Author: afridi-angell

The new DIFC Employment Law: key changes

On 12 June 2019, the Dubai International Financial Centre (the DIFC) announced the enactment of DIFC Law 2 of 2019 (the New DIFC Employment Law) to replace the existing DIFC Law 4 of 2005 (the Old DIFC Employment Law). The New DIFC Employment Law is to come into force on 28 August 2019 and will directly affect almost 24,000 employees based in the DIFC.

 

As the leading regional financial centre, the DIFC’s employment law is a fundamental piece of legislation which is key in ensuring a balance between an employer’s business interests and employee rights within the DIFC. After an extensive consultation process, the New DIFC Employment Law has introduced a number of changes which focus on this balance.

 

The repeal of the Old DIFC Employment Law 

 

The New DIFC Employment Law “repeals and replaces” the Old DIFC Employment Law in its entirety. However, the transitionary provisions (i.e. provisions which clarify the effect of the new law on any rights accrued under the old law) set out in Article 1 have ensured that any “right, remedy, debt or obligation which has accrued” under the previous law would not be prejudiced by the enactment of the new law, subject to a few exceptions.

 

Essentially, the New DIFC Employment Law has no retrospective effect and proceedings already before the DIFC Court (including appeals) would continue to be based on the provisions of the old law.

 

Conditions of employment, probation and part-time employment 

 

Article 17 of the new law now makes provisions with regard to the employment of part-time employees (a concept not recognised under the old law). A part-time employee is defined as an employee whose employment contract either stipulates: (a) less than eight working hours per work day, inclusive of any rest, nursing or prayer breaks; (b) less than five work days per work week; or (c) terms of employment which do not constitute full time employment.   All  provisions  of  the  new law  apply  to  part-time employees except for leave entitlements which are to be calculated on a pro rata basis as provided for in Article 17(2).

 

Other changes to conditions of employment include the expansion of maternity leave benefits for female employees who adopt a child less than five years old (Article 37(3)), introduction of up to five days of paternity leave for male employees to be taken within a month of the child being born (Article 39) and a reduction of sick pay (Article 35) as follows:

 

a) hundred per cent of the employees daily wage for the first ten work days of sick leave taken;

b) fifty per cent of the employees daily wage for the next 20 work days of sick leave taken; and

c) no further pay for the remaining maximum sick leave entitlement (60 work days per year).

 

In terms of Article 11(2), the conditions of employment set out in the New DIFC Employment Law are “minimum requirements” and cannot be waived even by express agreement by the employer and the employee unless such waiver is specifically allowed under the new law. It is possible to agree on conditions that are more favorable to the employee in an employment contract.

 

One such instance where an employer may change the minimum requirements by express written agreement is the maximum weekly working time of an employee. In terms of Article 22, the employee’s maximum working time is 48 hours per week. However, Article 22 allows an employer to increase this limit if the employee consents in writing. Taking into account the mandatory daily rest period (11 hours per day) and the weekly rest period (24 hours per week), an employer may increase the weekly working time up to 78 hours if the employee consents to such increase in writing.

 

The New DIFC Employment Law has also formally recognised the concept of probation (not specifically recognised under the old law). In terms of Article 14(2)(l), the maximum period of probation which a new employee may be subject to is six months. Furthermore, an employee terminated during a probation period is not entitled to a minimum notice period as specified in Article 62(2) and it appears that the New DIFC Employment Law has impliedly recognised that an employee may be terminated without notice during the probation period if such provisions are specifically made in the employment contract.

 

According to Article 14(3), any amendments to an employment contract must now be in writing and signed by both the employer and employee unless such amendment is of an administrative nature. In case of such an administrative amendment, the employer is required to record the amendment in writing and to give written notice to the employee prior to the amendment taking effect.

 

 Non-discrimination and non-victimisation 

 

The New DIFC Employment Law makes extensive provisions relating to non-discrimination and non-victimisation of employees and remedies for discrimination. Article 59 defines discrimination in wide terms to include both direct and indirect discrimination. New grounds of discrimination introduced under Article 59 of the new law are age, pregnancy and maternity.

 

Furthermore, Article 60 of the new law prevents an employer from victimising an employee for committing a “protected act”. Protected acts include bringing legal proceedings for discrimination against an employer, giving evidence against an employer in a claim for discrimination (whether in an employee’s own claim or a third party employee’s claim) and making allegations that the employer has committed acts of discrimination or victimisation.

 

In terms of Article 61, an employee is entitled to bring proceedings against an employer for victimisation or discrimination within six months of such an act taking place. The burden of proof in proving discrimination is on the employee and the court may (a) make a declaration as to the rights of the employee; (b) award compensation which could include compensation for “injured feelings”, subject to a maximum amount equivalent to the employee’s annual wage; (c) make appropriate recommendations; or (d) order a combination of such remedies.

