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Are Money Laundering Concerns Preventing Investment in Gulf Countries?

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Are Money Laundering Concerns Preventing Investment in Gulf Countries?

Money laundering is a global problem, but it has been a major obstacle for Gulf countries in particular as several institutions in the UAE alone failed over the years to perform the necessary security checks to counter money laundering and the financing of terrorism.

While the Gulf takes action to enhance the procedures of banks and law firms alike, the question remains of whether the region’s financial crimes created a reputation too bad for investment to grow yet. Then again, it could just be a matter of time and marked improvement.

Money Laundering Around the World and the Gulf

The process of money laundering typically has three stages: placement, layering, and integration. But these steps aren’t always clear-cut, which can make them even harder to spot, especially when dealing with very careful criminals.

As the United Nations explains about money laundering, the stages could be combined, missing a step, or repeated several times to obscure the fraud from authorities. As a result, the global GDP sees at least $800 billion to $2 trillion laundered for illicit activities.

That’s why keeping customers and businesses safe from financial crimes requires constant vigilance and strict security measures like know your customer (KYC), customer due diligence (CDD), anti-money laundering (AML), and countering the financing of terrorism (CFT) checks.

And these efforts pay off. SEON’s article on AML toolkit explains details on what is in the best AML software around that streamlines fraud detection and prevention. This includes risk scoring, politically exposed person (PEP) checks, and data enrichment, all of which can clearly depict each customer and whether they might be involved in money laundering.

Any firm can have this level of screening from the moment a new client signs up and assess them again as necessary, but to make a whole country more reliable, dozens of institutions must apply and police such procedures.

When it comes to Gulf countries, the Basel AML Index map of global risks shows that, as of 2021, Saudi Arabia, the UAE, and Bahrain are of medium risk, scoring 5.12, 5.91, and 4.50, respectively. There is room for improvement, but the region is far from a lost cause.

With the Central Bank of the UAE (CBUAE) introducing new anti-money laundering guidelines that also combat the financing of terrorism, one of many positive moves in the Gulf, the drive for a more secure and attractive industry is gaining momentum. But is it enough to attract greater investment?

Reports of numerous convictions, huge fines, and evidence of corruption in financial institutions undermine the integrity of Gulf countries. Potential investors see them as a big risk that could muddy their legitimate activities, cost them a lot in damages, and ruin their relationships with customers and partners.

At the end of the day, the only way to improve investment in the Gulf is decisive action and concrete results that prove their new ethics and professionalism are strong and here to stay.

Initiatives Aimed to Boost Investment in Gulf Countries

Governing bodies and businesses have already taken steps to counter fraud and terrorism financing. The first major initiative was the UAE Ministry of Economy’s anti-money laundering law that came into effect in 2018.

Firms and individuals were slow to comply with Federal Decree No. (20), but a crackdown followed. In 2021, the MoE released a list of money laundering violations, which amounted to 26 cases with fines ranging from Dhs50,000 to Dhs1 million each.

If nothing else, this shows investors that Gulf countries are serious about changing their corporate atmosphere for the better. But efforts go beyond official legislation and monitoring.

There are initiatives like the Gulf Coast Anti-Money Laundering Forum that takes place every year to discuss challenges and solutions related to anything from financial fraud in cryptocurrency to managing a business and its security during and after a pandemic.

The digital world also opens doors to spread awareness and host easily accessible spaces for discussion, not to mention online forums like Creative Zone’s UAE Anti-Money Laundering and Financial Crimes Initiative.

You’ll even find training courses addressing the Gulf’s problems with financial crime, another strategy that encourages the exchange of experiences and ideas, all of which nurtures people’s understanding of fraud and how to stop it. 

Combine these opportunities with fully functional software dedicated to the prevention and detection of fraud, and the Gulf’s solid foundation for reliable trade is clear.

Available Technology Can Combat Financial Crime

In addition to investing in cybersecurity strategies to counter cyber attacks, more and more firms are specifically embracing software and hardware that help prevent money laundering and related risks.

With the support of KYC and CDD systems, for example, they can analyze users’ data and verify their identities, monitor their transactions for anything suspicious, and ensure they have no connection to criminal watchlists. 

Additional AML and CFT layers of security make it harder still for bad actors to get a foothold with fake IDs, for example. They can still slip through as their technology improves, too, but the programs above are constantly looking for signs of money laundering and terrorism financing in new and existing accounts.

Furthermore, efficient equipment, like secure computers that can handle the required software and trustworthy phones for two-step verification and video ID validation, strengthen a firm’s ability to catch financial crime before it takes root and causes damage to the business and its customers.

Improving a firm’s security with all these features is expensive and time-consuming. Yet organizations in the UAE, Saudi Arabia, and beyond are stepping up and, at the very least, meeting the demands of anti-money laundering laws. 

Concerns about financial crime in the region have been a big reason why investors hesitate to build relationships with Gulf countries and this pattern may continue for a while. Nevertheless, trade should flourish as regulations take effect, violations fall, customers feel safer, and the voices advocating a secure, crime-free economy grow in strength and number.

About the Author

Gergo Varga’s fight against fraud has been going strong since 2009. Working at various companies, he’s even co-founded a startup. He has authored the Online Fraud Prevention Guide for Dummies and hundreds of other articles and guides. Based in Budapest, Gergo enjoys reading, tech and philosophy.

From Fashion Textiles to Money Laundering

The owners of Los Angeles-based import and export textiles company, Pacific Eurotex, were sentenced to federal prison time and hefty liabilities on December 18, 2018 for their involvement with laundering money related to international drug cartels, according to a release from U.S. Immigration and Customs Enforcement.

Formally known as the “Black Market Peso Exchange” scheme, it’s known as one of the primary strategies drug cartels use to gather proceeds resulting from illicit drugs in the United States. The strategy mechanism enables drug traffickers to eventually convert proceeds into another form of currency through internationally shipped goods.

Brothers Morad and Hersel Neman (CEO and CFO) pleaded guilty to filing false tax returns in addition to other IRS and defrauding-related crimes. Both were sentenced to more than a year in federal prison with six months of home confinement thereafter. Additionally,  Morad “Ben” Neman is jointly liable with the company to forfeit $3,178,230 million to the government while CFO Hersel Neman is liable for approximately $370,000. The company faces three years of probation and a $400,000 fine.

According to court documents the textiles company, “Received, laundered and structured approximately $370,000 in bulk cash delivered on four separate occasions over 2½ months in 2013 by an undercover agent posing as a money courier.”

The arrests originally occurred in 2014 after a Fashion District investigation using the “Black Market Peso Exchange” tactic resulted in law enforcement seizing over $100 million in laundered drug money.

Source: U.S. Immigration and Customs Enforcement