Germany is one of the largest financial centers in Europe. Most of the money laundering that occurs in Germany relates to white-collar crime. Although not a major drug producing country, Germany continues to be a consumer and a major transit hub for narcotics. Organized criminal groups involved in drug trafficking and other illegal activities are an additional source of money laundering in Germany. Germany is not an offshore financial center.
In 2002, the Federal Republic of Germany (FRG) enacted a number of laws to improve law enforcement’s ability to combat money laundering and terrorist financing. The measures brought German laws into line with the first and second European Union (EU) Money Laundering Directives, which mandate suspicious activity reporting by a variety of entities, including notaries, accountants, tax consultants, casinos, luxury item retailers, and attorneys.
In May 2002, the German banking, securities, and insurance industry regulators merged into a single financial sector regulator known as the Federal Financial Supervisory Authority (BaFIN). Germany’s anti-money laundering (AML) legislation requires that BaFIN maintain a centralized register of all bank accounts with electronic access to all key account data held by banks in Germany. Banks cooperate with German authorities. Many have independently developed risk assessment software to screen potential and existing clients and their financial activity, and to monitor transactions for suspicious activity.
Germany’s Money Laundering Act, amended by the Act on the Improvement of the Suppression of Money Laundering and Combating the Financing of Terrorism of August 8, 2002, criminalizes money laundering related to narcotics trafficking, fraud, forgery, embezzlement, and membership in a terrorist organization. It also increases due diligence and reporting requirements for banks and financial institutions and requires financial institutions to obtain customer identification for transactions conducted in cash or precious metals exceeding 15,000 euros (approximately U.S. $22,000). The legislation mandates more comprehensive background checks for owners of financial institutions and tighter rules for credit card companies. Banks must report suspected money laundering to the FIU as well as to the State Attorney (Staatsanwaltschaft).
The Federal Interior Ministry has drafted new legislation to implement the third EU Money Laundering Directive. The legislation is expected to be adopted in mid-2008. In addition to requiring that EU member states implement the Financial Action Task Force’s (FATF) 40 Recommendations, the directive contains further provisions on customer due diligence and other internal risk-management measures to prevent money laundering and terrorist financing. The new regulations will apply to banks, insurance companies, and a number of professional groups (e.g., financial services providers, lawyers, notaries public, tax advisors, and other business operators). The directive calls for improved integrity and transparency to help prevent financial crime and improve information exchange between the public and private sectors. According to the draft legislation, suitable control structures must ensure that proper, accurate and current information is available about the contracting party, to ensure transparency. The EU requirement also expands reporting requirements to encompass transactions that support the financing of terrorism. The EU regulation on wire transfers (EC 1781/2006) entered into force on January 1, 2007.
As of June 15, 2007, travelers entering Germany from a nonEU country or traveling to a nonEU country with 10,000 euros (approximately U.S. $14,500) or more in cash must declare their cash in writing. The definition of “cash” includes currency, checks, traveler’s checks, money orders, bills of exchange, promissory notes, shares, debentures, and due interest warrants (coupons). The written declaration must also include personal data, travel itinerary and means of transport as well as the total amount of money being transported, where the money originated from, what it is to be used for, who the owner of the money is and who is the payee. If authorities doubt the information given, or if there are other grounds to suspect money laundering or the funding of a terrorist organization, the cash will be placed under customs custody until the matter has been investigated. Penalties for nondeclaration or false declaration include a fine of up to one million euros (U.S. $1.46 million). During the period between January and September 2007 the Federal Customs Criminal Office identified 998 cases of individual cross-border cash movements that required further clarification and review. In December 2007 the new Schengen countries were enveloped within EU borders, making it possible to travel across Europe from Estonia through Germany to Portugal without border controls.
Germany established a single, centralized, federal financial intelligence unit (FIU) within the Federal Office of Criminal Investigation (Bundeskriminalamt or BKA). Staffed with financial market supervision, customs, and legal experts, the FIU is responsible for analyzing cases, responding to reports of suspicious transactions, and developing and maintaining a central database of this information. Another unit under the BKA, the Federal Financial Crimes Investigation Task Force, houses twenty BKA officers and customs agents.
Information for 2007 was unavailable, but in 2006, obligated entities filed 10,051 suspicious transaction reports (STRs) pursuant to the Money Laundering Act. According to the German Financial Intelligence Unit’s (FIU’s) 2006 annual report, 80 percent of the STRs filed pursuant to the Money Laundering Act and other notifications of money laundering activity forwarded to the FIU in 2006 cited fraud, including “phishing” and the use of “financial agents”, as a possible criminal offense from the perspective of the reporting party. The individuals recruited in phishing schemes may be liable for money laundering penalties as well as for the illegal provision of financial services. Document forgery and tax offenses were the next most frequently cited offenses.
In 2006, approximately fifty-seven percent of the persons cited in German STRs were German nationals. Of the forty-three percent of the STRs that referenced nonGerman nationals, suspects with Turkish citizenship comprised the greatest proportion followed by Russian, Chinese, Italian and Kazakh. The 2006 statistics on STRs concerning transfers of assets to and from foreign countries displayed a number of significant trends. Russia and the Ukraine were the top two destinations for asset transfers that generated STRs. The United States is the eighth most frequently listed destination for asset transfers that are cited by STRs. When entities file STRs on transfers of assets from foreign countries, the USA is the most frequently cited source nation.
As with other crimes, actual enforcement of money laundering laws under the German federal system takes place at the state (sub-federal) level. Each state has a joint customs/police/financial investigations unit (GFG), which works closely with the federal FIU. The State Attorney can order a freeze of accounts when warranted.
As an EU member, Germany complies with a recent EU regulation requiring accurate originator information on funds transfers for transfers into or out of the EU. However, this does not place Germany into compliance with FATF Special Recommendation Seven (SR VII) on Terrorist Financing, which governs wire transfers. SR VII requires such information on all cross-border transfers, including transfers between EU member countries.
Germany moved quickly after September 11, 2001, to identify and correct the weaknesses in its laws that had permitted terrorists to live and study in Germany. One reform package closed loopholes that had permitted members of foreign terrorist organizations to engage in fundraising in Germany (e.g., through charitable organizations), which extremists had exploited to advocate violence. Subsequently, Germany increased its law enforcement efforts to prevent misuse of charitable entities. Germany has used its Vereingesetz, or Law on Associations, to take administrative action to ban extremist associations that “threaten the democratic constitutional order.”
A second reform package enhances the capabilities of federal law enforcement agencies and improves the ability of intelligence and law enforcement authorities to coordinate efforts and to share information on suspected terrorists. The law also provides Germany’s internal intelligence service with access to information from banks and financial institutions, postal service providers, airlines, and telecommunication and Internet service providers. Another proposed counterterrorism reform, will further streamline and simplify security agencies’ access to German financial, travel, and telephone records. In 2002, the FRG also added terrorism and terrorist financing to its list of predicate offenses for money laundering, as defined by Section 261 of the Federal Criminal Code. The Criminal Code allows prosecution of members in terrorist organizations based outside Germany.
An amendment to the Banking Act institutes a broad legal basis for BaFIN to order frozen assets of EU residents suspected as terrorists. Authorities primarily concentrate on financial assets. BaFIN’s system allows immediate identification of financial assets that can be potentially frozen, and German law enforcement authorities can freeze accounts for up to nine months. However, unless the assets belong to an individual or entity designated by the UNSCR 1267 Sanctions Committee, the FRG cannot seize money until authorities prove in court that the funds were derived from criminal activity or intended for terrorist activity.
Germany participates in United Nations and EU processes to monitor and freeze the assets of terrorists. The names of suspected terrorists and terrorist organizations listed on the UNSCR 1267 Sanctions Committee’s consolidated list and those designated by EU or German authorities are regularly disseminated to German financial institutions. A court can order the freezing of nonfinancial assets. Germany and several other EU member states have taken the view that the EU Council Common Position requires, at a minimum, a criminal investigation to establish a sufficient legal basis for freezes under the EU Clearinghouse process. Proceeds from asset seizures and forfeitures go into the federal government treasury.
Since 1998, the FRG has licensed and supervised money transmitters, shut down thousands of unlicensed money remitters, and issued AML guidelines to the industry. German law considers the activities of alternative remittance systems such as hawala to be banking activities. Accordingly, German authorities require bank licenses for money transfer services, thus allowing authorities to prosecute unlicensed operations and maintain close surveillance over authorized transfer agents.
German law enforcement authorities cooperate closely at the EU level, such as through Europol. Germany has mutual legal assistance treaties (MLATs) with numerous countries. Germany exchanges law enforcement information with the United States through bilateral law enforcement agreements and informal mechanisms. United States and German authorities have conducted joint investigations. The U.S. and Germany signed a Mutual Legal Assistance Treaty in Criminal Matters on October 14, 2003. On July 27, 2006, the U.S. Senate ratified the MLAT and the German legislative bodies approved the implementing legislation in July and September 2007. Germany published the implementing legislation in the Federal Gazette on November 2, 2007, and the MLAT will come into effect once the parties formally exchange the instruments of ratification. Additionally, the U.S. and Germany signed bilateral instruments to implement the U.S.-EU Extradition and Mutual Legal Assistance Agreements on April 18, 2006. These instruments, as well as the underlying U.S.-EU Agreements, have not yet been ratified. German authorities cooperate with U.S. authorities to trace and seize assets to the full extent allowed under German laws. German law does not currently permit the sharing of forfeited assets with other countries.
Germany is a member of the FATF, the EU and the Council of Europe. The FIU is a member of the Egmont Group. Germany is party to the 1988 UN Drug Convention, the UN International Convention for the Suppression of the Financing of Terrorism and the UN Convention against Transnational Organized Crime. Germany has signed, but not yet ratified, the UN Convention against Corruption.
The Government of Germany’s AML laws and its ratification of international instruments underline Germany’s continued efforts to combat money laundering and terrorist finance. Germany should amend its wire transfer legislation to ensure that origination information applies to all cross-border transfers, including those within the EU. It should also amend legislation to waive the asset freezing restrictions in the EU Clearinghouse for financial crime and terrorist financing, so that the freezing process does not require a criminal investigation as well as amend its legislation to allow asset sharing with other countries. Germany should ratify the UN Convention against Corruption.
Ghana is not a regional financial center, but due to continuing turmoil in the region, Ghana’s financial sector is likely to become more important regionally as it develops. Most of the money laundering found in Ghana involves narcotics and public corruption. Ghana is a significant transshipment point for cocaine and heroin. Police suspect that criminals use nonbank financial institutions, such as foreign exchange bureaus, to launder the proceeds of narcotics trafficking. Criminals can also launder their illicit proceeds through investment in banking, insurance, real estate, automotive import, and general import businesses. Reportedly, donations to religious institutions have been used as a vehicle to launder money. The number of “advance fee” or 419 fraud letters, known as Sakawa in Ghana, that originate from Ghana continues to increase, as do other related financial crimes, such as use of stolen credit and ATM cards.
Informal activity accounts for about 45 percent of the total Ghanaian economy. Ghana’s 2000 census found that 80 percent of employment was in the informal sector. Only a small percentage of the informal economy, however, relies on the banking sector. Because some traders smuggle goods to evade tax and import counterfeit goods, black market activity in smuggled goods is a concern. In most cases the smugglers bring the goods into the country in small quantities, and Ghanaian authorities have no indication that these smugglers have links to criminals who want to launder money gained through narcotics or corruption.
Ghana has designated four free trade zone areas, but the Tema Export Processing Zone is currently the only active free trade zone. Ghana also licenses factories outside the free zone area as free zone companies. Free zone companies must export at least 70 percent of their output. Most of the companies produce garment and processed foods. The Ghana Free Zone Board and the immigration and customs authorities monitor these companies. Immigration and customs officials do not suspect that trade-based money laundering (TBML) schemes are a major problem in the free trade zones. Although the Government of Ghana (GOG) has instituted identification requirements for companies, individuals, and their vehicles in the free zone, monitoring and due diligence procedures are lax.
The GOG has developed new laws to stimulate financial sector growth, including the revision of the banking law to strengthen the operational independence of the Central Bank (Bank of Ghana). The government is promoting efforts to model Ghana’s financial system on that of the regional financial hub in Mauritius. In line with this, the GOG passed the Banking (Amendment) Act, 2007 Act 738, on June 18, 2007. The law establishes the basis for the provision of international financial services in Ghana and requires the Bank of Ghana to authorize offshore banks. Prior to this law, the Bank of Ghana licensed only reputable and internationally active banks. On September 7, 2007, Barclays Bank of Ghana Ltd., a subsidiary of Barclays Bank PLC, UK became the first to start operating as an offshore bank. The Bank of Ghana is in the process of drafting regulations for offshore banks.
Nearly six years after drafting began, the Parliament passed the Anti-Money Laundering (AML) Bill on November 2, 2007. The President signed it on January 22, 2008, and it was gazetted on January 25, 2008. The law covers obliged institutions and their reporting and disclosure requirements; the role of supervisory authorities; preventive measures; customer identification and record keeping requirements; and rules for suspicious transaction reporting. Ghana has bank secrecy laws, but allows the sharing of information with relevant law enforcement agencies. Law enforcement officials can compel disclosure of bank records for drug-related offenses. Bank officials have protection from liability when they cooperate with law enforcement investigations. The new AML law requires banks and individuals to report suspicious transactions.
The banking sector lacks a strong regulatory framework to prevent money laundering and report suspicious transactions, although entities recognize the importance of such a framework. The Bank of Ghana allows two types of foreign currency bank accounts: the foreign exchange (FE) account and the foreign currency (FC) account. The FE account is tailored to foreign currency sourced within Ghana while the FC account targets transfers from abroad. Bank of Ghana regulations instituted in December 2006 under the Foreign Exchange Act allow U.S. $10,000 per year to be transferred from an FE account without documentation and approval from the Bank of Ghana. The regulations also allow import transactions of up to $25,000 without initial documentation for FE accounts. There are no limits on the number of such transactions made on each account or on the number of such accounts that an individual can hold. The law does not permit foreign exchange bureaus to make outward transfers. Local banks strictly follow “know your customer” rules. Ghana has no effective system to obtain data on an individual’s dealings with all the banks in Ghana.
Ghana has a cross-border currency reporting requirement. However, Ghanaian authorities have difficulty monitoring cross-border movement of currency.
The new AML bill calls for establishment of a Financial Intelligence Unit (FIU), overseen by the Minister of Finance. Ghana plans to fund the FIU through government grants and donations. The FIU will not investigate crime but will gather and analyze intelligence to help in identifying proceeds of unlawful activity and the perpetrators of the crimes. The FIU will have the authority to obtain information from other government regulatory authorities and from financial institutions. The GOG made no arrests, nor did it pursue any prosecutions related to money laundering or terrorist finance in 2007.
The Narcotic Drug Law of 1990 provides for the forfeiture of assets upon conviction of a drug trafficking offense. A February 2007 court order compelled authorities to release seized assets in a 1991 landmark narcotics trafficking case which resulted in a ten-year jail sentence of the convict, and return the assets to the owners. The ex-convict had appealed the seizure, arguing that the assets did not belong to him. The draft Proceeds of Crime Bill, pending since 2006, contains provisions dealing with pre-emptive measures, confiscation and pecuniary penalty orders, search and seizure, and restraining orders and realization of property. The draft Proceeds of Crime bill will merge with the existing Serious Fraud Office Law, 1993 (Act 466). The Serious Fraud Office, established by this law, investigates corruption and crimes that have the potential to cause economic loss to the state.
Ghana has not yet criminalized the financing of terrorism, as required by United Nations Security Council Resolution 1373. A draft Anti-Terrorism Bill, incorporating terrorist financing provisions, came before Parliament in 2005. The Bill is under examination by members of the Constitutional, Legal, and Parliamentary Affairs Committee and the Defense and Interior Committee. The draft bill addresses terrorist acts, support for terrorist offenses, specific entities associated with acts of terrorism, and search, seizure, and forfeiture of property relating to acts of terrorism. The Central Bank has circulated the list of individuals and entities on the UNSCR 1267 Sanctions Committee’s consolidated list to local banks, but no Ghanaian entities have identified assets belonging to any of the designees.
Although current Ghanaian law does not allow for the sharing of seized narcotics assets with other governments, the Narcotic Drug Law of 1990 includes provisions for the sharing of information, documents, and records with other governments. It also provides for extradition between Ghana and foreign countries for drug-related offenses. The United States has not requested financial investigative assistance from Ghanaian authorities.
Ghana is a member of the Inter-Governmental Action Group Against Money Laundering and Terrorist Financing in West Africa (GIABA), a regional body modeled after the Financial Action Task Force (FATF). Ghana has bilateral agreements for the exchange of money laundering-related information with the United Kingdom, Germany, Brazil, and Italy. Ghana is a party to the twelve UN conventions on terrorism, including the UN International Convention for the Suppression of the Financing of Terrorism. Ghana is a party to the 1988 UN Drug Convention, and the African Union Convention on Preventing and Combating Corruption. In June 2007, Ghana ratified the UN Convention against Corruption. Ghana has not signed the UN Convention against Transnational Organized Crime. Ghana has endorsed the Basel Committee’s “Core Principles for Effective Banking Supervision.”
Although the Government of Ghana (GOG) became a party to the UN International Convention for the Suppression of the Financing of Terrorism in 2002, it has not criminalized terrorist financing. It should do so. The GOG should move swiftly to implement the AML Bill, and should expand the list of predicate crimes to comply with international standards. The GOG should issue promulgating regulations, improve capacity among the agencies impacted, and establish its FIU. The GOG should make every effort to pass asset seizure and forfeiture legislation that comports with international standards as soon as possible. Once the laws are in place, Ghana should take the necessary steps to promote public awareness and understanding of financial crime, money laundering and financing of terrorist activities. The GOG should reconsider establishing the offshore center altogether. Ghana should immediately release regulations and guidance for its new offshore entities, and draft legislation to ensure that offshore entities are treated identically to the onshore sector under the AML Bill. Additionally, the GOG should require that the true names of all offshore entities are held in a registry, accessible to law enforcement. The GOG should increase cooperation and information sharing with other governments. Ghana should also become a party to the UN Convention against Transnational Organized Crime.
Gibraltar is an overseas territory of the United Kingdom. A November 2006 referendum resulted in constitutional reforms transferring powers exercised by the U.K. government to Gibraltar. Gibraltar is a significant international financial center with strong ties to London, the Channel Islands, Israel, Cyprus, and other financial centers. Located at the southern tip of Spain, near the north coast of Africa, Gibraltar is adjacent to known drug-trafficking and human smuggling routes. It is also a retail banking centre for northern European expatriates with property in southern Spain. All of these factors reportedly contribute to money laundering and terrorist financing vulnerabilities in Gibraltar.
Gibraltar was one of the first jurisdictions to introduce and implement money laundering legislation that covered all crimes. The Gibraltar Criminal Justice Ordinance to Combat Money Laundering, which related to all crimes, entered into effect in 1996. The Drug Offenses Ordinance (DOO) of 1995 and Criminal Justice Ordinance of 1995, amended in June 2007 as the Criminal Justice Act, criminalize money laundering related to all crimes. The laws mandate reporting of suspicious transactions by any obliged entity or individual therein. The DOO obliges banks, mutual savings companies, insurance companies, financial consultants, postal services, exchange bureaus, attorneys, accountants, financial regulatory agencies, unions, casinos, charities, lotteries, car dealerships, yacht brokers, company formation agents, dealers in gold bullion, and political parties.
Authorities issued comprehensive anti-money laundering (AML) Guidance Notes, which have the force of law, to clarify the obligations of Gibraltar’s financial service providers. Gibraltar issued its most recent Guidance Notes in December 2007 with amendments based on the Criminal Justice (Amendment) Act 2007 and Terrorist (Amendment) Act 2007. The 2007 Guidance Notes apply to banks and building societies, the Gibraltar Saving Bank, investment business and controlled activities, life insurance companies, currency exchangers/bureaux de change, and money transmission/remittance offices. In transposing the EU’s Third Money Laundering Directive to include nonfinancial sectors, Gibraltar extended the Criminal Justice Act.
Gibraltar established the Financial Services Commission (FSC), the unified regulatory and supervisory authority for financial services, under the FSC Ordinance (FSCO) 1989. Required by statute to match the supervisory standards of the United Kingdom, the FSC is the supervisory body for banks and building societies, investment businesses, insurance companies, and controlled activities, which include investment services, company management, professional trusteeship, insurance management and insurance intermediation. The main legal instruments governing the regulation and supervision of the financial system, in addition to the FSCO, are: the Banking Ordinance (1992) that provides powers to license and supervise banking and other deposit-taking business in Gibraltar; the Insurance Ordinance (1987) that provides powers to regulate and restrict the conduct of the business of insurance; and the Financial Services (Collective Investment Schemes) Ordinance that provide for the licensing and supervision of investment business.
Legislation requires that all businesses establish the beneficial owner of any companies or assets before undertaking a relationship or incorporating any company or asset. Onshore and offshore banks are subject to the same legal and supervisory requirements. Institutions must retain financial records for at least five years from the date of completion of the business. If the obligated institution has submitted a suspicious transaction report (STR) to the Gibraltar financial intelligence unit (FIU) or when it knows that a client or transaction is under investigation, it is required to maintain any relevant record even if the five year interval has expired. If a law enforcement agency investigating a money laundering case cannot link the funds passing through the financial system with the original criminal money, then the funds cannot be confiscated.
The Financial Services Commission Act 2007 (FSCA) became effective in May 2007. This act repeals and replaces the Financial Services Commission Act of 1989. With this legislation, the FSC modernized and restructured itself. One of the most significant changes arising from the FSCA is in respect to the appointment of members of the Commission, who will be selected by the minister with responsibility for financial services (presently the Chief Minister) from a short list of three suitable persons provided to him by existing members. The FSC has also received expanded statutory functions. The FSC now holds formal licensing, supervisory, and regulatory powers over all firms authorized under the Supervisory Acts. The FSC authority also ensures compliance with legislation, rules and guidance notes in general as well as those specific to combating financial crime. The FSC is now able to issue Rules and Guidance, which enables the FSC to draft practical guidance for compliance with legislative measures, and regulatory expectations to supplement legislative provisions. As a safeguard against inappropriate or overregulation, the rules and guidance undergo a public consultation process and are subject to final veto of the Minister.
The Government of Gibraltar (GOG) permits Internet gaming that is subject to a licensing regime. Gibraltar has guidelines for correspondent banking, politically exposed persons (PEPs), bearer securities, and “know your customer” (KYC) procedures. In 2006, Gibraltar underwent a mutual evaluation by the International Monetary Fund (IMF). The IMF rated Gibraltar “largely compliant” or “better” with 32 of the Financial Action Task Force’s (FATF’s) 40 Recommendations and nine Special Recommendations.
In 1996, Gibraltar established the Gibraltar Coordinating Center for Criminal Intelligence and Drugs (GCID) to receive, analyze, and disseminate financial information and disclosures filed by obliged institutions. The GCID serves as Gibraltar’s FIU (GFIU) and is a sub-unit of the Gibraltar Criminal Intelligence Department. The GCID consists mainly of police and customs officers but is independent of law enforcement. The GFIU has responded to over 40 international requests for information and has initiated ten requests to counterpart FIUs. The GFIU receives approximately 100 STRs per year.
Gibraltar’s 2001 Terrorism (United Nations Measures) (Overseas Territories) Order criminalizes the financing of terrorism. The Order requires banks to report any knowledge that a present, past or potential client or customer is a terrorist, or receives funds in relation to terrorism, or makes funds available for terrorism. Gibraltar also addresses terrorist financing through the Terrorism Ordinance (2005).
