I just returned from a business trip to Qatar and the United Arab Emirates (UAE), which shed a great bit of light on compliance trends in the Gulf Cooperation Council (GCC) region, particularly the UAE. In conversations with numerous experts across different points in the compliance spectrum, the takeaway was that there is an evident trend of increased attention and care towards US (and increasingly regional/domestic) compliance directives. These indeed appear to be setting the tone of financial institutions in the Gulf region. This of course begs the question of where do they stand vis-a-vis compliance?
Foreign Account Tax Compliance Act (FATCA)
FATCA is the word on the street. There is increased interest and awareness of this law in the Middle East North Africa (MENA) region, but particularly in the Gulf. For those who don’t recall,
FATCA (largely codified in Chapter 26 of the Code of Federal Regulations) is the new U.S. regulation which requires foreign banks to report accounts they maintain for U.S. taxpayers to the U.S. Internal Revenue Service (IRS), America’s federal taxation authority. Banks that do not comply with FATCA regulations can run the risk of substantial (up to 30%) withholding on certain payments. Given the high number of US taxpayers maintaining accounts in the Gulf (due to residence, convenience, or whatever other reason), this is quite significant. There do not appear to be any banks refusing to take US taxpayers as a result, although this decision has been reportedly taken by some banks in Switzerland, for example.
Office of Foreign Assets Control (OFAC) and Anti-Money Laundering (AML)
Eyes are indeed on Iran and Syria, particularly the former. While many are awaiting any deal between the P5+1 negotiations involving Iran’s nuclear program, compliance with OFAC is of significant concern. Formal banking with Iran is almost non-existent and banks are vigilant, having received a directive from the UAE Central Bank. What was quite impressed was the depth of knowledge regarding OFAC and US regulations, though this is arguably not at the level of what US banks know, naturally. (Interestingly, one compliance person from a large European bank told me something to the effect of “in a few years we’ll all be doing RMB transactions, so these things won’t really be important”!)
The bottom line is that US compliance is a critical step that is only starting to be fully appreciated in the MENA region. With Dubai’s increasing role as a banking center, the need to have robust compliance practices in place will only be more heightened. This is accentuated by the Emirate’s geographic positioning in a generally troubled region and close to high exposure points. Indeed the reputation of turning a blind eye to financial crimes is arguably becoming more obsolete.
Given the trends in the United States’ regulatory landscape and the increasing extraterritorial reach of its laws, GCC banks are well-suited to adopt rigorous compliance programs that are mindful not only of sanctioned countries, but sanctioned entities, and of cognizant of the use of front companies and individuals. This means more Know Your Customer (KYC), heightened screening, better documentation and reporting, and expanded training to lower levels of bank management, particularly the “frontline” in the retail banking sector. Over time, a financial institution in the Gulf may find itself more needing of programs that are more closely aligned to those found in their US counterparts.