Why companies in the GCC can't ignore compliance

Tightened financial regulations will have a significant impact on the risk exposure of firms operating in the region

Firms operating in the region must adhere to strict financial regulations. Sarah Dea/The National

In the past year, GCC countries have reiterated they, like many other countries around the world, are serious about combatting money laundering, terrorism financing and other financial crimes.

Companies that ignore this shift will do so at their peril. Recent local and global economic, legal and political developments - ranging from new regulations and stronger enforcement authorities to the re-imposition of sanctions by the United States (US) against Iran - will have a significant impact on the risk exposure of companies operating in the region for the foreseeable future.

There is ever increasing scrutiny into financial crime. In the UAE, the newly enacted Anti-Money Laundering (AML) Law contains important improvements over the prior legal framework, notably, the inclusion for the first time of digital currencies and online money laundering within the scope of the law and the introduction of "controlled delivery" (a form of "sting operation") which allows a money laundering activity to proceed in order to investigate and apprehend the suspects. In 2018, the anti-bribery and anti-corruption provisions of the UAE Criminal Penal Code was amended, among other things, to include bribery committed by foreign public officials and, for the first time, expressly providing for extra-territorial reach of the criminal act.

In Saudi Arabia, fundamental changes to the AML counter-terrorism financing (CTF) regime and robust measures to detect financial crime have been introduced, taking into account the recommendations of the Financial Action Task Force (FATF), the intergovernmental organization that combats money laundering and terrorism financing. These changes bring the AML regimes of these countries closer in line with international standards.

Following its withdrawal from the Iran nuclear deal, the US’ unilateral re-imposition of sanctions has had a marked impact on companies doing business with Iran, and has increased the scrutiny into Iran-related transactions. For example, the flow of funds between Iran and the UAE has been disrupted even through traditional, more established banking channels. The UAE does not have a blanket prohibition on doing business with Iran, while Qatar has in fact increased its commercial ties with Iran.

The UAE authorities are also enhancing cooperation with foreign law enforcement bodies. For example, the UAE is working more closely with the US Treasury Department, notably through its partnership within the Terrorist Financing Targeting Center. This has led to the imposition of specific sanctions across the GCC countries and several highly visible joint enforcement actions, shutting down currency trading operations that had links to Iran.

Heightened accountability and enforcement authority are reflected by recent major senior appointments at the financial regulators in the UAE financial free zones. In addition, the Dubai Financial Services Authority and the Financial Services Regulatory Authority have enhanced the DIFC’s and ADGM’s AML regimes respectively, requiring the registration of Designated Non-Financial Professions and Businesses (including law firms, real estate brokerages and accounting firms) among other marked changes. These are clear signals that the regulators are likely to take a more active approach to enforcement and a renewed commitment to the financial safety and soundness of these financial hubs, particularly in advance of the FATF’s overall evaluation of the UAE financial system that will be undertaken later this year.

The KSA underwent a FATF assessment in 2018, achieving good results and uncovering some areas of focus such as pursuing large scale money laundering and confiscating assets. Investigations have increased in the Kingdom in recent years due in large part to the government’s anti-corruption campaign.

Businesses will be facing greater regulatory scrutiny and operating in a more compliance-focused environment than ever before. The UAE is likely to share investigation intelligence information more transparently going forward, and actively implement joint enforcement actions with foreign law enforcement agencies. Governments in GCC countries are also likely to adopt a more liberal approach to extradition requests and greater transparency in bribery cases, such as the recent disclosure of financial irregularities in public procurement contracts by the Anti-Corruption Department within the UAE's State Audit Institution.

These developments will have a profound effect on the business environment in the GCC. Companies can no longer approach compliance casually - it now needs to be on the agenda of boards and management teams to help them make effective strategic business decisions that will both protect and drive commercial growth.

Now more than ever, companies will need to reassess their compliance policies and risk exposure and focus on developing robust compliance systems and controls as well as training employees to ensure that these systems ultimately withstand regulatory scrutiny.

Businesses that make appropriate adjustments and corrective actions now in light of these developments are better placed to continue operating successfully in the future.

The author is Borys Dackiw, partner and head of the Gulf compliance practice at Baker McKenzie Habib Al Mulla, based in Dubai