countries, then as DNFBP, you are required to submit the HRC or HRCA with FIU UAE via the goAML Portal.

HRC or HRCA reporting requirement is for high-risk countries classified as “High-risk jurisdictions subject to a Call for Action” by FATF.

FATF has classified the below-mentioned countries as high-risk jurisdictions subject to a “call for action”:

Democratic People’s Republic of Korea (DPRK)
Iran

There is no threshold amount prescribed for filing HRC and HRCA. Every transaction involving high-risk countries must be reported in HRC and HRCA, irrespective of the transaction value.

Transactions not involving any cross-border transfer of funds to or from the high-risk countries are exempted from HRC/HRCA reporting requirements, like domestic cheques, payment of domestic utility bills using a card issued in UAE, cash by a person from a high-risk country, etc.

Once an HRC or HRCA has been filed with FIU, the reporting entity shall keep the execution of the subject transaction on hold for three days from the date of submission of HRC/HRCA.

Article UAE

A guide to Enhanced Due Diligence – Element of AML Compliance framework

Enhanced Due Diligence (EDD) is one of the critical elements of the entire customer onboarding journey, forming part of the AML compliance program. EDD is a higher version of the standard customer due diligence process, requiring extra checks and verifications to establish the person’s identity or any related information.

Let’s learn about enhanced due diligence, its purpose, the process involved, and its significance in complying with AML regulations and safeguarding the business against financial crime risks.

What is Enhanced Due Diligence (EDD)?

EDD is a part of the Know Your Customer (KYC) process, adopted as part of the AML framework while onboarding new customers/clients.

While conducting the risk profiling of the customer/client as part of the standard Customer Due Diligence (CDD) process, if the designated entities identify the person as “high-risk,” it calls for taking enhanced measures to assess the legitimacy of the person’s identity and other related information.

For low-risk customers, it is enough to conduct a standard CDD process, such as obtaining and verifying the customer’s identity, address, etc. However, it becomes critical for high-risk customers to dive a little deeper into the process and seek additional information or perform additional verifications.

Performing EDD is necessary as it is a regulatory requirement in case of customers classified as “high-risk,” requiring increased scrutiny and higher verification standards. It also becomes pertinent to safeguard yourself from being exposed to money laundering or terrorism financing activities.

An illustrative list of red flag indicators suggesting the need for EDD measures

Customers hailing from jurisdictions notified as “high-risk” or subject to increased monitoring (FATF grey list countries)
The customer is a Politically Exposed Person (PEP) or associated with PEP
A person having a criminal history or has been charged for any financial crimes and proceedings are underway
The customer insists on settlement of the transaction in virtual assets
Doubt about the appropriateness of customer’s risk classification
Customer is a non-profit organization (NPO)
Red-flag indicators of potentially unusual or suspicious activity, such as:

When intermediaries are involved in the transaction without any logical reasoning
When the customer’s legal structure is unnecessarily complex
Customer hesitant is sharing the details of the ultimate beneficial owner

Enhanced Due Diligence Procedures

Following for conducting adequate EDD measures:

Seeking additional details

Once a customer has been classified as “high-risk,” the following additional information is to be sought from the customer:

Nature of business
Source of funds
Source of wealth
Purpose of transaction

Such information should be backed up by substantial documentation, such as obtaining bank statements or audited books for determining the source of funds/wealth, etc.

Additional verification and establishing the legitimacy of the information received

Relying on third-party databases (e.g., cross-checking the identity of the foreign national with the country’s embassy or consulate)
Evaluating the reasonableness of the purpose of the transaction
Verifying the professional and financial background of the person

These verifications should be based on credible and independent sources such as private databases or official government websites to avoid bias or wrong information.

Adverse Media and Social profile check

Reviewing the open source information for the adverse media or negative news about the person helps to understand the person’s history and reputation. It corroborates your verification and overall risk categorization of the person.

Along with this, social profiles like LinkedIn or Facebook, etc., of the person should be looked for and reviewed to understand that social presence and association with other organizations. It helps in understanding the person’s social stature, as it is seen that a person indulging in financial crimes may not have strong social prominence.

Senior management approval

Before onboarding a high-risk customer, approval from senior management is mandatory.

Enhanced or frequent monitoring of customer information and the transactions

Given the high risk associated with the customers subjected to EDD, the AML regulations also require the designated entities to monitor the customer information and their transaction more frequently. Such enhanced monitoring would help in identifying and reporting the following:

Change in customer information contradicting the information shared earlier
Unusual pattern of transactions
Sudden change in terms of transactions,
Customer behavior suggesting money laundering-related suspicion, etc.

Why are EDD measures necessary?

As mentioned above, the primary purpose of EDD is to conduct detailed assessments of the customer’s identity, the purpose of the transaction, and the source of funds. These additional measures are critical:

Combat financial crimes

The additional information collected and rigorous verification measures performed as part of EDD help you and the government keep a tab on transactions of high-risk customers and identify any suspicious behavior beforehand, helping you prevent financial crimes.

Comply with regulations

EDD is a prominent part of the AML compliance framework. You conduct due diligence on your customers to avoid the risks of money laundering or other financial crimes. Thus, you follow these requirements by implementing EDD procedures, avoiding resultant fines and penalties.

Build your reputation

When you put in place proper EDD procedures, you not only adhere to the AML regulations but also safeguard your business from being vulnerable to money laundering and financial crime risks. It also conveys your ideologies and support to fight these financial crimes. It brings you customer loyalty and public trust, improving your reputation.

About the Author

Jyoti Maheshwari

CAMS, ACA

Jyoti has over 9+ years of hands-on experience in regulatory compliance, policymaking, risk management, technology consultancy, and implementation. She holds vast experience with Anti-Money Laundering rules and regulations and helps companies deploy adequate mitigation measures and comply with legal requirements. Jyoti has been instrumental in optimizing business processes, documenting business requirements, preparing FRD, BRD, and SRS, and implementing IT solutions.

Reach Out to Jyoti

Article UAE

A deep dive into the AML compliance requirements for the real estate sector in the UAE

AML compliance requirements for the real estate sector in the UAE

The real estate sector is one of the main non-financial sectors that are highly vulnerable to money laundering activities. This is because large sums of money are involved in real estate transactions with limited regulatory scrutiny. So, money laundering activities and terrorist financing transactions are quite common in the real estate sector.

It becomes essential for the regulators to make the sector more regulated and controlled. It is also important to identify the possible suspicious transactions and conduct regular monitoring of real estate transactions. UAE has made special provisions for AML requirements in the real estate sector.

In the blog, we list down the situations that real estate businesses must be aware of to identify money laundering. We also cover the UAE regulations that govern AML/CFT provisions in the country. Lastly, we include the AML requirements that real estate agents and brokers must fulfill.

