Tag: Corporate and Commercial

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.■

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. ■

Cautious optimism on 100 per cent foreign ownership

Recent media reports have suggested that 100 per cent foreign ownership of companies in the UAE will now be permitted. The reports are based on a government press release regarding a UAE Federal Cabinet (Cabinet) meeting held on 20 May 2018.

 

The press release states that the Cabinet announced changes in the system of foreign ownership in the UAE allowing global investors to own 100 per cent of companies by the end of the current year. While this is welcome news, some media reports and expert analysis have jumped the gun giving the impression that 100 per cent foreign ownership is a done deal. This news is better understood as a statement of intent and is not confirmation that the relevant legislation is already in place.

 

Companies incorporated in the UAE require a minimum of 51 per cent UAE ownership. This long-standing rule is set out in Article 10 of Federal Law 2 of 2015 on Commercial Companies, as amended (the Companies Law). The previous Companies Law (Federal Law 8 of 1984) contained a similar restriction. As an exception to this rule, 100 per cent foreign ownership is permitted in free zones.

 

An amendment to Article 10 of the Companies Law adopted in September of 2017 (pursuant to Federal Decree-Law 18 of 2017) stipulates that the Cabinet may adopt resolutions permitting greater than 49 per cent foreign ownership. Under the revised Article 10, the Cabinet has discretion to determine what types of companies may be majority or wholly owned by foreigners.

 

The idea of giving the Cabinet the power to designate companies in certain sectors as being eligible for 100 per cent foreign ownership is not new. For example, in September of 2011, following announcements by the Ministry of Economy regarding a series of forthcoming new laws, media reports circulated that a new foreign investment law giving the Cabinet the power to allow 100 per cent foreign ownership of certain companies was being drafted.

 

As of this time, no foreign investment law has been enacted. Instead, the mechanism for permitting the Cabinet to designate the sectors eligible for majority and 100 per cent foreign ownership has been inserted into the Companies Law.

 

While 100 per cent foreign ownership would be a welcome development, it is not yet a reality. Some reports may give the impression that a Cabinet Resolution that would allow implementation of 100 per cent foreign ownership is already in place. Such reports are misleading. A committee is currently studying the issue with a view to making recommendations but the Cabinet has not yet issued any resolutions stipulating that specific types of companies are eligible for 100 per cent foreign ownership. Until this happens, 100 per cent foreign ownership will be a goal rather than a reality.

 

Reports about new legislation in the UAE should always be treated with caution until the actual legislation is published in the Official Gazette. In some cases, rumored legislation never materialises. In other cases it takes much longer than predicted. For example, there were many reports going back well over a decade that the new Companies Law was imminent before it was finally promulgated in 2015. In the current case, the government’s press release indicates that the Cabinet has set a goal of implementing 100 per cent foreign ownership by the end of the year. Whether or not this goal will be achieved remains to be seen.

 

Permitting 100 per cent foreign ownership in certain sectors would be a major development. Not only have the relevant sectors not yet been identified, if and when such sectors are identified the government may get resistance from existing companies operating in these sectors. Industry resistance is a potential obstacle to implementation. The relevant business sectors must be identified and then the Cabinet must agree with the recommendations and adopt a resolution.

 

The recent news is cause for optimism that 100 per cent foreign ownership will eventually be implemented in certain sectors but 100 per cent foreign ownership is not yet a reality. ■

DIFC special purpose companies and exempt activities: a special purpose

The special purpose company (SPC) regime in the Dubai International Financial Centre (the DIFC) offers a vehicle that is convenient for use in many types of corporate finance transactions. A DIFC SPC is relatively quick and easy to establish and inexpensive to maintain on an ongoing basis as compared to a DIFC company limited by shares.

 

All SPCs are governed by and subject to the DIFC Special Purpose Company Regulations (the SPCoR).  Importantly, the SPCoR stipulates that an SPC can only be used for an “Exempt Activity”. In summary, the SPCoR requires that an SPC be used only where some form of financing, debt or capital markets transaction is contemplated.

