Libya Tribune

By Matthew Page & Jodi Vittori

Dubai is just one of many enablers of global corruption, crime, and illicit financial flows, but addressing the emirate’s role presents anticorruption practitioners, law enforcement agencies, and policymakers with particularly complex challenges.

SUMMARY

A twenty-first-century city, Dubai is a global financial center, a shopper’s paradise, and an oasis for the world’s well-to-do. While the vast majority of financial, business, and real estate transactions in Dubai are not associated with illegal activity, part of what underpins Dubai’s prosperity is a steady stream of illicit proceeds borne from corruption and crime.

The wealth has helped to fuel the emirate’s booming real estate market; enrich its bankers, moneychangers, and business elites; and turn Dubai into a major gold trading hub. Meanwhile, both Emirati leaders and the international community continue to turn a blind eye to the problematic behaviors, administrative loopholes, and weak enforcement practices that make Dubai a globally attractive destination for dirty money.

Corrupt and criminal actors from around the world operate through or from Dubai.

As leaders in Washington and several other Western capitals reassess their strategies and relationships in the Gulf to reflect changing geopolitical realities, new economic imperatives, and growing divergences with regional partners on a range of policy issues, there is a fleeting opportunity to elevate and address widespread concerns about Dubai’s role in enabling global corruption and its many destabilizing effects. But doing so will require a fine understanding of why and how corruption has become such a central element of Dubai’s political economy.

It will also require anticorruption practitioners to recognize that traditional—and largely punitive—policy instruments will not succeed absent a more affirmative and sustained effort by Emirati leaders to ensure that Dubai’s economy remains competitive and attractive over the long term.

MAJOR AREAS OF CONCERN

  • Corrupt and criminal actors from around the world operate through or from Dubai. Afghan warlords, Russian mobsters, Nigerian kleptocrats, European money launderers, Iranian sanctions-busters, and East African gold smugglers, all find Dubai a conducive place to operate.
  • Dubai’s property market is a magnet for tainted money. Built to attract foreign buyers, the emirate is dominated by towers of upscale flats and man-made islands studded with luxury villas. Property developers and real estate agents accept huge sums from politically exposed persons—individuals entrusted with a prominent public function, as well as their families and associates—and other suspicious buyers. Even individuals targeted by international sanctions use Dubai property to launder money due to weak regulations and lax enforcement.
  • Now one of the world’s largest gold hubs, Dubai is also a place to launder artisanally mined gold, especially from conflict-prone parts of East and Central Africa. Opaque business practices and regulatory loopholes allow this laundered gold to enter world markets on a massive scale.
  • With approximately thirty free trade zones, Dubai is a haven for trade-based money laundering. Operating with minimal regulatory oversight or customs enforcement, these zones allow businesses to disguise the proceeds of crime via the over- and under-invoicing of goods, multiple invoicing, and falsifying of other trade documentation. Many migrant workers are also treated as commodities in Dubai through the kafala system, an exploitative migrant labor scheme that shares some characteristics with human trafficking.
  • The central government of the United Arab Emirates (UAE), Dubai officials, and Emirati law enforcement agencies largely possess the technical knowledge and capacity to tackle these challenges. Emirati regulators, officials, and law enforcement agents are aware of how Dubai is being used as a conduit for illicit financial transactions. This is a feature, not a bug, of Dubai’s political economy.
  • What happens in Dubai—and the UAE—matters because both are strategically important to the United States, United Kingdom (UK), and other countries. The UAE is one of Washington’s and London’s key security and trading partners in the region. Dubai, in particular, has close historical and commercial ties to neighboring Iran. Moreover, many of the illicit activities outlined in this report have strategic consequences for the United States and UK insofar as they exacerbate conflict, transnational organized crime, terrorism, and poor governance in countries all around the world.

THORNY ANTICORRUPTION AND ORGANIZED CRIME CHALLENGES

Dubai is just one of many criminal facilitation nodes throughout the world, but addressing the emirate’s problematic role presents anticorruption and law enforcement practitioners and policymakers with particularly complex and delicate challenges.

Foremost among these challenges is the huge scope and sophistication of illicit financial flows and global facilitation networks that terminate in or transit through Dubai. These problematic linkages intersect with a range of other regional and functional policy concerns.

Secretive and standoffish, Dubai often rebuffs outside attempts to discern whether kleptocrats and criminals are buying property or laundering money through the emirate. International law enforcement agencies find it especially difficult to acquire information and solicit cooperation from Emirati authorities.

In its April 2020 report on the UAE, the intergovernmental Financial Action Task Force (FATF) specifically called out Dubai for its limited number of money laundering prosecutions and convictions. As a result, the FATF has placed the emirate under a year-long observation to ensure that it fully implements recently passed anti–money laundering legislation, actively works to dismantle international money laundering networks, and improves formal cross-border cooperation on criminal cases.

