International Fraud & Asset Tracing 2022

Last Updated May 03, 2022

UAE

Law and Practice

Authors



Herbert Smith Freehills LLP operates from 26 offices across Asia Pacific, EMEA and North America, and is at the heart of the new global business landscape, providing premium-quality, full-service legal advice. The firm provides many of the world’s most important organisations with access to market-leading dispute resolution, projects and transactional legal advice, combined with expertise in a number of global industry sectors. It has been advising on Middle East transactions for over 40 years. Operating from its Dubai office and association in Riyadh, its team of approximately 35 lawyers (including six partners and three of counsel) in the region is available to deliver a full service across the Middle East and beyond. Having worked on some of the largest transactions and highest-profile disputes in the region, representing governments and their ministries, sovereign wealth funds, major corporates, banks and professional services organisations, the firm has an in-depth understanding of Middle East business culture and practices and the civil and sharia law systems which apply.

In the UAE, there is close interaction between the civil and criminal justice systems, and this is particularly the case in relation to matters involving fraud. A victim of fraud may choose whether to bring a civil claim for damages arising from the fraudulent conduct before the civil courts, or to report the fraud to the police and later to join a civil claim to the criminal proceedings before the criminal court.

Criminal Liability

Fraud

In the UAE, fraud is primarily treated as a criminal offence and there are fewer provisions specifically dealing with it under civil law. The crime of fraud is codified in the UAE Penal Code (Federal Decree Law No 31 of 2021). There is a requirement of a material element and moral element. The material element of a crime consists of a criminal act committed or omitted in violation of a law forbidding or requiring it. The moral element of the crime consists of the intention or the error.

Article 451 of the Penal Code provides punishment for a company which:

  • uses fraudulent practices and assumes a false name;
  • takes possession for itself or for others of any movable property or written instrument; or
  • obtains any signature upon such instrument, its revocation or amendment, whenever it is intended to deceive a victim and bring them to surrender the instrument.

In addition, a company, or any of its representatives, shall be punished if they transfer or dispose of any real or movable property in the following circumstances:

  • being fully aware that it is not owned by the company;
  • being fully aware that they have no right to dispose of the property;
  • disposing of the property with the knowledge that another person has already disposed of it, or contracted to dispose it, which operates to injure others.

Merely making false statements is not sufficient for a crime of fraud to have occurred. The false statements should be accompanied with material acts.

Cyberfraud

A crime of fraud can also arise under Federal Decree Law No 34 of 2021 (the “Cyber Crimes Law”). The offences under the Cyber Crimes Law include:

  • forgery of an electronic document (including modifying its contents on an electronic site);
  • using a forged electronic document with knowledge of the forgery;
  • using an IT system to obtain for themself or for a third party, without any right, an asset, benefit, document or a signature by using any fraudulent method; and
  • accessing IT systems without permission.

Commercial fraud

Federal Law No 19 of 2016 on Commercial Fraud (the “Commercial Fraud Law”) criminalises commercial fraud, being any of the following acts:

  • the import, export, re-export, manufacturing, sale, display or acquisition for the purpose of sale, storage, lease, marketing or trading, fake, corrupt or counterfeit commodities;
  • advertising fake or unreal prizes or reductions;
  • exploiting commercials, submitting the same or promising to submit the same in misleading promotions or promoting adulterated, corrupted or counterfeit commodities; or
  • offering, submitting, promoting or advertising adulterated commercial services.

Bribery

The Penal Code prohibits a person or company from directly or indirectly promising, offering or granting a bribe to a public servant, a person assigned to a public service, a foreign public servant or an employee of an international organisation for the following purposes:

  • in return for performing or not performing an act which is in violation of the duties of their job;
  • to incite any such person to use their actual or assumed power for the purpose of obtaining an undeserved advantage in favour of the principal inciter, or in favour of any other person in a public department or authority; or
  • to use their actual or assumed power for the purpose of obtaining an undeserved advantage from a public department or authority.

Similarly, it is prohibited for a manager of a private sector entity or establishment, or an individual who is employed by such person in any capacity, to solicit or accept a bribe, directly or indirectly, for themself or for another person, in return for the following:

  • the performance or the refraining from the performance of an act of their duties; or
  • defaulting on the duties of their job, even if they do not intend to effect the act or not to refrain from it, or if the demand or acceptance or promise comes subsequent to the performance of the act or the refraining from its performance.

Under Article 283 of the Penal Code, a bribery conviction will lead to a fine equivalent to what has been demanded or offered or accepted (provided that the fine is not less than AED5,000, in which case a fine of AED5,000 shall apply). A person convicted of bribery can be imprisoned for a maximum period of five years.

The bribe itself will also be subject to confiscation. The Penal Code also provides for punishment of any individual who acts as an intermediary in the giving or receiving of the bribe.

However, under the Penal Code, an exemption may be provided if the individual informs the authorities of the crime before it is discovered.

There are also some individual emirate-level provisions. Under the Abu Dhabi Penal Code, it is a criminal offence to offer or give a bribe to a public official, if the public official abuses their official position in return for the bribe.

Under the Dubai Penal Code, it is a criminal offence to offer or provide any gift or benefit to a Dubai public official, even if the offeror has no intention to procure an act, or omission of an act, in violation of the duties of the public official’s function.

Conspiracy

Under Articles 45 and 46 of the Penal Code, individuals who conduct the following acts will be deemed to be accomplices to the crime:

  • committing a crime in association with others;
  • committing one of a series of acts which constitute a crime;
  • making use of another person for the perpetration of an act constituting a crime;
  • instigating or agreeing with the offender to commit a crime;
  • giving the offender the necessary tools knowing they would be used in the commission of a crime; or
  • intentionally aiding the offender in any other way in the preparation, facilitation or completion of a crime.

Misappropriation

Article 454 of the Penal Code provides that an individual who knowingly misappropriated, with the intention to own lost property owned by someone else, or property in their possession by mistake or by force majeure, can be subject to a jail sentence not exceeding two years or to a fine.

Civil Liability

Civil liability for fraud arises under the Federal Law Concerning Civil Transactions (Federal Law No 5 of 1985, as amended) (the "Civil Code").

Misrepresentation

Articles 185 to 192 of the Civil Code include liability for misrepresentation. Misrepresentation arises when one of the contracting parties deceives the other by means of trickery of word or deed which leads the other to consent to what they would not otherwise have consented to. Deliberate silence concerning a fact or set of circumstances can also be considered to be a misrepresentation if it is proved that the person misled the victim.

