Money laundering is a complex crime where illicit funds are transferred through various phases to make them appear legal. The Financial Institutions (FIs) in the UAE will have to identify such phases to effectively identify and reduce risk.

This article will outline the three main phases of Money Laundering (ML): Placement, Layering, and Integration as described in the Anti-Money Laundering and Combating Financing of Terrorism guidelines issued by CBUAE.

Also read: AML CTF Solutions for Accountants and Legal Professionals in UAE

What is Money Laundering?

Money laundering can be defined as “exchanging money or assets that were obtained criminally for money or other assets that are ‘clean’”. Money laundering risk is one of the most serious kinds of financial crime and, therefore, a risk that every organization from every industry needs to protect against.

Aside from familiarity with all three stages of money laundering, organizations should also be vigilant about the subsequent activity to the said stages, which is to reintegrate the ‘dirty’ illegal money or asset into a legitimate financial system.

Also read: AML in Cryptocurrency in the UAE

What are the Three Stages of Money Laundering?

Financial Institutions (FIs) should be aware of the three phases of money laundering to identify, understand, and correctly assess the money laundering and financing of terrorism (ML/FT) risks to which they are exposed at both the enterprise and business relationship levels.

Determining for which ML/FT phase a certain product can be misused or the FI itself can be misused will help the FI understand its specific inherent ML/FT risks.

Accordingly, the text below describes money laundering as the crime of three distinct – each sometimes overlapping – phases:

Stage 1: Placement Phase

The placement phase is the first step, where criminals introduce illicit funds—often in cash—into the financial system using a variety of techniques or typologies such as smurfing, purchase of valuable assets (real estate, race horses, vehicles, etc.), among others.

Common Placement Methods include:

Blending of funds: Commingling dirty money with legitimate business revenue (e.g., cash-intensive businesses).
Breaking up amounts (smurfing): Depositing small sums into multiple accounts to avoid reporting thresholds.
Currency smuggling: Physically transporting cash across borders to bypass banking scrutiny.
Foreign exchange purchases: Buying foreign currencies with illegal funds to obscure the ultimate beneficial owner and assets.
Loan repayment: Using illicit funds to repay legitimate loans, giving the appearance of legal transactions.

UAE Compliance Requirements

The UAE has put in place strict laws to trace and stop the process of illegal money placement. Federal Decree-Law No. 20/2018, amended by Federal Decree-Law No. 26/2021 and Federal Decree-Law No. 7/2024, prescribes the legal regime in combating money laundering.

All financial institutions need to report suspicious transactions to the UAE Financial Intelligence Unit – FIU with stringent CDD measures. This will involve measures that ensure real-time flagging and investigation of any irregular or large transactions.

Stage 2: Layering Phase

The layering phase is typically characterized by a series of complex transactions to further disguise the origin of the illicit funds and the true owner of the money.

At this stage, money is moved from one account to another or, where possible, between businesses and countries to obscure any trails that could lead authorities to trace the funds back to their original source.

Common Layering Techniques:

Cross-border electronic transfers: Transferring funds between accounts across international borders or financial markets.
Shell companies: Setting up front businesses to conceal the actual ownership.
Reselling of assets: Converting cash into an item that has high liquid value, like jewelry or real estate, and reselling.
Conversion into financial instruments: Buying stocks, bonds, or insurance policies with ‘dirty money’.
Internal transfers: Transfers between different accounts in a bank for hiding the track of the very same.

UAE’s Measures

The UAE has established complete monitoring mechanisms to prevent layering. The CBUAE along with other relevant regulatory authorities enforces controls wherein the concerned financial institution is bound to keep full records of the transactions taking place and report every suspicious transaction.

The UAE’s National Risk Assessment, which has been developed applying the methodology provided by the World Bank Group, is fundamental to identifying and mitigating risks related to money laundering. Furthermore, the UAE has followed advanced technological solutions while tracking and analyzing complex financial transactions that provide early detection of any attempt to layer illicit funds.

Stage 3: Integration Phase

The last stage is the integration. At this phase, the laundered money is reintroduced into the legitimate economy. This would be in the form of investing in real estate, business ventures, or financial instruments. Money at this stage seems to be legitimate and therefore not easy to distinguish from legally obtained funds.

Common Integration Methods:

Investing in businesses: Using laundered funds to acquire or invest in companies.
Purchasing real estate: Buying luxury properties to park illicit wealth.
Stocks and bonds investments: Placing funds in financial markets to legitimize them.
Use of stored value products: Leveraging prepaid cards or digital wallets for anonymity.
Funding new criminal activities: Integrating cleaned funds to facilitate future illegal ventures.

UAE’s Measures

The UAE has taken effective measures to avoid the integration of proceeds of crime. The Ministry of Economy, in coordination with other government entities, drafted policies and strategies to detect and deter financial crimes.

The UAE’s National Strategy for AML/CFT for the period 2024-2027 outlines the legislative and regulatory reforms for further enhancement of the effectiveness of the national AML framework. It includes the monitoring of large-value transactions, investigation of investment in sectors vulnerable to money laundering, and compelling financial operations to conform strictly to international standards.

AML Framework in the UAE

Federal Decree-Law No. 20/2018

This law forms the basis of AML in the UAE, outlining the responsibilities of the FIs and any penalties relevant to the case of non-compliance. It demands the implementation of stringent AML policies by the organizations, regular auditing, and training of the workforce on how to identify suspicious activities and report them.

Federal Decree-Law No. 26/2021 and No. 7/2024

These amendments reinforce the legal framework by making penalties for non-compliance much stronger, expanding regulatory powers to investigate and prosecute money laundering, and laying out tougher requirements on financial institutions with regard to customer identity verification.

National Strategy for AML/CFT 2024-2027

The new approach focuses on risk-based compliance, effectiveness, and sustainability. It describes 11 strategic objectives or priorities outlining specific reforms both at the legislative and regulatory levels, offering a concentrated focus on international cooperation, the improvement of financial intelligence units, and leveraging technology in the detection and prevention of money laundering.

AML and CFT Responsibilities for Financial Institutions

Financial institutions must implement effective AML programs, including:

Customer due diligence (CDD): Verifying customer identity and risk assessments.
Suspicious activity reports (SARs): Reporting unusual activities to the FIU.
Employee training programs: Ensuring staff are trained to detect money laundering risks.
Continuous transaction monitoring: Identifying patterns that could indicate money laundering.

How Farahat & Co. Can Assist

Complying with AML regulations in the UAE requires expertise. Farahat & Co. offers tailored AML consulting services, including:

Risk assessments and compliance audits
KYC implementation and monitoring solutions
Filing Suspicious Activity Reports (SARs)
AML/CFT training programs for staff

Contact Farahat & Co. today to ensure your business remains compliant with UAE’s AML framework and avoid the risks associated with money laundering and terrorist financing.