4.5. Implementation of Targeted Financial Sanctions - Special Considerations for Legal Persons and Arrangements

Effective from 7/6/2021

Key Terms for Targeted Financial Sanctions

Affiliate is an entity owned by another entity by more than 25% and less than 50% of its capital.

Controlling shareholder is a shareholder who has the ability to directly or indirectly influence or control the appointment of the majority of the Board of directors, or the decisions made by the board.

Listed Person is a person or organization listed by the UN Security Council on the Sanctions List, or listed by the Cabinet on Local Lists, as the case may be.

Subsidiary is an entity owned by another entity by more than 50% of its capital or under full control of that entity regarding appointment of the Board of Directors.

Legal persons can be included on international sanctions lists. In addition, the obligation to freeze the funds of a listed person, imposed by AML-CFT Decision and by articles 15 and 21 of Cabinet Decision (74) of 2020, extends to funds that a Listed Person owns or controls through ownership or control of a legal person or through a legal arrangement.

Listed individuals and legal persons are known to seek to evade sanctions by hiding their interest in a transaction via complex layers of control and ownership, through informal nominee arrangements, and through the assistance of complicit professionals. Listed Persons may also use front companies-companies mixing legitimate and illicit economic activity—to conceal their activities. For this reason, identification of beneficial ownership through the entire corporate ownership structure is critical for effective sanctions implementation, as is fully understanding the nature of the customer’s business.

LFIs that employ automated screening technologies to identify matches to sanctions lists must ensure that their screening tools include all individuals associated with a legal person customer, including beneficial owners, authorized signatories, directors, and senior management.

Legal persons and arrangements that are directly or indirectly (i) owned 50% or more in the aggregate, or (ii) controlled, by one or more Listed Person, including subsidiaries of a Listed Person, and entities where a listed person is a controlling shareholder, are subject to the same prohibitions as the Listed Person, even if such entities are not specifically listed by the UAE or the United Nations.

Financial institutions should observe caution when considering a transaction with an entity that is not a Listed Person in which one or more Listed Persons have a significant ownership interest that is less than 50 percent or which one or more Listed Persons may control by means other than a majority ownership interest. Such non-listed entities, to include affiliates, may become the subject of future designations or enforcement actions. As discussed above, LFIs should make a risk-based decision as to whether to identify beneficial owners who own or control less than 25% of the legal persona or arrangement. LFIs are not required to identify every beneficial owner in order to conduct sanctions screening. But should an LFI, in the course of enhanced due diligence, discover that a Listed Person owns a minority interest in a legal person, this information must be taken into consideration in risk-rating that customer.

Please see the Guidance on Targeted Financial Sanctions for more information on this issue.

LFIs should consult the CBUAE and the Supreme Council for National Security if they have any questions regarding implementation of UN or UAE sanctions. LFI employees must be trained on these issues as part of comprehensive ongoing training.

Example: Listed individual Ms. Y owns 25% of foreign Company A. Foreign Company A owns 30% of UAE Company B. Company B is a customer of UAE LFI Lion Bank. Ms. Y has no other ownership interests in Company B. Ms. Y therefore ultimately owns 7.5% of Company B.

Ms. Y’s minority interest may not in itself give her ownership or control Company B. But Lion Bank should also consider the following factors when determining whether Ms. Y exercises control over Company B:

	•	The other beneficial owners of Company B are known close associates of Ms. Y’s; and
	•	Ms. Y has loaned Company B a sum equal to 100% of its operating revenue in the previous financial year, and under the terms of the loan agreement, if Company B does not repay the loan Ms. Y will acquire an additional 35% of Company B. .../...
.../... When these factors are considered, it becomes likely that Ms. Y does in fact exercise control over Company B, despite her relatively small ownership stake, and transactions with Company B may therefore be prohibited under Cabinet Decision (20) of 2019.
Alternatively, if Company B operates in the high-tech manufacturing sector, and Ms. Y has been listed for proliferation activities, the LFI may conclude that the sanctions evasion risk posed by Company B is too great to permit accepting it as a customer, even if Ms. Y does not exercise control of the company.