Author: afridi-angell

New anti-money laundering law

The new anti-money laundering (AML) law of the UAE took effect at the end of October 2018. Containing features recommended by the Financial Action Task Force (FATF), the new law introduces subtle but important changes to the AML landscape in the UAE.

 

The new law was enacted as Federal Decree-Law 20 of 2018. The previous AML law was Federal Law 4 of 2002, as amended by Federal Law 9 of 2014, and the implementing regulations that were promulgated pursuant to Cabinet Resolution 38 of 2014. The new law indicates that new implementing regulations will likewise be promulgated, although they have yet to be issued.

 

Prior to the 2014 amendments, AML compliance was confined to specific of regulatory silos. In particular, obligations were imposed on banks, other financial institutions, insurance companies, accountants, best lawyers, and businesses active in the Dubai International Financial Center and the Abu Dhabi Global Market. The 2014 amendments expanded the AML compliance obligation to all businesses and professions. This is continued by the new statute, but with somewhat greater precision. Specifically, the new statute imposes AML compliance obligations on Financial Institutions and on Designated Non-Financial Businesses and Professions (DNFBPs), terms adapted from the FATF. The implementing regulations will specify which DNFBPs will be subject to AML compliance obligations under the new statute.

 

It was an often overlooked feature of the 2014 amendments that AML compliance throughout the economy was required. This is continued and enhanced by the new statute. Both Financial Institutions and DNFBPs are required to comply fully with the express prohibitions contained in AML statute, to report suspicious transactions to the Financial Information Unit of the Central Bank, to conduct due diligence with counterparties, to adopt internal guidelines to ensure that AML violations will not be committed inadvertently, to provide regular training to personnel, and to conduct regular and ongoing AML assessments of the business risks and sector risks that they face. Regulators throughout the UAE are instructed to ensure compliance with these requirements.

 

In a potentially significant change, the new statute obliges each Financial Institution and DNFBP to conduct a risk-based assessment of its business activities and to adopt compliance measures based upon such risk-based assessment. An appreciation of the risks should guide conduct of due diligence of proposed customers and ultimate beneficial owners so that AML efforts might be most efficiently deployed. The previous law did not mandate a risk-based approach to AML obligations, and indeed a non-calibrated “one size fits all” approach was widely used in the conduct of due diligence investigations on proposed customers and counterparties. Importantly, the new law leaves open the question of which factors a Financial Institution or a DFNBP would consider when undertaking the assessment. We expect that this will be clarified in due course by the anticipated implementing regulations.

 

The law enforcement toolkit is substantially enhanced by the new statute. The authorities are given enhanced ability to investigate and prosecute offenses and to gain access to records in connection with the same. The power of the Central Bank to order an account freeze based on a suspicious activity report is maintained, but such a freeze may now be extended by order of the public prosecutor or its delegate beyond the initial seven day period, whereas the previous law required a judicial order for such an extension. Sanctions for violations are substantially enhanced, including measures directed at individual managers and directors. In a measure inspired by practices followed in London and Washington, the authorities are given the power to impose continuing reporting and monitoring obligations on businesses following an initial indictment.

 

In addition, there are express obligations to cooperate with international investigations and enforcement measures. The new statute addresses matters such as the collection of documentation, interrogation of witnesses and extradition of suspects, as well as the honoring and enforcement of orders and judgments from foreign countries.

 

In terms of prohibited conduct, the new statute makes only minor changes in comparison with the 2014 amendments. The definition of a predicate offense is considerably expanded. A predicate offense is now defined as any act constituting a felony or misdemeanor under the applicable laws of the UAE, whether the act is committed inside or outside of the UAE, when such act is punishable both in the UAE and in the country where it was committed. In addition, it is now stated unambiguously that the handling of funds that are tainted by association with a terrorist organisation or an illegal organisation would be a money laundering offense.

 

The obligation to file suspicious transaction reports with the Financial Information Unit of the Central Bank is maintained. However, for the first time, a professional privilege exception is introduced applicable to lawyers, notaries and other legal professionals and independent legal auditors. The scope of this privilege, never before acknowledged expressly in the AML context, is to be elaborated in the implementing regulations.

 

The FATF is scheduled to commence a mutual evaluation with the UAE in mid-2019 on the current state of AML compliance in the UAE. The new statute is a proactive initiative to introduce best-practice AML regulations according with the FATF’s guidelines. ■

 

The new Foreign Direct Investment law

News of a new federal law on foreign direct investment in the UAE has many people asking: “Does this mean I can now form a new company with majority foreign ownership?”

