May 10, 2023

Dubai property market a minefield of laundering, scams, and sanctions evasion

The Dubai real estate market has long been a popular destination for foreign investors, with its attractive tax and investment incentives, luxurious lifestyle offerings and rapid development. However, Radha Stirling, CEO of Detained in Dubai and Due Process International, warns that investors must be aware of the risks associated with the Dubai property market, particularly relating to money-laundering, sanctions evasion, and other dangers.

“There have been several high-profile cases in recent years,” Stirling says, “The Financial Action Task Force (FATF), an intergovernmental body established to combat money laundering, has identified Dubai as a high-risk jurisdiction for money laundering and terrorist financing. The country's lack of effective anti-money laundering measures and weak regulatory environment make it an attractive destination for organised criminal groups to hide illicit funds.

“Criminals use the Dubai property market to transfer funds from one location to another, disguise the origin of the funds and invest the proceeds of their criminal activities in legitimate assets. This has only become easier as the major property development companies in UAE began accepting payment in cryptocurrency. The supply of apartments and homes in Dubai far exceeds demand, and property valuations are disconnected from market realities; meaning the real estate sector in the Emirates is quite unambiguously offering properties as instruments for legitimising illicit money. It is an open secret in Dubai.”

The lack of effective anti-money laundering measures in Dubai's real estate market can lead to reputational risks for investors, Stirling warns; “If an investor is unknowingly investing in properties linked to organised criminal groups or individuals, it can damage their reputation and expose them to serious legal and financial risks.”

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To address these concerns, the Dubai government has introduced several measures to combat money laundering in the real estate sector, including the implementation of a beneficial ownership register, stricter know-your-customer requirements and enhanced due diligence measures for high-risk transactions. However, Stirling says, the effectiveness of these measures remains to be seen, and there are still significant challenges in implementing them. “Dubai frequently responds to the concerns of the international community and risk assessment reports by announcing legislation and regulatory safeguards which usually do not amount to anything beyond the announcements themselves,” she explains, “The UAE sees such concerns as essentially PR problems that have PR solutions; not as substantive dangers that need to be addressed through real legal protections and oversight. While they publicise their efforts to combat money laundering, they are simultaneously facilitating the transfers of untraceable cryptocurrencies into the property market, for example. So, ultimately, investors cannot trust that the Dubai government can be relied upon to protect them from criminal operators, and they need to exercise extreme caution.”

Another concern, Stirling says, is that wealthy Russians may be using the Dubai property market to evade sanctions. “Since the invasion of Ukraine, and the imposition of US and the European sanctions against Russia, we have seen Russian investment in Dubai real estate skyrocket,” She explains, “Property prices are at their highest level in a decade, largely due to the influx of Russian cash. While they have always been significant investors in the UAE, it is conspicuous that we have seen such a flood of Russian capital coinciding with the sanctions regime, and it is fairly obvious that oligarchs are securing their money by parking it in Dubai villas and luxury apartments. Of course, we cannot verify that this is what is happening, which is exactly what makes it more likely. A well-intentioned investor could purchase a property that had been bought by a sanctioned Russian businessman, and inadvertently find themselves entangled in an international investigation as an accomplice to sanctions evasion.”

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Investors in the Dubai real estate market are also at risk of losing their money due to the lack of transparency in the market, Stirling further cautions. “Dubai's real estate market is largely unregulated, with no comprehensive database that tracks real estate transactions, property values or ownership information,” she says, “This makes it difficult for investors to assess the true value of the properties they are interested in and leaves them vulnerable to fraud and scams.

“Typically, people buy properties before they are even built, and their value is purely speculative. They may intend to let the properties out to tenants once they are completed, only to find that they cannot charge sufficient rent to cover their mortgage payments. It is also all too common for homebuyers to lay down hefty sums to secure a property in a development which is later cancelled, or one that only ever existed on paper. Refunds are hard enough to obtain from major developers, but it is impossible to get money back from real estate scamsters.”

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As a legal and human rights organisation, Detained in Dubai urges investors to use caution before considering investing in the Dubai real estate market and to conduct thorough due diligence before making any investment decisions. Stirling says, “Investors should work with reputable real estate agents and seek guidance from expert advisors who can help them navigate the risks associated with investing in the Dubai property market. This is a service we have provided countless clients, helping them to avoid potentially devastating financial and legal nightmares. The investment environment in the UAE can be dangerously attractive, but in many ways it is a minefield; entering it without the support of someone who knows the terrain can leave investors penniless or in prison.”