Application of the 1988 U.S.-UK Agreement Concerning the Investigation of Drug Trafficking Offenses and the Seizure and Forfeiture of Proceeds and Instrumentalities of Drug Trafficking was extended to Gibraltar in 1992. The DOO of 1995 provides for mutual legal assistance with foreign jurisdictions on matters related to narcotics trafficking and related proceeds. Gibraltar has passed legislation to update mutual legal assistance arrangements with its EU and Council of Europe partners. Gibraltar is a member of the Offshore Group of Banking Supervisors (OGBS) and the International Organization of Securities Commissions (IOSC). The GFIU is a member of the Egmont Group. The GOG has implemented the 1988 UN Drug Convention.
The Government of Gibraltar should continue its efforts to implement a comprehensive anti-money laundering and counter-terrorist financing (AML/CTF) regime. The criminal laws on money laundering should be consolidated, and powers presently available only in drug-related money laundering cases should be extended to money laundering cases involving the proceeds of other crimes. The GOG should introduce legislative provisions to its asset seizure and confiscation regime allowing authorities to confiscate assets, including cash, even without a link to the original criminal proceeds. Gibraltar needs to conduct risk assessment of those designated nonfinancial businesses and professions that are unsupervised and determine and extend the necessary authority to conduct AML/CTF compliance examinations of these entities.
Greece is becoming a regional financial center in the rapidly developing Balkans as well as a bridge between Europe and the Middle East Anecdotal evidence of illicit transactions suggests an increase in financial crimes in the past two years. Greek law enforcement proceedings indicate that Greece is vulnerable to narcotics trafficking, trafficking in persons and illegal immigration, prostitution, cigarette, and other forms of smuggling, large scale tax evasion, serious fraud or theft, and illicit gambling activities. The widespread use of cash facilitates a gray economy and tax evasion. Due to the gray economy, it is difficult to determine the amount of smuggled goods in the country. Crimes are often carried out by criminal organizations from Southeastern Europe and the Balkans.
U.S. law enforcement agencies believe that criminally derived proceeds are not typically laundered through the Greek banking system. Instead, they are most commonly invested in real estate, the lottery, and a growing stock market. U.S. law enforcement agencies also believe Greece’s geographic location has led to a moderate increase in cross-border movements of illicit currency and monetary instruments due to the increasing interconnection of financial services companies operating in Southeastern Europe and the Balkans. Reportedly, currency transactions involving international narcotics-trafficking proceeds do not appear to include significant amounts of U.S. currency.
The June 2007 Financial Action Task Force (FATF) mutual evaluation report (MER) of Greece found its legal requirements in place to combat money laundering and terrorist financing generally inadequate to meet the FATF standards. The report articulated concerns about the overall effectiveness of the AML/CTF system, including inadequate customer identification preventative systems, lack of adequate legal systems to prevent money laundering and terrorist financing, and a lack of adequate preventive measures and regulatory oversight. Of the FATF 40 Recommendations and Nine Special Recommendations on Terrorist Financing, Greece received 12 ratings of “largely compliant” or better and 13 ratings of “noncompliant.” Of the 5 core FATF recommendations (Recommendations 1, 5, 10, and 13, SR II and IV), Greece’s Anti-Money Laundering and Counter-Terrorist Financing (AML/CTF) regime was only deemed “partially compliant”.
The Government of Greece has criminalized money laundering through a series of laws that have expanded the list of predicate offenses for money laundering that now includes terrorist financing, trafficking in persons, electronic fraud, and stock market manipulation. However evidence indicates that the ML provisions have not been effectively implemented. The laws also empower supervisory authorities to block transactions when money laundering is suspected and authorizes the financial intelligence unit (FIU) director to temporarily freeze assets without a court order. With its Act 25779/2006, the Bank of Greece has applied the main provisions of the Third European Union (EU) Money Laundering Directive to all financial institutions. The Greek government anticipates it will take steps to formally transpose the Directive into national law in 2008.
The Bank of Greece (BOG), through its Banking Supervision Department and the Ministry of National Economy and Finance, through its Capital Market Commission, supervise and monitor credit and financial institutions. Both the BOG and the Hellenic Capital Markets Commission (HCMC) have extensive supervisory programs. Each entity has internal departments focused on AML/CTF staffed with auditors and examiners. Supervision includes the issuance of guidelines and circulars, and on-site audits with a component assessing compliance with AML legislation. The Central Bank conducts on-site examinations for banks located in Greece as well as of Greek banks located in the Balkans. The HCMC conducts on-site examinations on a routine basis for its supervised entities and off-cycle examinations of supervised entities when HCMC internal surveillance activities uncover possible noncompliance with regulations. In addition to their supervisory programs, both the BOG and HCMC conduct continuing education seminars for stakeholders inside and outside of the financial industry, to further heighten awareness of AML/CTF. While the BOG and HCMC have been granted sufficient powers and authorities to monitor financial institutions for AML/CTF requirements, according to the MER, these organizations may not be able to effectively carry out their supervisory functions due to a lack of resources.
Supervised institutions must send to their competent authority a description of the internal control and communications procedures they have implemented to prevent money laundering. In addition, banks must undergo internal audits. Bureaux de Change must send the BOG a monthly report on their daily purchases and sales of foreign currency. Infrequent audits of such companies also occur. However, there is reportedly weak implementation of regulatory requirements documenting the flow of large sums of cash through financial and other institutions.
Law 3148 incorporates EU directives regarding the operation of credit institutions and the operation and supervision of electronic transfers. Under this legislation, the BOG has direct scrutiny and control over transactions by credit institutions and entities involved in providing services for funds transfers. The BOG issues operating licenses after assessing the institutions, their management, and their capacity to ensure the transparency of transactions. The Ministry of Development, through its Directorate of Insurance Companies, supervises the insurance sector, but supervisory authority will soon shift to the Hellenic Private Insurance Supervisory Committee. The Directorate of Insurance Companies has not established a regulatory authority.
Under Decree 2181/93, banks in Greece must demand customer identification information when a customer opens an account or conducts transactions exceeding 15,000 euros (approximately U.S. $22,000). If there is suspicion of illegal activities, banks may take measures to gather more information on the identification of the person involved in the transaction, but, reportedly, do not normally do so. The BOG has taken steps to change this. Newly enacted legislation now requires banks to obtain specific documents from both natural and legal persons. Furthermore, credit institutions are now required to obtain identification documents in money changing transactions exceeding 500 euros (U.S. $735). The law requires that banks and financial institutions maintain adequate records and supporting documents for at least five years after ending a relationship with a customer, or, in the case of occasional transactions, for five years after the date of the transaction. According to the MER, customer due diligence (CDD) and other preventative measures lack both sufficient requirements on collecting beneficial ownership information and adequate measures relating to ongoing CDD requirements on existing clients and account holders.
Current AML laws do not adequately prevent anonymous accounts or accounts in fictitious names. Greek law does not prohibit financial institutions from engaging in business with foreign financial institutions that allow their accounts to be used by shell companies.
Both banks and nonbank financial institutions must report suspicious transactions, though in practice, the latter rarely do so. The law requires every financial institution to appoint a compliance officer to whom all other branches or other officers must report suspicious transactions. Reporting obligations also apply to government employees involved in auditing, including employees of the BOG, the Ministry of Economy and Finance, and the Capital Markets Commission. Those who report individuals must furnish all relevant information to the prosecuting authorities. In 2007, the FIU formalized the standard information required on the suspicious transaction reports (STRs), so that the information provided on the form is consistent. Safe harbor provisions in Greek law protect individuals reporting violations of AML laws and statutes.
Greece has adopted banker negligence laws under which individual bankers face liability if their institutions launder money. Authorities levy “fines” on banks and credit institutions if they breach their obligations to report instances of money laundering, and bank officers can receive fines and a prison term of up to two years. In 2007, the BOG “fined” approximately 14 institutions for failure to supervise general compliance regulations. The fines totaled approximately 20 million euros (approximately U.S. $30 million). The credit institution deposits the “fines” with the Central Bank in a separate, interest free account. After a designated period of time, the Central Bank returns the money to the credit institution. In 2007, the HCMC “fined” two supervised entities for failure to supervise in relation to AML/CTF regulations. The “fines” ranged from 5,000 to 10,000 euros (U.S. $7,350-$14,700). Some believe this sanction is not sufficiently prohibitive.
Law 2331/1995 established the Competent Committee (CC), which functions as Greece’s FIU. Law 3424 makes the CC a statutorily independent authority with access to public and private files and removes tax confidentiality restrictions. The law also broadens the CC’s authority with respect to evaluating information it receives from various organizations. The CC has, on paper, broad authority; however the FATF MER raised concerns about the CC, including its current structure, insufficient staff and technical resources to properly perform its tasks and functions and inadequate security measures to effectively protect information. A senior retired judge chairs the CC, which includes eleven senior representatives from the BOG, various government ministries and law enforcement agencies, the Hellenic Bankers Association, and the securities commission. The CC employs few or no financial analysts or experienced specialized AML/CTF personnel, and is significantly understaffed.
The CC has responsibility for receiving and processing all STRs, of which it receives approximately 1,000 per year. Although the CC recently established a database to track STR submissions, it still lacks other elements of a technology-savvy modern organization. STRs are hand delivered to the CC, where, upon receipt, the committee (comprised of only senior officials) reviews the STRs to determine whether further investigation is necessary. If the committee seeks more information from the reporting institution, the CC mails its questions to the institution. When it receives the reply, the committee reviews the file again to determine whether the report warrants further investigation. When the CC considers an STR to warrant further investigation, it forwards the case to the Special Control Service (YPEE), which functions as the CC’s investigative arm.
The YPEE is under the direct supervision of the Ministry of Economy and Finance and has formal investigative authority over cases that, broadly defined, involve smuggling and high-worth tax evasion. The CC is responsible for preparing money laundering cases on behalf of the Public Prosecutor’s Office and the YPEE has its own in-house prosecutor to facilitate confidentiality and speed of action. The director of the FIU can temporarily freeze funds.
Although the CC has the authority to impose heavy penalties on those who fail to report suspicious transactions, it has not done so. Reportedly, staff limitations have hampered effective communication with Greece’s broader financial community, as well as with its international counterparts. The lack of adequate personal and fiscal resources and political support for its mission limits its effectiveness.
Authorities do not frequently prosecute money laundering cases independent of a predicate crime, and according to the MER, limited data indicates a low rate of convictions on ML prosecutions. There are no prosecutors specifically assigned to prosecute financial crimes and all prosecutors carry a very large caseload. Furthermore, the Greek judicial system has only one court handling all judicial activity related to money laundering and terrorist financing. Greek authorities do not have an effective information technology (IT) system in place to track money laundering prosecution statistics. Despite requests by the CC and Greek Bar Association to do so, the Ministry of Justice has yet to compile statistics related to arrests or prosecutions for money laundering or terrorist financing offenses.
The Government of Greece does not provide guidance to institutions on freezing assets without delay and does not monitor compliance with requests. Furthermore, there are no sanctions for failure to follow freezing requests. The current process for notifying ministries and the financial sector to freeze or confiscate funds is lengthy. Therefore, these entities are unable to comply with requests to freeze assets without delay. Greek law allows for the seizure of assets upon conviction for a money laundering offense with a jail term of three years or greater. The director of the CC can temporarily freeze assets, but must prepare a report and forward it to an investigating magistrate and prosecutor, who conduct further investigation and who, upon conclusion of the investigation, can issue a freezing order, pending the outcome of the criminal case. The YPEE has established a mechanism for identifying, tracing, freezing, seizing, and forfeiting assets of narcotics-related and other serious crimes, the proceeds of which are turned over to the government. YPEE investigators have authorization to immediately seize property pending court review and seize property purchased with proceeds of narcotics trafficking or used to facilitate narcotics trafficking. However, official forfeiture requires a court order. If the basis for the forfeiture is facilitation proceeds, the Government of Greece need not prove that the property was purchased with narcotics-related proceeds. It must only demonstrate that it was used in furtherance of narcotics trafficking. Even legitimate businesses can be seized if they have laundered narcotics money.
Greek authorities maintain that Greece is not an offshore financial center. However, Greek law 89/1967 provides for the establishment of offshore entities of any legal form which may be registered in Greece but engage exclusively in commercial activities outside of Greece—a typical identifying restriction of offshore centers. “Law 89” companies reportedly operate in the shipping industry and are known for their complex corporate and ownership structures which are frequently designed to hide the the identity of the true beneficial owners of the companies.
Offshore entities must provide a bank letter of guarantee for U.S. $50,000 to the Ministry of Economy and Finance. If it is a shipping company, it must cover its annual operating expenses in Greece. It must keep a receipts and expenses book, though it has no obligation to publish any financial statements. These firms fall under the authority of nonGreek jurisdictions and often operate through a large number of intermediaries. As such, these entities can serve as a catalyst for money laundering. Although Greek law allows banking authorities to check these companies’ transactions, other Greek jurisdictions must work with the banking authorities for audits to be effective. There is no separate regulatory authority for the offshore sector and there is no longer a tax exemption for offshore companies.
Greek law does not provide for nominee directors or trustees in Greek companies. Although the government has abolished bearer shares for banks and a limited number of other companies, most companies may still issue bearer shares. The information available in the Companies Registries maintained by several authorities relates solely to the Board of Directors at the time of the incorporation of the company and does not log changes of directors, or the true beneficial owners of the company. Rather, regional registries keep this information in a paper format.
Authorities have recently targeted the gaming industry to restrain money launderers from using Greece’s nine casinos to launder illicit funds, however there is little regulatory oversight of the gaming industry. Greece has three free trade zones, located at the ports of Piraeus, Thessalonica, and Heraklion, where foreign goods may be brought in without payment of customs duties or other taxes if they are subsequently transshipped or re-exported. There is no specific information regarding whether these zones are being used in trade-based money laundering (TBML) or in the financing of terrorism
The BOG maintains that alternative remittance systems do not exist in Greece and has no plans to introduce initiatives for their regulation. Foundations in Greece are self-governing, nonmembership organizations with an endowment that serves public or private purposes and which receive legal capacity by state approval. Types of foundations include private law foundations, public benefit foundations, public foundations, and nonautonomous foundations. Nonprofit organizations fall within the purview of YPEE. The Greek government does not view charitable organizations as vulnerable to terrorist financing or money laundering and does not actively monitor such entities for these crimes.
Laws criminalizing terrorism, organized crime, money laundering and corruption have been in effect since July 2002. In 2004, Law 3251 was enacted criminalizing the financing of, the joining, or the forming of a terrorist group with a penalty of up to ten years imprisonment. If a private legal entity is implicated in terrorist financing, it faces fines of between 20,000 and 3 million euros (approximately U.S. $44,000 and U.S. $4.5 million), closure for a period of two months to two years, and ineligibility for state subsidies. However, some have described the law as poorly drafted. The law is not comprehensive as it is not illegal in Greece to fund an already established terrorist group and it is only considered a terrorist financing crime if a person funds a specific attack executed by three or more people. As a consequence, the financing of an individual terrorist act conducted by an individual terrorist or the financing of an individual terrorist is not an offense.
The BOG has circulated to all financial institutions under its supervisory jurisdiction the list of individuals and entities on the United Nations Security Council Resolution (UNSCR) 1267 Sanctions Committee’s consolidated list as being linked to Usama Bin Laden, the Al-Qaida organization, or the Taliban, as well as the EU’s list of designees. The BOG now includes Office of Foreign Asset Control lists for circulation to its supervised entities. The Greek government does not routinely circulate lists disseminated by the U.S. government, but it does circulate EU lists. In most instances, there must be an active investigation by Greek authorities before the Government of Greece can seize assets, thus hindering its ability to freeze assets without delay. The government has not found any accounts belonging to anyone on the circulated lists.
Greece is a member of the FATF. Its FIU is a member of the Egmont Group. The government is a party to the 1988 UN Drug Convention and the UN International Convention for the Suppression of the Financing of Terrorism. Greece is a signatory to the UN Convention against Transnational Organized Crime and to the UN Convention against Corruption, but has not yet ratified them. Greece exchanges information on money laundering through its mutual legal assistance treaty (MLAT) with the United States, which entered into force November 20, 2001. The Bilateral Police Cooperation Protocol provides a mechanism for exchanging records with U.S. authorities in connection with investigations and proceedings related to narcotics trafficking, terrorism, and terrorist financing. Cooperation between the U.S. Drug Enforcement Administration and YPEE has been extensive. Greece has signed bilateral police cooperation agreements with twenty countries, including the United States. It also has a trilateral police cooperation agreement with Bulgaria and Romania, and a bilateral agreement with Ukraine to combat terrorism, drug trafficking, organized crime, and other criminal activities. Despite the existing mechanisms for information exchange, the FATF report highlighted a lack of cooperation between Greek national and international authorities.
To meet its stated goal of effectively addressing money laundering, the Greek government should implement all recommendations of the June 2007 FATF mutual evaluation report on Greece. Greece should accelerate its efforts to realize new laws and regulations aimed at upgrading its FIU. This includes fully staffing with experienced analysts and improving its IT standards and capabilities so that analysts can effectively use its database. These IT upgrades should allow Greek authorities to implement a system to track statistics on money laundering prosecutions and convictions, as well as asset freezes and forfeitures. The Greek government should improve its asset freezing capabilities and develop a clear and effective system for identifying and freezing terrorist assets within its jurisdiction. The government should also publicize its system for appealing assets frozen in accordance with its UN obligations.
Greece should ensure uniform enforcement of its cross-border currency reporting requirements and take steps to deter the smuggling of currency across its borders. The government should abolish company-issued bearer shares, so that all bearer shares are legally prohibited. It should also ensure that its “Law 89” offshore companies and companies operating within its free trade zones are subject to the same AML requirements and gatekeeper and due diligence provisions, including know your customer rules and the identification of the beneficial owner, as in other sectors. The GOG should dedicate additional resources to the investigation and prosecution of ML cases, as well as increase specialization and training on AML/CTF for law enforcement and judicial authorities. The GOG should also amend the existing legislative and regulatory framework to ensure that appropriate CDD requirements are implemented. Finally, it should ratify the UN Convention against Transnational Organized Crime and the UN Convention against Corruption.
Grenada is not a regional financial center. As a transit location, money laundering in Grenada is primarily related to smuggling and drug trafficking. Illicit proceeds are typically laundered through a wide variety of businesses, as well as through the purchase of real estate, boats, jewelry, and cars.
As of December 2007, Grenada’s domestic financial sector is comprised of six commercial banks, 26 registered domestic insurance companies, two credit unions, and five money remitters. Grenada has one trust company and 1,580 international business companies (IBCs), a significant, if unexplained, decrease from the reported 6,000 IBCs in 2006. There are no casinos or Internet gaming sites operating in Grenada. There are no free trade zones in Grenada, although the Government of Grenada (GOG) has indicated that it may create one in the future. The GOG has repealed its economic citizenship legislation.
Bearer shares are not permitted for offshore banks. Registered agents are required by law to verify the identity of the beneficial owners of all shares. In addition, the International Companies Act requires registered agents to maintain records of the names and addresses of directors and beneficial owners of all shares. There is an U.S. $11,500 penalty and possible revocation of the registered agent’s license for failure to maintain records. Grenada has not enacted laws preventing disclosure of client and ownership information by domestic and offshore services companies to bank supervisors and law enforcement authorities.
The Grenada Authority for the Regulation of Financial Institutions (GARFIN) became operational in early 2007. The GARFIN was created to consolidate supervision of all nonbank financial institutions, and effectively replace the Grenada International Financial Services Authority (GIFSA). Institutions supervised by GARFIN include insurance companies, credit unions, offshore financial services, the building and loan society, money service businesses, and other such services. The Eastern Caribbean Central Bank (ECCB) retains supervision responsibility for Grenada’s commercial banks.
The Money Laundering Prevention Act (MLPA), enacted in 1999, and the Proceeds of Crime Act (POCA) No. 3 of 2003 criminalize money laundering in Grenada. Under the MLPA, the laundering of the proceeds of narcotics trafficking and all serious crimes is an offense. Under the POCA, the predicate offenses for money laundering extend to all criminal conduct, which includes illicit drug trafficking, trafficking of firearms, kidnapping, extortion, corruption, terrorism and its financing, and fraud. According to the POCA, a conviction on a predicate offense is not required to prove that certain goods are the proceeds of crime, and subsequently convict a person for laundering those proceeds. The POCA establishes a penalty three to ten years in prison and fines of $18,500 or more. This legislation applies to banks and nonbank financial institutions, as well as the offshore sector.
Established under the MLPA, the Supervisory Authority supervises the compliance of banks and nonbank financial institutions (including money remitters, stock exchange, insurance, casinos, precious gem dealers, real estate, lawyers, notaries, and accountants) with money laundering and terrorist financing laws and regulations. These institutions are required to know, record, and report the identity of customers engaging in significant transactions. This applies to large currency transactions over the threshold of $3,700. Records must be maintained for seven years. In addition, a reporting entity must monitor all complex, unusual or large business transactions, or unusual patterns of transactions, whether completed or not. Once a transaction is determined to be suspicious or potentially indicative of money laundering, the reporting entity must forward a suspicious transaction report (STR) to the Supervisory Authority within 14 days. Reporting individuals are protected by law with respect to their cooperation with law enforcement entities.
The Supervisory Authority issued its Anti-Money Laundering Guidelines in 2001. The guidelines direct financial institutions to maintain records, train staff, identify suspicious transactions, and designate reporting officers. The guidelines also provide examples to help institutions recognize and report suspicious transactions. The Supervisory Authority is authorized to conduct anti-money laundering inspections and investigations. The Supervisory Authority can also conduct investigations and inquiries on behalf of foreign counterparts and provide corresponding information. Financial institutions may be fined for not granting access to Supervisory Authority personnel.
In June 2001, the GOG established a police-style financial intelligence unit (FIU). The FIU is charged with receiving and analyzing suspicious transaction reports (STRs) from the Supervisory Authority, and with investigating alleged money laundering offenses. The FIU has access to the records and databases of all government entities and financial institutions and is empowered to request any documents it considers necessary to its investigations. From January to November 2007, the FIU received 25 STRs and investigations commenced for all STRs received. The FIU has the authority to exchange information with its foreign counterparts without a memorandum of understanding (MOU).
Two foreign nationals were arrested by GOG authorities for money laundering in October 2007. These individuals came to Grenada with a large number of fraudulent credit cards and over a short period of time, withdrew in excess of $40,000 from automatic teller machines (ATMs) from several local banks. Half of the amount stolen was sent out to a number of different destinations via a legitimate money remittance company, which agreed to freeze the transaction. Local authorities are working with the company to repatriate those funds. The two perpetrators were arrested and charged with money laundering and fraud by false pretense. The case is currently ongoing.
The FIU and the Director of Public Prosecution’s Office are responsible for tracing, seizing and freezing assets. Under current law, all assets can be seized, including legitimate businesses if they are used in the commission of a crime. The banking community cooperates with law enforcement efforts to trace funds and seize or freeze bank accounts. The time period for restraint of property is determined by the High Court. Presently, only criminal forfeiture is allowed by law. Proceeds from asset seizures and forfeitures can either be placed in the consolidated fund or the confiscated asset fund, which is supervised by the Supervisory Authority or the Cabinet for use in the development of law enforcement. The approximate dollar amount seized in the past year was U.S. $62,000, with approximately U.S. $22,000 forfeited. The Civil Forfeiture Bill, Cash Forfeiture Act, and Confiscation of the Proceeds of Crime Bill were introduced in 2006 and remain under discussion.
Grenada is not engaged in bilateral or multilateral negotiations with other governments to enhance asset tracing, freezing, and seizure. However, the GOG works actively with other governments to ensure tracing, freezing, and seizures take place, if and when necessary, regardless of the status of existing agreements.
The GOG regulates the cross-border movement of currency. However, there is no threshold requirement for currency reporting. Law enforcement and Customs officers have the powers to seize and detain cash that is imported or exported from Grenada. Cash seizure reports are shared between government agencies, particularly between Customs and the FIU.
