Essential AML/CFT Guidelines for Fintechs in Saudi Arabia

Saudi Arabia, propelled by its abundant oil wealth and strategic location, has emerged as a powerhouse in the global economy. However, amidst its economic growth, the Kingdom faces the pressing challenge of combating money laundering and terrorist financing activities. In this comprehensive overview, we will explore the money laundering challenges of Saudi Arabia's dynamic economy, its AML regulations and the measures undertaken to mitigate financial crime risks.

Saudi Arabia's Economic Landscape

With a GDP surpassing $1 trillion in 2023, Saudi Arabia boasts the largest economy in the Middle East, driven predominantly by its oil and gas sector. Despite initiatives like Saudi Vision 2030 aimed at diversifying the economy, oil and gas still contribute significantly, with approximately 50% of GDP and 70% of exports coming from these sectors. The Kingdom has witnessed exponential economic growth over the past decade, with GDP more than doubling, reflecting its robust economic trajectory.

Challenges and Vulnerabilities

However, alongside economic prosperity comes the looming threat of illicit finance. Saudi Arabia faces persistent challenges in combating money laundering and terrorist financing. Estimates suggest that up to $10 billion is laundered annually within the Kingdom, with certain sectors, such as real estate and precious metals trading, remaining particularly vulnerable due to their cash-intensive nature. Moreover, the luxury goods market's expansion poses additional risks, as luxury items may be used to conceal illicit funds. Saudi Arabia's AML legislation reflects the country's commitment to combatting financial crime. However, despite these efforts, challenges persist, particularly in sectors such as remittances, which are considered high-risk for money laundering. It is estimated that between 70% to 80% of the proceeds of crime generated in Saudi Arabia are estimated to flow out of the country, underscoring the need for enhanced AML measures to stem the outflow of illicit funds.

Regulatory Framework

To address these challenges, Saudi Arabia has established a comprehensive regulatory framework aligned with international standards, particularly those set forth by the Financial Action Task Force (FATF). Key regulations include:

• Anti-Money Laundering Law of 2003: Sets out the legal framework for combating money laundering.
• Implementing Regulations to the Anti-Money Laundering Law of 2017: Provides detailed guidelines for implementing AML measures.
• Anti-Money Laundering and Counter-Terrorist Financing Rules (AML/CTF): Issued by the Capital Market Authority (CMA).
• Saudi Financial Action Task Force’s (FATF) Recommendations: Deals with AML/CFT standards.
• Rules Governing the Opening of Bank Accounts & General Operation Guidelines: Issued by SAMA's Banking Inspection Department.
• Manual for Combating Embezzlement & Fraudulent Transactions: Issued by SAMA's Banking Inspection Department.
• The Rules of Electronic Banking Services issued by SAMA.
• The Risk-Based On-Site Inspection "Policy Framework & Procedures" issued by SAMA.
• The Guidelines Manual for Banks in Saudi Arabia for Regulating Audit Committees.

Inside the Machinery: Saudi Arabia’s AML/CFT Institutions 

Saudi Arabia has established a formidable institutional framework to counter illicit finance. Several authoritative bodies regulate financial institutions and fintech companies in Saudi Arabia, including:

• Ministry of Anti-Money Laundering: Founded by the Minister of Trade and Industry.
• Saudi Arabian Monetary Agency (SAMA): The central bank responsible for regulating banks and financial institutions.
• Capital Markets Authority (CMA): Regulator of the securities and investment sector.
• Communications and Information Technology Commission (CITC): Regulates telecommunications and information technology.
• Saudi Central Bank (SAMA): Responsible for monetary policy, banking supervision, and the stability of the financial sector.
• Saudi Arabia Financial Intelligence Unit (SAFIU): The FIU responsible for receiving, analyzing, and disseminating suspicious transaction reports (STRs).

As emphasized earlier, financial institutions in Saudi Arabia must adopt a risk-based approach to comply with Anti-Money Laundering (AML) regulations effectively. This entails various measures aimed at ensuring thorough due diligence, monitoring, and reporting of suspicious activities. Here's a detailed breakdown of each requirement:

1. Customer Due Diligence (CDD)

Saudi regulators mandate specific identification attributes to identify natural persons:

• Full Name

• Address

• Date and place of birth

• Nationality

For identity verification, institutions can use the following documents:

• National Identification Card

• Residence permit (Iqamah) or five-year special residence permit

• Passport

To verify the address, acceptable documents include:

• Utility bills (e.g., electricity or telephone bills) not older than three months containing the user's name and address

• Bank statements not older than three months containing the user's name and address

2. Enhanced Due Diligence (EDD)

In cases where clients are Politically Exposed Persons (PEPs) or pose higher money laundering or terrorist financing risks, businesses must conduct more extensive due diligence measures. This includes:

• Obtaining and verifying information about the client's job, activity, or profession

• Identifying the source of funds before engaging in any business dealings

• Obtaining information regarding the customer's size of assets and transactions

• Conducting on-site visits to verify the nature of the customer's business

• Obtaining any additional documents or information to understand the client better

Approval from senior management is necessary before engaging with high-risk clients.

3. Record Keeping

To comply with AML/KYC regulations, businesses must retain due diligence data on their clients for at least ten years. If managed by a third party, businesses are responsible for collecting all necessary information from that party.

4. Transaction Monitoring and Oversight

Financial institutions are obligated to continuously monitor transactions, documents, and data to ensure consistency with customer information. This monitoring should be facilitated by appropriate technologies, with manual methods deemed insufficient. Additionally:

• Supervisory tools must be tested annually to assess effectiveness and adequacy, with documented test results prompting necessary improvements.

5. Reporting of Suspicious Transactions

Any suspicious transactions must be reported to the Saudi Arabia Financial Intelligence Unit (SAFIU). To streamline reporting, institutions must establish and document procedures approved at the board level. These procedures should include:

• Internal protocols for employees and senior officers in cases of suspected money laundering and terrorist financing
• Identification of responsible employees or officers for reporting suspicious transactions to SAFIU
• Internal investigation procedures for suspicious cases while maintaining confidentiality
• Submission of a technical report to SAFIU, including account statements, documents obtained for due diligence, and additional reports on suspicious accounts or contracts

Additionally, financial institutions should notify the Saudi Central Bank and Saudi Arabian Monetary Authority (SAMA) of any accounts, business relationships, or financial transactions involving individuals listed in specified UN Security Council Committees.

Penalties and Enforcement Actions

Saudi Arabia imposes severe penalties for money laundering, including fines of up to 7 million riyals ($1.8 million) and up to 15 years of imprisonment. Recent enforcement actions against financial institutions highlight the importance of robust AML/CFT compliance.

As Saudi Arabia continues its economic ascent and embraces digital transformation, safeguarding the financial system from illicit finance remains a top priority. Through a robust regulatory framework, stringent AML/CFT regulations, and ongoing reforms, the Kingdom is committed to upholding financial integrity and fostering a secure environment for sustainable growth. By addressing vulnerabilities, enhancing regulatory oversight, and promoting international cooperation, Saudi Arabia aims to mitigate the risks posed by money laundering and terrorist financing, thereby contributing to global efforts to combat financial crime.