A complex compliance task: Mitigating UBO risk in the Gulf region


What’s inside?

    UBOs (ultimate beneficial owners) are often difficult to identify as they can misuse ownership structures to conceal their identities. Investigating ultimate beneficial ownership in the Gulf region is particularly challenging.

    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 are a common method to conceal illicit funds and trade-based money laundering (TBML) schemes. 

    The UBO is the one with direct or indirect control of a company

    Countries in the Gulf region have introduced a range of measures to better manage risk, including UBO requirements. And the Ministry of Economy (MoE) has 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 3, at least six tankers were involved in an incident in the Gulf of Oman. Tensions have been brewing in the Gulf throughout 2021. This recent hijacking 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 shared a mutual ultimate 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. This is because they 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, ten (50%) are high-risk for sanctions.

    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 IRGC-QF. Senior IRGC-QF officials used proceeds from their involvement in Iranian oil exports to help fund the group’s activities. OFAC 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. 

    Concealment of ultimate beneficial ownership takes place in multiple ways

    UBOs can take advantage of shell companies, front companies, legal persons, and the use of nominees to conceal their identities. 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. UBOs can make it appear that the oil originated from non-sanctioned countries. This is why bill of lading (BOL) documents are key in verifying the legitimacy of transactions. This is especially important in the involvement of high-risk goods such as oil, coal, iron, and ore.

    Looking ahead

    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. Contact us to learn more about how we can help you establish ultimate beneficial ownership and enhancing screening as it applies to fraud, trade-based money laundering, and sanctions.

    Any views expressed by the writer are entirely her own and not those of her employer.

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