Suspicious transactions in the real estate sector that raise a concern for money laundering

Following are the possible situations that raise suspicion regarding involvement of money laundering or any financial crime in the real estate sector:

Payment of the entire amount of the value of property in cash
People use complex loan structures or credit finance as a source of finance for buying property to launder money. In the repayment of these loans, the illicit money is forced into the legitimate financial system.
Undervaluation or overvaluation of property or sequence of property sale transactions to get a higher value is a way of laundering money.
Making frequent, unnecessary renovations and improvements in property are a sign of investment of illicit money.
Customers (buyers or sellers of property) use unknown third parties with a clean criminal record to hide their identity as the owner of the property.
Hiding the ownership of a property by the use of trust and company structures, shell companies, or front companies
Multiple purchases or sales of property
A legal owner of any property having an unusual nature of use or possession of assets, a mortgage with an unidentified lender, a strange rise in the financial funding, or an erratic relationship between income and living standards can be a suspicion of money laundering activity in real estate.
Purchase of property by Political Exposed Persons (PEPs) or individuals with Sanctions by posing as high-ranking foreign officials or members of their families.
Using the purchased property to carry out illicit or criminal activities such as drug production is a money-laundering example. Criminals use these revenues to buy more properties and thus hide the origin of illicit money.
A property buying or selling transaction that does not make any commercial or professional sense because of a lack of interest exhibited by any party.
Money launderers may buy a property in a third party’s name and show themselves as a tenant. Then they use illicit money to pay rent to the third party.
Money launderers use the help of different professionals to launder money with no possibility of detection. They use the services of accountants, trust and company service providers, lawyers, or any others to make their criminal activity look legitimate.
Buying real estate in a foreign country using illicit funds to hide assets from own country’s lawmakers.

In regards to these possibilities, the UAE government introduced AML/CFT regulations. Let us look at the key regulations and directives that control the real estate sector’s compliance with AML/CFT.

AML regulation for real estate sector in UAE

Decree-Law No. 20 of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Illegal Organizations is the primary law for AML in UAE. The Cabinet Decision No. 10 of 2019 concerning the Implementing Regulation of this Decree-Law makes real estate agents and brokers subject to the AML law. This means that the AML law applies to real estate agents and brokers in the UAE.

These regulations are necessary since the real estate sector has a lower level of awareness of possible suspicious ML/FT transactions. Also, the real estate sector is big with not many rules to invest or do business in it. This makes the sector highly exposed to ML/FT activities that disturb the economy and income distribution of the country.

The Cabinet Decision provides a list of Designated Non-Financial Businesses and Professions (DNFBPs) that includes real estate brokers and agents. These define the various CDD obligations of the real estate industry and ways to identify risk factors. Let us look at the AML/CFT compliance requirements for the real estate sector in the UAE.

AML/CFT compliance requirements for real estate brokers and agents in UAE

Real estate agents and brokers must comply with the following requirements under the AML regulations of UAE:

Understand possible ML/FT risk exposure

You must have a detailed understanding of how your real estate business can be exposed to ML and FT risks. For this:

You must adopt a risk-based approach to identify risks in your business transactions. These risks may be of different types based on business nature, type of service, the operational environment, and other factors. Accordingly, you must adopt risk mitigation measures.
You must be aware of the source of ML/FT risks and the phase in which the money laundering risk is high.
You must know the latest ML/FT trends and understand the various customer risks, channel risks, and geographic risks to the real estate industry. You must be able to identify each type and strategize for their elimination.
You must be aware of the type, size, complexity, transparency, geographic origins, or any unusual nature of financial arrangements or instruments related to the buying and selling of property.
Brokers and agents must have full information on a customer’s residence status, type of real estate transaction, and speed and frequency of transactions to gauge the risk.
You must keep all this information related to risk profiling documented and saved. The information must include methods of risk identification used, models used, and overall risk score.

Implement Customer Due Diligence measures

Real estate brokers and agents must apply the necessary customer due diligence (CDD) measures based on the category and profiling of the ML/FT risk. If there is any change in the risk category, they must update the due diligence measures as well. You must apply these measures during or before the transaction happens or the business relationship starts.

These due diligence measures include the following:

You must have in place a defined process for screening customers and prospects against Sanctions Lists. You must conduct background checks on your customers and prospects to identify any association with financial crimes.
You must be vigilant of the identity of the beneficial owner of your client. You must obtain all relevant proofs for establishing their identity and the source of funding.
You must check for the compatibility of the customer’s profile with the relevant real estate transaction to see if it suits their financial stature and professional circumstances.
You must track the legal arrangement or structure used in the transaction, as it may result in hiding the identity of the owner or source of funds.
You must also keep an eye on any association with Political Exposed Persons (PEPs), specifically in the case of foreign buyers or sellers.
You must check for any previous business transaction or relationship between buyer and seller.

Ongoing monitoring of transactions

Whenever you identify high-risk customers, you must conduct a regular check of their transactions. You must monitor the frequency and type of real estate transactions they have been involved in. You must check the status of the financial instrument during the lifecycle of the transaction or you must check the land registry details.

Put in place internal policies, controls, and procedures

The real estate brokers and agents must implement necessary measures to manage and mitigate the ML/FT risks. One of the key measures is the implementation of strong and effective internal policies, controls, and procedures. You must assess these policies for effectiveness and update them accordingly as and when the need arises.

These policies must relate to customer due diligence and suspicious transaction reporting. It must also include requirements for governance and record-keeping. Overall, such procedures must ensure management and mitigation of risks.

Report suspicious transactions to Financial Intelligence Unit (FIU)

You must report any kind of suspicious transactions to the Financial Intelligence Unit as and when you suspect it. You must add all the relevant information for the suspected transaction and keep it updated. You must be extra vigilant to identify any suspicion in any transaction or customer.

Some of the indicators for suspicious transactions include:

Unnecessary complex transactions whose purpose or beneficial owner is not known
Transactions that are inconsistent with the customer’s risk profiling
Large transactions (relatively large to a customer’s income or turnover)
Unexplained changes in the ownership of entities or unnecessary involvement of a third party
Transactions involving high-risk countries or third parties with no relationship with customers
Unclear or dubious sourcing of funds for a transaction
Refusal of customers to provide relevant information or proofs required for due diligence measures

Real Estate Activity Report Submission

Ministry of Economy has recently issued a Circular (No. 05/2022 dated 24th June 2022), requiring the real estate brokers to report the specified transactions pertaining to real estate in the new report named as – Real Estate Activity Report (‘REAR’). The reporting entities have to submit REAR with the FIU UAE.

