UAE banks 'recognised' by the DFSA now subject to DIFC Court jurisdiction

The DIFC Court of Appeal has in First Abu Dhabi Bank PJSC & Anor v. Larmag Holdings NV [2019] CA 010 (25 Sep 2019) confirmed a significant extension of the party jurisdiction of the DIFC Courts under Art 5(A)(1)(a). 

Even if UAE-regulated banks are merely ‘recognised’ by the DFSA, they are to that extent ‘authorised’ and ‘registered’ to carry on financial services for the purposes of Article 2 of the Judicial Authority Law (the ‘JAL’) and therefore ‘Licensed DIFC Establishments’ party to the jurisdiction of the DIFC Courts.

Under Art 5(A)(1)(a) JAL, ‘Licensed DIFC Establishments’ are subject to the party jurisdiction of the DIFC Courts. On the face of Art 5(A)(1), claims by and against them are subject to the mandatory and exclusive jurisdiction of the DIFC Courts, regardless of the subject-matter of the relevant claims. 

‘Licensed DIFC Establishments’ are defined in Art 2 JAL as entities ‘licensed, registered or authorised by the [DFSA] to provide financial services or conduct any other activities in accordance with the DIFC Laws’.

In a landmark ex tempore ruling, the DIFC Court of Appeal has found that UAE banks that are not ‘authorised’ or ‘registered’ for the purposes of the DIFC Regulatory Law or the DFSA Rulebook nonetheless are, in a broader sense, authorised or registered to conduct financial services in the DIFC even if they have been merely ‘recognised’ by the DFSA for regulatory purposes. 

This is because, by reason of being ‘recognised’ by the DFSA foreign banks regulated in their home state, they benefit from an implied exemption in the DFSA Rulebook from the relevant statutory prohibitions against promoting and carrying on financial services in the DIFC (the ‘Prohibitions’) and are on that basis allowed to trade on NASDAQ Dubai.

To that extent they are found to have been ‘authorised’ and/or ‘registered’ in the broader sense of those terms as used in the standard translation of the original Arabic of the JAL.

This ruling has been seen as a substantial extension of DIFC Court party jurisdiction, not least because it disrupts the conventional view, held since Al Khorafi v. Bank Sarasin-Alpen (ME) Ltd [2011] DIFC CA 003 (5 January 2012), that foreign banks can avoid that jurisdiction by carrying on any activities requiring authorisation through a licensed subsidiary.

The judgment of the Court was formally limited in its effect to only UAE-regulated banks. However, the Court implicitly rejected the DFSA’s guidance that Recognised Members trading on DIFC exchanges were not carrying on financial services in the DIFC. It follows that all Recognised Members, wherever regulated, need to rely on the relevant exemptions and may therefore be ‘authorised’ or ‘registered’ in the broader sense.

Background

The Applicant, Larmag, which is a Dutch property investment company, alleged that there was a serious issue to be tried as to whether it had been induced by alleged fraudulent statements by a UAE resident to transfer certain bonds (the ‘Bonds’) to accounts held with the Respondents, First Abu Dhabi Bank PJSC and FAB Securities LLC (together ‘FAB’), both of which are registered, regulated and head-quartered in the UAE. 

Larmag applied to the DIFC Court for a proprietary injunction to restrain any action by FAB in disposing of or dealing with the Bonds and to give related disclosure in respect of them. It was open as to its intention to use its claims against FAB as anchor defendants in order to assert ‘necessary and proper party’ jurisdiction over its claims against the UAE resident and entity said to have perpetrated the alleged fraud.

FAB challenged jurisdiction on the basis that they were not a Licensed DIFC Establishments in that they had not been ‘licensed, registered or authorised’ by the DFSA. Insofar as FAB carried on any financial services in the DIFC, they did so pursuant to a regulatory exemption or ‘carve out’ from the Prohibitions rather than any licence, registration or authorisation. 

FAB, formed from the merger in 2017 of the First Gulf Bank and the National Bank of Abu Dhabi, were in fact licensed by the Abu Dhabi Department of Economic Development and the UAE Central Bank and registered with the UAE Securities and Commodities Authority. It was this ‘home-state’ authorisation and regulation in the UAE that allowed FAB to ‘passport’ into the DIFC for the limited purpose of trading on NASDAQ Dubai.