Tort

Articles 282 to 298 of the Civil Code provide that a person causing harm, or a person deceiving another, must make good the harm resulting from that deception. Harm may be direct or consequential. If the harm is direct, it must unconditionally be made good, and if it is consequential there must be a wrongful or deliberate element and the act must have led to the damage, which will typically be the case in fraud matters.

In all cases the compensation shall be assessed on the basis of the amount of harm suffered by the victim, together with loss of profit, provided that it was caused by the harmful act.

Misappropriation

Articles 304 to 312 of the Civil Code include provisions which give rise to liability as a result of misappropriation of property. Whoever misappropriates property belonging to another must restore it and/or repay any losses.

The wrongdoer must also hand over any benefits or increase they have obtained from such property.

Criminal Claims

A claimant whose agent has received a bribe may make a complaint against the agent under the Penal Code. According to Article 278 of the Penal Code, an individual who manages or works in any entity or establishment and solicits or accepts or promises, directly or indirectly, any undeserved gift/bribe in return for the performance of or the refrainment from the performance of an act of their duties shall be imprisoned for a period not exceeding five years.

Similarly, the same penalty shall be imposed on any public official or any other person who demands or accepts any undeserved advantage, gift or grant for themself or for another person, directly or indirectly, in order for a public official or person to use their actual or assumed power for the purpose of obtaining an undeserved advantage from a public department or authority.

Federal Law by Decree No 11 of 2008, regarding the Human Resources in the Federal Government, also provides that a federal government employee who has requested or received a bribe shall be referred to the judicial authorities.

Onshore UAE – Civil Claims

There are a number of civil remedies available (in addition to criminal liability) that a person involved in bribery may be exposed to.

In onshore UAE, and under Federal Decree Law No 32/2021 on Commercial Companies (CCL) each manager of a limited liability company shall be liable to the company, shareholders and third parties for any fraudulent acts. Further, they shall be required to compensate the company for any losses or expenses incurred due to abuse of power or violation of the provisions of any law in force or the company's memorandum of association or their contract of appointment or due to gross error by the manager.

Similarly, under the CCL, the members of the board of directors and executive management shall be responsible towards the company, the shareholders and the third parties for all acts of fraud, misuse of power, and violation of the provisions of the CCL and the articles of association of the company.

A director who has breached the CCL may be subject to financial penalties and/or criminal sanctions.

DIFC and ADGM – Civil Claims

In the DIFC and ADGM, a director of a company cannot accept a benefit from a third party where the benefit is conferred on them due to their position as a director of the company for them doing (or not doing) anything as a director, unless the acceptance of such benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

Any breach of these duties may result in disqualification, personal civil liability, damages payable to the company in respect of losses suffered, in addition to the criminal liability already discussed at 1.1 General Characteristics of Fraud Claims.

In onshore UAE and DIFC/ADGM, it is likely to be possible to establish that an act of bribery gives rise to a cause of action, unlike general tort/harmful act principles.

Criminal Liability

Accomplices, or individuals who assist or facilitate fraudulent acts will be subject to the same punishment as imposed on the principal offender.

The provisions of Articles 45 and 46 of the Penal Code apply when determining whether an individual is an accomplice.

However, under Article 53 of the Penal Code, where the characterisation of the crime or penalty may vary according to the offender’s intention or knowledge of the circumstances, accomplices will be punished only according to their knowledge and intention.

Limitations Period under the Penal Procedures Law

The Penal Procedures Law, provides that:

  • for criminal cases the limitation period for felonies is 20 years;
  • for misdemeanours it is five years; and
  • for contraventions it is one year starting from the date on which the crime was committed (Article 20).

Depending on the seriousness of the fraud, either the limitation period for felony or misdemeanour may apply.

Limitation Periods under the Civil Code

Article 298 of the Civil Code provides that the general limitation period for such claims arising is three years from the date on which the victim became aware of the harmful event and the identity of the perpetrator, subject to a maximum of 15 years from the date on which the harm occurred. If criminal proceedings in relation to the relevant events are pending at the time the three-year period expires, the limitation period is extended.

ADGM and DIFC

In the ADGM, the limitation period is for six years from when the fraud was discovered or when it could have been discovered, with reasonable diligence. In the DIFC, where a cause of action arises as a result of fraud by the defendant, there is no time limit before an action must be commenced for fraud. In relation to claims of misrepresentation, a cause of action arises on the earliest date on which the claimant knows or ought reasonably to know about the loss that gives rise to the cause of action, and this action must be commenced within 15 years of the date on which the cause of action arose.

Onshore UAE – Criminal

Article 83 of the Penal Code provides that once the commission of a criminal offence has been established:

  • property caught and connected with, or acquired as a result of, the offence may be confiscated if such confiscation does not prejudice the rights of bona fide third parties;
  • if the production, use, possession, sale or offer for sale of the property by a bona fide third party would constitute a separate offence to the primary offence, then the property must be confiscated regardless of the rights of the bona fide third party;
  • if it would be impossible to confiscate the property due to the rights of bona fide third parties, then the courts will impose a fine equal to the property's value at the time the crime was committed.

If the assets recovered in connection with the crime are returned to the court, they are then managed by the public prosecutor at their discretion, so there is no certainty that confiscation will benefit a victim.

Onshore UAE – Civil

There are no proprietary claims against property obtained as a result of fraud.

An attachment order can be obtained over assets in the civil courts in civil matters, although this is an interim remedy and does not provide a proprietary interest.

DIFC and ADGM

The common law principle of knowing receipt and dishonest assistance are likely to be recognised by the DIFC and ADGM courts.

There are no pre-action conduct rules that apply to fraud claims.

Onshore UAE

Whilst there is no concept of an “injunction” in onshore UAE, Article 111 of Cabinet Decision No 57/2018 (issuing the implementing regulations of the UAE Civil Procedure Law No 11/1992) provides that a claimant may apply to the court for a precautionary attachment order (in rem), the effect of which is to seize or attach the defendant's property in order to preserve it pending trial. Attachment orders may also be made over assets that are in the possession of third parties (for example, bank accounts). For an order to be made, it must be apparent from the documents submitted to the judge that there is a serious question to be tried.

