As the U.A.E. is and continues to be a global trade and business hub, a multitude of stakeholders in the public and private sectors face unique set of risks tied to the misuse of its financial and operational systems for PF activities. Unlike money laundering and terrorist financing, PF directly supports the development and spread of weapons of mass destruction (WMD). Its unique complexities require targeted legal, regulatory and operational measures to mitigate the related risks effectively.
What is Proliferation Financing?
Whilst the United Nations has not defined Proliferation Financing it has called for member states to prevent it by way resolutions 1977(2011), 2325 (2016) 2663 (2022).
The Financial Action Task Force defined PF in the Guidance on Proliferation Risk Assessment and Mitigation (2021) as,"The financing of proliferation refers to the risk of raising, moving or making available funds, other assets or economic resources, or financing, in whole or in part, to persons or entities for purposes of WMD proliferation."
The scope of the definition is wide and includes activities such as manufacturing, acquiring, possessing, exporting, and brokering dual-use goods and technologies—items that can serve both civilian and military purposes but may be diverted for harmful uses. While direct involvement in WMD proliferation is typically deliberate, regulated entities can inadvertently become enablers of PF due to gaps in controls, insufficient awareness, or inadequate compliance mechanisms.
Regulatory Context in the U.A.E.
The U.A.E. has demonstrated a strong commitment to combating PF by establishing and implementing comprehensive legal and regulatory frameworks. Key laws and regulations include:
- Federal Decree-Law No. (20) of 2018: the law mandates adherence to UN Security Council resolutions and establishes measures to combat PF.
- Cabinet Decision No. 74 of 2020: provides for detailed guidance on sanctions lists, freezing measures, and compliance protocols.
The Executive Office for Control and Non-Profileration (EOCN) was established in 2009 in response to certain Federal Laws, and plays an active role in implementing export control besides curbing the proliferation of weapons of mass destruction with relevant associated technology, based on policies, legislations and partnerships domestically and internationally.
Despite these governmental, legal and regulatory efforts, gaps in awareness, implementation and effectiveness of mitigation measures persist. Many entities, including VASPs and DNFBPs, have yet to integrate PF-specific risks into their compliance frameworks, underscoring the need for enhanced legal, regulatory and operational alignment of mitigation measures.
Key Risk Categories Specific to the U.A.E.
Threats, Vulnerabilities, and Consequences
PF risks in the U.A.E. can be categorized into three key areas:
- Threats: Both state and non-state actors exploit regulatory gaps using sophisticated methods such as trade-based money laundering, free zone misuse, and deceptive shipping practices.
- Vulnerabilities: A lack of effectiveness in regulatory implementation, inconsistent enforcement across free zones and the inadequate use of technology heighten the U.A.E.’s exposure to PF risks. The limited awareness among VASPs and DNFBPs adds to the challenges.
- Consequences: Entities face reputational damage, legal and regulatory penalties, and the risk of facilitating global security threats if PF risks are not adequately mitigated.
Major Risk Factors
- Connections with High-Risk Jurisdictions
- Entities from countries like Iran and North Korea exploit global trade systems and financial hubs. Regulated entities must implement more rigorous due diligence typologies of clients and counterparties and their payments and/or transactions whilst monitoring geopolitical developments to address these threats effectively.
- Dual-Use Goods and Technology
- Goods with civilian and military applications pose significant risks. Compliance with U.A.E. Cabinet Resolution No. (50) of 2020 (annex to Federal Law No. 13 of 2007) and rigorous end-user verification are critical for all entities handling such goods, including DNFBPs in related sectors.
- Strategic Geographic Position
- The U.A.E.’s role as a global trade hub exposes it to illicit trade routes. Enhanced oversight of maritime consignments, insurance and cargo documentation can reduce vulnerabilities.
- Free Zones and Shell Companies
- Regulatory inconsistencies in free zones allow shell companies to obscure ownership structures, complicating due diligence. Establishing a free to use single centralized registry for beneficial ownership would improve the transparency for financial institutions, VASPs, and DNFBPs.
