IMF calls for need to widen financial and legal accords

The International Monetary Fund (IMF) has commended the Dubai Financial Services Authority (DFSA) for ensuring that its structures, procedures and practices conform to international standards.

The DFSA – which oversees compliance for all financial service providers at the Dubai International Financial Centre (DIFC) – has issued rules that generally match the Financial Action Task Force (FATF) recommendations, said an IMF report.

FATF is an inter-governmental body founded in 1989 by the G7 to develop policies to combat money laundering and terrorist financing. The IMF said the provisions covering institutions within the DIFC are extensive and, based on studies by the DFSA, are being implemented effectively, although the volume of business currently being undertaken within the DIFC is relatively small.

The financial sector in the UAE is divided between institutions operating in the domestic market and those licensed to conduct business in the DIFC, the country's only financial free zone.

While the federal laws on anti-money laundering (AML) and combating the financing of terrorism (CFT) apply equally to the domestic sector and within the DIFC, the responsibility for issuing and implementing regulations and overseeing compliance falls on the respective regulatory authorities.

In the case of the domestic sector this involves the Central Bank for banks, money changers and finance companies, the Emirates Securities and Commodities Authority for securities brokers and the Ministry of Economy for insurance companies. The DFSA is the sole regulator for all financial services providers at the DIFC.

The IMF said the requirements under UAE Central Bank regulations relating to wire transfers are "very general and fall well short" of the FATF requirements in terms of the procedures for verification of identity and the transmission of originator information. In contrast, the DFSA's rules generally match the FATF standards.

The IMF, a Washington-based organisation that oversees the global financial system, said the basic systems and controls requirements for the domestic banking sector go some way towards meeting the FATF standards but those for the securities and insurance sectors fall well short. It says the regulations issued for the domestic securities and insurance sectors refer only to the reporting of unusual transactions and the general procedures in these sectors are far less developed than those in the banking sector.

"These issues appear to be a factor in creating distinct variations in the nature and quality of reporting by individual institutions, and overall the level of reporting appears to be low relative to the size and nature of the financial markets," the report added.

The DFSA rules, on the other hand, have much more extensive provisions than those covering the domestic sector, requiring institutions to report transactions where there is knowledge, suspicion, or reasonable grounds to suspect that a person is engaged in money laundering. The suspicious transactions reporting regime in relation to money laundering had been in place in the domestic sector for several years. However, according to the IMF it lacks clarity as to the exact basis on which reports should be filed.

The Central Bank regulations refer variously to unusual and suspicious transactions and there is no indication of whether institutions are expected to apply a subjective or objective test to suspicion.

In addition there is an apparent variation in the definition of the money laundering offence between the primary law and the regulations. As a result it is unclear what the scope of the reporting should be in relation to the predicate offences.

In the domestic sector, the reporting of suspicions of terrorist financing has only been extended to institutions subject to the supervision of the Central Bank, but it is not incorporated in law and regulation. Within the DIFC, the DFSA originally sought to deal with the issue by revising the definition of money laundering to include terrorist financing, but has decided to amend its legislation to provide explicitly for rule-making powers with respect to terrorist financing.

Also, the procedures relating to the supervision and regulation of the domestic securities and insurance markets are far less developed, with the insurance sector not yet being subject to any effective anti-money laundering and combating the financing of terrorism compliance monitoring.

There is a limited range of formal sanctions available to the domestic regulators, but the Central Bank, in particular, has sought to draw on various general powers to bring institutions into compliance, although there remains a lack of evidence as to how these are used specifically for AML and CFT issues.

The structure, powers and procedures of the DFSA are generally in line with international standards, says the IMF, although it is early days within a market that remains relatively very small in terms of business volumes. While there is evidence of the willingness of the domestic regulatory authorities to co-operate with their domestic and foreign counterparts, their governing laws are silent on the mechanisms and safeguards necessary to ensure the effective and proper exchange of confidential information.

The provision of such legal gateways would be an important development. These exist with respect to the DFSA, which has entered into a number of bilateral memorandums of understanding (MOUs), and is also a signatory to the International Organisation of Securities Commissioners (IOSCO) Multilateral MoU.

In the past month the DFSA has fined two leading firms for being "inconsistent with the standards of behaviour that the DFSA expects from regulated firms".

On September 7, the DFSA said it had fined GFS Investments (Middle East) and suspended its operations for "mis-selling" and also banned its employees from operating at the DIFC for five years.

GFS was asked to pay $502,000 (Dh1,843,946) to investors who suffered losses because of its misconduct. In addition nine employees were fined $40,000.

DFSA said GFS broke the terms of its licence by placing foreign exchange trades on behalf of its clients when the company was allowed only to offer a platform for customers to place trades, according to a DFSA statement.

And on September 24 Shuaa Capital was fined a record $950,000 for alleged market manipulation on the Dubai International Finance Exchange (DIFX).

The DFSA censured Shuaa for artificially raising the share price of DP World in an attempt to window-dress its accounts. Shuaa was further fined $850,000 for market manipulation and $100,000 for hindering the DFSA investigation.

The DFSA said it had determined that Shuaa Capital intentionally set about to raise the closing price of DP World shares on March 31, 2008, so that it could mark up the book value of its proprietary portfolio in those shares for accounting purposes.

It did so by standing in the market during the closing minutes of trading with bid prices well above those at which DP World shares had been trading in the ordinary course of business, the DFSA added.

The action marked the highest profile regulatory action taken by the authority, which was launched under a cloud after the DIFC's governing body sacked the DFSA's independent chief executive and chairman, who had raised questions about the DIFC's standards of corporate governance.



BATTLING MALPRACTICE

Overall regime and ongoing supervision: The DFSA is actively engaged in fostering a culture of AML/CFT compliance by regulated entities within the Dubai International Financial Centre. The DFSA has ensured that its AML/ CFT regulatory regime is in line with international standards set by the Financial Action Task Force (FATF).

The initial vetting of all applicants and the ongoing supervision of AML/ CFT compliance remains high on the DFSA's agenda and forms an integral part of its risk-based approach.

Assessing the effectiveness of the AML/CFT controls established and maintained by companies forms a vital component of the ongoing risk assessment process.

To further strengthen its AML/ CFT regime, the DFSA in 2007 amended the regulatory law and its guidance to include relevant references to terrorism financing and to highlight the importance of suspicious transaction reporting. The DFSA also issued new guidance describing the criteria firms should consider when identifying a charitable organisation as a client.

In early 2007, the DFSA advised its regulated firms of their obligations under United Nations Security Council Resolution 1,267, which required them to check and monitor whether they maintained or held any accounts, funds, other financial assets, economic benefits and resources for individuals and entities associated with Al Qaeda, Osama bin Laden or the Taliban: Last year 13 suspicious transaction reports (STRs) were filed by authorised firms and ancillary service providers to the UAE's Anti-Money Laundering and Suspicious Cases Unit with copies sent to the DFSA, compared with eight STRs filed in 2006 and in 2005.