Article 111 provides that a person can apply for such order in any circumstance in which it is feared that an asset may be lost and as a result a claim may go unsatisfied, such as in the following circumstances:

  • if the obligor has no permanent residence in the state;
  • if the obligee fears that the obligor may abscond, remove or conceal their property; or
  • if the assets or securities for the debt are at risk of dissipation.

Such an attachment order must be accompanied with a signed undertaking to indemnify the defendant in the event that the order was obtained on fraudulent grounds.

An application for a precautionary attachment order may be made without notice to the defendant, but it must be followed by a substantive claim filed at court within eight days from the date that the order is made, which addresses the validity of the precautionary attachment and allows the defendant an opportunity to raise objections. Failure to comply with the court orders may lead to fines.

Article 188 provides that, under certain conditions, a travel ban can be requested against the defendant. However, the court must be satisfied with the following conditions before imposing a travel plan:

  • there must be serious reasons to believe that the defendant will flee the country;
  • the debt must not be less than AED1,000 where the substantive case has been filed, or AED10,000 where the substantive case has not yet been filed; and
  • the debt must be known, due for payment and unconditional, or if an unspecified amount, the claim must be based on written evidence and accompanied by a guarantee for any damages caused by the travel ban if not rightfully imposed.

DIFC and ADGM

Both the DIFC and ADGM courts have power to grant interim orders prior to the commencement of proceedings and without notice to the defendant. In the DIFC and ADGM, a victim of fraud, may be able to apply for injunctions, property preservation orders and freezing orders.

It is necessary to prove certain elements before a freezing injunction can be granted. These are as follows:

  • the existence of assets in the jurisdiction and the real risk of the dissipation of assets;
  • a good arguable case;
  • whether there is a serious question to be tried;
  • whether damages would be an adequate remedy; and
  • the balance of convenience between the parties.

A claimant is generally required to provide a cross-undertaking in damages when applying for freezing orders in the DIFC. Court fees are generally paid by the claimant and vary depending on the nature and type of case.

DIFC and ADGM

Article 25.1 of the Rules of the DIFC courts ("the DIFC Rules") and Rule 71 of the ADGM Court Procedure Rules 2016 ("the ADGM Rules") set out a number of interim remedies that the DIFC and ADGM courts can order.

Under Article 25.1(6) of the DIFC Rules and Rule 71.1(f) of the ADGM Rules, a claimant is able to obtain a freezing order which either restrains a party from removing from the jurisdiction assets located there or restrains a party from dealing with any assets whether located within the jurisdiction or not.

Related to the ability of the claimant to obtain a freezing order, the courts, under Article 25.1(7) of the DIFC Rules and Rule 71.1(g) of the ADGM Rules, may direct a party to provide information about the location of relevant property or assets or to provide information about relevant property or assets which are or may be the subject of an application for a freezing order.

UAE Onshore

There is no regime in the UAE courts to require a defendant to disclose its assets pre-judgment.

Onshore – Criminal

The Public Prosecutor has broad powers when conducting a criminal investigation. These powers include the ability to enter a place to determine the status of the persons, places and objects related to the crime and to search the place and seize anything which may likely be used in the perpetration of the crime.

Onshore – Civil

The procedures available for preserving evidence are similar to what has been described above at 1.7 Prevention of Defendants Dissipating or Secreting Assets.

A party will not be permitted to conduct a physical search of documents at the defendant's residence or place of business, but may request documents (as described in 2.1 Disclosure of Defendants' Assets) in onshore UAE.

In arbitration, pursuant to the UAE Federal Arbitration Law, the UAE courts may enforce an order from an arbitral tribunal to preserve evidence that may be relevant and material to the resolution of the dispute. Under Article 21(2), the party requesting the order for this conservatory measure may be required by the arbitral tribunal to provide appropriate security to cover the costs of the measures, and, further, that the requesting party should bear the damages arising in connection with enforcement in the event that it is decided that such party is not entitled to such measures. 

DIFC and ADGM

As outlined in 2.1 Disclosure of Defendants' Assets, the DIFC Rules and ADGM Rules provide for interim remedies which may be ordered by the DIFC courts and the ADGM courts respectively.

In instances where it is feared that important evidence might be destroyed or suppressed, parties may seek under Article 25.1(3)(a) of the DIFC Rules and Rule 71(1)(c)(i) of the ADGM Rules the detention, custody or preservation of relevant property. Rule 71(1)(c)(i) of the ADGM Rules goes one step further and also provides for an order permitting the inspection of the relevant property. To assist the party in possession of a preservation order, Article 25.1(4) of the DIFC Rules and Rule 71(1)(d) allows a party in possession of that order to enter any land or building for the purposes of carrying it out. Under Rule 71(1)(d) of the ADGM Rules, the party in possession of a preservation order may also enter any real property, with an officer of the court supervising, for the purposes of carrying out that order.

Parties may also apply for a search order under Rule 25.1(8) of the DIFC Rules and Rule 71(1)(h) of the ADGM Rules for the purpose of preserving evidence. These applications must be supported by affidavit evidence in both the DIFC and ADGM courts.

Onshore – Criminal

Federal Law No 35 of 1992 (Penal Procedures Law) provides the judicial police with broad powers to obtain evidence. Under Article 30, they are given the ability to “inquire about crimes, search for their perpetrators and collect the necessary information and evidence for investigation and indictment”.

Onshore – Civil

The UAE courts have broad and general powers to compel parties to produce documents in their possession. A court may, in the course of examination of the case, give permission to join a third party to the proceedings in order to compel them to prepare and produce a written instrument or provide information that is in their possession or under their control. It may also order to join any administrative entity to produce or furnish any written instrument or information that lies in its possession and which is deemed necessary for proceeding with the case.

DIFC and ADGM

In the DIFC, an application for production of documents by a person who is not a party to the proceedings must be supported by evidence.

The court may make an order under this rule only where: (i) the documents of which production is sought are likely to support the case of the applicant or adversely affect the case of one of the other parties to the proceedings; and (ii) production is necessary in order to dispose fairly of the claim or to save costs. Such an order may specify the time and place for production.

Similarly, in the ADGM, where an application is made to the court under any ADGM enactment for disclosure by a person who is not a party to the proceedings, the application must be supported by evidence and served according to practice directions.

There are no standard restrictions placed on the use of such materials.

Onshore – Criminal

See 1.7 Prevention of Defendants Dissipating or Secreting Assets.

