A new agreement between Dubai’s financial regulator and its Indian counterpart paves the way for a more efficient combat in both jurisdictions against financial crimes such as money laundering and terrorist financing. In essence, the recently agreed-upon framework for cooperation means that the Dubai Financial Services Authority (DFSA) and India's International Financial Services Centre Authority (IFSCA) will share information on companies with operations in both India and Dubai in order to fight financial crime and efforts to evade sanctions.
The accord is sorely needed. Following a series of scandals—in particular the collapse of private equity fund Abraaj which has culminated in ongoing legal proceedings against former Abraaj executives as well as auditors KPMG—investors still view Dubai as a hub for illicit money in the Gulf. However, the last few years have seen a series of efforts by Emirati authorities to crack down on financial crime. Last year, for instance, the UAE created an Executive Office for Anti-Money Laundering and Counter Terrorism Financing. In October, Dubai created a specialised court for money laundering cases.
Encouragingly, the Emirates are increasingly leaning on international cooperation to ramp up the fight against financial crime. The recently inked collaboration between the DFSA and the IFSCA is just the latest step in increased cooperation between India and the UAE. The UAE, home to nearly 3.5 million Indian expatriates, is one of India’s largest trading partners, and the two countries are planning to reach $115 billion in bilateral trade over five years.
Stepping up efforts
It’s not just trade, however. Both countries have been cracking down on financial crime amidst scrutiny from the Financial Action Task Force (FATF). The Paris-based watchdog is expected to decide in March whether to add the UAE to a dirty money watchlist, and while India is less likely to face placement on the grey list thanks to what the FATF dubbed its “significant progress”, the country still has an upcoming FATF review hanging over it. Getting placed on the list impacts reputation, investor sentiment, and makes affordable financing difficult to come by.
To be fair, the UAE has worked hard to bolster its monitoring and enforcement mechanisms ahead of the review. Earlier this year the country began a major risk assessment of the likelihood of money for banned weapons passing through Emirati institutions. The assessment will also draw up guidelines to help UAE-based companies adapt to more stringent anti-money laundering requirements, giving them greater certainty about how to adhere to regulations.
India, in turn, has stepped up efforts to regulate cryptocurrencies, trying to steer clear of becoming a Wild West for cryptocurrency. It’s currently one of the largest markets in Asia for cryptocurrency trading and is host to around 15 India-based cryptocurrency exchange platforms. It will be important to watch what happens next: the Indian government has repeatedly warned that unregulated cryptocurrency markets could enable money laundering and terror financing and now plans to introduce a new law this year that would ban all cryptocurrencies, aside from some limited exceptions. The government instead plans to launch an “official” cryptocurrency, to be issued by the Reserve Bank of India, next year.
KPMG: A history of scandal
The issue of greater financial governance has loomed large in both jurisdictions for years, particularly in the wake of a colossal scandal involving the Dubai-based private equity firm Abraaj. Abraaj, helmed by Pakistani entrepreneur Arif Naqvi, once collected funds from the likes of the Bill and Melinda Gates Foundation to bankroll impact investment projects around the world, including the CARE hospitals chain in India, as well as the India-based grocery service BigBasket.
Abraaj, which managed nearly $14 billion at its peak, collapsed in 2018 after being accused of misusing investor funds. Naqvi is accused of having stolen more than $250 million, and is currently under house arrest in London, facing up to 291 years in jail if extradited to the US.
Dubai regulators are still dealing with the fallout of the Abraaj disaster, and while recent steps such as a $136 million fine for Naqvi are moves in the right direction, ensuring accountability for the complete network of fixers and firms who apparently enabled the fraud at Abraaj will be essential.
Auditors KPMG are under special scrutiny, perhaps unsurprisingly given the Big Four firm’s history of controversy—local KPMG affiliate BSR narrowly avoided a five-year ban from operating in India for apparently abetting fraud and mismanagement at Indian state-funded firm Infrastructure Leasing & Financial Services. In the Abraaj case, executives apparently bounced back and forth between KPMG Lower Gulf and the private equity firm, while KPMG is facing a $600 million suit in Dubai over allegedly slipshod work which overlooked serious irregularities in Abraaj’s books.
An important wake-up call
It will be pivotal for the UAE to tighten regulations so that such oversight can never happen again. The collapse of Abraaj dried up private equity investment across the Gulf and other emerging markets as investors fled to safer, more regulated havens. This investor flight served as a long overdue wakeup call, highlighting that in order to become a truly global financial hub, the Emirates must ramp up oversight of the financial and financial services sectors. Failure to listen may mean another, even greater scandal waiting in the wings.
Reassuringly, the UAE is not only taking action inside the country but is seeking cooperation from major trade partners like India. In addition to the recent agreement inked between the DFSA and the IFSCA, India and the Emirates have taken other steps such as by making court verdicts on loan defaults in the UAE enforceable in India. The move means that Indian nationals who fled the UAE after defaulting on loans in the Emirates can no longer escape prosecution in India. The growing cooperation between India and the UAE on questions of financial crime is an encouraging sign that the Emirates are ready to be a more significant force in stamping out fraud, embezzlement and other financial crimes around the world.