Devise and implement a sound governance structure

You must formulate a governance structure to ensure your business complies with AML/CFT requirements. For this, you must appoint a fit and capable compliance officer. He/she must be capable of handling Ml/FT reporting, AML/CFT program management, and training and development of the team.

You must keep your employee up-to-date on AML/CFT laws, policies, and norms. You must design a training manual and impart it to relevant team members. You must also assess the effectiveness of these training programs to ensure the right knowledge development.

A well-functioning governance structure is tested by an independent audit frequently. This auditing procedure will check the risk profile of products and services, customers, and target markets. If it is not possible for you to keep an internal audit team, then you can hire a third-party auditing team.

Anti-money laundering regulations for real estate transactions

The real estate sector brings a huge difference to UAE’s economy. So, it is immensely critical to keep money laundering and terrorism financing in check in this sector. You must implement all the above-mentioned measures to comply with national and global AML regulations.

The compliance with the anti-money laundering regulations for real estate transactions will enable you to save yourself and your business from any fraudulent transaction or business relationship. This, in turn, helps you to minimize your exposure to money laundering and terrorism financing risks. These measures also help you to be in congruence with international AML/CFT regulations and best practices.

To plan and implement any of these measures, you can also take the support of AML consultants in the UAE. A professional, AML consultant will be better equipped to help real estate brokers and agents with the right, relevant measures against money laundering. The consultant will ensure that industry-specific steps are taken in the fight against money laundering and terrorism financing.

About the Author

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a Chartered Accountant with more than 26 years of experience in governance, risk, and compliance. He helps companies with end-to-end AML compliance services, from conducting Enterprise- Wide Risk Assessments to implementing the robust AML Compliance framework. He has played a pivotal role as a functional expert in developing and implementing RegTech solutions for streamlined compliance.

Reach Out to Pathik

Article UAE

What is Proliferation and Proliferation Financing?

Along with the risk assessment pertaining to money laundering and financing of terrorism, it is obligatory on the part of DNFBPs to assess the risk associated with “proliferation financing”.

Accordingly, it is critical to understand what the word “proliferation” means and how “proliferation financing” is a threat to the DNFBPs and society as a whole.

WMD (Weapons for Mass Destruction) Proliferation refers to the manufacture, acquisition, possession, development, export, trans-shipment, brokering, transport, transfer, stockpiling, or use of nuclear, chemical, or biological weapons and their means of delivery and related materials (including both Dual-Use technologies and goods used for non-legitimate purposes).
Financing of Proliferation or Proliferation Financing (‘PF’) refers to the risk of raising, moving, or making available funds, other assets or other economic resources, or financing, to persons or entities for purposes of WMD proliferation, including the Proliferation of their means of delivery or related materials.

Program fundraising Disguising the funds Procurement of proliferation-sensitive materials and technology

North Korea and Iran are subject to Targeted Financial Sanctions (‘TFS’) related to WMD proliferation, as these countries are a global threat because of their efforts to develop illegal WMD programs and capabilities.

Proliferation Financing Risk

As mentioned above, DNFBPs are required to assess and adopt the measures to mitigate the “proliferation fi

Proliferation Financing Risk refers to the potential breach, non-implementation, or evasion of the TFS obligations pursuant to United Nations Security Council Resolutions relating to the prevention, suppression, and disruption of the Proliferation of WMD and its financing.

PF Risk Assessment as part of AML/CFT Policy

For effective assessment of PF risk, DNFBPs need to understand the following aspects first:

1. Proliferation Financing Threats

Threat refers to persons and entities that have previously caused or have the potential to evade, breach, or exploit a failure to implement TFS related to Proliferation. Key Proliferation and PF threats include countries like North Korea and Iran, along with terrorist groups who are always assumed to be interested in nuclear weapons and radiological materials.

2. Proliferation Financing Vulnerabilities

Vulnerability refers to matters that may facilitate the breach, non-implementation, or evasion of TFS related to Proliferation. Vulnerabilities may include features of a particular sector, a financial product, or a type of service that make it attractive for a person or entity engaged in the breach, non-implementation, or evasion of TFS related to Proliferation.

PF vulnerabilities may be based on factors such as business structure or sector (banking or insurance), products or services (virtual assets or money transfer services), customers and transactions (customers from high-risk jurisdictions like Iran).

To identify the PF vulnerabilities, DNFBPs should consider the international reports on PF typologies and the sectoral reports on PF issued by UAE authorities.

3. Proliferation Financing Consequences

Consequence refers to the outcome where funds or assets are made available to proliferators, which could be used to procure the materials, items, or systems for developing illicit nuclear, chemical, or biological weapon systems, causing the threat of use of WMD.

Proliferation Finance Risk Assessment

DNFBPs should document their understanding and assessment of PF risk. The approach for PF risk assessment should be commensurate with DNFBP’s nature and size of business. DNFBP’s PF risk assessments shall include the following categories:

a. Geographic Risk:

DNFBPs should identify and assess their business locations, where it conducts business and their target markets.

As mentioned above, North Korea and Iran are the major source of PF risk. However, it is pertinent to note that geographic risk is not limited to these countries only, as such countries and terrorist groups depend on global networks, such as using neighbouring countries to route the money or procure the proliferation materials.

b. Customer Risk:

Customer risk may arise from the following aspects:

Sanctioned – If the customer is an UN-sanctioned person or entity.
Entities owned by UN-sanctioned persons – During the CDD process, DNFBPs must identify the UBO of such entities and screen them against the TFS list.
Customer business activities – Customers producing proliferation-sensitive goods can pose PF risk on DNFBPs.
Geographic – DNFBPs shall assess customers’ locations (residence and business place).

c. Product and Service Risk:

DNFBPs shall assess the risk that their products or services may be exploited for proliferation financing in any way – either to obtain funding for WMD activities or to disguise the funds or to obtain proliferation-sensitive goods.

Measures to prevent and mitigate Proliferation Financing Risk

1. DNFBPs shall identify the red flags related to proliferation financing and shall perform the Enhanced Due Diligence (‘EDD’) on the customers categorized as high-PF risk, considering such red flags.

2. As part of EDD, DNFBPs shall collect the information regarding –

Expected end users of any goods or services
Customer’s expected exposure to high-risk jurisdictions
The ultimate beneficial owner of the entity.

3. DNFBPs should also inquire about and check the TFS policy of the customer.

4. Before conducting any business transaction with such high-PF risk customers, approval from senior management shall be obtained.

5. DNFBP shall have a policy in place to restrict undertaking any transaction with the customer hailing from countries listed for TFS for proliferation financing (i.e., North Korea and Iran).