 

Termination of employment and settlements 

 

While termination with notice is largely unchanged from the old law, the New DIFC Employment Law has made a major change to an employee’s entitlements upon termination for cause (i.e. termination without notice for misconduct). In terms of Article 63(2) of the new law, an employee terminated for cause would still be entitled to gratuity payments which could have been withheld under the old law. Accordingly, the only retention that an employer could make when terminating an employee for cause is notice pay.

 

The New DIFC Employment Law does not expressly recognise the concepts of constructive termination (termination where an employee is forced to resign) or unfair dismissal (termination with notice for unfair reasons) and the DIFC Court has previously held that it would not intervene to introduce these concepts by judicial intervention unless statute specifically makes appropriate provisions in that regard.

 

Furthermore, the new law appears to have expressly recognised the ability to enter into employment settlement agreements. In terms of Article 11(2)(b), an employee may waive any right, remedy, obligation, claim or action under the new law by entering into a written agreement with their employer to terminate their employment or resolve any dispute. In entering into such agreements, the employee must warrant that the employee was given an opportunity to receive independent legal advice on the terms and effect of the agreement from a legal practitioner registered as a Part 1 or Part II practitioner in the DIFC Academy of Law’s register of legal practitioners.

 

Article 18 penalties

 

Another change which the New DIFC Employment Law has introduced, perhaps to balance the benefit granted to employees in awarding of gratuity when terminating an employee for cause, is the limitation of Article 18 penalties under the old law. In terms of Article 18(2) of the old law, an employer was liable to pay an employee a penalty equivalent to the last daily wage for each day the employer is in arrears or any amount (even one dirham) owing to an employee upon his termination.

 

Practically, the Article 18 penalties were applied inconsistently by the DIFC Courts in claims by employees challenging termination for cause (where the employer withholds gratuity and notice pay) leading to judgements where Article 18 penalties amounted to a substantial portion of the judgement amount. In certain cases, the court applied Article 18 penalties for the entire period from the date of termination of the employee to the date of judgement, without considering that (a) an employee had waited for a substantial period of time before bringing a claim; or (b) Court proceedings often took many months to complete.

 

In terms of Article 19(4) of the new law, in awarding Article 18 penalties (now Article 19 penalties), the court must discount (a) the time period in which a dispute is pending before a Court; and (b) the employee’s unreasonable conduct which is the material cause of the employee failing to receive any amounts due from the employee. Afridi & Angell is currently canvassing an appeal from a decision of the DIFC Small Claims Tribunal where Article 18 penalties were applied to almost an eight-month period. The appeal is based on the unfairness caused to employers by such an application of penalties which has now been recognised by the changes made to the new law.

 

Furthermore, Article 19 penalties cannot be awarded if the amount withheld by the employer as held by the court is not in excess of the employee’s weekly wage.

 

Recruitment costs

 

In terms of Article 21(2) of the New DIFC Employment Law, an employer is prevented from recouping any costs or expenses incurred in employing an employee from such employee during the course of employment. However, according to Article 21(3), an employer may now recoup such costs from an employee if an employee terminates their employment contract (ex. by resignation), within a period of six months from the employee’s date of commencement of employment.

 

Accordingly, an employee may now be liable to repay the employer for any fees charged by a recruitment firm or head-hunter (common in the DIFC) if the conditions set out in Article 21(3) are met.

 

Time limitation for employment claims

 

Yet another important and timely change brought about by Article 10 of the New DIFC Employment Law is the introduction of a six-month time limitation for employment claims starting from the date of termination of an employee. This time limitation comes into effect on 28 August 2019.

 

The introduction of a time limitation for employment claims will bring comfort to many DIFC employers. There have been cases before the DIFC Courts where ex-employees have made claims over twelve months after a termination occurred, exposing the employer to heavy penalties under the Old DIFC Employment Law.

 

Application of the New DIFC Employment Law and secondment 

 

Article 4 of the New DIFC Employment Law does not, unlike the Old Employment Law, limit its application to employees based within or ordinarily working within or from the DIFC. In terms of Article 4(1)(b)(ii), an employer who has a place of business in the DIFC (including a branch), may employ an employee under an employment contract subject to the New DIFC Employment Law even if such employee is not based within the DIFC.

 

Furthermore, Article 4(2)(1) of the New DIFC Employment Law also allows for a seconded employee to be subject to a law other than the New DIFC Employment Law despite such employee being based in the DIFC. For the purposes of this section, the secondment should be recognised by the DIFCA and should be for a temporary basis not longer than 12 months (or other period approved by the DIFCA on exceptional grounds).

