Some money exchange firms in the United Arab Emirates may have to merge and others could be forced to close as they struggle with rising capital and compliance costs and some banks refuse to do business with them, the head of an industry body said.

The UAE's majority expatriate population transferred a net Dh66 billion ($18 billion) abroad in 2013, according to central bank data, much of it through the estimated 120 exchange firms in the region's main financial hub.

But this year the industry has battled multiple headwinds. Money exchanges remitting money abroad were given two years from January to meet a new minimum capital requirement of Dh5 million ($1.36 million) imposed by the central bank, posing a challenge for smaller players.

Exchange houses are also increasingly expected to exercise greater scrutiny on their customers and the money they handle in a region considered a high risk for terror financing and money laundering.

In May 2013, the US treasury department prohibited dealings with Al Hilal Exchange for aiding Iranian attempts to circumvent international sanctions against Iran.

Complying with capital and compliance regulations has added between 20 to 40 per cent to industry costs this year, said Osama al-Rahma, chairman of the Foreign Exchange & Remittance Group UAE.

"This is why I'm expecting some won't be able to meet such huge operational costs, especially if you add this along with inflation and cost of doing business," he said. "You might see consolidation and you might see exits."

Some banks were also refusing to deal with exchange firms, he said. This has made it tricky for them to access banking services they need to operate, such as obtaining US dollars.

"International banks have started pressurising local banks to do the same. The main issue behind it is de-risking," said Rahma, who is also CEO at Al Fardan Exchange.

Many international banks have sought to cut risks in the region after several lenders, including BNP Paribas and HSBC, were found to have broken US sanctions against Iran in recent years.

Standard Chartered in October told thousands of small and medium-sized business customers in the UAE it was closing their accounts in response to pressure from U.S. authorities over anti-money laundering concerns. – Reuters