6. If any possible PF activities are envisaged for a customer/transaction or the customer is listed as sanctioned, DNFBP shall freeze the funds of the customer and should immediately report the same on goAML Portal.

Sanction Evasion and Red Flags for Possible PF Activities

Dealings, directly or through a client of DNFBP’s client, with sanctioned countries or territories where sanctioned persons are known to operate.
The use of shell companies through which funds can be moved locally and internationally by misappropriating the commercial sector.
Dealings with sanctioned goods or Dual-Use goods.
Identifying documents (e.g., bill of lading, sales purchase agreement, etc.) that seemed to be forged or counterfeited.
Identifying tampered or modified documents with no apparent explanation, especially those related to international trade.
The activity developed or financed does not relate to the original or intended purpose of the entity. For example:
For companies, they are importing high-end technology devices which are not in accordance with their trade license.
For a non-profit organization, they are exporting communication devices, but they are an entity aimed to provide humanitarian aid.
Complex commercial or business deals that seem to be aiming to hide the final destiny of the transaction or the good.
Complex legal entities or arrangements that seem to be aiming to hide the beneficial owner.

Survey by Executive Office for Control & Non-Proliferation (EOCN)

Executive Office for Control & Non-Proliferation (‘EOCN’) has recently released a survey to know the awareness about the TFS and Sanction Evasion amongst the reporting entities in UAE. As suggested by EOCN, the survey is performed just to know the understanding of the businesses on the subject and not to investigate the compliance status of the reporting entity. These survey includes questions such as under:

On which countries, the UNSC has imposed the TFS related to Proliferation Financing;
DNFBPs shall freeze the funds of the customer under what circumstances;
For what all parties, a DNFBP is required to carry out screening;
Who all should be made aware about PF guidelines issued by EOCN;
Whether DNFBPs have identified the red-flags related to PF risk;
Whether DNFBPs are aware about the techniques used by the proliferators to carry out PF and evade sanctions;
Understanding related to Sanctions Evasion Technique;
On what all factors, DNFBPs shall carry our PF risk assessment;
What are Compliance Officer’s responsibilities around PF-risk mitigation;
Whether DNFBPs have PF related policies in place and whether trainings are conducted on the said subject.

About the Author

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a Chartered Accountant with more than 26 years of experience in governance, risk, and compliance. He helps companies with end-to-end AML compliance services, from conducting Enterprise- Wide Risk Assessments to implementing the robust AML Compliance framework. He has played a pivotal role as a functional expert in developing and implementing RegTech solutions for streamlined compliance.

Reach Out to Pathik

Article UAE

Risk indicators for DPMS – Strategic Analysis by UAE FIU

Given the fact that precious metals and stones are being highly exploited by criminals to launder money given their size and high liquidity, and the fact that UAE is one of the biggest marketplaces for precious metals and stones trading, the UAE Financial Intelligence Unit (UAE FIU) has recently conducted a strategic analysis of data about Dealers in Precious Metals and Stones (DPMS).

The Strategic Analysis Report lays down the UAE FIU’s objective for conducting this analysis of the DPMS sector as under:

To enhance the understanding of ML/FT vulnerabilities associated with precious metals and stones,
Developing ML/FT trends, typologies, and red flags indicating exploitation of precious metals and stones and the DPMS sector.

The methodology adopted by the UAE FIU for the strategic analysis of the DPMS sector

The UAE FIU’s strategic analysis is conducted based on the information gathered from the reporting entities operating as DPMS and other relevant stakeholders for January 2021 to June 2022.

The UAE FIU reviewed the below-mentioned data to analyze the ML/FT trends prevalent in the DPMS sector:

Dealers in Precious Metals and Stones Report (DPMSR) filed on the goAML portal indicating cash and wire transfer transactions above the prescribed threshold,
Suspicious Transaction/Activity Report (STR/SAR), filed either by the DPMS entities or with a “Reason for Reporting” indicating the abuse of precious metals and stones,
Information exchanged between UAE FIU and counterparty FIUs around gold smuggling, illegal mining of precious metals, gold theft, etc.),
Information received from domestic authorities – Public Prosecutions, Police Departments, and the Ministry of Interior (MOI) related to an investigation of money laundering and terrorism financing offenses,
Ministry of Economy’s (MOE) information about DPMS registered in the UAE and MOE imposed sanctions, fines, and warnings to DPMS entities,
Information received from the Federal Customs Authority around ‘Cash declarations’ wherein the purpose mentioned is related to precious metals and stones.

Conclusions of the UAE FIU’s strategic analysis of the DPMS sector

The Strategic Analysis Report addresses the ML/FT typologies and red flags associated with the DPMS sector in the UAE. As per the UAE FIU’s analysis, the following are the major ML/FT typologies or patterns abused to launder money through the DPMS sector:

Trade-based money laundering

Using DPMS entities as “front” to launder the illegal money using trade-based money laundering methods like incorrect invoicing, phantom shipment, or fictitious supply transactions.
Use of multiple DPMS entities as a ‘Corporate Vehicle’ to disguise the source of funds by creating multiple layers by way of transferring a large sum of money amongst the entities without any business rationale.

The trade-based money laundering is widely used in the DPMS sector to launder money, wherein the transaction is manipulated to transfer the funds from one person to another and from one country to another.

Other widely exploited trade-based money laundering techniques are:

To move a large sum of illicit funds from one country (importer) to another (exporter) by over-pricing the commodity supplied compared to its market value.
Raising multiple invoices on the importer for the same set of products and receiving the payment using different methods to avoid the attention of the authorities.
Representing the duplicate or fake stones as original and precious stones to bag transfer of large amount from buyer to seller.
Trade-based money laundering often involves tax evasion, either by short declaring the import quantities or under-pricing the imported goods to avoid paying a large sum of taxes on the import of precious metals.

Money laundering through “foreign currency exchange”

Indulging employees or third parties into the conversion of foreign currency exchanges without getting the name of the DPMS entity involved anywhere. Here, multiple individuals are involved to avoid reporting threshold and justify the source of funds and purpose as under:
Source of funds used for currency conversion: salary income or savings
Purpose of currency conversion: travel or family upkeep
DPMS is undertaking many foreign currency transactions, mainly in cash, without any logical business transaction or for a quoted reason like foreign suppliers only accepting cash, etc.

Generally, it has been seen that one currency can be converted into another currency without any involvement of a regulatory authority. Moreover, the conversion of cash currency legitimizes the source of such converted currency, as generally, the party offers receipt of such conversion.

Moreover, with the increased volume of global trades, the cross-border movement of funds has also risen, leading to increased cases of terrorism financing and laundering funds to invest in unregulated financial centers.

