2. Understanding Risks
2.1 Vulnerabilities of Cash
The FATF’s Mutual Evaluation Report of the UAE issued in April 2020 stated that, as the UAE is a cash-intensive economy and plays an important part in global trade, there are significant risks associated with the cross-border movement of cash and bearer negotiable instruments, including bulk-cash smuggling that is associated with third-party money laundering risks.
As a major medium of exchange in the UAE, cash is particularly vulnerable to abuse by illicit actors to conduct money laundering activities and finance criminal activities. The specific characteristics of cash-anonymity, interchangeability, and transportability—make it an attractive method by illicit actors seeking to conceal the proceeds of crime. Unlike other monetary instruments, such as credit cards or wire transfers, cash holds no record of its source or owner, and can be easily concealed in large quantities upon which it is difficult to trace once spent. Cash transactions are also instantaneous and widely accepted across jurisdictions.
Criminal activity—or a predicate offense—is often cash based. A predicate offense for money laundering is the underlying criminal activity that generates proceeds. Criminals then seek to “launder” these illicit proceeds, which leads to the offense of money laundering. The FATF Recommendations identify “designated categories of offenses”2 as the following:
• Participation in an organized criminal group and racketeering; • Terrorism, including financing of terrorism and illegal organisations; • Trafficking in human beings and migrant smuggling; • Sexual exploitation, including sexual exploitation of children; • Illicit trafficking in narcotic drugs and psychotropic substances; • Illicit arms trafficking; • Illicit trafficking in stolen and other goods; • Corruption and bribery; • Fraud; • Counterfeiting currency; • Counterfeiting and piracy of products; • Environmental crime; • Murder, grievous bodily injury; • Kidnapping, illegal restraint, and hostage-taking; • Robbery or theft; • Smuggling; • Tax crimes; • Extortion, Forgery; • Piracy and • Insider trading and market manipulation. However, as the FATF expects countries to include the above-mentioned list at the minimum, the UAE’s definition of Predicate Offense is broader to include any act constituting a felony or misdemeanor under the applicable laws of the UAE, whether this act is committed inside or outside the UAE when such act is punishable in both countries.
2 Available at https://www.fatf-gafi.org/glossary/d-i/
2.2 Vulnerabilities of Alternatives to Cash
Illicit actors also use various monetary instruments in conjunction with, or as a replacement to, cash. Both bearer negotiable instruments and prepaid cards for instance offer similar benefits to cash, including anonymity and accessibility. They can store large amounts of value in a compact physical size that makes them potentially vulnerable to abuse by illicit actors who use them instead of cash to make physical cross-border transportations of value. Illicit actors seeking to avoid an LFI’s identification and verification requirements can exploit the ease of payment offered by bearer negotiable instruments and prepaid cards for the purpose of moving their proceeds—thus obscuring the origin of the funds—and converting them to payments for other goods or services. This may also include obtaining funds in one jurisdiction and having access to cash withdrawals in another jurisdiction. Additional characteristics and associated vulnerabilities of bearer negotiable instruments and prepaid cards are discussed below.
2.2.1 Bearer Negotiable Instruments
Bearer negotiable instruments are financial instruments of whatever form, whether in the form of a bearer document, such as traveler’s cheques, promissory notes and cheques, payment orders, or other forms that can be attractive to illicit actors as alternatives to cash. Bearer negotiable instruments provide the opportunity to move large amounts of funds in bearer form without the bulkiness of cash. They are transferable documents that provide unconditional guarantees of cash payments either on demand or at a future date. The individual who issues a negotiable instrument is known as the ‘payer’ or ‘issuer,’ and the person who receives a negotiable instrument is known as the ‘bearer’ or ‘payee’.
Bearer negotiable instruments often include the instruction 'pay to the bearer', meaning the bearer would be the person in physical possession of the instrument. The risk, in this scenario, is that the holder is a criminal and/or not the intended payee of the negotiable instrument. Bearer negotiable instruments are also unique in that they can also be easily transferred from one party to another, which effectively obscures the paper trail on the ‘payer’ or ‘issuer’, and enables illicit actors to distance the proceeds of crime from the illegitimate source. LFIs should seek to mitigate these risks by continuing accepting cash and third party cheques as long as the due diligence measures regarding the person presenting the cheque have been duly conducted by the LFI.
