The UAE – a global trade and investment center or a sanctions evasion hub

Pavlo Verkhniatskyi, Managing Partner at COSA

The Appearance of the UAE on FATF’s list of increased monitoring jurisdictions “coincided” with the Russian full-scale invasion of Ukraine which led to massive sanctions against the aggressor. Many of the sanctioned Russian “patriots” reportedly relocated their fortunes to the business-friendly Emirates. Almost immediately investigators started tracking illicit financial flows that support sanctions circumvention schemes, and some trails lead to the UAE.

The schemes applied are not as sophisticated though. Some newly established entities are only vehicles for holding the money in a safe harbor. Property purchased directly or through an offshore jurisdiction is also not something special. However, firms declaring to provide energy-related services with no visible track record, incorporated months after the Russian invasion, and using Russian website domains in their registration emails, raise concerns. A quick look at their visible profile, and a few chats with their assumed counterparts in oil-extracting regions in Russia, make that initial red flag simply glow and signal you – “sanctions evasion!”. And there are more parties to this mechanism. The real service providers now unable to receive funds from sanctioned companies of the aggressor state directly still want their piece of the pie in very cold, but money-generating tundra oil fields. And some might find the UAE-based shell firms a good solution to process those funds anonymously.

Such grey funds, on the one hand, made some local asset management and law firms slightly wealthier, but also sparked concerns among diligent international investors, as well as catching the attention of OFAC officials and financial intelligence units around the globe. The recent sanctioning of several UAE-based firms for facilitating shipments of Iran drone-related items and supporting Russian military-related programs is a signal for the country to take measures and shut down such dubious practices for the sake of its development as a true trade and investment hub, instead of being a link in the sanctions evasion chain.

The path is clear – let the toxic caravans bypass the blooming oasis. In other words, a robust enhanced due diligence procedure within banks, real estate agencies and other elements of the initial financial monitoring landscape should be introduced. Local investigators should also take real action. Furthermore, the entities discrediting the Emirates’ financial system should be penalized. All in the hands of the authorities and diligent systemic businesses. Action should be taken immediately as the next review of the country’s progress in improving its compliance with the FATF’s anti-money laundering and countering of terrorism financing standards is upcoming.