DIFC: Guardian lion standing watch over Dubai’s financial sector

During the Dubai Week in China summit in Beijing, which ended on 15 May, the purpose-built financial free zone Dubai International Financial Centre (DIFC) promoted itself as a mature and respected financial ecosystem to potential Chinese investors and firms seeking to expand their international presence and exposure across the Middle East and wider region.

It has been reported that prominent Chinese financial and non-financial institutions have expressed interest in DIFC’s widely appreciated regulatory framework, legal systems and enabling infrastructure.

Unique framework

DIFC operates on a unique legal and regulatory framework developed by synthesizing federal and Dubai law to create an optimal growth environment for the financial sector. This permits DIFC to have its own civil and commercial code that is modelled closely on international standards and principles of common law while also tailored to the needs of the region.

DIFC’s financial regulatory framework is administered by the Dubai Financial Services Authority (DFSA) as an adjunct to the legal framework overseen by the court of DIFC. The court is an English-language common law court; its rules of procedure are modelled on the English Civil Procedure Rules and it has a judicial bench drawn from various common law jurisdictions around the world.

DFSA functions

Established in 2005 to serve as independent regulator of financial and ancillary services conducted in or from DIFC, DFSA promotes its regulatory mandate over asset management, banking and credit services, securities, collective investment funds, custody and trust services, commodities futures trading, Islamic finance, insurance, international equities and international commodities derivatives exchanges.

In addition to regulating financial and ancillary services, DFSA is responsible for supervising and enforcing requirements applicable in DIFC to prevent and combat money laundering and the financing of terrorism. DFSA has also accepted a delegation of powers from DIFC’s registrar of companies to investigate the affairs of DIFC companies and partnerships.

As a measure of its stature, DFSA recently extended its formal ties with its counterparts in Southeast Asia by entering into a Memorandum of Understanding with Indonesia’s Otoritas Jasa Keuangan.

This alliance was made on the back of over 90 other significant memoranda, including the European Securities and Markets Authority, the United Kingdom’s Prudential Regulatory Authority, the Central Bank of Cyprus, France’s Autorité des marchés financiers and Banco de Portugal, to name a few.

Biggest fine

DFSA made a distinct impression on Dubai’s financial regulatory and enforcement by announcing on 15 April that it had issued a fine of US$8,400,000 to the DIFC branch of Deutsche Bank, the biggest fine imposed by DFSA in its 10-year history.

The charged contraventions included misleading DFSA, failures in Deutsche Bank’s internal governance and systems and controls and in its client take-on and antimoney laundering processes. Deutsche Bank in turn claimed that no client had lost money, nor had there been breaches in the bank’s mechanisms in regard to knowing your client or anti-money laundering obligations.

There is a line of proactive enforcement of what DFSA sees as one of the most important pillars of DIFC regulatory framework – that authorized persons dealing with DFSA do so in an open and cooperative manner and must disclose to the DFSA any information of which the DFSA would reasonably be expected to be notified.

DSFA expects that regulated DIFC participants evidence a strong compliance culture, and recognize that it is in the interests of the DIFC financial services industry for them to meet or exceed the required standards. When these standards are not met, enforcement action may become necessary.

Monitoring compliance

DFSA operates on a risk-based supervisory framework. It acts to supervise authorized firms, market institutions and individuals, as well as ancillary service providers. DFSA monitors compliance with the laws and rules including provisions on combatting money laundering.

The primary DIFC laws administered by DFSA are the central laws related to financial services set out below.

• Regulatory Law 2004
• Markets Law 2012
• Law Regulating Islamic Financial Business 2004
• Trust Law 2005
• Collective Investment Law 2010
• Investment Trust Law 2006

DFSA also undertakes market monitoring and research to identify, assess and address developments within or outside DIFC that may pose a risk to DIFC or its community.

Enforcement powers

DFSA is empowered to investigate suspected violations of its administered legislation. It may exercise its powers to conduct inspections and compulsorily obtain books and records, or it may require that individuals be questioned under oath or affirmation.

DFSA refers any conduct potentially constituting a breach of criminal law to the competent local, federal or international authority for investigation and prosecution. DFSA generally uses its enforcement powers only as required to achieve its objectives, and in a way that ensures the legitimate activities of participants in DIFC continue freely.

It is argued that the role of the DFSA as an independent, risk-based regulator is one of the principal factors behind the DIFC’s success. Its position allows DIFC to smoothly grant licences and regulate the activities of financial services conducted through the centre.