Introduction
In rapidly evolving financial markets, sham investment schemes are becoming an area of increasing regulatory scrutiny. These arrangements often use familiar legal forms and corporate structures to appear legitimate, while concealing their true purpose, the unlawful extraction, movement, or retention of funds. What may initially appear to be a regular or failed investment may, on closer review, reveal a more serious pattern of financial misconduct, giving rise to potential money laundering exposure and wider implications for the parties involved and the integrity of the financial system.
Beyond the Investment Label
Sham investment schemes are commonly structured around inducing investors to believe that their funds are being deployed in genuine investments, often presented as investment products, managed portfolios or investment funds. In substance, however, there is no real or lawful investment activity behind the arrangement.
Those behind these schemes often use registered companies, including limited liability companies or free zone entities, to create an appearance of credibility. This may be accompanied by fabricated financial reports, informal account statements, promotional materials, or promises of fixed or unusually high returns. In many cases, these representations are designed to withstand initial due diligence and to give the investor the impression that the arrangement is commercially legitimate.
Legally, such conduct may amount to positive misrepresentation, where the investor’s consent is procured by fraudulent statements as to the existence, nature or profitability of the investment. The key distinction, however, is between a genuine investment that fails and an arrangement that was never a real investment.
Where the arrangement is found to be a sham investment, UAE courts generally treat it as void for violation of public order, rather than as a mere regulatory breach. The consequence is that the court will not enforce the promised return or the mechanics of the scheme. Instead, the focus is on restoring the parties to their original position, principally by requiring the recipient to return the amounts received.
The Abu Dhabi Court of Cassation’s judgment in Cassation No. 178 of 2024 illustrates the legal consequence of a sham investment. The court treated an alleged investment arrangement as void, having found that it was not a genuine investment and was linked to fraudulent conduct, including by reference to a final criminal conviction of fraud and deceit. The court therefore declined to enforce the alleged investment arrangement or the promised repayment structure and limited the remedy to restitution of the amounts proven to have been actually received by the defendant.
This approach reflects the UAE courts’ strict treatment of sham investment arrangements as matters of public order. Sham investment arrangements are not treated as failed commercial bargains. They are treated as legally defective arrangements that cannot produce the contractual effects asserted by those behind them.
No Licence, No Legal Effect
Under UAE law, the activity of managing or investing third-party funds is subject to strict regulatory oversight. Federal Decree-Law No. 32 of 2021 on Commercial Companies, particularly Article 273 establishes the statutory basis for investment funds, requiring that they be constituted in accordance with the conditions and controls issued by the Securities and Commodities Authority (SCA), which in turn regulates licensing, promotion and fund operations. Article 274 further addresses the legal personality of investment funds, which arises only in accordance with the applicable regulatory framework. Notably, SCA regulations prohibit the promotion, marketing, or establishment of investment funds without prior licensing.
Any activity conducted in breach of these requirements is not merely a regulatory irregularity. Given the public interest in regulating the collection and investment of third-party funds, such breach may engage public order considerations. Consequently, any agreement arising from such illegal activity is treated as void and incapable of producing legal effect. The legal consequence of such invalidity is restorative: the parties are restored, so far as possible, to their pre contractual position, including by the return of funds and, where established, compensation for loss.
Further, Article 5 of the Chairman of SCA Decision No. 01 of 2023 concerning Investment Funds, prohibits announcing the commencement of procedures for establishing or licensing a fund, inviting subscriptions, promoting the fund, distributing related materials, or publishing any information about it without obtaining prior approval from SCA. This reflects a clear legislative intention to regulate investment fund activity strictly, by requiring prior SCA approval and preventing any form of promotion before the necessary licences are obtained. This prohibition is not limited to marketing. It also extends, in substance, to collecting funds from investors for investment purposes before obtaining the required approvals, given the close connection between these restrictions and the protection of the public and the regulation of funds within the financial system.
In light of the above, where funds are collected and promoted under the guise of investment in a fund that has not been properly licensed, or that does not exist within the applicable legal framework, such conduct goes beyond a regulatory breach and may amount to fraudulent conduct, giving rise to liability on the part of both the entity involved and its management.
The UAE courts have adopted a strict approach in this regard. The Dubai Court of Cassation has held that where a company carries out activities beyond the scope of its licensed business, particularly the investment of third-party funds, the underlying agreement becomes void for illegality, requiring the parties to be restored to their original position.
Beyond the Pitch: Fraud
Sham investment schemes fall within the scope of criminal fraud under UAE Penal Law where the evidence establishes fraudulent means, criminal intent and the unlawful obtaining of another person’s property. The offence is not made out by investment failure alone. It requires conduct capable of deceiving the investor and inducing the transfer of funds.
In this context, fraudulent means may include false representations, fabricated investment structures, misleading financial statements, or repeated reporting designed to create the appearance of genuine investment activity. The Dubai Court of Criminal Cassation, in Cassation No. 8 of 2019, has framed the point in similar terms, holding that fraud may involve deception relating to “a sham project or a fabricated event, or inducing hope for an illusory profit.”
