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The Rising Decline of Institutional Credibility

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By Ahmed Bin Sulayem, Chief Executive Office at DMCC (Dubai Multi Commodities Center)

ahmed_bin_sulayem_xx_dmcc.pngOn the 04th March 2022, the United Arab Emirates was placed on the Financial Action Task Force’s (FATF) ‘grey’ list, an inclusion that not only comes with increased monitoring and scrutiny, but the possibility of reputational damage, ratings adjustments, challenges obtaining global finance and higher transaction costs.

According to a 2021 report, as published by the International Monetary Fund (IMF), this usually means bad news for capital inflows, which typically decline on average by more than six percent at the time of grey-listing, while foreign direct investment inflows are negatively affected by around 3.2 percent. In addition, businesses, particularly major banks that use the UAE as a regional headquarters may be required to dedicate additional resources to shore up compliance or in a worst-case scenario decide to migrate their headquarters to a neighbouring state. Certainly not an ideal scenario for a nation that has earned its way to the highest echelons of global trade and finance, but nonetheless, an inclusion which the UAE government has taken very seriously.

Responding to the announcement, the UAE’s Executive Office of Anti-Money Laundering and Counter Terrorism Financing stated that, “the UAE takes its role in protecting the integrity of the global financial system extremely seriously and will work closely with FATF to quickly remedy the areas of improvement identified.” The UAE also committed to implementing the recommendations of the International Cooperation Review Group’s (ICRG) Action Plan to remove itself from the grey list as quickly as possible.

In order to better understand the reasoning behind FATF’s decision, it is perhaps best to consult the group’s most recent technical compliance re-rating request, found in the 1st Enhanced Follow-Up Report for United Arab Emirates. Contained within, it states that of the four recommendations under review, the UAE became successfully compliant in relation to “targeted financial sanctions related to terrorism & terrorist financing” and “targeted financial sanctions related to proliferation”, however remained only partially compliant when it came to “high-risk countries” and “transparency and BOs (beneficial ownership) of legal arrangements.” In summary, the UAE was rated compliant in 13 recommendations, largely compliant in 23 recommendations, and partially compliant in four and despite being acknowledged for making “significant progress” since its 2020 assessment, the country was relegated following a Plenary and Working Group Meeting, pending further progress towards investigations and prosecutions of money laundering being “consistent with the UAE’s risk profile”.

Aside from the notorious ‘black list’, which solely includes North Korea and Iran, the ‘grey list’ is otherwise known as ‘Jurisdictions Under Increased Monitoring’, representing nations at a higher risk of money laundering and terrorism financing, but which have formally committed to working with FATF to remedy their deficiencies.

With the greatest respect to the sovereign nations included on the ‘grey list’, it is hard not to notice that the UAE looks like an anomaly. With almost one third of the 23 nations listed found comfortably in the top 30 Fragile States Index, formerly known as the Failed States Index, the spectrum might suggest a more nuanced approach, as opposed to categorising a fiscally responsible, global trade hub with one of the lowest crime rates in the world in the same bracket as countries rife with urban warfare, human trafficking and illegal arms dealing. As an indicator of widespread corruption and criminality, non-provision of public services, involuntary movement of populations and sharp economic decline, it is almost a given that such states would be easy targets for money laundering and terrorism financing, particularly when the general population has more pressing issues such as famine, poverty, and violence to contend with. Nevertheless, under FATF’s guidance, we must assume that like the UAE, each of these nations have also been identified as having weaknesses in their financial systems with each acknowledging to address them in due course. Incidentally, the UAE ranks in the top 30 of least failed nations, just ahead of the United Kingdom.

Certainly, while being placed in the exact same category as war torn nations that are flooded with illicit funding and terrorist activities such as Yemen and Syria, or countries with ongoing humanitarian crises such as Mali and Haiti might seem disproportionate, the real mystery is how so many other nations have avoided inclusion, particularly considering their well-documented history of illicit financial activity. Additionally, there are clearly discrepancies between FATF’s findings and those of other global organisations such as the IMF, whose 2021 Article IV Consultation, published in February 2022 praised the UAE’s “major efforts…to improve the AML/CFT regime”, while highlighting the country’s delivery of “several important legislative and institutional reforms.”

While an NGO with whom I’ve certainly not seen eye to eye with in the past, Global Witness is one of the few organisations to have questioned the hypocrisy of the system and its authenticity, particularly when it comes to omitting founding G-7 nations that clearly warrant inclusion.

