Article on Criminal Liability of Directors
What Expat Managers in the UAE should know about UAE Criminal Law
There are many laws regulating managers’ and directors’ obligations in the United Arab Emirates. Whilst most directors and managers know their general duties and civil liabilities to the company, its shareholders and even third parties, few are aware of the impact that criminal law may have on their day-to-day duties. This article will address several criminal provisions in UAE law which are particularly relevant to managers and directors, including criminal liabilities under tax laws, insolvency laws, corporate laws and the Penal Code (Federal Law No. 3 of 1987, as amended).
What Could Trigger Criminal Prosecution?
Below, we have compiled the most common criminal legal matters which have led to police investigations, prosecution and criminal court procedures for expat directors and managers in the UAE.
Manager´s Actions under the Commercial Companies Law
There are several criminal provisions in the Commercial Companies Law (Federal Law No. 2 of 2015) that apply to directors. By way of example, a manager faces up to three years imprisonment or a fine of up to AED 1 million, or a combination of both for the following:
Article 361: Deliberately making false statements in company documents;
Article 363: Profit distribution against law or memorandum of association (e.g. by “bonus” payments which were not previously agreed); or
Article 369: Misuse by a director of company’s confidential information. Whereas most employers only consider legal action under employment laws and the employment contract (e.g. termination without notice; no end of service gratuity etc.), this provision could also form the basis for criminal prosecution against managers and subsequent civil claims against the manager.
Certain Business Practices
UAE laws impose other obligations on directors and managers relating to certain business practices. The Commercial Transaction Law (Federal Law No. 18 of 1993) provides for penalties and imprisonment e.g. for inciting employees of competitors to harm such competitor´s business (Article 64), for incorrect product information (Article 65) and for fraudulent activities to promote ones´ own business (Article 66). Even a manager only ordering such actions could be prosecuted.
Article 234 et seqq. of the Penal Code relate to bribery in the UAE and even outside. If a manager or director is found guilty, either directly or acting as an accomplice, this could result in up to five years imprisonment. Article 423 of the Penal Code relates to fraud in commercial transactions. The wrong statement of weight, quantity or quality towards a business partner could result in up to three years imprisonment. This provision could be used to put pressure on business partners who engage in such practices so that the company in question not only faces a civil claim, but also the manager himself is confronted with a criminal complaint with all associated risks and inconveniences (interrogations, handover of passports etc.).
Directors and managers must also be aware of laws relating to their employees and immigration laws as these laws prescribe potential fines of AED 50,000 and / or imprisonment of up to three years in case of employee safety violations or the employment of workers without proper work permits.
Violation of the rules relating to licensing of a corporate entity could also lead to criminal prosecution. In the Emirates of Dubai and Abu Dhabi, violation of the rules could lead to a fine up to AED 100,000 in both Emirates. In Abu Dhabi even imprisonment can be ordered (Article 6 of Abu Dhabi Law No. 2 of 2009). These provisions are rarely applied – thus, the main risk is not the government´s supervision and potential action, but rather competitors using this to exert pressure.
Managers and directors are usually registered with the Federal Tax Authority as their companies’ authorised representatives. This means that they are ultimately responsible for their company’s tax liability. In this context, Article 26 of Tax Procedure Law (Federal Law No. 7 of 2017) contains a provision providing for criminal liability of persons directly or indirectly responsible for “Tax Evasion”. Tax Evasion is defined as the “use of illegal means resulting in the reduction of the amount of the Due Tax, non-payment thereof, or a refund of a tax that a person does not have the right to have refunded under any Tax Law.” More concretely, Article 26 provides for prison sentences and penalties for e.g. failing to settle tax, charging tax without being registered or providing wrong information to the Federal Tax Authority.