The GOG criminalized terrorist financing through the Terrorism Act No. 5 2003. Grenada has the authority to identify, freeze, seize, and/or forfeit terrorist finance-related assets under the POCA and the Terrorism Act. The GOG circulates to the appropriate institutions the lists of individuals and entities that have been included on the UN 1267 Sanctions Committee’s consolidated list. There has been no known identified evidence of terrorist financing in Grenada. It is suspected that alternative remittance systems are used in Grenada, though none have been positively identified.
In 2003, the GOG passed the Exchange of Information Act No. 2, which strengthens Grenada’s ability to share information with foreign regulators. Grenada has a Mutual Legal Assistance Treaty (MLAT), Tax Information Exchange Agreement (TIEA) and an Extradition Treaty with the United States. The GOG cooperates fully with MLAT requests and responds rapidly to U.S. Government requests for information involving money laundering cases.
Grenada is a member of the Caribbean Financial Action Task Force (CFATF), and is expected to undergo a mutual evaluation in 2008. The GOG is also a member of the OAS Inter-American Drug Abuse Control Commission (OAS/CICAD) Experts Group to Control Money Laundering. Grenada’s FIU is a member of the Egmont Group. Grenada is a party to the 1988 UN Drug Convention, the UN International Convention for the Suppression of the Financing of Terrorism, the UN Convention against Transnational Organized Crime, and the Inter-American Convention against Terrorism. The GOG has not yet signed the UN Convention against Corruption.
Although the Government of Grenada has strengthened the regulation and oversight of its financial sector, it must remain alert to potential abuses and must steadfastly implement the laws and regulations it has adopted. The GOG should also move forward in adopting civil forfeiture legislation, and establish mechanisms to identify and regulate alternative remittance systems. Law enforcement and customs authorities should initiate money laundering investigations based on regional smuggling. Grenada should also become a party to the UN Convention against Corruption.
Guatemala is a major transit country for illegal narcotics from Colombia and precursor chemicals from Europe. Those factors, combined with historically weak law enforcement and judicial regimes, corruption, and increasing organized crime activity, contribute to a favorable climate for significant money laundering in Guatemala. According to law enforcement agencies, narcotics trafficking and corruption are the primary sources of money laundered in Guatemala; however, the laundering of proceeds from other illicit activities, such as human trafficking, contraband, kidnapping, tax evasion, and vehicle theft, is substantial. Officials of the Government of Guatemala (GOG) believe that the sources of the criminal proceeds laundered in Guatemala are derived from both domestic sources (primarily corruption cases) and foreign criminal activities. GOG officials also believe that cash couriers, offshore accounts, and wire transfers are used to launder funds, which are subsequently invested in real estate, capital goods, large commercial projects, and shell companies, or are otherwise transferred through the financial system.
Guatemala is not considered a regional financial center, but it is an offshore center. Exchange controls have been lifted and dollar accounts are common, but some larger banks conduct significant business through their offshore subsidiaries. The Guatemalan financial services industry is comprised of 22 commercial banks; ten offshore banks, all of which are affiliated, as required by law, with a domestic financial group (including affiliated credit card, insurance, finance, commercial banking, leasing, and related companies); two licensed money exchangers; 27 money remitters, including wire remitters and remittance-targeting courier services; 17 insurance companies; 17 financial societies; 15 bonded warehouses; 325 savings and loan cooperatives; eight credit card issuers; nine leasing entities; 11 financial guarantors; and one check-clearing entity run by the Central Bank. There are also hundreds of unlicensed money exchangers that exist informally.
The Superintendence of Banks (SIB), which is directed by the Monetary Board, has oversight and inspection authority over the Central Bank (Bank of Guatemala), as well as over banks, credit institutions, financial enterprises, securities entities, insurance companies, currency exchange houses and other institutions as may be designated by the Bank of Guatemala Act. Guatemala’s relatively small free trade zones target regional maquila (assembly line industry) and logistic center operations, and are not considered by GOG officials to be a major money laundering concern, although some proceeds from tax-related contraband may be laundered through them.
The offshore financial sector initially offered a way to circumvent currency controls and other costly financial regulations. However, financial sector liberalization has largely removed incentives for legitimate businesses to conduct offshore operations. All offshore institutions are subject to the same requirements as onshore institutions and are regulated by the Superintendence of Banks. In June 2002, Guatemala enacted the Banks and Financial Groups Law (No. 19-2002), which places offshore banks under the oversight of the SIB. The law requires offshore banks to be authorized by the Monetary Board and to maintain an affiliation with a domestic institution. It also prohibits an offshore bank that is authorized in Guatemala from doing business in another jurisdiction; however, banks authorized by other jurisdictions may do business in Guatemala under certain limited conditions.
To authorize an offshore bank, the financial group to which it belongs must first be authorized, under a 2003 resolution of the Monetary Board. By law, no offshore financial services businesses, other than banks, are allowed. In 2004, the SIB and Guatemala’s financial intelligence unit (FIU), the Intendencia de Verificación Especial (IVE), concluded a process of reviewing and licensing all offshore entities, a process which resulted in the closure of two operations. No offshore trusts have been authorized. Offshore casinos and Internet gaming sites are not regulated.
There is continuing concern over the volume of money passing informally through Guatemala. Much of the more than U.S. $4.1 billion in 2007 remittance flows passed through informal channels, although sector reforms led to an increased use of banks and other formal means of transmission. Terrorist finance legislation enacted in August 2005 requires remitters to maintain name and address information on senders (principally U. S. based) on transfers equal to or over an amount to be determined by implementing regulations. Increasing financial sector competition should continue to expand services and bring more people into the formal banking sector, isolating those who abuse informal channels.
Decree 67-2001, or the “Law Against Money and Asset Laundering,” criminalizes money laundering in Guatemala. This law specifies that individuals convicted of money or asset laundering are subject to a noncommutable prison term ranging from six to 20 years, and fines equal to the value of the assets, instruments or products resulting from the crime. Convicted foreigners are deported from Guatemala. Conspiracy and attempt to commit money laundering are also penalized. The law applies to money laundering from any crime and does not require a minimum threshold to be invoked. It also holds institutions and individuals responsible for failure to prevent money laundering or allowing money laundering to occur, regardless of personal culpability. Bank and financial institution directors or other employees can lose their banking licenses and face criminal charges if they are found guilty of failure to prevent money laundering. This law also applies to the offshore entities that operate in Guatemala but are registered under the laws of another jurisdiction.
Decree 67-2001 also obligates individuals to declare the cross-border movement of currency in excess of approximately U.S. $10,000 at the port of entry. The declaration forms are provided and collected by the tax authority at land borders, airports, and ports. The tax authority sends a copy of the sworn declaration to IVE for its database. The IVE can share this information with other countries under the terms and conditions specified by mutual agreement. In addition, the Law Against the Financing of Terrorism penalizes the omission of declaration with a sentence from one to three years in prison. At Guatemala City’s international airport, a special unit was formed in 2003 to enforce the use of customs declarations upon entry to and exit from Guatemala. Money seized at the airports—approximately U.S. $1.8 million in 2007—suggests that proceeds from illicit activity are regularly hand-carried over Guatemalan borders. However, apart from a cursory check of a self-reporting customs form, there is little monitoring of compliance at the airport. Compliance is not regularly monitored at land borders.
In addition to the requirements of Decree 67-2001, the Guatemalan Monetary Board’s Resolution JM-191, which approves the “Regulation to Prevent and Detect the Laundering of Assets” (RPDLA), establishes anti-money laundering requirements for financial institutions. The RPDLA required all financial institutions under the oversight and inspection of the SIB to establish anti-money laundering measures, and introduced requirements for transaction reporting and record keeping. The Guatemalan financial sector has largely complied with these requirements and has a generally cooperative relationship with the SIB.
Financial institutions are prohibited from maintaining anonymous accounts or accounts that appear under fictitious or inexact names. Nonbank financial institutions, however, may issue bearer shares, and there is limited banking secrecy. However, Guatemalan law prohibits banking secrecy or privacy laws from being used to prevent the disclosure of financial information to bank supervisors and law enforcement authorities. Financial institutions are required to keep a registry of their customers as well as some types of transactions, such as the opening of new accounts or the leasing of safety deposit boxes. Financial institutions must also keep records of the execution of cash transactions exceeding $10,000 or more per day, and report these transactions to the IVE. Under Decree 67-2001, financial institutions must maintain records of these registries and transactions for five years. Financial institutions are also mandated by law to report all suspicious transactions to the IVE. The law also exonerates financial institutions and their employees of any criminal, civil or administrative penalty for their cooperation with law enforcement and supervisory authorities with regards to the information they provide.
Decree 67-2001 established the IVE within the Superintendence of Banks to supervise financial institutions and ensure their compliance with the law. The IVE began operations in 2002 and in 2007 had a staff of 32. The IVE has the authority to obtain all information related to financial, commercial, or business transactions that may be connected to money laundering. The IVE conducts inspections of financial institution management, compliance officers, anti-money laundering training programs, “know-your-client” policies, and auditing programs. From January 2001 to December 2007, the IVE imposed over U.S. $115,000 in administrative penalties for institutional failure to comply with anti-money laundering regulations.
Since its inception, the IVE has received approximately 2,302 suspicious transaction reports (STRs) from the 400 obligated entities in Guatemala. All STRs are received electronically, and the IVE has developed a system of prioritizing them for analysis. After determining that an STR is highly suspicious, the IVE gathers further information from public records and databases, other covered entities and foreign FIUs, and assembles a case. Once the IVE has determined a case warrants further investigation, the case must receive the approval of the SIB before being sent to the Anti-Money or Other Assets Laundering Unit (AML Unit) within the Public Ministry. Under current regulations, the IVE cannot directly share the information it provides to the AML Unit with any other special prosecutors (principally the anticorruption or counternarcotics units) in the Public Ministry. The IVE also assists the Public Ministry by providing information upon request for other cases the prosecutors are investigating.
The AML Unit is in charge of directing the investigation and prosecution of money laundering cases. This unit has a staff of 14 officials, and an investigative support group of 16 law enforcement officers and investigators. Both the prosecutors and investigators receive yearly ad hoc training in various investigative and legal issues. In 2006, Guatemala created a money laundering task force. The money laundering task force is a joint unit comprised of individuals from the Guatemalan Tax Authority (SAT), the IVE, Public Ministry, Prosecutor’s Office, Government Ministry, National Police and Drug Police. Together they work on investigating financial crimes, building evidence and bringing the cases to prosecution. In late 2007, the task force was working on four major money laundering investigations and a number of smaller money laundering and drug-related cases. Under the Anti-Organized Crime Law of 2006, the use of undercover operations, controlled deliveries, and wire taps is permitted to investigate many forms of organized crime activity, including money laundering crimes.
Twenty-seven cases have been referred by the IVE to the AML Unit. In several cases, assets have been frozen. Sixteen money laundering prosecutions have been concluded, fifteen of which resulted in convictions. The Public Ministry’s AML Unit had initiated 63 cases as of January 2007, five of which have been transferred to other offices (such as the anticorruption unit) for investigation and prosecution, due to the nature of the particular crime. The seizures were made possible by information supplied by cooperating financial institutions.
Current law permits the seizure of any assets linked to money laundering. The IVE, the National Civil Police, and the Public Ministry have the authority to trace assets; the Public Ministry can seize assets temporarily in urgent circumstances, and the Courts of Justice have the authority to permanently seize assets. In 2003, the Guatemalan Congress approved reforms to allow seized money to be shared among several GOG agencies, including police and the IVE. Nevertheless, the Constitutional Court ruled that forfeited currency remains under the jurisdiction of the Supreme Court of Justice. The Anti-Organized Crime Law provides the possibility for a summary procedure to forfeit the seized assets and allows both civil and criminal forfeiture.
The courts do not allow seized currency to be used by enforcement agencies while cases remain open. For money laundering and narcotics cases, any seized money is deposited in a bank safe and all material evidence is sent to the warehouse of the Public Ministry. There is no central tracking system for seized assets, and it is currently impossible for the GOG to provide an accurate listing of the seized assets in custody. In 2006, Guatemalan authorities seized approximately U.S. $222,000 in bulk currency. No statistics are currently on the amount of assets seized in 2007. The lack of access to the resources of seized assets outside of the judiciary has made sustaining seizure levels difficult for the resource-strapped enforcement agencies.
In June 2005, the Guatemalan Congress passed legislation criminalizing terrorist financing, the Law Against the Financing of Terrorism. Implementing regulations were enacted by the Monetary Board in December 2005. The counter-terrorist financing legislation also clarifies the legality of freezing assets in the absence of a conviction where the assets were destined to support terrorists or terrorist acts. The legislation brings Guatemala into compliance with the FATF Special Recommendations on terrorist financing and the United Nations Security Council Resolution 1373.The GOG has cooperated fully with U.S. efforts to track terrorist financing funds.
Guatemala is a party to the UN Drug Convention, the UN International Convention for the Suppression of the Financing of Terrorism, the UN Convention against Transnational Organized Crime, and the UN Convention against Corruption. Guatemala is also a party to the Inter-American Convention against Terrorism and the Central American Convention for the Prevention of Money Laundering and Related Crimes. The GOG is a member of the OAS Inter-American Drug Abuse Control Commission (OAS/CICAD) Experts Group to Control Money Laundering and the Caribbean Financial Action Task Force (CFATF). In 2003, the IVE became a member of the Egmont Group. The IVE has signed a number of Memoranda of Understanding regarding the exchange of information on money laundering issues, seventeen of which also include the exchange of information regarding the financing of terrorism.
Corruption and organized crime remain endemic in Guatemala and are the biggest long-term challenges to the rule of law in Guatemala. The Government of Guatemala has made efforts to comply with international standards and improve its anti-money laundering and counter-terrorist financing regime; however, Guatemala should eliminate the use of bearer shares as well as identify and regulate offshore financial services and gaming establishments. The GOG should also continue efforts to improve enforcement of existing regulations and implement needed reforms. Cooperation between the IVE and the Public Ministry has improved in recent years, and several investigations have led to prosecutions. However, Guatemala should increase its capacity to successfully investigate and prosecute money laundering cases. Additionally, the GOG should identify or create a centralized agency to manage and dispose of seized and forfeited assets, create an assets forfeiture fund which would distribute forfeited assets to law enforcement agencies to assist in the fight against money laundering, terrorist financing, and other financial crime.
The Bailiwick of Guernsey (the Bailiwick) encompasses a number of the Channel Islands (Guernsey, Alderney, Sark, and Herm). A Crown Dependency of the United Kingdom, it relies on the United Kingdom for its defense and international relations. However, the Bailiwick is not part of the UK. Alderney and Sark have their own separate parliaments and civil law systems. Guernsey’s parliament legislates in matters of criminal justice for all of the islands in the Bailiwick. Guernsey is a sophisticated financial center and, as such, it continues to be vulnerable to money laundering at the layering and integration stages.
The approximately 18,800 companies registered in the Bailiwick do not fall within the standard definition of an international business company (IBC). Guernsey and Alderney incorporate companies, but Sark, which has no company legislation, does not. Companies in Guernsey must disclose beneficial ownership to the Guernsey Financial Services Commission (FSC) before legal formation or acquisition.
Guernsey has 47 banks, all of which have offices, records, and a substantial presence in the Bailiwick. The banks are licensed to conduct business with residents and nonresidents alike. There are 632 international insurance companies and 851 collective investment funds. There are also 18 bureaux de change, ten of which are part of a licensed bank. Bureaux de change and other money service providers must register their information with the FSC.
Guernsey has a comprehensive legal framework to counter money laundering and the financing of terrorism. Guernsey had further honed its anti-money laundering and counter-terrorist financing (AML/CTF) legislation with the Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007. The legislation criminalizes money laundering for all crimes except drug trafficking, which the Drug Trafficking (Bailiwick of Guernsey) Law, 2000, as amended, covers in identical terms. The Disclosure (Bailiwick of Guernsey) Law 2007 makes failure to disclose the knowledge or suspicion of money laundering a criminal offense. The duty to disclose suspicious activity extends to all businesses, not only financial services businesses. The original 1999 money laundering law creates a system of suspicious transaction reporting (including suspicion of tax evasion) to Guernsey’s financial intelligence unit (FIU), the Financial Intelligence Service (FIS). In 2007, the FSC issued companion guidance entitled “Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing” which replaced the Guidance Notes on the Prevention of Money Laundering and Countering the Financing of Terrorism.
Guernsey’s legal framework contains additional legislative provisions aimed at assisting in the detection of money laundering and terrorist financing. These include search and seizure powers, customer information orders and account monitoring orders. The Transfer of Funds (Guernsey) Ordinance 2007 requires any parties that offer funds transfer services to provide verified identification information for any person transferring funds electronically.
Guernsey authorities have approved further measures to strengthen the existing AML/CTF regime that should be in force by the middle of 2008. These include a comprehensive civil forfeiture law, new regulations for certain entities involved in high value transactions, and legislation governing charities and other nonprofit organizations.
Guernsey enacted the Prevention of Corruption (Bailiwick of Guernsey) Law of 2003 and the Regulation of Fiduciaries, Administration Businesses, and Company Directors, etc. (Bailiwick of Guernsey) Law of 2000 (“the Fiduciary Law”) to license, regulate and supervise company and trust service providers. Pursuant to Section 35 of the Fiduciary Law, the FSC must license all fiduciaries, corporate service providers and persons acting as company directors on behalf of any business. The FSC creates Codes of Practice for corporate service providers, trust service providers and company directors. To receive licenses, these agencies must follow strict standards, including client identification and “know your customer” (KYC) requirements. These entities are subject to regular inspection, and an entity’s failure to comply could result in prosecution and revocation of its license. The Bailiwick is fully compliant with the Offshore Group of Banking Supervisors (OGBS) Statement of Best Practice for Company and Trust Service Providers.
The FSC regulates the Bailiwick’s financial banks, insurance companies, mutual funds and other collective investment schemes, investment firms, fiduciaries, company administrators and company directors. The Bailiwick does not permit bank accounts to be opened unless there has been a KYC inquiry and the customer provides verification details. Regulations contain penalties to be applied when financial services businesses do not follow their obligations. Upon a company’s application for incorporation, the FSC evaluates the request. The Royal Court maintains the registry of incorporated companies. The Court will not permit incorporation unless the FSC and the Attorney General or Solicitor General have given approval. The Commission conducts regular on-site inspections and analyzes the accounts of all regulated institutions.
On July 1, 2005, the European Union Savings Tax Directive (ESD) came into force. The ESD is an agreement between the Member States of the European Union (EU) to automatically exchange information with other Member States about EU tax resident individuals who earn income in one EU Member State but reside in another. Although not part of the EU, the three UK Crown Dependencies (Guernsey, Jersey, and the Isle of Man), have voluntarily agreed to apply the same measures to those in the ESD and have elected to implement the withholding tax option (also known as the “retention tax option”) within the Crown Dependencies.
Under the retention tax option, each financial services provider will automatically deduct tax from interest and other savings income paid to EU resident individuals. The tax will then be submitted to local and Member States tax authorities annually. The tax authorities receive a bulk payment but do not receive personal details of individual customers. If individuals elect the exchange of information option, then no tax is deducted from their interest payments but details of the customer’s identity, residence, paying agent, level and time period of savings income received by the financial services provider will be reported to local tax authorities where the account is held and then forwarded to the country where the customer resides.
The Guernsey authorities have established a forum, the Crown Dependencies Anti-Money Laundering Group, where the Attorneys General, Directors General, and representatives of Police, Customs, the regulatory community and FIUs from the Crown Dependencies meet to coordinate AML/CTF policies and strategy.
The FIS operates as the Bailiwick’s FIU, and is comprised of Police and Customs Officers. The Service Authority, a committee of senior Police and Customs Officers who coordinate the Bailiwick’s financial crime strategy, directs the FIS. With a mandate to focus on money laundering and terrorist financing issues, the FIS serves as the central point within the Bailiwick for the receipt, collation, analysis, and dissemination of all financial crime intelligence. Much of this information comes from suspicious transaction report (STR) filings. In 2007, the FIS received 539 STRs.
The Bailiwick narcotics trafficking, money laundering, and terrorism laws designate the same foreign countries as the UK to enforce foreign restraint and confiscation orders.
In 2008, Guernsey will be the subject of an assessment regarding its compliance with internationally accepted standards and measures of good practice relative to its regulatory and supervisory arrangements for the financial sector. The International Monetary Fund (IMF) will conduct this assessment. The previous IMF assessment, conducted in 2002, determined that Guernsey had developed a legal and institutional AML/CTF framework and had a high level of compliance with what was then the Financial Action Task Force (FATF) Forty Recommendations.
There has been counterterrorism legislation covering the Bailiwick since 1974. The Terrorism and Crime (Bailiwick of Guernsey) Law, 2002, replicates equivalent UK legislation. The Terrorism Law criminalizes the failure to report suspicion or knowledge of terrorist financing.
Guernsey cooperates with international law enforcement on money laundering cases. The FSC also cooperates with regulatory/supervisory and law enforcement bodies. The Criminal Justice (International Cooperation) (Bailiwick of Guernsey) Law, 2000, furthers cooperation between Guernsey and other jurisdictions by allowing certain investigative information concerning financial transactions to be exchanged. In cases of serious or complex fraud, Guernsey’s Attorney General can provide assistance under the Criminal Justice (Fraud Investigation) (Bailiwick of Guernsey) Law 1991.
On September 19, 2002, the United States and Guernsey signed a Tax Information Exchange Agreement, which came fully into force in 2006. The agreement provides for the exchange of information on a variety of tax investigations, paving the way for audits that could uncover tax evasion or money laundering activities. Guernsey is negotiating similar agreements with other countries. The 1988 U.S.-UK Agreement Concerning the Investigation of Drug Trafficking Offenses and the Seizure and Forfeiture of Proceeds and Instrumentalities of Drug Trafficking, as amended in 1994, was extended to the Bailiwick in 1996.
Guernsey enacted the necessary legislation to implement the Council of Europe Convention on Mutual Assistance in Criminal Matters, the Council of Europe Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds from Crime, and the 1988 UN Drug Convention, upon their extension to the Bailiwick in 2002. The Bailiwick has requested that the UK Government seek the extension to the Bailiwick of the UN International Convention for the Suppression of the Financing of Terrorism.
Guernsey is a member of the Offshore Group of Insurance Supervisors and the Offshore Group of Banking Supervisors. The FIS has been a member of the Egmont Group since 1997 and represents the jurisdiction within The Camden Assets Recovery Inter-Agency Network (CARIN), an informal network of European Union (EU) member state contacts convened to work on asset recovery.
Guernsey continues to amend current legislation to stay current with international standards. Guernsey should ensure passage of its new 2008 legislation, and enact it, as soon as possible. It should integrate civil forfeiture into its legal framework. Guernsey should also work to ensure that the obliged entities uphold their legal obligations, and that the regulatory authorities have the tools they need to provide supervisory functions, especially with regard to nonfinancial businesses and professions. Guernsey should likewise ensure that all obliged entities receive the UN 1267 Sanctions Committee’s consolidated list of suspected terrorists and terrorist organizations.
Guinea-Bissau is not a regional financial center. Guinea-Bissau’s instability and tiny economy make it an unlikely site for major money laundering. Increased drug trafficking and the prospect of oil production, however, increase its vulnerability to money laundering and financial crime. Drug traffickers transiting between Latin America and Europe have increased their use of the country. Often, Guinea-Bissau is the placement point for proceeds from drug payoffs, theft of foreign aid, and corrupt diversion of oil and other state resources headed for investment abroad. A recent boom in construction of luxury homes, hotels and businesses, and the proliferation of expensive vehicles stands in sharp contrast with the conditions in the poor local economy. It is likely that at least some of the new wealth derives from money laundered from drug trafficking. Banking officials also think the country is vulnerable to trade-based money laundering (TBML).
The Central Bank of West African States (BCEAO), based in Dakar, is the Central Bank for the eight countries in the West African Economic and Monetary Union (WAEMU or UEMOA), including Guinea-Bissau, and uses the CFA franc currency. The Commission Bancaire, the BCEAO division responsible for bank inspections, is based in Abidjan. However, it does not execute a full AML examination during its standard banking compliance examinations.
