KPMG: Driving the region’s strategy

 

In the aftermath of a very challenging period, the financial sector in the UAE is ultimately maturing. Syed Kauzal Ali Rizvi, Director, Head of Investigations, Fraud Risk Management & AML- Lower Gulf Region, KPMG describes the current status of the financial market in the UAE as well as the financial impact of economic crime and anti-money laundering.

 

How do you appraise the financial market in the UAE?
 

The UAE financial market has recovered well from the 2008 crash. The inherent strength and solidarity within the UAE Federal Government has been paramount, particularly in supporting Dubai reschedule its debt pile. This support has benefited from consistently high oil prices over the last 5 years (even during the financial crisis – US$90-US$110 a barrel). Looking ahead, the core economic fundamentals are in good shape as both Abu Dhabi and Dubai’s GDP continues to grow and is widely expected to increase by 4-5% in 2014. Similar growth has been reflected in the last 2 years, as the country accelerates away from the global financial crisis. The Dubai Expo 2020 has reaffirmed Dubai’s leadership of a “can do” city and we expect to see infrastructure spend, albeit, in a few years’ time supported by the banks to facilitate this global showcase. Although, the UAE market is maturing, there is still a fair amount of volatility due to Dubai real estate exposures, as 31st December 2014 prices are expected to again reach pre-crash 2008 records.

The UAE banking market, although growing, is highly competitive with over 50 licensed banks. This relative saturation, particularly in retail banking, continues to put downward compression on margins.

 

Medium and ultimately long-term stability will be improved by broader and more encompassing financial regulations and oversight thereon. We expect that Regulatory stress testing of business models and capital pools, currently prevalent in the West, will in some shape or form be reflected in the Middle East in the coming years.

 

What are some of the challenges arising from credit markets?
 

Banks face a number of challenges going forward. There is excess liquidity in the market place, as the recovery gains traction and oil prices remain buoyant, however, the banks need to be cautious around risk management and quality lending. The banks do not want to get burnt again, and we are seeing signs that they are being more selective in lending and as such there are limited opportunities to go around.

Also the impact of Anti-Money Laundering (AML) and Sanctions means that potential customers face higher barriers to ensure they comply fully with a rapidly changing and increasingly complex legislative environment.

Looking at retail banking, the Middle East has a very high expat population, which in turn causes relative increases in credit risk and a short-term focus on retail lending, for example very few expats hold long term mortgage products. Having said this, there are very low levels of unemployment within the expatriate population to offset the short-tail nature of most credit relationships.

 

Which actions should be taken to overcome these encounters?
 

A number of factors can be implemented to encourage sustainable, balanced lending:

(i) UAE credit bureau
 

The introduction of a UAE Credit Bureau will be well received by the market, as it will provide lenders with consistent and timely information to assess inherent credit risks. Once the process is fully embraced, across the UAE market, we expect the quality and timeliness of risk data to improve. Reliance on high quality risk data will speed up the approval process time, which in turn, will improve market efficiency and increase lending volumes, to support a growing UAE economy.

The Credit Bureau will strengthen the economy and the financial system and will improve the banks’ understanding of the debt burden on prospective customers. It will also create an open and transparent borrowing environment with proper checks and balances, as good and bad lending risks alike will be quickly identified.

Data quality, privacy and security will be the biggest challenges during the initial stages as the Credit Bureau gains traction.

 

(ii) Tighter underwriting

Utilizing the Credit Bureau assessments and investing more time around understanding the client, will enhance the quality of credit decisions and improve the customer experience.

(iii) Stress testing

Enable better capital allocation and macro going concern risk assessments –considering multiple risk scenarios (following the lead from more developed western markets).

 

What are the financial services that KPMG provides to financial institutions in the Middle East?

KPMG provides a wide range of service from audit, tax, advisory, and transactions support. We deliver this broad range of services through a dedicated, connected and insightful team of financial services’ specialists.

 

We also work closely with the regulatory authorities and engage with them around improving regulation and benchmarking their supervisory regimes against the highest level of international standards.

How do you help them enhance their competitive advantage?

We work with leading financial institutions in many different ways to enhance their competitive advantage. From development of and assistance with the implementation of strategy, right through to assessment of internal controls, development of IT systems, tax compliance and the provision of statutory audit services.

We are able to draw on the expertise of a very broad range of skills and expertise to help financial institutions achieve their goals.

 

What is the financial impact of economic crime?
 

Estimating the scale and impact of largely hidden illegal markets is challenging. It involves us knowing not just how much of different crime there is and what the cost of this crimes is; but also whether or not the people committing those crimes are or should properly be labeled as ‘organized criminals’.

However, according to a survey conducted by Certified Fraud Examiners (CFE) who investigated cases between January 2012 and December 2013, organizations around the world lose an estimated 5 percent of their annual revenues to occupational fraud, applied to the estimated 2013 Gross World Product. This figure translates to a potential total fraud loss of more than $3.5 trillion (U.S.).

 

Why is Anti-Money Laundering considered as a big issue in this part of the world?
 

