According to the Financial Action Task Force, the United Arab Emirates (UAE) has 39 different company registries. Many of these exist to help promote economic growth in the various free trade zones (FTZs). However, the expansion of the UAE’s FTZs and the country’s myriad of company registries have created ample opportunity for exploitation. Complex company structures and unidentified third parties are employed by bad actors to conceal illicit funds and trade-based money laundering (TBML) schemes.
Countries in the Gulf region have recently introduced a range of measures to strengthen their efforts to manage risk, including ultimate beneficial owner (UBO) requirements. The UBO is defined as the individual who has – direct or indirect – ownership or control of a company. The Ministry of Economy (MoE) has also taken important steps in ensuring the completion and registration of UBO data. Nevertheless, managing the full scope of UBO risk is no small task.
A case in the news
On August 3rd, it was reported that at least six tankers were involved in a maritime incident in the Gulf of Oman. One of the tankers – the ASPHALT PRINCESS – had been hijacked. Tensions have been brewing in the Gulf throughout 2021. This recent incident highlights the increasing threat in one of the world’s most important oil shipping routes. On deeper investigation, Windward revealed that two of the vessels involved, the MT RIAH and the ASPHALT PRINCESS, shared a mutual Beneficial Owner ‘Prime Tankers Llc’.
Prime Tankers Llc is a free trade zone company in the UAE. The risk factors are two-fold. First, similar to financial crime operations, sanctions evaders take advantage of free trade zone companies which generally have reduced finance and trade controls and enforcement. With the UAE’s extensive financial, economic, corporate and trade activities, it becomes a lucrative target for bad actors. In Windward’s compliance system, Prime Tanker Llc was listed as high-risk prior to the day of the hijacking. When looking at vessels in this region, our system indicates that there are currently 20 active tankers registered with the UAE flag. Of these, 10 are high-risk for sanctions or 50%.
Why is this so important? The stakes are high when it comes to sanctions risk. OFAC recently designated individuals and businesses involved in an international oil smuggling network that supported Iran’s Islamic Revolutionary Guard Corps-Qods Force (IRGC-QF). Senior IRGC-QF officials used proceeds from their involvement in Iranian oil exports to help fund the group’s activities. OFAC’s action targeted an Omani broker who had partnered with senior IRGC-QF officials and used several companies to facilitate shipments of Iranian oil to foreign customers.
How it works and why it matters
Concealment of beneficial ownership takes place in multiple ways. Mostly commonly through the use of shell companies, front companies, shelf companies, legal persons and arrangements, and the use of nominees. The Gulf region’s proximity to Iran, a sanctioned country, makes the use of the tactics prominent. Bad actors take advantage of front companies as a means to do business in Iran while benefiting from the global market.
One example is the sale of Iranian-based oil through front companies based in the UAE and Iraq – making it appear that the oil originated from non-sanctioned countries. Obtaining a complete set of supporting documents when handling trade financing transactions, including bill of lading (BOL) copies and certificates of origin of goods is important to mitigate such cases. This is especially important in the involvement of high-risk goods such as oil, coal, iron, and ore.
To stay ahead of sanctions, stakeholders need systems that can boost ownership transparency and identify the percentage of ownership in line with global regulations. Otherwise, bad actors will continue to take advantage of loopholes to benefit from a lack of enforcement by authorities. According to the FATF Mutual Evaluation report UAE 2020, the Suspicious Transaction Reports (STRs) received from the FTZ sector have been minimal.
It’s clear that the sheer number of company registries in the Gulf region, along with the different rules across its city-states, provides a lucrative opportunity for bad actors. The recent OFAC designation highlights why the GCC region has increased its measures to identify UBO risk and support the discovery of individuals linked to malicious activities. In fact, Dubai Courts recently announced the establishment of a specialized court, focused on combating money laundering – accelerating the UAE’s role in its wider endeavor to fight crime. These are significant steps towards where the region needs to be.
Real-time and automatic monitoring of entities registered in the FTZ can help stakeholders maximize risk management in this environment. Further, compliance teams can streamline due diligence processes based on their specific needs by leaning on strong partners with regional expertise. This will be key to enhancing screening as it applies to fraud, trade-based money laundering, and sanctions. For more insights on the GCC region, join our webinar on September 29th.
Any views expressed by the writer are entirely her own and not those of her employer.