DIFC and ADGM

Under Article 25.8 of the DIFC Rules and Rule 64 of the ADGM Rules, application for interim relief may be made on an ex parte basis or by giving notice. The permission of the DIFC and ADGM courts is required in instances where the application is to be made without service of an application notice to the respondent. Permission will only be granted where there is exceptional urgency or where there are good reasons for making the application without notice – for example, because notice would or might defeat the object of the application. In the case of the DIFC courts, permission for a without notice application will also be granted in cases where the overriding objective is best furthered by doing so.

For all applications made without notice, it is the duty of the applicant and those representing them to make full disclosure of all matters relevant to the application including, in particular, disclosure of any possible defences that may be available to the respondent to the application.

Onshore – Criminal

A victim of a crime may request that a claim for compensation be annexed to the criminal charges and considered by the criminal court, which would be determined when criminal liability has been established.

Onshore – Civil

Where there is a parallel civil claim by the victim, the criminal court will generally transfer the civil claim to the civil court upon conviction and sentence in the criminal claim in accordance with Article 26 of the Criminal Procedures Code. The civil court will assess the quantum of damages, as the fact of the conviction allows the civil court to assume the liability of the defendant and therefore the only remaining issue left for the civil court to determine is ordinarily the quantum of damages.

The pursuit of criminal proceedings in fraud cases is common in the UAE since the criminal courts have wide powers, such as to prevent a suspected wrongdoer from travelling abroad pending conclusion of an investigation.

Onshore UAE

The UAE courts may pass a default judgment if the defendant has been duly served and fails to attend without providing an acceptable excuse.

DIFC and ADGM

Similar rules apply in the DIFC and ADGM courts, wherein a claimant may apply for default judgment if the defendant has failed to acknowledge the claim or acknowledged a claim but failed to file a defence in time.

A defendant will then have the option to either seek to set aside or vary the court’s ruling. However, they will not be able to appeal the judgment.

The DIFC and ADGM courts may give summary judgment (known as "immediate judgment" in the DIFC courts) against the claimant or defendant on the whole of a claim, part of a claim or on a particular issue if it considers that the claimant has no real prospect of succeeding on the claim or issue or if the defendant has no real prospect of defending the claim or issue and there is no other compelling reason why the case or issue should be disposed of at trial.

There are no special rules or professional conduct considerations for pleading fraud. However, under the code of ethics and professional conduct of the legal profession in the UAE, there is a requirement for a lawyer to maintain integrity.

Further, in the DIFC and ADGM a legal practitioner has a duty to never knowingly or recklessly make any incorrect or misleading statement of fact or law to the court.

Onshore UAE

There are no special rules to deal with claims against unknown fraudsters. A claimant may commence a criminal claim and the prosecution authority may then be able to assist using the broad powers given to them to identify unknown fraudsters as they are investigating the claim. However, there is no right to such assistance.

DIFC and ADGM

A "Norwich Pharmacal" order may also be made under the ADGM and DIFC courts’ jurisdiction in instances where the party knows that a fraud has taken place against it but it does not know the identity of the wrongdoer, but is able to identify a third party who has this information (whether this third party is innocent or not). This order enables a party to plead its case against the wrongdoer, to trace assets or to bring proprietary claims.        

Onshore – Criminal

If a witness is summoned to appear before the public prosecution and fails to attend without an excuse, the prosecution has the ability to issue a warrant for the arrest of that witness and make them appear before the prosecution to give their testimony.

Onshore – Civil

The Civil Evidence Law provides measures to be applied in respect of witnesses that fail to appear before the court when they have been summoned.

This is provided in Article 42(3) which states that if a witness is duly summoned to appear and fails to comply, the court or supervising judge shall impose a fine and, after being fined, if the witness still fails to appear in court, may impose a second fine for persistent refusal.

However, the witness may be exempt from the fine if they appear and provide an acceptable reason regarding their failure to appear previously.

DIFC and ADGM

In the DIFC and ADGM, a witness summons may be issued by the court. Failure to comply with such summons may result in contempt of court, which typically results in a referral to a prosecuting authority.

Onshore UAE

The CCL provides for a company to “acquire a legal personality” upon incorporation. This means that there is a corporate veil between the company and its shareholders and directors. Article 66 of the Penal Code provides that juristic persons, with the exception of governmental agencies, are responsible for any criminal act committed for their account or in their name by their representative, director or agent. Therefore, a limited liability company or other corporate entity may be liable in such circumstances.

The penalty that may be imposed against a convicted corporation is limited to a maximum fine of AED5 million. However, the Civil Procedure Law also allows the victim to make a claim against the company for civil compensation.

Under Article 22 of the CCL, a manager of a company is required to “act with due care” and carry out all acts consistently with the object of the company and within the powers vested in them by virtue of an authorisation issued by the company.

In the Dubai Court of First Instance Judgment 207 of 2020, it was held that a manager of a limited liability company who acts in breach of their managerial duties, the law or the company’s memorandum or articles of association shall be liable in tort for fraudulent acts. As an exception to the standard rules of corporate personality, where a manager has engaged in fraudulent acts, they are personally liable for any debts assumed by the company. In its judgment, the court held that the managers conduct satisfied those elements for fraud of Article 282 of the Civil Code and therefore the manager was personally liable to pay compensation to the claimant. 

DIFC and ADGM

Under the DIFC Companies Law, a company incorporated in the DIFC shall have a separate legal personality from that of its shareholders. The liabilities of a company, whether arising in contract, tort or otherwise, are the company’s liabilities and not the personal liabilities of any shareholder or officer of the company.

Under the DIFC Law of Obligations, a principal is jointly liable with their agent in respect of liability of the agent arising in the course of the agency, provided that the act or omission of the agent which gives rise to such liability is within the authority of the agent. Accordingly, an individual corporate director or officer’s knowledge can be attributed to the company they represent, and such person may be held jointly liable together with the company if their actions arise out of the ordinary course of the agency.

In the ADGM, if any business of a company is carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, a contravention is committed by every person who is knowingly a party to the carrying on of the business in that manner.

Onshore UAE

The CCL dictates that the corporate veil may be pierced where shareholders, managers, directors and auditors provide false statements as to the company’s finances. An individual guilty of providing false statements may be punished by imprisonment for a period between six months and three years and/or a fine between AED200,000 and AED1 million.

