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Remittances and Trade-Based Money Laundering

Dubai is a global hub for several kinds of money flows that are vulnerable to abuse.

In particular, these include remittance services and trade-based money laundering, says Tom Keatinge, director of the Centre for Financial Crime and Security Studies at the London-based Royal United Services Institute.

Dubai-based remittance companies such as Al Ansari Exchange and Al Ghurair Exchange send vast amounts of money around the world. The informal, centuries-old hawala system is another avenue for money flows, and it is neither well regulated nor transparent.

These systems are essential for the millions of foreign blue collar workers who toil throughout the Gulf region and must send money back to families in places like India and the Philippines.  

The 7.8 million foreign workers in the UAE (the fifth largest such population in the world, according to the United Nations) sent 121.1 billion dirham ($33 billion) to their home countries or other recipients abroad last year.

However, money laundering rules enacted after the Sept. 11, 2001 terrorist attacks have made it  more cumbersome to use regular channels for these transactions. Banks and money transfer services like Western Union require identification and paperwork designed to detect money laundering; the greater the amount being sent, the more paperwork.

As a result, many foreign workers have turned to informal avenues such as hawala, a centuries-old trust-based remittance system for which Dubai is famous. If an individual or business wants to pay a person in another country, hawala allows the sender to pay a sum to a local representative; that person’s counterpart in a second country pays the intended recipient.

Law enforcement agencies have expressed concern over the system’s lack of regulation and transparency.

The European Union’s counter-terrorism coordinator has told told the UK House of Lords that hawala and other alternative remittance systems “may offer an opportunity for criminals and terrorist organisations to move funds virtually without there being any traceability.”

Trade offers another opportunity to obscure the flow of money in Dubai.

Fake companies are set up and appear to engage in trade when in reality all they’re sending, along with paperwork for nonexistent goods, is money. Such trade-based money laundering is an “increasingly important money laundering and terrorist financing vulnerability,” according to the Financial Action Task Force.

Keatinge says that Dubai is a popular source.

“This intersection of trade and money is very powerful,” Keatinge said. “If you have a system that is vulnerable to abuse like this, then it’s not only open to abuse by criminals, but also for terrorist financing.”

These concerns have also been expressed by the US State Department.

“There are some indications that trade-based money laundering occurs in the UAE, including through commodities used as counter-valuation in hawala transactions or through trading companies,” the department wrote in its 2014 International Narcotics Control Strategy Report.

A transnational organized crime group, the Altaf Khanani organization, has laundered billions of dollars in criminal proceeds annually. Its clients have included Chinese, Colombian, and Mexican organized crime groups and individuals associated with Hizbullah and other designated terrorist organizations, according to the US Treasury.

The organization’s head, Altaf Khanani and the Dubai-based Al Zarooni Exchange, a money services business, have been involved in moving funds for the Taliban.

The US Drug Enforcement Administration arrested Khanani in 2015. Many of his accomplices and connected companies — including his brother Javed, his son Obaid, and his business partner Atif Polani — were sanctioned by the US the following year.

The UAE Central Bank revoked the license of Al Zarooni Exchange for violations of anti-money laundering regulations, but data shows that some individuals involved in the scandal are connected to Dubai’s luxurious properties.

Obaid, for instance, is connected to at least 21 properties in Dubai worth about US $12 million.

Some Dubai companies also appear to play a pivotal role in hiding the true nature of financial transactions in cash-based economies such as Iraq, which earns foreign currency — mainly US dollars — by selling oil. The proceeds are banked with the US Federal Reserve and delivered to the country in cash at regular intervals.

That’s where things can get interesting.   Iraq-based companies need US dollars to finance imports. They exchange dinars, Iraq’s local currency, for dollars through controlled exchange houses. Usually the exchanges are only approved on an as-needed basis, so companies must present an invoice for the goods they intend to purchase with dollars.   Keatinge and other experts say numerous Dubai companies are more than willing to supply fake invoices, helping bring dollars into the economy to purchase smuggled goods, guns, drugs, or to facilitate money laundering.  

“These frontier type, wild-west style goings on in Dubai fuel illicit finance in other parts of the region,” Keatinge said. “And some of that … is clearly linked to terrorist activity.”

This story is part of the Global Anti-Corruption Consortium, a collaboration started by OCCRP and Transparency International. For more information, click here.

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