2.2.2 Prepaid Cards
Prepaid cards can be used as an alternative to cash in that they provide access to funds that have been paid in advance. Funds can be claimed or transferred through an electronic device, such as through a card, code, electronic serial number, mobile identification number, or personal identification number within either an "open" or "closed" loop system:
• “Open loop” prepaid cards can be used for purchases at any merchant where that brand of the card is accepted and offers access to cash at any automated teller machine (“ATM”) that connects to the affiliated ATM network. Some prepaid cards may be reloaded, allowing the cardholder or third-party (such as an employer) to add value to the card. For example, a travel card can allow cardholders to top up at various locations, including online and at kiosks, and then allows cardholders to utilize the card to purchase local travel as well as goods or services at various participating stores.
• “Closed loop” prepaid cards generally can only be used to buy goods or services from the issuing merchant of the card or a select group of merchants that participate in that specific network. These cards generally do not allow for cash access, although they can often be re-sold through third-party websites in exchange for other closed loop cards or payments. For example, a chain of coffee shops may offer reloadable cards that can only be used to purchase goods at the coffee shop.
Prepaid cards can be abused by illicit actors seeking to launder money and finance terrorist activities. For instance, both open and closed loop prepaid cards can be utilized in conjunction with, or as a replacement to, bulk cash smuggling. Specifically, drug traffickers have been known to convert cash derived from narcotic sales to prepaid debit cards, which they then use to purchase goods and services or send to narcotic suppliers, who in turn use the cards to withdraw cash from an ATM. In addition, funds can be loaded onto prepaid cards in support of terrorist activities, such as purchasing various products and services whether buying a terrorist a plane ticket or providing other resources (e.g. car rental or hotel) to support a terrorist group.
When assessing the risks associated with prepaid cards, LFIs should consider the specific risks posed by the features and functionalities of the monetary instrument. If the cardholder is anonymous, or if the holder or purchaser provides false information on their identity for instance, the money laundering and financing of terrorism and illegal organisations risks are higher. In addition, LFIs should evaluate the risks associated with cash access, and the volume and velocity of funds that can be loaded and retrieved on prepaid cards. Further risk factors include type and frequency of loads and transactions, geographic location where the transaction activity occurs, value limits, distribution channels, and the nature of funding sources.
2.3 Vulnerabilities of Cash-Intensive Businesses
2.3.1 Types of Cash-Intensive Businesses
Cash-intensive businesses are businesses that experience a high volume of cash flows. However, because cash-based transactions are inherently difficult to trace, as discussed above, cash-intensive businesses may potentially be used as vehicles for money laundering and the financing of terrorism and illegal organisations. Businesses that generate a large volume of cash revenue may be susceptible to abuse by illicit actors that integrate the proceeds of crime into the banking system under the guise of legitimate business. In particular, they may exploit cash-intensive businesses for money laundering and the financing of terrorism and illegal organisations by using cash-intensive business to:
• Provide a front to launder large amounts of cash and reinvest cash proceeds of crime in the economy;
• Co-mingle illicit and legitimate income; and
• Finance, though often through small amounts of cash, terrorist activities without traceability.
Cash-intensive businesses span across various industry sectors. Most of these businesses are operating a legitimate business; however, some aspects of these businesses may be vulnerable to money laundering or the financing of terrorism and illegal organisations. Examples of cash-intensive businesses include but are not limited to the following:
• Convenience stores;
• Retail stores;
• Restaurants;
• Wholesale or general trading businesses;
• Travel agencies and tour operators; and
• Car dealers.
In addition, please consult the CBUAE’s Guidance for Licensed Financial Institutions providing services to the Real Estate and the Precious Metals and Stones sector3 for further information.
LFIs may expand on the above by considering additional factors when identifying cash-intensive businesses in their customer base. For example LFIs can define cash-intensive businesses based on specific criteria, such as a proportion or more of the business’ revenue is in cash or the business has a monthly revenue in cash above a certain threshold. In either scenario, the definition of cash-intensive business should be determined by the LFI, justified by a sound methodology that considers various factors including risk and characteristics, documented in the LFI’s policies and procedures, and approved by the LFI’s senior management.
The LFI should monitor whether the cash-intensive business appears to generate unusual transactions compared to the business’ expected activity and profile, and with other similar cash-intensive businesses. For example, a small business making significantly larger amounts of cash deposits than other businesses of a similar size in the same industry should be reviewed for potential money laundering activity. The extent of the vulnerability presented by cash-intensive businesses may be particularly severe due to large volumes of cash transactions, limited record keeping, and high customer turnover. LFIs should therefore understand the nature and purpose of the business relationship and expected activity of the customer in order to identify types of transactions that appear to be unusual, potentially suspicious, and/or inconsistent with the customer’s profile and stated purpose of the account.
The following sections examine common features of cash-intensive businesses that impact risk. LFIs should consider the specific risks posed by these features to determine whether the customer is considered as high-risk and should be subject to enhanced due diligence (“EDD”) measures. LFIs should incorporate this assessment into their AML/CFT program and update their policies, procedures, and processes with the aim to detect illicit activity and manage illicit financing risks.