 

Conclusion

 

The changes introduced by the New DIFC Employment Law have enhanced the balance between a DIFC employer’s legitimate requirements and the need to ensure global employment standards for DIFC employees. Changes to payments upon termination are likely to reduce employment claims proceeding to Court since an employer would not have a real incentive to risk litigation by terminating an employee for cause when the employee could be terminated with notice, especially since the employer can no longer withhold gratuity when terminating for cause. The new enhanced non-discrimination provisions are progressive, yet the practical effects of such provisions are yet to be tested by the courts. ■

A closer look at payment orders under the UAE Civil Procedure Law

Several significant changes to the UAE Civil Procedure Law (Federal Law No. 11 of 1992 as amended) came into effect in February this year. An overview of these changes, brought about by Regulations promulgated pursuant to Decree by Law No 10 of 2017 and Cabinet Resolution No. 57 of  2018 (the Regulations) can be found in our inBrief of 12 February 2019.

 

The changes made to Payment Orders under the Regulations have gathered a lot of interest, as it may offer an efficient means of recovering certain debts through the onshore UAE courts. In this inBrief, we take a closer look Payment Orders and the changes made by the Regulations.

 

What are Payment Orders?

 

Payment Orders are a mechanism for immediate ex parte judgment (i.e. without notice to the debtor). It existed under the UAE Civil Procedure Law before the Regulations were issued, but its use was restricted to claims involving financial instruments such as promissory notes and bills of exchange. Pursuant to the provisions   the Civil Procedure Law, Payment Orders may be applied for by a creditor holding a financial instrument and who has a confirmed claim for a fixed amount of money or a movable of a known type and quantity. It is important to note that where multiple claims are being asserted, and not all of them meet the legal requirements for an application for a Payment Order, the ordinary civil procedure for claims should be followed.

 

A key change brought about by the Regulations was to extend Payment Orders to disputes where the creditor’s right is “confirmed” either electronically or in writing, which need not be a financial instrument. What constitutes a “confirmed” debt has not been defined in the Regulations and the ordinary meaning may mean a written admission of debt. Recently, the Dubai Court granted a Payment Order based on a payment certificate certified by the engineer in a construction matter notwithstanding the existence of an arbitration clause in the underlying contract. The court therefore considered the certification of the engineer to be confirmation that the debt is due. This decision was not tested in appeal. Additionally, the Regulations provide that a claim for interest can be made under a Payment Order, whereas previously interest could not form part of such a claim.

 

This inBrief will consider the position where a Payment Order is sought consequent to a written admission of debt.

 

What constitutes a written admission of debt?

 

While the Civil Procedure Law and the Regulations provide no guidance on this issue, given the consequences of a successful application for a Payment Order (e.g. order issued within three days, a reduced appeal window of 15 days), it is likely that the courts will require a clear and unequivocal admission of debt. Although there is no system of binding precedent in the UAE, guidance may be given by reference to previous judgments:

 

It is established in the judgments of this court that an acknowledgment of a debt is the acknowledgment of a person that he owes a certain right to someone else, with a view to consider that right as being proved, and exempt the creditor from adducing any further evidence. For such an acknowledgment to be valid, it must be certain and assertive. If such an acknowledgment is surrounded by doubt, then it cannot be considered as correct or valid. The value of acknowledgment and significance of the paper issued by the debtor, where he acknowledges a debt and the consequences thereof on termination of limitation are matter of facts at the court discretion, as long as its inference is correct and reasonable. (Petition No. 1/2010(Labor))

 

The Regulations provide that confirmation of the debt, including written admissions of debt, may be established by reference to electronic sources.

 

What is the process?

 

Article 63 of the Regulations requires a creditor wishing to make an application for a Payment Order to first demand payment from the debtor. The creditor is required to grant the debtor at least five days from the date of receiving the demand to make payment. While the Regulations do not specifically address how a demand may be issued, Article 144 of the Civil Procedure Law provides that the demand be issued by registered post with acknowledgment of receipt, or by any other method that is agreed upon by the parties. Such alternative method should necessarily be one which facilitates a record of when the demand was served on the debtor. A prudent option would be to issue the demand through the Notary Public, as this would minimize the room for a debtor to successfully claim that the demand was not served on it.

 

Once five days have lapsed without payment being received from the debtor, an application may be filed before a summary judge. The competent court is identified with reference to the debtor’s domicile. The application must include the details required of an ordinary Statement of Claim/Plaint.  Additionally, the written admission of debt must be produced as evidence with the Statement of Claim/Plaint, together with evidence of the demand for payment being made.

 

An application for a Payment Order attracts the normal court fee (in Dubai, 6% of the claim value subject to a cap of AED 40,020).

