AML Compliance Challenges and Solutions for Dealers in Precious Metals and Stones

AML/CFT in DPMS

Dealers in Precious Metals and Stones (DPMS) are prone to being drawn into money laundering schemes intentionally or unintentionally. For instance, criminals use their ill-gotten money to buy gold, diamonds, and other precious metals or stones, transferring the black money from their possession to the dealers. These criminals then sell the precious metals to someone else to bring the money into the financial markets again and label it legitimate or authentically earned. This money can later be used for various unlawful practices like terrorist financing or proliferation financing.

AML/CFT Legal Framework in the UAE

The United Arab Emirates has taken proactive measures to combat money laundering and terrorist financing. As part of the UAE government’s efforts to fight these financial crimes, Anti-Money Laundering (AML), Combating the Financing of Terrorism (CFT), and Counter-Proliferation Financing (CPF) regulations are issued. These regulations pave the way for guidelines issued by various supervisory authorities and best practices necessary to identify instances of financial crimes and mitigate the risks.

UAE Federal AML/CFT/CPF legislation places responsibility on all relevant persons in UAE to ensure the prevention, detection, and reporting of money laundering, terrorism financing, proliferation instances, and compliance with sanctions. The UAE Federal AML/CFT/CPF legislation includes:

1. UAE Federal Decree-Law No. 20 of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and the Financing of Illegal Organisations.
2. Cabinet Decision No. 10 of 2019 On the Implementing Regulation of Federal Decree-Law No. 20/2018 on Anti-Money Laundering and Combating the Financing of Terrorism and the Financing of Illegal Organisations.
3. Cabinet Decision No. 74 of 2020 Concerning the UAE List of Terrorists and the Implementation of UN Security Council Decisions Relating to Preventing and Countering Financing Terrorism and Leveraging Non-Proliferation of Weapons of Mass Destruction, and the Relevant Resolutions.

DPMS Sector in the UAE

The UAE is one of the biggest hubs for trading precious metals and stones. Dubai is recognised as one of the leading centres for gold and diamond trading. Dubai Multi Commodities Centre (DMCC), the UAE’s largest free-trade zone in the Jumeirah Lake Towers district of Dubai, is dedicated to facilitating various trades, including precious stones and metals. Considering the size of the precious metals and stones market, DPMS is often exploited by criminals to launder money.

AML Compliance Challenges Faced by Dealers in Precious Metals and Stones

Dealers in precious metals and stones (DPMS) play a significant role in the UAE’s economy. They undertake various activities related to precious metals and stones, from production to trading, establishing the UAE as an important regional hub for precious metals and stones.  While DPMS play a pivotal role in shaping UAE’s economy, they also face various AML compliance challenges that must be addressed to prevent criminals from exploiting them.

Cash-Intensive Business

A considerable amount of cash is involved in the trade of precious metals and stones. Due to its cash-intensive nature, it becomes difficult to trace the origin of funds and discover the money-laundering activities involved. Moreover, due to the high prices involved in a transaction of precious stones or metals, payments are bifurcated in cash, multiple money orders, cheques, or paid through a third-party account. This further complicates the identification process of probable money laundering.

Heavily Dependent on Tourists

The UAE is one of the most famous tourist destinations. The tourist industry contributes immensely to the DPMS sector’s customer base. However, the non-stationary nature of tourists creates a challenge to undertaking customer due diligence (CDD) processes and monitoring.

High-Value Items

Precious metals and stones are high-value commodities, making them attractive targets for money laundering activities. Since a large amount of money is required to trade in these stones and metals, criminals often pool their black money into it. Differentiating between a genuine buyer’s money and a criminal’s money becomes challenging.

Cross-Border Trade

Precious metals and stones are traded internationally from one country to another, which makes them a subject of cross-border trade. Every country has laws and legislations that apply to trade and businesses taking place on its soil. This can complicate AML compliance efforts due to the presence of various regulatory frameworks and jurisdictional challenges.

Portable Nature of Precious Metals and Stones

The portable nature of precious metals and stones makes them easy to carry from one place to another, enhancing the chances of illicit smuggling and illegal trade.

Complex Supply Chain

The DPMS Supply Chain can be complicated due to the presence of various parties and intermediaries involved in the trade. The involvement of multiple parties makes it difficult to ensure transparency or trace the origin of money laundering.

Solutions to Mitigate AML Compliance Challenges in the DPMS Sector

1.Implementing a Risk-Based Approach

DPMS Entities must identify the risk and take measures to tackle the same. Since resources are always scarce, it is important that controls are prioritised according to the level of risks involved. Taking a risk-based approach (RBA) helps fight ML/TF risks in the most efficient way.

