Dubai’s Role in Facilitating Corruption and Global Illicit Financial Flows

In 2014, a businessman made a routine call from the fancy neighborhood of Clifton in Karachi, Pakistan. He was checking with his assistant, Yasir, on the status of his real estate investment in Dubai’s Al Khail Gate, an upscale community of apartments and townhomes close to several international schools, malls, and recreation centers.¹ The conversation was the normal sort of back and forth on building permissions, the escrow account, advertising, and sales numbers. But, in actuality, the call was anything but ordinary: the businessman was Dawood Ibrahim, a transnational criminal with a net worth of about $6.7 billion and, at the time, India’s most wanted man.²

Tapes of Ibrahim’s conversation caused quite a stir in India when they were released in April 2018. Many believe he was the mastermind behind a spree of terrorist bombings in Mumbai in 1993 that killed over 250 people and injured 1,400.³ The U.S. Federal Bureau of Investigation continues to investigate his criminal enterprise known as D-Company, which reportedly operates from India, Pakistan, and the United Arab Emirates (UAE).⁴ He also is on the United Nations Security Council’s al-Qaeda sanctions list for his support of and participation in activities linked to al-Qaeda and the Taliban.⁵

The tapes highlight the unique and often underappreciated role that Dubai plays in various illicit activities throughout the world, despite its being renowned as an international banking center, a global trade hub, and a stable polity in an otherwise unstable region. While the vast majority of transactions involving Dubai are not associated with corruption or criminal activity, criminals and kleptocrats frequently launder or stash illicit proceeds in Dubai—often via high-end real estate purchases. Dubai’s many free trade zones and globally connected financial institutions are also exploited to conduct trade-based money laundering. Likewise, gold of dubious providence can be brought into Dubai relatively easily and then be processed and reexported. And unlike many major banking locales, Dubai is not just a waystation for money but also an investment destination in itself.

Dubai offers neutral territory for many illegal and quasi-legal groups.

Relatedly, Dubai offers neutral territory for many illegal and quasi-legal groups. Dubai’s royal family upholds an exceptional balancing act: the emirate absorbs the financial proceeds from crime and conflict worldwide, while its middle-class and more privileged residents continue to enjoy largely safe streets and good living conditions. (Dubai’s response to the new coronavirus outbreak has thus far been rigorous—perhaps even draconian.)⁶ Terrorist attacks are rare, and the emirate has weathered upheavals like the Arab Spring with little protest, let alone the violent demonstrations, regime changes, and civil wars that have affected other countries in the region. This peace is due at least in part to the robust security and surveillance apparatus built by the Emirati state at the expense of residents’ civil liberties.⁷

Various leaked documents—from the Panama Papers to Angola’s Luanda Leaks documents to Dubai’s own property registry—demonstrate that Dubai is a place where many people associated with criminal activity feel free to settle down with their families, manage their networks, and engage in smuggling and money laundering.⁸ Moreover, the emirate offers its residents a luxurious lifestyle and amenities—shopping, dining, nightlife—on par with other global top city destinations, including London, New York, and Paris. While Dubai has undertaken various reforms to bring the operations of trade and financial institutions more closely in line with international standards, significant loopholes continue to enable criminal activity.

Of course, numerous other countries also offer havens for illicit gains and luxurious lifestyles. For example, the United Kingdom (UK) and United States are well-known hubs for money laundering. Their robust real estate markets present plenty of opportunities to invest or launder money and/or settle down. But in these countries, criminals and kleptocrats have to maintain a degree of anonymity and take significant pains to hide the sources of their funds in case of a law enforcement investigation. Meanwhile, strong, often transnational networks of civil society and media aggressively seek to expose malfeasance and lobby their governments to make needed reforms. Further, unlike the UAE, many other key banking, trade, and real estate hubs, including the United States, UK, and other European countries, are gradually introducing and strengthening measures to combat illicit activity, thus making these hubs less attractive to criminals and kleptocrats.

Dubai therefore enjoys a comparative advantage over these other locations. Emirati authorities ask far fewer—and more perfunctory—questions about the provenance of goods or money involved in a range of trade, finance, and real estate transactions. The likelihood that a foreigner’s financial activities would be scrutinized is low. Institutional weaknesses, especially a lack of standardization among various free trade zones, facilitate regulatory arbitrage for those seeking to exploit anti–money laundering loopholes.

These lapses in administrative oversight are compounded by law enforcement shortcomings. As Chapter 7 describes, governments asking Dubai for law enforcement cooperation to catch and prosecute international criminals or freeze their finances confront a byzantine system in which their requests often do not reach the relevant officials. And even when they do, some requests go unanswered. While Dubai has assisted with several investigations related to terrorism finance and organized crime, some international law enforcement officials consider Dubai—and the UAE writ large—to be a difficult partner. As the FATF recently noted for the UAE overall, “While the UAE has a sound legislative basis for international cooperation, it has provided mutual legal assistance (MLA) and extradition to a minimal extent considering its exposure to foreign predicate offenses and associated proceeds of crime”—though the report goes on to note that informal cooperation is often better than formal cooperation.⁹

This is not to say that Dubai lacks the capacity to cooperate or implement internal reforms. Emirati authorities have employed robust measures to extinguish internal dissent—for example, effectively outlawing criticism of the government by civil society groups and local media and swiftly cracking down on protests. More rigorous law enforcement efforts are possible as well as necessary given Dubai’s broad and deepening connections to international financial markets. No longer just a regional entrepôt, Dubai is a truly global trade and investment hub and an attractive residential and deal-making destination for some of the world’s most wealthy and powerful people. These linkages are not problematic per se but rather represent the conduits through which illicit money can flow.

Dubai’s Global Linkages

Even in an age of globalized cities, Dubai stands out due to its considerable financial and strategic influence and how quickly it achieved such importance. Though Dubai became a free port in the early twentieth century, well into the 1980s it was still not obvious to the astute observer that the city would eventually become a global hub of business and finance.¹⁰ After all, Dubai only had 59,000 people according to its first census in 1968.¹¹ It only allowed offshore banking institutions starting in 1975 and had no significant history of banking up until the 1990s. Put simply, Dubai lacks the long and storied financial history found in the cities of London, New York, Tokyo, or other global banking centers.¹²

Even in an age of globalized cities, Dubai stands out due to its considerable financial and strategic influence and how quickly it achieved such importance.

Nor does Dubai possess a natural harbor location with fresh water and ready supplies like Mumbai or Singapore. The Dubai Creek was barely navigable even by sailing vessels until dredging operations began in the 1950s, and it did not have significant berthing capabilities until the 1980s.¹³ But today, Dubai has the largest man-made harbor in the world and the biggest port in the Middle East. And although Dubai did not set up its first free trade zone (at the port of Jebel Ali) until 1979, now there are about thirty zones in the emirate.¹⁴ A free trade zone is a special area in which foreign companies can import and export materials and manufacture goods without being subject to the same national rules and taxes.

Likewise, Dubai did not build its first airport until the 1960s, and Emirates Air was only a four-aircraft airline when it started operations in 1985.¹⁵ But the Dubai emir chose to build an international airline—and the airport and cargo facilities to go with it—at breakneck speed starting in 1991.¹⁶ As a result, in 2015, Dubai International Airport overtook London’s Heathrow Airport as the world’s busiest airport for international travelers.¹⁷ As a booming tourist destination, Dubai has gone from having 42 hotels with 4,600 rooms and 400,000 visitors in 1985 to over 700 hotels with 100,000 rooms and almost 16 million visitors in 2018.¹⁸ It was only in 2002 that Dubai allowed foreigners to buy real estate under certain conditions, but today, it has a user-friendly real estate system with minimal residency requirements: a property investment of only $272,000 or more comes with a two-year visa for the purchasers and their family members. Some business visas are even cheaper.¹⁹ Given this, it is easy to understand how Dubai has rapidly become an attractive location for property and business investments.

Today, Dubai has the largest man-made harbor in the world and the biggest port in the Middle East.

Such investments have helped expand Dubai’s regional and international economic ties. Its connections to neighboring Iran, for example, are durable and long-standing even amid periodic Western sanctions. During the Iran-Iraq War in the 1980s, Dubai had leaned toward Iran and had served as a major transit point for war materiel headed there.²⁰ By 2010, following waves of Iranian migration—especially after the 1978–1979 Iranian Revolution—nearly 10,000 Iranian businesses were based there and Iranians outnumbered local Emiratis in the UAE three to one.²¹ This shift precipitated about $15 billion in capital flight to Dubai in 2007 alone and cemented the emirate’s position as Iran’s largest trading partner.²² By 2011, Iran accounted for about one-quarter of total exports from the UAE, despite a 2007 threat by the United States to cut off UAE-based firms from the U.S. financial sector if they continued to facilitate sanctions busting.²³

Asia—especially the Indian subcontinent—also has a long history of commerce with Dubai. Indians are heavily involved with trading pearls, which, until the 1930s, were the primary export for the Arabian Gulf. At the same time, because Dubai’s inhabitants generally saw real estate investing and shop keeping as undesirable occupations, migrant Indians took over this niche.²⁴ By 2010, about 1 million Indians were living in Dubai, and they continue to be a large backbone of its economy, especially the skilled worker class and the construction sector.²⁵

Also notable is Dubai’s thriving trade relationship with China. While Dubai-China trade flows are not necessarily suspicious, they could be exploited by the trade-based money laundering schemes described in Chapter 3. In 2014, an estimated 70 percent of all manufactured goods that left China by sea initially docked in Dubai.²⁶ That same year, there were 300,000 Chinese residents in Dubai, along with 4,200 Chinese companies registered in the UAE.²⁷ Especially prominent is Dragon Mart, an emporium of almost 4,000 vendors that handles retail and wholesale customers. In fact, many traders in places like Africa actually travel to Dubai to place orders for Chinese goods rather than travel to China.²⁸

Looking west, Dubai’s personal and financial ties to Russia and other European countries have also deepened in recent years. In 2016, the Russian Business Council Middle East and Africa estimated that 100,000 Russians were residing in Dubai and noted that they have historically been the highest spenders in the annual Dubai Shopping Festival.²⁹ In 2018, Europe accounted for 19 percent of Dubai’s non-oil trade, making it second after Asia.³⁰ Unfortunately, as Russian organized crime expert Mark Galeotti notes, “Dubai has become something of a hub and haven for gangsters from Russia and other post-Soviet countries.”³¹

Dubai also enjoys significant financial and trade relations with sub-Saharan Africa. According to the Dubai Chamber of Commerce and Industry, during the period 2011–2018, cumulative non-oil trade between Dubai and countries in Africa amounted to $252 billion, and the UAE ranks among the top ten sources of foreign direct investment in sub-Saharan Africa.³² It is a major trade hub between Africa and the rest of the world.

Just as quickly as its legal trade and financial flows have grown, so too has Dubai’s role as a global node for illicit and dubious activities.

Just as quickly as its legal trade and financial flows have grown, so too has Dubai’s role as a global node for illicit and dubious activities. Dubai’s earliest links to criminal activity related to smuggling, especially of gold and slaves. Smuggling became an important driver of the economy.³³ Saif al-Ghurair, a member of one of the leading merchant families, has described how he smuggled stolen ammunition and gold in the 1940s and 1950s, often by transporting gold to India via special vests worn under his clothing.³⁴ In 1958, the emir at the time, Sheikh Rashid bin Saeed Al Maktoum, in discussions with the British Foreign Office, acknowledged the importance of smuggling to the city’s economic health. Dubai also allowed the smuggling of hashish and opium from Iran and later Afghanistan; though today, Dubai advertises a zero tolerance policy on drug trafficking and often publicizes drug busts.³⁵

Since its independence in 1971, Dubai’s role as a node for a variety of illicit activities has grown. For instance, Liberian dictator Charles Taylor used Dubai as a supply base and place to buy weapons. And a famous Russian smuggler, Viktor Bout, used Sharjah, a city northeast of Dubai, as a base of operations for his worldwide fleet of aircraft. The Taliban and al-Qaeda reportedly moved gold out of Afghanistan and through Dubai, sometimes on Bout’s aircraft.³⁶ Until 2004, Dubai was used to help smuggle nuclear parts to Iran and Libya as part of Pakistani nuclear scientist Abdul Qadeer Khan’s clandestine nuclear weapons programs.³⁷ Indeed, even before the September 11, 2001, terrorist attacks, the United States was concerned about money laundering and illicit financial flows through Dubai banks—a concern that only heightened after the attacks.³⁸

The links between terrorism finance and Dubai brought the city into the spotlight in the early 2000s, forcing it to institute anti–money laundering and counterterrorism finance initiatives. However, numerous loopholes remain, evidenced by a leaked database of Dubai property and residency data comprising 54,000 addresses and 129,000 owners from 181 countries. The database includes crime bosses, sanctioned individuals, and politicians allegedly living well beyond their means.³⁹

Despite well-publicized reforms, the anecdotes in Table 1 indicate that Dubai remains a globally attractive locale for a range of illicit and smuggling activities. The cases also highlight some of the tensions between Dubai’s need to meet and maintain international standards—such as in the enforcement of sanctions—and the potential economic distress from enforcing these standards and cutting long-established, profitable ties.

Table 1. Examples of Illicit Financial Flows Associated With Dubai
Iran
Kambiz Mahmoud Rostamian	In 2017, the U.S. Department of the Treasury sanctioned Rostamian for helping to buy materials for Iran’s ballistic missile program using a Dubai-based company. He also owns five properties in Dubai worth $2.7 million.40
Hossein Pournaghshband	In 2016, the U.S. Department of the Treasury sanctioned Pournaghshband for helping Iran procure materials for its ballistic missile program. He used his Dubai-based firms to buy them from Hong Kong and mainland China.41
Beneathco DMCC	In January 2020, the U.S. Department of the Treasury sanctioned this petrochemical company in Dubai for helping Iran’s state oil company hide the origin of petroleum products transiting through the UAE.42
India, Afghanistan, and Pakistan
Altaf Khanani	U.S. and Australian police arrested Khanani—a Pakistani national—in Panama in 2015. His operation reportedly laundered $14 billion annually for al-Qaeda, the Taliban, Mexican drug dealers, and Hezbollah.43 In 2017, he pled guilty in a U.S. court to conspiracy to commit money laundering; thirteen other charges were dropped in return for his cooperation.44
Sherkhan Farnood	Ahead of Afghanistan’s 2009 presidential election, $600 million was removed from the country’s banks by various elites and transported to Dubai, according to a leaked diplomatic cable.45 Farnood—a co-founder of Kabul Bank—facilitated bank fraud totaling almost $1 billion (see Chapter 9).
Taliban	In 2018, the Washington Post noted that senior Taliban officials reportedly make frequent trips to Dubai. One U.S. official noted that—when pressed on Taliban presence there—UAE officials would say “it’s complicated.”46
Europe and Russia
Kamchibek Kolbayev	The United States sanctioned Kolbayev in 2012 for his ties to The Brothers’ Circle, an organized crime group. He has overseen various criminal activities in Central Asia and used the northern heroin smuggling route to bring drugs from Afghanistan into Russia and Europe.47 He is still linked to an apartment in Dubai Marina, according to the U.S. Department of the Treasury.48
Carousel Scandal	Partly run by Imran Yakub Ahmed, the Carousel scheme defrauded the UK, Italian, and German governments of value-added tax (VAT) proceeds during the 1990s and 2000s. Ahmed received a suspended sentence from an Italian court in 2017 for tax fraud linked to the Carousel scheme, and his firm is now being investigated in Germany over a $220 million fraud. Ahmed—who denies all wrongdoing—reportedly owns two floors in the Burj Khalifa.49
Sanjay Shah	UK authorities raided Shah’s hedge fund—Solo Capital—in 2016 and closed it down.50 Shah is also being investigated in Belgium, Denmark, Germany, Norway, the UK, and the United States for tax fraud.51 The Danish prosecution involves a $1.8 billion fraud conducted from 2012 to 2015.52 Shah now lives in Dubai and, as of 2014, owned six properties worth $56 million.53 He denies all of the fraud charges, and there is no suggestion of wrongdoing regarding his purchases.54
Sub-Saharan Africa
Dan Etete	Currently standing trial in Italy for bribery and embezzlement, former petroleum minister Etete has allegedly laundered significant sums through Dubai—including $21.5 million through the UAE-registered money-changing firm, Gunes General Trading.55 According to leaked records, Etete has lived in Dubai’s luxurious Emirates Hills development since at least 2015.56 Etete denies all wrongdoing.
Kaloti Precious Metals	In 2012, Kaloti Precious Metals—the largest gold refinery in Dubai—reportedly purchased 44 tons of gold from Sudan and then sold it to a Swiss refiner, despite U.S. sanctions on Sudanese gold.57 The company denies any impropriety.58 Much of the gold allegedly came from mines in North Darfur overseen by Mohamed Hamdan Dagolo (“Hemeti”), Sudan’s de facto leader since the April 2019 overthrow of former president Omar al-Bashir.59
Isabel dos Santos	Dos Santos—the daughter of Angola’s former president—allegedly used her connections and position as head of the state oil company to amass a fortune worth over $2 billion, according to the Luanda Leaks investigation.60 Of that sum, dos Santos allegedly deposited over $57 million in a shell company owned by a Dubai-based friend and, as of June 2019, had moved to the emirate, according to a Maltese commercial register.61 In January 2020, Angolan authorities charged her with corruption; she denies all charges, however, claiming that the leaks and allegations are politically motivated.62
Al-Shabaab	Significant quantities of charcoal are smuggled into Dubai, enriching the Somali terrorist group al-Shabaab and contributing to deforestation in the Horn of Africa.63 The United Nations (UN) banned charcoal exports from Somalia in 2012, but it remains a $150 million per year industry for criminals who reportedly bribe Emirati officials for false certificates of origin for the charcoal.
Latin America
Venezuelan gold	Gold flows between Venezuela and Dubai appear to have an illicit dimension. In 2018 and 2019, Venezuela’s Central Bank improperly sold 73.2 tons of gold to two UAE-based companies.64 In January 2019, 3 tons of gold drawn from central bank reserves was sold in the UAE, providing the Maduro regime with needed foreign exchange. Gold has also been transshipped to Dubai via Aruba, according to investigative reports.65
Ezio Benjamin and Hassein Eduardo Figueroa Gomez	Mexican narco-criminals sanctioned since 2012 under the United States’ Foreign Narcotics Kingpin Designation Act, this father and son have used Dubai as an operating base. Though Ezio is in a U.S. prison, Hassein still uses Cypriot companies registered at a Dubai address to conduct activities.66

Dubai’s Darker Side Illuminated

Taken together, the following chapters illustrate Dubai’s unique role in facilitating criminal and corrupt activity. Each chapter explores a particular vulnerability in Dubai’s legislative and regulatory systems and trade, business, and financial operations. In Chapter 2, Kristian Ulrichsen outlines Dubai’s political economy. Unlike Abu Dhabi, Dubai has relatively little oil. Its oil production peaked in 1991, and as a result, the Maktoum royal family moved quickly to diversify its economy away from oil into trade, banking, real estate, and tourism. These diversification efforts yielded rapid economic growth until the emirate’s real estate bubble burst in 2008, forcing it to seek a bailout from its richer neighbor, Abu Dhabi.