 

The answer is the same as previously, “No, not yet”.

 

Companies incorporated in the UAE require a minimum of 51 per cent UAE ownership. As an exception to this rule, 100 per cent foreign ownership is permitted in free zones. The new law may lead to further exceptions in the future.

 

Federal Decree-Law 19 of 2018 (the “FDI Law”) was issued on 23 September 2018. The FDI Law adopts a similar approach to majority foreign ownership as the UAE Commercial Companies Law. An amendment to Article 10 of the Companies Law adopted in September of 2017 (pursuant to Federal Decree-Law 18 of 2017) stipulated that the UAE Cabinet (the “Cabinet”) may adopt resolutions permitting greater than 49 per cent foreign ownership.  The Cabinet remains the key decision maker under the FDI Law.

 

Under the FDI Law, the Cabinet will appoint a Foreign Direct Investment Committee to be presided over by the Minister of Economy. The Foreign Direct Investment Committee shall be responsible for studying and making recommendations to the Cabinet regarding foreign direct investment but the ultimate determination will be made by decision of the Cabinet.

 

The FDI Law sets out a “Negative List” of thirteen sectors where existing laws and restrictions will continue to apply and majority foreign ownership will not be permitted:

 

• Exploration and production of petroleum products.

• Investigations, security, military sectors and manufacturing of weapons, explosives as well as military hardware, equipment and clothing.

• Banking and financing activities and payment and cash handling systems.

• Insurance services.

• Hajj and Umrah services and labour supply and recruitment services.

• Water and electricity services

• Services related to fisheries.

• Postal, communication and audio-visual services.

• Land and air transport services.

• Printing and publishing services.

• Commercial agents services.

• Retail medicine such as private pharmacies.

• Poison centres, blood banks and quarantines.

 

Activities may be added to or removed from the Negative List by decision of the Cabinet.

 

The FDI Law also provides that the Cabinet shall, based on a proposal of the Minister of Economy and recommendations of the Foreign Direct Investment Committee and subject to certain conditions set out in the FDI Law, issue a decision creating a “Positive List” where foreign direct investment projects of up to 100% foreign ownership will be allowed. The Positive List has not yet been created and the FDI Law sets no timetable for its creation.

 

Recent media reports state that on 12 November 2018, during the World Economic Forum’s Global Futures Council Meeting in Dubai, the UAE Minister of Economy told reporters that sectors under consideration for the Positive List include technology, outer space, renewable energy, artificial intelligence and manufacturing, among others. According to some reports, the government aims to have the Positive List published during the first quarter of 2019. Media reports regarding legislative developments should be viewed cautiously. Historically, predicted implementation dates have often not been met.

 

In addition to the requirement of a Cabinet decision, local approval and licensing requirements apply in each Emirate. Like all companies, FDI companies must obtain a license from the concerned licensing authority in the Emirate of incorporation. Moreover, the FDI Law provides that FDI companies must also obtain the approval of the competent authority in each Emirate in charge of foreign direct investment in such Emirate. This may require measures in each Emirate either creating a new authority for such purpose or designating an existing authority (in most Emirates, probably the Economic Department) as the competent authority for the purposes of the FDI Law.

 

There are several other interesting aspects of the FDI Law that are beyond the limited scope of this inBrief. The main point to be highlighted here is that the new FDI Law does not mean majority foreign ownership is a current reality.  The framework is now in place, but implementation is yet to come.■

Application for an anti-suit injunction: dismissed

In an order dated 31 October 2018, the DIFC Court accepted that a party seeking an anti-suit injunction against proceedings in a foreign court must show that proceeding before the foreign court is or would be “vexatious or oppressive” to that party. The DIFC Court further held that where the applicant has the option of obtaining a stay of proceedings in the foreign court itself, the DIFC Court would have no “compelling reason” to grant an anti-suit injunction; to do so would not be in line with the overriding objectives of the Court.

 

Case Background

 

Afridi & Angell continue to represent the Claimants in an ongoing employment dispute (case number CFI 015-2018) in the Dubai International Finance Centre’s Court of First Instance (the DIFC Court).

 

The First and Second Claimant are group companies which conduct business in international commodities and financial services. With operations in financial centres around the world, they are registered in the DIFC and the United Kingdom, respectively (together, the Claimants).

 

The First Defendant is a former employee of the First Claimant and a current employee of the Second Defendant, a company licensed in the DIFC with a similar business to that of the Claimants. The Third Defendant is the company secretary and office operations manager of the Second Defendant. The First, Second and Third Defendants are referred to collectively as the Three Defendants.

