Dubai Court Clarifies Bank Liability on Sanctions & Fund Transfers

Introduction

The increasingly complex intersection between financial compliance obligations and contractual banking duties has given rise to novel legal disputes. Particularly in jurisdictions such as the United Arab Emirates (UAE), which are simultaneously committed to international anti-money laundering standards and the sanctity of contractual obligations, disputes regarding international fund transfers often pose challenging legal questions.

The judgment rendered by the Dubai Court of Appeal on 15 May 2025 in Case No. 2437/2024/305 represents a landmark ruling on the liability of banks for executed fund transfers, especially in the context of subsequent international sanctions. The case draws a firm line between legitimate regulatory compliance and unlawful interference with client funds.

Case Background

A corporate claimant initiated legal proceedings against a UAE-based bank, seeking restitution of funds amounting to USD 47,666.99 that were previously transferred from its corporate account. The bank unilaterally froze the amounts, citing concerns over potential violations of the U.S. Office of Foreign Assets Control (OFAC) sanctions, as the ultimate beneficiaries were allegedly associated with Russian entities later placed on OFAC’s Specially Designated Nationals (SDN) List.

The Court of First Instance ruled in favour of the claimant, ordering the bank to return the full amount, along with 5% legal interest and costs. The bank appealed, contending that the funds were subject to international sanctions and that it was legally prohibited from releasing or reversing the transactions.

Key Legal Issues - Court Findings: Clarifying UAE Banking Law

The Court of Appeal was required to address several pivotal legal questions:

Q. Can banks reverse transfers due to later sanctions?

A. Legality is Assessed at the Time of Execution - The Court reiterated the cardinal legal principle that the legality of a banking transaction must be assessed based on the circumstances prevailing at the time of its execution, not on subsequent developments. Since the relevant fund transfers were executed before the beneficiary’s name appeared on any sanctions list or triggered regulatory alert within the UAE’s domestic system, the bank’s actions lacked a legal basis.

Q. What proof is required to override client agreements?

A. Burden of Proof on the Bank - The Court held that the bank bears the burden of proving that it was under a legal compulsion not to process or to reverse the transfer. The absence of formal communication from the UAE Central Bank or any other competent UAE

authority at the time of transfer undermined the bank’s defence. Furthermore, the bank failed to demonstrate that any relevant regulatory or compliance mechanism, either under UAE law or pursuant to international commitments, required the freezing or withholding of the transferred funds post-execution.

Q. Do U.S. OFAC sanctions apply in UAE banking law?

A. OFAC Sanctions Are Not Automatically Binding Under UAE Law - A notable and critical aspect of the judgment was the Court’s nuanced stance on international sanctions. It emphasised that OFAC sanctions, while internationally significant, do not carry the force of law within the UAE unless specifically adopted by the UAE authorities. Accordingly, reliance on OFAC restrictions without a corresponding directive or notification from UAE regulatory authorities was deemed legally insufficient to justify the bank’s unilateral action.

Established Legal Principles

The judgment clarified and affirmed the following principles:

Contractual Fidelity in Banking Transactions - Banks must perform their contractual duties, including executing transfers, unless there is a clear and present legal prohibition at the time of performance.

Legality Determined at Time of Transfer - Legality is determined at the moment of execution, not in hindsight based on supervening regulatory changes.

UAE Law Takes Precedence Over Foreign Sanctions - Domestic regulatory directives take precedence over foreign sanctions unless incorporated through appropriate legal instruments.

Banking Compliance Requires Transparency - Banks are expected to engage in proactive compliance reviews but must communicate any restrictions or risks to clients in a timely and transparent manner.

Liability for Wrongfully Withheld Client Funds - Where funds have been wrongfully withheld or frozen, banks are liable to restore such funds, together with legal interest and costs.

Implications for UAE Banking Practice

Compliance vs. Contractual Obligations

This judgment sends a clear message to the banking sector that compliance with foreign sanctions must not override contractual obligations unless such sanctions are explicitly adopted by the UAE regulatory framework. It further affirms that the unjustified retention or freezing of client funds exposes banks to judicial scrutiny and liability.

Documentation and Risk Management Best Practices

Banks must now ensure that internal risk and compliance frameworks are aligned with domestic legal requirements. The absence of documentation or official notifications from the Central Bank of the UAE significantly weakens any post-facto justification for non-execution of transfers.

Safeguarding Client Trust in the UAE Financial Sector

By holding the bank accountable, the Court underscored the importance of safeguarding public trust in the financial system. Clients must be assured that banks will not arbitrarily interfere with their funds under vague or foreign pretexts.

Conclusion: A Landmark Precedent in UAE Banking Compliance

The Dubai Court of Appeal’s judgment reaffirms fundamental principles in UAE banking law, above all, the sanctity of contractual obligations and the requirement that legality is assessed at the moment of execution.

It delivers a clear caution to financial institutions: compliance efforts, however well-intentioned, cannot override contractual duties unless supported by explicit UAE legal authority. Overreaching actions, particularly those based solely on foreign sanctions without UAE adoption, expose banks to liability.

For banks operating in the UAE, this ruling serves as both a framework and a warning:

• Ensure compliance actions are rooted in UAE law, not just foreign regulatory regimes.
• Maintain clear legal justification and documentation for freezing or withholding funds.
• Recognise that unjustified interference with client assets risks both litigation exposure and reputational damage.

Key Takeaways for the UAE Banking Sector

• UAE courts prioritise contractual certainty over unverified compliance concerns.
• Foreign sanctions (e.g., OFAC) do not automatically apply unless formally adopted in the UAE.
• Banks face financial and reputational risks when exceeding their legal remit.

FAQ’s

Q: Can UAE banks freeze funds based on U.S. sanctions?

A: Only if UAE regulatory authorities have adopted or communicated the sanctions.

Q: What happens if a bank wrongly withholds funds in the UAE?

A: The bank may be liable to return the funds with legal interest and court costs

Q: Can a client sue a bank in the UAE for wrongfully withholding funds?

A: Yes. Clients can bring legal action against a bank for breach of contract and may recover the withheld amount, legal interest, and potentially additional damages.

Q: When can a UAE bank lawfully freeze or reverse a fund transfer?

A: A UAE bank may freeze or reverse a transfer only if it receives a clear legal directive from UAE authorities, such as the Central Bank of the UAE, or if applicable UAE laws or regulations explicitly prohibit the transaction.