3 Available at https://www.centralbank.ae/en/cbuae-amlcft
2.3.1.1 Cross-Border Movement of Cash and Cash Couriers
Cash-intensive businesses may move cash across borders as part of their business model. Cross-border movement of licit cash can be legal, subject to compliance with reporting and other relevant legal and regulatory requirements. However, criminals may also seek to move cash across borders; according to FATF, the physical transportation of cash across an international border is “one of the oldest and most basic forms of money laundering” and is still widely used today.4 The criminal economy tends to be cash-based with illicit proceeds of crime moving quickly and anonymously, including across borders. Illicit actors often choose to remove their illicit assets from a bank account in order to obscure the audit trail by transporting it to another country where they can spend the cash on goods or services or reintroduce the cash into the financial system. Illicit actors who generate cash proceeds also seek to move their profits to jurisdictions that will allow the placement of cash into the legal economy without detection. Their selection of a jurisdiction can be driven by the predominant use of cash in that jurisdiction, the weaker AML/CFT controls of a jurisdiction’s financial system including few or no restrictions on cash payments, or a jurisdiction’s reputation as a banking secrecy haven. Illicit actors can exploit the high volume of passenger, cargo, and mail movements into and out of jurisdictions to move cash without attracting the attention of authorities.
Cash-intensive businesses may utilize cash couriers to move cash across borders. Cash couriers are natural persons who physically transport currency and bearer negotiable instruments on their person or accompanying luggage from one jurisdiction to another. Couriers may be directly involved in the underlying crime or may be third parties recruited specifically to move money to another jurisdiction. Mechanisms to conceal the cash include within pieces of clothing on the physical persons (such as a money belt), hidden within luggage, or even concealed internally. Cash couriers may use air, sea, or rail transport to cross an international border and typically use high denomination banknotes as part of their transportation, which decreases the size and bulk of low denomination banknotes.
Specifically, cross-border movements of cash across an international border are used to:
• Launder proceeds of crime by placing them in another jurisdiction, typically with weaker AML/CFT controls. • Move illicit value to purchase assets that can hold considerable value, such as luxury goods, or transfer the value of the funds for them to be stored. • Hide proceeds from authorities and complicate asset recovery.
It is not illegal to move cash into or out of the UAE. However, natural or legal persons must declare upon entering or leaving the UAE any currencies, bearer negotiable instruments, precious metals and stones above the threshold of AED 60,000. The relevant extract of the Regulation on the Declaration of Currencies, Bearer Negotiable Instruments, and Precious Metals and Stones in Possession of Travelers Entering or Leaving the UAE (issued in the Official Gazette No 703 dated 31/05/2021) is in the box below.
Article (8) of Federal Decree-Law No. (20) of 2018 on Anti Money Laundering and Combating the Financing of Terrorism and the financing of Illegal Organizations stipulates that (when entering or leaving the country, any person must declare the currencies or bearer negotiable financial instruments, precious metals or stones of value, in accordance with the declaration regulation issued by the Central Bank).
Accordingly, the Board of Directors of the Central Bank has decided that the maximum threshold for currencies, bearer negotiable instruments, and precious metals and stones, shall be in accordance with the table below, and shall apply to all forms of physical cross-border transportation, whether by travelers or through mail and cargo. Bearer negotiable instruments mean financial instruments of whatever form, whether in the form of a bearer document, such as travelers checks, promissory checks, payment orders, or others. Based on the above, any natural or legal person shall declare upon entering or leaving the UAE any currencies, bearer negotiable instruments, precious metals and stones above the threshold specified in the table and shall provide an honest and clear answer and adequate information to the Customs authority and its staff upon request. Declarations shall also be made for currencies, bearer negotiable instruments, precious metals or stones of a value exceeding the specified threshold crossing the border through cargo, mail or shipments transported using transport service companies using the official customs systems of the UAE.
Maximum threshold for currencies, bearer negotiable instruments, and precious metals and stones
Currencies/Instruments/Metals/ Precious stones Threshold above which declaration is required 1. Currencies (UAE Dhrs or equivalent in other currencies) UAE Dhrs 60,000
or equivalent in any other
currencies2. Any type of bearer negotiable instruments UAE Dhrs 60,000
or equivalent in any other
currencies3. Precious metals with high economic value in any form, type or classification, provided they are not intended for commercial purposes or transported by a traveler that engages in the same trade or a traveler that transports such materials as a profession and frequently visits the department or the customs port. UAE Dhrs 60,000
or equivalent in any other currencies4. Precious stones with high economic value in any form, type or classification, provided they are not intended for commercial purposes or transported by a traveler that engages in the same trade or a traveler that transports such materials as a profession and frequently visits the department or the customs port. UAE Dhrs 60,000
or equivalent in any other
currenciesUnderstanding whether customers have made any such declarations, in accordance with the Regulation should form part of any due diligence by the LFIs where required. As part of due diligence, LFIs may require additional information on the customer or the transaction, including the source of funds and relevant documentation.