Justice Sir Richard Field (the ‘Judge’) was content to make a proprietary injunction restraining any disposal by FAB of the Bonds on the basis that there was an arguable case that the DIFC Court had jurisdiction over Larmag’s claims against FAB. In view of the FAB’s obligations under UAE and Abu Dhabi law, the Judge agreed to resolve FAB’s jurisdictional challenge on an expedited basis. 

In his Jurisdictional Ruling in Larmag Holdings NV v. First Abu Dhabi Bank PJSC & Anor [2019] CFI 030 (4 August 2019), the Judge determined that Court had jurisdiction to hear Larmag’s claim against FAB and duly gave his reasons for doing so.

Regulatory framework

Given that the DIFC was established as a global financial centre, it is perhaps unsurprising that its very first law, DIFC Law No. 1 of 2004, was the Regulatory Law, setting out the regulatory framework for entities to be licensed and regulated in the DIFC.

The Regulatory Law gave the DFSA’s Board the power to determine the requirements for licensing, authorising and registering firms, and its Chief Executive the power to license, authorise, register and recognise firms. 

Part 3 of the Regulatory Law contains the regulatory regime for the authorisation of firms by the issue of a licence that exempts the firm from the relevant Prohibition. 

Part 4 in turn deals with the registration of such ancillary service-providers as ‘Designated Non-Financial Businesses and Professions’ (or ‘DNFBPs’) and auditors. Registration exempts them from the relevant prohibitions on carrying on their activities in or from the DIFC.

The provisions for the recognition of foreign firms and exchanges that are regulated by their home-state regulator were initially found in the Regulatory Law. The DFSA’s stated rationale for the recognition regime was that it permitted recognised firms to carry on limited cross-border activities ‘without the need to be authorised or otherwise licensed by the DFSA’ in order to avoid imposing on them a disproportionate regulatory burden.

The DFSA further explained that recognition was intended to apply a much lighter regulatory burden on firms whose activities were believed to be carried on outside the DIFC and which were in any event regulated in their home jurisdiction. The intention was to provide easy market access to firms that would increase liquidity within those markets.

UK financial services practitioners will note that the rights of Recognised Members are comparable to the ‘passport’ rights of EEA firms carrying on financial services in the UK under the relevant single market directives without being authorised by the FCA.

The recognition regime

In 2012, the statutory provisions in respect of registration were moved into the new Markets Law on the basis that the regulatory regime was about providing access to capital markets.

There is provision for the recognition of banks (as ‘Recognised Members’) and exchanges (as ‘Recognised Bodies’) on the DFSA’s being satisfied that they met the ‘Recognition Criteria’. These are found in the Recognition Module (‘REC’) of the DFSA’s Rulebook. 

The Recognition Criteria include requirements in respect of the home-state regulator and its cooperation with the DFSA. They also include a requirement that Recognised Members deal on the relevant DIFC exchange only for (i) non-DIFC customers or (ii) DIFC customers on an unsolicited request for execution-only services. Those conditions do not, however, apply to Recognised Members regulated in the UAE. To that extent, there are implicit regulatory exemptions from the statutory Prohibitions.

There are presently 60 Recognised Members. Many of them are firms from global banking groups such as Credit Suisse, Goldman Sachs and HSBC, and from UAE groups such as ADCB, Mashreq and Emirates NBD. Leading banking groups often have an authorised entity, for example Goldman Sachs International, and a recognised entity, Goldman Sachs & Co. Insofar as most of these entities are also members of NASDAQ Dubai, the intention in seeking recognition appears to be to trade securities on that DIFC exchange.

Many of the leading UAE companies, such as Emaar Properties, ADCB, Arabtec, DIB, Etisalat and Union Properties have been listed on NASDAQ Dubai’s equity futures market. A number of equities, sukuk and bonds remain listed on NASDAQ Dubai.

As for foreign exchanges, there are some 15 Recognised Bodies that are permitted to accept trades from DIFC customers by reason of their recognised status. These include leading exchanges such as the Chicago Mercantile Exchange Inc, the London Stock Exchange plc, and the Tokyo Commodity Exchange Inc. They benefit from an implicit statutory exemption from the relevant Prohibition by reason of their being admitted by the DFSA to the List of Recognised Persons.