 

In March 2018, the Claimants issued proceedings in the DIFC Court seeking immediate relief against the conduct of the Three Defendants (the DIFC Proceedings). The basis of the DIFC Proceedings is related to the resignation of the First Defendant from the Claimants and the actions of the First Defendant in the lead up to, and after, his resignation. The Claimants allege that the First Defendant, who at the time was an employee of the First Claimant, conspired with and assisted the Second and Third Defendants (his new employer and its company secretary, respectively) to facilitate the taking of the Claimants’ clients and employees to the business of the Second Defendant. The Claimants sought the assistance of the DIFC Court and issued proceedings to enforce the restrictive covenants contained in the First Defendant’s contract of employment, and to prevent the First Defendant from using confidential information of the Claimants for the benefit of the Second Defendant in the first “springboard injunction” proceedings before the DIFC Court.

 

The Claimants also initiated proceedings before the United States District Court for the Northern District of Illinois (the US Proceedings) against: (i) the Third Defendant; (ii) the parent company of the Second Defendant (the Parent Company); and (iii) the Chief Operating Officer of the Parent Company. The US Proceedings were instituted to prevent the Parent Company from an international attempt to poach the Claimants’ employees.

 

The Second and Third Defendants (the Defendants) consequently submitted an application to the DIFC Courts in the form of an anti-suit injunction requesting an Order for the Claimants to stay the US Proceedings.

 

Anti-suit Injunctions in the DIFC Courts

 

An anti-suit injunction is a form of relief sought against a party to prevent them from either instituting a legal action or continuing with proceedings that have already been commenced.

 

The power of the DIFC Court to grant anti-suit injunctions was confirmed in Brookfield Multiplex v DIFCI LLC [2016] DIFC CFI 020 in which the DIFC Court held that it has the power to grant anti-suit injunctions pursuant to Article 32 of DIFC Law 10 of 2004.

 

Justice Sir Jeremy Cooke summarised the principles applicable to the grant of an anti-suit injunction by the DIFC Court in the following terms:

 

“It is self-evident that this Court should not interfere with the decisions of other courts of competent jurisdiction…and should not impugn the contents of their judgments. It is only where there is an absence of jurisdiction or where proceedings are vexatious and oppressive that a court is ordinarily prepared to grant an anti-suit injunction.” (emphasis added)

 

The position of the Defendants in CFI 015-2018 

 

The Defendants application requesting an Order for the Claimants to stay the US Proceedings was based on the premise that the DIFC Court has the power to grant relief where the continuation of the foreign claim would be vexatious and oppressive. It was recognised that there was a heavy burden of proof on the Defendants, but it was argued that the applicable threshold had been discharged.

 

The Defendants made the following submissions in support of their assertion that the continuation of the US Proceedings would be vexatious and oppressive:

 

(1) The similar nature of the DIFC and US Proceedings creates a risk of conflicting decisions regarding the same facts as well as extensive and duplicative costs;

 

(2) One of the three defendants in the US Proceedings is resident in the UAE; another defendant in the US Proceedings is a non-trading company; and the relief of worldwide injunction the Claimant seeks in the US Proceedings is fanciful;

 

(3) The events at the heart of the Claimants claim all had a connection with the DIFC and there is no evidence of any link with the USA;

 

(4) The US Proceedings were brought in order to disrupt the Defendants preparation for trial of the DIFC Proceedings and as a means to harass the Defendants; and

 

(5) The relief sought would not interfere with US sovereignty.

 

The position of the Claimants in CFI 015-2018

 

The Claimants agreed that for an anti-suit injunction to be granted it must be shown that the pursuit of the foreign proceedings would be vexatious or oppressive on the injunction applicant (the Defendants). It was further iterated that the high burden of proof is at all times on the applicant and not the respondent to the application (the Claimants).

 

For the Defendants application to succeed, the Defendants must show that:

 

(1) The DIFC is the natural forum for the US Proceedings; and

 

(2) The US Proceedings are either vexatious or oppressive.

 

The Claimants invited the Courts to dismiss the Defendants’ application for an anti-suit injunction on the following grounds:

 

(1) The DIFC is not the natural forum for the US Proceedings on the grounds that:

 

a. the US Proceedings involve different parties each of whom have accepted service of the US Proceedings;

 

b. the US Proceedings involve a different, and notably broader, factual scope;

 

c. the causes of action in the US Proceedings are either broader or different (as applicable), with some being based on both federal and Illinois state legislation;

 

d. the relief sought in the US Proceedings is different. It would be unjust to deprive the Claimants of the additional relief available, and the additional defendants upon whom any judgment can be enforced, in the foreign proceedings; and

 

e. there is a fundamental nexus between the US Proceedings and the United States, namely that the key actions with which the US Proceedings are concerned occurred in Chicago.