Gold/cash smuggling

Smuggling gold or illegally transferring the gold from the conflict-affected or high-risk jurisdiction. This smuggled gold or illegally transported gold is sold in smaller quantities to local DPMS entities against cash or is processed and re-exported illegally to different countries,
Sourcing of gold from miners without adequate due diligence of the miner,
Individuals smuggle cash (importing and exporting) on behalf of DPMS entities.

Using the network of people, gold and other precious metals are increasingly smuggled from illegal miners, wherein quantities of gold are distributed amongst many individuals to avoid the attention of and reporting threshold before the Customs Authority.

ML/FT risk indicators for DPMS sector suggested in the Strategic Analysis Report

The risk indicators or the ML/FT red flags captured in this report can be used by the DPMS and financial institutions to identify and report any suspicious activities involving precious metals and stones. The following is an illustrative list of ML/FT risk indicators captured in the report involving the abuse of precious metals and stones:

DPMS entities with complex legal structures, created either to hide the UBO or disguise the transfer of funds,
DPMS entity formed as a front company to mix the legally obtained funds with the illicit funds,
Unreasonable behavior of or large complex transactions by newly formed DPMS entities,
DPMS entities extensively transact in cash,
Irregular shipping methods inconsistent with the standard business practice of DPMS,
Inconsistent documentation or forged documents to disguise the transaction,
DPMS frequently enters into transactions of an abnormally large amount,
DPMS having multiple bank accounts without any business sense or DPMS entities operating bank accounts in the employee’s name,
Adverse news about the DPMS’ UBO or senior management,
DPMS or its UBO or management having close association with high-risk countries,
Receipt or payment of money to third parties having no connection with the sanctions,
Transaction structuring into smaller value deposits to avoid reporting threshold,
DPMS entities extensively involved in cross-border cash movement,
Frequent deposit of cash amounts into banks or exchange of foreign currencies by DPMS,
DPMS entities importing precious metals from conflict-affected jurisdictions, or the volume of import is inconsistent with the country of import (having limited mining capacity or no mines),
Failure to furnish ‘Customs Declaration’ concerning cash deposit related to precious metals/stones transaction,
DPMS transacting in gold instead of cash/bank transfer,
Transfer of funds amongst unrelated companies, having no business nexus,
DPMS or its employees engaging in frequent foreign currency conversions without any business logic,
Frequent travel to high-risk areas or illegal mining jurisdictions,
DPMS operates on loans and credit facilities, generally settled before due dates through cash.

The primary reason for exploiting the DPMS sector

Given the peculiar nature of precious metals and stones, the same is most vulnerable in the hands of money laundering, using various methods. We have tried to map the main reason for exploitation against the money laundering technique as under:

Characteristic of precious metals and stones	Money laundering method
Global currency – Precious metals and stones are widely accepted as a medium of exchange across the globe	Gold smuggling, wherein gold from illegal mines is smuggled or illegally transferred to other countries to supply it in the local market against cash Trade-based money laundering, wherein gold is imported and exported at a manipulated price
High liquidity – Precious metals and stones can easily be converted into cash	DPMS entities purchase smuggled gold without any adequate KYC and due diligence process Terrorists convert their illegal funds into gold, which can be easily transported and encashed in the country of operations
Over-the-Counter – Precious metals and stones trading in not regulated over an exchange platform	Smuggled gold is sold to the DPMS entities without any adequate KYC and due diligence process Inadequate documentation of the precious metal and stone transaction
Easy transportation – Compact size makes its movement easy	Easy movement of gold without much hassle makes it lucrative for terrorism financing and money laundering Terrorists store their illegal funds in gold and transport the same to the country of operations

About the Author

Jyoti Maheshwari

CAMS, ACA

Jyoti has over 9+ years of hands-on experience in regulatory compliance, policymaking, risk management, technology consultancy, and implementation. She holds vast experience with Anti-Money Laundering rules and regulations and helps companies deploy adequate mitigation measures and comply with legal requirements. Jyoti has been instrumental in optimizing business processes, documenting business requirements, preparing FRD, BRD, and SRS, and implementing IT solutions.

Reach Out to Jyoti

Article UAE

What are FATF Blacklist and Grey list countries?

The Financial Action Task Force (FATF) is an independent agency that works internationally to prevent money laundering and financing. It provides several recommendations for governments that help them to make their AML compliance framework sturdy and robust. FATF has issued a blacklist. This backlist mentions the names of the countries which do not cooperate in the global efforts to prevent financial crimes such as money laundering, financing of terrorism, and financing of proliferation of weapons for mass destruction.

While the other list issued is the grey list of countries where the AML regulations are not entirely compelling and efficient enough to counter money laundering and terrorism financing.

About the FATF Blacklist and Grey list

FATF Blacklist 2023

The FATF Blacklist enlists the countries that do not have an efficient AML system or instead do not intend to control financial crimes. Their trade activities are not guided to prevent money laundering, financing of terrorism, or proliferation financing. Their AML frameworks are insufficient to deal with the global threat of money laundering. Their trade activities also put other countries at risk of financial fraud and jeopardized their economic system.

The FATF blacklist is officially known as High-Risk Jurisdictions subject to a Call for Action, which acts as a deterrent for countries doing business with the listed countries because of their non-cooperation in the global fight against financial crimes. The FATF blacklist makes other countries aware of the status of the blacklisted country, and they know that doing business with such a country or person hailing from these countries would be dangerous for their economy and the global economy.

With the FATF black list, the countries know which countries they need to put on the sanction lists, which helps their business organizations understand which countries they should not do business with. When FATF has deemed the blacklisted countries insufficient, other countries should cut off ties with the blacklisted countries until they improve their AML frameworks and satisfy the FATF criteria of being AML compliant, sufficient enough to remove their name from the FATF blacklist.

Please note that the FATF updates the blacklist annually or sometimes biannually, so businesses must continuously check them for new listing and delisting. The number of countries on the blacklist varies depending on the effectiveness of the AML compliance framework – if the blacklisted countries have improved their AML efforts to curb the evils of financial crimes. The FATF analyze the same and makes an informed decision about their continued listing or delisting. The FATF continuously monitors the country’s contribution and efforts to check on financial crimes and gathers reliable information on which the listing process is based.

As FATF does not have direct powers to ban a country from conducting business with other countries, its issuance of a blacklist is a recommendation to other countries dealing with a blacklisted country – not to continue such trade as it will put their business and the country’s financial system at risk.

At present (October 2023), only the Democratic Republic of North Korea, Iran and Myanmar are mentioned in the FATF blacklist – countries subject to a Call for Action.

What is FATF Grey List?

Along with the blacklist, the FATF also issues the grey list, which enlists FATF Grey List countries with a higher risk of money laundering and terrorism financing (yes, definitely less than the blacklisted countries). These countries are put on the grey list because FATF is assured that they are working towards improving their AML compliance structure.