In Chapter 3, Lakshmi Kumar examines the part that Dubai’s complex legislative and regulatory environment plays in enabling trade-related illicit activity. Dubai’s leadership both promotes commerce and finance within the emirate and oversees compliance with national and international standards. This dual role has led to a high degree of regulatory state capture. Meanwhile, each free trade zone has its own commercial regulations, and the Central Bank, the Dubai Financial Services Authority, and Dubai Customs have limited oversight roles. Thus, the definitions and requirements for documenting and verifying corporate beneficial ownership information are not standardized across each zone. Likewise, this weak oversight makes it relatively easy to repack and relabel products transferred through Dubai’s free trade zones, further facilitating trade-based money laundering. This complex structure creates many loopholes and opportunities for regulatory arbitrage ripe for criminal organizations to exploit.

In Chapter 4, Shawn Blore and Marcena Hunter highlight the weaknesses in Dubai’s oversight of gold commodity trading. The Dubai Multi Commodities Centre is both the chief promoter and regulator of Dubai’s gold and minerals trade. Responsible sourcing rules for gold are voluntary, and only three of the eleven gold refineries in the UAE officially follow them. Gold is remarkably easy to import through Dubai customs, and once the appropriate paperwork is acquired, a gold trader is free to sell it in the city’s gold souks. The gold is nominally conflict free, but almost half of it is imported from countries the Organisation for Economic Co-operation and Development has flagged as potentially conflict-affected or at high risk. Once processed through Dubai, the gold makes its way to the world’s leading gold hubs, such as India and Switzerland, or is reexported as jewelry to places such as India, Iran, and Iraq, where gold is often part of money laundering or conflict-driven financial schemes.

In Chapter 5, Peter Kirechu examines Dubai’s anti–money laundering and counterterrorism finance legislation and regulations. In particular, he focuses on Dubai’s weak oversight of nontraditional financial service providers—such as lawyers, real estate brokers, and precious metal dealers—who help facilitate the illicit activities of criminals and kleptocrats. After highlighting the weaknesses in Dubai’s prior efforts to comply with the intergovernmental Financial Action Task Force’s standards for fighting money laundering and illicit financial flows, Kirechu assesses whether the emirate’s recent legislative reforms, especially laws passed in 2018, will have any effect. The outcome may largely depend on whether Dubai and the UAE as a whole standardize their anti–money laundering and counterterrorism finance standards and regulations across their free zones.

In Chapter 6, Peter Kirechu and Jodi Vittori assess Dubai’s real estate market and associated money laundering. Most Dubai real estate investments are legitimate but a significant and growing number are not. In 2018, the Center for Advanced Defense Studies (now known as C4ADS) identified forty-four Dubai-based luxury properties directly associated with seven individuals sanctioned by the United States or European Union member states. The sanctions were imposed for a range of illicit activity, including conflict financing, narcotics and weapons trafficking, terrorism financing, or grand corruption. The Organized Crime and Corruption Reporting Project, run by a global network of media centers and investigative journalists, has also linked multiple property holdings in Dubai to politically exposed persons, their family members, and business associates from a diverse set of countries, including Pakistan, Russia, South Africa, and Thailand.

In Chapter 7, Karen Greenaway evaluates the law enforcement capabilities of Dubai and the UAE. While the emirate’s agencies appear well-trained overall, they may not have the investigative techniques needed to combat money laundering, corruption, and organized crime—in part due to their lack of relevant training and limited cooperation with investigative units globally. International cooperation is further hampered by the alleged misuse of INTERPOL Red Notices (for a wanted person) and by Emirati authorities’ use of torture, which delegitimizes any resulting testimony in most Western courts. Finally, the UAE’s complex web of federal and local law enforcement jurisdictions, as well as Dubai’s opaque command and control structure for policing and internal security, make international cooperation with investigators and other specialists trying at best. Further, despite Emirati commitments to various international and bilateral institutions and treaties, there has been little political will in either Dubai or the UAE writ large to effectively partner with foreign law enforcement on tackling illicit financial flows.

In Chapter 8, Mustafa Qadri assesses Dubai’s kafala system, whereby foreign nationals—especially low-wage and semi-skilled workers—must be sponsored by an Emirati national to reside and work in Dubai. This system shares characteristics with human trafficking—an illicit activity of growing international concern—and has led to abusive and exploitative working conditions. Despite recent reforms, these problems continue to some extent. One reason is that the Emirati government’s focus on sex trafficking has drawn attention away from labor exploitation. And another reason is that the kafala system is part of a social contract between Emirati leaders and its citizens. Businesses are often owned by Emirati citizens but managed by migrant workers on behalf of the sponsor, generating extensive wealth and social standing for citizens. This has become part of the bargain between the government and its citizens: citizens will have few rights but will be compensated with the opportunity to monetize their citizenship. Because of this bargain, labor and human rights reforms for noncitizens will continue to face considerable opposition from Emirati citizens.

In Chapter 9, Brian George examines the various financial and criminal linkages between Afghanistan and Dubai, arguing that these linkages—and Dubai’s lax policies—have contributed to Afghanistan’s continued instability. For example, prior to being convicted of fraud in 2013, Sherkhan Farnood, an Afghan powerbroker, successfully laundered millions of dollars for the Taliban, warlords, corrupt political leaders, and narco-traffickers. He did so by leveraging, among other tools, his Dubai-based trading company, an informal money transfer system (hawala) established between Afghanistan and Dubai in 1998, and a banking license. Much of the laundered money was invested in Dubai’s real estate sector or passed through to other banking locales around the world. Through Kabul Bank, co-founded by Farnood, Afghan politicians and warlords bought extensive portions of Dubai’s famous man-made Palm Jumeirah island. When the bank almost collapsed in 2010, many feared the fragile state’s economy and society would follow.

Finally, in Chapter 10, Jodi Vittori and Matthew Page offer recommendations to help anticorruption practitioners, policymakers, and international organizations prevent illicit financial flows from transiting through or being absorbed by Dubai. Advancing reform in Dubai will necessitate reducing Dubai’s economic dependence on illicit financial flows, which accounts for its leaders’ deep-seated resistance to reform. The emirate can wean itself off of illicit financial flows by enforcing existing laws more effectively and transparently; tightening and standardizing laws and regulations on real estate, gold, trade, and banking; and improving cooperation with international law enforcement. The international community—including governments, international institutions, and civil society—can provide the incentives by increasing its scrutiny of Dubai and those who operate there and by limiting Dubai’s opportunities for primping its reputation.

Notes

¹ Arvind Ojha and Divyesh Singh, “Caught on Tape: How Underworld Don Dawood Ibrahim Manages His Business Empire,” India Today, April 10, 2018, https://www.indiatoday.in/india/story/dawood-ibrahim-d-company-business-empire-1208242-2018-04-09.

² Ojha and Singh, “Caught on Tape: How Underworld Don Dawood Ibrahim Manages His Business Empire.” Note that all currency cited in this report is in U.S. dollars and uses the 2020 conversion rate unless otherwise stated.

³ “How the 1993 Blasts Changed Mumbai Forever,” BBC News, July 30, 2015, https://www.bbc.com/news/world-asia-india-33713846.

⁴ Naomi Canton, “US Tells London Court Dawood Is in Pakistan,” Times of India, July 3, 2019, https://timesofindia.indiatimes.com/world/uk/us-tells-london-court-dawood-is-in-pakistan/articleshow/70047592.cms.

⁵ United Nations Security Council, “Dawood Ibrahim Kaskar,” https://www.un.org/securitycouncil/sanctions/1267/aq_sanctions_list/summaries/individual/dawood-ibrahim-kaskar.

⁶ Sinéad Baker, “Dubai’s Intense COVID-19 Lockdown Requires an Online Permit, and Exhaustive Details, to Go Outside for Any Reason Whatsoever. This Is What It’s Like.,” Business Insider, accessed April 13, 2020, https://www.businessinsider.com/coronavirus-dubai-police-permit-leave-house-buy-groceries-2020-4.

⁷ “US Department of State Country Reports on Terrorism 2017—United Arab Emirates,” Refworld, September 19, 2018, https://www.refworld.org/docid/5bcf1f7415.html; and “Freedom in the World 2020 United Arab Emirates,” Freedom House, accessed April 29, 2020, https://freedomhouse.org/country/united-arab-emirates/freedom-world/2020.

⁸ “7772 UAE-Based Entities in Leaked Panama Papers,” Arabian Post, https://thearabianpost.com/7772-uae-based-entities-in-leaked-panama-papers/; Fergus Shiel and Hallman, “About the Luanda Leaks Investigation,” ICIJ (blog), January 15, 2020, https://www.icij.org/investigations/luanda-leaks/about-the-luanda-leaks-investigation/.

⁹ “Anti-Money Laundering and Counter-Terrorist Financing Measures: United Arab Emirates Mutual Evaluation Report,” Financial Action Task Force, April 2020, 12, http://www.fatf-gafi.org/media/fatf/documents/reports/mer4/Mutual-Evaluation-Report-United-Arab-Emirates-2020.pdf.

¹⁰ Jim Krane, City of Gold: Dubai and the Dream of Capitalism (New York, NY: Picador, 2010), 22.

¹¹ Kristian C. Ulrichsen, The United Arab Emirates: Power, Politics, and Policy-Making (New York, NY: Routledge, 2017), 53.

¹² Ulrichsen, The United Arab Emirates, 99–100.

¹³ Krane, City of Gold, 69–70.

¹⁴ Ulrichsen, The United Arab Emirates, 92–94.

¹⁵ Krane, City of Gold, 105–8.

¹⁶ Ibid., 108–11.

¹⁷ Ulrichsen, The United Arab Emirates, 119.

¹⁸ Krane, City of Gold, 117; and “Nearly 16 Million Tourists Visited Dubai in 2018,” Al Bawaba, November 10, 2019, https://www.albawaba.com/business/nearly-16-million-tourists-visited-dubai-2018-1257298.

¹⁹ Krane, City of Gold, 121–22; Ulrichsen, The United Arab Emirates, 94; and “Residency Visas and Banking,” OCCRP, June 12, 2018, https://www.occrp.org/en/goldensands/residency-visas-and-banking.

²⁰ Ulrichsen, The United Arab Emirates, 67.

²¹ “The Nuclear Deal’s Other Winner,” Economist, July 23, 2015, https://www.economist.com/middle-east-and-africa/2015/07/23/the-nuclear-deals-other-winner.

²² Krane, City of Gold, 24–25.

²³ Ulrichsen, The United Arab Emirates, 215–16.

²⁴ Krane, City of Gold, 26–27.

²⁵ Ibid., 199.

²⁶ Ulrichsen, The United Arab Emirates, 155.

²⁷ Ibid., 155.

²⁸ Ibid., 155–57.

²⁹ Ibid., 153.

³⁰ “Dubai Chamber Hosts High-Level European Business Delegation,” Dubai Chamber of Commerce (blog), accessed February 18, 2020, https://www.dubaichamber.com/whats-happening/chamber_news/dubai-chamber-hosts-high-level-european-business-delegation.

³¹ Karina Shedrofsky, “Real Estate,” OCCRP, June 12, 2018, https://www.occrp.org/en/goldensands/real-estate.

³² Converted from UAE Dh926 billion at an exchange rate of US$1 to UAE Dh3.6729 (the exchange rate on January 31, 2019, per exchange-rates.org). Khan, “Dubai’s Non-Oil Trade with Africa to Touch Dh1 Trillion Over Nine Years,” National, November 18, 2019, https://www.thenational.ae/business/economy/dubai-s-non-oil-trade-with-africa-to-touch-dh1-trillion-over-nine-years-1.939195.

³³ Ulrichsen, The United Arab Emirates, 32–34.

³⁴ Krane, City of Gold, 73–74.

³⁵ Ibid., 74.

³⁶ Ibid., 279–80.

³⁷ Ibid., 280.

³⁸ Ulrichsen, The United Arab Emirates, 100.

³⁹ Karina Shedrofsky, “Dubai’s Golden Sands: Free Trade Zones,” OCCRP, June 12, 2018, https://www.occrp.org/en/goldensands/dubais-golden-sands.

⁴⁰ Sandcastles: Tracing Sanctions Evasion Through Dubai’s Luxury Real Estate Market (Washington, DC: Center for Advanced Defense Studies, 2018), 23–25, https://static1.squarespace.com/static/58831f2459cc684854aa3718/t/5b1fd4bf575d1ff600587770/1528812745821/Sandcastles.pdf.

⁴¹ Ibid., 33–37.

⁴² Brian Scheid, “US Sanctions HK, Dubai, Shanghai Companies for Oil, Petrochemical Trades With Iran,” S&P Global, January 24, 2020, https://www.spglobal.com/platts/en/market-insights/latest-news/oil/012420-us-sanctions-hk-dubai-shanghai-companies-for-oil-petrochemical-trades-with-iran.

⁴³ “Catching the Money Man: How Australian Taxpayer Dollars and a Fake Drug Cartel Helped Bring Down the World’s Most Wanted Money Launderer,” ABC News, February 4, 2018, https://www.abc.net.au/news/2018-02-05/the-billion-dollar-bust/9383890.

⁴⁴ Khurram Husain, “Khanani Gets 68 Months in US Prison,” DAWN, April 4, 2017, https://www.dawn.com/news/1324717.

⁴⁵ Jonathan Steele and Jon Boone, “WikiLeaks: Afghan Vice-President ‘Landed in Dubai With $52m in Cash,’” Guardian, December 2, 2010, https://www.theguardian.com/world/2010/dec/02/wikileaks-elite-afghans-millions-cash.

⁴⁶ Greg Jaffe and Missy Ryan, “A Dubai Shopping Trip and a Missed Chance to Capture the Head of the Taliban,” Washington Post, March 24, 2018, https://www.washingtonpost.com/world/national-security/a-dubai-shopping-trip-and-a-missed-chance-to-capture-the-head-of-the-taliban/2018/03/24/0137dd66-2ba0-11e8-8ad6-fbc50284fce8_story.html.

⁴⁷ “What Is the Brothers’ Circle?” OCCRP, March 12, 2012, https://www.occrp.org/en/investigations/1393-what-is-the-brothers-circle; and Shedrofsky, “Real Estate.” Note that the term “The Brothers’ Circle” may be a term used by U.S. law enforcement to designate a networked Russian organized crime group. It is probably not a name used by the group itself.

⁴⁸ “Sanctions List Search,” Department of Treasury Office of Foreign Asset Control, accessed February 2, 2020, https://sanctionssearch.ofac.treas.gov/Details.aspx?id=2831.

⁴⁹ Madlen Davies, Ben Stockton, and Ferndinand Moeck, “From the UK to Dubai: On the Trail of the ‘Fraud of the Century,’” The Bureau of Investigative Journalism, June 9, 2019, https://www.thebureauinvestigates.com/stories/2019-06-09/from-preston-to-dubai-the-vat-fraud-trail.

⁵⁰ Nick Mathiason and Margot Gibbs, “Dubai Leaks: Property Treasure Chest Owned by City Tycoon Suspected of Massive Tax Fraud,” Finance Uncovered, June 12, 2018, https://www.financeuncovered.org/investigations/dubai-leaks-sanjay-shah-solo-capital-properties-emirates/.

⁵¹ Margot Gibbs and Nick Mathiason, “British Financier Under Investigation for Tax Fraud Owned $56 Million in Dubai Properties,” Organized Crime and Corruption Reporting Project, June 18, 2018, https://www.occrp.org/en/goldensands/british-financier-under-investigation-for-tax-fraud-Owned-56-million-in-dubai-properties.

⁵² Ibid.

⁵³ David Segal, “It May Be the Biggest Tax Heist Ever. And Europe Wants Justice.,” New York Times, January 23, 2020, https://www.nytimes.com/2020/01/23/business/cum-ex.html; and Gibbs, “Dubai Leaks.”

⁵⁴ Mathiason and Gibbs, “Dubai Leaks”; Segal, “It May Be the Biggest Tax Heist Ever. And Europe Wants Justice.”

⁵⁵ Margot Gibbs and Lionel Faull, “The Klepto Hills,” OCCRP, June 12, 2018, https://www.occrp.org/en/goldensands/the-klepto-hills; and Margot Gibbs, Lionel Faull, and Oladeinde Olawoyin, “Malabu Scandal: How Etete Bought Luxury Dubai Properties With Funds,” Premium Times of Nigeria, June 12, 2018, https://www.premiumtimesng.com/news/headlines/272004-malabu-scandal-how-etete-bought-luxury-dubai-properties-with-funds.html.

⁵⁶ Ibid.; Margot Gibbs, Ted Jeory, and Lionel Faull, “Nigerian Oil and Dubai Land,” OCCRP, June 12, 2018, https://www.occrp.org/en/goldensands/nigerian-oil-and-dubai-land.

⁵⁷ “Gold and Diamond Markets,” OCCRP, June 12, 2018, https://www.occrp.org/en/goldensands/gold-markets.

⁵⁸ Ibid.

⁵⁹ Ibid.

⁶⁰ Sydney Freedberg et al., “How Africa’s Richest Woman Exploited Family Ties, Shell Companies and Inside Deals to Build an Empire,” International Consortium of Investigative Journalists, January 19, 2020, https://www.icij.org/investigations/luanda-leaks/how-africas-richest-woman-exploited-family-ties-shell-companies-and-inside-deals-to-build-an-empire/.

⁶¹ Michael Forsythe, Gilberto Neto, and Megan Specia, “Africa’s Richest Woman Set to Face Charges in Angola Over Embezzlement,” New York Times, January 23, 2020, https://www.nytimes.com/2020/01/23/world/africa/angola-santos-embezzlement.html. Isabel dos Santos has also begun the process of assuming Russian citizenship, according to those same documents. Miguel Prado, “Isabel Dos Santos Muda-Se Para o Dubai, Um Novo Paraíso Fiscal,” Jornal Expresso, January 3, 2020, https://expresso.pt/economia/2020-01-03-Isabel-dos-Santos-muda-se-para-o-Dubai-um-novo-paraiso-fiscal.

⁶² Forsythe, Neto, and Specia, “Africa’s Richest Woman Set to Face Charges in Angola Over Embezzlement.”

⁶³ “Guns, Pirates and Charcoal,” Global Initiative (blog), December 18, 2018, https://globalinitiative.net/somalia_untocwatch/.

⁶⁴ Corina Pons and Mayela Armas, “Venezuela Plans to Fly Central Bank Gold Reserves to UAE,” Reuters, January 31, 2019, https://www.reuters.com/article/us-venezuela-politics-gold-exclusive-idUSKCN1PP2QR; Melendez and Boon, “How Venezuela’s Stolen Gold Ended Up in Turkey, Uganda and Beyond,” InSight Crime, March 21, 2019, https://www.insightcrime.org/news/analysis/venezuelas-stolen-gold-ended-turkey-uganda-beyond/; and Pamela Kalkman, “These Are the Refineries Processing Venezuela’s ‘Blood Gold’ —and Helping Maduro Stay in Power,” Miami Herald, July 23, 2019, https://www.miamiherald.com/news/nation-world/world/americas/venezuela/article232452267.html.

⁶⁵ Pons and Armas, “Venezuela Plans to Fly Central Bank Gold Reserves to UAE”; and Kalkman, “These Are the Refineries Processing Venezuela’s ‘Blood Gold’ —and Helping Maduro Stay in Power.”

⁶⁶ Sandcastles: Tracing Sanctions Evasion Through Dubai’s Luxury Real Estate Market, 17–21.

Dubai’s historical trajectory and idiosyncratic political economy help explain its prominent role in facilitating international financial flows. The most populous emirate of the UAE, Dubai enjoys a symbiotic relationship with Abu Dhabi, the country’s political and petroleum powerhouse. However, because of Dubai’s mercantilist history, its relative political autonomy, and its emergence as a global commercial hub, the emirate has long resisted periodic attempts by the federal government in Abu Dhabi to impose greater cohesion in national policymaking.