 

Article 63 provides that the order be granted (or denied, presumably) within three days of the application being filed. If the application is denied, the judge is required to provide reasons. Prior to the Regulations, there was no requirement for the judge to provide reasons. If the application for a Payment Order is denied, the case will be transferred to be heard under the ordinary procedures. If the Payment Order is granted, the Payment Order is required to be served on the debtor through court within three months, failing which the Payment Order is rendered void.

 

A Payment Order may be appealed within 15 days by the debtor, and the court is required to determine the appeal within a week from the date of registration. Payment Orders qualify for expedited execution, i.e. execution may immediately commence notwithstanding that time for an appeal still exists.  It is also important to note that an application for a Payment Order does not preclude the party from seeking provisional relief under the relevant provisions of the Civil Procedure Code.

 

What next?

 

There are already reports of Payment Orders being applied for and obtained pursuant to written admissions of debt, including reports of a recent case in which a Payment Order for approximately USD 8 million was obtained. While this is promising, not every debt may be suitable for an application for a Payment Order. Payment Orders have been consistently recognised by the UAE courts as being an exceptional remedy, and as being subject to the rules of public order which suggests that the courts will approach applications strictly.

 

A note of caution

 

This development also serves to highlight the fact that the concept of ‘without prejudice’ correspondence is not recognised by the onshore courts. Parties often make written settlement offers in good faith which are subsequently seized upon in onshore court litigation as admissions of indebtedness. With Payment Orders now being extended to written admissions of debt, it is ever more important to be cautious in conducting settlement attempts. ■

Keeping up with the Trend: The New Dubai International Financial Centre Insolvency Law

This article explores the reformation of the insolvency regime by the DIFC which had been motivated by the need to provide more efficient and practical insolvency and restructuring mechanisms to debtors as well as creditors. This article provides an understanding of the new Dubai International Financial Centre (‘DIFC’) insolvency law; DIFC Law 1 of 2019.

Is arbitration an exceptional or alternative form of dispute resolution?

The enactment of the UAE’s first standalone arbitration law (Federal Law No. 6 of 2018; the Arbitration Law) introduced some important changes to arbitration in the UAE, such as recognising the enforceability of interim awards and significantly streamlining the enforcement of arbitral awards. However, the requirements for establishing a valid arbitration agreement (i.e. a written agreement entered into by persons with the requisite authority) remained largely unchanged under the new law, which restated the previously existing legislative requirements and codified principles established by the courts, for example recognising arbitration agreements incorporated through reference to standard terms and through electronic correspondence.

 

Judgments on issues of arbitration ordinarily contain a reference, if not as part of the reasoning of the judgment then at least as a preface to the reasoning, to the nature of arbitration as a form of dispute resolution. In cases decided before the Arbitration Law came into effect, arbitration was characterised as an exceptional form of dispute resolution. The characterisation of arbitration as an exceptional form of dispute resolution goes beyond mere semantics, as it formed the basis for the application of strict standards in determining whether a valid arbitration agreement existed.

 

It was therefore a welcome development that the Dubai Court of Appeal in a judgment issued in January 2019 characterised arbitration not as an exceptional form of dispute resolution, but as an alternative one:

 

As such, arbitration is not an exceptional means of resolving disputes but an alternative means that shall be followed once its conditions are satisfied. Arbitration is a matter of the parties’ intent and giving expression to their intent in a written agreement, whether in the form of a separate agreement or as a clause within a contract. In all cases, the law requires that such agreement be evidenced in writing.1 

 

However, in its judgment issued in Cassation Petition No. 1019 of 2018 in March 2019, the Dubai Court of Cassation once again characterises arbitration as an exceptional form of dispute resolution. By way of background, Cassation Petition No. 1019 of 2018 involved a challenge to the jurisdiction of the Dubai Court based on the existence of an arbitration clause. Although several drafts of a contract containing an arbitration clause were exchanged between the parties via email, a physical copy was not signed. It is also important to note that (a) the disagreement between the parties was with respect to the commercial terms, and there was no discussion or disagreement regarding the arbitration clause in the draft agreements, (b) both parties performed certain obligations under the contract, and (c) the plaintiff in fact asked the defendant how many arbitrators should constitute the tribunal, before it instituted proceedings in Court. The Court held as follows:

 

It is also established that arbitration is an express agreement whereby parties agree on referring their disputes to an arbitrator and not to the court. The agreement on arbitration may be an arbitration clause or terms of reference, and this is only valid in writing, whether by signing an instrument between the two parties or the messages, cables or other electronic means exchanged between the parties or through any form of written correspondence. Agreement on arbitration may not be assumed or inferred from general provisions in a document or a quotation as long as the arbitration agreement is not specifically provided for in a way indicating that both parties expressly know about and accept it, because it is an exception from courts’ jurisdiction. (Emphasis added).