The main difference between the countries mentioned on the blacklist and the FATF grey list is that the former shows no signs of making an effort toward the AML compliance structure. At the same time, the latter follows the FATF recommendation to fix the issues in their AML compliance and regulatory framework.

The FATF scrutinizes the grey list countries regularly to check the specified countries’ progress towards an efficient AML compliance framework. The FATF assesses the progress of the countries on the grey list. At present (as on October 2023), several countries are on the FATF Grey list, including Nigeria, Croatia, Uganda, Syria, UAE, Vietnam and many more.

The FATF Grey List is also updated frequently, and de-listings and new additions are made based on the performance of the countries and the thorough analysis done by the FATF basis various parameters.

What is the difference between blacklisted and greylisted countries?

The FATF blacklisted countries or jurisdictions suffer from strategic deficiencies in combating money laundering, terrorist financing, and financing the proliferation of weapons of mass destruction. The FATF blacklisted jurisdictions are subject to enhanced due diligence and sanctions to protect the global financial system from the risks of money laundering, terrorist financing, and proliferation financing.

The FATF Greylisted countries are the jurisdictions working closely with the FATF to address strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing. The Greylisted jurisdictions are committed to resolving the identified issues within agreed timeframes and are subject to increased monitoring.

How many countries are part of FATF?

FATF, as of 27th October 2023, is composed of 40 members, with the latest addition of Indonesia. It relies on FATF-Style Regional Bodies (FSRBs) to achieve its goals and objectives. As of now, there are 9 FSRBs working closely with the FATF. Over 200 jurisdictions around the world have committed to the FATF recommendations through the global network of FSRBs and FATF membership.

What happens if FATF blacklists a country?

Once a country is placed on the FATF blacklist, the FATF member states and other international bodies will impose sanctions and restrictive measures against the blacklisted country. The blacklisted country can experience a negative impact on its economy as the economic sanctions imposed by various countries and global financial institutions will make it difficult for a blacklisted country to secure funds.

Further, the blacklisted country will experience declining international trade and foreign exchange inflows. International trade will become costly, and the blacklisted country’s banking system will find it difficult to survive.

FATF Blacklist and Grey list - Screening & monitoring process

Financial institutions and the designated non-financial businesses and professions, including virtual asset service providers, must continuously monitor their customer databases against FATF Blacklist and Grey list countries.

The screening will help them be alert against the non-cooperative countries that are not taking the AML compliance process seriously. It will protect them from doing business with such countries, which can cause financial losses and reputational damage. So, continuous monitoring is necessary to protect a nation’s financial system from the risk of money laundering and non-compliance with the AML laws and regulations.

So, they should keep the identity verification, Customer Due Diligence, and Enhanced Due Diligence process updated and screen the customers regularly against the sanction lists, the FATF blacklist, and the grey list. Identification of suspicious transactions and accounts should be immediately reported to the authorities. With the timely submission of STRs and SARs – institutions will contribute to and help strengthen the fight against money laundering and financing of terrorism.

About the Author

Jyoti Maheshwari

CAMS, ACA

Jyoti has over 9+ years of hands-on experience in regulatory compliance, policymaking, risk management, technology consultancy, and implementation. She holds vast experience with Anti-Money Laundering rules and regulations and helps companies deploy adequate mitigation measures and comply with legal requirements. Jyoti has been instrumental in optimizing business processes, documenting business requirements, preparing FRD, BRD, and SRS, and implementing IT solutions.

Reach Out to Jyoti

FAQs About the FATF Blacklist and Grey list

As per FATF June 2023 Plenary, there are 26 countries under the FATF Grey List countries – “Jurisdictions under Increased Monitoring”

Countries mentioned under the FATF GREY list are committed to addressing the strategic deficiencies in their measures to combat money laundering and terrorism financing within the agreed timeframe. While these countries are working on improving the AML regimes, it is commended that the designated entities perform enhanced due diligence (by seeking additional information such as the source of funds/wealth, the purpose of the transaction, and obtaining management approval before onboarding these customers) for the customers hailing from these countries or who have a close business association with these jurisdictions.

Article UAE

Decentralized Finance (DeFi) and AML implications in UAE

The scope of Decentralised Finance is growing rapidly as the concept of virtual assets is being widely accepted across the globe. Decentralized finance, popularly known as DeFi, is an emerging finance domain that operates very distinctly from the traditional centralized financial system regulated and controlled by a country’s government.

With anonymity and lack of centralized governing authority, the money laundering risk around the same is also very grave. In this context, let us understand what DeFi is and what AML implications are around DeFi.

What is DeFi?

DeFi is a blockchain technology-based borderless and independent financial network.

Unlike a centralized financial system, there is no central authority governing DeFi, but it is owned by the users who operate and build it. DeFi is an independent system that works autonomously. People trade on the virtual platform, using technology to borrow, lend, invest, or trade without any central authority/intermediary regulating their finances.

DeFi works on blockchain technology in which the financial services are distributed in a series over the blockchain structure. It is monitored using smart contract programs without the involvement of any intermediary. Protocols are created using open-source software managed by a community of developers of DeFi.

With DeFi, financial transactions such as lending or borrowing can be done from any place with internet connectivity. A distributed financial database collates and aggregates data from all users and verifies the same using a consensus mechanism (a mechanism used to obtain agreement, trust, and security over a single value or parameter across a decentralized network).

DeFi is all about peer-to-peer transactions, where two parties come together to exchange cryptocurrency against any supply of goods or services without the involvement of any third parties like banks. Let’s take an example of a loan, where generally you would go to a bank or lending institution and get the money on interest. In the case of DeFi, once you input your loan requirement into the DeFi systems, an algorithm will run to find you a match. Of all the potential peer matches shown, you would agree to the lending terms of one of the peers and get the money on loan. This lending transaction is then recorded in the blockchain. Everything happens at a click of a mouse, and that too in a few seconds.

What are the benefits of DeFi?

It reduces the cost of financial services, which generally the banks and other financial institutions levy for obtaining their services.
Eliminates the intermediaries and establishes direct connections between the parties.
The money is kept in a digital wallet rather than placing it in a bank account.
Transferring funds becomes easy and quick.

What is Virtual Asset Service Provider?

Here, reference should be made to the definition of VASP as given by FATF, which is as under:

"A business which conducts one or more of the following activities or operations for or on behalf of another natural or legal person:

an exchange between virtual assets and fiat currencies,
exchange between one or more forms of virtual assets,
transfer of virtual assets; (transfer means to conduct a transaction on behalf of another natural or legal person that moves a virtual asset from one virtual asset address or account to another),
safekeeping and administration of virtual assets or instruments, enabling control over virtual assets,
participating in and provision of financial services related to an issuer’s offer or sale of a virtual asset.

