Front companies are completely functional companies that have the same attributes as a legitimate business entity but are used for disguising illegal financial activities While front companies can be used to simplify transactions or for other lawful purposes, they can also be misused for fraudulent schemes, such as false invoicing and phoenix activity.

Offenders can additionally use nominee shareholders or directors to further obscure the identity of beneficial owners. A nominee shareholder holds shares in a company for the benefit of another person. A nominee director is appointed to the board of a company to represent the interests of the appointer.

Nominees can be exploited to circumvent restrictions on foreign business ownership or foreign trade or by individuals who are prohibited from acting as directors of a company owing to their past conduct.

UAE’s regulatory regime requires nominee board members to disclose to the legal person that they are acting as a nominee within fifteen days of becoming a nominee board member. The nominee member is also obligated to inform the legal person if he or she ceases to be a nominee board member.

The Register of Partners or Shareholders kept by the legal person must also include data of any of the partners or shareholders serving as a nominee board member. This includes:

• Number of shares held along with the category of the shares and associated voting rights
• The date on which the partner or shareholder acquired that position in the legal person
• Particulars of the partner or shareholder, depending on whether they are a natural or legal person

The nominee member must inform the legal person if there are any updates in any of the above-mentioned information within 15 days of such change.

It is one thing to identify the UBO, but it is equally important to verify the identity of such a UBO against reliable government-issued identity documents and records.

This helps rule out the possibility of such UBO being falsely identified due to identity theft or forgery.

The option to select whether to screen a single customer or a batch of a large number of customers must be as each DNFBP’s or VASP’s requirements differ from one another. 

Further, the screening software must also provide functionality to screen a natural person customer as well as a legal entity customer. 

Entities should take into account the specific risks related to ML, TF or PF that are relevant and unique to the sector in which they operate. These risks are often assessed by the sector’s AML/CFT regulator. For example, the Central Bank of the UAE releases its Sectoral Report on ML and TF Risk Assessment for the financial sector. Financial institutions must refer to it while conducting their EWRA exercise.  

EWRA must take into Consideration ML/TF/PF risks posed by the following:

Regulated entities need to conduct a business risk assessment to identify the proportion of various risk factors that contribute to the overall risk profile. This is then translated into a mechanism to derive the risk each customer poses to the business. A vicious circle – customer risk to business risk and overall business risk to risk from each customer. 

A sound and effective CRA process for a regulated entity such as a DNFBP or VASP is integrated, aligned, and developed with the parameters used for the EWRA process. 

Having access to EWRA findings facilitates regulated entities to formulate and develop CRA parameters, risk scoring methodology and overall program to customer risk assessment. CRA is the function of risk-weightage derived for each risk factors considered during the EWRA exercise. 

Illustration: The outcome of the CRA exercise and subsequent customer risk profiling and scoring would differ for the same customer from one DNFBP to another. For example, the CRA outcome of one real estate agent to another real estate agent shall differ due to variations in degree, extent, and risk weightage assigned to various risk factors in the course of assessing the business risk.  

• A customer, say, for example, Mr ABC for a real estate agent – Company A, may pose ‘low’ risk as identified post CRA as the majority of Company A’s customer base consists of high net-worth individuals and Mr ABC is also a high net worth individual, becoming homogenous with Company A’s existing and usual customer base. 
• Contrastingly, the same customer, Mr ABC, for a real estate agent – Company B, may pose a ‘high’ ML/FT and PF risk,  due to Company B’s customer base mostly consisting of lower and middle-income group clients, making Mr ABC as a customer with unusual profile. 
• In both the above situations, the customer, Mr ABC, and the business sector for which he is a customer remained the same. However, distinguishing factors resulting in different risk scoring as ‘low’ or ‘high’ is the EWRA outcome (the overall business portfolio affects the regulated entity’s risk acceptance level). EWRA outcomes for both real estate agents, Company A and Company B differed because of the general business profile they have. 

The above illustration emphasises how the use of EWRA outcome acts as a foundation on the basis of which, the CRA methodology is developed. 

Having a grasp over identifying suspicious transactions and activities  helps businesses to evade potential reputational loss that comes along due to association with individuals and entities engaged in ML/TF. 

As part of the PEP’s risk assessment, businesses should evaluate the PEP’s public profile by examining its reputation and image in the public domain. PEPs, who are often in the media and under public scrutiny, may pose different and potentially higher risks compared to those with low profiles.  

However, while high visibility can increase scrutiny, it does not necessarily correlate with higher ML/FT and PF risk.  

Thus, to accurately analyse the potential risk associated with a PEP, businesses need to consider both public opinion and media coverage, depending on the context of information available about the PEP.  

Regulated entities with their exposure to international clients must not ignore implementing global sanctions lists, as it would expose businesses to regulatory noncompliance consequences such as potential license cancellation, liquidation, or asset seizure. These risks arise from violations of regulatory requirements enforced by the regulatory authorities in the UAE. Further, it also leads to the imposition of administrative consequences and regulatory penalties such as fines, which significantly increase financial burdens and disrupt operations.

Frontline staff play a crucial role in the business’s AML/CFT strategy due to their role as the first point of contact with customers.

• Explain the importance of the frontline staff in the regulated entity’s AML/CFT strategy and maintaining regulatory compliance. By helping them outline their responsibilities, they can understand AML measures and implement them effectively.
• As frontline staff interact directly with customers, they must know internal policies and procedures in relation to KYC, CDD, and record-keeping, which helps them verify customer identities, assess risks, maintain accurate records, and keep compliance efforts.
• Discuss and establish red flags and common ML/TF typologies. This will enable front-line staff to take a proactive approach to identify illicit activities and equip employees to be aware of transactions that deviate from normal behaviour.
• Describe policies and procedures for reporting suspicious activities and transactions, as well as steps involved in filing the internal SAR/STR. Explain the tipping-off provisions so that they don’t end up informing their decision to file SAR/STR to suspicious customers and others.
• Explain the concept of targeted financial sanctions and their purpose, the implications of non-compliance, and screening procedures. This will help employees better understand TFS obligations and prevent transactions with sanctioned individuals or entities.
• Discuss strategies and guidelines for maintaining client relationships after filing a SAR/STR. This will help businesses in managing client relationships post-filing of a SAR/STR, which requires sensitivity.