(Bloomberg) -- The United Arab Emirates was removed from a global watchdog’s “gray list” on Friday, less than two years after the Gulf state’s demotion, capping a push by local authorities to clamp down on illicit financial flows.

The Paris-based Financial Action Task Force highlighted how the oil-rich country had strengthened its regime for anti-money laundering and combating terrorist financing. “The UAE is therefore no longer subject to the FATF’s increased monitoring process,” the watchdog said in a statement. 

The decision could lead to smoother foreign currency transactions, lower inter-bank fees, and increased trade and investment, according to Moody’s Analytics Industry Practice Lead Mohamed Daoud. “Even so, don’t expect the international compliance community to immediately change the way it interacts with the country.”

“Think of it as a gradual thawing, not an instant spring,” he said. “Specific actions by the UAE, reactions from other nations and financial institutions, and even global geopolitical shifts will all influence the size of the benefits.”

Following its latest review, the FATF placed Namibia and Kenya on the gray list. For the UAE, which was added to the list of jurisdictions under increased monitoring in March 2022, the de-listing marks a rapid turnaround. A Bloomberg investigation at the time chronicled Dubai’s status as a destination for some of the world’s wealthiest exiles.

Read more: UAE Poised to Exit Watchdog’s Dirty Money List After Reforms 

Wall Street Banks

The gray-list exit would be particularly welcomed by Wall Street banks, many of them with large operations in the UAE. They’ve grappled with increased compliance costs since the designation, forcing some to outsource more functions to India.

The move will increase the international community’s confidence in the country’s financial sector and enhance flow of foreign direct investment in different sectors, UAE Banks Federation Director General Jamal Saleh said.  

Gray listings have historically led to “statistically significant reduction in capital flows,” according to a 2021 report by the International Monetary Fund, though the UAE weathered the designation better than most countries. 

Still, Emirati officials told Bloomberg they’re keen to avoid the fate of Panama, which was removed from the gray list in 2016 only to get demoted again three years later. Kenya, too, has previously been on the gray list. 

“The UAE’s fight against financial crime isn’t over with its removal from the list,” Moody’s Analytics’ Daoud said. “It is crucial for long-term progress that it maintains its robust AML/CFT regime - especially with the next round of rigorous FATF evaluations approaching in 2026.”

Political Priority

Emirati officials involved in the FATF proceedings made it a political priority to get off the gray list. A body called the Executive Office of Anti-Money Laundering and Counter Terrorism Financing was staffed up with top local talent to streamline policies across the country’s seven emirates and dozens of free zones. 

The UAE also leveraged its role hosting Expo 2020 to sign more international cooperation agreements, paving the way for high-profile extraditions of individuals accused of white-collar crimes back home.

Read More: UAE Ramps Up Extradition Pacts in Bid to Fight Dirty Money

After the initial wave of inflows, UAE banks began tightening scrutiny on various nationalities, including Russians, as the government pushed to exit the list.

What’s FATF, The Global Body Targeting Dirty Money?: QuickTake

The government said it imposed almost 250 million dirhams ($68 million) in AML/CFT fines from January to October 2023, representing a more than three-fold increase from the year prior.

“This success is the outcome of collaborative efforts by the ministries, federal and local government entities, and the private sector, to achieve the leadership’s directives and further strengthen the country’s leading position and international competitiveness,” UAE Foreign Minister Sheikh Abdullah bin Zayed Al Nahyan said.

--With assistance from Nicolas Parasie.

(Updates with quotes and adds detail from 3rd paragraph.)

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