Ruled since 2006 by septuagenarian Sheikh Mohammed bin Rashid Al Maktoum, Dubai has evolved from a regional trade hub into an aspirant global city. Unlike Abu Dhabi—which possesses over 90 percent of the UAE’s oil and gas reserves—Dubai is a post-oil state. After peaking at 410,000 barrels per day in 1991, its oil production fell sharply. As a result, Dubai became an early proponent of economic diversification, especially of construction and real estate.¹ In 2000, Dubai ambitiously set a target to grow its gross domestic product to $30 billion by 2010, only to achieve it by 2005.² Dubai was booming.

After peaking at 410,000 barrels per day in 1991, its [Dubai’s] oil production fell sharply. As a result, Dubai became an early proponent of economic diversification, especially of construction and real estate.

Nevertheless, the real estate crash precipitated by the 2008 global financial crisis left Dubai more than $120 billion in debt, necessitating a $20 billion bailout from Abu Dhabi to meet its immediate financial obligations. The debt crisis weakened Dubai’s political economy, shifting the balance of power in the UAE firmly toward Abu Dhabi in the 2010s. Unfortunately, the crisis also created space for less legitimate financial flows, which Dubai came to rely on to sustain its economy.

Historical Overview

Dubai was first populated in the eighteenth century but remained a small fishing village until the early 1830s, when the Al Bu Falasah section of the Bani Yas tribal confederation seceded to Dubai after disagreeing with the Al Bu Falah section about succession. Led by Maktoum bin Buti, the Al Bu Falasah settled in Dubai in 1833 and established the ruling dynasty that bears his name.³

Initially dependent on Abu Dhabi, the early rulers of Dubai lived a somewhat precarious existence. On several occasions, they were nearly dragged into a wider regional conflict between the Bani Yas in Abu Dhabi and the powerful Qawasim rulers in neighboring Sharjah. But by the early 1900s, Dubai’s economic importance had begun to grow. It was declared a free port in 1901 and subsequently received a major boost in 1903 when a string of Persian and Arab merchants migrated to the city from the Persian port of Lingah. Alienated by the Tehran government’s new regulations and higher taxation, the merchants brought their businesses and trading networks, which extended to India and beyond.⁴

For most of the seventy years that followed the 1903 influx, Dubai, rather than Abu Dhabi, was the region’s economic and commercial mainstay. Over the following decades, Dubai’s merchants and rulers derived their wealth from the fishing and pearling industries, as well as the trading of general goods across the eastern coast of Africa and the western coast of India. Even at this early stage, and in anticipation of its later geoeconomic role, Dubai’s rulers positioned the emirate as a transit center for regional trade and the reexport of goods to and from the Arabian Peninsula, Persia, and India.⁵ Successive Maktoum rulers in the early/mid-twentieth century continued to attract trade and business activity by reducing import and export taxes and placing merchants in senior government positions.⁶ Major infrastructural developments during the long rule (1958–1990) of Sheikh Rashid bin Saeed Al Maktoum, the father of current ruler Mohammed bin Rashid, included dredging of the Dubai Creek in the late 1950s and construction of the Jebel Ali port and free trade zone in the 1970s. These actions cemented Dubai’s preeminent regional status as a trade hub.⁷

Federal-Emirate and Abu Dhabi-Dubai Relations at Independence

On December 2, 1971, Dubai and five of the other so-called Trucial States—named by the British government—joined to create the UAE. This occurred two days after the British terminated treaties that protected each individual sheikhdom and as the British government withdrew its forces from all remaining positions east of the Suez Canal. (The seventh emirate, Ras al-Khaimah, initially remained outside the UAE, in the hope of discovering oil, but joined the federation in February 1972 after failing to do so.) The UAE came together after three years of on-off negotiations that at one point included the rulers of Bahrain and Qatar in a proposed nine-member Union of Arab Emirates. Bahrain and Qatar went their own way and declared independence in August and September 1971, respectively, and Sheikh Rashid briefly entertained the prospect that Dubai might also go it alone.⁸

From the beginning, power and authority in the UAE were shared between the federal and emirate levels and apportioned among the seven emirates based largely on population size.

From the beginning, power and authority in the UAE were shared between the federal and emirate levels and apportioned among the seven emirates based largely on population size. The discovery of enormous oil reserves in Abu Dhabi in the 1960s was followed by the ousting of its lackluster long-standing ruler—Sheikh Shakhbut bin Sultan al-Nahyan—by his dynamic younger brother, Sheikh Zayed bin Sultan, in 1966. Sheikh Zayed immediately accelerated the development of Abu Dhabi’s oil resources and used the surging income to modernize not only his emirate but also the five poorer “northern emirates” as well. His largesse and his conviction that the Trucial States must stick together meant that Sheikh Zayed was the natural choice as the inaugural president of the UAE, a position he held for thirty-three years until his death in 2004. His eldest son, Sheikh Khalifa bin Zayed, succeeded him as UAE president and ruler of Abu Dhabi.⁹

Dubai is represented at the federal level by its ruler, who has—by convention—held the position of vice president and prime minister of the UAE since 1971. He also sits on the seven-member Federal Supreme Council of rulers. While each council member has a single vote and procedural matters are decided by a simple majority, substantive issues require both Abu Dhabi and Dubai to agree.¹⁰ In addition to this effective veto over council decisionmaking, Abu Dhabi and Dubai also hold eight seats each in the forty-member Federal National Council; Sharjah and Ras al-Khaimah have six seats each, and the small emirates of Ajman, Fujairah, and Umm al-Quwain each have four. At independence in 1971, Dubai also received three prominent cabinet posts: defense, finance, and economy and industry. Abu Dhabi controls six cabinet posts, including foreign affairs and interior.¹¹

Dubai is represented at the federal level by its ruler, who has—by convention—held the position of vice president and prime minister of the UAE since 1971.

The provisional constitution drafted in 1971 (made permanent in 1996) also established the separation of powers between federal and emirate institutions. It gave the federal government responsibility for nineteen issues—including foreign affairs, defense, finances, education, and health—while also allowing each emirate to exercise sovereignty over issues not under federal jurisdiction.¹² This effectively allowed Abu Dhabi to retain control over its own oil and gas reserves.

Much of the UAE’s first two decades of governing focused on resolving lingering pre-1971 issues among rulers who were unaccustomed to sharing power in a centralized manner. One rift that persisted throughout the 1970s was over the degree of federal power and oversight: Dubai favored a looser arrangement, while Abu Dhabi supported closer integration. The disagreement led to a three-year constitutional crisis between 1976 and 1979, during which Abu Dhabi’s ruler threatened to resign as president of the UAE.¹³ Even after the constitutional impasse was resolved, it took another two decades to fully integrate other governing areas into the federal government. For example, the complete military unification of pre-1971 emirate forces did not occur until 1996, when the Dubai Defense Force and the Ras al-Khaimah National Guard were incorporated into the Union Defense Force.¹⁴

Dubai and Abu Dhabi in the 2000s

A feature of Dubai policymaking in the early 2000s was its unilateralism. Decisions often were taken with little or no deference to the federal government in Abu Dhabi, which, among other effects, undermined attempts to craft a coherent UAE foreign policy. This was evident, for example, in Abu Dhabi’s negotiations with the U.S. government on a “123” nuclear agreement that would secure U.S. support for the UAE’s civil nuclear energy program. Officials in Washington expressed unease about Dubai’s rapidly expanding reexport trade with Iran, which represented a loophole in the tightening noose of international sanctions. Abu Dhabi’s push for U.S. congressional approval of its nuclear plans exposed the sensitivity of such commercial ties, especially given the possibility that illicit trade in dual-use material could bypass or erode the sanctions regime on Iran.¹⁵

When Mohammed bin Rashid became Dubai’s ruler in January 2006—after the sudden death of his older brother, Sheikh Maktoum bin Rashid Al Maktoum—he also succeeded Maktoum as vice president and prime minister of the UAE. Over the following two years of Mohammed bin Rashid’s federal premiership, Dubai briefly became more influential at the national level.

Economic growth was another feature of Dubai in the early 2000s. The emirate gained worldwide attention for its spectacular mega projects, including the Palm Islands and the luxurious Burj Al Arab hotel. Also during this period, Dubai relaxed a law that prohibited foreigners from purchasing real estate. Allowing them to buy properties in designated areas, without requiring residency as originally mandated, contributed to the rapid expansion of the real estate market in the mid-2000s. But the bursting of the real estate bubble in 2008 dealt a blow to both its economy as well as its political prowess.¹⁶

But the bursting of the real estate bubble in 2008 dealt a blow to both its [Dubai’s] economy as well as its political prowess.

Dubai’s liquidity and credit soon dried up, leading to a major debt crisis. In November 2009, the global holding company, Dubai World, requested a repayment standstill and a debt restructuring. The announcement came to symbolize the severity of the financial hit, as the emirate’s debts rose to more than 100 percent of the gross domestic product. Dubai raised money to meet its financial obligations by selling $10 billion worth of bonds to the UAE Central Bank (based in Abu Dhabi) in February 2009 and then securing a $10 billion loan from two state-owned Abu Dhabi banks in November 2009.¹⁷ Whether there was a quid pro quo for Abu Dhabi’s financial support is unclear, but in January 2010, the tallest building in the world—known throughout its construction phase as Burj Dubai—was suddenly renamed Burj Khalifa (after Abu Dhabi’s ruler) on the day of its grand opening.

The 2008 real estate market collapse reverberated across the economic landscape of Dubai. More than $300 billion in projects were scaled back, put on hold, or canceled.¹⁸ While the emirate’s government remained solvent, government-related entities, such as Dubai World and the property developer Nakheel, borrowed heavily to finance their activity. Dubai World’s requests for government assistance illustrate a key feature of the emirate’s political economy, namely the opaque nature of the ties among key stakeholders in the ruling family and the local business community. While the government announced that its Dubai Financial Support Fund would oversee the restructuring of $26 billion of Dubai World debt, it stunned financial analysts and investors by stating that it would not guarantee the debt itself. Many creditors assumed that it would do so given that Dubai World is wholly owned by the government.¹⁹

After 2008, Abu Dhabi wielded greater influence due to its economic leverage and the rise of Crown Prince Mohammed bin Zayed Al Nahyan, its assertive leader. Khalifa bin Zayed, Abu Dhabi’s ruler and the president of the UAE, had gradually withdrawn from public life due to ill health. Mohammed bin Zayed had worked closely with Mohammed bin Rashid in their capacities as deputy commander-in-chief of the UAE’s armed forces and defense minister, respectively. The two were known as the pioneers of the modern development of Abu Dhabi and Dubai, but it was Mohammed bin Zayed who came to dominate decisionmaking in Abu Dhabi (and across the UAE) through his take-no-chances, security-first response to the 2011 Arab uprisings.

Although there was virtually no unrest, or even threat of trouble, within the UAE itself, Mohammed bin Zayed constructed a sophisticated surveillance state and engaged in a campaign to push back against Islamist opposition—perceived and actual—across a broad swath of the Middle East and North Africa. Much of this regional campaign was undertaken in close coordination with Saudi Arabia, and the June 2018 launch of a Saudi-Emirati Coordination Council became a symbol of the new center of gravity. The crown princes of Abu Dhabi and Saudi Arabia, Mohammed bin Zayed and Mohammed bin Salman, were made council co-chairs, while Mohammed bin Rashid—who, unlike Mohammed bin Zayed, actually holds senior federal positions (UAE vice president and prime minister)—was nowhere to be seen at the inaugural meeting.²⁰

Dubai’s Political-Economic Nexus

Dubai’s ruling family remains the emirate’s central decisionmaking authority, although this is sometimes hard to discern due to the different hats worn by Mohammed bin Rashid as the ruler of Dubai and the UAE’s prime minister and vice president. Indeed, Mohammed bin Rashid’s decisions often emanate from the prime minister’s office (located in Dubai) rather than from the Dubai Royal Court itself.

Dubai’s ruling family remains the emirate’s central decisionmaking authority.

Mohammed bin Rashid has been the dominant figure in Dubai since the 1980s—despite only becoming its ruler in 2006—and he continues to be the man most closely associated with the visionary development of the emirate. During the boom years in the early 2000s, his inner circle included nonmembers of the ruling family, but since the 2008 financial crisis, its members have mostly been key family members such as his uncle and sons (see Figure 1).²¹ His policymaking style includes playing key functionaries against each other to generate a competitive rivalry in project development and execution.

Although nine years younger, Mohammed bin Rashid’s uncle, Sheikh Ahmed bin Saeed Al Maktoum, was appointed the chairman of Emirates Airline in 1985 and later given additional senior roles that placed him at the forefront of Dubai’s 2008 postcrisis financial rehabilitation. In November 2010, he became the chairman of Dubai World, a year after the company’s inability to service its debts discredited its previous leadership.²² Eight months later, Mohammed bin Rashid appointed him chairman of Emirates NBD, the largest bank in the UAE and one of the largest investors in Dubai World.²³ And in 2013, Mohammed bin Rashid entrusted him to lead the successful campaign to win the hosting rights to Expo 2020. Ahmed bin Saeed also now sits on the boards of the Investment Corporation of Dubai (the investment arm of the Dubai government) and the Dubai Executive Council’s Economic Development Committee.

As they came of age, two of Mohammed bin Rashid’s sons—Crown Prince Sheikh Hamdan bin Mohammed Al Maktoum and Deputy Ruler Sheikh Maktoum bin Mohammed Al Maktoum—assumed greater policymaking authority. Sheikh Hamdan’s major appointments have placed him at the helm of Dubai’s economic development. These positions include chairman of the Dubai Executive Council and co-leader (with Ahmed bin Saeed) of Expo 2020 Dubai. Sheikh Maktoum has been entrusted with chairing a new governing board for the flagship Dubai International Financial Centre (DIFC) and with supervising and coordinating the three so-called independent authorities affiliated with the DIFC: the DIFC Authority, the Dubai Financial Services Authority, and the DIFC Courts.

A March 2015 interview with Mohammed Alabbar, the founder and chairman of Emaar Properties—one of the largest real estate developers in the world—best exemplifies the cross-cutting nature of political and economic relationships in Dubai and the blurred lines between the public and private sectors. Emaar is considered a private company, yet it was originally founded with state funding. The Investment Corporation of Dubai, the government’s investment arm chaired by Mohammed bin Rashid, holds a 29 percent stake in Emaar. Alabbar stated that “I do not do anything without me talking to HH [His Highness], he is the man who gave me unimaginable opportunities, and he gave me a chance to be who I am. And to trust me.”²⁵ Alabbar’s comments indicated that though some of the top policymaking figures changed after the financial crisis, the style of Mohammed bin Rashid’s decisionmaking remains broadly similar. In a 2006 interview, the head of a subsidiary of Dubai World also noted that whenever he passed on a request to the head of Dubai World, he got “an answer within thirty minutes. . . . Here [in Dubai] they are much more forward thinking, dynamic, and a lot more trusty.”²⁶

Looking Ahead

Expo 2020 Dubai—with the slogan “Connecting Minds, Creating the Future”—will now run from October 2021 to March 2022 (delayed one year due to the coronavirus pandemic). Although part of the UAE’s fiftieth anniversary celebrations, the expo comes at a moment of renewed economic and geopolitical uncertainty. The expo may become a focal point for critics of the UAE since the country’s muscular approach to foreign policy has generated a degree of regional unease and its participation alongside Saudi Arabia in the Yemen war has drawn criticism—including some pushback from the U.S. Congress.

Awarding of the expo to Dubai in November 2013 seemed to symbolize the emirate’s return to economic good health, but growth has slowed in the wake of the UAE boycott of Qatar and the spike in regional tension with Iran. Economic growth slowed from 3.1 percent in 2017 to 1.9 percent in 2018, which is the weakest return since 2010. The finance, mining, and manufacturing sectors performed especially badly.²⁷ The UAE’s participation in the Saudi-led blockade of Qatar (ongoing since June 2017) meant the loss of a significant trade and investment partner and the sudden severance of political ties. And consequently, both Dubai’s economy and its reputation as a place to do business unencumbered by political or geopolitical considerations have suffered. Likewise, a spate of maritime attacks on tanker shipping near the Strait of Hormuz in May and June 2019—allegedly masterminded by Iran—has raised the specter of an asymmetric regional conflict, which dramatically increases the risk of doing business in and with Dubai.²⁸

Awarding of the expo to Dubai in November 2013 seemed to symbolize the emirate’s return to economic good health, but growth has slowed in the wake of the UAE boycott of Qatar and the spike in regional tension with Iran.

What does Dubai’s increasingly precarious economic and geopolitical position mean for international policymakers engaging with the emirate and the UAE? First, they must keep in mind that federal government officials in Abu Dhabi may not necessarily speak for government officials in Dubai. Second, the degree of pressure that the federal government and/or emirate authorities in Abu Dhabi can exert on Dubai depends greatly on internal political dynamics and power relationships within the UAE. Lastly, because Dubai’s authorities view the forthcoming Expo 2020 as a global platform to showcase their brand, they will be keen to minimize international criticism of their shortcomings.

Notes

¹ Gerald Butt, “Oil and Gas in the UAE,” in Ibrahim Abed and Peter Hellyer, eds., United Arab Emirates: A New Perspective (London: Trident Press, 2001), 237.

² Ulrichsen, The United Arab Emirates, 93.

³ Christopher Davidson, Dubai: The Vulnerability of Success (London: Hurst & Co, 2008), 13.

⁴ Fatma al-Sayegh, “Merchants’ Role in a Changing Society: The Case of Dubai, 1900–90,” Middle Eastern Studies 34, no. 1 (1998): 89–90.

⁵ Michael Quentin Morton, “The British India Line in the Arabian Gulf, 1862–1982,” Liwa: Journal of the National Center for Documentation and Research 5, no. 10 (2013): 50.

⁶ Pardis Mahdavi, Gridlock: Labor, Migration, and Human Trafficking in Dubai (Stanford, CA: Stanford University Press, 2011), 46–47.

⁷ Donald Hawley, The Trucial States (London: George Allen & Unwin Ltd, 1970), 244.

⁸ Simon Smith, Britain’s Revival and Fall in the Gulf: Kuwait, Bahrain, Qatar and the Trucial States, 1950–1971 (Abingdon: Routledge, 2004), 103–104.

⁹ There is nothing in the UAE’s constitution that specifically allocates the presidency to Abu Dhabi’s ruler other than the convention that, so far, has only been tested once in 2004. Article 51 of the 1971 temporary constitution, which was made permanent in 1996, notes only that “the Supreme Council of the Union shall elect from among its members a President of the Union and a Deputy”; the rulers of the seven constituent emirates or their representatives make up the Supreme Council.

¹⁰ Khalid S. Almezaini, The UAE and Foreign Policy: Foreign Aid, Identities and Interests (Abingdon: Routledge, 2011), 32.

¹¹ J.E. Peterson, “The Future of Federalism in the United Arab Emirates,” in H. Richard Sindelar III and J.E. Peterson, eds., Crosscurrents in the Gulf: Arab Regional and Global Interests (Abingdon: Routledge, 1988), 208.

¹² United Arab Emirates Constitution of 1971, with amendments through 2004, available at constituteproject.org.

¹³ Abdullah Omran Taryam, The Establishment of the United Arab Emirates, 1950–1985 (London: Croon Helm, 1987), 234.

