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The United Arab Emirates: A key piece in the global money laundering puzzle

By the normal standards of the Financial Action Task Force (FATF), a recent report into attempts by the United Arab Emirates to combat money laundering and terrorist financing is damning, to say the least.

The report highlights several major weaknesses in the UAE’s anti-money laundering framework. Not least, a chaotic approach to registering companies, making it incredibly difficult for law enforcement to find out who is actually behind a suspicious company registered in the Emirates. Ludicrously, 39 different registries operate across the seven Emirates; our research shows that the only effective system for tackling financial crime is to have a single, central register.

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The UAE’s booming construction and real estate sector emerges as another major weakness. It accounts for a fifth of the Emirates’ GDP, but remains incredibly vulnerable to money laundering. Complex ownership structures can be used to obscure the identity of those buying property, as well as where their money is coming from.

Despite the UAE’s role as a major international hub for finance and trade, the report concludes that authorities there are not cooperating with international partners. This could make the Emirates an attractive location in which “criminals could operate, maintain their illegal proceeds, or use as a safe haven.”

The FATF report confirms what investigative journalists, anti-corruption activists and whistleblowers have been saying for years: the UAE is a key piece in the global money-laundering puzzle. Its susceptibility to money laundering has seen it appear time and again in major cross-border corruption scandals.

Here, we take a look at the shameful role of the UAE, and in particular Dubai, in some of the biggest scandals of recent years.

Luanda Leaks

One of the most eye-popping revelations of Luanda Leaks is the last-minute transfer of tens of millions of dollars from Angola’s state oil company to one in Dubai, controlled by a dos Santos friend

In January this year, the International Consortium of Investigative Journalists (ICIJ) broke a major investigation into Isabel dos Santos, the daughter of Angola’s former president and often described as Africa’s richest women. The ‘Luanda Leaks’ revealed how dos Santos used a network of offshore companies to take advantage of her powerful connections and position at the head of the state oil company, Sonangol, to allegedly appropriate millions in state funds from Angola.

In 2017, dos Santos sensed that the political environment in Angola was turning against her following her father’s succession as president by João Lourenço. Over several months, she allegedly made Sonangol transfer at least US$115 million of public funds to an offshore company, Matter Business Solutions, in Dubai. The company was controlled by her close friend and business partner, Paula Oliveira. Oliveira is thought to be a proxy for Isabel and not the final beneficiary of the company – not that anyone had to check: at the time the company was incorporated, authorities in Dubai were under no obligation to record its real owner or even ask questions about the actual beneficiary.

The day after dos Santos was finally dismissed from the board of Sonangol, her “last man standing” at the company, chief financial officer Sarju Raikundalia, ordered three money transfers worth almost US$58 million to the same Dubai-registered company. Even though Paula and Isabel had been business partners at least since 2009, which made her a Politically Exposed Person (PEP), the transaction did not seem to have raised any red flags from the state-owned Emirates NBD Bank, where Matter Business Solutions received the funds.

The Fishrot Files

In November 2019, Wikileaks and investigative journalists published documents showing how the Icelandic fishing company, Samherji, allegedly paid up to US$10 million in bribes to government officials in Namibia to secure lucrative mackerel fishing quotas in the Atlantic.

The bribes were reportedly paid to a shell company in Dubai, Tundavala Investments Limited, via two holding companies belonging to Samherji in Cyprus. Tundavala Investments was owned by James Hatuikulipi, former Chair of Fishcor, Namibia’s state-owned company which distributes fishing quotas. As in the dos Santos case, the suspicious payments were made under the guise of ‘consultant fees’. Tundavala’s only income was the deposits made by the Samherji holding companies.

Recently, the Namibian Finance Minister revealed that assets linked to the case include not only bank accounts, but Dubai real estate as well. The Namibian Anti-Corruption Commission has announced that they are seeking to recover the value of 21 properties in the emirate linked to the six officials involved in the scandal.

