UAE currency houses will be subject to new Central Bank rules

New rules designed to tighten the regulation of money exchange houses are planned by the Central Bank in the wake of the closure of two exchange houses for breaking rules.

The proposed law change comes after a Central Bank decision this month to revoke the licences of two exchange houses. Pawan Singh / The National

New legislation designed to tighten the regulation of money exchange houses is planned by the Central Bank following the closure of two such companies for breaking industry rules.

The Central Bank is considering raising the minimum capital required to operate an exchange house, said two people familiar with the matter. It may also seek to tighten anti-money laundering legislation, both people said.

"New regulations will benefit the industry," said Osama Al Rahma, the general manager of Al Fardan Exchange and chairman of the Foreign Exchange and Remittance Group, an association of more than 50 exchange houses.

"Some of the current rules date from 1992 and technology and services within the industry have changed a lot since then. In the payment sector new products are being developed and rules have to be in place to regulate that."

The proposed law change comes after a Central Bank decision this month to revoke the licences of two exchange houses. Al Hilal Exchange and Asia Exchange Centre both committed "major regulatory violations", the regulator said at the time.

Al Hilal Exchange also breached anti-money laundering compliance rules, it said.

Acting as the shadow banking system, the exchange industry handles billions of dollars in transactions every year on behalf of people paying wages, bills or sending money overseas.

Under existing capital requirements dating from 1992, exchange houses with an unlimited liability are required to have a minimum capital of Dh1 million to operate as a money exchange business and Dh2m as a money exchange and remittance business.

The capital requirement rises to Dh50m if the business wants to operate with limited liability, meaning the company is liable only up to a limit of that amount.

But the industry has changed since then, with new services and products introduced offering customers the ability to make transactions via ATMs, the internet and mobile phones.

Some larger exchange houses have also branched out to offer customers access to products sold by other financial companies such as investment in bonds and other savings schemes.

Inevitably, larger exchange houses have the ability to invest more in compliance with rules than smaller players. The changes could result in consolidation and rationalisation of the sector, industry executives said.

"We invest US$100m each year in compliance globally," said Rania Chidiac, the director of corporate communications in the Middle East for Western Union Financial Services, a money exchange business.

"It's not only the reputation of our company and the UAE that's at stake but it's the safety of customers."

In a region beset by sanctions, preventing illicit money flows is a potentially more complex challenge for the industry to face. Companies have to contend with steadily tightening sanctions against companies and individuals in Iran and Syria.

In addition to breaking Central Bank anti-money laundering rules, Al Hilal Exchange was also last week sanctioned by the US treasury department for "providing financial services to previously designated Iranian banks".

"We have warned the financial community about the risks posed by Iran's use of exchange houses and trading companies to evade sanctions, and today's action makes clear that we will impose sanctions against non-bank financial institutions that facilitate Iran's illicit conduct," David Cohen, the US under secretary for terrorism and financial intelligence, said last week.

Officials say exchange houses are at particular risk of being targeted by money launderers because of a perception of being controlled by less stringent rules than the banking system.

For the industry, many of the concerns boil down to "know your customer", said Mr Al Rahma.

"In general the philosophy that works best is to know your customer and to look for red flags such as making sure their money exchange activities match their income and be particularly vigilant with transactions to certain countries in the region," he said.

Nobody was available to comment from the Central Bank.