 

Those that seek to use an SPC in their corporate structures must take this limitation into account. The DIFC Registrar of Companies is granted the right to review the status of a DIFC SPC, and to revoke the privileges and exemptions granted to an SPC by the SPCoR, should an SPC undertake any activity which is not an Exempt Activity. Specifically, this means that an SPC should not be used merely as a holding company, where there is no genuine financing element that would qualify as an Exempt Activity under the SPCoR. We are aware that the DIFC authorities have recently stepped up enforcement activity in an effort to ensure that all SPCs are adhering to the restrictions set forth in the SPCoR in letter and spirit.  This approach could affect the viability of using an SPC as a mere holding vehicle in new structures, and could also affect existing structures if the DIFC authorities choose to examine the stated versus actual activities of existing SPCs. ■

New ministerial decision brings clarity to private joint stock companies

The private joint stock company is one of the forms of company contemplated by UAE Federal Law No. 2 of 2015 concerning commercial companies (the Companies Law). The UAE Federal Ministry of Economy has now promulgated Ministerial Decision No. 539 of 2017 (the Ministerial Decision) which was issued on 29 May 2017 and is now in force, and expressly abrogates Ministerial Decision No. 370 of 2009 on the Register of Shares of Private Joint Stock Companies (and all other contradictory decisions and circulars). The Ministerial Decision brings much awaited clarity on the process for setting up and operating a private joint stock company (a PJSC).

 

 

Unlike the provisions in the Companies Law concerning public joint stock companies, which are relatively more detailed, the provisions relating to PJSCs are general in nature and provide little by way of detailed guidance. Notably, article 265 of the Companies Law provides that save for those concerning public subscription, all provisions concerning public joint stock companies shall apply to PJSCs. It will be of interest to see how the authorities and the courts will reconcile article 265 with the detailed guidance contained in the Ministerial Decision, much of which addresses the same content as the relevant provisions of the Companies Law.
The Ministerial Decision is extensive and brings welcome clarity to many issues, and anyone owning, managing, acting as director of, or advising a PJSC should read it in full.  For example, it deals with the following:
Board of directors: guidance as to the process and preconditions for an appointment to the board of a PJSC. For example, any person wishing to be appointed to the board of a PJSC must submit an acknowledgment that he shall abide by the Companies Law, any supplementary legislation thereto and the provisions of the company’s memorandum and articles of association.  It also deals with conflicts of interests, related party transactions and director remuneration, and clear permission for participation in meetings by electronic means (previously subject to approval of the “Authority” per article 156 of the Companies Law),  among other things.
Capital: guidance on issued versus authorized share capital, share premiums, treasury shares and pre-emptive rights of shareholders and various exceptions to such rights.
Employee share schemes: article 226 of the Companies Law contemplated the issuance of guidance to detail the methods by which a company could implement an employee share scheme. This guidance is contained in the Ministerial Decision (see articles 45 through 47 of the Ministerial Decision). Notably, directors are not permitted to participate in such a scheme and any shares held for the purposes of an award to employees shall not carry any right to vote or otherwise receive distributions from the company, until such time as such shares are transferred to an employee under the terms of the company’s share scheme.
The Ministerial Decision may be a sign of further detail to come.  Guidance on issues concerning the Companies Law is anticipated and will assist in further developing the corporate governance landscape in the United Arab Emirates. As an example, we expect further guidance on the form of memorandum and articles of association to be used for PJSCs (as alluded to in article 3 of the Ministerial Decision). In addition, article 5 of the Companies Law contemplates the issuance of guidance concerning the ability of a free zone entity to conduct business in the United Arab Emirates, but outside the relevant free zone. All guidance that helps clarify issues concerning the Companies Law will be welcomed. ■

 

Companies law compliance

The new Commercial Companies Law was enacted as Federal Law No. 2 of 2015. It gave existing companies until 1 July 2016 to achieve compliance with its terms. Article 374 provides that a further one-year extension could be granted by Resolution of the Cabinet, and such an extension was in fact granted. Article 374 also provides that a company that fails to achieve compliance shall be deemed dissolved.