With this charge, policymakers and practitioners cannot overlook Dubai’s failure to take the remedial policy and enforcement steps needed to stem illicit financial flows.

Dubai is just one of many criminal facilitation nodes throughout the world, but addressing the emirate’s problematic role presents anticorruption and law enforcement practitioners and policymakers with particularly complex and delicate challenges.

Other major challenges are the emirate’s highly personalized institutions and lack of mechanisms to hold elites accountable. Although kleptocrats and criminals are similarly active and able to exploit lax regulations in the United States, the UK, and many other European countries, they face significantly more scrutiny from law enforcement, media, and civil society in those countries than they do in Dubai.

The emirate does not uphold open elections, a free press, a vigorous civil society, and the right to peaceful protest. Absent domestic and international pressure, Emirati elites are free to resist reforms that endanger their vested interests or their preferred political economic vision for Dubai and the UAE overall. Until international policymakers and practitioners intensify their efforts to incentivize and pressure Emirati decisionmakers to make reforms and crack down on illicit financial flows through the emirate, Dubai will remain a challenge to anticorruption and anticrime efforts globally.

Finally, calling Dubai out on its prominent role in facilitating illicit financial flows bumps up against competing strategic policy priorities important to Western decisionmakers. The UAE is a stable and reliable regional ally of the United States, the UK, and other European countries.

The Emirati government has long enjoyed a special friendship with Washington—one that transcends political party lines. A former U.S. ambassador to the UAE has remarked, “It was well known that if you needed something done in the Middle East, the Emiratis would do it.”

From a political-military standpoint, the UAE has publicly supported the U.S. government’s hard-line policy toward Iran. Anticorruption advocates and law enforcement practitioners must acknowledge the genuine importance of these close strategic ties and take them into account when dealing with Western policymakers who look at the UAE with a broader spectrum of priorities in mind.

WAYS AHEAD

Incremental reforms are feasible, realistic, and in the strategic interest of Emirati leaders and their international partners. Dubai’s role as a facilitator of corruption is unsustainable over the long term because it is predicated on continued international tolerance of the emirate’s permissive attitude toward many types of illicit activities.

Being placed under observation by the FATF is an important signal that international scrutiny and pressure on Dubai’s activities will only increase. Moreover, the emirate will remain disproportionately vulnerable to external shocks like the 2008 global financial crisis, when not only legitimate business, real estate, travel, and finance markets suffered but also criminal enterprises.

The emirate could immediately begin weaning itself off illicit financial flows by enforcing existing laws more effectively and transparently. Dubai could also tighten regulation of the real estate, gold, and banking sectors; liberalize labor laws; tackle trade-based money laundering; and deepen cooperation with international law enforcement.

Being placed under observation by the FATF [Financial Action Task Force] is an important signal that international scrutiny and pressure on Dubai’s activities will only increase.

Western policymakers can also play a role in encouraging and pressuring the Dubai government and the UAE to implement reforms, striking a balance between their anticorruption concerns and other strategic priorities.

Potential actions could include U.S., UK, and European policymakers imposing travel and financial sanctions on facilitators of UAE-based crime and corruption. They could also focus more on soft power issues, such as the lack of human rights, democracy, and good governance in Dubai and the UAE overall, rather than concentrating almost solely on terrorism finance and anti-Iran activities.

As part of this effort, security engagement and assistance can be conditioned on needed reforms. Further, given the lack of journalistic and civil society freedom in the UAE, Western governments could increase their support for external independent journalists, civil society groups, and anticorruption and human rights researchers reporting on Dubai.

Nonstate entities could also contribute to such efforts. International organizations, including the United Nations and the Bretton Woods institutions, could take a harder look at Dubai’s role in facilitating illicit financial flows and consider adding the emirate to various blacklists in line with the FATF’s recent findings.

International organizations, civil society groups, and Western governments could also distance themselves from Dubai’s reputation laundering efforts, such as by avoiding counterproductive or mixed messages when participating in events that burnish Dubai’s anticorruption, human rights, or conflict prevention credentials.

These international actors would need to work together to craft a coherent and coordinated set of incentives and disincentives—the so-called carrots and sticks—that would influence Emirati leaders’ decisionmaking calculus.

If Dubai’s role as a global hub for illicit financial flows begins to have real-world reputational consequences—skewing how Western governments and multinational corporations engage with the UAE—then Dubai leaders’ willingness to embrace reforms and rein in the problematic activities described in this report will increase over time.

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Matthew T. Page is a nonresident scholar at the Carnegie Endowment for International Peace.

Jodi Vittori is a nonresident scholar in the Democracy, Conflict, and Governance Program. She is an expert on the linkages of corruption, state fragility, illicit finance, and U.S. national security.

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