- Virtual Assets
- Virtual assets and service providers (VASPs) are increasingly exploited for PF. Enhanced monitoring systems, "Travel Rule" compliance, and robust customer due diligence processes are essential for mitigating these emerging risks.
Considerations for Regulated Entities
Enhanced Due Diligence for High-Risk Sectors
- Collaborate with industry regulators: All regulated entities should actively work with regulators and trade associations to develop industry-specific guidelines. These collaborations can help address unique risks in sectors such as chemicals, electronics, and aerospace.
- Verify end-users of dual-use goods rigorously: Entities must ensure that buyers of dual-use goods are legitimate and have no links to proliferation activities. Third-party inspections and certifications can provide additional layers of assurance.
- Conduct ongoing due diligence on supply chains: Regular monitoring of supply chain partners can help identify unusual patterns, such as sudden changes in transaction volumes or previously unknown links to high-risk jurisdictions.
Screening Against Proliferation-Specific Lists
- Regularly update watchlists: Ensure that screening systems are equipped with the latest updates from U.A.E. regulators, FATF, and international sanctions bodies. Regular updates prevent outdated information from creating compliance gaps.
- Integrate cross-jurisdictional intelligence: Use intelligence from global partnerships and data-sharing agreements to enhance the effectiveness of screening processes. Cross-border collaboration helps identify entities attempting to exploit regulatory gaps in different jurisdictions.
Integration of Advanced Technology
- Incorporate AI and machine learning: Advanced technologies can analyze large datasets to detect subtle patterns and anomalies indicative of proliferation financing. Predictive analytics can also forecast potential risks based on historical data.
- Update transaction monitoring systems: Ensure monitoring systems are equipped with U.A.E.-specific PF typologies, such as those involving dual-use goods or entities linked to high-risk jurisdictions. Calibrating these systems enhances detection accuracy.
- Utilize advanced threat anticipation tools: Deploy tools that model emerging threats, enabling entities to proactively address vulnerabilities and respond swiftly to new risks.
Key to Proliferation Financing Mitigation: Updating Risk Assessments
- Conduct iterative assessments: Develop risk assessment frameworks that evolve with changing regulations, geopolitical dynamics, and PF typologies. Incorporate insights from the EOCN national risk assessment, enforcement cases and audit findings to strengthen methodologies.
- Integrate U.A.E.-specific insights: Utilize comprehensive guidance from U.A.E. regulators, including the EOCN, alongside FATF standards to address region-specific vulnerabilities. This is particularly critical for high-risk sectors and activities.
- Adopt a risk-based approach: Focus resources on areas of greatest exposure, such as high-risk jurisdictions, shell companies, and virtual assets. Use advanced analytics to prioritize and target these risks effectively.
- Collaborate with stakeholders: Work with authorities, industry peers, and international organizations to share intelligence and adopt best practices. Collaboration fosters a unified response to proliferation financing challenges.
Tailored Training and Awareness Programmes
- Emphasize U.A.E.-specific risks: Training programmes should highlight risks unique to the U.A.E., such as the misuse of free zones and trade routes for proliferation financing. This ensures that employees, users and stakeholders are adequately informed about local challenges, threats and vulnerabilities.
- Incorporate case studies: Real-world examples from PF incidents provide practical insights, helping staff recognize red flags and understand how theoretical risks manifest in practice.
- Regular updates and outreach: Entities should attend workshops and training sessions organized by the EOCN and other regulatory bodies. Keeping up-to-date with new typologies and regulatory expectations ensures a proactive approach to risk management.
Addressing proliferation financing requires a coordinated and proactive approach. Regulated entities across the U.A.E., including financial institutions, VASPs, and DNFBPs, must strengthen their frameworks, leverage advanced technologies, and align with legal and regulatory standards to combat PF effectively. An effective, comprehensive and timely proliferation financing risk assessment is fundamental in not only complying with legal and regulatory requirements but ultimately identifying and mitigating threats to global security.
We would like to thank Julian Hunn , Financial Crime Compliance SME and the Managing Partner of FCC Solutions, for his contributions to this article. Please do not hesitate to contact Bhavesh Dattani or Julian Hunn should you require any assistance.