DIFC and ADGM

Under the DIFC Companies Law, a company incorporated in the DIFC shall have a separate legal personality from that of its shareholders. The liabilities of a company, whether arising in contract, tort or otherwise, are the company’s liabilities and not the personal liabilities of any shareholder or officer of the company. Under the legal framework of the ADGM, the liability of a shareholder is limited to the amount, if any, unpaid on its shares.

Onshore UAE

Managers of a company have a statutory duty of care. In the event that a manager acts fraudulently or fails to act within the statutory duty of care, shareholders of the company may bring claims against the fraudulent directors.

Article 84 of the CCL provides that every manager in a limited liability company (LLC) shall be liable to the company, the shareholders and third parties for any fraudulent acts by such manager and shall also be liable for any losses or expenses incurred due to improper use of the power or the contravention of the provisions of any applicable law, the memorandum of association of the company or the contract appointing the manager or for any gross error by the manager.

Similarly, the board of directors shall be liable towards the company, the shareholders and third parties for all acts of fraud, misuse of power, and violation of the law or the articles of association of the company or an error in management.

Article 166 of the CCL states that shareholders may individually pursue a liability claim against the board of directors of the company if they have suffered harm as a result of any act carried out by any of them in violation of the provisions of the CCL.

Under the Civil Code, directors may only act within their authority and will be personally liable for exceeding it.

DIFC and ADGM

In the DIFC, a director is considered a fiduciary. A person is the fiduciary of another if they have undertaken (whether or not under contract) to act for or on behalf of another in circumstances which give rise to a relationship of trust and confidence.

Where a fiduciary breaches their obligation of loyalty they are liable to: (i) pay damages to their principal in respect of any loss suffered by the principal in accordance with the Law on Damages and Remedies; and (ii) account to their principal for any benefit they have acquired in consequence of the breach.

Further, under the DIFC Companies Law, a director has the following duties:

  • to act honestly, in good faith and lawfully with a view to the interests of the company;
  • to act with care diligence and skill that a reasonably prudent person would exercise in comparable circumstances;
  • to avoid conflicts of interest;
  • to not use the company’s property, information or opportunities for their own benefit unless approved by the company;
  • a duty of confidentiality – to only use information obtained in confidence from the company for the benefit of the company and not for their own or anyone else’s advantage.

Furthermore, under Article 149 of the DIFC Companies Law, a shareholder is able to seek a court order requiring the company to take an action or refrain from taking an action. Under Article 149(1)(c), this includes an order authorising proceedings to be brought in the name of an on behalf of the company by such person or persons and on such terms as the court may direct.

In the ADGM, a director has a duty:

  • to act within their allocated powers;
  • to promote the success of the company;
  • to exercise independent judgment.

The ADGM Regulations provide for derivative claims which allow a member of the company to seek relief on behalf of the company and will be in relation to a cause of action arising from an actual or proposed act or omission involving default, negligence, breach of trust or breach of duty by a director of the company. This right is restricted to those eligible members holding 5% of the share capital.

Criminal

The rules to facilitate joinder of overseas parties is provided for in Article 21 of the Penal Code, which provides for joinder in limited circumstances such as:

  • crimes committed against the internal or external security of the state, or against its constitutional regime or its stocks and bonds issued under legal licence, or in connection with its stamps, or crimes of falsification or counterfeiting of its official documents or seals;
  • crimes of falsifications, counterfeiting or forgery of money belonging to the state, no matter whether such acts are committed in or out of the state;
  • crimes of falsification, counterfeiting or forgery of coined or paper money which is legally in circulation in the state, or crimes of putting such money into circulation in the state or the possession thereof with the intention of putting it into circulation; and
  • deliberate murder committed against a UAE citizen.

The Penal Code's provisions also apply outside the UAE, in the following instances:

  • to a person who commits a bribery offence if either the offender or victim is a UAE citizen;
  • if the crime is committed by an employee in the UAE public or private sector; or
  • if it involves UAE public property.

Onshore – Civil Claims

This can be done both in DIFC/ADGM and onshore, although the latter is less common.

UAE Judgments

In order to enforce a UAE judgment, the claimant is required to start execution proceedings in the courts of the relevant emirate. The judgment has to be final and certified by the execution court.

The debt must be settled within 15 days. If the debtor fails to do so, a request can be made to the execution judge to enforce the judgment. Usually a UAE judgment is enforced in the form of an attachment order. The attachment could be to property, stocks, bonds, shares or real estate. Other methods of enforcement may include bankruptcy proceedings. However, debtors will usually appeal such judgments to achieve delay.

Process of Deputation

Enforcement for inter-emirate judgments (and previously the enforcement of DIFC court judgments and orders outside Dubai but in the UAE), has to be pursued through the process of "deputation" or "referral" as provided under Article 71 of Cabinet Decision No 57/2018.

Article 71 provides that the execution court shall refer the judgment or order to the execution judge for the area in which the judgment or order is sought to be enforced, and provide the latter with all the legal documents required for execution. The execution judge to whom the referral is made would then take all the decisions necessary to execute the referral and rule on procedural objections relating to the execution.

The execution judge who has carried out the execution shall inform the execution court which made the referral of what has happened and transfer any items or property received by them as if the execution judge to whom the matter has been referred finds legal reasons precluding the execution, they must notify the execution court.

Dubai and DIFC

In Dubai, there is a reciprocal protocol of enforcement between the courts of the DIFC and onshore Dubai, pursuant to which a judgment of the Dubai courts (or DIFC court) can, subject to certain procedural formalities being met, be enforced in the DIFC as if it were a DIFC court judgment (or enforced in the Dubai courts as if it were a Dubai court judgment). 

Abu Dhabi and ADGM

In Abu Dhabi, a memorandum of understanding (MoU) with the Abu Dhabi Judicial Department and ADGM has been signed for the reciprocal enforcement of their judgments, decisions and orders.

MoU between DIFC/ADGM and Ras Al Khaimah

Similarly, an MoU between DIFC courts and Ras Al Khaimah courts and an MoU between Ras Al Khaimah courts and ADGM courts for enforcement of judgments has been signed.

Bilateral and Multilateral Conventions

The UAE has entered into a number of treaties with other countries which govern the reciprocal enforcement of judgments. The most commonly used in the Middle East is the Riyadh Arab Convention for Judicial Cooperation of 1983 ("the Riyadh Convention") for enforcing foreign judgments and awards. The other commonly used treaty is the GCC Convention of 1996 which allows the recognition and enforcement of judgments and awards without any review of the merits. The other signatories to the GCC Convention are Bahrain, Saudi Arabia, Oman, Qatar and Kuwait.

