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The United Arab Emirates faces a battle to avoid inclusion on an international watchlist after the Financial Action Task Force found that local authorities have failed to protect their economy from abuse by money launderers and sanctioned parties based overseas.

In a damning 228-page report published Thursday, the intergovernmental group, FATF, recognized the UAE’s attempts to bolster its laws against money laundering and terrorist financing, enhance cooperation between authorities across the seven Emirates and strengthen the country’s financial intelligence unit, or FIU.

But FATF also concluded that the UAE has mostly failed to act against professional money-laundering networks that exploit the global financial centers of Dubai and Abu Dhabi and the jurisdiction’s thriving gold and property markets to move and launder funds, and have also neglected to clamp down on poor sanctions compliance and criminal abuse of legal entities.

“The country faces significant illicit finance risks and authorities need to act immediately to make fundamental and major improvements to effectively combat money laundering,” FATF noted in a statement accompanying the report.

The UAE’s vulnerabilities to financial crime—and Dubai’s in particular—are compounded by a cash-intensive economy and booming real estate market, vast amounts of remittances from abroad, a large market for trading gold, precious metals and stones across almost 30 free trade zones, and proximity to heavily sanctioned jurisdictions such as Syria and Iran.

Despite those risks, Emirati authorities opened only 50 prosecutions against money launderers from 2013 to 2018 and secured just 33 convictions from 2013 to 2018. The low number of prosecutions in Dubai is “particularly concerning” in light of its exposure to financial crime, FATF found.

“There is a noticeable absence of consistent investigations and prosecutions of money laundering related to other high-risk predicate crimes, such as drug trafficking, professional third-party money laundering, and those involving higher-risk sectors,” the group concluded.

Emirati authorities secured 75 convictions against terrorist financiers from 2013 to 2019 but tended not to target the threat posed by global terrorist groups and blacklisted parties that use sophisticated schemes to funnel funds through the jurisdiction.

In terms of effectiveness, the nation’s rules against illicit finance earned a “low” rating, the worst of four possible scores, in four of 11 categories: international cooperation, corporate transparency, investigations and prosecutions of money launderers, and sanctions against proliferators of weapons of mass destruction.

The UAE rated “moderate” in six other categories of effectiveness, including supervision, use of financial intelligence and confiscation of illicit funds, and “substantial” in only one: investigation and prosecution of terrorist financiers. The country did not receive a single high score.

Failure to address those and other shortcomings within a year will land the UAE on FATF’s “gray list” of high-risk jurisdictions and imperil the country’s role as a major financial center and global trading hub.

The UAE’s proximity to jurisdictions such as Iran, Iraq and Syria, and strategy of promoting itself as a regional banking and commercial center, has blossomed into “a toxic combination of risks,” Matthew Redhead, an associate fellow at the Royal United Services Institute in London, told ACAMS moneylaundering.com in an email.

“Until very recently, I think it is fair to say that Emirati authorities haven’t been totally dedicated about tackling AML issues,” Redhead wrote. “Free trade zones have been a classic example of [places] where generating profit has tended to have a substantial edge over fighting crime and regulatory rigor.”

Gold and ‘first steps’

Banks and supervisors in the financial centers of Abu Dhabi and Dubai generally show a good understanding of the risk posed by money launderers and sanctioned parties, according to FATF, but AML supervision and compliance in the rest of the Emirates, especially in nonfinancial sectors of the economy, often falls far short of the intergovernmental group’s standards.

Dubai’s luxury property market, for example, is characterized by large volumes of cash transactions and a global client base, and the UAE’s gold trade is worth several billion dollars a year. But real estate brokers and precious metals dealers filed only a handful of suspicious transaction reports from 2013 to 2018.

FATF also questioned whether customs and border authorities have adequate resources to seize illicit cash and clamp down on gold smuggling in the Emirates, the scope of which is now international.

Last month, the High Court in London awarded a former Dubai-based auditor for global consulting firm EY $11 million in damages after he accused the company of helping cover up gold smuggling and large-scale money laundering at a local refinery, Kaloti Jewellery International.

EY and Kaloti have denied the claims.

In October 2018, German authorities raided several locations tied to a network of conspirators who would transport drug cash to Dubai to buy gold, then ship the gold to Germany, the U.K. and back to Dubai to disguise the origin of the funds.

Emirati authorities have allocated more resources to the FIU, introduced new beneficial-ownership requirements and enacted a range of other anti-financial crime measures since completing their first national risk assessment in late-2018.

“These are important first steps,” FATF found Thursday. “However, it is too early to assess their impact in mitigating sophisticated risks posed by, for example, professional networks or trade-based money laundering, in the absence of more specific measures designed to address these risks.”

In stark contrast to its subpar effectiveness ratings, the country scored “compliant” or “largely compliant” with 34 of 40 of FATF’s technical recommendations.

The UAE’s strategic importance and close relationship with the United States may ultimately spare the nation from FATF’s gray list if Emirati authorities rapidly accelerate their AML reforms, said Redhead, the RUSI analyst.

“I sense from reading this report that FATF will be increasingly impatient with any backsliding or poor implementation,” Redhead said. “My gut tells me that ‘gray-listing’ remains unlikely given UAE’s political and economic significance to the West, but it’s not impossible.”

Contact Koos Couvée at kcouvee@acams.org