DIFC and DFSA Latest Developments

The DFSA has released Consultation Paper 118 which proposes changes to the DFSA Anti-Money Laundering (AML), Counter-Terrorist Financing (CTF) and Sanctions regime as well as the DIFC Regulatory Law 2004.  The proposed changes are designed to ensure that the DFSA’s AML regime is compliant with the 2012 Financial Action Task Force (FATF) Recommendations and the UAE Federal AML Legislation. The proposed changes come ahead of an FATF Mutual Evaluation of the UAE which has been scheduled for July 2019.

At an Outreach Session on 12th March 2018 to discuss the proposed changes, the DFSA highlighted that the consequences of non-compliance with the 40 Recommendations would have a serious impact on how the UAE would be perceived internationally, with serious repercussions for future cross border activity if the country is found to be deficient.  Efforts have been mounted at a national level and involve more than 100 stakeholders contributing to assessments of both the country’s technical compliance with the 40 Recommendations, as well as the effectiveness of its AML/CTF systems and controls.

In summary, the following changes are proposed:

  • Affirming that the DFSA is the exclusive AML regulator for all Relevant Persons in the DIFC
  • Amending the current definition of a Designated Non-Financial Business or Profession (DNFBP) as well as making changes to the registration, supervision and withdrawal processes for such entities.
  • Dealers in high value goods will be removed from the definition of a DNFBP. These entities will no longer have to register with the DFSA, or be categorized as a Relevant Person and will now have to comply on an ongoing basis with the Federal AML Legislation requirements and appropriate DIFC laws and regulations.
  • Single Family Offices (SFOs) will also be removed from the DNFBP regime. SFOs will not be supervised directly for AML purposes, however those who provide services to SFOs will need to be appropriately regulated.
  • The DFSA will have more detailed powers to perform AML/CTF supervisory functions over DNFBPs as well as having the necessary powers to exclude a person from being a DNFBP if they are deemed not fit and proper to perform their function.
  • Amendments will be made to the registration process for DNFBPs, requiring them to be registered as such by the DFSA before being able to conduct any activities in the DIFC. This amends the current arrangement whereby a commercial licence could be issued before the DFSA has had the opportunity to fully consider all qualifying terms of a registration application by the DNFBP.
  • The registration process for a DNFBP will be different from that of an Authorised Firm as the focus will be on the issue of integrity and suitability of the applicant to control a DNFBP, rather than on qualifications and experience.
  • Existing DNFBPs need not re-apply for registration with the DFSA, but will need to self-certify certain matters to the DFSA, including the suitability of their procedures relating to AML/CTF controls. Certifications are required within 3 months of the amendment to the rules, and failure to submit will be cause for the DFSA to take action against the DNFBP. 
  • The DFSA will introduce an Annual Information Return that will highlight the information about the firm, such as its legal status, address, MLRO, senior management and beneficial owners. The Returns will be used by the DFSA to determine where to allocate supervisory resources.
  • The Federal AML Legislation refers to a Financial Intelligence Department (FID), previously known as the Anti-Money Laundering and Suspicious Cases Unit (AMLSCU), of the UAE Central Bank. References to AMLSCU in the AML Module will now be replaced by FID.

CCL’s experienced team of consultants can undertake a review of your internal AML/CTF systems and controls so that you can provide demonstrable records and assurance to your senior management as to the suitability and effectiveness of your control framework, and meet the deadline for submission to the DFSA. For details, click here.

The DFSA and the Central Bank of Oman has signed a Memorandum of Understanding (MoU) to cooperate in the supervision and authorisation of firms operating in both markets.

MoUs are the traditional method of formalising cooperation between global regulators and provide a formal basis for cooperation between authorities based on existing laws.

While a lack of MoU does not signify a blocking of information between regulators, the existence of an understanding provides a formal agreement and symbolic strengthening of relationships between the regulators.