¹⁴ Davidson, Vulnerability of Success, 294. An incident in 1973 in which a helicopter carrying Mohammed bin Rashid, today the ruler of Dubai and vice president of the UAE, was shot at forty-three times by a detachment of the Sharjah National Guard illustrated the striking patchwork of forces still within living memory. The disagreement was over the construction of a road in disputed Dubai-Sharjah territory, and while Mohammed bin Rashid was then (as now) the UAE defense minister, it was the Dubai Defense Force that he had ordered into the disputed area.

¹⁵ Elena McGovern, “Export Controls in the United Arab Emirates: A Practical Manifestation of a Strategic Dilemma,” Stimson Center (blog), February 1, 2009, https://www.stimson.org/2009/export-controls-united-arab-emirates-practical-manifestation-strategic-dilemma/.

¹⁶ One of the first examples (in the entire Gulf let alone the UAE) of a luxury property development being targeted at international buyers was the 1997 launch by Emaar Properties of the Emirates Hills residential project in which direct foreign ownership was not only marketed but encouraged.

¹⁷ “UAE, Abu Dhabi Roll Over $20Bln of Dubai’s Debt,” World Bulletin, March 16, 2016, https://www.worldbulletin.net/economy/uae-abu-dhabi-roll-over-20-bln-of-dubais-debt-h131197.html.

¹⁸ Shalendra Sharma, Global Financial Contagion: Building a Resilient World Economy After the Subprime Crisis (New York, NY: Cambridge University Press), 274.

¹⁹ Andrew Petersen and David Jones, “A Dubai World Debt and Nakheel Sukuk—Apocalypse Now?” K&L Gates Distressed Real Estate Alert, December 10, 2009, https://studylib.net/doc/13688361/distressed-real-estate-alert-a-dubai-world-debt-and-nakhe....

²⁰ Shireena Al Nowais, “First Meeting of Saudi-Emirati Coordination Council Takes Place in Jeddah,” National (UAE), June 7, 2018, https://www.thenational.ae/uae/first-meeting-of-saudi-emirati-coordination-council-takes-place-in-jeddah-1.737716.

²¹ Simeon Kerr, “Bin Sulayem Exit Ends Tumultuous Era,” Financial Times, December 13, 2010, https://www.ft.com/content/b722858a-06ec-11e0-8c29-00144feabdc0.

²² Raissa Kasolowsky, “Dubai Ruler Names Sheikh Ahmed Dubai World Chairman,” Reuters, December 12, 2010, https://www.reuters.com/article/idINIndia-53511220101212.

²³ Arif Sharif, “Dubai’s Sheikh Ahmed to Head Emirates NBD in Board Reshuffle,” Bloomberg, June 26, 2011, https://www.bloomberg.com/news/articles/2011-06-26/sheikh-ahmed-appointed-chairman-of-emirates-nbd-replacing-ahmed-al-tayer.

²⁴ The co-author of this report, Jodi Vittori, created the diagram based on information gathered from the following sources: Almezaini, The UAE and Foreign Policy, 32; “UAE, Abu Dhabi Roll Over $20Bln of Dubai’s Debt”;

Petersen and Jones, “A Dubai World Debt and Nakheel Sukuk—Apocalypse Now?”; Nowais, “First Meeting of Saudi-Emirati Coordination Council Takes Place in Jeddah”; Kerr, “Bin Sulayem Exit Ends Tumultuous Era”;

Kasolowsky, “Dubai Ruler Names Sheikh Ahmed Dubai World Chairman”; Sharif, “Dubai’s Sheikh Ahmed to Head Emirates NBD in Board Reshuffle”; Anil Bhoyrul, “Exclusive: Mohammed Alabbar—Uncensored,” Arabian Business, April 12, 2015; and interview with Geoff Taylor, chief executive officer of Dubai DryDock, cited in Martin Hvidt, “The Dubai Model: An Outline of Key Development-Process Elements in Dubai,” International Journal of Middle East Studies 41, no. 3 (2009): 403.

²⁵ Bhoyrul, “Exclusive: Mohamed Alabbar—Uncensored.”

²⁶ Interview with Geoff Taylor, chief executive officer of Dubai DryDock, cited in Martin Hvidt, “The Dubai Model: An Outline of Key Development-Process Elements in Dubai,” 403.

²⁷ Abeer Abu Omar and Netty Idayu Ismail, “Dubai’s Long-Awaited Stats Show Economic Growth Slowed Below 2%,” Bloomberg, March 27, 2019, https://www.bloomberg.com/news/articles/2019-03-27/dubai-s-long-awaited-stats-show-economic-growth-slowed-below-2.

²⁸ Anjli Raval, “Shipping Industry Grapples With Threat in Strait of Hormuz,” Financial Times, July 21, 2019, https://www.ft.com/content/0eb38854-aafd-11e9-8030-530adfa879c2.

Dubai’s lax regulatory climate facilitates illicit financial and commercial activity—particularly trade-based money laundering (TBML)—via the emirate’s many free trade zones. The emirate’s ambivalence toward unregulated financial dealings and illicit trade is long-standing and deeply entrenched. Unlike other sharia-based legal systems, Dubai’s civil legal frameworks provide insufficient anti–money laundering regulation and oversight—a reflection of the emirate’s long history as a freewheeling regional trading center.¹ As a result, Dubai is now one of the most conducive places in the world to undertake TBML.

A Permissive Legal and Regulatory Landscape

Throughout the 1960s, Dubai fed India’s large appetite for gold; the emirate imported, at its peak in 1968, 580 tons of gold from Beirut, London, and Zurich. Also during this time, Dubai served as a commercial hub for both smuggling and reexport trade schemes—known as round-tripping—involving a range of goods.² Further, the emirate capitalized on the regions’ conflicts, especially those in Lebanon by welcoming displaced businesses and trade flows. Dubai positioned itself to take over Lebanon as the region’s financial center and to serve as a neutral zone where Indian and Pakistani businessmen could meet.³ A. Q. Khan, the architect behind Pakistan’s nuclear program, carried out his two-decade-long proliferation financing scheme through Dubai and through an Indian contact based out of the emirate.⁴

The emirate’s ambivalence toward unregulated financial dealings and illicit trade is long-standing and deeply entrenched.

By the 1980s, Dubai’s laissez faire attitude to financial transparency had opened the door to some of the world’s most wanted criminals and allowed their activities and wealth to flourish unchecked. For example, Dawood Ibrahim, a Pakistan-based Indian gangster and formerly India’s most wanted man, and Viktor Bout, a notorious Russian arms dealer, were able to carry out their operations from Dubai without interference.⁵

In the 2000s, Dubai has been implicated in fueling conflict in the Democratic Republic of Congo through its role in international gold trade.⁶ It has also been involved in large-scale money laundering operations related to Azerbaijan’s oil industry and in embezzlement schemes, such as Russia’s Magnitsky scandal, named after a murdered accountant who uncovered the embezzlement of $230 million from Russian state coffers.⁷

When state leaders control the regulatory apparatus, this raises the risk of their being complicit in illicit financial activities and reduces the regulator’s capacity to carry out its functions without state approval.

Dubai’s governance architecture is underpinned by the deep and pervasive influence of the ruling royal family. An International Monetary Fund report from May 2011 depicted the extent of the family’s personal control over major firms and investment vehicles active in Dubai (see Figure 2).⁸ For instance, the family directly appoints the board members of the Dubai Financial Services Authority. This control is highly problematic, given that a well-documented risk to good governance is regulatory capture by state or private interests. When state leaders control the regulatory apparatus, this raises the risk of their being complicit in illicit financial activities and reduces the regulator’s capacity to carry out its functions without state approval.⁹ For example, Wall Street Exchange—one of the largest remitters in the Middle East and wholly owned by the UAE government and headquartered in Dubai—was recognized as a key conduit for the billion dollar money laundering operation run by Altaf Khanani. For over two decades, he helped the Taliban, Hezbollah, and other transnational groups move their money through Dubai and finance their operations.¹⁰

Dubai’s Free Trade Zones

What makes Dubai a particularly attractive destination for illicit financial flows are its roughly thirty free trade zones, where many of the country’s laws do not apply. These zones have separate commercial and labor laws and, in the case of the Dubai International Financial Centre (DIFC), a separate court system based on English common law.¹¹ Dubai’s legal enclaves have since been duplicated in other parts of the UAE and in Astana, Kazakhstan.

The UAE boasts about forty-five free trade zones and two financial free zones (the DIFC and Abu Dhabi Global Market). (See the appendix for a list of the total known free zones in the UAE.) Approximately thirty of the free trade zones are located in Dubai and are vital to its economy, accounting for 41 percent of Dubai’s total trade.¹² Data show that Dubai’s free trade zones generated a combined total of $118 billion in trade value in 2017.¹³ The Jebel Ali Free Zone (JAFZA)—established in 1985—accounts for almost 32 percent of the total foreign direct investment flowing into the UAE and for roughly 24 percent of Dubai’s annual gross domestic product.¹⁴ In 2015, JAFZA alone generated trade worth $87.6 billion.¹⁵ And these numbers have grown each year since, according to data published by the government. In 2019, JAFZA reportedly accounted for 70 percent of all trade value and 97 percent of all trade volume generated by Dubai’s free trade zones.¹⁶

To keep the juggernaut of Dubai’s economy moving forward, these zones have a unique regulatory regime that provides both an express route to trade facilitation and investment and a fertile environment for a myriad of illegal activities, including gold smuggling, arms trafficking, round-tripping, and trade misinvoicing.¹⁷ The free trade zones permit 100 percent foreign ownership and repatriation of capital and profits and have no corporate, personal, or customs tax. In addition, there are no restrictions on the recruitment of foreign national labor, all documentation can be done in English, and all regulatory and licensing needs can be fulfilled within the zone.¹⁸ Finally, all employment contracts are sponsored through the relevant free trade zone and not through the employer.¹⁹

Each free trade zone has its own separate commercial regulations, labor laws, and property laws, and each zone is supervised by an independent regulatory authority.

Most striking of all, however, is that each free trade zone has its own separate commercial regulations, labor laws, and property laws, and each zone is supervised by an independent regulatory authority.²⁰ For instance, separate commercial laws apply to the Dubai Development Authority, DIFC, JAFZA, and Dubai International Airport Free Zone.²¹ UAE administrative and commercial regulations are applicable only to the Dubai Healthcare City Free Zone.²² The UAE therefore has to contend with a bewildering patchwork of forty-five different sets of laws and regulations. The UAE’s Central Bank, in particular, has to issue many similar but distinct circulars to each zone.²³

This complex arrangement presents significant hurdles for international standard-setting bodies such as the Financial Action Task Force (FATF), which, during its 2008 evaluation of the UAE, could only conduct a “rudimentary sampling of their [free trade zones] laws and procedures.”²⁴ The FATF also flagged significant difficulties in its 2020 evaluation, which noted that the complexity of different company registries and rules has led to “regulatory arbitrage.”²⁵ Furthermore, the primary mandate of the independent authorities in the free trade zones appears to be geared more toward enhancing trade facilitation than overseeing financial flows and curbing illicit activity. With no national watchdog operating in the zones, opportunities for regulatory arbitrage abound.

The laws on beneficial ownership transparency within the free trade zones illustrate another danger of this complicated and overcrowded regulatory architecture. Beneficial ownership information is the bedrock of financial transparency and is meant to deter the entry of illicit actors into the market. However, instead of adopting one definition of beneficial ownership, which would create a consolidated approach toward anti–money laundering (AML) enforcement, each free trade zone uses drastically different language to define a beneficial owner. Beyond mere definitions, the quality of guidance provided on how to meet the standards varies widely. For example, the Dubai Development Authority issued a two-page circular in June 2019 that defines an ultimate beneficial owner as “an individual who ultimately owns or controls 25% or more of a Business Partner, whether directly as a shareholder, or indirectly via control of companies, other entities or structures that control the Business Partner.”²⁶

By contrast, the DIFC—via a lengthy 2018 regulation—provides a more exhaustive definition of the ultimate beneficial owner:

A natural person (other than a person acting solely in the capacity of a professional adviser or professional manager) who: (a) in relation to a company, owns or controls (directly or indirectly): (i) shares or other Ownership Interests in the Registered Person of at least the Relevant Percentage; (ii) voting rights in the Registered Person of at least the Relevant Percentage; or (iii) the right to appoint or remove the majority of the Directors of the Registered Person; (b) in relation to a partnership, has the legal right to exercise, or actually exercises, significant control or influence over the activities of the partnership; or (c) in relation to a foundation or a Non Profit Incorporated Organisation, has the legal right to exercise, or actually exercises, significant control or influence over the activities of the Governing Body, person or other arrangement administering the property or carrying out the objects of the foundation or the Non Profit Incorporated Organisation.²⁷

Additionally, the DIFC regulation allows the registration of nominee directors.²⁸ Nominee directors are individuals with no other connection to a firm who serve as professional proxies for a company’s actual controlling interests. Many grand corruption schemes involve the use of nominee directors, according to a World Bank study.²⁹ The Dubai Development Authority’s circular is silent on whether nominee directors are permitted within the zone and requires no such disclosure of nominee arrangements.³⁰ On JAFZA’s website, none of the forms that commercial entities must complete to be licensed or registered mention beneficial ownership.³¹

Having multiple definitions of beneficial ownership needlessly complicates the regulatory framework in which free trade zones operate.

Having multiple definitions of beneficial ownership needlessly complicates the regulatory framework in which free trade zones operate. Differences such as this, especially when combined with a multitude of separate, applicable laws, clearly limit the Central Bank’s ability to carry out its appointed role across Dubai’s thirty free trade zones.³² The problems the Central Bank and Dubai Customs have had in implementing anti–money laundering norms are well-documented.³³ However, there does not appear to be any movement toward rationalizing the regulatory framework to ensure a more cohesive approach to oversight and supervision.³⁴ This is unfortunate because the environment provides significant opportunities for regulatory arbitrage and for groups—including al-Qaeda, the Taliban, Lone Wolves, D-Company, Comanchero motorcycle gangs, and Mexican drug cartels—to use Dubai as a conduit for their money laundering, smuggling, and terrorism financing operations.³⁵

In addition, there appears to be little political will to create appropriate mechanisms for customs inspections, information sharing, and anti–money laundering, and anti–terrorism financing supervision.³⁶ Although the UAE now requires that free trade zones share information with the country’s Financial Intelligence Unit and Central Bank, the continuous stream of reporting on the scale of ongoing illicit activity indicates that this measure exists merely on paper.

The lack of regulatory and customs enforcement within free trade zones is not unique to Dubai, and interest in finding more effective ways to address the loopholes has grown over the last decade. The World Customs Organization (WCO), the FATF, and the Organisation for Economic Co-operation and Development (OECD) have all produced studies identifying the risks and have recommended necessary changes.³⁷ Data from the most recent one—a 2019 WCO study—show that the main risk factors within free trade zones are insufficient customs controls; the ease of setting up companies, which undermines a robust compliance culture; and the insufficient integration of information technology systems by governmental agencies. OECD and FATF studies echo these same concerns. While the lack of enforcement is clearly a global issue, the misuse and weak governance of free trade zones is a particular problem in Dubai, given the outsized role the zones play in contributing to the emirate’s economy and its long-standing reputation as a refuge for illicit money.

Trade-Based Money Laundering and Dubai

The FATF defines TBML as “the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins.”³⁸ TBML methods include over- and under-invoicing of goods, multiple invoicing of goods, over- and under-shipments of goods, and false description of goods.³⁹

Factors that increase the risk or likelihood of TBML include less restrictive customs environments, large amounts of paperwork, lack of data, and ports with limited regulation.⁴⁰ Free trade zones, in particular, pose a high risk for TBML because they are designed to have more relaxed regulatory environments to attract businesses. Until very recently, Dubai’s free trade zones required little or no ownership information, and even with the recent changes in laws, the tangled regulatory environment leaves ample space for abuses to occur.

Free trade zones, in particular, pose a high risk for TBML because they are designed to have more relaxed regulatory environments to attract businesses.

The absence of adequate customs controls in Dubai’s free trade zones means that goods shipped there undergo “various economic operations such as transshipment, assembly, manufacturing, processing, warehousing, repackaging and re-labelling.”⁴¹ Of these operations, repackaging is a common method used by illicit actors to manipulate the country of origin or destination.⁴² Other tools used to mask the origin, and which have been observed in Dubai’s free trade zones, include third party payments and cash and other bearer-negotiable instruments such as a check or promissory note.⁴³

According to documentation, illicit actors in Dubai have also created fake invoices through anonymous Dubai companies. Cash-based economies, such as Iraq, need U.S. dollars to finance imports. Once the U.S. dollars are acquired, they are used to buy smuggled goods, guns, or drugs or to facilitate money laundering and terrorist activity.⁴⁴ According to the U.S. Department of State’s International Narcotics Control Strategy Report on the UAE, TBML apparently occurs through commodities that are used as collateral in transactions conducted via hawala (informal money-transferring services), or other trading companies.⁴⁵

Although free trade zones are at a heightened risk for TBML, other significant avenues warrant attention as well. For example, Dubai has played a central role in helping launder the proceeds of value-added tax (VAT) carousel fraud through its banks (see Figure 3). VAT carousel fraud is also called missing trader fraud and occurs when a business imports goods VAT-free from overseas and then sells the goods to domestic buyers, charging them VAT. The sellers then disappear, taking the VAT without paying the appropriate taxes to the country of origin, such as the United Kingdom (UK).⁴⁶ A major VAT scheme—active from 2005 to 2016—cost the UK government an estimated $20.6 billion in tax revenues.⁴⁷ This money was routed through Dubai’s banks.

Perpetrators similarly exploited the European Union’s carbon credits system and cost the EU around $5.4 billion between 2008 and 2009. Individuals behind the carbon credits scam laundered their illicit proceeds in Dubai by purchasing luxury real estate.⁴⁸

Although the FATF has acknowledged the size, scale, and importance of the problem, there has been little progress in establishing clear international standards to address TBML.⁴⁹ According to the FATF, this is largely due to the complexity and varied nature of TBML, which includes:

• The enormous volume of trade flows, which obscures individual transactions and provides abundant opportunity for criminal organizations to transfer value across borders;
• The complexity associated with (often multiple) foreign exchange transactions and recourse to diverse financing arrangements;
• The additional complexity that can arise from the practice of commingling illicit funds with the cash flows of legitimate businesses;
• The limited recourse to verification procedures or programs to exchange customs data between countries; and
• The limited resources that most customs agencies have available to detect illegal trade transactions.⁵⁰

All these stumbling blocks have prevented an international consensus from emerging. Nevertheless, the Wolfsberg Group and some national governments, including in Singapore and the UK, have started issuing guidance on matters related to TBML and trade finance.⁵¹ The thrust of such regulatory approaches has been to keep the banking sector at the forefront. However, open account trades constitute 80 percent of all global trade, meaning the buyer and seller have agreed to the terms beforehand and the bank is unaware of the underlying reason for the payment.⁵² National customs agencies must therefore take a central role in overseeing these transactions.

In 2016, the Dubai Financial Services Authority—the DIFC’s financial services regulatory authority responsible for regulating banking and related financial services—issued trade finance guidelines. But this regulatory move is puzzling because the DIFC is a financial free zone, which is different from a free trade zone, so unless trade transactions within Dubai’s free trade zones are routed through financial institutions in the DIFC, it is unclear what impact these guidelines would have on TBML.⁵³

Policy and Regulatory Remedies

Despite these myriad issues, several steps could help strengthen the regulatory environment to combat TBML, both globally and in Dubai in particular. To create a truly robust mechanism, UN bodies and the World Trade Organization must first agree on which agencies should take the lead in tackling TBML. They must also design a robust reporting framework that will spread out supervisory responsibilities across market participants, such as forwarding agents, shipping agents, clearing agents, importers, exporters, and other relevant actors. Doing so will help reduce the risk of TBML.

