Objective Liability & De-Risking: The Impact of the UAE’s 2025 AML Decree on Indian Trade Finance

I. Introduction

Following the conflict between the US and Iran, crude oil prices crossed $100 per barrel earlier in 2026 amid the fighting, before easing back with the ceasefire. This reinforced the UAE’s position as an attractive destination for crisis-driven capital given that its dirham is directly pegged to the US Dollar, making the banking system relatively stable. Against this backdrop, the UAE’s Federal Decree No. 10 of 2025 (decree law) came into effect on October 14, 2025, marking a fundamental shift in its money laundering framework, transitioning it from a subjective intent-based standard to an objective circumstantial liability regime.

This piece examines how the UAE’s decree law creates a regulatory mismatch with India’s PMLA. It exposes Indian banks and dual-use goods exporters to UAE’s criminal liability by shifting the intent-based liability to circumstantial liability, whereas the same attract no legal risk under Indian law. In the absence of regulatory guidance, this mismatch holds the capability to disrupt legitimate trade between the two trading nations.

II. The AML Risk Landscape and the Evidentiary Gap

Some of the capital entering the UAE’s financial system may also include illicit or high-risk funds attempting to exploit it. Therefore, UAE banks face an increase in Anti-Money Laundering (“AML”) and proliferation financing risk. Historically, banking laws in the UAE required prosecutors to prove a bank’s actual knowledge or intent that it was processing proceeds of crime. This gave banks an explicit defence by claiming they were unaware of the customer’s true operations, thereby enabling them to exploit the subjective-standard loophole.

To tackle this evidentiary gap, the UAE introduced the decree law, which was contingent on legislative reform. The UAE’s financial laws changed from the intent rule in the 2018 decree law to the now strict “should have known” liability curve under Article 27(5) of the decree law. The Decree requires the financial institutions, as part of their statutory obligation, to identify and report suspicious transactions, irrespective of whether subjective criminal intent can be established. This is a clear change in the evidentiary burden, directly impacting all Banking Institutions, including Indian banks and businesses that have correspondent banking relationships with the UAE or have been exposed to trade finance through the Strait of Hormuz.

III. The Shift to Objective Liability: Articles 2 and 3

The decree law brings the standard of liability from a knowledge-based to a circumstance-based approach, aligning the UAE's evidentiary standard with FATF Recommendation 3. Under Article 2 of the Decree, a person commits money laundering if they knowingly or where there are sufficient indicators or factual or objective circumstances exist, that the funds are proceeds of crime. This “reasonability” test, which relies on the rigorous application of the Customer Due Diligence measures under FATF Recommendation 10 to flag suspicious anomalies, makes a bank criminally liable if the circumstances surrounding the funds indicate that the bank ought to have known that the transactions were risky. Under Article 2, the presence of objective indicators is enough to meet the threshold of evidence when the transaction is in relation to a high-risk or war-affected jurisdiction; the processing institution cannot rely on the absence of subjective intent as a defence.

Proliferation Financing is now a specific criminal act under Article 3 in the Federal Decree, which was absent in the previous 2018 decree law. This obliges banks to monitor the financing of weapons and goods that could be repurposed for military or dual-use ends. Together, Articles 2 and 3 strip the financial institutions of the historical defence of plausible deniability.

IV. The Indian Correspondent Banking Exposure and the Dual-Use Trade Finance Risk

Indian exporters and trading companies that deal in goods of dual-use nature face scrutiny risks from the UAE banks under Article 3 of the decree law. An Indian company routing a shipment of dual-use goods through the UAE free zone, even to a legitimate buyer, carries a risk of enhanced scrutiny by the banking system, particularly where the beneficial ownership of the receiving party is layered. The UAE bank clearing such transactions may face criminal liability if the surrounding circumstances suggest that it should have known the goods could be repurposed. This makes the correspondent bank the last line of defence in a supply chain into which it may have limited visibility.

Indian banks issuing letters of credit for dual-use goods exports routed through UAE correspondents may find them demanding beneficial ownership disclosures or enhanced documentation that the Indian exporter may lack due to past non-requirement or unfamiliarity with this aspect. Thus, if any document is incomplete, if the end-buyer is from any sanctioned jurisdiction, or if any doubtful circumstances arise, the UAE banks may decline the transaction rather than investigate it. This defensive behaviour is driven by Article 27(1) of the decree, which imposes massive penalties to the tune of AED 5 million to AED 100 million for non-compliance with money laundering and proliferation finance regulations. This bottleneck is likely to affect Indian exporters most acutely if they lack the necessary compliance mechanisms.

