In recent years, the United Arab Emirates (“UAE”) has strengthened its anti-money laundering (“AML”) and counter-terrorism financing (“CTF”) framework by revising regulations on ultimate beneficial ownership (“UBO”). The new regulations, issued in Cabinet Decision No. 109 of 2023 and Cabinet Decision No. 132 of 2023, aim to combat crimes related to money laundering and terrorist financing. This briefing explores these updates and their implications for companies in the UAE.
1. Introduction
Similar to the Old UBO Cabinet Decision (Cabinet Decision No. 58 of 2020), the objective of the New UBO Cabinet Decision (Cabinet Decision No. 109 of 2023) is to define the core responsibilities of each licensing authority (“Registrar”). These key duties include overseeing the licensing, registration, and shareholder registry procedures within both free zones and the mainland. The New UBO Cabinet Decision aims to establish more effective and sustainable methods for supervising these processes related to identifying beneficial owners within each Registrar.
The scope of application of the New UBO Cabinet Decision remains unchanged and includes both mainland and free zone entities, except for:
- companies fully owned by federal or local governments or their wholly owned subsidiaries;
- financial free zones, namely Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM); and
- so-called Governmental Partners, defined as federal or local governments that contribute to or own shares in the company.
2. What are the key differences between the Old and New UBO Cabinet Decisions?
The New UBO Cabinet Decision largely mirrors its predecessor but introduces certain regulatory revisions. While the Old UBO Cabinet Decision established the framework for identifying and registering beneficial owners of legal entities in the UAE, the New UBO Cabinet Decision focuses on defining UBOs in complex structures where identifying the real beneficiaries may be challenging. According to the New UBO Cabinet Decision, a complex structure is an institutional mechanism designed to obscure the identity of the natural person who ultimately owns or controls the legal entity.
To address these complexities, the New UBO Cabinet Decision introduces an administrative unit within each Registrar responsible for enforcing rules and policies to identify beneficial owners and address suspicious financial activities. This unit reports in real time to the Ministry of Economy and is supervised by the Supreme Committee, which oversees the UAE’s anti-money laundering and counter-terrorism financing strategies.
3. Who is recognized as a UBO and how can the UBO be identified?
The definition of a beneficial owner remains consistent with the Old UBO Cabinet Decision, covering individuals who own or exercise ultimate control over a legal entity. This control may be through direct or indirect ownership of 25 % or more of the entity’s capital or by holding voting rights of 25 % or more. This includes ownership through chains of control or other means, such as the right to appoint or dismiss the majority of the directors.
The New UBO Cabinet Decision introduces a risk-based approach for identifying beneficial owners, especially in complex structures. This approach aims to prevent the misuse of legal entities for money laundering or terrorism financing by conducting annual risk assessments and taking necessary measures to mitigate risks.
The decision outlines five steps for identifying UBOs:
- Apply the Registrar’s risk-based approach, especially in complex structures;
- Trace the actual beneficial owner through various legal entities or arrangements;
- If multiple individuals jointly own or control a portion of a legal entity, all are considered joint owners;
- If no natural person is identified or there is reasonable doubt, the person controlling the legal entity through other means is deemed the beneficial owner;
- In the absence of identifiable ownership, the senior management officer is treated as the ultimate beneficial owner.
4. What measures must existing com- panies take, and what happens in cases of non-compliance?
Under the New UBO Cabinet Decision, legal entities must maintain accurate records of each beneficial owner and shareholder. These records must contain all relevant data, and the legal entity is responsible for keeping them updated and reporting any changes to the Registrar within 15 days of becoming aware of such changes.
The legal entity must also provide additional information requested by the Registrar within 14 days of the request. The Registrar is responsible for obtaining and updating the relevant data, ensuring its accuracy.
The New Administrative Penalties Decision outlines the penalties for non-compliance, particularly for companies with complex structures. For a first-time violation, the company will receive a written warning and must take corrective action within 15 to 30 days. For a second violation, the company will receive a fine and another warning. For a third violation, the company will face a fine double the previous amount, and its commercial license may be suspended, with business premises closed until the fine is paid and the violation corrected.
Administrative penalties range from AED 15,000 to 100,000, depending on the severity of the violation. The dead- line for correction depends on the nature of the infraction.
5. Conclusion and Outlook
While the content of the Old UBO Cabinet Decision remains largely unchanged, the New UBO Cabinet Decision introduces amendments with a focus on identifying beneficial owners within complex structures. Implementing a risk-based approach requires stricter procedures for identifying beneficial owners, and Registrars must conduct thorough due diligence to ensure compliance.
However, this approach may present challenges for companies operating in the UAE, particularly those with complex ownership structures, as it may lead to delays in the incorporation process and difficulties in obtaining the necessary documentation. The increased compliance burden will require companies to maintain accurate records, conduct regular audits, and implement strong internal controls.
Furthermore, the lack of explicit guidelines about the risk-based approach in the New UBO Cabinet Decision leaves companies uncertain about their compliance obligations, complicating efforts to mitigate risks related to beneficial ownership. Without clear guidance, companies may struggle to assess their responsibilities.
The New Administrative Penalties Decision underscores the importance of consulting the Registrar to ensure compliance and avoid penalties, including fines or potential business suspension. This highlights the crucial role of Registrars in providing clear guidance to help companies navigate the New UBO Cabinet Decision.
Dr. Constantin Frank-Fahle, LL.M.
Founding Partner
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