 

(2) The US Proceedings are not vexatious or oppressive. As explained by Mr Justice Cooke in Kyrgyz Mobil Tel. Ltd v Fellowes International Holdings Ltd [2005] EWHC 1314 (Comm), the question that must be asked is “whether or not there was a reason justifying the foreign proceedings”. For all the reasons above, this was clearly the case. Furthermore, with particular regard to the additional relief that the Claimants are entitled to seek in the US Proceedings, the Claimants again cited Mr Justice Cooke who explained that “for that reason alone it cannot be said that there was any vexation or oppression.”

 

(3) Notwithstanding the above, whether to grant an anti-suit injunction remains a matter for the Court’s discretion and it was the Claimants position that it would be inappropriate to exercise that discretion. In support of this view, the Claimants averred that:

 

a. the Defendants evidenced an intention to issue an application for a stay of the US Proceedings and as such, and having regard to the basic principles of comity, it is right that the DIFC Court does not interfere but rather allows the US Court to decide whether to entertain the application; and

 

b. the DIFC Proceedings would likely be concluded long before a final judgment is issued in the US Proceedings meaning there is no realistic prospect of conflicting judgments. As such, the injunctive relief sought would be futile.

 

The Order of the DIFC Court in CFI 015-2018

 

His Excellency Justice Omar Al Muhairi stated that he “found the Defendants submissions to be weak” and that there was “no compelling reason” for the Court to order the Claimants to stay the US Proceedings. Accordingly, the Defendants application for an anti-suit injunction was dismissed.

 

In summary, Justice Al Muhairi “agree[d] with the Claimants submissions” and found that:

 

(1) the US Proceedings were different both in respect of the parties involved and the relief sought;

 

(2) he accepted the principle set out in Deutsche Bank AG v Highland Crusader Offshore Partners [2010] 1 WLR 1023 that the party seeking an anti-suit injunction must show that the proceeding before the foreign court is or would be vexatious or oppressive; the Claimants claim in the US Proceedings would be neither “vexatious nor oppressive”;

 

(3) “no apparent injustice” would be suffered by the Defendants should the DIFC Court refuse to order the Claimant to stay the US Proceedings as the Defendants to the US Proceedings “are perfectly capable of making a stay application in the USA proceedings themselves”; and

 

(4) making an order for an anti-suit injunction in such circumstances would “put the parties on unequal footing” which would “not be in line with the overriding objectives of th[e] Court”.

 

Following on from the establishment of the DIFC’s power to grant anti-suit injunctions, this landmark case re-iterates the applicable threshold that must be satisfied for an anti-suit injunction to be granted in the DIFC Court.  The case helpfully highlights the high burden of proof on the applicant, whilst also providing examples of relevant considerations taken by the DIFC Court, namely comity, access to justice, and the overriding objectives of the Court, when considering such applications. ■

Big brother is watching

The DIFC Court has confirmed that businesses in the DIFC can listen in and make use of telephone conversations made by their employees. His Excellency Justice Omar Al Muhairi issued an order to this effect on 31 October in the case of ED&F Man Capital Markets MENA Ltd and RJ O’Brien MENA Capital Ltd (and others). Afridi & Angell are representing ED&F Man Capital Markets MENA Ltd in this matter. Lawyers for the defendants had sought to exclude evidence introduced by ED&F which consisted of transcripts of telephone conversations made by ED&F employees. Defendants’ counsel claimed that such recordings were a breach of the UAE Penal Code, and therefore should be inadmissible in the DIFC Court proceedings. Justice Al Muhairi rejected this argument on two grounds. Firstly, on the basis that the individuals involved in the telephone conversations had provided consent to the recordings, and secondly on the basis that the Dubai Financial Services Authority mandates the recording of communications relating to transactions. ■

Remote litigation in Dubai Labour Court

On 18 October 2018, the Dubai Court and the Ministry of Human Resources & Emiratisation (MOHRE) launched a “remote litigation service” for labour disputes under AED 20,000 in value.

 

Under this initiative, the requirement of personally attending hearings for labour disputes under AED 20,000 is dispensed with, and parties and their representatives are permitted to ‘attend’ the hearing before the judge electronically. The cases will be heard by a single judge, who is required to render judgment within 24 hours. This initiative has been introduced in order to dispose of low value labour cases in Dubai quickly and efficiently.

