Small to medium-sized enterprises (SMEs) form the backbone of the UAE economy and although much has already been done to support the growth and subsequent success of SMEs some hurdles still remain.
Here are some of the unique problems:
1. The lack of clear non-conflicting legal guidance
2. Issues of avoiding Sharia for non-Muslims
3. Bureaucratic red tape and months of know your customer (KYC) due diligence to open bank accounts
4. Safeguarding against illegal legal service providers
The first two hurdles go hand in hand to some extent and are of immediate concern to SMEs.
It is important for SMEs to put plans in place to safeguard company assets. It’s therefore wise to seek reliable legal support or to closely monitor legislative or regulatory changes.
A ruling that directly affects SMEs was implemented last month by the Personal Status Court of the Dubai Courts and could result in the freezing of company accounts.
This change relates to the demise of individual shareholders of companies or establishments located in Dubai. If the deceased is an individual partner or shareholder, then the company account could be frozen until the court makes further decisions in this regard.
Ultimately, this change in the inheritance process can affect the smooth operation of an SME in which there are living partners continuing to operate day-to-day business.
What is more, this new stance applies to all companies including those in free zones and both Muslims and non-Muslims.
The best move is to either seek legal advice or for companies to structure shareholding properly, have multiple signatories for all bank accounts and have offshore holding companies.
Hopefully the system will become more transparent in years to come and such matters can be reduced to straightforward cases, following a precise set of applications and issuance of orders. In the meantime, SMEs should keep abreast of developments.
Red tape and bank accounts
SMEs in the UAE can face rigorous compliance checks when trying to open bank accounts and it takes great patience to endure months of KYC due diligence and break through the red tape.
Some SMEs have reported that it can take up to six months to successfully open an account.
Banks require all bank account owners’ details to be divulged and if the owners are corporate owners, their ultimate beneficial owners’ details must be declared.
If the owner is a trust, then the trust company’s documents must be notarised and legalised and the trust deed divulged.
All this has arisen due to the Foreign Account Tax Compliance Act or FATCA and necessary adherence to Common Report Standards but more often than not, banks in the UAE err on the side of caution and refuse to accept any opening of bank accounts of some corporate entities.
Regulatory enforcement
SMEs should always find reliable legal advice so that they are not misled.
Choose your counsel wisely as there have been multiple incidents of legal service providers running illegal operations. The issue here has been insufficient proper regulatory enforcement against such providers.
We understand that this is changing.
The Legal Affairs Department has issued new regulations, which came into effect in November (following on from the Execution Resolution issued in 2011), which states that legal services must be provided by licensed legal consultants and advocates.
Even visiting lawyers who advise on cases in the DIFC Courts, for example, must register with them.
However, we see constant breaches of such regulations by so-called lawyers who are unregulated and do not carry any proper professional indemnity insurances. We see will-writing companies and trust companies offering legal services and who market themselves aggressively.
These companies sometimes use scaremongering tactics to spread rumours.
As the UAE incubates more and more SMEs, it will be critical moving forward to enforce the regulations against such non-compliant entities, fine them and, if required, close down such companies.
Finally, caveat emptor, consumers beware: all SMEs should ask the company providing legal services to provide its up-to-date licence issued by the government of Dubai.
— The writer is Principal at Dubai-based law firm Trench & Associates