The UAE has also entered into a number of international treaties for enforcement of judgments with Tunisia, France, India, Egypt, China and Kazakhstan, for example.

Onshore UAE

In criminal and civil matters, there is no concept of privilege against self-incrimination. However there is a general right for the accused to remain silent when responding to allegations against them; as such, no inferences may be drawn if a defendant decides to remain silent.

DIFC and ADGM

In DIFC and ADGM, common law principles of privilege apply, including privilege against self-incrimination.

Onshore UAE

Under the UAE Advocacy Law, a lawyer is not permitted to reveal a secret confided in them, or which comes to their knowledge through their profession, provided its revelation is not in order to prevent the perpetration of crime.

A lawyer may be criminally liable if they disclose confidential information obtained during the course of their services under the Penal code. Article 432 of the Penal Code prohibits the disclosure of confidential information by any person who by their profession is entrusted with a secret. 

DIFC

In Practice Direction No 2 of 2009, DIFC Courts’ Code of Professional Conduct for Legal Practitioners, it is provided that practitioners are required to keep information communicated to them by their client confidential unless such disclosure is authorised by the client, ordered by the court or required by law. This duty extends to all partners and employees of a practitioner and continues even after the practitioner has ceased to act for the client.

ADGM

Similarly, in the ADGM, there is a duty of confidentiality that is imposed on lawyers. Disclosure is only permitted if it is authorised by the client, ordered by the court or otherwise required by law as provided in the ADGM Courts Rules Of Conduct 2016.

In DIFC and ADGM, the common law principle that privilege may be lost if the communication or document in question came into being for the purpose of furthering a criminal or fraudulent design will apply. This is sometimes known as "the fraud exception" or "the iniquity principle", which is founded on public policy.

Onshore UAE and ADGM

The concepts of punitive damages and exemplary damages are not recognised by UAE law.

DIFC

In the DIFC, courts may order punitive damages when the defendant’s conduct has been deliberate and particularly egregious. Article 40(2) of the DIFC Law of Damages and Remedies provides: “The Court may in its discretion on application of a claimant, and where warranted in the circumstances, award damages to an aggrieved party in an amount no greater than three (3) times the actual damages where it appears to the Court that the defendant’s conduct producing actual damages was deliberate and particularly egregious or offensive.”

Onshore UAE

Banking documents are confidential and disclosure without consent is likely to be unlawful. This is provided in Article 120 of the Central Bank and the Organisation of Financial Facilities and Activities Law which states that all data and information relating to customers' accounts, deposits, safe deposit boxes and trusts with licensed financial institutions – in addition to all relevant transactions with customers – shall be considered confidential in nature, and may not be made available or disclosed, directly or indirectly, to any third party without the written permission of the owner of the account or deposit, their lawyer or their authorised agent.

A court can order production where relevant to a claim in certain situations, as discussed in 2. Procedures and Trials.

DIFC and ADGM

Similarly, in the DIFC and ADGM banking documents are confidential and disclosure without consent is likely to be unlawful. However, production can be ordered in certain circumstances as discussed in 2. Procedures and Trials.

The UAE Central Bank does not currently recognise crypto-assets as legal tender.

Crypto-assets are regulated in the UAE under Securities and Commodities Authority Decision No 23/RM/2020 Concerning Crypto Assets Activities Regulation (CAAR).

  • Crypto-assets are defined as records within an electronic network which function as mediums for exchange, units, representations of ownership, economic rights or access or utility rights, capable of being transferred electronically.
  • The CAAR regulates the trade of crypto-assets and the licensing of companies carrying out financial activities related to crypto-assets, which attract enhanced anti-money laundering and monitoring obligations. For example, under Article 21 additional screening must be carried out where unverifiable geographical locations are used or the identity of users is designed to be hidden.
  • It is a criminal offence to advertise or deal in crypto-currency without a licence, under Article 48 of the Cyber Crimes Law.
  • The CAAR does not apply to state-issued crypto-assets or digital currencies that are already regulated by the UAE Central Bank. 

In Dubai, Law No 4/2022 was issued on 11 March 2022 which will create the Dubai Virtual Asset Regulation Authority with the aim of enabling and promoting the use of virtual assets in the emirate. 

In the DIFC, the Dubai Financial Services Authority is proposing various steps to regulate the use of crypto-assets in the financial free zone, contained in a consultation paper released on 8 March 2022. In the ADGM, crypto-assets are regulated under the Financial Services and Markets Regulations 2015.

Herbert Smith Freehills LLP

Dubai International Financial Centre
Gate Village 7, Level 4
PO Box 506631
Dubai
UAE

+971 4 428 6300

+971 4 365 3171

stuart.paterson@hsf.com www.herbertsmithfreehills.com
Author Business Card

Trends and Developments


Authors



Herbert Smith Freehills operates from 26 offices across Asia Pacific, EMEA and North America, and is at the heart of the new global business landscape, providing premium-quality, full-service legal advice. The firm provides many of the world’s most important organisations with access to market-leading dispute resolution, projects and transactional legal advice, combined with expertise in a number of global industry sectors. It has been advising on Middle East transactions for over 40 years. Operating from its Dubai office and association in Riyadh, its team of approximately 35 lawyers (including six partners and three of counsel) in the region is available to deliver a full service across the Middle East and beyond. Having worked on some of the largest transactions and highest-profile disputes in the region, representing governments and their ministries, sovereign wealth funds, major corporates, banks and professional services organisations, the firm has an in-depth understanding of Middle East business culture and practices and the civil and sharia law systems which apply.

Introduction

The last year has seen many interesting trends and developments in the realm of fraud and asset tracing in the United Arab Emirates (UAE), as a result of significant legislative reform implemented in celebration of the country's 50th anniversary, as well as global events such as the outbreak of conflict in Ukraine.

Fraud

A number of new laws were announced in the UAE in September 2021, largely coming into force in January 2022. This included a new Labour Law (Federal Decree Law No 33/2021) and Data Protection Law (Federal Decree Law No 45/2021) which introduced various new legal protections for individuals, but more importantly with respect to fraud and asset tracing, a new Penal Code (Federal Decree Law No 31/2021) and Cyber Crimes Law (Federal Decree Law No 34/2021). We have also seen new whistleblowing measures introduced at state level and in one of the UAE's commercial and financial free trade zones ("freezones").