Recognised Members are not subject to any of the core modules of the DFSA Handbook, in particular the Anti-Money Laundering, Conduct of Business, Collective Investment Rules, Prudential or Takeover Rules Modules of the DFSA Rulebook. They cannot carry on core financial services such as accepting deposits, providing credit, or managing assets. They can only deal in investments and, in the case of UAE firms, provide related advice. They are required to pay minimal or no annual fees to the DFSA for their recognised status.

Insofar as Recognised Members do trade in the DIFC, that trading is plainly subject to the subject-matter jurisdiction of the DIFC Courts insofar as relevant contracts are concluded or performed in the DIFC or relevant incidents occur in the DIFC. Further, they are required under the NASDAQ Dubai Business Rules, as a condition of admission to NASDAQ Dubai, to ‘opt in’ to DIFC Court jurisdiction in respect of their trading in the DIFC.

Findings of the Judge

In his Jurisdictional Ruling, the Judge rejected FAB’s submissions that the Arabic words used in the JAL, namely ‘????’ / markhas (licensed), ‘????’ / musajal (registered) and ‘???? ??’ mossarah laho (authorised) were intended to track the specific concepts of licensing, registration and authorisation used consistently in all of the Regulatory Law, the Markets Law and the DFSA Rulebook.

Following the suggestion of the Court of Appeal in Al Khorafi that Arabic may be imprecise in its legal meaning, he found that, because no expert evidence had been adduced on the expedited timetable, he was required to reject a ‘literalist’ construction of the Arabic words and so to adopt a broad and non-technical construction, in particular of authorisation.

In identifying the legislative intent by reference to his own construction of the relevant provision, he found that the underlying purpose was ‘to render those entities which are officially permitted by the DIFC regulatory authorities to provide financial services in the DIFC, or otherwise carry on business or conduct any activity in the DIFC, subject to the jurisdiction of the DIFC Courts’. 

On that basis ‘authorised’ meant ‘permitted’ in its broadest sense. It was sufficient that FAB was allowed, under an implicit regulatory exemption from the relevant Prohibition, to carry out limited trading on NASDAQ Dubai for FAB to be subject to the party jurisdiction of the DIFC Courts in respect of all its activities in any jurisdiction.

Similarly, to the extent that the DFSA maintains what the Markets Law describes as a ‘list’ of Recognised Persons, they may be said on a broad construction of the statutory language to have been ‘registered’ by the DFSA.

Any exorbitance of jurisdiction that may result from those findings would be mitigated by the fact that, if the rival jurisdiction were in the UAE, the Recognised Person could bring a jurisdictional challenge in the Union Supreme Court, and if it were outside the UAE, then they could seek a stay of the DIFC Court proceedings as being a forum non conveniens.

The Judge expressly restricted the scope of his ruling to the UAE-regulated firms that had the benefit of less-restricted trading on a DIFC exchange, so they can, for example, trade for DIFC customers or for non-DIFC customers pursuant to solicitation or advice from the relevant firm. He found that Recognised Members that are licensed by a regulator elsewhere in the UAE are Licensed DIFC Establishments for the purposes of founding the party jurisdiction of the DIFC Courts.

Exceptionally, the Judge gave FAB permission to appeal his own judgment on the grounds both that the appeal had ‘real prospects of success’ and that there was a ‘compelling reason why the appeal should be heard’, in that ‘the Court’s Jurisdictional Ruling has important implications for entities that are licensed and supervised by a financial services regulator in the UAE and which are granted by the DFSA the status of ‘Recognised Members’’.

Jurisdictional Ruling upheld on appeal

Before the Court of Appeal, FAB argued that the original Arabic words translated in the standard English version of the JAL as ‘licensed’, ‘registered’ and ‘authorised’ had to be construed in their legislative context, not least as they are expressly qualified in Article 2 by the words ‘in accordance with the DIFC Laws’. In that context, as in ordinary English, there is an obvious distinction between being expressly authorised by licence to do something, and being allowed to do something by the absence of, or exemption from, a prohibition.

The meaning of the Arabic words had been established before the Judge by reference to an authoritative legal dictionary, and there was no requirement of expert evidence on what was in essence an issue of Dubai law. Even if Larmag had failed that evidence in seeking to establish the Court’s jurisdiction, that failure did not of itself compel a broad construction of the relevant words, and a rejection of their technical meanings, to the advantage of Larmag.