 

 

Many companies set about amending their constitutive documents (Contracts of Establishment for limited liability companies and Memoranda and Articles of Association for joint stock companies) to achieve compliance with the new requirements. Shareholders of limited liability companies were assisted somewhat by Ministerial Resolution No. 272 of 2016, which specified which provisions of the Commercial Companies Law on joint stock companies would also apply to limited liability companies.

 

 

A new resolution of the Minister of Economy, Ministerial Resolution No. 694 of 2016, now provides further relief. It states that Contracts of Establishment of existing limited liability companies that are not amended by the deadline shall be deemed amended to the extent necessary to achieve compliance. One could question whether the Commercial Companies Law gave the Ministry the power to grant this relief from compliance. Executive measures cannot modify legislative measures absent enabling legislation. Nevertheless, the practical result is that such companies no longer face the prospect of dissolution, fines or other sanctions for failure to comply.

 

 

The new measure applies to general partnerships and limited partnerships as well as limited liability companies. It does not apply to the other forms of companies that exist under the Commercial Companies Law, the private joint stock company and the public joint stock company.

 

 

Although sanctions relief is welcome, some uncertainty remains, and not only because of the inherent limitations on executive power noted above. The parties to a Contract of Establishment that is deemed amended could still be unsure of where they stand. The Contract of Establishment will no longer mean what it says, and an authoritative determination of its actual meaning may be elusive. Although major substantive problems would seem unlikely, it is not ideal for a corporate document not to mean what it says.

 

 

In contrast, the companies that have amended their Contracts of Establishment do not face this ambiguity. Their amended documents would have been notarized and filed with the authorities, making it unlikely that the new Resolution would impose further amendments.

 

 

To illustrate the issues that might arise, the new Commercial Companies Law requires that a register of shareholders be maintained by the company, including such particulars as the full name, nationality, date of birth and place of residence of each shareholder. The date of birth was not previously required. Even a company that does not amend its constitutive documents should amend its register of shareholders so as to include this new information.

 

 

As a further example, the new law slightly changes the requirements for exercise of preemption rights when a share transfer is contemplated. When a shareholder in an LLC wishes to sell its shares, it must first make an offer on the same terms to the other shareholders, or alternatively obtain a waiver of the preemption right from the other shareholders. In the event of a dispute over the price, the new Commercial Companies Law requires that the price be determined by one or more experts nominated by the Competent Authority in the relevant Emirate. The previous Commercial Companies Law (and many constitutive documents of companies formed in the UAE) provided that this value would be determined by the company auditor. An expert appointed by the Competent Authority will now play that role, whether or not the underlying constitutive documents are amended.

 

 

The new Commercial Companies Law contains an express prohibition against a manager of a limited liability company acting as manager of a competing enterprise without the consent of the company. This exposes a manager to liability even if the prohibition is not stated in the constitutive documents of the company.

 

 

As a final example, a shareholder in a limited liability company is now able to pledge its shares. However, this is possible to the extent that the constitutive documents enable the same. It is unlikely that a provision to this effect would be deemed included in the company’s constitutive documents by virtue of the new Resolution.

 

 

The new Resolution was published in Issue No. 612 of the UAE Federal Official Gazette dated 28 February 2017, and it took effect on 1 March 2017. ■

New UAE funds regime

The UAE has embarked on an ambitious undertaking by introducing new business friendly mutual funds regulations to stimulate the UAE funds industry and provide the foundation for a more developed regional funds regime in the Gulf Cooperation Council (the “GCC”). The mutual funds industry can facilitate the gathering of monies for investment in various sectors across the UAE and Middle Eastern economies through funds that are established in the UAE, as well as foreign funds that are registered and promoted in the jurisdiction.