Crime

Whilst many of the offences in the Cyber Crimes Law replicate those in the previous legislation (Federal Decree Law No 5/2012), Article 11 establishes a new crime relevant to fraud – that of fabricating emails, websites or electronic accounts which are falsely attributed to an individual or company. The penalties include a fine of between AED50,000 and AED2 million, imprisonment of at least two years where the fabrication causes harm to someone, and up to five years' imprisonment if a state institution is impersonated.

The Penal Code implements extensive reform to the criminal landscape in the UAE, such as in relation to pre-marital relationships and alcohol consumption. However, the offences relating to bribery and fraud mirror those in the previous law, Federal Law No 3/1987, demonstrating these were not deemed to be in need of amendment.

Also in the criminal sphere, in August 2021 it was announced that a new court would be established in Dubai to combat financial crime, specifically money laundering and terrorist financing. Any cases filed in the Dubai Court of First Instance or the Dubai Court of Appeal which appear to involve such crimes will be transferred to this new court, with specialist judges. This move sends a clear signal that Dubai is keen to combat financial crime.

Whistleblowing

There has also been a move towards encouraging whistleblowing disclosures and offering protections to those making them. At the federal level, in June 2021 the UAE Central Bank announced the introduction of a new whistleblowing mechanism which allows bank stakeholders and members of the public to submit concerns about a bank's employees, representatives or licensed entities via an online portal, by phone, in writing or in person. Its expressed aim was to avert "fraud and corruption" and protect reputations by ensuring information can be received and acted on quickly. This can be done anonymously if desired. Similarly, in April 2022, the UAE's Federal Tax Authority announced the launch of a new whistleblowing system for reporting suspected tax evasion or violations.

In the Dubai International Financial Centre (DIFC), for entities regulated by the Dubai Financial Services Authority (DFSA), a comprehensive new whistleblowing regime has been introduced following a consultation underway since July 2021. This came into effect on 7 April 2022, through amendments to the DIFC Regulatory Law (DIFC Law No 1/2004) and new Rules and Guidance contained in Section GEN 5.4 of the DFSA Rulebook.

Entities subject to this new regime will, for the first time, be required by law to establish whistleblowing policies and procedures, which must be in writing and reviewed periodically. The amendments to the DIFC Regulatory Law create a new Article 68A which protects individuals making qualifying disclosures from dismissal or any detrimental action by their employer, as well as from civil and contractual liability (but notably, not criminal liability).

One type of disclosure which qualifies for such protection is concerning a suspicion that a DFSA regulated entity or one of its employees has engaged in fraud or other financial crime, provided this is made in good faith. The new regime is therefore a clear step towards combating wrongdoing such as fraud within financial services firms in the DIFC.

Asset Tracing

Asset tracing in the UAE has historically been particularly difficult due to a number of factors. While major challenges still remain, steps have been taken in recent years which offer cause for optimism.

Key obstacles

Asset tracing is particularly challenging in the UAE, due in large part to its complex legal system. The UAE is made up of seven emirates (“onshore UAE”). Although the UAE’s legal system is federal, each emirate also has its own legislative and administrative powers and, therefore, priorities. These differences can be exploited to make the identification of assets and their recovery more difficult. 

The UAE is also home to various freezones which allow businesses in specified industries to operate with greater freedom than those established elsewhere; the most significant freezones are the DIFC and the Abu Dhabi Global Market (ADGM). Although many onshore UAE laws apply, the freezones also have separate regulations, and the DIFC and AGDM have their own entirely independent systems of law, based on English law (in contrast to the civil law regime which applies in onshore UAE). In addition, there are large trading freezones such as Jebel Ali Freezone – a port-based freezone and the home of a wide range of companies and commercial activity connected to the transportation, processing and trans-shipment of goods. The freezones typically afford a high level of privacy to their users, such that funds that are transferred to companies within them may be very difficult to trace.

Public registers

As part of the recent legislative overhaul discussed above, a new Commercial Register and Economic Register are being established under Federal Decree Law No 37/2021, which will come into force six months after the awaited accompanying Implementing Regulations. This law will unify the various registers of companies which currently exist across the emirates and regulatory bodies of the UAE, with the exception of the DIFC and the AGDM. This is potentially a significant step forward in fighting fraud and other crime in the UAE.

Companies will need to be registered on the Commercial Register, which will include various information such as the identity of shareholders, details of security registered against a company's assets and decisions of any bankruptcy filings against a company. The Economic Register will be maintained by the Ministry of Economy and will contain the same information as the Commercial Register, as well as additional information to be specified in the Implementing Regulations – perhaps, for example, audited accounts or tax registrations.

Importantly, certain information contained in the registers will be publicly available, making it much easier to gather information to assist in recovering assets.

Assistance available from courts

The civil law courts of onshore UAE are not as familiar with the types of relief that are often sought in common law courts in aid of asset tracing. Interim remedies such as precautionary attachment orders are available, but traditional common law interim remedies such as freezing orders, search orders or asset/information disclosure orders are not (outside of the DIFC and ADGM).

The DIFC has separate courts to the onshore UAE courts. These courts are modelled on English and other common law courts and are served by Emirati and international judges with common law experience. The DIFC also enjoys a codified, English language commercial legal system based on English law, although with some important differences such as the inclusion of an obligation to act in good faith in contractual matters. The DIFC courts are therefore an attractive forum for many international parties who do business in the region and who are less familiar with (and less confident in dealing with) the Arabic language civil law courts in onshore UAE.

In order to support the introduction of the DIFC and its courts into the Dubai legal system, a protocol was put in place which provides for the automatic mutual recognition and enforcement of Dubai court and DIFC court judgments, without review of the merits.

This system works well in regard to domestic DIFC–Dubai court matters. However, the arrangement has been used by foreign judgment creditors as well. Such creditors would bring their judgment to the DIFC court for ratification and then seek to enforce the DIFC court ratification order (rather than the original foreign judgment directly) in the Dubai courts. There was initially a perception that this would make ultimate enforcement more straightforward as the onshore courts would not scrutinise the DIFC court order in the same way as the foreign judgment, and dealing with the DIFC court would be a familiar and less challenging experience for a foreign judgment creditor. This worked for a while and gave foreign parties greater confidence in the UAE as a place where foreign judgments could, in both theory and in practice, be readily enforced.