Can DeFi be construed as VASP or the person controlling it?

As apparent from the definition above and in the context of DeFi, the DeFi arrangement may fit in the definition of VASP as this technology-based network enables the users to enter if smart contract related to financial services using virtual assets. Thus, DeFi provides a platform to transfer virtual assets between parties by way of a transaction executed between the involved parties.

As mentioned above, though DeFi qualifies for VASP per se, it cannot be subjected to AML regulations as it is a technology solution or an application. It is essential to understand that even though the name suggests that such software operates on a decentralized ledger, these applications have an authoritative structure where any person or group of a few individuals influence or control DeFi. This control or influence may be related to enhancing the functionalities of the application, aspects related to user interfaces, say, over the governing protocols, or even earning profits out of this network.

In line with the FATF’s intent to apply the AML regulations to a natural or legal person, the person who is exercising control or has sufficient influence over the DeFi shall be construed as VASP for the purpose of implementing the AML provisions. Accordingly, the owners, developers, or the application operators have to ensure that they undertake due ML/FT risk assessment prior to operating the application as DeFi. This shall also include the implementation of adequate routine AML/CFT procedures and ongoing monitoring measures.

About the Author

Jyoti Maheshwari

CAMS, ACA

Jyoti has over 9+ years of hands-on experience in regulatory compliance, policymaking, risk management, technology consultancy, and implementation. She holds vast experience with Anti-Money Laundering rules and regulations and helps companies deploy adequate mitigation measures and comply with legal requirements. Jyoti has been instrumental in optimizing business processes, documenting business requirements, preparing FRD, BRD, and SRS, and implementing IT solutions.

Reach Out to Jyoti

Article UAE

Why gold is still the second-best mode for money launderers

Other than using Gold for Money Laundering, the uses of gold are wide-ranging and well-documented. Since ancient times, gold has been used in various cultures as a medium for exchange or payment. Historically, governments minted coins out of a physical commodity such as Gold, Silver, Copper, and Bronze. In addition to its value as an investment, the physical appearance and properties of gold lend themselves to be used in jewelry and for various technological/manufacturing uses.

For example, in many developing countries, gold jewelry is not only perceived as an adornment but also as an effective savings vehicle. Even now, the Gold reserve of the country determines its creditworthiness. Gold stands tall as a status symbol and has a lot of cultural values too. Hence making Gold for Money Laundering as a perfect choice. It is also an instrument of investment.

As the financial regulators grow strong and robust, so do the Gold for Money Laundering methods. The inventions and discoveries on Gold for Money Laundering methods and trends never end. Precious metals like Gold, Platinum, and silver were not much on anyone’s radar. So when banks tightened the noose, the money launderers resorted to precious metals like gold and platinum, and real estate, etc., to use Gold for Money Laundering.

Using Gold for Money laundering is not a new trend. This comes from history. The BFSI industry is shutting its door one by one, so money launderers will find some new trends or retrofit the old trends. One does not need a tax identity to buy gold. This paves the way for using Gold for Money Laundering in all 3 layers of Money laundering. Gold seems to be lucrative for all sides of the transaction.

The regulatory authorities identified this trend, and it started monitoring the precious metals sector by bringing it under the preview of the AML law UAE by terming them as Designated Non-Financial Businesses and Professions (DNFBPs).

12 reasons why Gold for Money Laundering is used:

1. Contango:

The gold market is mostly in Contango. This means the Future price of gold is greater than the spot price. Even during the downtimes, gold has been the prime choice for commodity trading.

2. Liquidity:

The liquidity of gold is high when compared to other modes of investments like Bank FDs, Stocks & Mutual Funds. Unlike the other investment products, you don’t need a bank account to buy or sell gold. Redemption from gold is instant & we can get ready-cash instantaneously.

3. Always OTC:

Gold can be sold anywhere Over the Counter & isn’t controlled by any exchange. Unlike markets, you can even sell or buy on weekends too. It is easy to find buyers or sellers for gold rather than stock. Hence they use Gold for Money Laundering.

4. Tax:

There is no tax associated with gold when you go with an investment perspective. The sales tax or VAT is all that you pay.

5. Return on investment:

Unlike Stocks/Bonds, Gold will give reliable returns depending on the market rate.

6. Attractive for tax evaded money:

Money laundering need not necessarily be done for Terrorist financing or illicit proceeds. Sometimes people launder the money that was evaded from tax. This can be rental income, Benami transactions, money coming from Hawala transactions/remittances.

7. Efficient:

Gold can be used in all 3 layers of Money Laundering. Be it Placement or Layering, or Integration.

8. Global currency:

Gold is considered a global currency. One can buy or sell gold anywhere around the globe. There is no currency conversion or loss there. One can buy it in the eastern part of the world and sell it in the west without losing the face value.

9. Complex transactions:

The transactions involving the gold or jeweller are too complex to drill down. There might be multiple persons involved on both sides of the transaction.

10. Transformable:

Gold can be changed into many forms (Jewelry) and denominations (Coins / Bars) without losing the face value. This helps money launderers to use gold for Smurfing or Smuggling and many such methods.

11. Win-win game:

The jewellers need gold for trading and manufacturing purposes. So there’s always a demand for it. It’s a win-win situation for dealers in precious metals and stones, and the money launderer as both of them get to trade for their benefit.

12. Lack of regulatory reporting:

Unlike Banks / FIs, they can keep their transactions under their control. In many countries, there is no periodic submission of Cash transaction report or Suspicious Transaction report. Such a multi-faceted commodity somehow missed the attention of the regulators. Even if it comes to a need for supervision, there will be a question of ‘Who will regulate the gold?’ Will it be the commodity market? Or the Central Bank? Or the Government?

About the Author

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a Chartered Accountant with more than 26 years of experience in governance, risk, and compliance. He helps companies with end-to-end AML compliance services, from conducting Enterprise- Wide Risk Assessments to implementing the robust AML Compliance framework. He has played a pivotal role as a functional expert in developing and implementing RegTech solutions for streamlined compliance.

Reach Out to Pathik

FAQs On why gold is still the second-best mode:

From an AML perspective, precious metals are considered high-risk and associated with ML/FT typologies. Precious metals, owing to their size and value, offer a lucrative market to the money launderers – as they are easy to hide, transport, and hold as investments of their huge illegal funds in small volumes.

Gold carries high value compared to its volume and is considered one of the best mediums to store funds and transport them easily across borders. Further, gold can be easily traded anywhere and anytime, with the realization of the optimal value.