Certain IT Communications via Electronic Means
The Cyber Crimes Law (Federal Law No. 5 of 2012) was issued in 2012 and the provisions were further tightened in 2018. The law criminalises a vast range of cybercrimes i.e., the use of information technology to commit a crime. Although the law is extensive and applicable to everyone, the following cases/actions could be particularly relevant to managers and directors:
- Unauthorised access to networks or data systems;
- Deletion of relevant company files without authorization
- Breach of privacy (e.g. spreading information on reasons of termination of an employee) and disclosure of confidential information;
- Insults / defamation through information technologies such as emails, websites, blogs etc.
High monetary penalties and imprisonment apply for these violations. Previously, obligatory deportation was provided in the law for expats who violated any of its provisions, but in 2018 Article 42 of the Cyber Crimes Law was amended and contains now a discretionary provision regarding the deportation of a foreigner who was found guilty for crimes under the Cyber Crimes Law. This means that deportation is no longer mandatory for most misdemeanours, but rather can be ordered in the discretion of the courts.
The Bankruptcy Law (Federal Law No. 9 of 2016) introduced several detailed processes which expedite timelines to address financial distress and help protect the legal rights of creditors. For insolvency processes it imposes significant duties on managers and directors. The Bankruptcy Law contains e.g. penalties under Article 198, which states that directors and general managers face up to five years imprisonment and a fine up to AED 1 million, if they hide, damage or alter company’s records with the intention of harming creditors; embezzle or hide company assets; if they distribute fictitious profits; receive bonuses higher than the previously agreed amount; or wilfully acknowledge debts which are not owed by the company.
Further liability falls upon directors and managers under Article 201 of the Bankruptcy Law: If found guilty of the following acts, it could result in two years imprisonment for the directors or managers if they fail to keep adequate commercial records or, upon the initiation of an insolvency file, dispose of the company’s assets with intent to conceal the assets from creditors, or favour one creditor after opening of insolvency file.
In practice, the most frequent criminal cases against directors and mangers relate to cheques. Under Article 401 of the Penal Code the bank signatory, usually a director or manager of the company, is liable for any cheques issued on behalf of the company. Whereas a bounced cheque in Europe or the USA would result only in civil liability, in the UAE a bounced cheque will result in criminal liability. Intention is irrelevant, so it does not matter if the manager intended for the cheque to bounce or was unaware that the company had insufficient funds on the account.
The procedure is different in each Emirate. In recent practice, Dubai directors and managers are rarely imprisoned for bounced cheques (at least for cheques up to AED 200,000, as for these the prosecution issues payment orders of up to AED 10,000), whereas in other Emirates there is still the potential for imprisonment, even for cheques of lower amounts.
Managers should keep very accurate and up to date records on existing funds and any issued cheque. If a manager happens to leave his position at a company, he should make sure to exchange outstanding cheques signed with cheques signed by the replacement signatory.
It is also essential for expat directors in the UAE to be aware that they might face severe legal consequences even for their companies’ unpaid civil liabilities. This is so because unlike laws in most Western countries, UAE laws still provide for debtor´s prison (“Erzwingungshaft”), even for corporate debts (e.g. unpaid suppliers, contractual damages or salaries & gratuity of employees): As per Article 327 of the Civil Procedure Law, for legal entities an order for detention is to be made against the person to whom the failure to perform is personally attributable; in most cases this would be a company’s director or manager. Thus, if a company’s civil liabilities remain unpaid, there is the potential for directors and managers to be subjected to a travel ban and prison.
If you have any questions or require any advice or legal assistance regarding the above, please contact Dr. Clemens Daburon (firstname.lastname@example.org) or Ms Sali Jumah (sali@daburon- partners.com).
Daburon & Partners Legal Consultants LLP
Phone: +971 2 6948655
Address: Office 2404, 24th Floor Al Sila Tower–Abu Dhabi Global Market Square–Abu Dhabi–UAE
This article is provided on a complimentary basis as general information. It does not constitute legal advice, and the authors do not assume any legal liability whatsoever.