The legal basis for Guinea-Bissau’s AML/CTF framework is the Loi Uniforme Relative a Lutte Contre le Blanchiment de Capiteaux No. 2004-09 of February 6, 2004, or the Anti-Money Laundering Uniform Law (Uniform Law). As the common law passed by the members of UEMOA/WAEMU, all member states are required to enact and implement the legislation. On November 2, 2004, Guinea-Bissau became the third WAEMU/UEMOA country to enact the Uniform Law. The new legislation largely meets international standards with respect to money laundering. Guinea-Bissau has an “all crimes” approach to money laundering. The law requires banks and other financial institutions to know their customers and record and report the identity of any person who engages in significant transactions, including the recording of large currency transactions. Covered institutions include financial institutions and nonbank financial institutions such as exchange houses, brokerages, cash couriers, casinos, insurance companies, charities, nongovernmental organizations (NGOs), and intermediaries such as lawyers, accountants, notaries and broker/dealers. All obliged entities must report all suspicious transactions to the financial intelligence unit (FIU). There is no threshold amount triggering a report. Safe harbor provisions give reporting individuals and their supervisors civil and criminal immunity and immunity from professional sanctions for providing information to the FIU in good faith. There is no exemption for “self laundering”. It is not necessary to have a conviction for the predicate offense before prosecuting or obtaining a conviction for money laundering. Criminal liability applies to all legal persons as well as natural persons. The new legislation meets many international standards with respect to money laundering, and goes beyond, by covering the microfinance sector, but does not comply with all Financial Action Task Force (FATF) recommendations concerning politically-exposed persons (PEPs), and lacks certain compliance provisions for nonfinancial institutions. All three banks operating in the country report that they have anti-money laundering (AML) compliance programs in place. However, Article 26 of National Assembly Resolution No. 4 of 2004 stipulates that if a bank suspects money laundering, it must obtain a declaration of all properties and assets from the subject and notify the Attorney General, who must then appoint a judge to investigate. The bank solicitation of an asset list from its client could amount to “tipping off” the subject. The WAEMU/UEMOA Uniform Law does not deal with terrorist financing.
Western Union and MoneyGram function under the auspices of the banks. Unlicensed money remitters and currency exchangers, although prevalent, are illegal. Authorities report problems with porous borders and cash smuggling; reportedly, corruption in the Customs agency exacerbates this situation.
The Uniform Law provides for the establishment of an FIU, and a 2006 Directive to establish it is in place. However, no operational FIU exists in the country. Guinea-Bissau is working with external donors to establish a functioning FIU, which will be housed within the Ministry of Economy and Finance. A senior Ministry of Finance official will administer the FIU. The FIU’s mandate will be to receive and analyze suspicious transaction reports (STRs) and, when it deems appropriate, to refer files to the Prosecutor General. The FIU will rely on counterparts in law enforcement and other governmental institutions to provide information upon request for the FIU’s investigations. Lack of capacity, corruption, instability, and distrust (particularly of the judicial sector), could significantly hamper progress in the FIU’s development. Reportedly, banks are reluctant to file STRs because of the fear of “tipping off” by an allegedly indiscrete judiciary. The FIU, when operational, can legally share information with any other FIU in the WAEMU/UEMOA countries.
The Judicial Police and Prosecutors investigate money laundering as well as terrorist financing. The Attorney General’s office houses a small unit to investigate corruption and economic crimes. In November 2007, Guinea-Bissau’s government Audit Office created a commission to investigate illegal acquisition of wealth by present and former government officials. However, a lack of training and capacity, as well as endemic corruption and reported lack of cooperation from banks, impede investigations. Official statistics regarding the prosecution of financial crimes are unavailable. There are no known prosecutions of money laundering.
Although the current AML legislation obliges NGOs and nonprofits, including charities, to file STRs, the current regulatory regime is unknown.
Article 203, Title VI of Guinea-Bissau’s penal code criminalizes terrorist financing. However, there are no reporting requirements or attendant regulations. In addition, because the penal code only criminalizes the financing of terrorist groups or organizations, it does not address financing of a single or individual terrorist. The penal code also does not criminalize the financing of terrorist organizations when the money is not used to commit terrorist acts. The BCEAO has released Directive No. 04/2007/CM/UEMOA, obliging member states to pass domestic counter-terrorist financing legislation. Member states must enact a law against terrorist financing, which will likely be a Uniform Law to be adopted by all WAEMU/UEMOA members in the same manner as the AML law. Each national assembly must then enact the law. In July 2007, UEMOA/WAEMU released attendant guidance on terrorist financing for member states. In addition, the FATF-style regional body for the Economic Community of Western African States (ECOWAS), the African Anti-Money Laundering Inter-governmental Group (GIABA) has drafted a uniform law, which it has recommended that all of its member states adopt and enact.
The Ministry of Finance and the BCEAO circulate the UN 1267 Sanctions Committee consolidated list to commercial financial institutions. To date, no entity has identified assets relating to terrorist entities. The WAEMU/UEMOA Council of Ministers has issued a directive requiring banks to freeze assets of entities designated by the Sanctions Committee.
Multilateral ECOWAS treaties deal with extradition and legal assistance. Under the Uniform Law, once established, the FIU may share information freely with other FIUs in the union. Guinea-Bissau is a party to the 1988 UN Drug Convention, and has signed but not ratified the UN International Convention for the Suppression of the Financing of Terrorism, the UN Convention against Transnational Organized Crime, or the African Union (AU) Anticorruption Convention. Guinea-Bissau is a member of ECOWAS and GIABA. It has not signed or ratified the UN Convention against Corruption. Transparency International’s 2007 Corruption Perception Index ranks Guinea Bissau 147 out of 180 countries.
The Government of Guinea-Bissau (GOGB) should continue to work with its partners in GIABA, WAEMU/UEMOA and ECOWAS to establish and implement a comprehensive AML/CTF regime that comports with all international standards. GOGB should ensure that the sectors covered by its AML law have implementing regulations and supervisory authorities to ensure compliance with the law’s requirements. The GOGB should clarify, amend or eliminate Article 26 of the 2004 National Assembly Resolution that appears to mandate actions resulting in the tipping off of suspects. It should also adopt and enact the uniform terrorist financing law when it is presented to the WAEMU/UEMOA states. Guinea-Bissau should amend the definitions in its penal code to comport with the international standards regarding financing of individual terrorists and terrorist groups engaging in acts other than terrorism. It should establish, staff and train, its FIU, and ensure that resources are available to sustain its capacity. It should work to improve the training and capacity of its police and judiciary to combat financial crimes, and address any issues resulting from a lack of understanding of money laundering and terrorist financing. Guinea-Bissau should undertake efforts to eradicate systemic corruption and become a party to the UN International Convention for the Suppression of the Financing of Terrorism, the UN Conventions against Corruption and Transnational Organized Crime, and the African Union (AU) Anti-corruption Convention.
Guyana is neither an important regional nor an offshore financial center, nor does it have any free trade zones. Money laundering is perceived as a serious problem, and has been linked to trafficking in drugs, firearms, and persons, as well as to corruption and fraud. The Government of Guyana (GOG) made no arrests or prosecutions for money laundering in 2007. Guyana currently has inadequate legal and enforcement mechanisms to combat money laundering, although legislation tabled in Parliament would enhance the GOG’s anti-money laundering regime.
The Money Laundering Prevention Act (MLPA) of 2000 criminalizes money laundering related to narcotics trafficking, illicit trafficking of firearms, extortion, corruption, bribery, fraud, counterfeiting, and forgery. The MLPA does not specifically cover the financing of terrorism or all serious crimes in its list of offenses. Banks, finance companies, factoring companies, leasing companies, trust companies, and securities and loan brokers are required to report suspicious transactions to the GOG’s financial intelligence unit (FIU), and records of suspicious transaction reports (STRs) must be kept for six years. However, the GOG does not release statistics on the number of STRs received by the FIU, despite the requirement to make these statistics available to relevant authorities as mandated by the Financial Action Task Force (FATF). The MLPA also requires that the cross-border transportation of currency exceeding U.S. $10,000 be reported to the Customs Administration, but does not allow for the provision of this information to the FIU or other law enforcement bodies. The MLPA establishes the Guyana Revenue Authority, the Customs Anti-Narcotics Unit, the Attorney General, the Director for Public Prosecutions, and the FIU as the authorities responsible for investigating financial crimes.
The GOG’s anti-money laundering regime is rendered ineffective by other major structural weaknesses of the MLPA. While the MLPA provides for the seizure of assets derived as proceeds of crime, guidelines for implementing seizures and forfeitures have never been established. Conviction for a predicate offense is considered necessary before a money laundering conviction can be obtained, and the list of such predicate offenses is cursory. While the FIU may request additional information from obligated entities, it does not have access to law enforcement information or the authority to exchange information with its foreign counterparts. These limitations collectively stifle the analytical and investigative capabilities of the FIU and law enforcement agencies. As a result of these legislative weaknesses, there have been no money laundering prosecutions or convictions to date.
To augment the tools available to the GOG’s anti-money laundering authorities, the FIU drafted legislation entitled the Anti-Money Laundering and Countering the Financing of Terrorism Bill 2007. The bill provides for the identification, freezing, and seizure of proceeds of crime and terrorism; establishes comprehensive powers for the prosecution of money laundering, terrorist financing, and other financial crimes; requires reporting entities to take preventive measures to help combat money laundering and terrorist financing; provides for the civil forfeiture of assets; expands the scope of the money laundering offense; and mandates the accessibility of all relevant data among law enforcement agencies. The legislation provides for oversight of export industries, the insurance industry, real estate, and alternative remittance systems, and sets forth the penalties for noncompliance. The bill also establishes the FIU as an independent body that answers only to the President, and defines in detail its role and powers. The draft legislation was tabled in Parliament in late 2007, but its passage in the near future is uncertain.
In January 2007, the National Assembly passed the Gambling Prevention (Amendment) Bill, which legalizes casino gambling. The bill establishes a Gaming Authority authorized to issue casino licenses to new luxury hotel or resort complexes with a minimum of 150 rooms. Vocal opposition to the bill from religious groups, opposition parties, and the public included concerns that casino gambling would provide a front for money launderers. No casinos have opened in Guyana to date.
The Ministry of Foreign Affairs and the Bank of Guyana continue to assist U.S. efforts to combat terrorist financing by working towards compliance with relevant United Nations Security Council Resolutions (UNSCRs). In 2001, the Bank of Guyana, the sole financial regulator as designated by the Financial Institutions Act of March 1995, issued orders to all licensed financial institutions expressly instructing the freezing of all financial assets of terrorists, terrorist organizations, and individuals and entities associated with terrorists and their organizations. Guyana has no domestic laws authorizing the freezing of terrorist assets, but the government created a special committee on the implementation of UNSCRs, co-chaired by the Head of the Presidential Secretariat and the Director General of the Ministry of Foreign Affairs. To date the procedures have not been tested, as no terrorist assets have been identified in Guyana. The FIU director also disseminates the names of suspected terrorists and terrorist organizations listed on the UN 1267 Sanctions Committee’s consolidated list to relevant financial institutions.
Guyana is a member of the OAS Inter-American Drug Abuse Control Commission (OAS/CICAD) Experts Group to Control Money Laundering and the Caribbean Financial Action Task Force (CFATF). Guyana is a party to the 1988 UN Drug Convention and the UN Convention against Transnational Organized Crime. On September 12, 2007, the GOG became a party to the International Convention for the Suppression of the Financing of Terrorism, and on June 5, 2007, Guyana ratified the Inter-American Convention against Terrorism. The GOG has not signed the UN Convention against Corruption. Guyana’s FIU is one of the few in the region that is not a member of the Egmont Group, and no change in that status is anticipated until Guyana’s anti-money laundering laws have been modernized and the financing of terrorism is criminalized. Guyana does not have a Mutual Legal Assistance Treaty (MLAT) with the United States.
The Government of Guyana should pass the draft legislation on money laundering and terrorist financing that is currently before the Parliament. The passage of this legislation would extend preventive measures to a far wider range of reporting entities, including casinos and designated nonfinancial businesses and professions. The draft legislation would also provide greater resources and critical autonomy for the FIU, enable the FIU to access law enforcement data, and ensure that the FIU has the operational capacity to meet the membership requirements of the Egmont Group. In short, the passage of this legislation is essential in enhancing the GOG’s compliance with international standards and ensuring that its anti-money laundering and counter-terrorist financing regime is operational and effective. In the interim, Guyana should provide appropriate resources and awareness training to its regulatory, law enforcement, and prosecutorial personnel, and establish procedures for asset seizure and forfeiture. The GOG should also become a party to the UN Convention against Corruption.
Haiti is not a major financial center. Haiti’s dire economic condition and unstable political situation inhibit the country from advancing its formal financial sector. Nevertheless, Haiti is a major drug-transit country with money laundering activity linked to the drug trade. Money laundering and other financial crimes are facilitated through the banks and casinos, and through foreign currency transactions and real estate transactions. While the informal economy in Haiti is significant and partly funded by illicit narcotics proceeds, smuggling is historically prevalent and predates narcotics trafficking.
Flights to Panama City, Panama, remain the main identifiable mode of transportation for money couriers. Suspected drug flights from Venezuela continue, where a permissive environment allows smuggling aircraft to operate with impunity. Travelers, predominantly Haitian citizens, usually hide large sums ranging from U.S. $30,000 to $100,000 on their persons. There is low confidence in the efforts of Haitian customs and narcotics personnel to interdict these outbound funds. Suspicions that clandestine fees are collected to facilitate the couriers continuing without arrest appear to be well-founded. In addition, those persons that are actually interdicted are frequently released by the courts and the funds are ordered to be returned.
During interviews, couriers usually declare that they intend to use the large amounts of U.S. currency to purchase clothing and other items to be sold upon their return to Haiti, a common practice in the informal economic sector. Cash that is routinely transported to Haiti from Haitians and their relatives in the United States in the form of remittances represented over 21.2 percent of Haiti’s gross domestic product in 2006, according to the World Bank. The Inter-American Development Bank estimated the flow of remittances through official channels to Haiti at $1.65 billion in fiscal year 2006.
The Government of Haiti (GOH) has made progress in recent years to improve its legal framework, create and strengthen core public institutions, and enhance financial management processes and procedures. The constitutional government of President René Préval and Prime Minister Jacques Edouard Alexis continued the monetary, fiscal and foreign exchange policies initiated under the past Interim Government of Haiti with the assistance of the International Monetary Fund and the World Bank. Continued insecurity and a lack of personnel expertise, however, have reduced the impact of the Government’s initiatives and hampered its ability to modernize its regulatory and legal framework.
Despite political instability, Haiti has taken steps to address its money laundering and financial crimes problems. President Preval has openly affirmed his commitment to fight corruption, drug trafficking, and money laundering. He is actively seeking technical assistance and cooperation with countries in the region to reinforce Haiti’s institutional capacity to fight financial crime. In March 2007, the GOH participated in a Summit on Drug and Money Laundering in the Dominican Republic to identify synergies between countries in the region (Haiti, Dominican Republic, Jamaica and Colombia) to fight organized crime. Preparations are underway for a subsequent meeting to be held by the end of December 2007 in Cartagena, Colombia.
Since 2001, Haiti has used the Law on Money Laundering from Illicit Drug Trafficking and other Crimes and Punishable Offenses (AML Law) as its primary anti-money laundering legislation. Although the government has publicly committed to combat corruption, the court system is slow to move forward with pending cases. None of the investigations initiated under the interim government have led to any prosecutions, and the Financial Crimes Task Force (FCTF), which is charged with conducting financial investigations, is currently inoperative.
The AML Law criminalizes money laundering and establishes a wide range of financial institutions as obligated entities, including banks, money remitters, exchange houses, casinos, and real estate agents. Insurance companies, which are only nominally represented in Haiti, are not covered. The AML Law requires financial institutions to establish money laundering prevention programs and to verify the identity of customers who open accounts or conduct transactions that exceed 200,000 gourdes (approximately U.S. $5,550). It also requires exchange brokers and money remitters to compile information on the source of funds exceeding 200,000 gourdes or its equivalent in foreign currency. Microfinance institutions and credit unions, however, remain largely unregulated. A draft banking law, if passed by Parliament, will address this regulatory gap.
The AML Law contains provisions for the forfeiture and seizure of assets; however, the government cannot seize and declare the assets forfeited until there is a conviction. Although the AML Law provides grounds for seizure, it does not contain procedures to handle the management and proceeds of seized assets. This deficiency in the law reduces the government’s authority and resources to prosecute cases. Out of U.S. $565,723 seized in 2007 at the airport in Port-au-Prince, courts ordered that U.S. $367,417 be returned to the owners.
Implementation of the AML Law is compromised by weak enforcement mechanisms, poor understanding of the law on the part of legal and judicial personnel and an overall weak judicial system. From 2001 to 2007, 475 persons were arrested in connection with drug trafficking and money laundering. Fifteen individuals were sent to the United States to face prosecution. The remaining 460 individuals have yet to be prosecuted in Haitian courts. An amendment to the AML Law to redress weaknesses in the current law is being drafted for consideration by Parliament.
In 2002, Haiti formed a National Committee to Fight Money Laundering (CNLBA) under the supervision of the Ministry of Justice and Public Safety. The CNLBA is in charge of promoting, coordinating, and recommending policies to prevent, detect, and suppress the laundering of assets obtained from the illicit trafficking of drugs and other serious offenses. Haiti’s financial intelligence unit (FIU), established in 2003, is the Unité Centrale de Renseignements Financiers (UCREF), which falls under the supervision of the CNLBA. The UCREF’s mandate is to receive and analyze reports submitted by financial institutions in accordance with the law. The UCREF has 42 employees, including 23 analysts. Institutions, including banks, credit unions exchange brokers, insurance companies, lawyers, accountants, and casinos, are required to report to the UCREF transactions involving funds that may be derived from a crime, as well as transactions that exceed 200,000 gourdes (U.S. $5,550). Failure to report such transactions is punishable by more than three years’ imprisonment and a fine of 20 million gourdes (approximately U.S. $550,000). Banks are required to maintain records for at least five years and to present this information to judicial authorities and UCREF officials upon request. Bank secrecy or professional secrecy cannot be invoked as grounds for refusing information requests from these authorities.
In 2006, the UCREF assisted the U.S. in at least three major investigations. UCREF also assisted the interim government in filing the first-ever civil lawsuit in a U.S. court for reparation of Haitian government funds diverted through U.S. banks and businesses. However, the lawsuit was dropped shortly after the new government took office. Despite recent achievements, the UCREF is still not fully functional, and the UCREF’s analysts lack the experience and skills needed to independently analyze suspect financial activities, write adequate reports and expeditiously move cases to prosecutors. Due to the absence of an investigative institution tasked with conducting financial investigations in the justice system, the UCREF responded to fill the void. This has led to a perception of conflict of interest and has, in some high-profile cases, sparked controversy.
In November, in response to a request for assistance from President Preval, the U.S. Treasury and the GOH entered into an agreement to restructure UCREF into an administrative FIU, and to reconstitute the investigative functions of the FCTF into a new and separate Office of Financial and Economic Affairs (BAFE). The U.S. Treasury Department agreed to provide training and technical assistance to BAFE investigators as well as the UCREF analysts, prosecutors, and judges. The World Bank has also entered into an agreement with the GOH to assist with training. These steps were supported by President Préval, who has sent out a presidential mandate to his ministers to support these new efforts in combating money laundering and corruption. In addition, draft counter-terrorist financing legislation has been submitted to the USG for review and comment.
Corruption is an ongoing challenge to economic growth. Haiti is ranked one of the most corrupt countries in the world according to Transparency International’s Corruption Perception Index for 2007. The GOH has made incremental progress in enforcing public accountability and transparency, but substantive institutional reforms are still needed. In 2004, the government established the Specialized Unit to Combat Corruption (ULCC) in the Ministry of Economy and Finance. The ULCC is in the process of drafting a national strategy to combat corruption and has prepared a draft law for asset declaration by public sector employees and a code of ethics for the civil service. ULCC will submit the law to Parliament for consideration in the coming months.
Haiti has yet to pass legislation criminalizing the financing of terrorists and terrorism, and is not a party to the International Convention for the Suppression of the Financing of Terrorism. Haiti reportedly circulates the list of terrorists and terrorist organizations identified in UN Security Council Resolution 1267. The AML Law may provide sufficient grounds for freezing and seizing the assets of terrorists; however, given that there is currently no indication of the financing of terrorism in Haiti, this has not been tested.
Haiti is a party to the 1988 UN Drug Convention, and has signed, but not ratified, the UN Convention against Transnational Organized Crime, the UN Convention against Corruption, and the Inter-American Convention against Terrorism. Haiti is a member of the OAS/CICAD Experts Group to Control Money Laundering and the Caribbean Financial Action Task Force (CFATF). In September 2007, the World Bank conducted an assessment of the GOH that will also serve as a CFATF mutual evaluation; the report will be released in the spring of 2008. The UCREF is not a member of the Egmont Group of financial intelligence units. The UCREF has memoranda of understanding with the FIUs of the Dominican Republic, Panama, Guatemala and Honduras.
The GOH appears cognizant of deficiencies in its anti-money laundering and counter-terrorist financing regime through its efforts to improve its legal framework to combat, drug trafficking, money laundering, and corruption, and its action to reform the judicial process. President Preval has made these improvements a key element of his national agenda. Areas in need of improvement include an ineffective court system, weak enforcement mechanisms and poor knowledge of current laws governing this area. The GOH should move quickly to prosecute cases of corruption, drug trafficking and money laundering. This could send a positive message that financial crimes will be punished to the fullest extent of the law and also help garner broader public support for the rule of law. The GOH should also reinforce the capacity of the Haitian justice system to prosecute financial crimes. Initiatives to enhance the UCREF’s capacity to meet the Egmont Group membership standards and provide timely and accurate reports on suspicious financial activities are also needed. The GOH should finalize its draft legislation on terrorist financing to criminalize the financing of terrorism and become a party to the International Convention for the Suppression of the Financing of Terrorism.
Money laundering in Honduras stems primarily from significant narcotics trafficking, particularly cocaine, throughout the region. Trafficking in persons also constitutes a growing source of laundered funds. Laundered proceeds typically pass directly through the formal banking system, but currency exchange houses and front companies may be used with increasing frequency. High remittance inflows, which reached more than $2.6 billion in 2007, as well as a rapidly growing construction sector and smuggling of contraband goods, may also generate funds that are laundered through the banking system. Money laundering in Honduras derives both from domestic and foreign criminal activity, and the majority of proceeds are suspected to be controlled by local drug trafficking organizations and organized crime syndicates. Honduras does not appear to be experiencing an increase in financial crimes such as bank fraud. Lack of resources for investigations and analysis, as well as corruption, remain serious problems, particularly within the judiciary and law enforcement sectors.
Honduras is not an important regional or offshore financial center. It does not have a significant black market for smuggled goods, although recent high-profile smuggling cases have involved gasoline and illegal lobster. Honduras has established a number of free trade zones with special tax and customs benefits. The majority of companies with free trade zone status operate in the textile and apparel industry, mostly assembling piece goods that originated in the United States for re-export to the United States. Under Honduran legislation, companies may register for “free trade zone” status, and enjoy the associated tax benefits, regardless of their location in the country. In 2007, banks reported two abnormal transactions into the accounts of free-trade zone factory owners. Although prosecutors suspect money laundering, they were not able to build enough evidence to prosecute either case. There is no other evidence Honduran free trade zone companies are being used in trade-based money-laundering schemes or by financiers of terrorism.