Following Consultation Paper No.116, released in September 2017, the DFSA has implemented the following changes, all of which should should be of interest to Authorised Firms as well as those planning or advising firms on applying for Authorisation:

  1. Exclusion from dealing in investments as principal – with changes to GEN 2.7.4. The amendment has been made to add guidance and make clear the limitation in the scope of this exclusion.
  2. Financial statements for debt issuers – with changes to MKT rulebook, table A1.1. The DFSA has aligned its rules with EU legislation to allow financial statements to be up to 18 months old without condition.
  3. Price stabilisation for shares in listed funds – with changes to PRS 2.2.1(2). The DFSA has proposed under the Price Stabilisation Rules to add shares that represent Unitholder interests in a Listed Fund to the category of securities for which Price Stabilisation measures can be taken.
  4. Fees for Provision of Trust Services – with changes to FER 2.1.1 and 3.2.1 This amendment will be of interest to Trust Service providers: The DFSA has amended the FER module so that firms who are Providing Trust Services, but who are not acting as trustee in respect of at least one express trust, should face application and annual fees of $15,000, thus making the fees comparable to firms who undertake Category 4 activities.
  5. Fees for changes of scope – with changes to FER 2.2.7
ADGM and FSRA Latest Developments

The Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) has started developing an electronic Know Your Customer (KYC) platform. The development symbolises the ADGM’s commitment to Financial Technology (FinTech) in the ADGM.

The CEO of the FSRA, Richard Teng, stressed how financial institutions are seeking more ways to meet KYC and AML requirements and standards on an international level. There is also great interest in mixing other forms of FinTech with KYC, such as blockchain for KYC and using FinTech for effective management of digital identities.

The E-KYC project proposes Distributed Ledger Technologies as the platform underpinning the network – this is a technology that comprises a consensually shared database and is synchronised across networks spread across multiple sites and institutions andwill help increase the efficiency of KYC for financial firms. This technology is the same technology that underpins Bitcoin.  

The project is part of many institutional-focused ADGM projects for 2018.

The FSRA is developing a regulatory framework to regulate and supervise activities of virtual currency exchanges and intermediaries.

In October 2017, the FSRA released regulatory guidance and an initial framework on Initial Coin/Token Offerings (ICO/ITO) and virtual currencies to support the growing interest by financial firms and the general public.  The guide provided a background to virtual currencies and explained that currencies and tokens with virtual characteristics are to be treated as commodities and that ICOs will be assessed by the Financial Services and Markets Regulations (FSMR) on a case by case basis in order to clarify how the token will be treated in a regulatory environment.

The guidance also recommended that all consumers take caution with their investments in virtual currencies due to price volatility.

The FSRA acknowledges that virtual currencies are increasingly being deemed as a medium of exchange for goods and services across the world,  but warns of the risks of money laundering and terrorist financing that accompany it. Consequently, the ADGM  is following the lead of other countries such as Australia, Japan, Singapore and the UK by introducing or proposing regulations to address such risks.

The ADGM is reviewing and considering a regime to suit virtual currency exchanges and intermediaries that meet international standards and the regulatory regimes of other jurisdictions.

The ADGM has opened its Regulatory Laboratory (RegLab) to applications focusing on financial services for the small-medium enterprise (SME) sector.

Globally, the ADGM RegLab is the 2nd most active FinTech sandbox and during their second cohort they doubled the amount of firms accepted into the programme.  

The focus on SMEs is due to the sector making up more than 94% of the total number of companies operating in the country and providing employment for more than 86% of the private sector’s workforce (source: UAE Ministry of Economy). The ADGM believes that international advancements in FinTech “have immense potential to improve financing opportunities and unlock economic value for the SME sector”.

SMEs with a FinTech focus may wish to apply for the RegLab. Applications close on 10th May 2018. CCL has helped previous FinTech firms with applications in both the ADGM and the DIFC FinTech Hive.

Middle East Regulatory Updates

Regal RA DMCC –a subsidiary of Regal Assets Inc, which is a gold trading company and the Middle East’s first company to hold a Crypto trading  licence – has  launched a ‘’deep cold storage’ solution for investors and traders.  This is an offline server – with insurance – which will generate offline blocks, using the specific crypto blockchain-derived algorithm.

In a statement, the CEO of RA DMCC said that investors worldwide are reluctant to store large amounts of coins in online wallets due to the high risk of theft, hacking malware and cybercrime and pointed out that huge interest in investing in cryptocurrencies is being destabilised by the overall risks to investors.

Earlier this year hackers stole more than half a billion dollars in cryptocurrencies from Japanese exchange - Coincheck, as the company reported $ 531.8 million had been directed to another account and, allegedly, more than 3 million bitcoins were lost.

International Developments

The UK Home Office has created a new National Economic Crime Centre within the National Crime Agency (NCA). The new centre will be tasked with coordinating the response to economic crime due to the advances in technology, greater intelligence and analytical capabilities.