 

Following from its characterisation of arbitration as an exceptional form of dispute resolution, the Court of Cassation went on to hold that there is no valid arbitration agreement:

 

However, the emails do not show that the two parties agreed on the terms included in the draft contract and this is further evidenced by the two parties’ failure to sign the contract. The expert’s report, which the court believes to be correct, indicates that the two parties did not sign the contract because they were in disagreement on some of the contractual terms and that the basis of the transactions between them was the quotation. The messages exchanged between the two parties did not refer to any agreement between the parties on referring their dispute through arbitration or to the back-to-back condition, therefore, the two pleadings are baseless both in fact and law, and the court hereby dismisses them.

 

Interestingly, the Court of Cassation made no reference to the provisions of the Arbitration Law or its applicability, even though it was relied on by the parties in their written arguments.

 

There is no system of binding precedent in the UAE and, notwithstanding the judgment discussed above, there is still reason to believe that the Dubai Courts are getting progressively more arbitration-friendly, particularly following the enactment of the Arbitration Law. However, it appears that there still may be some instances where the courts view arbitration as an exceptional form of dispute resolution and consequently apply strict standards to determining whether a valid arbitration agreement exists.  Given the circumstances, the prudent view is that parties should continue to have a signed agreement (as was the practice before the enactment of the Arbitration Law) or, at the very least ensure that there is an unequivocal agreement to arbitrate contained in the electronic correspondence they wish to rely on, which are until there is further clarity on this issue. Parties will also have to ensure that the individuals agreeing to arbitration on behalf of corporate entities must have specific authority to do so, regardless of whether the agreement is reached through a signed agreement or electronic correspondence. ■

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1 Quoted from third party sources.

Implementation of passporting regime for domestic funds

On 11 March 2019, the Securities and Commodities Authority (SCA), the Dubai Financial Services Authority (DFSA) of the Dubai International Financial Centre (DIFC) and the Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) issued a joint press release announcing the enactment of legislation enabling the implementation of a “passporting” scheme to facilitate UAE-wide promotion of domestic funds.

 

The three regulators had previously signed a passporting agreement last November and a public consultation process followed in the ensuing months (covered in our inBrief of 30 January 2019).

 

The press release quotes several officials. Of particular note are the comments of the Chairman of the ADGM (who is also a Minister of State in the UAE Federal Cabinet):

 

There has been an accelerating demand and appetite for a greater variety of domestic funds in the UAE by the investment community. The new passporting regime enables investors to access growth opportunities with greater ease and efficiency. It will also bolster the UAE’s economic diversification strategy and attract more foreign direct investments and new investors and institutions to participate and support the growth of our economy and the development of the region.

 

Historically, the existence of three different regulatory regimes in the UAE has been an impediment to the growth of the market for funds since a fund approved by a particular regulator was only eligible for promotion within the relevant jurisdiction and not throughout the UAE. The passporting regime aims to change this.

 

The DFSA and ADGM have published amendments to the relevant rules and regulations implementing the passporting regime. The SCA’s regulations have not yet been published.

 

The Guidance to the DFSA’s Fund Protocol Rules (FPR) explains that:

 

The three UAE securities regulators: the SCA, the DFSA and the FSRA have agreed a “Protocol” regarding co-ordinated supervision of the marketing and selling of units of domestic funds within the UAE (State). The “Protocol” introduces a notification and registration process to enhance the monitoring and supervision of the financial services associated with the marketing and sale of units in domestic funds. The Protocol sets out a common regulatory framework which is to be implemented by each of the regulators. The Protocol is implemented in the DFSA Rulebook primarily through this module (FPR).

 

The passporting regime applies to both private and public domestic funds. It does not apply to foreign funds promoted in the UAE. Foreign funds and other types of securities promoted in the UAE remain subject to the applicable rules of the jurisdiction in which they are promoted.

 

Overall, this is a positive development that will reduce the regulatory burdens faced by domestic funds. ■

New regulations offer welcome guidance to anti-money laundering law

UAE Federal Decree-Law 20 of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Illegal Organizations (AML Law) came into force at the end of October 2018. Containing features recommended by the Financial Action Task Force (FATF), the new AML Law has been shaped by international AML standards and provides several mechanisms to combat money-laundering and to ensure that businesses in the UAE are actively involved in managing compliance risks associated with money laundering activities.

 

While the new AML Law has introduced subtle but important changes, it is the implementing regulations to the new AML Law which have helped bring further clarity to the anticipated operation of the AML Law. The Implementing Regulations were issued on 28 January 2019 pursuant to Cabinet Resolution 10 of 2019 (AML Regulations).