Money laundering has been a criminal offense in Honduras since 1998. Law No. 27-98 criminalizes the laundering of narcotics-related proceeds and contains various record-keeping and reporting requirements for financial institutions. Decree No. 45-2002 strengthens the legal framework and available investigative and prosecutorial tools to fight money laundering. Decree 45-2002 expands the definition of money laundering to include transfer of assets that proceed directly or indirectly from trafficking of drugs, arms, human organs or persons; auto theft; kidnapping; bank and other forms of financial fraud; and terrorism, as well as any sale or movement of assets that lacks economic justification. The penalty for money laundering is 15 to 20 years. The law also requires all persons entering or leaving Honduras to declare (and, if asked, present) cash and convertible securities that they are carrying if the amount exceeds U.S. $10,000 or its equivalent.
Decree 45-2002 also creates the financial intelligence unit (FIU), the Unidad de Información Financiera (UIF), within the National Banking and Insurance Commission (CNBS). Banks and financial institutions are required to report any suspicious transactions and all transactions over $10,000, or its equivalent to the UIF. The UIF and reporting institutions must keep a registry of reported transactions for five years. Banks are required to know the identity of all their clients and depositors, regardless of the amount of deposits, and to keep adequate records of the information. Banker negligence provisions subject individual bankers to two- to five-year prison terms if, by carelessness, negligence, inexperience, or nonobservance of the law, they permit money to be laundered through their institutions. Anti-money laundering requirements apply to all financial institutions that are regulated by the CNBS, including state and private banks, savings and loan associations, bonded warehouses, stock markets, currency exchange houses, securities dealers, insurance companies, credit associations, and casinos.
Decree No. 129-2004 eliminates any ambiguity concerning the responsibility of banks to report information to the supervisory authorities, and the duty of these institutions to keep customer information confidential, by clarifying that the provision of information requested by regulatory, judicial, or other legal authorities shall not be regarded as an improper divulgence of confidential information. Under the Criminal Procedure Code, officials responsible for filing reports on behalf of obligated entities are protected by law with respect to their cooperation with law enforcement authorities. However, some have alleged that their personal security is put at risk if the information they report leads to the prosecution of money launderers.
Congress is currently considering legislation that, if adopted, would bring the Government of Honduras (GOH) up to international legal standards for illicit financing, including money laundering and terrorist financing. In October 2007, the CNBS proposed to Congress major amendments to the money laundering law and proposed a new chapter to the penal code that would criminalize terrorist financing. The proposed amendments to the money laundering law would give the UIF oversight for collecting all suspicious transactions reports, and expand the scope of entities required to report suspicious transactions to the UIF beyond the financial scope of the CNBS. Such entities would include real estate agents, used car dealership, antique and jewelry dealers, remittance companies, armed car contractors, and nongovernmental organizations. The reforms would also give the UIF sole oversight and responsibility not only for collecting suspicious transaction reports but for analyzing and presenting to prosecutors cases deemed appropriate for prosecution.
The Public Ministry (Attorney General’s Office), UIF, and police all suffer from low funding, limited capacity, and a lack of personnel and training. For example, the police officers charged with investigations of money laundering crimes in Honduras must ride public buses to conduct investigations. The lack of capacity and coordination limits the scope of analysis and prosecutions, and prosecutors expend the bulk of their limited resources focusing on high-profile crimes related to money laundering, such as narcotics, trafficking in persons, and cash smuggling. Prior to 2004, there had been no successful prosecutions of crimes specifically labeled as money laundering in Honduras. Between 2004 and 2006, prosecutors obtained 11 convictions. Prosecutors initiated legal proceedings in eight cases in 2007, all of which are still ongoing, and obtained two additional convictions from prosecutions initiated in 2005. Only two of 54 ongoing investigations in 2007 originated from financial reports.
Attempts to improve coordination among the Public Ministry (Attorney General’s Office), the UIF, and police have met with some degree of success; however there is still a need for additional improvement. An attempt in late 2004 to create a coordinating body, the Interagency Commission for the Prevention of Money Laundering and Financing of Terrorism (CIPLAFT), failed in early 2006, for political reasons. Although Decree 45-2002 requires that a public prosecutor be assigned to the UIF, the Special Prosecutor for Money Laundering himself acts as coordinator and contact is sporadic. Nevertheless, response times for information sharing between the UIF and the seized assets unit have improved due to a 2006 agreement between the Public Ministry, CNBS, and UIF to prioritize money laundering cases. These actions helped to streamline the number of cases for potential prosecution, and allowed many cases to be officially closed. Fewer active cases have allowed the overloaded prosecutors and under-funded police units to focus on the strongest and most important cases. Adoption of the new anti-money laundering amendments should improve coordination and clarify division of responsibilities for investigations and reporting.
Remittance inflows, mostly from the United States, are estimated at more than U.S. $2.6 billion in 2007, which constitutes more than 25 percent of GDP. There has been no evidence to date linking these remittances to the financing of terrorism. However, it is estimated that up to half of cash flows labeled as remittances to Honduras may involve laundered money. Without the new money laundering amendment, the UIF lacks oversight capacity to properly investigate remittance companies, which are required to report suspicious transactions but currently not required to register under Honduran law. Remittances are increasingly sent through wire transfer or bank services, but the remittance companies themselves facilitate transactions that are carried out by separate financial institutions.
The GOH’s asset seizure law has been in effect since 1993. The law allows for both civil and criminal forfeiture, and there are no significant legal loopholes that allow criminals to shield their assets. Decree No. 45-2002 strengthens the asset seizure provisions of the law, and establishes an Office of Seized Assets (OABI) under the Public Ministry. Decree 45-2002 also authorizes the OABI to guard and administer all goods, products, or instruments of a crime and requires money seized or money realized from the auctioning of seized goods to be transferred to the public entities that participated in the investigation and prosecution of the crime.
The OABI has moved to distribute funds to various law enforcement units and nongovernmental organizations (NGOs). The funds, which constituted the first systematic distribution under the new guidelines, went to the Supreme Court, federal prosecutors, OABI, and two civil society groups. Equitable sharing of seized monies has been a continuing problem, controlled by political influence. Police entities involved in the original investigations rarely see an equitable share of the assets seized. Groups like OABI and the Public Ministry generally receive an inflated portion of the forfeiture proceeds, leaving next to nothing for the police. In some cases, entities that have nothing to do with the investigation receive an unjustified portion of the funds
The OABI is currently a poorly administered organization, evident by the vast amounts of assets that are unaccounted for, especially after the initial seizure, as well as the number of assets rotting away in parking lots, boat yards, and airports. The processing of final forfeiture of assets is mostly motivated by the entities that “arm wrestle” over who will actually receive disbursement of monies from auctioned assets or bulk cash seizure. This is typically influenced by political will. Momentum is now gaining for OABI to more quickly liquidate all assets once confiscated, in an effort to avoid parking lots full of deteriorating assets or high protection and maintenance fees. With new management and guidelines in place, OABI is set to expand its role significantly when a witness protection law passes that will allow the unit to hold all seized assets, not just assets seized under the money laundering law.
Decree No. 45-2002 leaves ambiguous the question of whether legitimate businesses found to be laundering money derived from criminal activities can be seized. Although the chief prosecutor for organized crime believes that businesses laundering criminal assets cease to be “legitimate,” subjecting them to seizure and prosecution, this authority is not explicitly granted in the law. There has been no test case to date that would set an interpretation. There are currently no new laws being considered regarding seizure or forfeiture of assets of criminal activity.
Under the Criminal Procedure Code, when goods or money are seized in any criminal investigation, a criminal charge must be submitted against the suspect within 60 days of the seizure; if one is not submitted, the suspect has the right to demand the release of the seized assets.
As of December 2006, the total value of assets seized since Decree 45-2002 came into effect was approximately U.S. $5.7 million, including U.S. $4.6 million in tangible assets such as cars, houses, and boats. The total for 2007 decreased compared to 2006, because the prosecutor was forced to return almost U.S. $1 million this year, more than the sum collected. However, several high profile cases succeeded: U.S. $750,000 collected from the sale of an abandoned plane in 2007, probably related to narcotics, was used to purchase several cars for police investigators, and U.S. $500,000 collected from a high-profile lobster-smuggling case was awarded to the Ministry of Agriculture. Most of these seized assets have derived from crimes related to drug trafficking; none is suspected of being connected to terrorist activity.
Decree 45-2002 designates an asset transfer related to terrorism as a crime, but terrorist financing is not identified as a crime itself. However, in October 2007 the CNBS proposed adding a new chapter and five appendices to the Penal Code that would make financing of terrorism a crime. The crime would carry a 20 to 30 year prison sentence, along with a fine of up to $265,000. Changes to the penal code may not be discussed by Congress until the Supreme Court issues an opinion on the penalties. The proposal was being considered by the Supreme Court as of November 2007. It is unlikely that the terrorist financing and money laundering amendments will be considered by Congress before April 2008.
Under separate authority, the Ministry of Foreign Affairs is responsible for instructing the CNBS to issue freeze orders for organizations and individuals named by the United Nations Security Council Resolution (UNSCR) 1267 and those organizations and individuals on the list of Specially Designated Global Terrorists by the United States pursuant to Executive Order 13224. The Commission directs Honduran financial institutions to search for, hold, and report on terrorist-linked accounts and transactions, which, if found, would be frozen. Both the Ministry of Foreign Affairs and CNBS have responded promptly to these requests. CNBS has reported that, to date, no accounts linked to the entities or individuals on the lists have been found in the Honduran financial system.
Honduras cooperates with U.S. investigations and requests for information pursuant to the 1988 United Nations Drug Convention. No specific written agreement exists between the United States and Honduras to establish a mechanism for exchanging adequate records in connection with investigations and proceedings relating to narcotics, terrorism, terrorist financing, and other crime investigations. However, Honduras has cooperated, when requested, with appropriate law enforcement agencies of the U.S. Government and other governments investigating financial crimes. The UIF has signed memoranda of understanding to exchange information on money laundering investigations with Panama, El Salvador, Guatemala, Mexico, Peru, Colombia and the Dominican Republic.
Honduras is a party to the 1988 UN Drug Convention, the UN Convention against Transnational Organized Crime, the UN International Convention for the Suppression of the Financing of Terrorism, the UN Convention against Corruption, and the Inter-American Convention against Terrorism. At the regional level, Honduras is a member of the Central American Council of Bank Superintendents, which meets periodically to exchange information. Honduras is a member of the Organization of American States Inter-American Drug Abuse Control Commission (OAS/CICAD) Group of Experts to Control Money Laundering, and the Caribbean Financial Action Task Force (CFATF). In 2005, the UIF became a member of the Egmont Group.
The Government of Honduras made progress in 2007 by continuing to implement existing anti-money laundering regulations, and proposing improvements to existing anti-money laundering legislation and amendments to the criminal code to criminalize terrorist financing. The GOH should ensure the passage and implementation of the proposed legislation in 2008 to bring its anti-money laundering and counter-terrorist financing regime into greater compliance with international standards. In the interim, the GOH should continue to support the developing law enforcement and regulatory entities responsible for combating money laundering and other financial crimes. It should hire and train more financial crimes investigators and analysts; improve cooperation between police, prosecutors, and the UIF; and ensure that resources are available to strengthen its anti-money laundering regime. The GOH should also resolve any ambiguity regarding the seizure of businesses used for criminal purposes.
Hong Kong is a major international financial center. Its low taxes and simplified tax system, sophisticated banking system, shell company formation agents, and the absence of currency and exchange controls facilitate financial activity but also make Hong Kong vulnerable to money laundering. The Hong Kong Special Administrative Region Government (HKSARG) considers the primary sources of laundered funds to be corruption (both foreign and domestic), tax evasion, fraud, illegal gambling and bookmaking, prostitution, loan sharking, commercial crimes, and intellectual property rights infringement. Laundering channels include Hong Kong’s banking system, legitimate and underground remittance and money transfer networks, trade-based money laundering, and large-ticket consumer purchases—such as property, gold and jewelry. The proceeds from narcotics trafficking are believed to be only a small percentage of illicit proceeds laundered.
Money laundering is a criminal offense in Hong Kong under the Drug Trafficking (Recovery of Proceeds) Ordinance (DTRoP) and the Organized and Serious Crimes Ordinance (OSCO). The money laundering offense extends to the proceeds of drug-related and other indictable crimes. Money laundering is punishable by up to 14 years’ imprisonment and a fine of HK $5,000,000 (approximately U.S. $641,000).
Money laundering ordinances apply to covered institutions—including banks and nonbank financial institutions—as well as to intermediaries such as lawyers and accountants. All persons must report suspicious transactions of any amount to the Joint Financial Intelligence Unit (JFIU). The JFIU does not investigate suspicious transactions itself but receives, stores, and disseminates suspicious transactions reports (STRs) to the appropriate investigative unit. Typically, STRs are passed to the Narcotics Bureau, the Organized Crime and Triad Bureau of the Hong Kong Police Force, or to the Customs Drug Investigation Bureau of the Hong Kong Customs and Excise Department.
Financial regulatory authorities have issued anti-money laundering guidelines reflecting the revised FATF Forty Recommendations on Money Laundering to institutions under their purview and monitor compliance through on-site inspections and other means. The Hong Kong Monetary Authority (HKMA) is responsible for supervising and examining compliance of financial institutions that are authorized under Hong Kong’s Banking Ordinance. The Hong Kong Securities and Futures Commission (SFC) is responsible for supervising and examining compliance of persons that are licensed by the SFC to conduct business in regulated activities, as defined in Schedule 5 of the Securities and Futures Ordinance. The Office of the Commissioner of Insurance (OCI) is responsible for supervising and examining compliance of insurance institutions. Hong Kong law enforcement agencies provide training and feedback on suspicious transaction reporting.
Financial institutions are required to know and record the identities of their customers and maintain records for five to seven years. The filing of a suspicious transaction report cannot be considered a breach of any restrictions on the disclosure of information imposed by contract or law. Remittance agents and moneychangers must register their businesses with the police and keep customer identification and transaction records for cash transactions above a legal threshold for at least six years. A directive from Hong Kong’s Monetary Authority (HKMA) reduced this threshold amount from HK $20,000 (approximately U.S. $2,565) to HK $8,000 (approximately U.S. $1,000), effective January 1, 2007.
Hong Kong does not require reporting of the movement of any amount of currency across its borders, or of large currency transactions above any threshold level. Hong Kong is examining the effectiveness of its existing regime in interdicting illicit cross border cash couriering activities. Reportedly, Hong Kong is deliberating ways of complying with FATF Special Recommendation Nine but does not intend to put in place a “declaration system” and is instead considering a disclosure-based system. Law enforcement agents in Hong Kong are already empowered to seize criminal proceeds anywhere in the jurisdiction, including at the border.
Hong Kong does not make a distinction between onshore and offshore entities, including banks. Its financial regulatory regimes are applicable to residents and nonresidents alike. No differential treatment is provided for nonresidents, including with respect to taxation and exchange controls. The HKMA regulates banks. The Office of Commissioner of Insurance (OCI) and the Securities and Futures Commission (SFC) regulate insurance and securities firms, respectively. All three impose licensing requirements and screen business applicants. There are no legal casinos or Internet gambling sites in Hong Kong.
In Hong Kong, it is not uncommon to use solicitors and accountants, acting as company formation agents, to set up shell or nominee entities to conceal ownership of accounts and assets. Many of the more than 500,000 international business companies (IBCs) created in Hong Kong are established with nominee directors; and many are owned by other IBCs registered in the British Virgin Islands. The concealment of the ownership of accounts and assets is ideal for laundering funds. Additionally, some banks permit shell companies to open bank accounts, based only on vouching by the company formation agent. In such cases, the HKMA’s anti-money laundering guidelines require banks to verify the identity of the owners of the company, including beneficial owners. The bank should also assess whether the intermediary is “fit and proper.” However, solicitors and accountants have filed a low number of suspicious transaction reports in recent years; and Hong Kong officials seek to improve their reporting through regulatory requirements and oversight.
Hong Kong’s open financial system has long made it the primary conduit for funds transferred out of China. Hong Kong’s role has been evolving as China’s financial system gradually opens. On February 25, 2004, Hong Kong banks began to offer Chinese currency-based (renminbi or RMB) deposit, exchange, and remittance services. Later that year, Hong Kong banks began to issue RMB-based credit cards, which could be used both in Mainland China and in Hong Kong shops that had enrolled in the Chinese payments system, China Union Pay. In November 2005, Hong Kong banks were permitted modest increases in the scope of RMB business they can offer clients. The new provisions raised daily limits and expanded services. This change brought many financial transactions related to China out of the money-transfer industry and into the more highly regulated banking industry, which is better equipped to guard against money laundering. Banks in Hong Kong are still not permitted to make loans in RMB.
Despite Hong Kong’s efforts to encourage capital shifts to the banking industry, Chinese capital controls impel entities in both Hong Kong and Mainland China to use underground financial systems to avoid restrictions on currency exchange. A well-publicized June 2007 raid by Chinese police on an underground bank in Shenzhen resulted in the detention of six suspects, including a Hong Kong-based businesswoman, accused of facilitating the transfer of RMB 4.3 billion (over U.S. $570 million) out of China since the beginning of 2006—including transfers by Chinese state-owned enterprises. Authorities believe the majority of these funds were used to purchase properties and stocks in Hong Kong. Media reports indicate that such underground exchange houses are rampant in Guangdong province and have transferred more than RMB 200 billion (U.S. $26.7 billion) out of China since 2006.
Under the Drug Trafficking (Recovery of Proceeds) Ordinance (DTRoP) and the Organized and Serious Crimes Ordinance (OSCO), a court may issue a restraining order against a defendant’s property at or near the time criminal proceedings are instituted. Property includes money, goods, real property, and instruments of crime. A court may issue confiscation orders at the value of a defendant’s proceeds from illicit activities. Cash imported into or exported from Hong Kong that is connected to narcotics trafficking may be seized, and a court may order its forfeiture. Legitimate businesses can be seized if the business is the “realizable property” of a defendant. Realizable property is defined under the DTRoP and OSCO as any property held by the defendant, any property held by a person to whom the defendant has directly or indirectly made a gift, or any property that is subject to the effective control of the defendant. The Secretary of Justice is responsible for the legal procedures involved in restraining and confiscating assets. There is no time frame ascribed to freezing drug proceeds or the proceeds of other crimes. Regarding terrorist property, a formal application for forfeiture must be made within two years of freezing. Confiscated or forfeited assets and proceeds are paid into general government revenue. In July 2002, the legislature passed several amendments to the DTRoP and OSCO to strengthen restraint and confiscation provisions. These changes, effective January 1, 2003, lowered the evidentiary threshold for initiating confiscation and restraint orders against persons or properties suspected of drug trafficking, eliminated the requirement of actual notice to an absconded offender, eliminated the requirement that the court fix a period of time in which a defendant is required to pay a confiscation judgment, authorized courts to issue restraining orders against assets upon arrest rather than charging, required the holder of property to produce documents and otherwise assist the government in assessing the value of the property, and created an assumption under the DTRoP (to make it consistent with OSCO) that property held within six years of the violation by a person convicted of drug money laundering constitutes proceeds from that money laundering.
According to JFIU figures, as of September 30, 2007, the value of assets under restraint was $199 million, and the value of assets under a court confiscation order but not yet paid to the government was $9.85 million. JFIU also reported that, as of September 30, 2007, $56.5 million had been confiscated and paid to the government since the enactment of DTRoP and OSCO. Hong Kong has shared confiscated assets with the United States.
Hong Kong Customs and Hong Kong Police are responsible for conducting financial investigations. The Hong Kong Police has a number of dedicated units responsible for investigating financial crime, but the primary units responsible for investigating money laundering and terrorist financing are the Commercial Crimes and Narcotics Bureaus in Police Headquarters. There were 157 prosecutions for money laundering during the first 6 months of 2007. Hong Kong Customs had a significant money laundering case in 2006 in which the mastermind of a local pirated optical disc syndicate was convicted of money laundering involving HK $27.4 million (U.S. $3.5 million) accrued over a four-year period from piracy activities. This conviction was upheld on appeal in May 2007. The judge increased the sentence by 50 percent, in accordance with OSCO provisions. Hong Kong Customs arrested two individuals charged with copyright infringement and money laundering in 2007.
The JFIU receives and analyzes STRs to develop information that could aid in prosecuting money laundering cases and, in suitable cases, distributes reports to law enforcement investigating units. The JFIU can refer cases to all Hong Kong law enforcement agencies and, in certain circumstances, to regulatory bodies in Hong Kong as well as to overseas law enforcement bodies. The JFIU also conducts research on money laundering trends and methods and provides case examples (typologies) to financial and nonfinancial institutions to assist them in identifying suspicious transactions. The JFIU has no regulatory responsibilities. Since 1994, when OSCO first mandated the filing of suspicious transaction reports (STRs), the number of STRs received by JFIU has generally increased. In the first nine months of 2007, 12,308 STRs were filed, of which 1798 were referred to law enforcement agencies. This compares with 10,782 STRs filed for the same period in 2006, 13,505 STRs filed during all of 2005, 14,029 filed during 2004, and 11,671 during 2003. The JFIU launched an electronic system for reporting STRs by registered users in late 2006
On July 3, 2004, the Legislative Council passed the United Nations (Anti-Terrorism Measures) (Amendment) Ordinance. This law is intended to implement UNSCR 1373 and the FATF Special Eight Recommendations on Terrorist Financing in place in July 2004. It extends the HKSARG’s freezing power beyond funds to the property of terrorists and terrorist organizations. It also criminalizes the provision or collection of funds by a person intending or knowing that the funds will be used in whole or in part to commit terrorist acts. Hong Kong’s financial regulatory authorities have directed the institutions they supervise to conduct record searches for assets of suspected terrorists and terrorist organizations listed on the UN 1267 Sanctions Committee’s consolidated list and the list of Specially Designated Global Terrorists designated by the United States pursuant to E.O. 13224.
The People’s Republic of China (PRC) represents Hong Kong on defense and foreign policy matters, including UN affairs. Through the PRC, the 1988 UN Drug Convention, the UN Convention against Transnational Organized Crime, the UN Convention against Corruption, and the UN International Convention for the Suppression of the Financing of Terrorism are all applicable to Hong Kong
To help deal with anti-money laundering (AML) issues from a practical perspective and reflect business needs, the Hong Kong Monetary Authority (HKMA) has recently coordinated the establishment of an Industry Working Group on AML. The Group, which includes representatives of some 20 authorized institutions, has met twice. Three subgroups have been established to share experiences and consider the way forward on issues such as PEPs (politically exposed persons), terrorist financing, transaction monitoring systems and private banking issues. The subgroup on Customer Due Diligence (CDD) issued guidelines on issues related to PEPs in November 2007. The HKMA has also implemented a number of initiatives on AML issues, including issuing circulars and guidance to authorized institutions on combating the financing of weapons of mass destruction conducting in-depth examinations of institutions’ AML controls and setting out best practices for AML in high-risk areas—such as correspondent banking, private banking, and remittance.
The HKMA circulated guidelines that require banks to maintain a database of terrorist names and management information systems to detect unusual patterns of activity in customer accounts. The Securities and Futures Commission (SFC) and the Office of the Commissioner of Insurance (OCI) circulated guidance notes in 2005 that provided additional guidance on CDD and other issues, reflecting the new requirements in the Revised FATF Forty Recommendations on Money Laundering and Special Recommendations on Terrorist Financing. In 2006, the OCI and the SFC revised their guidance notes to take into account the latest recommendations by the FATF.
Other bodies governing segments of the financial sector are also engaged in advancing anti-money laundering efforts. The Hong Kong Estates Agents Authority, for instance, has drawn up specific guidelines for real estate agents on filing suspicious transaction reports; and the Law Society of Hong Kong and the Hong Kong Institute of Certified Public Accountants are in the process of drafting such guidance for their members.
Hong Kong is an active member of the Financial Action Task Force’s FATF and Offshore Group of Banking Supervisors and was a founding member of the Asia Pacific Group on Money Laundering (APG).
In November 2007, the APG and FATF conducted a site visit as part of their joint mutual evaluation of Hong Kong. The mutual evaluation report will be discussed at FATF’s June 2008 Plenary
Hong Kong’s banking supervisory framework is in line with the requirements of the Basel Committee on Banking Supervision’s “Core Principles for Effective Banking Supervision.” Hong Kong’s JFIU is a member of the Egmont Group and is able to share information with its international counterparts. Hong Kong is known to cooperate with foreign jurisdictions in combating money laundering.