This formulation is particularly relevant to sham investment schemes. Where the investor is induced to part with funds on the basis of a project that does not exist, an investment activity that is misrepresented, or returns that are presented as real but are in fact illusory, the matter may cease to be a contractual dispute and may support criminal characterisation as fraud.
Sham Investment as a Predicate Offence to Money Laundering
The criminal dimension of sham investment schemes does not end with fraud. Where the proceeds of fraud are transferred, concealed, or reintroduced into the financial system, the conduct may constitute money laundering under Federal Decree-Law No. 20 of 2018 (as amended). Article 2 defines the offence broadly, covering the transfer or movement of proceeds to conceal their origin, the disguise of their nature or ownership, and the acquisition or use of such proceeds with knowledge of their illicit source. The offence is autonomous and may be pursued independently of the underlying fraud.
In sham investment cases, the underlying fraud is often the starting point for the money laundering analysis. Investor funds obtained through deception may be treated as illicit proceeds, particularly where they are then moved, transferred, or recycled through corporate layers, cross border transfers, or internal movements within the scheme. Where those steps are used to distance the funds from their source, disguise their ownership, or bring them back into circulation as apparently legitimate assets, they may support a finding of money laundering.
Elements of the Laundering Offence in Sham Investment Schemes
Under UAE law, the offence of money laundering is generally assessed by reference to three core components: the underlying predicate offence, the material act of laundering, and the required mental element. The predicate offence is the criminal conduct that generates the illicit proceeds, which, in sham investment schemes, will often be the underlying fraud. The material element is reflected in acts involving the transfer, concealment, possession, use, or movement of those proceeds, including through layered structures, repeated internal transfers, or reinvestment into apparently legitimate assets. The mental element requires knowledge, or sufficient indications or evidence to believe, that the funds derive from criminal conduct. In practice, that state of mind may be inferred from the surrounding circumstances, including the person’s control over the scheme, their role in moving the funds, and their awareness that no genuine investment activity existed. Although the laundering offence is linked to the predicate offence, the two remain legally distinct.
- Extended Legal Liability:
Liability in in sham investment schemes is not confined to the corporate entity. The UAE Commercial Companies Code imposes personal liability on directors and managers where their conduct involves fraud, gross misconduct, or breach of law.
UAE courts have consistently affirmed this principle. In Dubai Court of Cassation Case No. 260 of 2011 (Civil), the Court held that a manager may be held personally liable for fraudulent or unlawful acts, even if undertaken in the name of the company. In Case No. 143/2014 (Civil), the Court confirmed that a void contract produces no legal effects, while preserving the injured party’s right to claim compensation, including loss of profit where justified.
Investor Protection: A Comprehensive Legal and Compliance Framework
Protection against sham investment schemes depends on action at several levels. Investors should begin with basic but critical checks, including confirming the promoter’s regulatory status, testing the commercial logic of the proposed investment, and assessing whether the promised returns are credible. Where possible, they should also identify the ultimate beneficial owner and review audited financial information. Institutions, in turn, must maintain effective compliance controls, including Know Your Customer (KYC), Customer Due Diligence (CDD), and Enhanced Due Diligence (EDD) procedures, to understand the source and movement of funds and detect suspicious activity at an early stage. At the regulatory level, close supervision, enforcement of licensing requirements, and scrutiny of financial promotions are essential to prevent the financial system from being used to give fraudulent schemes an appearance of legitimacy.
Key Risk Indicators (Red Flags)
Sham investment schemes often carry recognisable warning signs. These may include guaranteed or unusually high returns with no clear commercial basis, limited transparency on how funds are used, no verifiable assets or audited records, delays or restrictions on withdrawals, and complex corporate structures that do not appear to serve a genuine business purpose. No single factor will be conclusive, but the combination of several should raise serious concern.
Conclusion
The UAE legal framework takes a firm position on unlicensed investment activity. Where an arrangement is found to contravene mandatory regulatory requirements or public order, it may be treated as void, with the parties restored, so far as possible, to their original position, without prejudice to any claim for damages.
Sham investment schemes may also form part of wider financial misconduct, including money laundering, particularly where legal structures are used to give an appearance of legitimacy to funds generated through fraud. The continued interaction of enforcement, regulatory oversight, institutional compliance, and investor due diligence remains central to preserving market integrity and protecting investors from these risks.
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For further information or advice in relation to any of the matters addressed above, please feel free to contact our Senior Associate, Kholoud Hafez.
Disclaimer
The content provided in this article is intended for informational purposes only and does not constitute legal advice. While every effort has been made to ensure the accuracy and completeness of this information, the article does not offer a guarantee or warranty regarding its content. The matters discussed in this article are subject to interpretation, and legal outcomes may vary based on specific facts and circumstances. We recommend that readers seek individual legal counsel before making any decisions based on the information provided. If you require specific legal advice, please contact us directly.