To create a truly robust mechanism, UN bodies and the World Trade Organization must first agree on which agencies should take the lead in tackling TBML.

National governments should also create more detailed and transparent centralized databases that provide beneficial ownership information—as well as financial histories of the legal entities/arrangements involved in the trade transaction—to customs agents, departments of commerce, the Financial Intelligence Unit, and the Central Bank. This will help prevent legal entities/arrangements from being used to commit contract fraud and trade misinvoicing and to establish trade channels.

Customs departments should be fully included in the FATF National Risk Assessment. Currently, customs departments partially engage in this assessment process to flush out bulk cash smuggling and other money laundering offenses identified by the FATF. This, however, does not fully address the entire gamut of money laundering risks that often vary depending on industry sector and destination. Banks also need better training to fully understand TBML- and customs-related risks. They need to know more about the products traded and shipping routes, and they need access to other detailed records that cover the commerce side of transactions.

Notes

¹ Though influenced by Egyptian law, Dubai’s civil laws are underpinned by Islamic sharia tenets. Egyptian law itself was heavily influenced by the French legal system; Ahmed Aly Khedr, “Update: Overview of United Arab Emirates Legal System,” GlobaLex, January 2018, https://www.nyulawglobal.org/globalex/United_Arab_Emirates1.html; and Michael Matly and Laura Dillon, “Dubai Strategy: Past, Present, and Future,” Belfer Center for Science and International Affairs, February 27, 2007, https://www.belfercenter.org/sites/default/files/legacy/files/matly_paper1.pdf.

² Round-tripping is a money laundering practice by which funds are deposited offshore—typically in a tax haven where few records are kept—and then shipped back as tax-exempt foreign direct investment; Tony Warwick Ching, The International Gold Trade (Cambridge: Woodhead Publishing, 1993), 42–43.

³ Oxford Analytica, “Rival Financial Centers in the Middle East,” March 14, 2005, https://www.forbes.com/2005/03/14/cz_0314oxan_gulf.html#66c233f77c6b.; and “Narrative Report of the UAE,” Financial Secrecy Index, Tax Justice Network, 2018 http://www.financialsecrecyindex.com/PDF/UnitedArabEmirates_Dubai.pdf.

⁴ Molly MacCalman, “A.Q. Khan Nuclear Smuggling Network,” Journal of Strategic Security 9, no. 1 (2016): 104–118.

⁵ Nicholas Schmidle, “Disarming Viktor Bout: The Rise and Fall of the World’s Most Notorious Weapons Trafficker,” New Yorker, August 27, 2014 https://www.newyorker.com/magazine/2012/03/05/disarming-viktor-bout; Ahmed Shabaan, “What’s an Aircraft Doing in the UAE Desert?” Khaleej Times, September 27, 2019, https://www.khaleejtimes.com/uae/umm-al-quwain/people--places-whats-an-aircraft-doing-in-the-uaq-desert-; and “Dawood Ibrahim Is 2nd Richest Gangster of All Time; 10 Things About Most Wanted Global Terrorist,” India Today, April 29, 2017, https://www.indiatoday.in/india/story/dawood-ibrahim-pakistan-karachi-974276-2017-04-29; https://www.un.org/securitycouncil/sanctions/1267/aq_sanctions_list/summaries/individual/dawood-ibrahim-kaskar.

⁶ Marcena Hunter, “Pulling at Golden Webs: Combating Criminal Consortia in the African Artisanal and Small-Scale Gold Mining and Trade Sector,” ENACT, April 2019, 21, https://enact-africa.s3.amazonaws.com/site/uploads/2019-04-24-pulling-the-golden-webs-research-paper.pdf.

⁷ David Lewis, Ryan McNeill, and Zandi Shabalala, “Gold Worth Billions Smuggled Out of Africa,” Reuters, April 24, 2019, https://www.reuters.com/investigates/special-report/gold-africa-smuggling/; Mystery Figure Behind Azerbaijan’s State Oil Company Revealed, Global Witness, December 6, 2013, https://www.globalwitness.org/en/archive/mystery-figure-behind-azerbaijans-state-oil-company-revealed/; Stella Dawson, “Corrupt Money Hides in Dubai, Officials Turn Blind Eye,” Thomson Reuters Foundation, December 13, 2013, http://news.trust.org//item/20131213143038-zrhlb/; and Alec Luhn, “Whatever Happened to the Magnitsky Money?” PRI, January 2, 2013, pri.org/stories/2013-01-02/whatever-happened-magnitsky-money.

⁸ “UAE: Selected Issues and Statistical Appendix,” International Monetary Fund, May 2011, https://www.imf.org/external/pubs/ft/scr/2011/cr11112.pdf, 4.

⁹ John A. Turner, Gerard Hughes, and Michelle Maher, “An International Comparison of Regulatory Capture and Regulatory Outcomes,” International Public Policy Association, June 2015, https://www.ippapublicpolicy.org/file/paper/1433341161.pdf; “Chapter 5: Regulatory Capture,” in The Warwick Commission on International Financial Reform: In Praise of Unlevel Playing Fields (Warwick, UK: University of Warwick, 2009), https://warwick.ac.uk/research/warwickcommission/financialreform/report/chapter_5.pdf.

¹⁰ Linton Besser, “Money Exchange With Links to Dubai Government Identified as Hub for Billion-Dollar Laundering Empire,” ABC (Australia), February 5, 2018 https://www.abc.net.au/news/2018-02-06/khanani-network-laundered-money-through-wall-street-exchange/9398148.

¹¹ “Foundation of ADGM Courts,” Abu Dhabi Global Market Courts, https://www.adgm.com/adgm-courts/english-common-law; and “An Introduction to the Astana International Financial Court,” Astana International Financial Court, http://aifc-court.kz/an-introduction.

¹² Waheed Abbas, “More Relief as UAE Free Zones Are Out of VAT Scope,” Khaleej Times, July 5, 2018, https://www.khaleejtimes.com/business/local/More-relief-as-three-UAE-free-zones-are-out-of-VAT-scope; and Sarah Townsend, “Dubai Free Zones Saw 22% Growth This Year, Government Says,” National (UAE), December 22, 2018, https://www.thenational.ae/business/economy/dubai-free-zones-saw-22-trade-growth-this-year-government-says-1.805246.

¹³ “How Free Zones Help Power the UAE Economy.”

¹⁴ “Jebel Ali Port and Free Zone Play Key Role in Dubai and UAE’s Economic Growth,” February 3, 2019,

https://mediaoffice.ae/en/media-center/news/3/2/2019/jebel-ali-port-and-free-zone-play-key-role-in-dubai-and-uaes-economic-growth.aspx.

¹⁵ “Jafza: At the Forefront of Innovation,” Khaleej Times, December 28, 2016, https://www.khaleejtimes.com/20161228/no-title.

¹⁶ “Jebel Ali Port and Free Zone Play Key Role in Dubai and UAE’s Economic Growth.”

¹⁷ Shedrofsky, “Dubai’s Golden Sands.”

¹⁸ Christopher Gunson, “Second Meeting of the Working Group on Investment Zones in Iraq,” Organisation for Economic Co-operation and Development, undated, https://www.oecd.org/mena/49226268.pdf.

¹⁹ Ibid.

²⁰ “Working in Free Zones,” Government of the United Arab Emirates, August 1, 2019, https://government.ae/en/information-and-services/jobs/working-in-free-zones.

²¹ “Running a Business in a Free Zone,” Government of the United Arab Emirates, October 23, 2019, https://www.government.ae/en/information-and-services/business/running-your-business/running-a-business-in-a-free-zone-.

²² Ibid.

²³ Ibid.

²⁴ “United Arab Emirates: Detailed Assessment Report on Anti-Money Laundering and Combating the Financing of Terrorism,” Financial Action Task Force Evaluation Report, International Monetary Fund, June 19, 2008, https://www.imf.org/external/pubs/ft/scr/2008/cr08305.pdf, 136.

²⁵ “Anti-Money Laundering and Counter-Terrorist Financing Measures: United Arab Emirates Mutual Evaluation Report,” 5.

²⁶ “Circular 323: Ultimate Beneficial Ownership (‘UBO’),” Dubai Development Authority, June 16, 2019, https://dda.gov.ae/wp-content/uploads/2019/06/323.pdf.

²⁷ “Ultimate Beneficial Owner Regulations,” Dubai International Financial Center, November 12, 2018, 4, https://www.difc.ae/files/7815/4200/4130/UBO_Regulations_2018.pdf.

²⁸ Ibid.

²⁹ Gerard Ryle and Stefan Candea, “Faux Corporate Directors Stand in for Fraudsters, Despots and Spies,” International Consortium of Investigative Journalists, April 7, 2013, https://www.icij.org/investigations/offshore/faux-corporate-directors-stand-fraudsters-despots-and-spies/.

³⁰ “Circular 323: Ultimate Beneficial Ownership.”

³¹ Jebel Ali Free Zone, “Rules and Regulations,” http://jafza.ae/rules-regulations/.

³² U.S. Department of State, “International Narcotics Control Strategy Report: Volume II,” Bureau for International Narcotics and Law Enforcement Affairs, March 2017, 189, https://www.state.gov/wp-content/uploads/2019/04/2017-INCSR-Vol-II.pdf.

³³ U.S. Department of State, “International Narcotics Control Strategy Report”; and Tom Arnold, “Free Zones in Focus of Anti-Laundering Drive,” National (UAE), October 5, 2010, https://www.thenational.ae/business/free-zones-in-focus-of-anti-laundering-drive-1.510921.

³⁴ “Running a Business in a Free Zone.”

³⁵ Besser, “Money Exchange With Links to Dubai Government Identified as Hub for Billion-Dollar Laundering Empire”; and Judy Pasternak and Stephen Braun, “Emirates Looked the Other Way While Al-Qaida Funds Flowed,” Chicago Tribune, January 21, 2002, https://www.chicagotribune.com/sns-worldtrade-emirates-lat-story.html.

³⁶ Angela Shah, “Free Trade Zones Attract Criminals,” New York Times, November 10, 2010, https://www.nytimes.com/2010/11/11/world/middleeast/11iht-m11mtrade.html.

³⁷ Kenji Oni, “‘Extraterritoriality’ of Free Zones: The Necessity for Enhanced Customs Involvement,” September 2019, http://www.wcoomd.org/-/media/wco/public/global/pdf/topics/research/research-paper-series/47_free_zones_customs_involvement_omi_en.pdf?db=web; “Money Laundering Vulnerabilities of Free Trade Zones,” Financial Action Task Force, March 2010, https://www.fatf-gafi.org/media/fatf/documents/reports/ML%20vulnerabilities%20of%20Free%20Trade%20Zones.pdf; and “Trade in Counterfeit Goods and Free Trade Zones: Evidence From Recent Trends,” Organisation for Economic Co-operation and Development, March 15, 2018, https://www.oecd.org/gov/trade-in-counterfeit-goods-and-free-trade-zones-9789264289550-en.htm.

³⁸ “Trade Based Money Laundering,” Financial Action Task Force, June 23, 2006, https://www.fatf-gafi.org/media/fatf/documents/reports/Trade%20Based%20Money%20Laundering.pdf.

³⁹ Ibid., 2–4.

⁴⁰ “Money Laundering Vulnerabilities of Free Trade Zones,” Financial Action Task Force, March 2010, 15–17, https://www.fatf-gafi.org/media/fatf/documents/reports/ML%20vulnerabilities%20of%20Free%20Trade%20Zones.pdf.

⁴¹ “Money Laundering Vulnerabilities of Free Trade Zones.”

⁴² Ibid.

⁴³ Dominic Dudley, “Dubai Has Become a ‘Money Laundering Paradise’ Says Anti-Corruption Group,” Forbes, January 29, 2019, https://www.forbes.com/sites/dominicdudley/2019/01/29/dubai-has-become-a-money-laundering-paradise-says-anti-corruption-group/#50c7eaa0315e. On April 30, 2014, the UAE Federal National Council passed a draft law to amend Federal Law No. 4 of 2002 regarding the criminalization of money laundering and to prevent the use of bearer negotiable instruments; and Mark Brown, “Financial Institutions: Obligations Under the New AML Law,” Al Tamimi & Company, December 2014, https://www.tamimi.com/law-update-articles/financial-institutions-obligations-under-the-new-aml-law/.

⁴⁴ Karina Shedrofsky, “Remittances and Trade-Based Money Laundering,” OCCRP, June 12, 2018, https://www.occrp.org/en/goldensands/remittances-and-trade-based-money-laundering.

⁴⁵ U.S. Department of State, “International Narcotics Control Strategy Report: Volume II,” 182.

⁴⁶ “‘Reasonable Grounds for Knowing or Suspecting’: A Cautionary Tale About VAT Fraud,” RiskScreen KYC360, February 6, 2017, https://www.riskscreen.com/kyc360/article/reasonable-grounds-for-knowing-or-suspecting-vat-fraud-and-the-solicitor-jailed-for-laundering-its-proceeds/.

⁴⁷ Margot Gibbs and Jamie Doward, “Fraudsters ‘Turning Dubai Into the New Costa del Crime,’” Guardian, June 24, 2018, https://www.theguardian.com/world/2018/jun/24/fraudsters-turn-dubai-new-costa-del-crime.

⁴⁸ “EU Energy Industry Calls for VAT Exemption on Trading to be Extended,” Reuters, September 4, 2018, https://www.reuters.com/article/eu-carbon-fraud/eu-energy-industry-calls-for-vat-exemption-on-trading-to-be-extended-idUSL8N1VQ23R.

⁴⁹ The FATF and the Asia/Pacific Group on Money Laundering published reports in 2006 and 2012, respectively, documenting the importance of the issue.

⁵⁰ “Trade Based Money Laundering,” 2.

⁵¹ U.S. Department of State, “International Narcotics Control Strategy Report: Volume II”; Bankers Association for Trade and Finance, “The Wolfsberg Group, ICC and BAFT Trade Finance Principles,” 2019, https://www.wolfsberg-principles.com/sites/default/files/wb/Trade%20Finance%20Principles%202019.pdf; “Best Practices for Countering Trade Based Money Laundering,” Monetary Authority of Singapore, May 2018, https://abs.org.sg/docs/library/best-practices-for-countering-trade-based-money-laundering.pdf; and “Banks’ Control of Financial Crime Risks in Trade Finance,” Financial Conduct Authority, July 2013, https://www.fca.org.uk/publication/thematic-reviews/tr-13-03.pdf. Of the seventeen banks surveyed, half had no clear policy or procedures for dealing with trade-based money laundering risks; “Guidelines for Prevention of Trade Based Money Laundering,” Chapter 2.4.1: Import Procedures and Avenue for TBML in Bangladesh, Bangladesh Bank, https://www.bb.org.bd/aboutus/regulationguideline/draft/24052018_tbml_draft.pdf; and “Framework for Managing Risks of Trade Based Money Laundering and Terrorist Financing,” State Bank of Pakistan, October 14, 2019, http://www.sbp.org.pk/epd/2019/FEC4_Annex.pdf.

⁵² Livia Benisty and John Ladany, “Trade-Based Money Laundering: Your Guide to Understanding It, Detecting It, and Preventing It,” Citibank, 2016, 4, https://www.citibank.com/tts/insights/eSource_academy/docs/thought_leadership/1461942122-Citi-Trade-Based-Money-Laundering-Whitepaper.pdf.

⁵³ In 2016, the Dubai Financial Services Authority published a report on trade finance that stated that while overall due diligence was conducted satisfactorily, there were areas for improvement; “Trade Finance Report 2016,” DFSA, http://www.dfsa.ae/Documents/ThematicReviews/TF-Report-FINAL%20Eng%2012%20october%202016%20mid-res.pdf.

Among the world’s major gold trading hubs, Dubai is a relatively new player. Yet it is savvy enough to pursue previously untapped markets and ambitious enough to frequently cut corners to bring gold to the market. The UAE’s share of world gold trade in 2018 is evidence of just how successful this strategy has become.¹ As late as 1996, the UAE did not even appear among the world’s top one hundred gold-importing countries. Two decades later, the UAE ranked among the top four, above Hong Kong and the United States (see Table 2).

Of the eleven gold refineries in the UAE, the majority are located in Dubai. This accords with the Dubai Multi Commodities Centre’s (DMCC) own statistics, which show that Dubai is responsible for about 80 percent of the total UAE gold imports and exports (measured either by volume or value).²

 

Table 2. Top Gold-Importing Countries in 2018, by Weight
Rank	Reporting Entity	Weight (kilograms)	Trade Value	Unit Value (per gram)
1	Switzerland	2,248,611	$63,321,203,855	$28.16
2	China	1,121,317	$45,805,882,835	$40.85
3	India	945,060	$31,756,390,865	$33.60
4	United Arab Emirates	923,247	$27,672,052,091	$29.97
5	China, Hong Kong SAR	665,575	$23,627,497,773	$35.50
6	United Kingdom	629,049	$25,564,378,411	$40.64
7	Singapore	338,389	$13,514,112,543	$39.94
8	Turkey	299,556	$11,300,396,230	$37.72
9	USA	232,441	$9,641,469,104	$41.48
10	Italy	158,703	$4,056,681,077	$25.56
Source: UN Comtrade Database, accessed April 17, 2020, https://comtrade.un.org/data/; data reflects the gold classified under HS Commodity Code 7108.

Laundering Artisanal Gold

What is most problematic about the UAE’s strategy is where it gets its gold. Other major gold hubs source the bulk of their gold from relatively few countries, typically either other gold hubs or other major gold-producing nations. According to UN Comtrade data, for example, in 2016 the United Kingdom (UK) imported about 1,208 tons of gold from just six countries (listed in descending order): Switzerland, Canada, South Africa, Hong Kong, Australia, and the United States.

By contrast, in 2016, the UAE imported gold from more than one hundred countries, mainly located in Africa, South America, or South Asia. Less likely to be engaged in traditional large-scale gold mining, many of these countries are better known for artisanal and small-scale gold mining (ASGM). Characterized by low capital inputs, the use of traditional technologies, heavy demand for labor, and poor or absent government regulation, ASGM is nonetheless an important source of income for the rural communities.

Yet in some parts of the world—notably the Democratic Republic of Congo, Sudan, and Venezuela—ASGM gold is sometimes taxed by, or otherwise used to benefit, illegal armed groups conducting insurgencies or is implicated in gross human rights violations. For this reason, ASGM gold is sometimes characterized as a conflict mineral. Even in countries that are not afflicted by civil conflict or atrocities, ASGM is often impacted by weak or nonexistent government oversight, illegal exportation, and smuggling.

For these reasons, gold is subject to many different—and often overlapping—sourcing, chain of custody, and due diligence standards.³ The specific elements of these standards vary, but all of them require that—at a minimum—those countries sourcing ASGM gold be able to determine whether the gold originated in a conflict-affected or high-risk country or is otherwise associated with gross human rights violations. Some tighter standards add additional criteria, such as the absence of child labor, holding of a legitimate mining title, and proof of legal export. Given the difficulties in assuring the clean origins of ASGM gold, reputable refiners tend to avoid it altogether.

ASGM [artisanal and small-scale gold mining] gold hand carried into Dubai is almost always sold in the emirate’s gold souk . . . rather than by major refineries.