Hong Kong’s mutual legal assistance agreements generally provide for asset tracing, seizure, and sharing. Hong Kong signed and ratified a mutual legal assistance agreement (MLAA) with the United States that came into force in January 2000. Hong Kong has MLAAs with 22 other jurisdictions. Hong Kong has also signed surrender-of-fugitive-offenders (extradition) agreements with 17 countries, including the United States, and has signed agreements for the transfer of sentenced persons with ten countries, also including the United States. Hong Kong authorities exchange information on an informal basis with overseas counterparts and with Interpol.
The Government of Hong Kong should further strengthen its anti-money laundering regime by establishing threshold reporting requirements for currency transactions and putting into place “structuring” provisions to counter evasion efforts. Per FATF Special Recommendation IX, Hong Kong should also establish mandatory cross-border currency reporting requirements. Hong Kong should continue to encourage more suspicious transaction reporting by lawyers and accountants, as well as by business establishments, such as auto dealerships, real estate companies, and jewelry stores. Hong Kong should also take steps to stop the use of “shell” companies, IBCs, and other mechanisms that conceal the beneficial ownership of accounts by more closely regulating corporate formation agents. Particularly, since Hong Kong is a major trading center, Hong Kong law enforcement and customs authorities should seek to address trade-based money laundering.
With an advantageous and pivotal location in central Europe, a cash-based economy and a well-developed financial services industry, criminal organizations from countries such as Russia and Ukraine have reportedly entrenched themselves in Hungary. Money laundering is related to a variety of criminal activities, including illicit narcotics trafficking, prostitution, trafficking in persons, and organized crime. Other prevalent economic and financial crimes include real estate fraud and the copying/theft of bankcards. Financial crime reportedly has not increased in recent years though there have been some isolated, albeit well-publicized, cases.
Hungary has worked continuously to improve its money laundering enforcement regime following its 2003 removal from the Financial Action Task Force (FATF) list of Non-Cooperative Countries and Territories. Since then, it has worked to implement the FATF Forty Recommendations and the Nine Special Recommendations on Terrorist Financing. In early 2005, the International Monetary Fund (IMF), in conjunction with the Council of Europe’s Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL), conducted the third-round mutual evaluation of Hungary’s anti-money laundering and counter-terrorist financing (AML/CTF) regime. Of the FATF 49 Recommendations, Hungary received 38 ratings of “largely compliant” or better. Since the evaluation, Hungarian authorities have been committed to full implementation of the IMF/MONEYVAL recommendations to address deficiencies in its AML/CTF framework and implementation.
Hungary banned offshore financial centers, including casinos, by Act CXII of 1996 on Credit Institutions. Hungary discontinued its preferential tax treatment for offshore centers at the end of 2005; and in 2006 these companies automatically became Hungarian companies. The only special status they retain is the ability to keep financial records in foreign currencies. Hungary no longer permits the operation of free trade zones.
Act CXII of 1996 on Credit Institutions bans the use of any indigenous alternative remittance systems that bypass, in whole or in part, financial institutions. Act CXX of 2001 eliminated bearer shares and required that all such shares be transferred to identifiable shares by the end of 2003. All shares now are subject to transparency requirements, and both owners and beneficiaries must be registered.
The Government of Hungary (GOH) has prohibited the use of anonymous savings booklets since 2001. Act CXX of 2001 eliminated bearer shares and required that all such shares be transferred to identifiable shares by the end of 2003. All shares are now subject to transparency requirements, and all owners and beneficiaries must be registered. By mid-2003, Hungary had successfully transferred 90 percent of anonymous savings accounts into identifiable accounts. Individuals with remaining anonymous passbook accounts now need written permission from the police to access their accounts. The total balance remaining in anonymous accounts is approximately 20 million euros (approximately U.S. $29.5 million) for 2.5 million owners. This total is mainly comprised of accounts for which savings booklets were lost, accounts whose holders have not proceeded with the conversion nor tried to make a withdrawal, and accounts whose original owners have died and their heirs do not know how to access the funds.
The European Union’s Third Money Laundering Directive (Directive 2005/60/EC of the European Parliament and of the Council of October 26, 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing) entered into force in December 2005 with member states required to enact the laws, regulations and administrative provisions necessary to comply with this Directive by December 15, 2007. The EU’s Third Directive, which is consistent with the FATF 40 Recommendations and Nine Special Recommendations, necessitated that Hungary re-codify its original money laundering legislation, Act XV of 2003 on the Prevention and Impeding of Money Laundering. Hungary amended the legislation, and the implementing regulations entered into force in August 2006. These measures ensure the uniform implementation of the EU Directive with regard to the definition of “politically exposed persons” (PEPs), the technical criteria for simplified customer due diligence procedures, and exemptions for financial activity conducted on an occasional or very limited basis.
On November 19, 2007, the Parliament adopted Act CXXXVI on the Prevention and Combating of Money Laundering and Terrorist Financing (AML/CTF Act) and published the AML/CTF Act on November 28, 2007. The AML/CTF Act entered into force on December 15, 2007.
The AML/CTF Act establishes the legislative framework for the prevention and combat of terrorist financing and complies with international AML standards and requirements. The AML/CTF Act expands its scope to cover the following professions: financial services, investment services, insurance industry, commodity exchange services, postal money order and transfers, real estate agents, auditors, accountants, tax advisors, casinos, jewelry, lawyers, and notaries. The AML/CTF Act introduces more specific and detailed provisions relating to customer and beneficial owner identification and verification. The Act introduces a risk-sensitive approach regarding customer due diligence (CDD) and establishes detailed rules for CDD, including simplified as well as enhanced CDD for low or high-risk customers or business relationships, appropriate procedures to determine whether a person is a PEP, and other requirements. Regulation (EC) No 1781/2006 of the European Parliament and of the Council of November 15, 2006 regarding originator information accompanying transfers of funds entered into force on the January 1, 2007. Hungary has implemented the regulation’s requirements in the AML/CTF Act.
Obliged entities must send a suspicious transaction report (STR) to the financial intelligence unit (FIU) and suspend the transaction if there is suspicion of money laundering or terrorist financing. The AML/CTF Act sets out the requirements for disclosure of information, and mandates the keeping of statistics so that the effectiveness of the AML/CTF measures can be evaluated. The Act contains provisions on the internal procedures, training and internal communication, detailing special protocols for lawyers and notaries. Safe harbor provisions protect individuals when executing their AML/CTF reporting obligations.
Only banks or their authorized agents can operate currency exchange booths, of which there are approximately 300 in Hungary. These exchange houses are subject to “double supervision,” because they are subject to both the banks’ internal control mechanisms, as well as to supervision by the HFSA. In addition, the AML/CTF Act contains threshold-reporting requirements for currency exchange enterprises. Exchange booths must verify customer identity for currency exchange transactions totaling or exceeding 500,000 forints (approximately U.S. $3,000), whether in single transaction or derived from consecutive separate transactions. Exchange booths must file STRs for suspicious transactions in any amount.
Regulation (EC) No. 1889/2005 of the European Parliament and of the Council of October 26, 2005 on controls of cash entering or leaving the Community addresses FATF Special Recommendation Nine regarding cash couriers. The regulation requires travelers to make a declaration to the competent authorities of all movement of cash reaching or exceeding 10,000 euros (approximately U.S. $15,000). Act No. XLVIII of 2007 on the promotion of the Regulation states that based on the EC regulation, the Hungarian customs authorities should record the information obtained under Article 3 (Obligation to declare) as well as the data collected in connection with any inspection of the declaration. If the data suggests money laundering or terrorist financing, the Hungarian Customs and Finance Guard (HCFG) must immediately send an STR to the financial intelligence unit (FIU).
A new provision on the money laundering offence [Section 303 of the Hungarian Criminal Code (HCC) after the amendment by Act XXVII of 2007] brings Hungary into compliance with the Vienna and Palermo Conventions by enlarging the scope of the money laundering offense to cover the transfer of proceeds to a third party even if it is carried out through a nonbanking or nonfinancial transaction. Act XXVII of 2007 also addresses problems that have occurred with the AML reporting regime. Strict criminal penalties for nonreporting have resulted in over-filing by Hungarian financial institutions. This, in turn, has resulted in a high volume of STRs that are reportedly of low quality. Act XXVII of 2007 reduces the maximum punishment for intentional noncompliance with reporting obligations from three years imprisonment to two years imprisonment. Hungary has also abolished the negligent form of nonreporting as a criminal offence. Section 9 of Act XXVII of 2007 includes provisions punishing individual financing of terrorist acts. In January 2008, Act XIX of 1998 on the Hungarian Criminal Procedure was amended. This amendment transferred the authority to investigate money laundering crimes and noncompliance with the AML/CTF Act from the Hungarian National Police (HNP) to the HCFG.
Hungary’s financial regulatory body, the Hungarian Financial Supervisory Authority (HFSA), supervises financial service providers with the exception of cash processors, which are supervised by the National Bank of Hungary. The Hungarian Tax and Financial Control Administration supervises casinos. The FIU supervises most designated nonfinancial businesses and professions (DNFBPs), such as real estate agents, accountants and tax advisors. Supervisory functions are performed by self-regulatory bodies in certain cases: the Hungarian Bar Association with respect to lawyers, the Hungarian Association of Notaries Public with respect to notaries public, and by the Chamber of Hungarian Auditors and Auditing Activities with respect to auditors. The Hungarian Trade Licensing Office is the supervisory authority with respect to the natural and legal persons trading in goods and allowing cash payments above the amount of 3.6 million forints (approximately U.S. $20,000).
In 2006, the HFSA established a new division to deal with money laundering and financial crimes. The division coordinates supervisory tasks related to money laundering and terrorist financing and also assists other departments of the HFSA with on-site inspections. In 2007, the HFSA enlarged the staff of its Financial Forensic division. One of the HFSA’s major undertakings in 2007 was its participation in the implementation of the Third EU Directive on AML/CTF. The HFSA established a standing AML/CTF working group with the participation of the representatives of financial institutions and their associations.
Hungary’s FIU, the National Bureau of Investigation’s Anti-Money Laundering Department (ORFK), was originally a unit under the HNP. The FIU serves as the national center for receiving and analyzing STRs and other information regarding potential money laundering or terrorist financing. and disseminating them to the competent authorities As a law-enforcement style FIU, the ORFK has the authority to itself investigate money laundering cases. From January 1, 2007 until December 15, 2007 the FIU received 9,475 STRs, opened 40 cases, and confiscated 971,681,352 forints (approximately U.S. $5.5 million). In 2006, the FIU received 9,999 STRs, and opened 193 cases based upon STRs received.
As of December 15, 2007, the ORFK has undergone substantial organizational changes. It has moved from its current position within the HNP to the Hungarian Customs Authority. Although the ORFK still exists and receives STR data, its future operational capacity under the Hungarian Customs Authority remains unclear. The FIU’s move to the Customs Authority has caused a significant reduction in information exchange with international counterparts. The Egmont Group of FIUs has decided to temporarily suspend information exchange with the ORFK, pending further clarification of the structural changes within the FIU.
The Hungarian Criminal Code (HCC), Act IV of 1978 contains a provision on asset forfeiture. Under this provision, assets used to commit crimes, pose a danger to public safety, or derive from criminal activity, are subject to forfeiture. All property related to criminal activity during the interval when its owner was involved with a criminal organization can be confiscated, unless the owner proves it was acquired legally. For most crimes, the police or FIU first freeze the assets and inform the bank within 24 hours whether they will pursue an investigation. A court ruling determines forfeiture and seizure for all crimes, including terrorist financing. The banking community has cooperated fully with enforcement efforts to trace funds and seize and freeze bank accounts. If the owner of the assets requests it, and the FIU approves the request, the frozen assets may be released on the basis of financial need, such as health-related expenses or basic sustenance,
Act IV of 1978, Article 261, criminalizes terrorist acts. Hungary has criminalized terrorism and all forms of terrorist financing with Act II of 2003, which modifies Criminal Code Article 261. Section 261 of the HCC, amended by Act XXVII of 2007, states that any person sponsoring activities of a terrorist or a terrorist group by providing material assets or any other support faces two to ten years imprisonment. The HFSA provides access for supervised institutions as well as for the general public on its homepage to access updates to the UN 1373 Sanctions Committee Consolidated List and its equivalent EU list, as well as the list of Specially Designated Global Terrorists designated by the United States pursuant to E.O. 13224. Terrorist finance-related assets can be frozen. The Act XIX of 1998 on Criminal Procedures, Articles 151, 159, and 160, provide for the immediate seizure, sequestration, and precautionary measures against terrorist assets.
Hungary and the United States have a Mutual Legal Assistance Treaty and a nonbinding information sharing arrangement designed to enable U.S. and Hungarian law enforcement to work more closely to fight organized crime and illicit transnational activities. In May 2000, Hungary and the U.S. Federal Bureau of Investigation established a joint task force to combat Russian organized crime groups. Hungary has signed bilateral agreements with 41 other countries to cooperate in combating terrorism, drug trafficking, and organized crime.
Hungary is a member of the MONEYVAL Committee, a FATF-style regional body (FSRB). Hungary’s FIU is a member of the Egmont Group; however, information exchanges within this body have been suspended pending the finalization of the FIU’s reorganization and new functions. Hungary is a party to the UN International Convention for the Suppression of the Financing of Terrorism; the UN Convention against Transnational Organized Crime; the 1988 UN Drug Convention; and the UN Convention against Corruption.
Hungary has strengthened its legal and institutional background, and has made a significant progress regarding international communication and cooperation as well as training for the service providers who face money laundering and terrorist financing risks. Despite this progress, the GOH needs to continue its efforts with regard to implementation. An increased level of cooperation and coordination among the different law enforcement entities involved in fighting financial crime should be pursued. Prosecutors, judges, and police require enhanced knowledge to promote the successful prosecution of money laundering cases. The police and FIU should also have the option to extend their 24-hour time limit for the freezing of assets. The HFSA and other supervisory bodies should improve supervision and provide increased outreach and guidance to financial institutions with regard to reporting obligations. Hungary should re-criminalize negligent nonreporting of suspicious activities and transactions. The GOH should take steps to ensure that nonbank financial institutions file STRs. Increased AML/CTF training for the employees of financial institutions and other obliged entities is also necessary to improve the quality of STRs filed, in particular those which may be related to the financing of terrorism. The GOH should distribute the updates of the UN designated terrorist lists to the obliged entities, and not rely on posting updates online.
India’s emerging status as a regional financial center, its large system of informal cross-border money flows, and its widely perceived tax avoidance problems all contribute to the country’s vulnerability to money laundering activities. Some common sources of illegal proceeds in India are narcotics trafficking, illegal trade in endangered wildlife, trade in illegal gems (particularly diamonds), smuggling, trafficking in persons, corruption, and income tax evasion. Historically, because of its location between the heroin-producing countries of the Golden Triangle and Golden Crescent, India continues to be a drug-transit country.
India’s strict foreign-exchange laws and transaction reporting requirements, combined with the banking industry’s due diligence policy, make it increasingly difficult for criminals to use formal channels like banks and money transfer companies to launder money. However, large portions of illegal proceeds are often laundered through “hawala” or “hundi” networks or other informal money transfer systems. Hawala is an alternative remittance system that is popular among not only immigrant workers, but all strata of Indian society. Hawala transaction costs are less than the formal sector; hawala is perceived to be efficient and reliable; the system is based on trust and it is part of the Indian culture. According to Indian observers, funds transferred through the hawala market are equal to between 30 to 40 percent of the formal market. The Reserve Bank of India (RBI), India’s central bank, estimates that remittances to India sent through legal, formal channels in 2006-2007 amounted to U.S. $28.2 billion. Due to the large number of expatriate Indians in North America and the Middle East, India continues to retain its position as the leading recipient of remittances in the world, followed by China and Mexico.
Many Indians, especially among the poor and illiterate, do not trust banks and prefer to avoid the lengthy paperwork required to complete a money transfer through a financial institution. The hawala system can provide the same remittance service as a bank with little or no documentation and at lower rates and provide anonymity and security for their customers. Hawala is also used to avoid currency restrictions, assists in capital flight, facilitates tax evasion, and avoids government scrutiny in financial transactions. The Government of India (GOI) neither regulates hawala dealers nor requires them to register with the government. The RBI argues that hawala dealers cannot be regulated since they operate illegally and therefore cannot be registered. Indian analysts also note that hawala operators are often protected by some politicians.
However, the Indian government is attempting to regulate a broader swath of the financial sector. In December 2005, the RBI issued guidelines requiring financial institutions, including money changers, to follow “know your customer” (KYC) guidelines and maintain transaction records for the sale and purchase of foreign currency. Foreigners and Nonresident Indians are permitted to receive cash payments up to U.S. $3,000 or its equivalent in other currencies from moneychangers. Recently, the RBI has been taking additional steps to crack down on unlicensed money transmitters and increase monitoring of nonbanking money transfer operations like currency exchange kiosks and wire transfer services. In September 2007, the RBI asked Western Union’s Indian-based subsidiary, Western Union Services India, to desist from appointing any more sub-agents until further instruction. Western Union officials have explained to U.S. government officials that this is due to a new policy the Ministry of Home Affairs (MHA) is formulating to require wire transfer businesses to perform due diligence on sub-agents and seek RBI and MHA approval before appointing new sub-agents.
Historically, in Indian hawala transactions, gold has been one of the most important commodities. There is a widespread cultural demand for gold in India and South Asia. Since the mid-1990s, India has liberalized its gold trade restrictions. In recent years, the growing Indian diamond trade has been considered an important factor in providing counter-valuation; a method of “balancing the books” in external hawala transactions. Invoice manipulation is also used extensively to avoid both customs duties, taxes, and to launder illicit proceeds through trade-based money laundering.
India has illegal black market channels for selling goods. Smuggled goods such as food items, computer parts, cellular phones, gold, and a wide range of imported consumer goods are routinely sold through the black market. By dealing in cash transactions and avoiding customs duties and taxes, black market merchants offer better prices than those offered by regulated merchants. However, due to trade liberalization, the rise in foreign companies working and investing in India, and increased government monitoring, the business volume in smuggled goods has fallen significantly. In the last 10-15 years, most products previously sold in the black market are now traded through lawful channels.
With tax evasion a widespread problem in India, the GOI is gradually making changes to the tax system. The government now requires individuals to use a personal identification number to pay taxes, purchase foreign exchange, and apply for passports. The GOI also introduced a central value added tax (VAT) in April 2005 which replaced numerous complicated state sales taxes and excise taxes with one national uniform VAT rate. As a result, the incentives and opportunities for entrepreneurs and businesses to conceal their sales or income levels have been reduced. Except for Uttar Pradesh, all Indian states have implemented the national VAT mandate. Uttar Pradesh announced in late October 2007 that it would also implement the VAT.
In the aftermath of September 11, India joined the global community in addressing concerns about money laundering and terrorist finance by implementing the Prevention of Money Laundering Act (PMLA) in January 2003. The PMLA criminalized money laundering, established fines and sentences for money laundering offenses, imposed reporting and record keeping requirements on financial institutions, provided for the seizure and confiscation of criminal proceeds, and established a financial intelligence unit (FIU). In July 2005, the PMLA’s implementing rules and regulations were promulgated. The legislation outlines predicate offenses for money laundering. Predicate offenses are listed in a schedule to the Act, but these do not include many of the predicate offenses listed as essential by the FATF Recommendations, including organized crime, fraud, smuggling and insider trading. Penalties for offenses under the PMLA are severe and may include imprisonment for three to seven years and fines as high as U.S. $12,500. If the money laundering offense is related to a drug offense under the Narcotic Drugs and Psychotropic Substances Act (NDPSA), imprisonment can be extended to a maximum of ten years. The PMLA mandates that banks, financial institutions, and intermediaries of the securities market (such as stock market brokers) maintain records of all cash transactions (deposits/withdrawals, etc.) exceeding U.S. $25,000 and keep a record of all transactions dating back 10 years.
The Criminal Law Amendment Ordinance allows for the attachment and forfeiture of money or property obtained through bribery, criminal breach of trust, corruption, or theft, and of assets that are disproportionately large in comparison to an individual’s known sources of income. The 1973 Code of Criminal Procedure, Chapter XXXIV (Sections 451-459), establishes India’s basic framework for confiscating illegal proceeds. The NDPSA of 1985, as amended in 2000, calls for the tracing and forfeiture of assets that have been acquired through narcotics trafficking and prohibits attempts to transfer and conceal those assets. The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act of 1976 (SAFEMA) also allows for the seizure and forfeiture of assets linked to Customs Act violations. The Competent Authority (CA), within the Ministry of Finance (MOF), administers both the NDPSA and the SAFEMA.
The 2001 amendments to the NDPSA allow the CA to seize any asset owned or used by an accused narcotics trafficker immediately upon arrest. Previously, assets could only be seized after a conviction. Even so, Indian law enforcement officers lack knowledge of the procedures for identifying individuals who might be subject to asset seizure/forfeiture and in tracing assets to be seized. They also appear to lack sufficient knowledge in drafting and expeditiously implementing asset freezing orders. In 2005, pursuant to the NDPSA and with U.S. government funding through its Letter of Agreement (LOA) with India, the CA began training law enforcement officials on asset forfeiture laws and procedures. CA has since held ten asset seizure and forfeiture workshops in New Delhi, Himachal Pradesh, Uttar Pradesh, Rajasthan, Andhra Pradesh, Karnataka and Assam. CA reports that the workshops have led to increased seizures and forfeitures. In 2007, the joint U.S./GOI Project Implementation Committee provided additional funds so that the Competent Authority could expand its training.
One of the GOI’s principal provisions in combating money laundering is the Foreign Exchange Management Act (FEMA) of 2000. The FEMA’s objectives include establishing controls over foreign exchange, preventing capital flight, and maintaining external solvency. FEMA also imposes fines on unlicensed foreign exchange dealers. Related to the FEMA is the Conservation of Foreign Exchange and Prevention of Smuggling Act (COFEPOSA), which provides for preventive detention in smuggling and other matters relating to foreign exchange violations. The MOF’s Directorate of Enforcement (DOE) enforces the FEMA and COFEPOSA. The RBI also plays an active role in the regulation and supervision of foreign exchange transactions.
In April 2002, the Indian Parliament also passed the Prevention of Terrorism Act (POTA), which criminalizes terrorist financing, among other provisions. In March 2003, the GOI announced that it had charged 32 terrorist groups under the POTA. In July 2003, the GOI arrested 702 persons under the POTA. In November 2004, due to concerns that the overall law permitted overreaching police powers not related to the terrorist financing provisions, the Parliament repealed the POTA and amended the Unlawful Activities (Prevention) Act 1967 (UAPA) to include the POTA’s salient elements such as criminalization of terrorist financing.
As part of the PMLA mandate, India’s FIU was established in January 2006 to combat money laundering and terrorist financing. The FIU is responsible for receiving, processing, analyzing, and disseminating cash and suspicious transaction reports from financial institutions, banking companies, and intermediaries of the securities market. Over the last two years, the FIU has become fully operational and disseminates report analysis to law enforcement, investigative, and intelligence officers to investigate and prevent money laundering and curb financial crimes. The FIU has a staff of forty-three officers, headed by an Indian Administrative Service Director of equal rank to a Joint Secretary in the GOI ministries.
As of September 2007, FIU received more than 1800 suspicious transaction reports (STRs), of which about 800 were shared with relevant enforcement agencies. According to FIU officials, income tax evasion has been readily detected in the STRs and has also led to the arrest of suspected terror operatives. Reporting entities have immunity from civil proceedings for disclosures to FIU. The FIU also receives threat information and leads from foreign intelligence agencies concerning terrorists, terrorist groups, and international financial crimes information. Cash smuggling reports, which are prepared by Customs and the Enforcement Directorate, are not disclosed to the FIU but are shared with them indirectly on a need to know basis.