Guptas: State capture in South Africa

In what’s been described as a “modern coup”, the Gupta family effectively took control of the highest levels of power in South Africa, by allegedly bribing politicians, giving lucrative jobs to President Zuma’s children and using other means to gain extraordinary levels of influence. The Gupta family took in as much as US$7 billion in government funds, including a US$4.4 billion supply contract with South Africa’s rail and port company.

The UAE has emerged as an important jurisdiction for enabling the Gutpa’s activities in South Africa.

One of the most infamous cases centred on TRANSNET SOC Ltd, a South African majority state-owned enterprise that wanted to buy new locomotives from China South Rail (CSR). In a recent report released by OpenSecrets, it is alleged thatTRANSET’s choice of CSR was secured through a whopping US$910 million worth of kickbacks.

Some of those kickbacks seem to have been paid by CSR to a UAE-based front company, JJ Trading, again under the guise of ‘consultant fees’. Despite no evidence of services rendered, HSBC’s Dubai branch approved the payments.

As with other companies incorporated in the UAE, we have no idea who the real person behind JJ Trading is. The company also didn’t seem to have an office or any presence in its registered address, raising questions on whether it really existed. Recent investigations show close connections between JJ Trading and Tequesta, another shell company headed by Salim Essa – a well-known affiliate of the Guptas. Later, in 2014, Tequesta would come to replace JJ Trading as the sole company to which the kickbacks were reportedly paid.

The Russian Laundromat

In 2014, the Organized Crime and Corruption Reporting Project (OCCRP) broke the story of the Russian Laundromat: a system to move over US$20 billion out of Russia, legitimising the funds by putting them in the hands of shell companies, then moving the money to 5,140 other companies in 96 countries. At least 150 companies in the UAE received funds from the Laundromat. Another investigation linked to the scandal shows that many of these companies seem to have been set up only to receive the funds and ceased to exist afterwards. While the names of these companies allegedly involved are known, the final beneficiaries remain a mystery.

A wide variety of banks were used in the scheme - spanning the UK, Denmark, Sweden, Slovenia and Estonia – and the UAE proved to be another key jurisdiction through which to launder the proceeds. One prominent example is Emirates NBD, responsible for suspicious bank transfers worth US$357 million. Abu Dhabi Commercial Bank (ADCB) also allegedly made bank transfers connected to the Laundromat worth more than US$26 million.

Dubai's property market

Dubai’s real estate market is its crown jewel. In 2019 alone, it drew in AED 80 billion in investment (US$21.7 billion) through 41,000 real estate investments by over 31,000 investors from around the world. The sector’s secrecy and close-to-zero fees make it a highly attractive jurisdiction not only for wealthy investors (close to 5,000 millionaires took up residence in the UAE in 2017 alone) but also to the corrupt and other criminals from around the world.

A plethora of cases have shown how high-end real estate in the emirate provides an opportunity to park large sums of money without disclosing its origin. For instance, Dubai was revealed to be a prominent location for Nigerian Politically Exposed Persons (PEPs) to buy luxury property. A data leak revealed 800 properties valued at US$400 million linked to 334 Nigerian PEPs, their family members, associates, and other suspected proxies.

The same data leak also revealed six Armenian PEPs owning multiple high-end apartments in Dubai. One, a Member of Parliament, was found to own an apartment worth approximately US$350,000. His monthly salary is US$1,350.

In another case, the purchase of Dubai property seems to be a key part of the operation to launder the proceeds of an underground empire that smuggled goods, evaded taxes and exploited corruption in the customs service of Kyrgyzstan. Kygryz tycoon Khabibula Abdukadyr and his family were shown to have made millions from such schemes. His former personal money launderer confessed to wiring US$104 million from Abdukadyr’s companies to Dubai to purchase high-end real estate. His family also made a joint investment in the UAE real estate sector of the with the wife of Raimbek Matraimov, the former deputy head of Kyrgyzstan’s customs service. Leaked real estate data reveals her to be one of the owners of the land where a five-story building is under development. As deputy head of customs, Matraimov’s backing reportedly facilitated Abdukadyr’s deals. Matraimov, however, has publicly denied allegations of wrongdoing.

