Criminalization of Illegal Virtual/Cryptocurrency Activities in The United Arab Emirates

11th November 2022

By Seodi White

Global Law Consultant

Email: [email protected]

1.?????Introduction

In my last two articles dated 3rd November 2022[1] and 7th November 2022,[2] I looked at how the UAE is regulating the virtual/cryptocurrency market in its onshore and offshore legal jurisdictions.

In this article, I am examining how the UAE criminal law is framed within the ambit of Virtual/Cryptocurrency. I am looking at both Federal Legislation which is applicable to the whole of UAE (Offshore, On-shore and all the Seven Emirates).

2.????Anti-Money Laundering Laws

Regarding the criminalisation of money laundering, the main piece of relevant legislation is Federal Law No. 20 of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Financing of Illegal Organisations (the AML Law)?together with Cabinet Resolution No. (10) of 2019 Concerning the Executive Regulation?of Federal Law No. 20 of 2018 (the AML Executive Regulation).

Article 2 of the AML Law defines the main money laundering offence.

The offence renders a person a perpetrator of money laundering who:

1. conducts any transaction aiming to conceal the funds' illegal source.
2. conceals the true nature, origin, location, way of disposition or ownership of rights with respect to the proceeds of a transaction.
3. acquires, possesses, or uses the proceeds upon receipt; or
4. assists the perpetrator of the office to escape punishment.

It is not required to prove the illicit source of the funds to convict a person for money laundering. It is, however, only money laundering if the person is fully aware that the funds are derived from a felony or a misdemeanour.

For the purposes of virtual /cryptocurrencies, funds refer to any assets whatsoever, including assets in digital or electronic form. In this regard,?Virtual/Cryptocurrency does fall within the scope of the UAE's AML/CFT regime.

Sanctions for money laundering include:

·??????prison sentences of up to 10 years,

·??????monetary fines for individuals of between 100,000 dirhams and 5 million dirhams.

Where a representative of a legal person commits any of the AML Law's money laundering offences, monetary fines range from 500,000 dirhams to 50 million dirhams.

The AML Law applies broadly to financial institutions, and in contrast to previous regulation, now also explicitly designates non-financial businesses and professions and non-profit organisations as obliged entities.

The term 'financial institutions' includes anyone who does any of the following on behalf of a customer:

1. receives deposits and other funds that can be paid by the public.
2. provides private banking services, credit facilities, cash brokerage services, currency exchange and money transfer services, stored value services, electronic payments for retail and digital cash, and virtual banking services.
3. conducts financial transactions in securities, finance, and financial leasing.
4. issues and manages means of payment, guarantees or obligations.
5. trades, invests, operates or manages funds, option or futures contracts, and exchange rates.
6. conducts interest rate transactions, other derivatives, or negotiable financial instruments.
7. participates in issuing securities and providing related financial services.
8. manages fund portfolios.
9. manages saving funds.
10. prepares or markets financial activities.
11. conducts insurance transactions; or
12. conducts any other activity or financial transaction as determined by a supervisory authority.

In addition to the AML, the Securities and Commodities Authority (SCA) Virtual Asset Regulation requires that deposits and withdrawals may only be made from and to a designated bank account in the name of the client with an authorized financial institution in the UAE or a foreign financial institution explicitly signed off by the SCA.?Crucially, the SCA Virtual Asset Regulation suggests that a crypto asset that cannot be traced may not be used to fund accounts or make transactions through a licensed person, such as an SCA-licensed crypto asset exchange.

3.????The Dubai International Finance Centre (DIFC)

As stated, the Federal AML law and its accompanying legislative and regulatory provisions are applicable everywhere in the UAE including the Dubai International Finance Centre (DIFC). Violations of the mainland UAE AML/CTF regime may also be punished in the DIFC.?Additionally, the DIFC has its own AML/CFT regime contained in the DIFC Regulatory Law and the Anti-Money Laundering, Counter-Terrorist Financing and Sanctions Module (the AML Rules) of the Dubai Financial Services Authority (DFSA) Rulebook, last updated in April 2020.

To help combat the rise in crypto fraud, on 22 August 2021, the Dubai Courts announced the establishment of a specialist criminal court focused on combating money laundering. The new court will sit within the Court of First Instance and Court of Appeal. Additionally, in October 2021, the Dubai Police launched a specialist Virtual Asset Crime department to investigate crypto fraud?and announced that it will be collaborating with a cryptocurrency trading platform and other industry experts to fight crime within the space.?In the past year, the Dubai Police have arrested forty members of a crypto laundering scheme and successfully investigated the theft of an NFT from a Dubai resident.

4.????The Abu Dhabi Global Market (ADGM)

The mainland UAE AML/CTF regime also applies in the Abu Dhabi Global Market (ADGM) which is regulated by the Financial Services Regulatory Authority (FSRA). Like the DIFC, the FSRA maintains an AML Rulebook, which complements the federal regulations and puts detailed requirements on regulated entities, including for risk-based KYC and AML controls. In line with other jurisdictions, the ADGM requires the provision of detailed and comprehensive virtual asset compliance policies and the appointment of a money laundering reporting officer responsible for overseeing the authorized person's compliance with the AML Rulebook. Operators of a virtual asset business in the ADGM are subject to the full remit of financial crime offences, including making misleading statements and market abuse.

5.????Other Criminalizing Regulatory Frameworks

In addition to the Anti-Money Laundering (AML) laws cited above, as part of general legal reforms introduced within the UAE at the start of 2022, Federal Decree Law No. 5/2012 on Combatting Cybercrime was repealed and replaced by Federal Decree-Law No.34/2021 Concerning the Fight Against Rumours and Cybercrime (the Cybercrime Law), which came into effect on 2 January 2022.

The Cybercrime Law includes several offences prevalent in cryptoasset fraud, from hacking and compromising information systems to the unauthorised obtaining of third-party symbols and codes of electronic information technology (passwords), to the fabrication of websites, mail, and electronic accounts.?It also criminalises acts related to unlicensed cryptocurrency trading and behaviour that promote or encourage unlicensed dealing in cryptocurrency that is not officially recognised in the UAE.

6.????Conclusion

Echoing the words of his father, His Highness Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, Crown Prince of Dubai, and Chairman of Dubai Executive Council, said at the launch of Dubai Virtual Asset Regulatory Authority (VARA )into the Metaverse in May 2022:

“We have exceeded the role of an early adopter to become an innovator and participant in shaping the future of this technology . . . VARA represents a serious effort to build a new, powerful economic sector that contributes to the nation's economy and creates new investment opportunities, and this is possible through the safe and modern regulatory solutions we envision”.?

For any new economic model to thrive in a country, it needs the political will of its political leadership to support the innovation through the creation of enabling legal and policy frameworks aimed at not only legitimating the innovations within that economic model but also assuring private sector investors of the stability and safety of the model making it attractive for investments to take place. Looking at the UAE model both in providing clarity on regulation of the business of offering, issuing, listing and trading of virtual/cryptocurrencies as well as the criminalisation of illegal activities in this business such as AML laws, UAE has set itself apart as a global leader in this ecosystem. We are yet to see how this pans out in the future.

[1] https://www.dhirubhai.net/pulse/how-does-united-arab-emirates-uae-legislate-regulate-virtual-white/?published=t

[2] https://www.dhirubhai.net/pulse/how-does-united-arab-emirates-uae-legislate-regulate-on-shore-white/?trackingId=pYVHLfyUAlwD02rslDRH7w%3D%3D

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