Money laundering is the process of disguising illegally obtained money as legal money. This is usually done by moving funds through a series of transactions, mostly involving foreign banks, in order to conceal the true origin of the money. Anti-money laundering (AML) refers to a set of laws, regulations, and processes that are in place to prevent, detect, and report any money laundering activities. AML laws require financial institutions and designated businesses to monitor transactions and report any suspicious transactions to relevant authorities. The goal of AML regulations is to fight financial crimes, for instance, corruption, terrorism financing, and so on.
In the UAE, AML laws and regulations are mainly implemented by the Central Bank of the UAE (CBUAE). These regulations apply to a wide range of financial institutions and designated non-financial businesses and professions (DNFBPs). Failure to comply with AML laws will result not only in significant fines and penalties but also in damage to the reputation of the respective organization.
AML Laws and Regulations in the UAE: The Need for the KYC
To combat money laundering, the UAE has a broad legal framework. The first and foremost is Federal Decree-Law No. 20 of 2018, which is considered a fundamental pillar of UAE AML efforts. This law provides a legal framework for combating money laundering and terrorist financing in the UAE. According to this decree, two units are established:
1) A committee dedicated to AML, supervised by the Governor of CBUAE
2) A Financial Intelligence Unit (FIU) that is mainly responsible for receiving and investigating suspicious illicit financial activity based on the information sent by other financial institutions and corporations. The FIU receives and analyzes information related to money laundering and other financial crimes, and disseminates the relevant information.
Some other important laws and resolutions include:
These laws and resolutions have raised the effectiveness of overall AML regulation in the UAE as per the recommendations and requirements of the Financial Action Task Force (FATF). Financial institutions operating in the UAE should be aware of AML/CFT laws and regulations and ensure that their AML policies and procedures are in compliance with them.
KYC in the UAE
We know that the UAE has a robust legal framework to combat money laundering. One of the major components of this framework is the Know Your Customer (KYC) process. KYC involves the process of verifying the identity and assessing the risks of the customers with respect to money laundering. The KYC process is one of the most critical elements in preventing financial fraud and theft, so it is an important aspect of AML regulations. It usually has three parts: collecting information from customers, verifying identity, and risk profiling. Let’s discuss best practices for KYC procedures in the UAE:
Best Practices for KYC in the UAE
Collect Sufficient Information:
The first step in the KYC process is to collect sufficient information from customers. This broadly includes name, address, date of birth, and nationality. Furthermore, the institution should also collect information related to the occupation, source of funds, and purpose of the account. The institution is responsible for ensuring that the information is accurate and up-to-date.
Verify the Customer’s Identity:
The next step is to verify customers’ identities. Financial institutions and designated non-financial businesses (DNFBs) should verify the customer’s identity before opening an account and conducting any financial transactions. There are several ways to verify identities, for instance, by requesting original identity documents, performing digital identity verifications, and conducting face-to-face interviews.
Conduct Risk Assessment:
After collecting sufficient information from the customers and verifying their identities, financial institutions should perform a risk assessment. The risk profile of each customer is based on location, source of funds, and business activities. Consequently, high-risk customers are subject to enhanced due diligence processes. Moreover, continuous monitoring is required for suspicious activities.
Implement an AML Compliance Program:
Financial institutions should have a comprehensive AML compliance program in order to ensure the prevention of money laundering and terrorist financing. This includes policies and procedures for KYC, monitoring of transactions, and reporting of suspicious activities. Furthermore, there should be proper training given to employees on AML regulations so that they are aware of their obligations in this respect.
Financial institutions and DNFBPs should maintain their records and keep them for a period of not less than five years from the date of completion of the transaction or termination of the business relationship. Organizations should maintain all records, including documents and statistics, as well as local and international commercial and cash transactions, for a minimum of five years.
Regular Update KYC Information:
Apart from these practices, institutions should regularly update KYC information if there are any changes. Furthermore, they should verify the customers’ identities on a regular basis and also reassess their risk profiles if there is any change in the business activity or source of income. There is also a need to make sure that the AML compliance program is effective and make changes where necessary.
To comply with AML laws and regulations, financial institutions and DNFBPs should have effective KYC procedures in place. The foremost goal of KYC is to prevent money laundering, terrorist financing, and other financial crimes. However, there are other benefits to having best practices for KYC. For instance, institutions can avoid reputational damage through proper KYC. Furthermore, they can have a better relationship with their clients, as they know more about their customers and their business. Thus, institutions should have best practices in place for KYC.
Our Role at Creative Zone Tax Accounting:
Your goal is to grow your business, and our goal is to let you achieve that goal smoothly and timely. As a professional and experienced firm, we can assist in AML compliance programs and KYC procedures to ensure that you focus on your business. Our lines are always open for discussion; feel free to contact us.