 

Labour complaints can be filed physically, electronically, or by calling the MOHRE hotline (80060). Once the case is registered, the parties to the case (i.e. the employer and the employee) are required to attend in person before a Tawafuq Centre to attempt settlement of the dispute. If the dispute is not resolved, and the value of the dispute is under AED 20,000, it will be referred to the labour court to be considered under the remote litigation service. The parties will be provided with an electronic link which will enable them to upload written submissions and evidence, and attend a hearing remotely if required. The service will also allow the parties to access the judgment electronically.

 

The service is not yet operational, and is expected to start functioning in November 2018. ■

New services by Dubai Rental Disputes Centre

Launch of the New Rental Good Conduct Certificate Service 

 

On 8 October, the Rental Disputes Centre in Dubai launched the Rental Good Conduct Certificate service.

 

This service is a first-of-its-kind initiative in the world.

 

We set out below what the service will provide and how to access it.

 

• The service will allow:

 

o a tenant to inquire whether or not a rental case has been filed against them;

 

o a landlord to inquire about a potential tenant, and whether a rental case has been filed against them in the past; and/or

 

o a tenant to inquire about the landlord and whether they are known to cause legal problems with tenants.

 

• It is hoped that the new service will reduce the number of rental disputes by providing both the tenant and landlord with accurate information on each other. This in turn will allow the parties to make an informed decision on whether or not they want to sign the tenancy contract.

 

• The data will be provided by the Rental Disputes Centre, which has stated that it will do so without violating the laws of confidentiality in Dubai.

 

• The service can be obtained by phoning the Rental Disputes Centre or by downloading the Rental Disputes Centre app from the Apple Store or Play Store.

 

Launch of “remote litigation” by the Rental Disputes Centre

 

On 4 October, the Rental Disputes Center in Dubai launched the Remote Litigation service. The service will allow parties to rental disputes, or their representatives, to attend the hearing before the judge electronically.

 

The new mechanism will work as follows:

 

• A claimant can choose the option of “remote litigation” at the time of registering its rental dispute case.

 

• A date and time will be fixed for the hearing of the case electronically.

 

• On the hearing date, a link will be sent via email to the parties. The parties will use this link for attending the hearing electronically along with the judge.

 

• The judge will then fix a date for the judgment, after which the judgment will be available to the parties electronically.

 

It is hoped that this new mechanism will reduce the time for settling rental disputes in Dubai.

 

Travel Ban in Rental Disputes  

 

In June 2108, the Rental Dispute Centre announced a new mechanism for an automatic travel ban to apply to defendants in certain rental disputes. Under this mechanism, a travel ban will be issued automatically to defendants in rental disputes which involve monetary claims at the time of registration of the dispute.

 

The mechanism is required as the Rental Disputes Centre is facing a number of cases where defendants have left Dubai in order to avoid the execution of judgments against them.

 

The Rental Disputes Centre has announced that the travel ban can be lifted within five minutes if the defendant pays the claimed amount or provides acceptable security for the claim amount. The defendant can make an application to lift the travel ban electronically. The application can be made, and the lifting service is available, even on the weekends and holidays. If an application to lift a travel ban is successful, the relevant order from the judge to lift the travel ban will be communicated electronically to Dubai police to execute it.■

Netting arrangements in qualified financial contracts made enforceable

For decades, banks and other counterparties in the UAE have obtained financial services from foreign financial institutions. Industry bodies, such as the International Swaps and Derivatives Association (ISDA), the International Capital Market Association and the International Securities Lending Association, have developed standard documentation for these kinds of transactions. A new statute in the UAE makes it clear for the first time that the netting and setoff provisions in such documentation are valid and enforceable under UAE law. Among other matters, this clarity should reduce the cost to UAE counterparties of obtaining these financial services.

 

Federal Decree-Law 10 of 2018 on Netting (the Netting Law) was published in the UAE Federal Gazette on 30 September 2018 and will take effect on 30 October 2018 (the Effective Date). It is a significant development to the derivatives framework in the UAE, in terms of both the legal enforceability of such arrangements and the ability to implement close-out netting (i.e., netting of obligations following an event of default or termination event), particularly following the bankruptcy of one of the parties. The Netting Law is closely modelled on the 2018 ISDA Model Netting Act and Guide (as published by ISDA) and applies to all Qualified Financial Contracts, Netting Agreements or Collateral Arrangements entered into by a person or entity in the UAE (other than persons and entities located in financial free zones, i.e., the DIFC and ADGM, which have separate netting regulations).

