DUBAI, Feb 28 (Reuters) - A global financial crime watchdog will decide this week whether the United Arab Emirates has made enough progress to avoid landing on a 'grey' watchlist, a designation which risks reputational damage to the Middle East's business hub.
The Financial Action Task Force (FATF) in 2020 called for "fundamental and major improvements" by the UAE, the region's financial capital and a gold trading hub that has tightened regulations to overcome an image as a hotspot for illicit money.
Countries on the 'grey list' face increased FATF monitoring and risk reputational damage, ratings adjustments, trouble obtaining global finance and higher transaction costs, experts say.
UAE Minister of State Ahmed al-Sayegh told Reuters the risk from a potential greylisting to sectors such as banking, real estate and credit ratings was "generally low".
"The UAE's economy is resilient and diverse," he said.
"We are engaged in an active dialogue with investors, financial institutions and firms doing business in the UAE to anticipate all relevant scenarios and mitigate any consequences as a result of increased monitoring."
The Paris-based FATF will update its list of high-risk and other monitored jurisdictions by March 4.
Mazen Boustany, of Habib Al Mulla & Partners, a member of Baker & McKenzie International, said greylisting could impact sovereign and local bank ratings, and the UAE property sector.
"I believe the UAE will do everything in its power to be removed very, very shortly thereafter if it is (listed)," he said.
Ratings agencies S&P and Fitch did not directly comment on whether a greylisting of the UAE would lead to a ratings change.
Mohamed Damak of S&P Global Ratings said the firm looks at regulation and supervision when making Banking Industry Country Risk Assessments. "Whenever we see weaknesses we take them into account," he told Reuters.
"The cost of transacting with banks in that (grey-listed) country may be higher due to additional checks and compliance requirements. It could also increase the cost of cross-border funding for banks in that country," Damak added.
When FATF grey-listed Malta in 2021, Fitch did not alter sovereign or bank ratings, saying authorities' responses would be important in assessing any credit impact.
The UAE, an oil and gas exporter that vaunts open-for-business credentials and enables glitzy expatriate lifestyles, has introduced reforms to improve technical compliance with FATF anti-money laundering and counter-terrorism financing standards. But it will also be evaluated on implementation in the federation of seven emirates.
"I am confident that we are in a position to continue to address any potential aspects of FATF's feedback promptly and effectively," Emirati minister al-Sayegh said.
The UAE's property sector, in particular Dubai's, is fuelled by foreign money. FATF's 2020 report said the UAE had not demonstrated effective supervision of real estate agents and precious stones and metal dealers.
The UAE last year founded an Executive Office for Anti-Money Laundering and Counter Terrorism Financing after passing an anti-money laundering and terrorism financing law in 2018.
The Executive Office has moved to raise standards for trading of bullion and improve ultimate ownership transparency.
Highlighting progress ahead of the FATF review, it said that assets worth $625 million were confiscated in 2021, including for money laundering and the gold and precious metals sectors.
The average time it takes to act on international requests for money laundering and terrorism financing cooperation fell to 37 days in 2021, from 139 in 2019.
"Illicit finance poses a threat to the UAE's international reputation and to the integrity of our world-leading financial sector," Emirati Foreign Minister Sheikh Abdullah bin Zayed wrote in Forbes Middle East magazine this month.
"We are already making strong progress," he wrote, adding that sharing information more effectively is key.
Our Standards: The Thomson Reuters Trust Principles.