In practice, Dubai follows few, if any, of these standards. ASGM gold hand carried into Dubai is almost always sold in the emirate’s gold souk—a compact area of a few city blocks where hundreds of small dealers compete to buy and sell gold in all its myriad forms—rather than by major refineries. Officially, the DMCC requires gold dealers operating in the emirate to have a written due diligence policy that aligns with standards of the Organisation for Economic Co-operation and Development (OECD), but there is little or no enforcement of this requirement.⁴ Dealers buying gold to sell in the souk require only a single document—a UAE customs form—that proves the gold was legally declared to customs officials upon arrival at an Emirati airport. The form does not require information about the gold’s origin.⁵ These dealers therefore accept gold originating from any country, regardless of the production circumstances, no questions asked.⁶ They habitually record their purchases of ASGM gold as “scrap,” a practice that even some refineries have exhibited.⁷ This accounting sleight of hand completed, souk dealers can then sell this gold to DMCC buyers or UAE refineries, having sufficiently clouded its origins to satisfy their auditing requirements.⁸

This lack of due diligence and Dubai’s efforts to cater to ASGM producers helps explain the UAE’s rapid rise as a major global gold hub. Far from competing with the traditional gold centers, Dubai does what other hubs will not—or legally cannot—do. It accepts ASGM gold from producer countries that—because of OECD and other standards—more respectable hubs avoid. An analysis of the UAE’s imports in 2016 showed that at least 46 percent of its gold supply came from countries that would be “red-flagged” by the OECD as being conflict-affected or high-risk countries had their country of origin been recorded rather than the country through which the gold transited. For example, gold from the Democratic Republic of Congo (DRC) and South Sudan are both commonly trafficked through Uganda, thus disguising its origins and resulting in it being considered Ugandan gold from a regulatory standpoint.

The process of reselling ASGM gold freely exported from red-flagged sources to Dubai jewelers and refiners (via the emirate’s bustling souk) essentially launders illicit ASGM gold into a refined product that is acceptable to the world’s most reputable gold hubs. As shown in Table 3, Switzerland and India imported a total of more than 200 tons or just over $8 billion in UAE gold doré in 2016.

Table 3. Gold Exported by the UAE in 2016, by Weight
Rank	Reporting Entity	Weight (kilograms)	Trade Value	Unit Value (per gram)
1	Switzerland	148,423	$5,922,940,937	$39.91
2	India	59,548	$2,136,789,719	$35.88
3	Turkey	42,952	$1,444,004,799	$33.62
4	Bangladesh	42,808	$306,054,164	$7.15
5	Morocco	39,714	$1,089,176	$0.03
Source: UN Comtrade Database, accessed April 17, 2020, https://comtrade.un.org/data/; data reflects the gold classified under HS Commodity Code 7108.

A second and comparably large portion of UAE gold is exported as jewelry, often to developed countries where conflict minerals laws should be more rigorously enforced. As shown in Table 4, the UAE exported just over 323 tons of gold jewelry worth some $11.5 billion in 2016. Most of this jewelry went to Iraq and India, but almost $500 million worth of jewelry made its way to the United States and a total of nearly $700 million worth made its way to Italy, the UK, and Germany—countries with legislation regulating the import of gold from conflict-affected countries.

Table 4. Gold Jewelry Exported by the UAE in 2016, by Weight
Rank	Destination	Weight (kilograms)	Trade Value	Unit Value (per gram)	% of Total Weight
1	Iraq	79,459	$2,600,224,360	$32.72	25%
2	India	53,292	$1,600,353,586	$30.03	16%
3	Iran	19,815	$594,195,871	$29.99	6%
6	Italy	13,136	$354,293,022	$26.97	4%
11	USA	8,553	$468,594,559	$54.79	3%
17	Switzerland	4,648	$530,450,196	$114.12	1%
19	UK	3,585	$211,440,949	$58.98	1%
20	Afghanistan	3,030	$100,422,757	$33.13	1%
24	Germany	1,590	$52,963,233	$33.31	0.5%
27	Canada	1,478	$38,962,628	$26.34	0.5%
Source: UN Comtrade Database, accessed April 17, 2020, https://comtrade.un.org/data/; data reflects gold jewelry classified under HS Commodity Code 711319.

In summary, the UAE imported over 971 tons of gold worth some $32 billion in 2016, and nearly half of this gold came from red-flagged sources. It also exported 846 tons (jewelry and gold combined) worth $28 billion—much of it to countries that would have been prevented from directly purchasing this problematic gold because of domestic laws (for example, the United States’ Dodd-Frank Act and the EU Conflict Minerals Regulation) or other standards (for example, those set by the OECD and London Bullion Market Association). These statistics make clear that Dubai is a conducive place for laundering ASGM gold.

The DMCC: Is It a Serious Watchdog?

Established in 2002, the DMCC is Dubai’s quasi-private regulatory body for precious metals and gems. A fundamental challenge to the DMCC is its dual role of regulating the sector and promoting and facilitating trade. There is an inherent conflict of interest when efforts to increase trade involve relaxing regulation.

The DMCC established the Dubai Good Delivery (DGD) standard in 2012 and the DMCC Rules for Risk Based Due Diligence in the Gold and Precious Metals Supply Chain in 2016. These actions brought the DMCC’s standards closer in line with the core principles of the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals From Conflict-Affected and High-Risk Areas. The DGD standard includes technical standards for gold purity and now also a requirement for the responsible sourcing of gold in accordance with the DMCC rules.⁹ Refineries wishing to achieve or retain DGD status must pass a periodic audit and publish a public assurance report.

Unfortunately, the DMCC’s [Dubai Multi Commodities Centre’s] sourcing and due diligence requirements are entirely voluntary and thus easily ignored.

Unfortunately, the DMCC’s sourcing and due diligence requirements are entirely voluntary and thus easily ignored. Only three of eleven refineries in the UAE have made themselves DGD compliant. The other eight refineries operate without any independent check on their sourcing. Yet these noncertified refineries all claim on their websites to adhere to DGD or OECD due diligence rules on sourcing; many also post compliance reports by auditors of some stripe purportedly showing their compliance (in Table 5, these are labeled as self-certified).

Table 5. Gold Refineries in the UAE
Refiner	Location	Current Accreditation	Former Accreditation
Al Etihad Gold Refinery	Dubai	Dubai Good Delivery	Not available
International Precious Metal Refiners	Sharjah	Dubai Good Delivery	Not available
Emirates Gold	Dubai	Dubai Good Delivery	Limited assurance report up to 2018
Dijllah Gold	Sharjah	Self-certified	Removed from Dubai Good Delivery status in 2018
Gold Standard	Dubai	Self-certified	Not available
Gulf Gold Refinery	Sharjah	Self-certified	Removed from Market Deliverable Brand status in 2017
Istanbul Gold Refinery Precious Metals (Dubai)	Dubai	Self-certified	Not available
Kaloti Precious Metals	Dubai	Self-certified	Removed from Dubai Good Delivery status in 2015
Al Ghurair Gold Refinery	Dubai	Self-certified	Removed from Dubai Good Delivery status in 2010
VGR Gold Refinery	Sharjah	Self-certified	Not available
Fujairah Gold	Fujairah	Self-certified	Removed from Market Deliverable Brand status in 2019
Sources: DMCC, Dubai Good Delivery Status List, https://www.dmcc.ae/application/files/4915/8729/0026/DGD_List-_Gold_Alphabetical_-Final-16-04-2020_Version_22.pdf, accessed April 18, 2020; DMCC, Market Deliverable Brand Status List, https://www.dmcc.ae/application/files/5215/7795/6905/MDB_list_-_Gold_Alphabetical_-_Final-V7.pdf, accessed April 18, 2020.

Given this patchwork of standards and the dubious practice of self-certification, the rigor of local audit processes remains questionable. In 2013, a whistleblower alleged that his then employer—international auditing firm Ernst and Young—colluded with Kaloti Jewelry International and the DMCC to conceal the sourcing of gold from high-risk or unknown sources.¹⁰ Under newly revised rules, Kaloti Jewelry International subsequently passed that audit but was later removed from the DGD list in 2015.¹¹ The firm has strongly denied media reports about these allegations, asserting that they are “full of contradictions and inaccuracies” and rejects “any implication relating to regulatory non-compliance in the gold trade.”¹² Nevertheless, in April 2020, a UK judge awarded almost $11 million in compensation to the whistleblower, finding that his former firm had breached its professional duties in its handling of the 2013 audit of Kaloti Jewelry International; Ernst and Young says it will appeal the ruling.¹³

Dubai-based refineries also frequently trade with each other, creating yet another loophole in global supply chains. This self-regulation appears to satisfy their customers. This is perhaps because, with one exception, the noncertified refineries all make it clear that they do not source mined gold.¹⁴ All of their gold, they claim, comes from jewelry, scrap, and sources within Dubai. But this likely means that these refineries only buy gold through the souk—of which most is considered laundered. For these refineries’ buyers, though, the claim appears to be enough. The identity of these buyers—for example, which firms in India or Switzerland purchase from which Dubai refineries—remains a mystery.

These problematic practices therefore beg the question: does the DMCC give false legitimacy to gold flowing through the jurisdiction from high-risk sources?

Fly by Night: How Gold Is Smuggled Into Dubai

Figure 4 shows the cumulative contribution of the most significant African sources of the UAE’s gold imports from 2008 to 2016.¹⁵ Particularly notable—in addition to the vast growth in volumes of UAE-bound gold—is the lack of any geographic pattern. Gold travels to Dubai from all regions of Africa—basically from anywhere with an airport. Gold bound for the UAE travels overwhelmingly by air.¹⁶ Most of this gold is hand carried by individual couriers, who usually carry 2–20 kilograms, with 10 kilograms being a typical parcel.¹⁷

Dubai airport is now the world’s busiest by passenger volume. Many, if not most, African capitals are serviced by direct flights to the UAE. Even better, these flights are often under five hours in duration and generally cost less than $500, meaning a gold courier can reach Dubai in a single day’s travel for the cost of approximately 10–12 grams of gold. The UAE’s geographical position and extensive air links to Africa are one of Dubai’s legitimate competitive advantages in the gold trade.

The UAE’s laissez-faire customs process is a second, somewhat less legitimate, competitive advantage. As noted above, most gold is hand carried to the UAE by air. Gold couriers, like other air passengers, are subject to security screening, including x-rays, which make gold ingots exceedingly obvious. Given this, African nations that serve as export points for gold would seem to be in a position to enforce their export laws and regulations, particularly those pertaining to royalties. And yet the opposite appears to be the case.

The UAE’s laissez-faire customs process is a second, somewhat less legitimate, competitive advantage.

Figure 5 compares the volumes of gold legally declared and exported from the eleven nations of the International Conference on the Great Lakes Region (ICGLR) (blue columns) with the volumes of gold arriving in the UAE from these same nations (red columns).¹⁸ According to the results shown, the price of gold quadrupled between 2003 and 2011 from some $12 per gram to over $50 per gram, and the volume of gold imported to the UAE (red columns) shot up in tandem from some 4 tons in 2003 to more than 28 tons in 2011. Mysteriously, however, gold legally declared and exported from these same countries declined precipitously year over year during that same period.

The difference between the blue and red columns—in other words, the volume of gold legally exported and the volume of gold arriving in Dubai—represents the volume of gold smuggled from these nations to Dubai. In 2011, the difference amounted to some 22.5 tons, or $1.1 billion dollars in smuggled gold. Assuming an export royalty rate of just 2 percent, this represents a tax loss to these countries of about $22.5 million per year.

This figure illustrates African exporters’ increasing expertise at evading export controls. While techniques vary from one country to another, the need to pass gold through airport x-ray machines depends on some sort of arrangement with the airport security staff at the exporting airport. Several gold couriers who regularly make the trip from Bunia in the DRC to Entebbe in Uganda and then on to Dubai informed the author that these arrangements are put in place beforehand by the courier’s boss, who deals with officials at a higher level than frontline airport security staff. The couriers reported that x-ray machines at Entebbe airport have indeed detected their gold, but the gold was subsequently passed on to a supervisor who then facilitated the couriers’ passage (and the gold) through to the airport departure lounge.¹⁹ These couriers were not privy to the details of whatever financial arrangements might have been made to facilitate this passage.²⁰

Once past security and on the plane, all need for deception is past. On arrival in the UAE, couriers declare their gold to customs authorities (there is no tax) and fill out and sign a gold import form, listing, among other things, an unverified self-reported claim about the gold’s country of origin. Sometimes couriers are asked to show their boarding pass as proof of the gold’s origin, but this is rare.²¹ Form in hand, couriers are free to sell the gold wherever they want in Dubai or elsewhere in the UAE. Typically, the gold is sold in the Dubai gold souk. As noted above, souk dealers record these purchases as scrap gold, which provides a suitable paper trail for selling this gold on to one of Dubai’s gold refineries.

Dubai: A Smuggler’s Gateway?

Dubai’s role as a financial center and its lax regulation of the gold trade, favorable geographic position between Asia and Africa, and access to free trade zones have all contributed to Dubai’s growing reputation as a node of corruption. This is evidenced by the increasing crossover of smuggling, gold laundering, and TBML activities involving Africa and Dubai. Gold is smuggled to Dubai, and the profits are used to purchase goods for import to Africa (often after being misinvoiced) and then sold for a profit, creating double the opportunity to raise illicit funds. Globalization is exacerbating the problem, as many countries are struggling to update regulations in line with the exponential growth of global trade.

Meanwhile, free trade zones help criminal actors take advantage of the regulatory loopholes. A 2010 FATF study identified a number of endemic weaknesses that make free trade zones vulnerable to money laundering, including relaxed oversight, lack of transparency, absence of trade data, and limited systems integration.²² Dubai’s gold-oriented free trade zones are thriving; in 2018, the DMCC welcomed 1,868 new companies to its zone, marking a 12 percent growth.²³ Gold traders use the hawala system extensively for the purposes of TBML.²⁴ The hawala system is a centuries-old informal financial system that allows money to transit countries without currency actually moving, usually by linking money flows with the import and export of goods. A combination of loosely regulated gold imports, poor oversight of free trade zones, trade misinvoicing, and the flow of currency via informal systems like hawala are a boon to trade-based money laundering networks.

The hawala system is a centuries-old informal financial system that allows money to transit countries without currency actually moving, usually by linking money flows with the import and export of goods.

Dubai’s illicit and licit traders alike also enjoy favorable tax rates. In 2017, the UAE levied a 5 percent value-added tax on gold and diamonds at the wholesale level. However, after gold traders subsequently had their worst months ever—reported sales fell 30 to 40 percent from the year before—the UAE rolled back the tax in 2018, restoring Dubai as a leader in global gold trading.²⁵

Negative Impacts of the Illegal Gold Trade

Numerous harmful impacts stem from the illegal gold trade, which is heavily facilitated by how easy it is to launder gold through Dubai. In particular, protection economies—where the state, businesses, community actors, and organized crime are all interlinked and use corruption and violence to secure illicit rents—are especially problematic. They undermine the rule of law, stability, and security. Corruption is nearly ubiquitous in the ASGM space, but violence can also be found, often in some combination with corruption.

Unsurprisingly, corruption at the highest levels inflicts the most damage to governance and rule of law. Politicians may use proceeds of gold-related corruption to fortify political patronage, thereby securing power and the ability to continue to profit from the gold trade. For example, in Zimbabwe, the benefits of ASGM are not just enjoyed by high-level members of Zimbabwe’s ruling party but are also allocated to its core supporters. The result is a mutually beneficial relationship, with politicians seeking to gain the support of AGSM operators. This prevents members of the opposition party from engaging in the ASGM sector. This has a particularly strong impact in Zimbabwe, where gold is an important sector of the economy and few comparable alternative livelihoods exist, forcing individuals to support the ruling party in order to eke out a livelihood. High rates of corruption enable actors to exploit the gold sector with impunity and make it difficult for interventions, such as those aimed at formalization, to penetrate the ASGM sector.²⁶

There is also evidence of gold being sold either indirectly or directly via Dubai, contributing to insecurity and conflict in Africa. This benefits conflict actors in the region, many of whom are increasingly profit-motivated rather than ideologically driven. Persistent insecurity spurred on by these armed groups enables them to continue to profit from illegal activities—including the illicit gold trade—unimpeded. Thus, because it is easy for conflict actors to move gold to and find buyers in Dubai, the trade continues to contribute to insecurity and conflict. For example, there is evidence of direct illicit gold trade between Sudan and the DRC and Dubai. In the DRC, numerous reports by the UN Group of Experts find that ASGM provides the most significant and continual financial benefit to DRC-based armed groups and organized criminal networks. They have also identified the central players responsible for the organized smuggling of Congolese gold to Dubai. But these players continue to export gold without the imposition of administrative or legal sanctions by either the exporting countries or Dubai.²⁷

Likewise, since 2011, ASGM has been closely linked to conflict and competition for illicit rents in the Darfur region of Sudan. In 2016, the UN Group of Experts estimated that the Jebel Amir mines—Darfur’s largest gold field—were yielding 8,571 kilograms of gold per year, valued at $422 million. Today, the gold mines are controlled by Mohamed Hamdan Dagolo (“Hemeti”), deputy chairman of Sudan’s ruling Sovereignty Council. Investigative journalists found that a minimum of 57 tons of gold were exported from Sudan to Dubai during 2012. The mined gold was reportedly classified as scrap gold to disguise the high-risk source of the mineral.²⁸

Policy and Enforcement Remedies

Dubai is entitled to be a major world gold hub. The emirate’s ideal geographical location, excellent access via air, and competitive marketplace allow its gold dealers to offer higher prices and faster turnarounds—to the benefit of both buyers and sellers.

However, Dubai’s role in the global gold trade is problematic due to Emirati authorities’ lackadaisical approach toward traders’ due diligence and responsible sourcing obligations. Without requiring any kind of export license or certificate of origin for hand carried parcels, the UAE has essentially allowed gold smugglers to try and avoid legitimate government royalties or export taxes. As a direct result, smuggling of African gold has become the norm, not the exception, depriving African nations of millions of dollars of needed revenue.

The UAE’s lax due diligence policies have also made Dubai the destination of choice for African exporters looking to launder conflict gold.

The UAE’s lax due diligence policies have also made Dubai the destination of choice for African exporters looking to launder conflict gold. These include armed groups from the DRC, Sudan, and, to some extent, the Central African Republic and the Sahelian countries. This, in turn, has unnecessarily exacerbated or prolonged a number of African civil conflicts.

Fortunately, feasible technical measures exist to address these problems:

• To deter smuggling, the UAE could demand that couriers hand carrying gold produce legitimate export documents (export licenses, certificates of origin) and proof of payment of export taxes/royalties from the purported country of export.
• To deter the laundering of conflict gold, the UAE and Dubai authorities could work with African nations—particularly ICGLR countries—to develop a system that requires mineral exports to have a certification attesting to their conflict-free status.
• To further deter the illicit gold trade, the UK and United States could impose discretionary travel and financial sanctions on those Dubai-based businesses and individuals that facilitate it.
• To foster the adoption and implementation of the OECD due diligence standards, Dubai could demand that refineries adhere to the DGD standard as a condition of operation.
• To discourage laundering of smuggled and conflict gold through the Dubai souk, the DMCC or another appropriate Dubai authority could develop an OECD-type system of due diligence for souk dealers and insist on its adoption as a condition of operation.

Most of these technical measures would be relatively easy for UAE authorities (for example, customs departments and the DMCC) to implement. What is lacking is the political will to attempt them. Numerous entities, ranging from nongovernmental organizations to the OECD, have tried to constructively engage UAE and Dubai authorities on these issues, with limited to no effect.