 

The Emirates Securities and Commodities Authority (“SCA”) has recently issued the following new regulations governing the registration, licensing, and promotion of mutual funds in the UAE (the “Fund Regulations”):

 

1. SCA Board Decision No. 9 of 2016 regulating mutual funds;

 

2. SCA Board Decision No. 10 of 2016 setting out fees related to mutual funds;

 

3. SCA Administrative Decision No. 49 of 2016 regulating exchange traded funds (“ETFs”);

 

4. SCA Administrative Decision No. 52 of 2016 regulating cash investment funds;

 

5. SCA Administrative Decision No. 1 of 2017 regulating real estate investment trusts (“REITs”);

 

6. SCA Administrative Decision No. 2 of 2017 regulating private ownership funds;

 

7. SCA Administrative Decision No. 3 of 2017 regulating venture capital funds; and

 

8. SCA Board Decision No. 3 of 2017 regulating promotion and arranging activities.

 

The Fund Regulations constitute the new UAE fund regime regarding onshore local funds and foreign funds that are marketed in the UAE (outside of its financial free zones).  Such regulations replace SCA Board of Directors Decision No. 37 of 2012 concerning the regulations on mutual funds (the “2012 Regulations”).

 

In addition to revamping the primary mutual fund law that applies to all UAE funds, the Fund Regulations set out additional obligations and key exemptions for certain funds, including REITs, ETFs, private equity funds, and venture capital funds.  This marks a significant change from the 2012 Regulations, which failed to differentiate between varying types of local funds, and should encourage fund managers and other sponsors to establish funds in the UAE.

 

Mutual Funds

 

As with the 2012 Regulations, the Fund Regulations apply to all mutual funds and parties that are “related” to mutual funds.

 

A “mutual fund” is defined as a financial pool engaged in the activity of accumulating investors’ assets for the purpose of investment against the issue of fund units of equal value. SCA interprets this definition broadly.

 

Corporate Structure

 

A local mutual fund must be established by an eligible sponsor, which includes companies licensed by SCA “in the area of securities” or to manage funds, local and foreign banks licensed by the UAE Central Bank, and UAE branches of foreign companies licensed by an International Organization of Securities Commissions regulator and having an operating history of at least five years.  The sponsor must contribute a minimum share capital of AED 5,000,000 and cannot own more than 30% of the fund units.

 

While UAE Law No. 2 of 2015 (the “Companies Law”) contemplates local funds having corporate personality, it does not prescribe a specific form for funds.  As with the previous regime, a UAE fund is established through the contractual relationship between the sponsor and its investors, and each investor will have a balance sheet entry in the accounts of the fund administrator (which must meet comparable eligibility requirements as those of the sponsor).

 

The Fund Regulations provide that the contractual relationship will benefit from limited liability (i.e. up to the amount invested) and impose certain conditions related to the fund units (e.g. preventing pledging assets of the fund to satisfy third party debts and allocation of units by heirs or creditors).  Furthermore, a fund sponsor is only required to obtain SCA approval to establish a local fund; accordingly, there is no need to obtain a separate operating license for the fund with any economic department in accordance with the Companies Law.

 

Types of Local Funds

 

The Fund Regulations provide for (or otherwise contemplate) the following types of funds:

 

• public and private funds;

 

• master/feeder funds and umbrella fund/sub-funds;

 

• open ended and closed ended funds; and

 

• specialty funds, including Islamic funds, REITs, venture capital funds, private equity funds, ETFs, and cash investment/money market funds.

 

The provisions related to these funds are based on the Undertakings for Collective Investment in Transferable Securities (UCITS) model, which creates a harmonized regulatory regime that permits funds to be sold to any investor in the European Union.  While the GCC states have not adopted a comparable framework, it appears that the Fund Regulations have been prepared with this possibility in mind. ■

 

* * *

 

The new Fund Regulations mark the beginning of a new chapter in the UAE funds regime and should contribute to the growth of the UAE and the broader region by fostering more efficient and transparent investment structures.