2.Robust AML/CFT Program Implementation

DPMS Entities must implement a comprehensive AML/CFT program that covers all necessary aspects like policies and procedures, business risk assessment, customer due diligence, transaction monitoring, reporting, etc.

3.Staff Training

DPMS entities must offer adequate training to their staff for compliance with all necessary procedures that ensure regulatory compliance. Effective AML compliance training should cover well-defined procedures, policies, and internal controls.

4.Automation

AML compliance challenges can be mitigated in the DPMS Sector through automation. Automation can help reduce the complexities that the DPMS sector faces while understanding AML regulations. Automation can help identify and report suspicious activities, streamline customer due diligence, and provide a centralised platform for managing AML compliance efforts to avoid non-compliance penalties.

• AML Compliance: AML compliance challenges can be mitigated in the DPMS Sector through automation. AML Compliance Software can help reduce the complexities that the DPMS sector faces while understanding AML regulations. Automation can help identify and report suspicious activities, streamline customer due diligence, and provide a centralised platform for managing AML compliance efforts to avoid non-compliance penalties.
• Customer Identification: Customer due diligence processes, which involve the identification of a customer, help in identifying, mitigating, and managing money laundering and terrorism financing (ML/TF) instances. AML Compliance Software can help DPMS gather information about the customers, such as identification documents, business details, beneficial ownership details, etc. This helps identify legitimate customers and enables risk assessment. Further, enhanced due diligence measures for customers who pose a higher risk, for instance, politically exposed persons (PEPs) or customers from high-risk jurisdictions, can help mitigate potential AML risks.
• Screening: DPMS sector, like any other business, is required to undertake a risk-based approach to anti-money laundering and the prevention of fraud and other criminal activities like screening. AML Compliance Software can help screen ‘high-risk’ individuals, such as PEPs, adverse media references, fraudsters and terrorists, as well as sanctioned individuals, entities, or countries, which is useful to comply with regulatory requirements.
• Know Your Customer (KYC): AML Compliance Software can help implement an effective Know Your Customer (KYC) procedure, such as collecting and verifying customer information. This can assist the DPMS sector in identifying and mitigating potential AML risks.
• Customer Risk Assessment: AML compliance software can help assess risks associated with a customer. The ML/TF risks may emerge from the customer’s geography, product, service, profile of the customer, delivery channel, transaction, technology, etc. As a part of the risk-assessment process, AML Compliance Software can help DPMS identify specific areas of the business that are more likely to be used by criminals for terrorist financing or money laundering activities. Once identification is done, instant control and implementation of mitigation measures become easy.
• Transaction Monitoring: Transaction monitoring works on detecting and reporting suspicious financial transactions that can potentially be linked to money laundering or terrorist financing. AML Compliance Software can help with transaction monitoring, which involves continuous surveillance of customer transactions, analysing patterns, and identifying potential red flags. By doing so, DPMS can ensure compliance with regulatory requirements and mitigate the risks associated with illicit financial transactions.
• Enterprise-Wide Risk Assessment: Identifying the risks that can impact the enterprise and designing the appropriate risk management strategies and AML Compliance Software helps determine the DPMS sector’s inherent AML risk. Once the risk has been identified, controls required to mitigate this risk are established. Once the sort of controls that are required are identified, the quality and adequacy of these controls are tested, and if required, additional mitigation measures are also implemented.
• Record-Keeping: Maintaining accurate and detailed records of customers, financial transactions, and due diligence measures, AML Compliance Software helps in the compliance process of regulatory requirements.

5.Independent AML/CFT Audit

Periodic and independent AML/CFT audits can help identify lacunas in policy and procedure and the effectiveness of controls so that continuous improvements can be made.

Conclusion

Money laundering is a serious crime and is no longer restricted to financial institutions or businesses. Rather, it includes precious metals and stones and many other non-financial businesses and professions. Black money is pooled into precious metals and stones. The smuggling, stealing, and trading of precious metals, stones, or gems generate funds. These funds generated from such unlawful activities are later on used for Anti-Money Laundering.

DPMS sector is prone to various criminal involvements due to its vast nature. This further leads to the sector facing multiple compliance challenges and risks associated with it. To deal with criminal involvement and ML/TF cases, implementation of AML/CFT measures, technological advancements, and risk-based approaches can contribute significantly. Further, mitigating AML compliance challenges in the DPMS Sector is crucial to ensure effective compliance with regulatory frameworks.