The new centre will be composed of experts from across government, law enforcement and criminal justice agencies as well as input being provided from the private sector. The NCA will be able (through new legislation) to communicate directly to the Serious Fraud Office (SFO) in order for the SFO to investigate entities and people who are the worst offenders.

Another UK government-run initiative is to introduce an overseas companies’ beneficial ownership register, developed by the Department for Business, Energy and Industrial Strategy. This initiative is to reduce the opportunity for criminals to use shell companies to launder money through property in the UK, by requiring them to provide details of their ultimate owners.

Both the introduction of the National Economic Crime Centre and the overseas companies’ beneficial ownership requirement should help the UK tackle an increasing amount of economic crime.

The use of credit cards to buy Bitcoin and other virtual currencies has been banned by several banks in the UK and the United States. Lloyds Banking Group, Virgin Money, JP Morgan and Citigroup have all banned their credit card users from buying currencies due to the price volatility of virtual currencies such as Bitcoin and Ethereum.

The volatile price of virtual currencies has left fears that customers could run up huge debts from buying currencies on credit without being able to repay these debts should the values plummet. Credit card providers, analysing the transactions of their customers, have noted that the amount of transactions from their customers on virtual currencies through online exchanges has risen sharply and they are unwilling to take a chance on customers who could leave banks with large debts if they cannot repay.

However, other banks are still allowing customers to buy virtual currencies. Barclays (the UK’s leading credit card issuer with 27% market share) has taken the position that while they will let credit card customers continue to buy these currencies, they are “constantly reviewing their procedures and keeping the matter under close review.”.

FATF has updated the list of jurisdictions with strategic deficiencies, adding one country to those that have strategic deficiencies and removing one country which is no longer subject to the FATF’s on-going global AML/CFT compliance process. The update comes after the February plenary meeting which includes an ongoing review of the standards of countries across the world and identifies those that have deficiencies, but who work with the FATF to develop an action plan to combat these shortcomings.

Serbia was identified as having deficiencies, but has already written a high-level political commitment to combat these problems. In February 2018, Serbia made the commitment to work with the FATF and MONEYVAL (The Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism) to strengthen the effectiveness of its AML/CFT regime and address any related technical deficiencies.

The list of jurisdictions with strategic deficiencies are:

  • Ethiopia
  • Iraq
  • Serbia
  • Sri Lanka
  • Syria
  • Trinidad and Tobago
  • Tunisia
  • Vanuatu
  • Yemen

Bosnia and Herzegovina is the only country which has been taken off the list and is no longer subject to ongoing AML/CFT compliance processes due to the significant progress made in rectifying the deficiencies identified by the FATF in June 2015.

FATF continues to advise jurisdictions to apply enhanced due diligence measures proportionate to the risks arising from Iran.

It also continues to advise jurisdictions to apply counter-measures to protect the international financial system from the on-going and substantial money laundering and terrorist financing risks emanating from the Democratic Peoples Republic of North Korea (DPRK).

Transparency International have released their 2017 index ranking perceived levels of corruption of all countries within the public sector according to experts and businesspeople.

The 2017 results showed no big differences in perceived levels of corruption, with New Zealand and Denmark ranking highest with scores of 89 and 88 (100 being perceived as “very clean”). The worst ranked countries were Syria, South Sudan and Somalia with scores of 14, 12 and 9 respectively. In terms of regions, Western Europe ranked the best with an average score of 66 and Sub-Saharan Africa scoring the least with 32.

Analysis of the results indicated that countries which have the least protection for press and non-governmental organisations (NGOs) were also countries that tend to have scored lower.

As part of the analysis by Transparency International in combatting corruption, the organisation have recommended:

  • Governments and businesses must do more to encourage free speech, independent media, political dissent and an open and engaged civil society.
  • Governments should minimise regulations on media, including traditional and new media, and ensure that journalists can work without fear of repression or violence. In addition, international donors should consider delevelopment aid and access to international organisations relevant to press freedom.
  • Civil society and governments should promote laws that focus on access to information. This access helps enhance transparency and accountability while reducing opportunities for corruption. It is important, however, for governments to not only invest in an appropriate legal framework for such laws, but also commit to their implementation.
  • Activists and governments should take advantage of the momentum generated by the United Nations Sustainable Development Goals (SDGs) to advocate and push for reforms at the national and global level. Specifically, governments must ensure access to information and the protection of fundamental freedoms and align these to international agreements and best practices.
  • Governments and businesses should proactively disclose relevant public interest information in open data formats. Proactive disclosure of relevant data, including government budgets, company ownership, public procurement and political party finances allows journalists, civil society and affected communities to identify patterns of corrupt conduct more efficiently.