 

Netting

 

The Netting Law allows parties to enter into Netting Agreements for the purposes of netting off their payment and delivery obligations under Qualified Financial Contracts (Netting). A Netting provision may include the following features:

 

(a) any termination, liquidation and/or acceleration of payment/delivery rights or obligations under Qualified Financial Contracts entered into under a Netting Agreement or to which a Netting Agreement applies;

 

(b) calculation, estimation or adoption of an index of close-out or termination value, market value, liquidation value or any other relevant value, which may arise from a party’s failure to enter into or perform a transaction under a Netting Agreement, where the rights and/or obligations of the parties under such Netting Agreement have been terminated, liquidated and/or accelerated under point (a), above;

 

(c) conversion of the values calculated under point (b), above, into a single currency;

 

(d) determination of the net balance of values calculated under point (b), above, as converted under point (c), above, whether by operation of setoff or netting; and

 

(e) entry into an arrangement whereby the net amount calculated above becomes payable directly or as part of either the (i) consideration for a specific asset or (ii) damages for non-performance of such transaction.

 

The Netting Law currently identifies 23 categories of agreements as Qualified Financial Contracts (which create either a right to receive or an obligation to make a payment or delivery or to transfer title to assets/commodities for consideration) including all types of swaps (in relation to currencies, interest rates, basis rates or commodities), forward rate agreements, currency or interest rate futures, currency or interest rate options, derivatives (relating to bonds, energy, bandwidth, freight, emissions and property index), securities contracts, Collateral Arrangements,1   commodities related contracts and any Shari’ah compliant equivalent of the above agreements. This list may be expanded by the Committee for Designation of Qualified Financial Contracts (the Committee), which will be formed under a resolution issued by the UAE Minister of Finance (the Resolution).

 

Under the Netting Law, Netting Agreements include:

 

(a) any agreement between two parties for Netting of present or future rights to or obligations for payments or delivery, or transfer of title arising in connection with one or more Qualified Financial Contract between the parties (a Master Agreement);

 

(b) any agreement providing for the Netting of amounts due under two or more Master Netting Agreements (a Master Netting Agreement);

 

(c) any Collateral Arrangements relating to or forming part of a Master Netting Agreement or Master Agreement;

 

(d) any Shari’ah compliant agreement or arrangement which is intended to have a similar effect as an agreement under points (a) through (c) above or any other Netting Agreement; and

 

(e) any agreements, contracts or transactions which falls within the definition of a Qualified Financial Contract.

 

A Netting Agreement and all Qualified Financial Contracts to which it applies will constitute a single agreement.

 

Legal Recognition

 

Under UAE law, futures, margin trading and derivatives transactions generally have been viewed as potentially unenforceable due to perceived gharar, an unacceptable level of risk or uncertainty that undermines contract formation. For this reason, the potential exists – and UAE courts have held in some instances – that derivatives are unenforceable “contracts of risk,” even when used to manage risk (as in hedging contracts) rather than to create risk or to speculate. Even for Shari’ah compliant hedging products in the market (for example, the ISDA/IIFM Tahawwut Master Agreement), which are supported by fatwas confirming that such products are Shari’ah compliant and free of gharar, there was no certainty on how the courts would hold. The Netting Law has minimized, if not eliminated, these uncertainties by providing that Qualified Financial Contracts shall not be void, unenforceable, or not final by reason of gharar under the UAE Civil Code.

 

Bankruptcy

 

Under the UAE Bankruptcy Law, a debtor and creditor may only set off obligations (i) if the conditions for exercising the setoff are satisfied before initiating procedures under the UAE Bankruptcy Law, (ii) if conducted as part of the implementation of a preventative composition or restructuring scheme or (iii) as approved by the court.

 

The Netting Law provides that the provisions of a Netting Agreement shall be deemed final and enforceable (including against a third party security provider, even if such third party becomes insolvent), even following the insolvency of one of the parties thereto. The arrangements under a Netting Agreement may not be suspended, delayed or made conditional merely by the appointment of a liquidator or the initiation of bankruptcy proceedings or under any other law applicable to insolvent parties. Insolvency and/or bankruptcy proceedings will not affect the Netting arrangements under a Netting Agreement or a Qualified Financial Contract (or any other financial contract) to which a Netting Agreement applies. Similarly, the provisions of a Netting Agreement shall not be affected by any limitations on setoff or netting imposed under any insolvency or bankruptcy laws.