Potential Risk Indicators:
o Transactions involving locations or customers originating from locations with poor AML/CFT regimes or high exposure to corruption. o Significant and/or frequent cash deposits or currency exchanges made over a short period of time. o Customer is in possession of money supposedly for business reasons while travelling to countries where cash payments are restricted. o Customer requests to purchase, or has possession of, large volumes of high denomination banknotes. o Customer requests to purchase, or has possession of, large amounts of foreign currency without a plausible explanation. o Customers who use false identification or offer different identifications on separate occasions
4 FATF “Money Laundering through the Physical Transportation of Cash” (October 2015), available at: https://www.fatf- gafi.org/media/fatf/documents/reports/money-laundering-through-transportation-cash.pdf
2.3.1.2 Cash Deposits
Cash-intensive businesses can be expected to make cash deposits, which is legal and a natural fit with their business model. Illicit actors, however, will seek ways to place their illicit cash into the financial system. Illicit actors involved in cash generating crimes frequently need to use a significant portion of the cash they have acquired to pay for the illicit goods they have sold, to purchase additional goods, and to pay the various expenses incurred in acquiring or transporting the goods. As part of the money laundering process, individuals seek to use the proceeds of crimes by disguising the origin of the funds as legitimate economic activities. Terrorists also seek to finance, often through small amounts of cash, terrorist activities without traceability. LFIs should therefore be aware of cash deposits placed into the banking system that involve high-risk customers and/or geographical areas, third parties without a relationship to the customer, and transactions that lack an apparent business purpose. LFIs should, as the case may be, undertake CDD measures on the third party cash depositors transacting in any accounts above the threshold specified in Article 6 of the AML-CFT Decision. LFIs should also obtain appropriate information regarding the source of cash deposited in a customer’s account as well as mandate the use of Emirates ID for cash deposits in ATMs.
• Potential Risk Indicators: o Large cash deposits followed immediately by withdrawals or electronic transfers. o Large cash deposit followed by an immediate request that the money be wired out or transferred to a third party, without any apparent business purpose. o Frequent cash deposits by multiple individuals into a single bank account, followed by international wire transfers and /or international withdrawals through ATMs. o Large cash deposit is followed within a short time by wire transfers to high-risk jurisdictions. o Numerous cash deposits made in different bank branches over a short period of time. o Frequent cash deposits in small amounts, without any apparent business purpose or reasonable grounds. o Customers who use false identification or offer different identifications on separate ccasions
2.3.1.3 Currency Exchanges
Cash-intensive businesses may include currency exchanges as legitimate providers of services. Currency exchanges, however, can also be an attractive vehicle that illicit actors seek to exploit to enter the financial system and transfer their funds. According to the FATF, the simplicity and certainty of currency exchanges transactions and the anonymity and portability of cash make them attractive to money laundering and the financing of terrorism and illegal organisations.5 Once the money has been exchanged, it is difficult to trace its origin. There are two different ways to perform a currency exchange: (1) the use of cash to exchange and transfer the funds; or (2) the use of the internet to perform the currency exchange and transfer the funds to a bank account.
• Potential Risk Indicators: o Significant and/or frequent local or foreign currency exchanges. o Opening of foreign currency accounts with no apparent business or economic purpose. o Customers who know little about or are reluctant to disclose details about the payee, or customers or parties with no apparent ties to the destination country. o Suspicion that the customer is acting on behalf of a third party but not disclosing it. o Transactions involving charities and other non-profit organizations, which are not properly licensed or registered. It is reminded that when opening any accounts for non-profit organisations, LFIs must obtain an original signed letter from the Ministry of Community Development for opening accounts to collect donations and an authorization from the UAE Red Crescent for conducting financial transfers out of the UAE through some of these accounts. o Customers who use false identification or offer different identifications on separate ccasions. o Customers who receive transfers in seasonal patterns or transactions in a pattern consistent with criminal proceeds.
5 FATF “Money Laundering through Money Remittance and Currency Exchange Providers” (June 2010), available at: https://www.fatf-gafi.org/media/fatf/ML%20through%20Remittance%20and%20Currency%20Exchange%20Providers.pdf