Gold is easy to store and has its value (almost the same) across the globe. Investment in gold offers a higher rate of return than bank rates, as the value of gold is subject to speculation based on the demand and supply of this metal. Moreover, it is considered one of the best hedging tools against inflation.

Article UAE

What is terrorist financing?

Terrorist financing is one of the most complex and troublesome financial crimes across the world. The potential and level of impact of terrorist funding have increased dramatically in the last few decades. Terrorists require a considerable amount of money in order to execute their ill intentions. As per the current state of terrorism across the world, terrorist financing makes available for non-state actors or individual terrorist accommodation, training & development, funds to buy or test weapons and to cater to other financial needs for observing terrorism in the world.

How are funds for terrorism provided?

The funds for terrorism are provided through several means; a few of them are listed hereunder:

Huge sum of money is obtained through several illicit activities
Leveraging the power of money laundering activities in order to utilize the illegally occupied cash in a more destructive way
Obtaining massive sum of money with the help of criminal activities like smuggling of drugs, kidnapping, fraud, money laundering, and extortion

Anti-money laundering or AML regulations are a key measure to counter-terrorist financing. Financial institutions (FIs) and Designated Non-Financial Businesses and Professions (DNFBPs) play a vital role in combatting the financing of terrorism simply because criminals or terrorists mostly rely on them, especially banks, in order to transfer illicitly occupied funds.

Therefore, many regulations and laws have been enacted in order to prevent terrorist financing, primarily known as counter-terrorist policies. As per the counter-terrorist policies, financial institutions should know their customers closely.

Therefore, they should monitor and keep records of the transactions of the customers or clients. In this manner, business enterprises can have sufficient information related to their customers and ensure that their customers or clients are not involved with any financial crimes or illicit financial activities.

Suppose a massive sum of money is found with an intention to support terrorist activities. In that case, law enforcement agencies will come into the picture to combat some of these crimes or illicit financial activities.

Financial Action Task Force (FATF)

FATF is an abbreviated form of Financial Action Task Force established in 1989 by G-7 countries to prevent money laundering activities from the economy as a whole. The FATF comprises 35 governments and two regional organizations. The FATF is working in order to combat terrorism financing and money laundering by developing standardized procedures to stop the threats to the international financial system.

Criminals like terrorists can infiltrate the economic system of several countries with weak controls. Therefore, it is pretty challenging to check the financing of terrorism by establishing standard procedures. The FATF standards require governments to take several legal measures to ensure that the serious crime of terrorism financing, covering most of the elements stipulated by the convention of terrorism financing, be punished as a separate crime altogether.

Furthermore, the FATF reflects the measures created to counteract money laundering activities and make sure that the implementation of the private sector’s required preventive measures is being taken in the best possible manner.

The Terrorism Prevention Branch or the TPB of the United Nations (UN) office on Drugs and Crime (UNODC) sweats on the legal aspects of all the relevant universal legal documents that are proudly countering terrorist financing.

This law usually includes a review of internal legislation to counter terrorist financing and the appropriate punishment of crimes. It also provides for the implementation of all of these international standards and empowers law enforcement officials with specialized training.

Anti-money laundering compliance solutions

Terrorist financing is a serious criminal activity that can have severe consequences. These illegal activities are perceived as financial crimes like money laundering, which involve obtaining vast amounts of money through several illicit methods. Therefore, all financial institutions and DNFBPs at the risk of terrorist financing should comply with the home country and global regulations such as FATF. Although compliance with these regulations appears complicated, complying with them has become much easier with the help of anti-money laundering-related technology-based solutions.

How can AML or CFT tool help?

Here are a few ways in which AML/CFT tool can help:

AML and CFT can lead to forfeiture and recovery of unlawfully acquired assets
It aids the authorities with legitimate roadmaps to identify those who facilitate illicit and criminal activities
Expose the infrastructure of criminal or illegal organizations conspiracies and webs of corruption to commit inhuman terrorist attacks
Support effective and broad deterrence efforts against a wide range of illicit and unlawful activities, including the funding of terrorism

In addition to that, clear and effective communication is a must for an anti-money laundering Compliance Officer because he is the one who is in touch with almost all the employees of the business enterprise and also has the responsibility to report the suspicious transactions to the Financial Intelligence Unit on behalf of the organization. Therefore, a Compliance Officer is expected to share an essential piece of information with the Company’s staff at a specific time to ensure adherence to AML/CFT regulations.

About the Author

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a Chartered Accountant with more than 26 years of experience in governance, risk, and compliance. He helps companies with end-to-end AML compliance services, from conducting Enterprise- Wide Risk Assessments to implementing the robust AML Compliance framework. He has played a pivotal role as a functional expert in developing and implementing RegTech solutions for streamlined compliance.

Reach Out to Pathik

FAQs On Terrorist Financing

Strict enforcement of AML/CFT Laws

Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) measures

Fines and Penalties on violators

Filing of STR (Suspicious Transactions Report) with the FIU

Here are a few actions that must be taken to enhance the overall financial intelligence in the battle against terrorist financing:

By introducing whole new centralized banking and payment account registers

By aligning the rules of Financial Intelligence Units with the latest international trends

a. Intention or purpose of crime:

Money laundering: To hide the source of illegal funds and integrates such funds into the legit financial system
Terrorism financing: Collating funds to carry out terrorist activities to threaten the peace and integrity of the society

b. Source of funds involved:

Money laundering: As the definition suggests, the source of funds involved in laundering is always illegal
Terrorism financing: Funds collected for terrorist activities may not always be illegally obtained, as sometimes genuine profits are also diverted for terrorist activities

c. Driving force for conducting crime:

Money laundering: Generating more profits through illegal activities
Terrorism financing: Driven by ideologies and emotions to adversely affect the society

d. Stages & Process

Money laundering: This is a cyclical process, where profits generated through illegal activities are-invested back into illegal activities. Involving 3 stages – Placement, Layering, and Integration
Terrorism financing: This is a straight/linear process where funds are consumed for carrying out the terrorist activities

e. Stages

Money laundering: 3 stages – Placement, Layering, and Integration
Terrorism financing: 4 stages – Collecting, Storing, Moving, and Using

The following elements make the tracing of terrorism financing challenging:

Terrorism financing hardly follows any pre-determined pattern, and that too is not fixed all the time,
Terrorist groups are aware of countermeasures being deployed. They identify the loopholes to avoid the attention of authorities and evade these measures,
Terrorism financing involves other criminal activities like smuggling, narcotics, money laundering, etc., which complicates the terrorism funding process,
Involvement of multiple countries and high-profile individuals,
Counterfeiting and increased use of cash instead of digital/bank transfers do not leave any trail to identify the source of such funding

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