 

The AML Regulations provide welcome guidance on the implementation of the AML Law and clarify the intended impact in certain key areas. In particular, guidance has been provided on the following matters:

 

• types of businesses subject to the AML Law;

• the scope of the exemption, accorded to lawyers and auditors, from the obligation to report suspicious transactions; and

• the functions and role of the Financial Intelligence Unit (FIU).

 

What businesses are subject to the AML Law?

 

Prior to the release of the AML Regulations, it was thought to be the case that all businesses engaged in economic, commercial or professional activities in the UAE were subject to the full set of AML obligations imposed by the AML Law. The AML Regulations make it clear, however, that only those entities which qualify as Financial Institutions or as Designated Non-Financial Businesses and Professions (DNFBPs) will be subject to the obligations of the AML Law.

 

A Financial Institution is a person or entity that conducts one or more financial activities or transactions for or on behalf of a Customer. Pursuant to the AML Regulations, the following are considered financial activities and transactions:

 

1. receiving deposits and other funds from the public, including deposits in accordance with Islamic Sharia;

2. providing private banking services;

3. providing credit facilities of all types;

4. providing credit facilities in accordance with Islamic Sharia;

5. providing cash brokerage services;

6. financial transactions in securities, finance and financial leasing;

7. providing currency exchange and money transfer services;

8. issuing and managing means of payment, guarantees or obligations;

9. providing stored value services, electronic payments for retail and digital cash;

10. providing virtual banking services;

11. trading, investing, operating or managing funds, option contracts, future contracts, exchange rate and interest rate transactions, other derivatives or negotiable financial instruments;

12. participating in issuing securities and providing financial services related to these issues;

13. managing funds and portfolios of all kinds;

14. saving funds;

15. preparing or marketing financial activities;

16. insurance transactions, in accordance with Federal Law 6 of 2007 Concerning the Establishment of the Insurance Authority and the Organisation of its Operations; and

17. any other activity or financial transaction determined by the Supervisory Authority.

 

A DNFBP is a person or entity engaged in the following trade or business activities:

 

1. brokers and real estate agents when they conclude operations for the benefit of their Customers with respect to the purchase and sale of real estate;

2. dealers in precious metals and precious stones when they carry out any single monetary transaction or several apparently related transactions with a value equal or exceeding AED 55,000;

3. lawyers, notaries, and other independent legal professionals and independent accountants, when preparing, conducting or executing financial transactions for their Customers in respect of the following activities:

 

a) purchase and sale of real estate;

b) management of funds owned by the Customer;

c) management of bank accounts, saving accounts or securities accounts;

d) organising contributions for the establishment, operation or management of companies;

e) creating, operating or managing legal persons or Legal Arrangements; and

f) selling and buying commercial entities.

 

4. providers of corporate services and trusts upon performing or executing a transaction on behalf of their Customers in respect of the following activities:

 

a) acting as an agent in the creation or establishment of legal persons;

b) working as or equipping another person to serve as director or secretary of a company, as a   partner or in a similar position in a legal person;

c) providing a registered office, work address, residence, correspondence address or administrative address of a legal person or Legal Arrangement;

d) performing work or equipping another person to act as a trustee for a direct Trust or to perform a similar function in favor of another form of Legal Arrangement; and

e) working or equipping another person to act as a nominal shareholder in favor of another person.

 

The AML Law also specifies that other professions and activities may be added to this list over time as determined by a resolution of the Minister.

 

Once an entity qualifies as either a Financial Institution or as a DNFBP, it will be required to undertake customer due diligence; identify, assess and understand AML risks that may arise for its business; mitigate such risks; and take measures for the enhanced management of any high risks that it identifies.

 

Exemption for lawyers and auditors from reporting suspicious transactions

 

As noted above, lawyers, notaries, and other independent legal professionals and independent accountants may qualify as DNFBP’s depending on the activities they are undertaking for their clients.

 

This has caused issues for such professionals who may be bound by client confidentiality requirements as well as non-disclosure agreements.

 

The AML Law introduced the concept of an exemption for lawyers, notaries, other legal professionals and independent legal auditors with regard to information that they receive subject to professional confidentiality. However, little detail regarding this exemption was provided in the AML law. As a result, professionals were left wondering as to the scope of the exemption and their ability to rely on it.

 

The AML Regulations have provided further clarity on the operation of this exemption.

 

As a general rule, the AML Regulations require that any Financial Institution or DNFBP who has reasonable grounds to suspect that a transaction, attempted transaction, or funds in whole or in part constitute the proceeds of a crime, are related to a crime, or are intended to be used in criminal activity, must provide a suspicious transaction report to the FIU and thereafter provide all additional information requested by the FIU.