It is striking that a qualifying definition for the party jurisdiction of the DIFC Court was drafted in precisely the same technical terms as were used in the regulatory framework of the Regulatory Law, the Markets Law and the DFSA Handbook. It can be inferred that these were conceived and drafted when the DIFC was established as a global financial centre by the same of advisors who had a consistent legislative purpose.

The reference to entities ‘licensed, registered or authorised by the [DFSA]’ was not therefore a list of terms all of which were subsumed within ‘authorised’ in its broader sense of ‘allowed’ or ‘permitted’. Rather it was a reference to distinct and specific regimes within the regulatory framework of the DIFC.

The legislative purpose was accordingly to align the statutory and regulatory framework by which entities would be regulated by the DFSA with the scope of the party jurisdiction of the DIFC Courts. Just as the DFSA has little interest in regulating foreign firms already supervised by their home state regulators, it may be assumed that the DIFC Courts had little interest in assuming jurisdiction over activities of those firms that had no connection to the DIFC.

It is unlikely that the framers of the JAL would have intended the broader construction preferred by the Judge in view of the obvious likelihood of jurisdictional conflict. While there may be means of mitigating that conflict under the principles of forum non conveniens and in UAE constitutional law, these are likely to be time-consuming and costly in practice.

Larmag, in responding to the appeal, endorsed the reasoning of the Jurisdictional Ruling, further arguing that the wording of the JAL should be given an ‘autonomous’ meaning, unfettered by the language of DIFC legislation and DFSA regulation. In oral argument, it sought to support that point by showing that the words ‘licensed’, ‘registered’ and ‘authorised’ were used in the broader definition of ‘DIFC Establishment’ and may therefore be applicable in a context outside the sphere of financial regulation.

The Court of Appeal, composed of Chief Justice Tun Zaki Azmi, H.E Deputy Chief Justice Omar Al Muhairi and H.E Justice Ali Al Madhani, dismissed the appeal in an ex tempore judgment with reasons to follow. 

Implications of the Jurisdictional Ruling

If the reasoning of the Jurisdictional Ruling is upheld, then it will, as the Judge recognised, have important implications for banks that are registered on-shore in Dubai and in the other Emirates of the UAE who will now fall subject to the party jurisdiction of the DIFC Courts. It has been said in the DIFC Courts that such jurisdiction is only mandatory and exclusive in relation to the jurisdiction of the on-shore Dubai Courts, but such an implication runs contrary to the express wording of Article 5(A)(1) of the JAL.

It is unclear whether the Courts of on-shore Dubai or the other Emirates will recognise the party jurisdiction of the DIFC Courts over their ‘own’ banks. Where there is jurisdictional conflict between the Courts of different Emirates then the UAE Constitution requires that such conflict be resolved by decision of the Union Supreme Court. That issue of jurisdiction is likely to be considered an issue of public order on which there can be no discretion.

In spite of the expressly limited scope of the Jurisdictional Ruling, it is not clear that its reasoning can be limited to UAE-regulated firms. Indeed, firms regulated beyond the UAE are still permitted by the implied exemption in the DFSA Rulebook to trade on NASDAQ Dubai, albeit subject to certain conditions, by reason of the recognised status. To that extent they are ‘authorised’ by the DFSA on the Judge’s broad construction of that term.

Similarly, to the extent that the operators of foreign exchanges may permit customers in the DIFC to trade on their exchanges, that trading is permitted by exemption from the relevant Prohibition and may be said to have been similarly ‘authorised’.

These consequences may once have been avoided on the ground that the Recognised Persons did not benefit from any relevant exemption. The DFSA has consistently expressed the view that the exemptions are unnecessary and are applied by abundance of caution in circumstances where no financial services are in fact carried on in or from the DIFC. However, that view has been expressly doubted in the Jurisdictional Ruling.

It follows that all Recognised Members and Recognised Bodies will need to give serious consideration to the jurisdictional consequences of their recognised status in the light first of the Jurisdictional Ruling and then of such reasons a may be given by the Court of Appeal for its upholding the Jurisdictional Ruling.

It is hoped that these findings and their consequence will not have a chilling effect on the desire of foreign banks and exchanges to seek the recognition of the DFSA for the purposes of trading on DIFC exchanges and accepting trades from DIFC customers.

Rupert Reed QC and Sophia Hurst of Serle Court Chambers acted with Rita Jaballah, Patrick Dillon-Malone SC and Jonathan Brooks of Al Tamimi & Co for FAB.