The reasons for the UAE’s reticence to take action are not entirely clear. Certainly, the current laissez-faire model is working, if gold volumes are the yardstick. But a UAE that insists that exporters pay taxes and that importers perform due diligence would still be a UAE with comparative advantages, including its geographical location, access via air, and established marketplace.

Unfortunately, UAE authorities appear untroubled by the fact that Dubai has become a major hub for laundering ASGM gold. Instead of becoming a responsible member of the world’s gold community, the UAE is essentially facilitating tax evasion and indirectly perpetuating conflict within its supplier countries. Disabusing the UAE of its current business strategy ultimately will require some degree of external pressure.

Notes

¹ Figures in this section are drawn from the UN Comtrade Database. Gold here refers to HS code 7108, including its three sub-components: 710811, 710812, and 710813. For most countries, the bulk of the traded gold falls into the 710812 categories. The United Kingdom, however, classifies the bulk of its gold imports under 710813. Using the global 7108 category captures all of this trade.  

² “Our Gold Services,” Dubai Multi Commodities Centre (DMCC), https://www.dmcc.ae/gateway-to-trade/commodities/gold.

³ Chief among these are the OECD Due Diligence Guidance for Responsible Mineral Supply Chains, the measures outlined in Section 1502 of the U.S. Dodd-Frank Act, the Responsible Jewelry Council Certification Standards, the Conflict-Free Standard of the World Gold Council, and the Responsible Gold Guidance of the London Bullion Market Association.

⁴ Hunter, “Pulling at Golden Webs.”

⁵ This is for hand-carried gold. For air-freighted gold, four documents are required: an import declaration, airway bill, delivery order, and original invoice. None of these, however, is an export permit or certificate of origin; in any case, most gold is now hand carried. See Alan Martin and Bernard Taylor, “All That Glitters Is Not Gold: Dubai, Congo, and the Illicit Trade of Conflict Minerals,” Partnership Africa Canada, May 1, 2014, 14, https://www.africaportal.org/publications/all-that-glitters-is-not-gold-dubai-congo-and-the-illicit-trade-of-conflict-minerals/.

⁶ Shawn Blore, “Contraband Gold in the Great Lakes Region: In-Region Cross-Border Gold Flows Versus Out-Region Smuggling,” Partnership Africa Canada, May 2015, 27, https://impacttransform.org/wp-content/uploads/2017/09/2015-May-Contraband-Gold-in-the-Great-Lakes-Region-In-Region-Cross-Border-Gold-Flows-Versus-Out-Region-Smuggling.pdf.

⁷ Ibid., 28.

⁸ “City of Gold: Why Dubai’s First Conflict Gold Audit Never Saw the Light of Day,” Global Witness, February 2014, http://www.globalwitness.org/sites/default/files/library/dubai_gold_layout_lr.pdf.

⁹ “Accreditation Initiatives,” Dubai Multi Commodities Centre (DMCC), https://www.dmcc.ae/gateway-to-trade/commodities/gold/accreditation-initiatives.

¹⁰ According to Global Witness, “Kaloti Jewellery International DMCC (KJI) and Kaloti Jewellers Factory Ltd (the refinery) are subsidiaries of the Kaloti Group. KJI is responsible for the management of all aspects of the physical precious metals business in the UAE.” See Global Witness, “City of Gold”; and Martin and Taylor, “All That Glitters Is Not Gold.”

¹¹ “Active Dubai Good Delivery Members,” Dubai Multi Commodities Centre, https://www.dmcc.ae/application/files/3615/6259/4701/DGD_List-_Gold_Alphabetical_-Final-07-07-2019_Version_18.pdf, accessed February 24, 2020.

¹² “Kaloti Response to Media Reports,” Kaloti Precious Metals, undated, http://www.kalotipm.com/Media-Center-PressReleases-Details/13/KALOTI--RESPONSE-TO-MEDIA-REPORTS.

¹³ Jane Croft and Tabby Kinder, “EY Ordered to Pay $10m to Dubai Whistleblower,” Financial Times, April 17, 2020, https://www.ft.com/content/ff29cc66-d77b-472e-bf5f-fb364e82333a.

¹⁴ The exception, Kaloti, admits it sources gold dore from mined sources worldwide.

¹⁵ Hunter, “Pulling at Golden Webs.”

¹⁶ Hunter, “Pulling at Golden Webs”; and Blore, “Contraband Gold in the Great Lakes Region,” 22.

¹⁷ Blore, “Contraband Gold in the Great Lakes Region,” 22. Air freight was in common use, at least from Entebbe airport, until one trader had over 14 kilograms of gold stolen from a Dubai-bound air freight container. Since then, traders in East Africa have largely relied on hand carrying gold. Author communication with a Kampala gold trader, Kampala, September 2014.

¹⁸ Blore, “Contraband Gold in the Great Lakes Region,” 22.

¹⁹ Author communication with Bunia gold couriers, Bunia, May 2015.

²⁰ A supervisor for Aviation Security claims that security staff regularly detect gold in small amounts (1–5 kilograms) and that gold that is not declared is seized. However, he could provide no corroborating data on gold seizures. This supervisor also admitted that collusion with gold smugglers does sometimes occur but that management was working to eliminate this problem. Author communication with an aviation security official, Entebbe Airport, September 2014. See also Gregory Mthembu-Salter, “Baseline Study Four: Gold Trading and Export in Kampala, Uganda,” OECD, May 2015, https://www.oecd.org/daf/inv/mne/Gold-Baseline-Study-4.pdf.

²¹ Author communication with Bunia gold couriers, Bunia, May 2015.

²² “Money Laundering Vulnerabilities of Free Trade Zones,” 15–17.

²³ “DMCC Has Welcomed 1,868 New Companies to Its Free Zone in 2018,” Gulf News, June 23, 2019, https://gulfnews.com/business/dmcc-has-welcomed-1868-new-companies-to-its-free-zone-in-2018-1.64790921.

²⁴ Shedrofsky, “Remittances and Trade-Based Money Laundering.”

²⁵ Manoj Nair, “VAT Charges Removed on Gold at Wholesale Level,” Gulf News, May 1, 2018, https://gulfnews.com/business/vat-charges-removed-on-gold-at-wholesale-level-1.2214957.

²⁶ Hunter, “Pulling at Golden Webs.”

²⁷ Ibid.

²⁸ Ibid.

In Dubai, weak regulation, poor enforcement, and relatively high levels of secrecy and anonymity create a welcoming environment for global kleptocrats, money launderers, and other illicit entrepreneurs seeking to hide ill-gotten earnings. With global pressure for stricter enforcement on the rise, UAE authorities recently introduced new laws and regulations on beneficial ownership and customer due diligence disclosure. The effectiveness of these measures will depend on the strength of enforcement, especially in the UAE’s free trade zones where—as described in Chapter 3—the extent and effectiveness of enforcement varies widely from one zone to the next.

In 2020, amid numerous public disclosures of misuse of the global financial system by criminal syndicates, terrorism financiers, kleptocrats, and other illicit actors, the intergovernmental Financial Action Task Force (FATF) delivered the results of the UAE’s second mutual evaluation conducted in 2019. Public pressure for states to align their anti–money laundering, financial transparency, and tax policies with international norms is currently at an apex. Transparency advocates have long called for the public disclosure of ultimate beneficial owners, as well as rigorous policing of corporate ownership vehicles such as shell corporations, trusts, and nominee companies. In 2018, partly in anticipation of the FATF evaluation, UAE authorities introduced a new anti–money laundering and counterterrorism finance (AML/CTF) law that aims to expand and strengthen beneficial ownership and customer due diligence requirements, including by aligning some of its existing standards with FATF standards.¹ According to the FATF’s findings, however, major or fundamental improvements are still required in ten of the eleven areas it assessed. Nevertheless, the task force acknowledged the UAE’s 2018 legal reforms and that insufficient time has passed for their full implementation and thus put the UAE under a year-long observation.² At the year’s end, should the FATF deem the UAE’s progress “insufficient to address its strategic deficiencies,” it will develop an action plan to address the deficiencies and consider requiring enhanced due diligence for financial transactions with the UAE or even eventual blacklisting.³

Some of the newly created compliance and enforcement measures now apply to both financial institutions—the more traditional targets for anti­–money laundering and counterterrorism finance scrutiny—and nonfinancial service providers, such as lawyers, real estate brokers, and precious metal dealers. This is because various monitoring bodies—including the Middle East and North Africa Financial Action Task Force, which coordinates anti–money laundering and counterterrorism finance efforts regionally—have formally identified these providers as designated nonfinancial businesses and professions (DNFBPs) and recognized them as potential gateways for illicit financial flows.⁴ In 2008, FATF evaluators had found that DNFBPs in the UAE were at a heightened risk of money laundering and terrorism finance due to the heavy use of cash transactions, the increase in foreign investment, and the overall allure of the country’s luxury markets.⁵

While it is unclear how much illicit finance transited through Dubai’s real estate market in the pre-2018 period, the 2019 FATF evaluation found it was too early to accurately measure the impact of the UAE’s 2018 AML/CTF law on beneficial ownership declarations in real estate and on DNFBPs throughout the country more generally. It will take yet more time to assess whether the new law has had a broader deterrent effect on illicit financial flows. While beneficial ownership disclosures are not a panacea for disrupting illicit flows through DNFBPs, they do lower the existing discovery barrier and raise the risk of public disclosure and noncompliance penalties. These deterrent effects may be further enhanced by making beneficial registries fully transparent and publicly accessible—something not addressed by the UAE’s 2018 law.

The Allure of International Trade and Finance Hubs

Since the universe of global illicit actors is vast, diverse, and increasingly dispersed, global kleptocrats, terrorism financiers, and weapons proliferators often operate across borders and in concert with other criminal groups, high-end money launderers, and other financial facilitators. This illicit ecosystem generates millions in black and gray revenues—earnings that must be laundered before they can enter the licit financial system. As a result, many of these criminal actors gravitate to international trade and financial hubs, where weak financial regulation, low transparency standards, and stable investment vehicles (from luxury real estate to precious metals) create attractive opportunities.

Illicit actors’ attraction to the world’s foremost financial and commercial trade centers is age-old. As demonstrated by the 2015 Panama Papers, illicit actors often flock to tax and financial havens to operate beyond the scrutiny of enforcement agencies.⁶ And in the five years since the Panama Papers’ release, public disclosures on illicit schemes and activities have erupted into the public consciousness. Other investigative organizations, such as Transparency International, the International Consortium of Investigative Journalists, and the Organized Crime and Corruption Reporting Project, have documented similar illicit capital flows to other metropolitan capitals and financial hubs, including Hong Kong, London, New York, Singapore, Toronto, and Vancouver.⁷

The most vulnerable jurisdictions offer vibrant banking systems, generous tax incentives, low commercial trade barriers, and accommodations and inducements designed to attract foreign investments.

While locations and jurisdictions have varied, each new report highlights a set of characteristics and vulnerabilities that make some financial and commercial capitals more susceptible to criminal and illicit infiltration than others.⁸ The most vulnerable jurisdictions offer vibrant banking systems, generous tax incentives, low commercial trade barriers, and accommodations and inducements designed to attract foreign investments. Such jurisdictions are also plagued by low transparency standards that allow foreign investors to purchase or hold real property, establish trading companies, and conduct business and financial transactions without declaring the origin of their finances and/or the beneficial owners of their investments. These benefits also facilitate the use of anonymous ownership vehicles—shell corporations and shelf companies, trusts, nominee companies, and service providers—all of which can hide illicit investments from regulators, enforcement agencies, and the general public.

Illicit Investments Through Nontraditional Financial Sectors

Public attention on illicit financial flows has historically targeted the misconduct of financial sector entities, including banks, money exchange companies, and financial service companies. As a result, these entities have been subject to the greatest amount of scrutiny by government regulators and transparency advocates, while the equally important activities of nonfinancial businesses and professions have flown largely under the radar.

As the timeline in Table 6 demonstrates, though the UAE began to open up its markets in the 1970s, its compliance with AML/CTF standards lagged. In the UAE’s 2008 mutual evaluation, FATF assessors found that domestic authorities lacked specific anti–money laundering requirements for each type of nonfinancial business and profession.⁹ Evaluators also found that many of these providers were unaware of the requirements, while others were not captured by the current AML/CTF law.¹⁰ This mismatch in expectations and requirements, as well as the UAE’s overlapping jurisdictional arrangements, complicated any enforcement efforts.¹¹ The FATF highlighted many of these same shortcomings in its 2020 evaluation. For instance, outside of free trade zones, the FATF noted that there was “very limited activity” for supervision beyond some initial registration of DNFBP entities, and the UAE was not due to have its supervisory regime in place before 2021. Its evaluation also noted a lack of basic knowledge of beneficial ownership registration and other obligations to combat money laundering and terrorism financing and that the UAE’s various competing corporate registries led to confusion and “regulatory arbitrage.”¹²

In 2012, the FATF formally classified these types of providers as DNFBPs and recognized the particular risks they pose. The task force added new recommendations to its 2012 plenary report, which was last updated in June 2019.¹³ Thus, since 2012, the task force has applied the same AML/CTF requirements to both financial sector entities and DNFBPs.¹⁴

Table 6. Timeline of Dubai’s Anti–Money Laundering and Counterterrorism Finance Laws and Regulations
1971	The UAE is formed after the emirates receive independence from Great Britain; by convention, the ruler of Dubai holds the position of vice president and prime minister of the UAE.
1975	Dubai allows offshore banking, but significant banking does not take off there until the 1990s.
1979	Dubai sets up its first free zone, the Jebel Ali free trade zone.
1991	Dubai’s oil production peaks, forcing Dubai to focus on alternative economic sectors, including banking.
2002	In response to international pressure following the role of UAE territory in financing the September 11, 2001, terrorist attacks, UAE passes its first federal AML/CTF law.
2002	Dubai opens its real estate market to foreign ownership.
2004	The Dubai International Financial Center financial free zone opens.
2004	The UAE places all free trade zones subject to the 2002 AML/CTF legislation.
2008	The global financial crisis bursts bubbles in the finance, trade, tourism, and real estate sectors; in return for substantial financial bailouts, Abu Dhabi gains significant influence over Dubai affairs.
2008	The first FATF mutual evaluation on the UAE finds significant shortcomings in UAE’s AML/CTF standards, especially related to DNFBPs.
2010	The UAE’s Central Bank signs an agreement with the Dubai Multi Commodities Centre requiring the free trade zone to share information on financial transactions suspected of links to money laundering for the purposes of terrorism financing.
2011	The United States threatens to cut UAE-based firms from the U.S. financial system due to sanctions busting associated with Iran; the UAE begins to crack down on Iran-related transactions.
2012	The FATF formally classifies DNFBPs as AML/CTF risks and applies the same financial standards to financial and nonfinancial entities.
2014	The UAE passes a new AML/CTF law that introduces the first beneficial ownership requirements, strengthens business records requirements, and requires financial institutions to confirm the source of wealth for politically exposed persons.
2018	The UAE introduces a new AML/CTF law to expand and strengthen beneficial ownership and customer due diligence requirements more in line with FATF standards; it is the first time the term DNFBP officially appears in UAE law and broadens what types of nonfinancial entities fall under AML/CTF regulations.
2018	The DIFC introduces its own, more stringent, beneficial ownership standards than those of other free zones or businesses outside those zones.
2019	The UAE issues a decree to implement the 2018 UAE AML/CTF law; it adds specific requirements for DNFBPs on handling politically exposed persons, suspicious activity reports, and high-risk countries, as well as supervising foreign branches and subsidiaries and keeping better records. It also adds the regulation of corporate service providers and trusts to the UAE standards passed in 2014.
2019	The FATF updates its AML/CTF recommendations.
2019	The second FATF mutual evaluation on the UAE commences.
2020	Results of the second FATF mutual evaluation on the UAE made public; the FATF stated that improvements in ten of the eleven areas they evaluated are still insufficient and thus put the UAE under a one-year observation.

Dubai’s Risky DNFBP Sector

DNFBPs in the UAE currently include real estate agents and brokers, precious metals traders, company service providers, trust services providers, lawyers, notaries, and other independent professionals that support the purchase and sale of real estate and commercial entities, among other services.¹⁵ These DNFBPs operate both inside and outside of commercial free trade zones. Though UAE authorities failed to provide the exact breakdown of where DNFBPs operate at the time of the 2008 FATF evaluation, the 2020 report documented a total of 28,144 DNFBPs. The bulk of these—20,485—operated outside of free zones, while 181 were registered in financial free zones. The remainder did business in one of the UAE’s other free zones.¹⁶ Because the total number of commercial free zones has grown from twenty-three in 2013 to twenty-nine in 2019, it is likely that the number of DNFBPs in Dubai has also increased.¹⁷ This expansion complicates an already-fraught enforcement environment, whereby the extent and effectiveness of enforcement varies from one free zone to the next.

In 2008, FATF evaluators identified the variation in enforcement as a substantial money laundering and terrorism finance vulnerability.¹⁸ Their evaluation found that while national anti–money laundering and counterterrorism finance laws applied universally to all businesses—whether inside or outside of free trade zones—enforcement fell to each zone’s independent regulators rather than the national bodies that administer traditional financial institutions. This split in supervisory authority created a mismatch in the level of enforcement found inside the free trade zones versus outside the zones.¹⁹

For example, in 2008, outside the free trade zones, most traditional financial institutions were being regulated by the Central Bank.²⁰ However, inside the Dubai International Finance Centre (DIFC), these traditional financial institutions were being regulated by the Dubai Financial Services Authority, the independent regulatory authority of that free zone.²¹ This allowed firms to be able to select a regulatory environment, rather than falling under universal regulation and enforcement.

The DIFC, which has its own regulatory and judicial system based on an English common law framework (including laws and regulations written in English), abides more closely to international standards than many areas outside of the DIFC. DNFBPs outside the DIFC were, at the time, only subject to the UAE’s 2002 AML/CTF law, which fell short of existing FATF recommendations on beneficial ownership requirements and enforcement measures. ²² These businesses were therefore operating under a lower compliance threshold than those inside the DIFC, thereby heightening the risk of money laundering and terrorism finance.²³ While this mismatch was reportedly addressed by the 2018 AML/CTF law, DNFBPs in the intervening period were potentially vulnerable to illicit financial infiltration.²⁴ The 2008 and 2020 FATF evaluations cited the heavy use of cash in the UAE generally—and in the DNFBP sector specifically—as a money laundering and terrorism finance risk.²⁵

While supervision within free zones—such as the DIFC [Dubai International Finance Centre] financial free zone—seems to have improved, oversight outside of those zones has been minimal at best.

Unfortunately, the 2020 evaluation cited similar problems. While supervision within free zones—such as the DIFC financial free zone—seems to have improved, oversight outside of those zones has been minimal at best. As the report noted, though checks completed by financial institutions are “comprehensive,” for DNFBPs, “outside of the [financial free zones] and [commercial free zones] these controls are not particularly comprehensive or not yet fully in place, and do not adequately address the issue of foreign directors, shareholders, or beneficial owners.”²⁶ Given these regulatory shortfalls outside free zones—where the bulk of DNFBPs are located—significant vulnerabilities to illicit activity remain.

