UAE Removed from the FATF Financial Crimes Watch List
The Financial Action Task Force (FATF) has removed the United Arab Emirates (UAE) from its global watch list of countries at risk of illicit money flows. Given the UAE’s status as a hub for millionaires, bankers, and hedge funds, the FATF’s delisting is a major win for the country and indicator of improving financial sector transparency.
By Melissa Cyrill
In a significant boost to its standing as a premier financial and commercial hub and with major investment interests across the world, the global financial watchdog FATF has dropped the UAE from its ‘grey list’. The FATF releases two public documents three times a year to identify jurisdictions lacking effective measures against money laundering and terrorist financing (AML/CFT). Its method of publicly listing countries with deficient AML/CFT regimes has demonstrated efficacy.
As of February 2024, the FATF has evaluated 131 countries and jurisdictions, publicly identifying 106 of them. Among these, 82 have subsequently enacted the required reforms to rectify their AML/CFT deficiencies and have been delisted from the process. Countries that feature on the grey list (jurisdictions under increased monitoring), as of February 23, 2024, include South Africa, Croatia, Turkiye, the Philippines, Vietnam, and Nigeria.
The removal from the FATF grey list is a significant achievement for the UAE; it reflects the country’s prioritization of delisting and the strengthening of anti-money laundering measures. This initiative was led by the Minister of Foreign Affairs, who is also the brother of President Mohamed bin Zayed Al Nahyan. The UAE has implemented various measures to achieve this goal, including enhancing financial investigations and prosecutions, fostering international cooperation, and aligning virtual asset regulations with global standards.
Financial and banking professionals anticipate that this development could enhance trust in the country and encourage greater foreign investment. Investors may perceive the UAE as a more secure destination for their capital. Furthermore, banks could cut the costs associated with servicing wealthy clients within the country.
The UAE faced heightened scrutiny in 2022 as the FATF highlighted concerns regarding the potential risks of money laundering and terrorist financing associated with banks, precious metals and stones, as well as real estate. That year, Dubai’s luxury real estate sector had ranked fourth globally, following New York, Los Angeles, and London, as reported by property consultant Knight Frank. Additionally, the UAE surpassed Belgium in 2023 to emerge as the primary global trading hub for rough diamonds.
There is a growing competition among Gulf states to diversify their economies beyond oil, focusing on sectors like financial services, trade and logistics, and tourism. Attracting foreign investment plays a pivotal role in this endeavor.
Moreover, the UAE’s removal from the financial crimes watch list could boost Indian financial and corporate entities seeking to raise capital. Indian finance companies seeking foreign equity, start-ups grappling with funding challenges, and private equity (PE) and venture capital (VC) funds attracting overseas investors stand to benefit. Capital flows from countries on the FATF’s increased monitoring list are subject to greater scrutiny by banks managing remittances and handling fund custodians, thereby raising transactional costs. Foreign portfolio investors (FPIs) from jurisdictions labeled as ‘black list’ or ‘grey list’ are subject to annual KYC (know-your-customer) compliance as opposed to every three years for other funds.
As the UAE becomes a more important source of foreign direct investment (FDI) into India, its status as an FATF-compliant jurisdiction will strengthen capital flows. The RBI, India’s central bank, will now permit UAE FDI beyond 20 percent in non-banking financial companies.
Moreover, if an entity in another country (such as the United States) has an investor from a grey-listed country holding 10 percent or more equity, it is also prohibited from subscribing to alternative investment funds (AIFs) in India. The FATF delisting will now facilitate Indian AIFs from accepting investment commitments from UAE-based entities or entities in other countries where Emirati investors hold 10 percent or more funds.
Further, DPIIT-recognized Indian start-ups can take advantage of the External Commercial Borrowing (ECB) framework to obtain ‘venture debt’ from lenders in the UAE, according to Harshal Bhuta, partner at the CA firm P.R. Bhuta & Co, speaking to The Economic Times. The ECB framework offers greater fund raising flexibility through extended early repayment periods, elimination of constraints such as interest rate caps, and relaxation of debt-equity ratios beyond specified limits. Additionally, Bhuta notes that recognized startups under this framework have leeway regarding the utilization of foreign loans and are allowed to secure borrowing against intangible assets.
Per reports, there are 198 FPIs from the UAE that trade on India’s stock exchanges. In FY 2023, FDI from the UAE to India grew three times to US$3.35 billion, making it the fourth largest investor in the country. In February, the UAE and India signed a Bilateral Investment Treaty (BIT) and Abu Dhabi’s sovereign wealth fund ADI received the green light to set up in India’s international financial services center at GIFT City, Gujarat.
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