V. The Evidentiary Mismatch: UAE's Objective Liability vs India's PMLA Regime

The impact of this decree law on the functioning of cross-border networks can only be understood by comparing it to India's anti-money laundering legislation, the Prevention of Money Laundering Act (PMLA), 2002. The definition of money laundering under Section 3 is very much subjective and focuses on the mens rea of the money launderer, with the requirement for an actor to knowingly assist, knowingly be a party or be actually involved in a process related to the proceeds of crime. In the Vijay Madanlal Chowdhary v. Union of India (2022) judgment, the Indian Supreme Court held that while the PMLA includes a wide range of asset-tainting activities, it is important to show a clear and unambiguous link with a predicate offence to be held liable in the domestic prosecution. Thus, the Indian reporting entities operate under a reactive mechanism, with the risk arising only when there is actual knowledge involved.

By contrast, the UAE decree law relies on circumstantial context in its charge to define the crime under Articles 2 and 3, bypassing the need to identify a specific predicate offence altogether. This objective "reasonableness test" represents a massive compliance gap for Indian correspondent banks and exporters used to the predicate, threshold-based approach of the PMLA, where they may face ceased transactions on any suspicion from the UAE banks.

VI. The Systemic Importance of Shifting the Burden of Proof

This shifting of the evidentiary burden fundamentally enhances the prosecution's ability to prosecute money laundering, terrorist financing, or proliferation financing. This standard was hard to meet in practice, as the defendant's mens rea may become blurry when layered cross-border corporate structures are in play before the effective date of the decree law.

The law is now grounded in a standard of professional negligence: once a transaction appears suspicious on an objective level, the financial institution must investigate, and failing to do so exposes it to accomplice liability. This shifts the burden onto banks to redesign their internal audit programmes, moving from reactive to investigative compliance.

VII. Regulatory Compliance vs Corporate De-Risking: A Dual Effect

This transformation produces a dual regulatory effect:

On one hand, the law safeguards the UAE against global regulatory isolation by enacting stringent measures against proliferation finance and by reducing the standard of evidence, and it directly helps the UAE to ally with global standard setters such as the FATF. It also helps keep the UAE's financial system entirely white-listed and keep open global banking lines wide.

On the other hand, it also leads to a defensive banking practice of de-risking since the fines against corporations have been doubled to AED 100 million under Article 27(1) of the decree law. This leads to a pitfall that, in light of increased penalty exposure, banks might become so conservative that they can withdraw from existing client relationships, rather than undertake the level of due diligence necessary to consider highly complex trade or business profiles. Businesses with normal trading operations centred on a transit hub, or operating in digital assets, are at risk of being shut out, as the banks will deny transactions rather than investigate them. As a consequence, this will create a choke point for legitimate businesses.

VIII. Conclusion and Strategic Recommendation

The key issue in the implementation of the decree law will be the proper application of the objective liability test with adequate specificity to distinguish high-risk transactions from routine commercial activity. In this context, two complementary steps should be taken.

First, in the UAE financial sector, supervisory authorities need to mandate the adoption of automated transaction-monitoring systems that are able to classify transactions in real time by objective criteria outlined in the decree law. At the same time, the regulators need to give clear supervisory guidelines defining the scope of the objective knowledge principle, so that financial institutions can refer, record and defend their decisions on more complex cross-border transactions against the principle. The significant rise in corporate fines under Article 27(1) could otherwise encourage de-risking behaviour, which might undermine the overall regulatory objectives of the decree law if these boundaries are not put in place. Another way to further the cause would be for the supervisory authorities to provide the list of additional transactional documents required for all trading entities, including India.

Second, a clear direction or an advisory by the Directorate General of Foreign Trade (DGFT), India, should be provided to understand this de-risking trend and its effect on cross-border trading. The question of whether there is an overlap between export control and dual-use goods within the scope of Article 3 of the decree law is one aspect. India's Foreign Trade Policy 2023 lists numerous exemptions from export licensing, but if the context suggests a potential military application or dual use, then the items may be subject to in-depth investigations regarding compliance in the UAE. Even if an Indian exporter is fully compliant with domestic laws and regulations and has no licensing requirements or restrictions under the SCOMET (Special Chemicals, Organisms, Materials, Equipment and Technologies) threshold, they still encounter unexpected transaction rejections by banks in the UAE based on broad dual-use suspicions. If the formal DGFT advisory is issued, Indian exporters will be able to plan their technical end-user and transaction documentation if the specific product categories are identified and targeted to be subject to Article 3 of the UAE decree law. Such a preventative alignment would lower the risk of settlement failures on the foreign side of the shipping and contribute to maintaining bilateral trade between both countries intact.

About the Author

Prayas Das and Shivam Gupta are third-year law students at National Law University, Odisha.

Editor

Tanay Hindocha, Senior Editor

Megha Chhari, Assistant Editor