 

The AML Regulations exempt lawyers, notaries public, other legal professionals and independent legal auditors from this requirement if the information regarding such transactions was obtained in the course of their assessment of their clients’ legal position, defending or representing the clients before judicial authorities or in arbitration or mediation proceedings, providing a legal opinion with regard to legal proceedings, or other circumstances where such clients benefit from professional privilege.

 

Furthermore, while a Financial Institution or a DNFBP is normally prohibited from disclosing to its client the fact that it has made a suspicious transaction report, the AML Regulations clarify that in cases where a lawyer, notary, other independent legal professional, or independent legal auditor attempts to discourage their client from committing a violation, this shall not be considered as such disclosure.

 

While lawyers, notary publics, other legal professionals and independent legal auditors are exempted from reporting suspicious transactions as aforesaid, they are still required to abide by all other obligations in the AML Regulations imposed on them as DNFBPs, including conducting customer due diligence and enhanced management of high risks.

 

The role of the FIU

 

The AML Law and AML Regulations have maintained the role of the FIU to receive and process information related to crime. They accord the FIU powers to investigate and to process suspicious transaction reports and to seek further information from Financial Institutions and DNFBPs. The AML Regulations grant the FIU the international role of exchanging information with and reporting to its counterparts in other countries.

 

Conclusion

 

The AML Regulations provide welcome clarity on the operation of the AML Law and in particular the changes introduced in the AML Law.

 

Such changes complement a series of other measures aimed at strengthening the integrity of the UAE’s financial system and bringing it into consistency with global standards.

 

The AML Law and AML Regulations should further be viewed as a sign that there is no tolerance for financial crime in the UAE. Businesses operating in the UAE who fall within the definition of a Financial Institution or DFNBP need to consider the application of the AML Law and AML Regulations to their business and ensure that they have internal processes in place to identify, manage and mitigate high risk customers and activities.■

Amendments to classification requirements for engineers and contractors in Abu Dhabi

Background

 

Companies licensed to conduct engineering or contracting activities in Abu Dhabi must be classified by the Contractors and Consultants Classification and Engineers Registration Office at the Abu Dhabi Department of Town Planning and Municipalities.

 

The applicable regulations setting out the classification requirements are not new and date back to 2009, although implementation was delayed until 2014. Subsequent to the 2009 regulations, new regulations were introduced in 2018.

 

Abu Dhabi Administrative Resolution 162 of 2018 on the Classification System for the Engineering Consultancy Offices in the Emirate of Abu Dhabi, and its subsequent implementing instructions, set out the classification requirements for engineering consultancies (the 2018 Regulations).

 

Administrative Resolution 160 of 2018 on the Classification of Contractors in the Emirate of Abu Dhabi, and its subsequent implementing instructions, set out the classification requirements for contractors.

 

Administrative Resolution 158 of 2018 on the Regulations for Registering Engineers in the Emirate of Abu Dhabi, and its subsequent implementing instructions, set out the classification requirements for engineers.

 

While there are similar criteria which need to be satisfied by both contractors and engineering consultancies, this InBrief highlights the key items which engineering consultancies will need to be aware of when looking to meet the rigorous classification requirements, as well as what new amendments have been introduced by the 2018 Regulations that will impact engineering consultancies.

 

Who is subject to the classification requirements?

 

Classification is a condition precedent to renewal of the professional license for any existing engineering company. A company established in the future will have one year from the date of initial licensing to satisfy the classification requirements.

 

The 2018 Regulations now also provide that no new applications may be filed for a new building or an infrastructure license, and no engineering consultancy firm may participate in any tender in the Emirate of Abu Dhabi, unless the applicant engineering firm is in possession of a valid certificate of classification. Furthermore, an engineering firm may not practice the profession of engineering consultancy, even as a sub-consultant, in any field other than the engineering consultancy specializations in which it is classified and licensed.

 

How can the classification requirements be met?

 

Classification is not a routine or automatic approval. Nor is it simply additional bureaucracy and paperwork. Classification entails a substantive review by a panel of experts of a company’s capabilities and qualifications and a company that does not meet the specified criteria will not be classified.

 

Engineering consultancies in the Emirate have to take one of the following three forms:  a local engineering office, a branch of a foreign engineering office or an advisory (opinion) engineer office. The 2018 Regulations have introduced a fourth alternative, being an associated engineering firm. An associated engineering firm is an engineering firm that is comprised of a joint venture agreement between a local engineering firm classified in the Special Category, and a foreign engineering firm or firms with no UAE presence. Upon incorporation, an associated engineering firm is granted a temporary certificate of classification for a duration of six months, during which it is permitted to conduct the engineering consultancy activities stated in the temporary certificate. The temporary certificate may be extended for an additional duration of six months.