However, this approach was often taken in circumstances where there were no assets in the DIFC against which the judgment creditor could enforce, and no other nexus existed to the DIFC. The strategy of using the DIFC court to circumvent the onshore court’s review of the judgment it was being asked to enforce therefore started to attract criticism. These cases were known as "conduit jurisdiction" cases.

In 2016, the Ruler of Dubai established a special tribunal to decide issues of jurisdiction between Dubai and the DIFC courts. Now, after a long line of decisions, the use of the DIFC courts as a “conduit jurisdiction” to enforce foreign judgments in onshore Dubai/UAE has been significantly curtailed. There still remains an element of uncertainty as to the circumstances in which the DIFC courts may have a role to play in respect of the enforcement of foreign judgments absent a substantive connection to the DIFC, but the overall trend is clear – if the asset in question is not in the DIFC, a creditor must go directly to the onshore UAE courts. This inevitably acts as a deterrent to the asset-tracer, given the more limited range of court remedies available and the perceived challenges of dealing with an Arabic language court that is much less familiar to international parties.

It is also important to note that the UAE is a party to a small number of international treaties which provide for mutual co-operation and assistance in legal matters, as well as for the enforcement of judgments. For example, the UAE is party to the Riyadh Convention, the GCC Convention and individual treaties with countries such as China, India and France. Extending the range of treaties would be valuable in assisting with asset-tracing and enforcement.

Recent Trends

Money laundering

Despite the new measures relating to financial crime and money laundering outlined above, on 4 March 2022 the Financial Action Task Force (FATF) added the UAE to its "grey list" of jurisdictions under increased monitoring. The FATF is an inter-governmental money laundering and terrorist financing watchdog which sets international standards implemented in several countries and jurisdictions.

The inclusion of the UAE on this list will create an additional compliance burden for financial institutions and professional services firms doing business with companies established in the UAE, due to the likely need to increase due diligence and monitoring. The UAE has, however, committed to implementing reform in order to be removed from the grey list, and we expect to see increased investigations and prosecutions in the coming year in this regard.

Crypto-currencies

The recent increase in use of crypto-currencies in the UAE, encouraged through changes to the legal landscape, is likely to lead to an increase in financial crime. This is because crypto-currencies typically offer anonymity and easier cross-border transfers which can evade international regulation.

One such legal change in the last year is Dubai Law No 4/2022, issued on 11 March 2022, which establishes a Dubai Virtual Asset Regulation Authority. A number of its expressed aims contained in Article 5 relate to the promotion of crypto-assets within the Emirate, for example "improving the Emirate’s position as a regional and global destination in the field of virtual assets" and "attracting investments and companies" operating in that field. In order to mitigate the inevitable increased risk associated with this promotion, the law also has stated aims relating to increased regulation, such as "protecting investors and dealers in virtual assets" and providing the necessary "systems, rules and standards necessary" for doing so.

Extradition

The UAE has extradited several high-profile alleged criminals, including in the absence of a treaty with the requesting state. This approach indicates an increased level of cross-border co-operation to bring serious criminals to justice, and may help to make the UAE a less attractive place for criminals to move to in the hope of evading law enforcement authorities elsewhere.

International transfers

As a result of sanctions imposed by many countries across the globe following the conflict breaking out in Ukraine in early 2022, financial institutions have in many cases refused to service transfers of money from Russian clients. This has led to an increased use of illegal hawala money exchange operations in the UAE.

Hawala is a traditional money transfer system which is particularly vulnerable to financial crime, whereby money is paid to an agent who in turn instructs an associate in the relevant jurisdiction to provide the funds to the final recipient. The UAE Central Bank has been driving registration and reporting of hawala operators – however, in the wake of the Ukraine conflict, the system has reportedly been increasingly used by Russian clients to import cash into the UAE. Due to the nature of hawala, it is difficult to identify when these transfers are taking place, but greater scrutiny of the sources of funds in transactions such as real estate purchases, and the increased investigations expected as a result of the FATF grey listing, may help to combat this practice. 

Conclusion

Overall, the last year has shown that the UAE is committed to becoming a more regulated jurisdiction, with clear frameworks being put in place to combat fraud and improve the ability to trace assets. The country has entered an ambitious period of reform, and over the next 12 months it will be interesting to observe how patterns of business and investment transform as this is recognised globally.

Herbert Smith Freehills LLP

Dubai International Financial Centre
Gate Village 7, Level 4
PO Box 506631
Dubai
UAE

+971 4 428 6300

+971 4 365 3171

stuart.paterson@hsf.com www.herbertsmithfreehills.com
Author Business Card

Law and Practice

Authors



Herbert Smith Freehills LLP operates from 26 offices across Asia Pacific, EMEA and North America, and is at the heart of the new global business landscape, providing premium-quality, full-service legal advice. The firm provides many of the world’s most important organisations with access to market-leading dispute resolution, projects and transactional legal advice, combined with expertise in a number of global industry sectors. It has been advising on Middle East transactions for over 40 years. Operating from its Dubai office and association in Riyadh, its team of approximately 35 lawyers (including six partners and three of counsel) in the region is available to deliver a full service across the Middle East and beyond. Having worked on some of the largest transactions and highest-profile disputes in the region, representing governments and their ministries, sovereign wealth funds, major corporates, banks and professional services organisations, the firm has an in-depth understanding of Middle East business culture and practices and the civil and sharia law systems which apply.

Trends and Development

Authors



Herbert Smith Freehills operates from 26 offices across Asia Pacific, EMEA and North America, and is at the heart of the new global business landscape, providing premium-quality, full-service legal advice. The firm provides many of the world’s most important organisations with access to market-leading dispute resolution, projects and transactional legal advice, combined with expertise in a number of global industry sectors. It has been advising on Middle East transactions for over 40 years. Operating from its Dubai office and association in Riyadh, its team of approximately 35 lawyers (including six partners and three of counsel) in the region is available to deliver a full service across the Middle East and beyond. Having worked on some of the largest transactions and highest-profile disputes in the region, representing governments and their ministries, sovereign wealth funds, major corporates, banks and professional services organisations, the firm has an in-depth understanding of Middle East business culture and practices and the civil and sharia law systems which apply.

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