Expert Corner: How to Tackle the AML Challenges in the Middle East

The Middle East is a heterogeneous region with a variety of complications and unique features. In recent years the region has shown a relatively stable economic growth, going from the GDP of $2,460 billion in 2015 to $3,570 billion in 2024. According to the International Monetary Fund, the number will continue growing in the next few years, reaching the GDP of $4,550 billion by 2029.

The economy is growing, but so is the level of financial crime. The PwC report from 2020 shows that businesses in the Middle East have experienced a sharp increase of financial crime cases in comparison to 2018.

AML is a global issue that affects every region and sector of the economy. However, the Middle East faces some unique challenges that make AML compliance more difficult and complex. In this article, we will explore some of these challenges and provide some practical solutions for financial institutions and regulators in the region.

What are the AML challenges in the Middle East

The growing market isn’t the only reason why fraudsters and other criminals get interested in the region. The Middle East is a diverse and dynamic region that encompasses many countries, cultures, religions, and languages. It is also a region that has been affected by political instability, conflicts, sanctions, and humanitarian crises. These factors create a fertile ground for money laundering and terrorist financing activities, which pose a serious threat to the security and stability of the region and the world.

Some of the specific AML challenges that the Middle East faces are:

• Lack of harmonized and effective AML legislation and regulation. The Middle East is not a homogeneous region, and each country has its own legal and regulatory framework for AML. However, not all countries have adopted the international standards and best practices set by the Financial Action Task Force (FATF), the global watchdog for AML and counter-terrorist financing (CTF). This creates a fragmented and uneven AML landscape that hinders cross-border cooperation and information sharing.
• Regulatory Arbitrage. Regulatory arbitrage is the practice of exploiting the differences or loopholes in the regulatory and supervisory standards and practices among different authorities or jurisdictions, in order to gain an advantage or avoid a disadvantage. Regulatory arbitrage can undermine the effectiveness and efficiency of the regulation and supervision of the banking sector, and can create unfair competition and distort the level playing field among the banks. It also poses risks to the financial stability and consumer protection. Having multiple or overlapping regulators or supervisors for the banking sector in the same country or market can create various challenges and issues for the banks and the authorities, such as regulatory inconsistency, regulatory burden, regulatory gaps, and regulatory conflicts.
• Issues of transparency and accountability in the financial system. The Middle East has a high prevalence of cash-based transactions, informal money transfer systems such as Hawala operators, free zones and offshore financial centres. These features make it difficult to trace and verify the origin, destination, and purpose of funds, and to identify the beneficial owners and controllers of legal entities and arrangements. This creates a risk of money laundering, tax evasion, and illicit financial flows.
• Lack of awareness and education on AML risks and obligations. Many stakeholders lack the knowledge, skills, and tools to detect and report suspicious transactions and activities, and to comply with the AML requirements. This creates a risk of ignorance, negligence, and complicity.

Each country in the region has its own regulatory system with varying levels of sufficiency. In particular, the UAE has been showing clear progress in recent years and, as a result, has been removed from FATF’s “gray list”. You can learn more about UAE’s policy framework by checking the complete guide on AML regulations. Meanwhile, Saudi Arabia is also showing a steady increase in the level of AML regulations.

Sources and Drivers of Financial Crime in the Region

Financial crime in the Middle East is driven by a complex and interrelated set of factors, such as:

• The geopolitical and security situation in the region, which could create opportunities and incentives for illicit financial flows, especially in conflict-affected and fragile states, such as Syria, Iraq, Yemen, Libya, and Lebanon.
• The prevalence of informal and cash-based economies, which lack transparency and accountability, and facilitate the movement and concealment of illicit funds.
• The presence and activities of various non-state actors, such as terrorist groups, militias, criminal networks, and sanctioned entities, which rely on financial crime to fund their operations and agendas.
• The corruption and weak governance in many public and private institutions, which undermine the rule of law and the integrity of the financial system and create vulnerabilities and loopholes for financial crime.
• The lack of awareness and capacity among the relevant stakeholders, such as financial institutions, regulators, law enforcement, judiciary, civil society, and media, which hampers the detection, prevention, and prosecution of financial crime.
• The limited regional and international cooperation and coordination on AML/CFT matters, which impedes the exchange of information and intelligence, and the provision of mutual legal assistance and extradition.

With such a combination of factors, many countries in the region end up at the black lists and gray lists of different international watchdogs, such as FATF. You can learn more about such lists and countries that comprise them in this complete guide. 

How to tackle the AML challenges in the Middle East

The AML challenges in the Middle East require a concerted and coordinated effort by all stakeholders, including governments, regulators, financial institutions, non-financial entities, and civil society. Some of the possible solutions are:

• Harmonize and strengthen the AML legislation and regulation. The Middle East should adopt and implement the FATF standards and recommendations and align their national AML laws and regulations with the international best practices. The region should also enhance its regional and international cooperation and information sharing and participate in the mutual evaluation and peer review processes of the FATF and its regional bodies.
• Enhance and streamline the AML supervision and oversight. The Middle East should establish and empower independent and competent AML authorities and allocate sufficient resources and capacity to them. The region should also streamline and rationalize its AML regulatory framework and ensure consistent and effective supervision and oversight of all financial and non-financial entities. The region should also enforce the AML laws and regulations and impose proportionate and dissuasive sanctions for non-compliance and violations.
• Improve the transparency and accountability in the financial system. The Middle East should implement the FATF recommendations on transparency and beneficial ownership and require all legal entities and arrangements to disclose and update their beneficial owners and controllers. The region should also regulate and monitor the cash-based transactions, informal money transfer systems, offshore financial centres, and shell companies, and ensure that they comply with the AML requirements. The region should also cooperate and exchange information with other jurisdictions on cross-border transactions and investigations.
• Increase the awareness and education on AML risks and obligations. The Middle East should develop and implement a comprehensive and tailored AML awareness and education program for all stakeholders, including financial institutions, non-financial entities, and the general public. The region should also provide guidance, training, and tools to help the stakeholders detect and report suspicious transactions and activities, and to comply with the AML requirements. The region should also promote a culture of compliance and integrity and encourage the stakeholders to report any AML violations or concerns.
• Work with professional compliance specialists. An important task for every company is to build an efficient security system that will minimize the amount of fraud and provide the best AML system possible. To do so, companies need to create a clear set of policies and implement them with the help of a professional verification solution provider.

Conclusion

The Middle East is a region that faces many AML challenges, but also has many opportunities to overcome them. By adopting and implementing the international standards and best practices, enhancing and streamlining the AML supervision and oversight, improving the transparency and accountability in the financial system, and increasing the awareness and education on AML risks and obligations, the region can effectively combat money laundering and terrorist financing, and contribute to the security and stability of the region and the world.