 

The classification categories remain as Special Category, First Category and Second Category, but branches of foreign engineering offices, opinion engineer offices and associated engineering firms may apply for classification only in the Special Category. The Special Category is the highest category for engineering firms, and firms in this category may perform contracts with a value of over AED 60 million (down from AED 70 million prior to the 2018 Regulations).

 

Generally, the classification requirements — as regards technical staff, financial criteria and financial situation, prior expertise and quality, and professional insurance requirements — remain the same. However, as will be noted from our discussion below, the more onerous requirements have been eased somewhat. The 2018 Regulations have also introduced an additional criterion based upon the project’s area (quota) and number of floors in a building.

 

The classification requirements will vary from case to case. For example, a local engineering consultancy seeking classification in the Special Category must meet, among others, the following criteria:

 

• The value of the capital and assets owned by the company should not be less than AED 2 million (previously this was AED 4 million).

 

• The company is required to employ four (previously five) specialised and registered engineers having a minimum experience of ten years each. This applies to each Special Category of engineering type the company requires to undertake; e.g., for civil engineering, it must employ four civil engineers meeting the foregoing minimum experience, and for mechanical engineering, it must employ four mechanical engineers meeting the foregoing minimum experience.

 

• The cumulative value of previously executed projects must not be less than AED 240 million, provided that the value of each project submitted is not less than AED 30 million (previously this was AED 480 million and AED 60 million respectively).

 

• The company must hold an ISO 9001 certificate and professional indemnity insurance.

 

• A local engineering consultancy seeking classification in the Special Category may undertake works with unlimited number of floor levels and an area quota of 60,000 square metres.

 

Conclusion

 

All companies conducting activities involving engineering or contracting should immediately investigate whether the licensed activities currently on the company’s trade license require classification.

 

If a company is not already classified, it should begin investigating the specific requirements it will have to meet well in advance of its next licensed renewal date.

 

Companies that are already classified should ensure that they have rectified their situations according to the provisions of the implementing instructions within one year from the effective date of the 2018 Regulations, i.e., by 3 March 2019. It is hoped that the easing of some of the onerous classification requirements will encourage both contractors and engineering consultancies to do so. ■

ADGM grows up: issues first fines

The Abu Dhabi Global Market (ADGM), the financial free zone which began operations in 2015, has now come of age.

 

On 14 April 2019 Mr Alexander Guy, Senior Executive Officer and Director at Eshara Capital Limited, had the uncommon honour of becoming the first named person to be fined by ADGM’s Financial Services Regulatory Authority. Eshara Capital, in its corporate capacity, was also fined in connection with the same contraventions.

 

Commencement of regulatory enforcement actions, such as the imposition of financial penalties, demonstrates that the Financial Services Regulatory Authority has the capacity, and perhaps more importantly, the appetite to take actions against its member firms (and their senior management). Financial free zones who act too aggressively in the early days risk scaring away potential members. Being seen as too lenient is just as bad, and risks threatening the creditability of the institution itself.

 

In this instance Mr Guy has been fined a modest sum, USD 10,000. Eshara Capital has itself been fined a further USD 10,000. The size of the fines reflects the relatively low-key nature of the offenses. It appears that Eshara Capital failed to file a number of regulatory returns. These included the firm’s annual prudential return for 2017, the regulatory return auditor’s report for 2017, and the first three quarterly returns for 2018.

 

The regulator has drawn attention to the fact that Mr Guy, as SEO and a licensed director, had ultimate responsibility for the day-to-day management of Eshara Capital and held significant responsibilities for ensuring that Eshara Capital complied with all applicable legislation. The regulator also drew attention to the fact that although Mr Guy appeared to have been cooperating with the regulator in terms of remedying the defaults, the remedial action he took in respect of the contraventions was not timely or complete. Mr Guy’s conduct allowed Eshara Capital to breach and remain in breach for a considerable period of time, and despite repeated reminders from the regulator. In conclusion, it was held that Mr Guy behaved in a reckless manner.

 

The regulator did not order disgorgement in this matter as it appears that Mr Guy did not derive any personal financial benefit from the contravention or the reckless conduct.

 

In any regulated environment there will be a period of time between a contravention, the regulator becoming aware of it, investigating the same, and then taking public enforcement action. Under the circumstances, it might be reasonable to assume that there is now a pipeline of ADGM enforcement actions, and that Mr Guy’s punishment is but the first.

 

Afridi & Angell has been advising on matters of UAE financial services regulation since 1975. In 2008 we advised the first firm to be sanctioned by the Dubai Financial Service Authority, and we have continued to advise on regulatory investigations and enforcement actions in both Dubai and Abu Dhabi. ■