The FIU is an independent body reporting directly to the Economic Intelligence Council (EIC), which is headed by the Finance Minister. For administrative purposes, the FIU’s operations are supervised by the MOF’s Department of Revenue. While the FIU receives processes, analyzes, and disseminates information relating to suspect financial transactions to enforcement agencies and foreign FIUs, the unit does not have criminal enforcement, investigative, or regulatory powers. In 2007, the FIU initiated a project to adopt industry best practices and appropriate technology for creating an Information Technology Integrator. The integrator will process financial intelligence and alert on suspicious transactions.
In June 2007, India’s FIU was admitted as a member of the Egmont Group. Admission of India’s FIU as a member of the Egmont Group is seen by Indian officials as a major step forward in India joining the international community in its fight against money laundering and terrorist financing. FIU officials have expressed an interest in signing bilateral MOUs with foreign FIUs to facilitate sharing of money laundering information.
Under the MOF, the Enforcement Directorate is responsible for investigations and prosecutions of money laundering cases. In 2006-2007, the Enforcement Directorate initiated investigations into 38 cases of money laundering, eight of which were related to terrorist financing. The directorate has made seven seizure cases of properties worth $436,000. Headquartered in New Delhi, the directorate has seven zonal offices in Mumbai, Kolkata, Delhi, Jalandhar, Chennai, Ahmedabad, and Bangalore. In addition to the MOF, the Central Bureau of Investigation (CBI), the Directorate of Revenue Intelligence (DRI), Customs and Excise, RBI, and the CA are involved in GOI’s anti-money laundering efforts.
The CBI is a member of INTERPOL. All state police forces and other law enforcement agencies have a link through INTERPOL/New Delhi to their counterparts in other countries for purposes of criminal investigations. India’s Customs Service is a member of the World Customs Organization and shares enforcement information with countries in the Asia/Pacific region.
To assist in enhancing coordination among various enforcement agencies and directorates at the MOF, the GOI has established an Economic Intelligence Council (EIC). This provides a forum to strengthen intelligence and operational coordination, to formulate common strategies to combat economic offenses, and to discuss cases requiring interagency cooperation. In addition to the central EIC, there are eighteen regional economic committees in India. The Central Economic Intelligence Bureau (CEIB) functions as the secretariat for the EIC in the MOF. The CEIB interacts with the National Security Council, the Intelligence Bureau, and the Ministry of Home Affairs on matters concerning national security and terrorism.
In October 2006, the MOF started the process to reconcile its list of predicate crimes under the PMLA with that of international FATF recommendations. Having made some progress towards that commitment, India gained FATF observer status in February 2007 and has a two-year probationary period to adopt FATF core recommendations towards gaining full membership. As defined by FATF, this includes criminalization of money laundering, customer due diligence, record-keeping, suspicious transaction reporting, criminalization of terrorist financing, and suspicious transaction reporting relating to terrorist financing, as well as expressing a political commitment to international standards for anti-money laundering. India is a member of the Asia/Pacific Group (APG) on Money Laundering, a FATF-style regional body.
The MOF is leading an inter-ministerial effort to amend the PMLA to meet FATF requirements. At present, the PMLA does not include comprehensive provisions on terrorist financing, and the required legislative amendments to the PMLA are still awaiting Cabinet approval before moving to Parliament for enactment. MOF officials have stated that changes to the PMLA will include incorporating provisions of the UAPA that criminalize terrorist financing, adopt most FATF recommended categories for predicate offenses, and implement reporting requirements for money changers, money transfer service providers, and casinos.
The Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority and the National Housing Board have also adopted anti-money laundering policies. SEBI has also issued a circular to all registered intermediaries on their obligations as financial institutions to prevent money laundering. This includes guidelines on maintaining records, preserving sensitive information with respect to certain transactions, and reporting suspicious cash flows and financial transactions to the FIU.
Prompted by the RBI’s 2002 notice to commercial banks to adopt due diligence rules, many of these institutions have taken steps to combat money laundering. For example, most private banks and several public banks have hired anti-money laundering compliance officers to design systems and training to ensure compliance with these regulations. The Indian Bankers Association has also established a working group to develop self-regulatory anti-money laundering procedures and assist banks in adopting the mandated rules.
The RBI and SEBI have worked together to tighten regulations, strengthen supervision, and ensure compliance with KYC norms, which were implemented in December 2005. This includes, for example, provisions that banks must identify politically involved account holders who reside outside of India and identify the source of these funds before accepting deposits of more than U.S. $10,000. The RBI continues to update its due diligence guidelines based on FATF recommendations. For banks that are found noncompliant, the RBI has the power to order banks to freeze assets.
Banks are required to file STRs with FIU. Banks have installed software to enable their internal controllers to better monitor accounts for any unusual relationship between the size of the deposit and the turnover in the account and for matching names of terrorists and terrorist-associated countries. All banks have been advised by RBI that they should guard against establishing relationships with foreign financial institutions that permit their accounts to be used by shell companies. The UNSCR 1267 Sanctions Committee’s consolidated list is routinely circulated to all financial institutions.
India does not have an offshore financial center but does license offshore banking units (OBUs). These OBUs are required to be predominantly owned by individuals of Indian nationality or origin resident outside India. The OBUs include overseas companies, partnership firms, societies, and other corporate bodies. OBUs must be audited to confirm that ownership by a nonresident Indian is not less than 60 percent. These entities are susceptible to money laundering activities, in part because of a lack of stringent monitoring of transactions in which they are involved. Finally, OBUs must be audited financially; however, the auditing firm is not required to obtain government approval.
GOI regulations governing charities remain antiquated and the process by which charities are governed at the provincial and regional levels is weak. The GOI does require charities to register with the state-based Registrar of Societies, and, if seeking tax exempt status, they must apply separately with the Exemptions Department of the Central Board of Direct Taxes. There are no guidelines or provisions governing the oversight of charities for anti-money laundering or counter-terrorist financing (AML/CTF) purposes, and there is insufficient integration and coordination between charities’ regulators and law enforcement authorities regarding the threat of terrorist finance. The Foreign Contribution Regulation Act (FCRA) of 1976, supervised by the MHA, regulates the use of foreign funds received by charitable/nonprofit organizations.
The GOI is a party to the 1988 UN Drug Convention. It is a signatory to, but has not yet ratified, the UN Convention against Transnational Organized Crime or the UN Convention against Corruption. India is a party to the UN International Convention for the Suppression of the Financing of Terrorism. India has signed and ratified a number of mutual legal assistance treaties with many countries, including the United States.
The Government of India should move forward expeditiously with amendments to the PMLA that explicitly criminalize terrorist financing, and expand the list of predicate offenses so as to meet FATF’s core recommendations. Further steps in tax reform will also assist in negating the popularity of hawala and in reducing money laundering, fraud, and financial crimes. The GOI should ratify the UN Conventions against Transnational Organized Crime and Corruption. The GOI needs to promulgate and implement new regulations for nongovernment organizations including charities. Given the number of terrorist attacks in India and the fact that in India hawala is directly linked to terrorist financing, the GOI should prioritize cooperation with international initiatives that provide increased transparency in alternative remittance systems. India should devote more law enforcement and customs resources to curb abuses in the diamond trade. It should also consider the establishment of a Trade Transparency Unit (TTU) that promotes trade transparency; in India, trade is the “back door” to underground financial systems. The GOI also needs to strengthen regulations and enforcement targeting illegal transactions in informal money transfer channels.
Although neither a regional financial center nor an offshore financial haven, Indonesia is vulnerable to money laundering and terrorist financing due to a poorly regulated financial system, cash-based economy, the lack of effective law enforcement, and widespread corruption. Most money laundering in the country is connected to nondrug criminal activity such as gambling, prostitution, bank fraud, theft, credit card fraud, maritime piracy, sale of counterfeit of goods, illegal logging, and corruption. Indonesia also has a long history of smuggling, a practice facilitated by thousands of miles of un-patrolled coastline and law enforcement and customs infrastructure riddled with corruption. The proceeds of illicit activities are easily parked offshore and only repatriated as required for commercial and personal needs.
In June 2001, the Financial Action Task Force (FATF) added Indonesia to its list of Non-Cooperative Countries and Territories (NCCT). This designation was due to a number of serious deficiencies in Indonesia’s Anti-Money Laundering (AML) framework including the lack of a basic set of AML provisions and the failure to criminalize money laundering. As a result of Indonesia’s enactment of relevant AML legislation and its ongoing efforts to implement reforms to its AML regime, the FATF removed Indonesia from its NCCT list on February 11, 2005.
In April 2002, Indonesia passed Law No. 15/2002 Concerning the Crime of Money Laundering, making money laundering a criminal offense. The law identifies 15 predicate offenses related to money laundering, including narcotics trafficking and most major crimes. Law No. 15/2002 established the Financial Transactions Reports and Analysis Centre (PPATK), Indonesia’s financial intelligence unit (FIU) to develop policy and regulations to combat money laundering and terrorist financing.
Law No. 15/2002 stipulated important provisions to enhance Indonesia’s anti-money laundering regime, such as: obligating financial service providers to submit suspicious transactions reports and cash transaction reports; exempting reporting, investigation and prosecution of criminal offenses of money laundering from the provisions of bank secrecy that are stipulated in Indonesia’s banking law; placing the burden of proof on the defendant; establishing the PPATK as an independent agency with the duty and the authority to prevent and eradicate money laundering; and establishing a clear legal basis for freezing and confiscating the proceeds of crime.
In September 2003, Parliament passed Law No. 25/2003, amending Law No. 15/2002, to further address FATF’s concerns. Law No. 25/2003 provides a new definition for the crime of money laundering, making it an offense for anyone to deal intentionally with assets known, or reasonably suspected, to constitute proceeds of crime with the purpose of disguising or concealing the origin of the assets. The amendment removes the threshold requirement for proceeds of crime. The amendment further expands the scope of regulations by expanding the definition of reportable suspicious transactions to include attempted or unfinished transactions. The amendment also shortens the time to file an STR to three days or less after the discovery of an indication of a suspicious transaction. However, there is no clear legal obligation to report STRs related to terrorist financing. The amendment makes it an offense to disclose information about the reported transactions to third parties, which carries a penalty of imprisonment for a maximum of five years and a maximum fine of one billion rupiah (approximately U.S. $105,000).
Additionally, Articles 44 and 44A of Law 25/2003 provide for mutual legal assistance with respect to money laundering cases, with the ability to provide assistance using the compulsory powers of the court. Article 44B imposes a mandatory obligation on the PPATK to implement provisions of international conventions or international recommendations on the prevention and eradication of money laundering. In March 2006, the GOI expanded Indonesia’s ability to provide mutual legal assistance by enacting the first Mutual Legal Assistance (MLA) Law (No. 1/2006), which establishes formal, binding procedures to facilitate MLA with other states.
A proposed second amendment to the AML law was submitted to the parliament in October 2006. If passed, it would require nonfinancial service businesses and professionals who potentially could be involved in money laundering, such as car dealers, real estate companies, jewelry traders, notaries and public accountants, to report suspicious transactions. The amendments also would include civil asset forfeiture and give more investigative powers to the PPATK, as well as the authority to block financial transactions suspected of being related to money laundering. Despite these provisions, the draft amendments appear to have remaining gaps when measured against current AML/CTF international standards.
Indonesia’s FIU, PPATK, established in April 2002, became operational in October 2003 and continues to make progress in developing its human and institutional capacity. The PPATK is an independent agency that receives, analyzes, and evaluates currency and suspicious financial transaction reports, provides advice and assistance to relevant authorities, and issues publications. As of November 2007 the PPATK had received approximately 12,000 suspicious transactions reports (STRs) from 112 banks, seven rural banks, and 82 nonbank financial institutions. Approximately 5,000 of these STRs were received during 2007. The agency also reported that it had received a total of over four million cash transaction reports (CTRs) from 132 banks, 48 moneychangers, 35 rural banks, five insurance companies, and two securities companies. PPATK have submitted a total of 521 cases to various law enforcement agencies based on their analysis of 882 STRs.
The PPATK actively pursues broader cooperation with relevant GOI agencies. The PPATK has signed a total of 16 domestic memoranda of understanding (MOUs) to assist in financial intelligence information exchange with the following entities: Attorney General’s Office (AGO), Bank Indonesia (BI), the Capital Market Supervisory Agency (BAPEPAM), the Ministry of Finance Directorate General of Financial Institutions, the Directorate General of Taxation, Director General for Customs and Excise, the Ministry of Forestry Center for International Forestry Research, the Indonesian National Police, the Supreme Audit Board (BPK), the Corruption Eradication Committee, the Judicial Commission, the Directorate General of Immigration, the State Auditor, the Directorate General of the Administrative Legal Affairs Department of Law and Human Rights, the Anti-Narcotics National Board, and the Province of Aceh.
Bank Indonesia (BI), the Indonesian Central Bank, issued Regulation No. 3/10/PBI/2001, “The Application of Know Your Customer Principles,” on June 18, 2001. This regulation requires banks to obtain information on prospective customers, including third party beneficial owners, and to verify the identity of all owners, with personal interviews if necessary. The regulation also requires banks to establish special monitoring units and appoint compliance officers responsible for implementation of the new rules and to maintain adequate information systems to comply with the law. BI has issued an Internal Circular Letter No. 6/50/INTERN, dated September 10, 2004 concerning Guidelines for the Supervision and Examination of the Implementation of KYC and AML by Commercial Banks. In addition, BI also issued a Circular Letter to Commercial Banks No. 6/37/DPNP dated September 10, 2004 concerning the Assessment and Imposition of Sanctions on the Implementation of KYC and other Obligations Related to Law on Money Laundering Crimes. BI is also preparing Guidelines for Money Changers on Record Keeping and Reporting Procedures, and Money Changer Examinations to be given by BI examiners. Currently, banks must report all foreign exchange transactions and foreign obligations to BI.
With respect to the physical movement of currency, Article 16 of Law No. 15/2002 contains a reporting requirement for any person taking cash into or out of Indonesia in the amount of 100 million Rupiah or more, or the equivalent in another currency, which must be reported to the Director General of Customs and Excise. These reports must be given to the PPATK in no later than five business days and contain details of the identity of the person. Indonesia Central Bank regulation 3/18/PBI/2001 and the Directorate General of Customs and Excise Decree No.01/BC/2005 contain the requirements and procedures of inspection, prohibition, and deposit of Indonesia Rupiah into or out of Indonesia.
The Decree provides implementing guidance for Ministry of Finance Regulation No.624/PMK. 2004 of December 31, 2004, and requires individuals who import or export more 100 million Rupiah in cash (approximately U.S. $10,500) to declare such transactions to Customs. This information is to be declared on the Indonesian Customs Declaration (BC3.2). The cash declaration requirements do no cover bearer negotiable instruments as required by FATF’s Special Recommendation IX. In addition, cash can only be restrained if the passenger fails to disclose or a false declaration is made. In most cases, the cash is returned to the traveler after a small administrative penalty is applied. There is no clear authority to stop, restrain or seize money that is suspected of promoting terrorism or crime or constitutes the proceeds of crime. As of December 2007, the PPATK has received more than 2,137 reports from Customs on cross border cash carrying issues. The reports were derived from two airports, Jakarta Cengkarang and Denpasar, the seaports of Batam and Tanjung Balai Karimun, Bandung, Batam and Denpasar. As of July 2007, the Indonesian National Police have conducted 20 investigations based on cross-border currency reports. Despite these investigations, detection capacity is very weak and criminal penalties are limited and are not being applied.
Indonesia’s bank secrecy law covers information on bank depositors and their accounts. Such information is generally kept confidential and can only be accessed by the authorities in limited circumstances. However, Article 27(4) of the Law No. 15/2002 expressly exempts the PPATK from “the provisions of other laws related to bank secrecy and the secrecy of other financial transactions” in relation to its functions in receiving and requesting reports and conducting audits of providers of financial services. In addition, Article 14 of the Law No. 15/2002 exempts providers of financial services from bank secrecy provisions when carrying out their reporting obligations. Providers of financial services, their officials, and employees are given protection from civil or criminal action for making required disclosures under Article 15 of the anti-money laundering legislation.
There is a mechanism to obtain access to confidential information from financial institutions through BI regulation number 2/19/PBI/2000. PPATK has the authority to conduct supervision and monitoring compliance of providers of financial services. PPATK may also advise and assist relevant authorities regarding information obtained by the PPATK in accordance with the provisions of this Law No. 15/2002.
The GOI has limited formal instruments to trace and forfeit illicit assets. Under the Indonesian legal system, confiscation against all types of assets must be effected through criminal justice proceedings and be based on a court order. The GOI has no clear legal mechanism to trace and freeze assets of individuals or entities on the UNSCR 1267 Sanctions Committee’s consolidated list, and there is no clear administrative or judicial process to implement this resolution and UNSCR 1373. While the BI circulates the consolidated list to all banks operating in Indonesia, this interagency process is too complex and inefficient to send out asset-freezing instructions in a timely manner. In addition, no clear instructions are provided to financial institutions as to what will happen when assets are discovered. Banks also note that without very specific information, the preponderance of similar names and inexact addresses, along with lack of a unique identifier in Indonesia, make identifying the accounts very difficult. Attempts to use a criminal process are confusing and ad hoc at best, and rely on lengthy investigation processes before consideration can be given to freezing or forfeiting assets.
Article 32 of Law No. 15/2002, as amended by Law No. 25/2003, provides that investigators, public prosecutors and judges are authorized to freeze any assets that are reasonably suspected to be the proceeds of crime. Article 34 stipulates that if sufficient evidence is obtained during the examination of the defendant in court, the judge may order the sequestration of assets known or reasonably suspected to be the proceeds of crime. In addition, Article 37 provides for a confiscation mechanism if the defendant dies prior to the rendition of judgment.
In August, 2006, the GOI enacted Indonesia’s first Witness and Victim Protection Law (No. 13/2006). Indonesia’s AML Law and Government Implementing Regulation No. 57/2003 also provide protection to whistleblowers and witnesses.
The October 18, 2002 emergency counter-terrorism regulation, the Government Regulation in Lieu of Law of the Republic of Indonesia (Perpu), No. 1 of 2002 on Eradication of Terrorism, criminalizes terrorism and provides the legal basis for the GOI to act against terrorists, including the tracking and freezing of assets. The Perpu provides a minimum of three years and a maximum of 15 years imprisonment for anyone who is convicted of intentionally providing or collecting funds that are knowingly used in part or in whole for acts of terrorism. However, the terrorist financing regulation appears to suffer from a number of deficiencies. For example, the terrorist financing offense must be linked to a specific act of terrorism and the prosecution must prove that the offender specifically intended that the funds be used for acts of terrorism. This regulation is necessary because Indonesia’s anti-money laundering law criminalizes the laundering of “proceeds” of crimes, but it is often unclear to what extent terrorism generates proceeds. Terrorist financing is therefore not fully included as a predicate for the money laundering offence. In October 2004, an Indonesian court convicted and sentenced one Indonesian to four years in prison on terrorism charges connected to his role in the financing of the August 2003 bombing of the Jakarta Marriott Hotel.
The GOI has begun to take into account alternative remittance systems and charitable and nonprofit entities in its strategy to combat terrorist financing and money laundering. The PPATK has issued guidelines for nonbank financial service providers and money remittance agents on the prevention and eradication of money laundering and the identification and reporting of suspicious and other cash transactions. The GOI has initiated a dialogue with charities and nonprofit entities to enhance regulation and oversight of those sectors.
Indonesia is an active member of the Asia/Pacific Group on Money Laundering (APG), and currently serves as the co-chair. The APG conducted its second mutual evaluation of Indonesia in November 2007 and the report will be discussed and adopted at the APG Annual Meeting in July 2008. In June 2004, PPATK became a member of the Egmont Group. The PPATK has pursued broader cooperation through the MOU process and has concluded 23 MOUs with other Egmont FIUs. The PPATK has also entered into an Exchange of Letters enabling international exchange with Hong Kong. Indonesia has signed Mutual Legal Assistance Treaties with Australia, China and South Korea. Indonesia joined other ASEAN nations in signing the ASEAN Treaty on Mutual Legal Assistance in Criminal Matters on November 29, 2004, though the GOI has not yet ratified the treaty. The Indonesian Regional Law Enforcement Cooperation Centre was formally opened in 2005 and was created to develop the operational law enforcement capacity needed to fight transnational crimes.
The GOI has enacted Law No. 7/2007 to implement the 1988 UN Drug Convention, to which it is a party. The GOI also has enacted Law No. 22/1997 Concerning Drugs and Psychotropic Substances, which makes the possession, purchase or cultivation of narcotic drugs or psychotropic substances for personal consumption a criminal offense. The GOI is a party to the UN International Convention for the Suppression of the Financing of Terrorism and a party to the UN Convention against Corruption. The GOI has signed but has yet to ratify the UN Convention against Transnational Organized Crime. Indonesia is ranked 143 of 180 countries ranked in Transparency International’s 2007 Corruption Perception Index.
While The Government of Indonesia has made progress in constructing an AML regime, efforts to combat terrorist financing have been weak. Sustained public awareness campaigns, new bank and financial institution disclosure requirements, and the PPATK’s support for Indonesia’s first credible anti-corruption drive has led to increased public awareness about money laundering and, to a lesser degree, terrorist financing. However, weak human and technical capacity, poor interagency cooperation, and rampant corruption in business and government remain significant impediments to the continuing development of an effective anti-money laundering regime. The highest levels of GOI leadership should continue to demonstrate strong support for strengthening Indonesia’s anti-money laundering regime. In particular, the GOI must continue to improve capacity and interagency cooperation in analyzing suspicious and cash transactions, investigating and prosecuting cases, and achieving deterrent levels of convictions. As part of this effort, Indonesia should review and streamline its process for reviewing UN designations and identifying, freezing and seizing terrorist assets, and become a party to the UN Convention against Transnational Organized Crime.
Iran is not a regional financial center. Iran’s economy is marked by a bloated and inefficient state sector and over-reliance on the petroleum industry. Iran’s huge oil and gas reserves produce 60 percent of government revenue-and state-centered policies that cause major distortions in the economy. Iran earns about U.S. $50 billion a year in oil exports. Private sector activity is typically small-scale; workshops, farming, and services. Reportedly, a prominent Iranian banking official estimates that money laundering encompasses an estimated 20 percent of Iran’s economy. There are other reports that approximately U.S. $12 billion a year is laundered via smuggling commodities in Iran and over U.S. $6 billion is laundered by international criminal networks. The World Bank reports that about 19 percent of Iran’s GDP pertains to unofficial economic activities. Money laundering in Iran encompasses narcotics trafficking, smuggling, trade fraud, counterfeit merchandise and intellectual property rights violations, cigarette smuggling, trafficking in persons, hawala, capital flight, and tax evasion.
After the Iranian Revolution of 1979, the Government of Iran (GOI) nationalized the country’s banks, leaving the following: Bank Refah, Bank Melli Iran, Bank Saderat, Bank Tejarat, Bank Mellat and Bank Sepah, and three specialized institutions, Bank Keshavrzi, Bank Maskan and Bank Sanat va Madden. No foreign banks were allowed to operate in the country. Since 1983, consistent with Islamic law, banks have been prohibited from paying interest on deposits or charging interest on loans. However, alternative financial instruments were developed including profit-sharing and financing based on trade. In 1994, Iran authorized the creation of private credit institutions. Licenses for these banks were first granted in 2001. Currently, these banks include Karafarin, Parsian, Saman Eghtesad, Pasargad, Sarmayeh, and Eghtesade Novin. Standard Chartered Bank became the first foreign bank to be awarded a license to establish a branch in Iran, although this was limited to Kish, a free-zone island. Currently, some 40 international banks have representative offices in Iran, which may undertake lending but not accept deposits.