Post-2008 Changes to DNFBP Regulation

Since its 2008 FATF evaluation, the UAE has passed new AML/CTF laws in 2014 and 2018.²⁷ Both laws introduced new beneficial ownership and DNFBP requirements. They redefined and expanded money laundering definitions and predicate offenses (crimes that are components of more serious criminal offenses) and also increased incarceration and financial penalties for offenders.²⁸ The 2014 law introduced beneficial ownership requirements for the first time, modified customer due diligence requirements to include mandatory maintenance of records for corporate entities that own more than 5 percent of a business, and added a requirement for financial institutions to confirm the source of wealth for politically exposed persons and their families.²⁹ Prior to 2018, the term DNFBP did not appear in either the 2002 or 2014 AML/CTF laws. Both laws identified this category of actors as “other financial, commercial and economic establishments” licensed and supervised by agencies other than the Central Bank (2002 law) or those licensed by entities other than Central Bank and the Securities and Commodities Authority (2014 law).³⁰

The 2002 law had a rather limited definition of these establishments that included “insurance companies, stock exchanges, and others.” This list expanded in 2014 to include “real estate brokers, jewelry, precious metals and stone traders, lawyers, legal consultants, private notaries, and accountants.”³¹ The 2018 law expanded the definition of DNFBPs and further broadened the list to include “anyone who conducts one of several of the activities or operations” identified by the 2019 cabinet decree that implemented the 2018 law.³² The decree added corporate service providers and trusts to the list and also gave the minister of finance additional discretion to designate additional professions and activities as DNFBPs.³³ The 2019 implementation decree also added specific requirements on vetting politically exposed persons, filing suspicious transaction reports, working with clients from high-risk countries, maintaining records, and supervising foreign branches and subsidiaries for both traditional financial institutions as well as DNFBPs.

While some free zones have operated in line with higher AML/CTF [anti–money laundering and counterterrorism finance] standards, other free zones, as well as entities outside of these zones, have not.

A surface-level assessment of the 2019 decree suggests that if implemented and enforced, the new regulations would eliminate any compliance gaps between traditional financial institutions and DNFBPs. The regulations seem to align the UAE’s 2018 AML/CTF framework with existing FATF requirements and were likely subject to scrutiny as part of the 2019 evaluation. The regulations appear to raise the minimum compliance threshold for all entities operating inside and outside of the free trade zones.³⁴ While some free zones have operated in line with higher AML/CTF standards, other free zones, as well as entities outside of these zones, have not. With the new standards established by the 2018 national law, all businesses must now operate at a higher compliance threshold than has existed before. Nonetheless, because the FATF could not adequately assess implementation of the 2018 regulations, it is unclear whether enforcement gaps within free zones require further reform.

Post-2008 Changes to Ultimate Beneficial Ownership

The 2014 and 2018 laws include slightly different definitions of a beneficial owner. The 2014 law refers to the ultimate beneficial owner as a “real beneficiary” and defines that actor as a “natural person in actual control of the client or performs transactions on his behalf, including the person that actually controls a corporate person or legal arrangement.”³⁵ Both the 2014 and 2018 standards emphasize the centrality of a natural person—in other words, an actual individual—as a beneficial owner as opposed to a legal person, which could be a business entity, nongovernmental organization, or public body.³⁶ The 2018 law does not, however, further define “effective ultimate control” and may therefore allow free trade zones to determine their own standards. Some zones, such as the DIFC and the Dubai Creative Clusters Authority, appear to have independent regulations that modify the national beneficial ownership standard.³⁷

The DIFC is one of the more regulated free zones in the UAE and has at least ten independent regulatory and judicial authorities and at least twenty-seven different laws and regulations that govern operations therein. In November 2018, the DIFC enacted its own beneficial ownership regulations requiring that each “registered person” within the DIFC maintain a beneficial ownership register and that entities with one or more nominee directors maintain a Register of Nominee Directors.³⁸ The new DIFC regulation modified the 2018 ultimate beneficial ownership definition to include natural persons with 25 percent ownership or voting rights, as well as the authority to appoint or remove a majority of directors.³⁹ While some exemptions exist for some foreign companies, nonprofit organizations, and government-run entities, the DIFC’s beneficial ownership standards appear to go beyond the national requirements set by the 2018 law.

The [Financial Action Task Force’s] placement of the UAE under a one-year observation will heighten international scrutiny on the nation—and Dubai specifically.

It is, however, currently unclear whether the other free zones will alter and implement their own versions of beneficial ownership requirements and whether gaps across the various free zones will continue to provide opportunities for illicit exploitation. According to the 2020 FATF evaluation, however, such opportunities will remain because the UAE still has thirty-nine different entities responsible for registering beneficial ownership in different ways. Indeed, the report specifically noted that “the risk of criminals being able to misuse legal persons in the UAE for money laundering/terror finance remains high, particularly through concealment of beneficial ownership information via complex structures, which may be controlled by unidentified third parties, or the use of informal nominees.”⁴⁰ The report’s public release and the placement of the UAE under a one-year observation will heighten international scrutiny on the nation—and Dubai specifically—until they harmonize beneficial ownership requirements and improve training and enforcement related to DNFBPs.

Conclusions

As states tighten enforcement measures around money laundering and terrorism financing through financial institutions, DNFBPs will continue to provide savvy illicit entrepreneurs with alternative avenues. And while the 2018 AML/CTF framework reduces the risk of illicit infiltration by establishing a national baseline for beneficial ownership and customer due diligence requirements, complete deterrence will require strict enforcement of these standards, especially in the free trade zones. By aligning the country’s compliance standards to FATF requirements, UAE authorities have telegraphed their willingness to confront the many challenges posed by the free movement of illicit capital through the country’s often touted commercial and financial sectors.

The UAE’s introduction of stricter beneficial ownership and customer due diligence requirements in 2014, and again in 2018, was a welcome start. However, UAE authorities should work to more closely align the regulatory frameworks of all free trade zones across the country. While some zones have, at least on paper, transparent compliance regulations and standards, many more zones operate behind a veil of secrecy. The implementation of uniform standards across all free trade zones will not only level the playing field for both existing and incoming investors but also simplify the regulatory environment as a whole. It will also help to improve transparency and reduce enforcement burdens. The UAE is now under enormous pressure to ramp up its enforcement efforts during the FATF’s one-year observation period.

Notes

¹ Tom Arnold, “UPDATE 1-UAE Passes Law to Combat Money Laundering, Terror Financing,” Reuters, October 30, 2018, https://www.reuters.com/article/emirates-lawmaking/update-1-uae-passes-law-to-combat-money-laundering-terror-financing-idUSL8N1XA2N4; and Federal Decree-law No. 20 of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Financing of Illegal Organizations.

² Cornwell, “UAE Doing Too Little to Stem Money Laundering and Terrorist Finance: Watchdog”; and “United Arab Emirates’ Measures to Combat Money Laundering and Terrorist Financing.”

³ “High-Risk and Other Monitored Jurisdictions,” accessed May 14, 2020, https://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/more/more-on-high-risk-and-non-cooperative-jurisdictions.html?hf=10&b=0&s=desc(fatf_releasedate).

⁴ “Designated Non-Financial Businesses and Professions (DNFBPs) in Relation to AML/CTF,” Middle East & North Africa Financial Action Task Force, November 10, 2008, 3–4, http://menafatf.org/sites/default/files/Newsletter/DNFBPs_in_relation_to_AMLCFT.pdf; and “Objectives,” MENAFATF, 2018, http://www.menafatf.org/about/objective.

⁵ “Mutual Evaluation Report: Anti-Money Laundering and Combating the Financing of Terrorism—United Arab Emirates,” FATF and MENAFATF, April 9, 2008, 47, http://www.fatf-gafi.org/media/fatf/documents/reports/mer/MER%20UAE%20full.pdf.

⁶ “The Panama Papers: Exposing the Rogue Offshore Finance Industry,” International Consortium of Investigative Journalists, 2019, https://www.icij.org/investigations/panama-papers/.

⁷ “No Reason to Hide: Unmasking the Anonymous Owners of Canadian Companies and Trusts,” Transparency International Canada, 2016, https://www.yumpu.com/en/document/read/58031165/no-reason-to-hide/5; “Opacity: Why Criminals Love Canadian Real Estate (And How to Fix It),” Transparency International Canada, 2019, https://www.readkong.com/page/opacity-why-criminals-love-canadian-real-estate-9000884?p=1; Caroline Binham “UK Money Laundering Reports Hit Record Level in 2018,” Financial Times, January 10, 2019, https://www.ft.com/content/15aebf9e-0548-11e9-99df-6183d3002ee1; and “Towers of Secrecy: Piercing the Shell Companies,” New York Times, 2019, https://www.nytimes.com/news-event/shell-company-towers-of-secrecy-real-estate.

⁸ Alison Fitzgerald and Marina Walker Guevara, “New Leak Reveals Luxembourg Tax Deals for Disney, Koch Brothers Empire,” International Consortium of Investigative Journalists, December 9, 2014, https://www.icij.org/investigations/luxembourg-leaks/.

⁹ “Mutual Evaluation Report: Anti-Money Laundering and Combating the Financing of Terrorism—United Arab Emirates,” paragraph 22.

¹⁰ Ibid.

¹¹ Ibid., paragraph 9.

¹² “Anti-Money Laundering and Counter-Terrorist Financing Measures: United Arab Emirates Mutual Evaluation Report,” 5, 10.

¹³ “International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation: The FATF Recommendations,” Financial Action Task Force, June 2019, https://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf.

¹⁴ Ibid. According to the 2019 update to the FATF International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation, DNFBPs are required to comply to FATF recommendations 10, 11, 12, 15, 17, 18, 19, 20, and 21—all of which apply to traditional financial service providers.

¹⁵ “Cabinet Decision No. (10) of 2019 Concerning the Implementing Regulation of Decree Law No. (20) of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Illegal Organisations,” Central Bank of United Arab Emirates, February 10, 2019, 7–8, https://www.centralbank.ae/sites/default/files/2019-07/Cabinet%20Decision%20No%20%20%2810%29%20of%202019%20CONCERNING%20THE%20IMPLEMENTING%20REGULATION%20%20%20.pdf.

¹⁶ “Mutual Evaluation Report: Anti-Money Laundering and Combating the Financing of Terrorism—United Arab Emirates,” paragraph 49; and “Anti-Money Laundering and Counter-Terrorist Financing Measures: United Arab Emirates Mutual Evaluation Report,” 32.

¹⁷ “Free Zones in the UAE 2018,” PKF International, 2018, https://www.pkf.com/media/10038961/free-zones-v5-digital.pdf; and M Hazem Shayah and Yang Qifeng, “Development of Free Zones in United Arab Emirates,” Proceedings of the First Middle East Conference on Global Business, Economics, Finance and Banking, October 2014, 5.

¹⁸ “Mutual Evaluation Report: Anti-Money Laundering and Combating the Financing of Terrorism—United Arab Emirates.”

¹⁹ Ibid., paragraph 14.

²⁰ Ibid., paragraph 13.

²¹ The Dubai Financial Services Authority is an integrated regulator responsible for the authorization, licensing, and registration of institutions and individuals who wish to conduct financial and professional services in or from the Dubai International Finance Centre.

²² “Cabinet Resolution No. 38 of 2014 Concerning the Executive Regulation of Federal Law No.4 of 2002 Concerning Anti-Money Laundering and Combating Terrorism Financing,” Federal Reserve Cabinet United Arab Emirates, 2014,

https://www.adgm.com/-/media/project/adgm/operating-in-adgm/financial-crime-prevention-unit/aml-tab/05-eng-cabinet-resolution-no-38-2014-concerning-the-executive-regula.pdf.

²³ FATF evaluators reported that “AML/CFT regulation or guidance had been issued for DNFBPs operating in the commercial FTZs [outside the DIFC] at the time of the evaluation mission. See “Mutual Evaluation Report: Anti-Money Laundering and Combating the Financing of Terrorism—United Arab Emirates,” paragraph 514.

²⁴ “Federal Decree-law No. (20) of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Financing of Illegal Organisations,” United Arab Emirates, 2018, https://www.mof.gov.ae/en/lawsAndPolitics/govLaws/Documents/EN%20Final%20AML%20Law-%20Reviewed%20MS%2021-11-2018.pdf.

²⁵ “Mutual Evaluation Report: Anti-Money Laundering and Combating the Financing of Terrorism—United Arab Emirates,” paragraph 47.

²⁶ “Anti-Money Laundering and Counter-Terrorist Financing Measures: United States Mutual Evaluation Report,” 11.

²⁷ “Federal Law no. (7) of 2014 on Combating Terrorism Offences; Federal Decree-law No. (20) of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Financing of Illegal Organizations,” United Arab Emirates, 2018, https://www.mof.gov.ae/en/lawsAndPolitics/govLaws/Documents/EN%20Final%20AML%20Law-%20Reviewed%20MS%2021-11-2018.pdf; and “The Updated UAE Federal Anti-Money Laundering Framework,” Briefing Note, Clifford Chance, May 2015, 1, https://financialmarketstoolkit.cliffordchance.com/content/dam/cliffordchance/briefings/2015/05/the-updated-uae-federal-antimoney-laundering-framework.pdf.

²⁸ Predicate offenses are crimes underlying money laundering and terrorist finance activity; drug-related crimes, for instance, are predicate offenses. See “Cabinet Resolution No. 38 of 2014, concerning the Executive Regulation of Federal Law No.4 of 2002 Concerning Anti-Money Laundering and Combating Terrorism Financing”; “Federal Law no. (7) of 2014 on Combating Terrorism Offences,” 2014, https://www.ilo.org/dyn/natlex/docs/ELECTRONIC/98658/117474/F399649256/LNME-FED-LAW-7-2014.pdf; and “Federal Decree-law No. (20) of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Financing of Illegal Organizations.”

²⁹ Politically exposed persons (PEPs) are those entrusted with a prominent public function and are thereby at higher risk for potential involvement in corruption by virtue of their position and/or influence. PEPs include senior government leaders and their families, for example. The introduction of this report highlights a number of PEPs with significant financial and other holdings in Dubai, including Isabel dos Santos and Dan Etete; “Cabinet Resolution No. 38 of 2014, Concerning the Executive Regulation of Federal Law No.4 of 2002 Concerning Anti-Money Laundering and Combating Terrorism Financing,” 2014, articles 4 and 5, https://www.adgm.com/-/media/project/adgm/operating-in-adgm/financial-crime-prevention-unit/aml-tab/05-eng-cabinet-resolution-no-38-2014-concerning-the-executive-regula.pdf.

³⁰ “Federal Law No- (4) of 2002 Regarding Criminalization of Money Laundering,” United Arab Emirates, 2002, https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/dmea5-4.pdf; and “Cabinet Resolution No. 38 of 2014, Concerning the Executive Regulation of Federal Law No.4 of 2002 Concerning Anti-Money Laundering and Combating Terrorism Financing,” article 5.

³¹ “Federal Law No- (4) of 2002 Regarding Criminalization of Money Laundering”; “Cabinet Resolution No. 38 of 2014, Concerning the Executive Regulation of Federal Law No.4 of 2002 Concerning Anti-Money Laundering and Combating Terrorism Financing,” article 5.

³² “Cabinet Decision No. (10) of 2019 Concerning the Implementing Regulation of Decree Law No. (20) of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Illegal Organisations.”

³³ Ibid.

³⁴ Ibid.

³⁵ In the 2014 AML/CTF law, a “client” is defined as “any natural or corporate person that the financial institution and other financial, commercial and economic establishments deal with, such as opening an account in the name of such person or providing as service to him”; “Cabinet Resolution No. 38 of 2014, Concerning the Executive Regulation of Federal Law No.4 of 2002 Concerning Anti-Money Laundering and Combating Terrorism Financing,” article 5.

³⁶ “Federal Decree-law No. (20) of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Financing of Illegal Organizations,” 3.

³⁷ “Circular 308: DCCA to Dubai Development Authority,” Dubai Development Authority, January 6, 2019, https://dda.gov.ae/wp-content/uploads/2019/02/308-1.pdf.

³⁸ The DIFC regulation requires that the following information is maintained as part of the Beneficial Ownership and/or Nominee Director Registry: full name, residential address, address for service of notices (if different), date and place of birth, nationality, and details of passport or government issued ID. A nominee director is a director appointed to the board of a company to represent the interests of his or her appointer on that board. The nominee director can be a shareholder, a creditor, or another stakeholder. Registering companies with nominee directors rather than with the ultimate beneficial owners of a company can be a means to ensure anonymity of the ownership of the firm.

³⁹ “Ultimate Beneficial Ownership Regulations,” Dubai International Finance Centre, November 12, 2018, https://www.difc.ae/files/7815/4200/4130/UBO_Regulations_2018.pdf.

⁴⁰ “Anti-Money Laundering and Counter-Terrorist Financing Measures: United Arab Emirates Mutual Evaluation Report,” 11.

The tightening of anti–money laundering and terrorism finance regulations across the formal international financial sector has pushed illicit actors to invest or launder their earnings in other lucrative sectors such as luxury real estate. Nowhere is this trend more visible than in some of the world’s premier commercial and financial centers, including Dubai, New York, and Vancouver, among others.

Money laundering through real estate takes place during three stages: placement, layering, and integration. During placement, the launderer invests illegally garnered funds in real estate through the construction or purchase of properties. During layering, the launderer mixes illicit and licit real estate transactions as part of a series of financial transactions that move funds across numerous jurisdictions and economic sectors, obscuring their origin. During integration, the generated paperwork supporting these transactions provides a plausible explanation for the source of funds, such as from property purchases or rent payments, allowing laundered money to appear clean.¹ This is especially true when real estate purchases are associated with anonymous shell companies, trusts, or foundations or when nominee directors are used to obscure ownership.

Kleptocrats, criminal actors, and other money launderers are able to purchase and hold properties anonymously or through other indirect ownership vehicles.

Because, as noted in Chapter 5, international standards for anti–money laundering and terrorism finance have generally focused on banks and other financial institutions, money laundering practices associated with real estate have garnered less scrutiny by anti–money laundering institutions. Even the United States has significant legal loopholes, and for that reason, it is a haven for real estate–related money laundering. Especially in the absence of enforceable beneficial ownership standards and requirements, kleptocrats, criminal actors, and other money launderers are able to purchase and hold properties anonymously or through other indirect ownership vehicles. This ultimately shields their illicit investments from public discovery. A 2016 Transparency International report found that in Canada, anonymous companies and trusts were used to funnel illicit finances into Vancouver’s property market, making beneficial owners invisible to financial regulators and law enforcement agencies.² The report found that in the absence of beneficial ownership and other strict customer due diligence requirements, illicit actors purchased and profited from luxury real estate holdings without the fear of public disclosure, seizure, or penalty.³

Real estate–related money laundering has particular advantages for the beneficiary and the host government. Foremost, the beneficiaries or their associates, such as family members, can reside in the properties. The beneficiaries can also use the properties to conduct further criminal activities. For example, properties purchased with the proceeds of narcotics crimes can be used to conduct drug processing or sales. Real estate purchases are also fairly liquid investments; a property can be sold relatively quickly, especially if the seller is willing to sell at a loss. Further, properties in other countries can become a potential safe haven for criminals or corrupt actors to flee to if required. Finally, should the beneficiary be interested in conspicuous consumption, ownership of, or residence in, luxury properties can signify “having made it” in much the same way that expensive clothing, watches, or jewelry can.⁴

For the host governments, real estate investments provide capital for urban redevelopment, additional real estate–associated tax revenue, and local jobs in construction. The capital can then be disbursed as a form of patronage. For example, favored banks can be given special privileges to profit from the investments, construction firms close to a regime can receive priority for contracts, or powerbrokers can expropriate or buy land at below market rate and resell it at higher prices.

It [real estate–related money laundering] can lead to housing bubbles, unfair land expropriation, and unaffordable prices for ordinary citizens.

Money laundering through real estate can have uniquely destabilizing effects, however. Due to revelations of incredible opulence, it can help ignite popular grievances against regimes. It can lead to housing bubbles, unfair land expropriation