Due-diligence procedures within finance firms in one of the biggest economic areas of Dubai are inadequate for combating money laundering in the trade finance field, says a damning regulatory review.
Published on 16 January by the Dubai Financial Services Authority (DFSA), Trade Finance Report 2016 assesses anti-money laundering (AML) measures maintained at 300 firms, and broadly finds them wanting.
DFSA officials zeroed in on firms based in the Dubai International Financial Centre (DIFC), conducting surveys and undertaking 17 site visits.
Its research found that, while firms demonstrate a sound oversight of credit risks – and have adequate controls in place for broader trade-finance processes – they are not paying enough attention to risks associated with trade-based money laundering (TBML).
According to the report, some of the most common problems with firms in the DIFC free zone are:
In general, the report says, “The methodologies associated with AML risk scoring of customers are not sufficiently sensitive to trade-finance products and risk indicators… There is a theme running throughout the findings of our Review where credit risk is being emphasised and prioritised, with less focus on TBML risks.”
One area where shortcomings proved to be particularly dramatic was customer due diligence (CDD) – the various systems that firms utilise for vetting the ethical and regulatory fitness of their corporate clients.
As the regulator points out in the report: “We observed that the risk ratings of customers are not used to determine the nature and extent of CDD conducted either initially, or for ongoing monitoring of transactions.”
Instead, it says, firms are tending to apply Enhanced Customer Due Diligence (EDD): a method that calculates average risk factors across entire customer bases. With this approach, firms believe, they can dispense with the need to allocate low, medium or high risk ratings to specific customers.
In the DFSA’s view, the risks with employing that common approach include:
With that in mind, the report notes: “Almost all firms have room to improve their systems and controls to enable them to perform appropriate and effective ongoing CDD and transaction monitoring. In particular, controls around identifying and dealing with the risk of dual-use goods need improvement.”
In a statement, DFSA chief executive Ian Johnston warned stakeholders that global groups such the Financial Action Task Force, together with financial services regulators, are putting an ever-greater focus on TBML risks.
“Our review and the published report are further testament to the DFSA’s commitment to maintaining the highest international standards in the DIFC,” he said. “Given the importance of trade to this region, regulators need to effectively oversee and supervise trade finance without hindering actual trade.
“We urge firms to benefit from all international guidance issued in that regard.”