 

In case of procedures under the UAE Bankruptcy Law, the liquidator or trustee of a party to a Netting Agreement (the Insolvent Party) may annul, stop or refuse the performance of a transaction constituting a preference to a non-insolvent third party (the Third Party). For example, such a transaction could be the transfer of cash, assets, property or collateral from the Insolvent Party to the Third Party under a Netting Agreement. However, the liquidator or trustee may do so only on the basis of clear and convincing evidence that such Third Party entered into the transaction with the intention to prevent, hinder or delay debt recovery by a current or future creditor of the Insolvent Party. There is no definition of “clear and convincing evidence” (a term that has no antecedent in UAE law), but the concept would appear to present a higher hurdle than a mere preponderance of evidence. Significantly, there are no other grounds in the Netting Law for a liquidator or trustee to fail to implement Netting.

 

Multi-Branch Netting

 

In line with the 2018 ISDA Model Netting Act and Guide, the Netting Law has recognized Multi-Branch Netting Agreements (the MBNA) as Netting Agreements under which a party can enter into Qualified Financial Contracts through its Home Office (i.e., the office in its Home Country) and one of its branches or agencies in countries other than its Home Country (i.e., the jurisdiction where such party is incorporated regulated or duly registered).

 

In the event of the insolvency of a foreign party’s branch/agency (the Branch), its liability (or the liability of its liquidator in the UAE) to the non-insolvent counterparty (the Counterparty) shall be calculated on the date of the termination of the Qualified Financial Contract under the MBNA and limited to the lesser of (i) the foreign party’s net payment obligations2 (as adjusted by any payments to the Counterparty and the fair market value of any collateral provided by the foreign party under the MBNA) or (ii) the Branch’s net payment obligation.3  The foreign party’s net payment entitlement4 from the Counterparty (as adjusted by any payments made to the liquidator of the foreign party and the fair market value of any collateral provided by the Counterparty under the MBNA) shall be netted against the Counterparty’s net payment entitlement from the foreign party. The Counterparty may liquidate any collateral (provided under an MBNA) and apply the proceeds against settlement of sums due from the foreign party under any related Qualified Financial Contracts. Any excess collateral shall be returned.

 

The Committee

 

The Committee shall undertake the following responsibilities in accordance with the mechanisms outlined in the Resolution:

 

(a) providing opinions on topics relating to Qualified Financial Contracts;

 

(b) designating any additional financial agreement, contract or transaction as a Qualified Financial Contract;

 

(c) amending the list of Qualified Financial Contracts; and

 

(d) any other function designated by the UAE Cabinet.

 

Conclusion

 

The introduction of the Netting Law is a sign of the UAE’s desire to participate fully in international markets for financial services. UAE counterparties will now be able, more readily and presumably at lower cost, to take advantage of the full range of products that are available.

 

Nevertheless, it remains to be seen how the Netting Law will be implemented by the courts in specific cases. Financial contracts concluded before the Effective Date that qualify as Netting Agreements or Qualified Financial Contracts should now be enforceable, even though enforceability might have been uncertain when the contracts were first concluded. Proceedings under the UAE Bankruptcy Law will be governed by the Netting Law as of the Effective Date, but trustee, liquidator or court actions taken before the Effective Date would presumably remain undisturbed even if inconsistent with the Netting Law. We will continue to report as these and other issues are addressed in the coming weeks and months. ■

 

*****

1 The Netting Law defines a Collateral Arrangement as a margin, variation margin, collateral or security procedure or other credit enhancement tool relating to a Netting Agreement or Qualified Financial Contract entered into under a Netting Agreement or to which a Netting Agreement applies, including (a) pledges, mortgages and charges (whether possessory or non-possessory), (b) Title Transfer Collateral Arrangements (as defined in the Netting Law) and (c) any guarantee, letter of credit or reimbursement obligation by or to a party to a Qualified Financial Contract, in connection with such Qualified Financial Contract.
2 The aggregate of all amounts owed by the foreign party (including subsidiaries and affiliates) to the Counterparty after giving effect to the Netting provisions under the MBNA and all related Qualified Financial Contracts.
3 The amount (if any) owed by the Counterparty to the Branch under a MBNA after giving effect to the Netting provisions under all related Qualified Financial Contracts between the Counterparty and Branch.
4 (i) The aggregate of all amounts owed by the Counterparty (including to any subsidiaries and affiliates of the foreign party) to the foreign party after giving effect to the Netting provisions under the MBNA and all related Qualified Financial Contracts or (ii) the aggregate amount owed if the MBNA contained provisions providing for payments to the parties, upon termination of related Qualified Financial Contracts.

ADGM announces tech start-up licensing regime

The Abu Dhabi Global Market (the ADGM) recently announced the launch of a commercial license specifically catered towards tech start-ups that allows entrepreneurs to obtain an operational license in the ADGM and access to a Professional Services Support Program aimed at allowing entrepreneurs entry to a community of businesses, financial services and professional advisors.