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IMDB

More than US$4 billion is estimated to have been embezzled from 1Malaysia Development Berhad (1MDB), a Malaysian sovereign wealth fund that was meant to boost the country’s economy through strategic investments.

Through a network of shell companies and layers of transactions, billions of dollars of development money was allegedly spent on luxury real estate in New York, paintings and gifts for celebrities, among other things.

At the centre of the scandal is the former Prime Minister of Malaysia, Najib Razak, currently on trial over his alleged role in the affair. Malaysian anti-corruption officials have released audio recordings in which Razak allegedly asks the crown prince of the UAE, Sheikh Mohammed bin Zayed al-Nahyan, to help fabricate a loan agreement to cover up the embezzlement of funds from 1MDB.

In a place where money laundering and corruption appears to be part of the business model, it sadly comes as little surprise for high-level political figures to appear in such scandals.

Recommendations

Despite the dire picture painted by these scandals and the Financial Action Task Force report, there are steps that the UAE can take to end its role as the destination of choice for those plotting transnational corruption schemes.

Make opaque company structures transparent

The UAE recently made changes to its anti-money laundering rules that included measures to collect information on the real individuals behind companies incorporated there. This is an important step, but reforms will not be more than lip service if key loopholes are not closed. It is still too easy to hide behind complex ownership structures or provide false or misleading information, particularly because existing rules are applied inconsistently across the different emirates and free zones.

Centralising company and beneficial ownership data in a single register and making it available to the public would ensure that journalists and civil society could cross-check and validate the information on the real owners of companies. As companies incorporated across the UAE are often used in cross-border schemes, opening up the register would also allow competent authorities abroad to have access to essential information to detect crimes.

Hold professional enablers to account

Banks, corporate services providers, lawyers, accountants and real estate agents play the important role of gatekeepers of the financial sector as they are in a privileged position to detect and report suspicious transactions to authorities. The UAE needs to ensure that these professionals are doing their part to stop the flow of dirty money into and out of the country by identifying the real beneficiaries of companies and the sources of funds, for example. Authorities in the UAE need to sanction those who fail to do so and investigate and punish cases of complicity.

Work proactively with international partners to detect and investigate money laundering related to corruption

International cooperation is often very challenging, particularly in money laundering cases where the underlying crime was committed in a country with limited investigative capacity. Authorities in the UAE have to proactively share intelligence information and contribute to cross-border investigations that relate to companies and assets in the country. For that, authorities need to improve their own understanding and knowledge of money laundering risks related to corruption and other predicate crimes committed outside of the UAE as well as improve their capabilities to support these types of investigations. Moreover, proactively publicising key data like ownership of companies and real estate as the norm would already facilitate access to information by foreign authorities, reducing the need to go through complex mutual legal assistance processes.

Changing

The secrecy the UAE offers investors has helped make it a financial powerhouse in the Gulf and increased its influence across the Middle East. This reality, combined with the lack of democratic decision-making or legislative process in the Emirates, unfortunately makes it unlikely that there will be the political will required to change course. Nonetheless, the UAE should strengthen its institutions for investigating and prosecuting financial crimes, and ensure that they are completely free of political interference.

Just as some economies will soon have to pivot away from unsustainable dependence on fossil fuels for their income, the UAE and other secrecy jurisdictions will face increasing economic challenges if they continue to rely on attracting investment by looking the other way. Following the latest report, the FATF may add the UAE to its so-called Grey List if there aren't impovements. That, at least, would have some consequences for the UAE's leaders.

For any press enquiries please contact press@transparency.org

Photo David Rodrigo / Unsplash

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