According to KPMG’s Anti-Money Laundering (AML) survey, the importance of implementing measures against financial crime is on the rise both globally and regionally. Further, the survey showed that the Middle East region needs to be more vigilant against financial crimes. The AML Survey indicates that 92 per cent of respondents considered money laundering as high risk area. While the profile of anti-money laundering efforts within the Middle East region has risen over the last three years, the KPMG survey states that it still faces some significant challenges around compliance, especially with regard to customer due diligence, transaction monitoring, and Politically Exposed Persons (PEPs) identification.

The greatest concern for Middle Eastern banks in the AML and Customer Due Diligence (CDD) technology space is the lack of data consistency.

The banks surveyed also indicated that the 3 main concerns on their AML agenda are the lack of qualified resources (76.6 percent), the pace and impact of regulatory change (72.3 percent) as well as the lack of overall training (72.3 percent).

The political and civil unrest in the Middle East continues to pose a challenge for financial institutions’ sanctions screening systems in terms of responding to rapid changes to sanctions lists and their increased volumes.

The majority of respondents from the region said that they would like their regulatory authorities to become more involved in the globalization of AML standards and learn from their counterparts in improving their regulatory approach. Also, inconsistent regulations have left gaps in which money launderers have been able to thrive. It has become imperative for regulators to implement a consistent regulatory approach and foster a closer working relationship with industry professionals in order to leverage each other’s resources, align mutual interests, and effectively tackle financial crime.

How are Middle Eastern (ME) countries improving AML measures?
 

The survey also highlights the continuing need in the wider Middle East to reduce the region’s vulnerability to financial crimes, and how countries within the region are taking measures to implement tougher systems.

The financial services industry worldwide and in the UAE is making significant changes in response to regulatory action and increasingly far-reaching global anti money laundering regulations, changing the anti-money laundering efforts from a stand-alone function under compliance, to a complex and overarching function cutting across legal, risk and operations.

Majority of the ME countries are the members of Middle East & North Africa – Financial Action Task Force (MENA FATF-voluntary and co-operative in nature and is established by agreement between its members). All member countries are subject to mutual evaluation and follow-up review to determine their conformity with the AML/CFT measures issued by FATF. As this is a continuous and evolving process this would not only help these countries to identify the gaps but also to introduce/ implement measures to ensure compliance with the AML/CFT regime (especially in the countries where there is a clear will at the top level).

However, there are some jurisdictions (in ME) with AML/CFT deficiencies that have not made sufficient progress in addressing the deficiencies or having challenges and issues going on – to comply with all these requirements.

UAE is considered as one of the pro-active countries in the ME, recently, its Financial and Economic Affairs Committee (FNC) announced changes in its key money laundering legislation. These amendments would not only help UAE in enhancing its overall AML/CFT legislative and regulatory framework but would also assist UAE system to combat the illegal practices.

Also, the National Anti-Money Laundering Committee (NAMLC - UAE) has been proactive and plays a key role in proposing AML rules and procedures in the UAE. It also facilitates exchange of information and co-ordination between agencies represented in the Committee and represents the country at international AML forums.

 

What do you foresee for the financial sector in the UAE?
 

Cautious in the short-term as the recovery beds down, but positive in the medium to long-term as long as the upbeat economic fundamentals are sustainably harnessed with responsible lending patterns. All stakeholders must ensure that credit markets are not allowed to overheat as happened in 2008. Retail business will grow organically as Dubai fast becomes a Mega City; the corporate sector will pick-up momentum in the next few years around Expo 2020 and the planned infrastructure and real estate spend thereon.

 

What are KPMG’s future plans for growth in this region?
 

The market sentiment remains positive and is marked with a notable upturn in growth, panning across the Middle East and particularly in the UAE. At KPMG, our business agenda remains aligned with the economic backdrop to better drive and support growth in the region.

KPMG continues to play a catalytic role in the region’s business agenda by working closely with the Government, Regulatory Authorities and the Economic and Developmental Council. We remain bullish in our growth strategy; and the firm has made significant investment into in-house talent and expertise along the key industries spearheading the region’s growth curve, namely: Financial Services, Energy, Healthcare, Infrastructure, Education and Retail Trade, particularly addressing key business focal areas such as: Dispute Advisory, Anti-Money Laundering, Cyber security and Data Analytics.

We will continue to drive the region’s strategy through active engagement in strategic and critical initiatives like the Expo 202O (Dubai), the GCC Rail Project, launching new business Free zones and other developmental milestones. A key part of our strategy remains to invest into vital skill-sets, capabilities, relevant industry subject matter experts and clients to optimize economic growth.

 

About Syed Kauzal Ali Rizvi:

 

Syed Kauzal Ali Rizvi is Director, Head of Investigations, Fraud Risk Management & AML- Lower Gulf Region, KPMG. With his 14 years of experience, Syed has worked and successfully completed a number of high profile cases involving millions of dollars whilst working with the National Accountability Bureau. He specializes in advising clients and leading engagements on fraud investigations, anti-bribery and corruption reviews/investigation, and fraud risk management, anti-money laundering, compliance reviews, regulatory compliance reviews and dispute advisory services. Syed holds a bachelor's degree in Commerce. He is a certified Internal Auditor and Anti-Money Laundering Specialist (USA).

 

*Interview conducted by Jenny Kassis

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