Pakistan has received a 3-month reprieve to avoid being added to a list of countries deemed non-compliant with anti-money laundering and terrorist financing regulations by FATF, following the U.S.-led motion to put the South Asian country on a terrorist financing watchlist.

State Department officials in Washington could not confirm that FATF deferred action for Pakistan for three months, pointing out that FATF’s deliberations are confidential until it makes them public. The international community continues to have concerns over Pakistan’s deficiencies in the field of anti-money laundering and counter-terrorism, even though steps were taken by Islamabad to address the flaws.

Enforcement Action

The Swiss regulator, the Financial Market Supervisory Authority (FINMA), has banned Gazprombank Switzerland from accepting new private clients after serious shortcomings were revealed in their efforts to tackle money laundering.

After the Panama Papers were leaked from the law firm, Mossack Fonseca, FINMA looked into possible wrongdoing in Switzerland due to the country being very popular with offshore accounts. The papers and the corporations mentioned within the papers triggered investigations by FINMA into 20 banks. Following the investigations all banks were required to take action to improve their anti-money laundering processes.

Gazprombank Switzerland, a Russian owned bank was found to have serious breaches of its anti-money laundering due diligence requirements between 2006 and 2016.

Failures in their due diligence included:

  • Failure to carry out adequate economic background clarifications into business relationships
  • Failure to raise transactions with increased money laundering risks

No new relationships with private clients may be accepted and existing relationships must be strictly monitored.

ABLV Bank AS, the third largest Latvian Bank has been outright banned from entering the US financial system after ties to North Korea’s missile program were found.

The ban means US financial institutions cannot maintain any correspondent accounts with the Latvian bank which will seriously affect or end the ability for the bank to make transactions in US dollars. Other breaches included ABLV allowing transactions tied to corruption in Russia and Ukraine. Currently the bank is rebutting the claims and is stating that they are victim to “outrageous defamatory information” and they have 60 days to submit objections to the finding, but the US Treasury Secretary will have the final word.

Latvia has been subject to tighter controls within the financial services industry in recent years. JP Morgan Chase and Co. stopped offering dollar-clearing services to Latvia in 2013 and Deutsche Bank stopped dealing with Latvian lenders in 2017 which has put severe strain on the country’s active accounts and transactions of US dollars.

ABLV Bank’s regulatory action has been the most recent action taken by the US to tighten controls on sanctioned countries.

The UK’s Serious Fraud Office (SFO) has charged Barclays for a second time over a $3 billion loan the bank make to Qatar. During the 2008 Financial Crisis, emergency fundraising was necessary to keep Barclays propped up amid serious financial difficulty. The bank took out a loan with Qatari investors – subsequently deemed illegal -   which was used to prop up its shares. UK public companies such as Barclays are normally prohibited from lending money for the purchase of their own shares, which is known as “financial assistance”.

 In a previous incident, four executives from Barclays’ parent company had already been charged by the SFO with the same offence. The charge is now against Barclays itself at an operating level, which could see regulatory penalties and licence withdrawal should the SFO deem this necessary. Retail banking is ring fenced under a new company and therefore will not be affected. However, this could seriously affect Barclays’ investment banking, corporate lending and international operations.

A former employee of Credit Suisse has been jailed for a long-term fraud which earned him personal gains of 30 million francs. Patrice Lescaudron was sentenced in a Geneva court for abusing the trust of clients and carrying out a fraudulent system for over 8 years.

The employee used a system in which he copy and pasted signatures on documents to falsify transfer orders, forging signatures of former clients such as the former Prime Minister of Georgia, Bidzina Ivanishvili and the Russian oligarch, Vitaly Malkin. The fraud lost Bidzina Ivanishvili more than 100 million dollars.

The bank’s surveillance of transactions was claimed to be ‘non-existent’ and the handling of portfolios seriously lacked any effective systems and controls, allowing Lescaudron to go undetected over the majority of the 8 years.

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