Contained in a statement in reaction to a previous FATF review the NGO stated that, “The task force has reverted to type by focusing mostly on poorer countries, while ignoring the substantial loopholes in the anti-money laundering systems of many rich jurisdictions. No countries have fully met the FATF standard, not even the United States, which has led the global campaign against dirty money. Global Witness has exposed how banks, including Barclays, Citibank, HSBC, and Bank of America, have been able to do business with corrupt regimes, facilitating corruption and denying some of the world's poorest people a way out of poverty. A recent report by a U.S. Senate committee detailed how foreign officials and their family members exploited holes in the anti-money laundering framework to bring millions of illicit dollars into the U.S. The list is based on the latest round of peer reviews carried out by the FATF and its regional bodies. The reviews measured whether countries had laws on the books, rather than whether those laws are actually being implemented and enforced effectively. This should be the next stage of the FATF's reviewing and blacklisting process.”

Likewise, there is also some confusion over how some of the “poorer countries” are evaluated. As the only country to be removed from the grey list in March 2022, Zimbabwe’s well documented, illicit financial flows are estimated be worth $1.8bn. Covering a wide range of criminality including drug trafficking, livestock theft, money laundering and mineral smuggling, the issue has become so serious, that a national commission has now been forced to target its own revenue authority in order to address the problem.

Arguably, the most blatant and worrying oversight is the United Kingdom. Dubbed the “London Laundromat” or “Londongrad”, Britain’s political approach of publicly supporting Ukraine has been somewhat undermined, thanks to its cosy relationship with several, Kremlin-linked oligarchs. As clearly stated by British journalist, Edward Lucas, “Loudly proclaiming new sanctions on Russia will do very little to curb the laundering and fraud.”

Contained in the executive summary of the UK’s December 2018 FATF Mutual Evaluation Report, the key findings highlighted that “all entities within the FATF definition of financial institutions and all designated non-financial businesses and professions are subject to comprehensive AML/CFT requirements and subject to supervision” and that the UK is “a global leader in promoting corporate transparency and has a good understanding of the ML/TF risks posed by legal persons and arrangements.”

Without having to leave the subject of Russia, the Financial Times feature published on 22nd April 2022, “How London became the dirty money capital of the world”, clearly illustrates that Britain hasn’t just turned a blind eye to laundering, but welcomed it. Echoed through numerous publications, including Transparency International which found “at least 929 UK shell companies used in 89 corruption and money laundering cases, amounting to around £137 billion globally in potential economic damage”, it is clear that a criminal, political elite has been drawn to take advantage of Britain’s lightly regulated corporate landscape.

Then there are the banks, which according to some sources places the UK as the second-highest money launderer globally, only after the U.S, with France, Germany and Canada coming in third through fifth respectively. In total, these countries are allegedly responsible for over $400 billion in laundered money per year thanks to the consistent failures in their respective banking systems, which are ultimately only penalized with a fractional amount of the money successfully laundered.

If you want evidence of what kind of a deterrent fines are to banks, you only have to look at UK-based, serial reoffender, HSBC, which despite its accolade for being issued the largest penalty ever paid by a bank ($1.9bn) to settle a money-laundering probe by US authorities, was fined again only as recently as last December for “unacceptable failings” of its anti-money laundering systems.

This isn’t to say that fines shouldn’t be applied. In the UAE, the Central Bank issued just under $12.5 million in fines across eleven banks for violating anti-money laundering regulations in January 2021, however, the effectiveness of fines should be questioned when financial institutions blatantly continue with illicit activity, safe in the knowledge that they can more or less model the risk reward of laundering versus the likelihood of being caught and fined.

It is only fair to mention that London and the UK’s banks are not alone. The EU has been marred by consistent scandals which include former Swedbank CEO Birgitte Bonnesen being charged with fraud relating to statements made in 2018 and 2019 about anti-money laundering controls at her bank through to Antwerp’s meteoric rise as “the cocaine capital of Europe”, which included 90 tons being discovered at the city’s port worth an estimated €13bn. Authorities believe this to be just 10% of the total flow of narcotics into the continent.

Given what appears to be an unfounded application of criteria, it is only appropriate to point out that several countries clearly contradict FATF’s guidance, yet remain free from any listing while being praised, specifically in one case, as a “leader in corporate transparency”. As an inter-governmental task force established to prevent global money laundering and terrorist financing you must either be seen to unilaterally apply the same standards to all nations or none at all. Similarly to the lost credibility of institutions such as rating agencies after the 2008 crash, or auction houses after the price fixing scandals, FATF should tread a very careful line, lest be seen as a subjective organisation whose political influence has irreversibly poisoned its purpose to exist.