 

The license is available to entrepreneurs of all nationalities floating technology driven start-ups with scalable innovative business concepts that can be deployed in the UAE and contribute to the development of the local economy. Demonstrable evidence of the progress of such technology (such as a prototype or market traction) will be required along with a clearly defined business plan with relevant forecasts.

 

Registering under the license offers the following benefits:

 

• a fully operational commercial license for two years;

 

• annual fee of USD700 (as opposed to the USD10,300 initial registration fee and USD8,100 annual renewal fee ordinarily  applicable);

 

• registration with a virtual office address (business centre or agent/advisor registered address) or physical working space  (micro-office);

 

• access to ADGM’s Professional Services Support Program; and

 

• the option to obtain up to four employee visas.

 

The registration process remains the same as the current online procedure used for ordinary commercial licenses (involving submission of an application form and business plan, initial screening and pre-approval, final approval and issuance of license after registration and incorporation). After two years, if the start-up is able to show progress such as revenue or a sufficient level of investments, it will either be converted to a traditional operational entity on normal license terms or a holding company.

 

The Professional Services Support Program is a unique partnership between the ADGM and leading local and international advisers, established to help entrepreneurs enhance the scalability of their ventures, build business skills and provide guidance in the fields of accounting, compliance, finance, legal and VAT.

 

These developments come on the back of a number of initiatives by the ADGM to address set-up costs, access to funding and business support for start-ups (such as the FinTech RegLab programme). They are also in line with the UAE’s National Innovation Strategy to make the UAE a more attractive base for new businesses and ultimately promote economic diversification, foster growth and stimulate the region’s innovation environment. ■

Dubai relaxes rules on filing appeals before the Court of Cassation

On 19 September 2018, H.H. Sheikh Mohammed Bin Rashid Al Maktoum, the Ruler of Dubai, issued Decree No. 28 of 2018 concerning the Acceptance of the Civil Petitions before Dubai Courts (the Decree). The Decree was issued by His Highness to address the procedures in filing appeals to the Court of Cassation. The Court of Cassation is the highest court in Dubai.

 

Article No. 173 of Federal Law No. 11 of 1992 (as amended) (the Civil Procedures Law) provides that appeals to the Court of Cassation must be filed within 60 days of the judgment of the Court of Appeal. A matter is appealable to the Court of Cassation on questions of law, and provided that the value of the dispute exceeds AED 200,000 (Article 176).

 

Prior to the Decree, appellants were required to make payment of the Court of Cassation fee of approximately AED 6,000 and file a detailed petition of appeal before the expiry of the 60 day deadline. Over the past few years, several appeals were rejected by the Dubai Court of Cassation because the payment of the Cassation Court fee was delayed beyond the 60 day deadline, even though the petition of appeal itself was filed in time.

 

The Decree seeks to address this issue by clarifying that the Cassation Court fee may be paid within three working days of the Case Management Office requiring the petitioner to pay the fee, irrespective of the 60 day limit to file the appeal. The Head of the Dubai Court is given discretion to amend this time frame. Going forward, parties wishing to appeal to the Court of Cassation are still required to file the appeal petition within the 60 day deadline, but only need to make arrangements to ensure that payment is made as soon as the Case Management Office requires it.

 

The Decree further provides that a party which had its petition dismissed for reasons of delay in payment of the Cassation Court fee after 3 May 2015 may apply to the Court of Cassation for reconsideration of the dismissed petition. Such applications must be made within 30 days of the Decree coming into effect. This option is not available where the Cassation petition itself was delayed for more than 60 days (i.e. as opposed to the payment of the fee).

 

The Decree will come into force upon being published in the Gazette, which is yet to occur. Dubai is not part of the Federal Court structure, and the Decree is applicable only with respect to proceedings before the Dubai Court of Cassation. ■

Islamic structured products: too complex for their own good? – Islamic Finance News

There is no doubt that Sukuk continue to be the star performer of the Islamic finance industry, and are regularly deployed for an array of transactions including infrastructure development, Basel III liquidity requirements and even social welfare funding. However, other Islamic structured products have simply not attracted a similar level of interest in the UAE, despite the obvious advantages these products offer to companies looking to manage risk exposure (particularly in the context of trade finance, where plain vanilla hedging instruments may not be
sufficient) and to sophisticated investors looking to customize their investment portfolio to meet specific risk return objectives. Rahat Dar asks; why haven’t these Islamic structured products found a ready market in the UAE?