Changes to anti-corruption regulation in the UAE

Changes to the UAE Penal Code (Federal Law No. 3 of 1987) (the “Penal Code”) at the end of 2016 have (i) extended the current bribery provisions to include bribery involving a foreign public official or an official of an international organisation, (ii) increased the penalties for committing a bribery-related offence and (iii) criminalised the offering of a bribe in the private sector.

 

General Overview of Anti-Corruption Regulation

 

Since 1987, the Penal Code has contained prohibitions against bribery, making it an offence to bribe a public official in consideration for an act on the part of that official. A bribe could be anything of value. Offering or promising a bribe was also prohibited, as was the solicitation or acceptance of a bribe on the part of a public official. A public official could be an employee of the government or a person tasked with an official duty. An offence would be committed even if the official’s act was not part of his or her official duties, and even if the official did not actually intend to commit the act. In December 2005, the solicitation or acceptance of a bribe on the part of an employee in the private sector was also prohibited.

 

Changes to the Penal Code

 

The recent amendments to the Penal Code have brought anti-corruption regulation in the UAE more in line with other jurisdictions by the inclusion of “foreign public officials”.

 

Foreign public official is defined as “any person in a legislative, executive, administrative or judicial position [in] another country, whether permanently or temporarily, be elected or appointed, and whether with or without pay and any person entrusted with a public service”.

 

Both individuals and companies can be found to be liable for bribery of a foreign public official, as the relevant provisions of the Penal Code apply to anyone (whether a natural or legal body).

 

Crucially, the Penal Code provisions also now apply outside the territory of the UAE to any person who commits any of the bribery offences set out in the Penal Code, if the criminal or victim is a UAE citizen or if the crime is committed by an employee of the public or private sector of the UAE or if it involves public property. (Public property is defined as “(i) property that is fully or partially owned by any of the federal or local authorities, federal or local public establishments or institutions or companies owned, either wholly or partially, by the federal Government, local governments, societies and associations of public welfare and (ii) any property that is subject to the management or supervision of any of the entities set forth in paragraph (i) or of which it has the right to use or exploit”).

 

In addition, bribery involving an official of an international organisation has been prohibited.

 

Finally, the prohibition against bribery in the private sector has been expanded.  Previously, the offence of private sector bribery was limited to the solicitation or acceptance of a bribe by a private sector individual. Now, it is also a criminal offence to offer a bribe to a person working in the private sector.

 

Consequence of Committing an Offence

 

There are various punishments for committing an offence under the bribery provisions, as follows:

 

• Imprisonment for any public official, foreign public official or official of an international organisation who demands or accepts a bribe. This now means that the relevant bribery provisions apply to non-UAE nationals and entities engaging in acts of bribery.

 

• Up to five years imprisonment for (i) anyone who offers a bribe to a public official, a private sector manager, a foreign public official or an employee of an international organisation and (ii) any person that has acted as a mediator between the briber and the receiver.

 

• A fine equal to the amount of the bribe (but which shall not be less than AED 5,000) for any of the above offences.

 

• Any gifts accepted or offered as a bribe will be confiscated.

 

The briber or mediator can be exempt from the above punishments if he informs the relevant judicial or administrative authorities of the crime, but only so long as he does so before the crime is discovered.

 

There is no time restriction on a civil or criminal lawsuit being taken against any individual or company having been found to have committed bribery offences.

 

Conclusion

 

The changes to the bribery provisions of the Penal Code are a significant change to anti-corruption regulation in the UAE. The Penal Code is now more wide ranging than before, extending to foreign as well as domestic bribery, and covering the public sector, international organisations and the private sector. ■

Ministerial decision No. (272) of 2016

Federal Law No.2 of 2015 on Commercial Companies (the “New Law”) came into force on 1 July 2015, replacing Federal Law No.8 of 1984. The New Law, similar to its predecessor, contains sections relating to various forms of companies, including public and private joint stock companies (“PJSCs”) and limited liability companies (“LLCs”).

 

While the New Law is divided into sections which expressly apply to a particular type of company, Article 104 of the New Law relates specifically to LLCs and states that “the provisions concerning Joint Stock Companies shall apply to Limited Liability Companies”.

 

The recently enacted Ministerial Decision No. (272) of 2016 (the “Decision”) addresses the scope of Article 104 by stating which articles relating to PSJCs apply to LLCs.

 

Article 3 of the Decision sets forth the articles of the New Law relating to PJSCs which also apply to LLCs. The articles listed are:

 

  • Article 162 – This article states, inter alia, that members of the board shall be liable to the PJSC, its shareholders and third parties for acts of fraud, violations of law or the PJSC’s articles or for errors in management. As applied to an LLC, this would mean that the manager or manager(s) of an LLC would also be so liable to the LLC and its partners for fraud, violations of law, breach of the articles and mismanagement.

 

  • Article 163 – This article states that a PJSC will be bound by acts of a director vis-à-vis a third party, even if it is later found that the director was not properly elected or appointed. Again, with respect to LLCs this would apply to acts of its manager(s).

 

  • Article 167 – This article relates to a waiver by the general assembly of a PJSC of the liability of its directors. A general waiver will not prevent a claim against the directors. However if the act giving rise to the claim was presented to and approved by the general assembly, the claim shall be discharged after one year. Again, with respect to LLCs this would apply to acts of its manager(s).

 

  • Articles 174, 175 and 176 – These articles state, respectively, that shareholders holding 20% of the shares of a PJSC, the PJSC’s auditor, or the Securities and Commodities Authority (the “SCA”), may require the PJSC’s board to convene a meeting of the general assembly. It also stipulates deadlines within which to do so. Applied to LLCs, this would mean that partners owning at least 20% of the capital of the LLC, the LLC’s auditor, or the Economic Department of the relevant Emirate, may require the manager(s) to convene a meeting of the general assembly.

 

  • Article 191 – This article stipulates that shareholders holding at least a 5% shareholding in a PJSC may apply to the SCA to have decisions of the general assembly annulled if such decision is prejudicial to a certain class of shareholders or are of particular benefit to the directors of the PJSC. Article 191 also states that the decision of the SCA may be appealed to a court of law. Thus partners of an LLC that hold at least 5% of the LLC’s capital may make a similar application to the relevant Economic Department for a decision to annul a resolution of the general assembly.

 

  • Article 192 – Section 1 of this article states that in the event a PJSC’s general assembly fails to elect a board in two successive meetings, the SCA’s Chairman may appoint a temporary board for not more than one financial year. After such period the general assembly will be asked once again to elect a board, failing which the SCA’s Chairman will decide a course of action which may include dissolving the PJSC. Section 2 states that if the general assembly fails to appoint an auditor, the SCA may do so on its behalf for a period of one year. Applied to an LLC, Section 1 of Article 192 would mean that if the partners fail to appoint a manager after two successive meetings, the relevant Economic Department may do so. Section 2 would mean that if the partners cannot decide on an auditor, the Economic Department may do so.

 

  • Chapter 7 (Dealing with Auditors) – Provisions relating to the requirement for appointment of an auditor (though for no longer than three consecutive years) (Article 243); requirement for the auditor to issue a report (Article 245); confidentiality of the report (Article 247); prohibition on the auditor from trading in the company’s securities (Article 248); requirement that the auditor report violations of law it may uncover (Article 249); required contents of the auditor’s report (Article 250); dismissal of an auditor (Article 251); resignation of an auditor (Article 252); liability of an auditor and limitation periods for such liability (Article 253 and 254). With the respective replacement of directors for managers and the SCA with the Economic Department, the above provisions apply virtually verbatim to LLCs.

 

  • Article 236 – This article requires a PJSC to provide the SCA and the relevant Economic Department with a copy of the auditor’s report within seven days of the submission of the report to the general assembly. Thus an LLC will need to provide its audited financial statements to the Economic Department within the same time frame.

 

Article 3 of the Decision also sets forth provisions of the New Law which apply to PJSCs but do not apply to LLCs. ■