There are currently no meaningful anti-money laundering (AML) controls on the Iranian banking system. The Central Bank of Iran (CBI) has issued AML circulars that address suspicious activity reporting and other procedures that demonstrate an awareness of international standards, but there is a lack of implementation. In 2003, the Majlis (Parliament) reportedly passed an anti-money laundering act. The act includes customer identification requirements, mandatory record keeping for five years after the opening of accounts, and the reporting of suspicious activities. However, the act has not been implemented due to reported pressure by vested interests within the government. Iran has reported to the United Nations that it has established a financial intelligence unit (FIU). However, Iran has not provided any documentation or details on the FIU.
The U.S. Department of State has designated Iran as a State Sponsor of Terrorism. On September 8, 2006 the U.S. Treasury Department issued a regulation prohibiting U.S. financial institutions from handling any assets, directly or indirectly, relating to Iran’s Bank Saderat, based on evidence of its involvement in transferring funds to terrorist groups. Bank Saderat is one of Iran’s largest with approximately 3,400 branches. On January 9, 2007, the U.S. Treasury Department imposed sanctions against Bank Sepah, a state-owned Iranian financial institution for providing support and services to designated Iranian proliferation firms, particularly Iran’s missile procurement network. There are reports that Bank Sepah requested other financial institutions to remove its name from processing suspect transactions in the international financial system. Bank Sepah is the fifth largest Iranian state-owned bank and has international branches in Europe.
On October 11, 2007, FATF released a statement of concern stating that “Iran’s lack of a comprehensive AML/CTF regime represents a significant vulnerability within the international financial system. FATF calls upon Iran to address on an urgent basis its AML/CTF deficiencies, including those identified in the 2006 International Monetary Fund Article IV Consultation Report for Iran. FATF members are advising their financial institutions to consider the risk arising from the deficiencies in Iran’s AML/CTF regime and practice enhanced “due diligence.” Iran is currently the only country for which FATF has publicly identified such significant AML/CTF vulnerabilities. On October 16, 2007, the Department of Treasury issued an advisory to financial institutions that they “should be aware that there may be an increased effort by Iranian entities to circumvent international sanctions and related financial community scrutiny through the use of deceptive practices involving shell companies and other intermediaries or requests that identifying information be removed from transactions. Such efforts may originate in Iran or Iranian free trade zones subject to separate regulatory and supervisory controls, including Kish Island. Such efforts may also originate wholly outside of Iran at the request of Iranian controlled entities.”
On October 25, 2007, the Department of Treasury designated for proliferation activities under Executive Order 13382 Iran’s state-owned Banks Melli and Mellat. Bank Melli is Iran’s largest bank. Bank Melli provides banking services to entities involved in Iran’s nuclear and ballistic missile programs, including entities listed by the UN for their involvement in those programs. Bank Melli provides banking services to the Iranian Revolutionary Guards Corps (IRGC) and the Qods Force. When handling financial transactions on behalf of the IRGC, Bank Melli has employed deceptive banking practices to obscure its involvement in the international banking system. Bank Mellat provides banking services in support of Iran’s nuclear entities, including those designated by the United States and by the UN Security Council under UNSCRs 1737 and 1747. On October 25, Bank Saderat was also designated for its support for terrorism, specifically channeling funds to terrorist organizations including Hizballah and EU-designated terrorist groups Hamas, PFLP-GC, and Palestinian Islamic Jihad.
Iran has a very large underground economy, which is spurred by restrictive taxation, widespread smuggling, currency exchange controls, capital flight, and a large Iranian expatriate community. The IMF reports that Iran has the highest “brain drain” rate of 90 countries measured. Over 400,000 Iranians live in Dubai. Anyone engaging in transfers or transactions of foreign currency into or out of Iran must abide by CBI regulations, including registration and licensing. Those who do not are subject to temporary or permanent closure. The regulations and circulars address money transfer businesses, including hawaladars. However, underground hawala and moneylenders in the bazaar are active in Iran. Since there is an absence of an adequate banking system and working capital, the popular informal system meets the need for currency exchange and money lending. Many hawaladars and traditional bazaari are linked directly to the regional hawala hub in Dubai. Counter valuation in hawala transactions is often accomplished via trade. The trade and smuggling of goods into Iranian commerce leads to a significant amount of trade-based money laundering and value transfer. Approximately 7,500 Iranian-owned companies operate out of Dubai.
Iran’s real estate market is often used to launder money. Frequently, real estate settlements and payment are made overseas. In addition, there are reports that a massive amount of Iranian capital has been invested in the United Arab Emirates, particularly in Dubai real estate. Iranian investments in Dubai may be in excess of U.S. $350 billion.
Via a transit trade agreement, goods purchased primarily in Dubai are sent to ports in southern Iran and then via land routes to markets in Afghanistan. The transit trade facilitates the laundering of Afghan narcotics proceeds via barter transactions, trade-based money laundering, and trade goods that provide counter valuation in the regional hawala markets. According to the United Nations Office on Drugs and Crime, approximately 60 percent of Afghanistan’s opium is trafficked across Iran’s border. Reportedly, Iran has an estimated three million drug users and the highest per capita heroin addiction rate in the world. Opiates not intended for the Iranian domestic market transit Iran to Turkey, where the morphine base is converted to heroin. Heroin and hashish are delivered to buyers located in Turkey. The drugs are then shipped to the international market, primarily Europe. In Iran and elsewhere in the region, proceeds from narcotics sales are sometimes exchanged for trade goods via value transfer. The United Nations Global Program against Money Laundering (GPML) also reports that illicit proceeds from narcotics trafficking are used to purchase goods in the domestic Iranian market and then the goods are often exported and sold in Dubai.
Iran’s “bonyads,” or charitable religious foundations, were originally established at the time of the Iranian revolution to help the poor. They have rapidly expanded beyond their original mandate. Although still funded, in part, by Islamic charitable contributions, today’s bonyads monopolize Iranian import-export concerns and major industries including petroleum, automobiles, hotels, and banks. Bonyad conglomerates account for a substantial percentage of Iran’s gross national product. Individual bonyads such as Imman Reza Foundation and the Martyrs’ Foundation have billions of dollars in assets. Mullahs direct the bonyad foundations. Given the low rate of capital accumulation in the Iranian economy, the foundations constitute one of the few governmental institutions for internal economic investment. Reportedly, the bonyads stifle entrepreneurs not affiliated with them due to the bonyads’ favored status, which includes exemption from taxes, the granting of favorable exchange rates, and lack of accounting oversight by the Iranian government. Bonyads have been involved in funding terrorist organizations and serving as fronts for the procurement of nuclear capacity and prohibited weapons and technology.
On October 25, 2007, the United States designated Iran’s IRGC, the armed guardians of Iran’s theocracy, as a proliferator of weapons of mass destruction. The elite Quds Force was included in the designation as a supporter of terrorism. The Revolutionary Guard’s suspect financing is entwined with Iran’s economy. The Revolutionary Guard is involved with more than 100 companies and manages billions of dollars in business. Similar to bonyads, the military/business conglomerate uses high-level political connections, no-bid contracts, and squeezes out competitors. Corruption is widespread throughout Iranian society; at the highest levels of government, favored individuals and families benefit from “baksheesh” deals. Iran is ranked 131 out of 179 countries listed in Transparency International’s 2007 Corruption Perception Index. Despite some limited attempts at reforming bonyads and other entities, there has been little transparency or substantive progress.
Iran is a party to the 1988 UN Drug Convention and has signed, but not yet ratified, the UN Convention against Transnational Organized Crime. Iran has signed but not ratified the UN Convention against Corruption. It has not signed the UN International Convention for the Suppression of the Financing of Terrorism.
The Government of Iran should engage with the FATF and construct and implement a viable anti-money laundering and terrorist finance regime that adheres to international standards. Iran should be more active in countering regional smuggling. Iran should implement meaningful reforms in bonyads that promote transparency and accountability. Iran should create an anti-corruption law with strict penalties and enforcement, applying it equally to figures with close ties to the government and the clerical communities. It should ratify the UN Convention against Transnational Organized Crime and the UN Convention against Corruption. Iran should also become a party to the UN International Convention for the Suppression of the Financing of Terrorism. Iran should refrain from supporting terrorism or the funding of terrorism.
Iraq’s economy is primarily cash-based, and there is little data available on the extent of money laundering. However, cross-border smuggling is widespread, including the smuggling of bulk cash. Iraq is a major market for smuggled cigarettes and counterfeit goods, and money is laundered through intellectual property right violations. There is a large market for stolen cars from Europe and the United States. Ransoms generated from kidnapping generate tens of millions of dollars every year. Kidnappings are linked to human exploitation and terrorist finance. Iraq is a source country for human trafficking. Trade-based money laundering, customs fraud, and value transfer are found in the underground economy and are commonly used in informal value transfer systems such as hawala. Hawala networks are prevalent and are widely used in Iraq and the region. Cash, trade-based money laundering, and hawala are all components of terrorist and insurgent finance found in Iraq. In early 2006, the Iraqi oil ministry estimated that ten percent of the $4 billion to $5 billion in fuel imported for public consumption at subsidized rates in 2005 was smuggled internally and out of the country for resale at market rates. Large amounts of Iraqi oil are smuggled to Iran and other Gulf countries through routes established by Saddam Hussein when Iraq was under sanctions in the 1990s. The organized smuggling rings siphon oil from pipelines, and load it onto tanker trucks that carry the oil to small boats in the Persian Gulf. Corrupt officials facilitate the smuggling by issuing certificates and permits that allow the smugglers to pass through security checkpoints. Moreover, it is reported that approximately ten percent of all oil smuggling profits are going to insurgents. Subsidy scams and black market sales also exist for gasoline, kerosene, and cooking fuel. Corruption is a severe problem that permeates society and commerce and is also found at the highest levels of government, and large public and private institutions. Transparency International’s 2007 International Corruption Perception Index ranked Iraq 178 of 180 countries surveyed. The formal financial sector is growing and at least ten new banks, both domestic and international, have been licensed to operate in Iraq. The two largest state-owned banks control at least 90 percent of the banking sector.
The Coalition Provisional Authority (CPA), the international body that governed Iraq beginning in April 2003, issued regulations and orders that carried the weight of law in Iraq. The CPA ceased to exist in June 2004, at which time the Iraqi Interim Government assumed authority for governing Iraq. Drafted and agreed to by Iraqi leaders, the Transitional Administrative Law (TAL) described the powers of the Iraqi government during the transition period. Under TAL Article 26, regulations and orders issued by the CPA pursuant to its authority under international law remain in force until rescinded or amended by legislation duly enacted and having the force of law. The constitution, which was ratified in October 2005, also provides for the continuation of existing laws, including CPA regulations and orders that govern money laundering.
The CPA Order No. 93, “Anti-Money Laundering Act of 2004” (AMLA) governs financial institutions in connection with: money laundering, financing of crime, financing terrorism, and the vigilance required of financial institutions in regard to financial transactions. The law also criminalizes money laundering, financing crime (including the financing of terrorism), and structuring transactions to avoid legal requirements. The AMLA covers: banks; investment funds; securities dealers; insurance entities; money transmitters and foreign currency exchange dealers, as well as persons who deal in financial instruments, precious metals or gems; and persons who undertake hawala transactions. Covered entities are required to verify the identity of any customer opening an account for any amount. Covered entities are also required to verify the identity of nonaccount holders performing a transaction or series of potentially related transactions whose value is equal to or greater than five million Iraqi dinars (approximately U.S. $4,125). Beneficial owners must be identified upon account opening or for transactions exceeding ten million Iraqi dinar (approximately U.S. $8,250). Records must be maintained for at least five years. Covered entities must report suspicious transactions and wait for guidance before proceeding with the transaction; the relevant funds are frozen until guidance is received. Suspicious transaction reports (STRs) are to be completed for any transaction over four million Iraqi dinars (approximately U.S. $3,300) that is believed to involve funds that are derived from illegal activities or money laundering, intended for the financing of crime (including terrorism), or over which a criminal organization has disposal power, or a transaction conducted to evade any law and which has no apparent business or other lawful purpose. The “tipping off” of customers by bank employees where a transaction has generated a suspicious transaction report is prohibited. Bank employees are protected from liability for cooperating with the government. Willful violations of the reporting requirement may result in imprisonment or fines.
CPA Order No. 94, “Banking Law of 2004,” gives the Central Bank of Iraq (CBI) the authority to license banks and to conduct due diligence on proposed bank management. Order No. 94 establishes requirements for bank capital, confidentiality of records, audit and reporting requirements for banks, and prudential standards. The CBI is responsible for the supervision of financial institutions. The CBI was mandated by the AMLA to issue regulations and require financial institutions to provide employee training, appoint compliance officers, develop internal procedures and controls to deter money laundering, and establish an independent audit function. The CBI has branches in Irbil, Sulimeniyah, Dahuk (which are located in the Northern Kurdistan Region of Iraq) and Basra. The CBI also houses Iraq’s financial intelligence unit, the Money Laundering Reporting Office (MLRO). The CBI branches are responsible for licensing and examining private and public banks, and money exchangers and transmitters. The CBI branches are required to conduct periodic examinations of the banks. For public banks this occurs every six months and every three months for private banks. Order No. 94 gives administrative enforcement authority to the CBI, up to and including the removal of institution management and revocation of bank licenses. While the banks are ostensibly providing traditional banking services such as lending to the community in practice, they collect funds and send excess reserves to the CBI in Baghdad where they receive an 18 to 20 per cent return. There is no time limit for reserves to be held in the CBI for accrual of interest. Outside of this relationship, there is poor communication with the CBI, particularly with respect to money laundering, terrorist financing and other potential risks.
One of the most significant challenges facing the CBI is the lack of communication both among its branches and between the branches and the CBI in Baghdad. There is a general lack of modern banking technology, in particular a lack of an electronic payment system and wire transfer capability. As the financial sector is relatively new, there is little institutional knowledge with respect to anti-money laundering/counterterrorist finance (AML/CTF) issues. Another challenge confronting the CBI, is the lack of trust, confidence, and modernization in the formal financial sector due to the history of misuse and abuses of the sector during the Saddam Hussein regime
Bulk cash smuggling is a major problem in Iraq. The CBI is considering issuance of regulations to require large currency transaction reports for the cross-border transport of currency of more than 15 million Iraqi dinars (approximately U.S. $12.380). Neither Iraqis nor foreigners are permitted to transport more than U.S. $10,000 in currency when exiting Iraq.
An additional vulnerability to Iraq’s AML/CTF regime is that money exchanges and money transmitters are largely unregulated. Although they are required to be licensed, the level of supervision is nominal. Money exchanges are not subject to the same examination process as banks nor are they required to report suspicious transactions. The current training given to managers and operators of money exchanges and money transmitters on AML/CTF and banking examination practices is inadequate. The MLRO, which in other circumstances could assist in the training and monitoring for AML/CTF, is not developed enough yet to execute its core mission and also suffers from a lack of communication with CBI branches outside of Baghdad. Most transactions, foreign exchange operations, and money remittances take place through such money transmitter businesses and not through the banking sector. Most international remittances are done via related offices in Amman or Dubai. While simple funds transfers can take weeks to accomplish through the banking sector, the same transactions can be done very rapidly and far more effectively through money exchange and transfer services.
Although financial institutions are required to report suspicious transactions including potential money laundering and terrorist financing under the Anti-money Laundering Ordinance, in practice they do not do so, due to the isolation of the MLRO and a lack of training and technology. The MLRO was formed in June/July 2006 and has a small but dedicated staff. The CBI and representatives from the United States are working together to build the MLRO’s capacity and implement the day-to-day functions of a financial intelligence unit (FIU). The MLRO operates independently to collect, analyze and disseminate information on financial transactions subject to financial monitoring and reporting, including suspicious activity reports. The MLRO is also empowered to exchange information with other Iraqi or foreign government agencies. The CBI and its MLRO finalized implementing regulations to the AMLA, which became effective September 15, 2006.
The predicate offenses for the crimes of money laundering and the financing of crime are quite broad and extend beyond “all serious offenses” to include “some form of unlawful activity.” The penalties for violating the AMLA depend on the specific nature of the underlying criminal activity. For example, “money laundering” is punishable by a fine of up to 40 million dinar (approximately U.S. $33,000) or twice the value of the property involved in the transaction (whichever is greater) or imprisonment of up to four years or both. Other offenses for which there are specific penalties include the financing of crime with a fine of up to 20 million dinar (approximately U.S. $16,510) or two years imprisonment or both and structuring transactions of up to 10 million dinar (approximately U.S. $8,250) or one year imprisonment or both. No arrests or prosecutions under the AMLA have been reported to date.
The AMLA includes provisions for the forfeiture of any property. Such property includes, but is not limited to, funds involved in a covered offense, or any property traceable to the property, or any property gained as a result of such an offense, without prejudicing the rights of bona fide third parties. The courts can order confiscation of property, but it appears they can only do so if the property is directly related to the crime, including drug proceeds. According to the Iraqi Penal Code, a person must pay the government back for any property stolen from the government. In other cases of theft, restitution is made to the victim(s). Any property forfeited to the state becomes state property and goes into the general treasury. Should the government confiscate perishables, it can sell them while the case is on-going and if the defendant is acquitted, the government returns the money it realized from the sale of the goods to the defendant. While the case is on going, the government appoints a judicial guardian to supervise and maintain the property pending the outcome of the case. The AMLA also blocks any funds or assets, other than real property (which is covered by a separate regulation), belonging to members of the former Iraqi regime and authorizes the Minister of Finance to confiscate such assets following a judicial or administrative order. The lack of automation or infrastructure in the banking sector, however, hinders the government’s ability to identify and freeze assets linked to illicit activity.
Iraq has free trade zones in Basra/Khor al-Zubair, Ninewa/Falafel, Sulaymaniyah, and Al-Quaymen. Under the Free Zone (FZ) Authority Law, goods imported and exported from the FZ are generally exempt from all taxes and duties, unless the goods are imported into Iraq. Additionally, capital, profits, and investment income from projects in the FZ are exempt from taxes and fees throughout the life of the project, including in the foundation and construction phases.
The CBI is also mandated by the AMLA to distribute the UN 1267 Sanction Committee’s consolidated list of suspected terrorists or terrorist organizations. No asset freezes pertaining to any names on the consolidated list have been reported to date.
Iraq became a member of the Middle East and North Africa Financial Action Task Force (MENAFATF) in September 2005. Iraq is a party to the 1988 UN Drug Convention, but not the UN International Convention for the Suppression of the Financing of Terrorism, the UN Convention against Transnational Organized Crime, or the UN Convention against Corruption.
The Government of Iraq continues to lay the foundation for anti-money laundering and counterterrorist finance regimes. In these efforts, there is strong cooperation with the U.S. Government. However, there is much work ahead. While Iraq’s economy is primarily cash-based, this is likely to change as the expected development of the energy sector will increase the need for the development of a formal financial sector that is integrated into the international payment system. Concurrently, the financial sector must adopt AML/CTF standards and practices. Iraq should take a more active part in MENAFATF and in implementing its recommendations. As independent foreign banks become more interested in opening branches in Iraq, the CBI should be cautious in granting licenses to banks from jurisdictions of concern. Iraq should continue its efforts to build capacity and actively implement the provisions of the AMLA and related authorities. As a priority, as Iraq’s MLRO becomes fully functional, it should develop increased capacity to investigate financial crimes and enforce the provisions of the AMLA. Iraqi law enforcement, border authorities, and customs service should strengthen border enforcement and identify and pursue smuggling and trade-based money laundering networks. Increased border enforcement is also a prerequisite in combating terrorist finance. The Government of Iraq should also take concerted steps to combat the corruption that hinders development and impedes an effective anti-money laundering and counter-terrorist finance regime. Iraq should become a party to the UN Convention against Corruption, the UN International Convention for the Suppression of the Financing of Terrorism and the UN Convention against Transnational Organized Crime.
Ireland is an increasingly significant European financial hub. Narcotics-trafficking, fraud, and tax offenses are the primary sources of funds laundered in Ireland. Money laundering occurs in credit institutions, although launderers have also made use of money remittance companies, solicitors, accountants, and second-hand car dealerships. The most common laundering methods are: the purchase of high-value goods for cash; the use of credit institutions to receive and transfer funds in and out of Ireland; the use of complex company structures to filter funds; and the purchase of properties in Ireland and abroad.
The Shannon Free Zone was established in 1960 as a free trade zone, offering investment incentives for multinational companies. The Shannon Free Zone is supervised by “Shannon Development,” a government-founded body. Reportedly, there are no indications that the Shannon Free Zone is being used in trade-based money laundering (TBML) schemes or by financiers of terrorism. The international banking and financial services sector is concentrated in Dublin’s International Financial Services Centre (IFSC). In 2007, there were approximately 440 international financial institutions and companies operating in the IFSC. Services offered include banking, fiscal management, re-insurance, fund administration, and foreign exchange dealing. Although there are no tax benefits for companies in the IFSC, Ireland offers the lowest corporate tax rate (12.5 percent) in the EU. Casinos, including Internet casinos, are illegal in Ireland. Private gaming clubs, however, operate casino-like facilities that fall outside the scope of the law.
Ireland criminalized money laundering relating to narcotics trafficking and all indictable offenses under the 1994 Criminal Justice Act. The law requires financial institutions (banks, building societies, the Post Office, stock brokers, credit unions, bureaux de change, life insurance companies, and insurance brokers) to report suspicious transactions. There is no monetary threshold for reporting suspicious transactions. The obliged entities submit suspicious transaction reports (STRs) to the Garda (Irish Police) Bureau of Fraud Investigation, Ireland’s financial intelligence unit (FIU), and to the Revenue (Tax) Department in addition to the FIU, as required by law. Reporting entities must submit the STR before the suspicious transaction is finalized. There are no other legal requirements governing the time period within which an STR must be filed. Financial institutions must implement customer identification procedures and retain records of financial transactions. Ireland has amended its Anti-Money Laundering (AML) law to extend customer identification and suspicious transaction reporting requirements to lawyers, accountants, auditors, real estate agents, auctioneers, and dealers in high-value goods. Ireland’s Customer Due Diligence procedure requires designated entities to take measures to identify customers when opening new accounts or conducting transactions exceeding 13,000 euros (approximately U.S. $19,000). These requirements do not extend to existing customers prior to May 1995 except in cases where authorities suspect that money laundering or another financial crime is involved.
The Corporate Law requires that every company applying for registration in Ireland must demonstrate that it intends to carry on an activity in the country. Companies must maintain an Irish resident director at all times, or post a bond as a surety for failure to comply with the appropriate company law. In addition, the law limits the number of directorships that any one person can hold to 25, with certain exemptions. This limitation aims to curb the use of nominee directors as a means of disguising beneficial ownership or control. The Company Law Enforcement Act 2001 (Company Act) established the Office of the Director of Corporate Enforcement (ODCE). The ODCE investigates and enforces provisions of the Company Act. Under the law, a company must provide the names of its directors. The ODCE has the authority to uncover a company’s beneficial ownership and control. The Company Act also creates a mandatory reporting obligation for auditors suspicious of breaches of company law to the ODCE. In 2006, the ODCE secured the conviction of 31 company directors and other individuals on 41 charges for breaching various requirements of the Company Act. An additional 17 company officers were disqualified from eligibility for a lead position in companies for periods ranging from one to 10 years.
EU Regulation 1889/2005, introduced in Ireland on June 15, 2007, requires travelers transporting more than 10,000 euros (approximately U.S. $14,600) into or out of the EU to declare these funds. The declarations are automatically reported to the FIU. Customs authorities also require reports detailing movements of precious metals and stones into or out of the EU when Ireland is the initial entry or final exit point. The FIU will have access to these reports.
The Third EU Money Laundering Directive entered into force in December 2005 and was transposed into Irish law prior to the December 2007 deadline. The Government of Ireland (GOI) is likely to implement new legislation to address customer due diligence, the identification of beneficial owners, politically exposed persons, and the designation of trusts. A Mutual Evaluation conducted in 2005 by the Financial Action Task Force (FATF), published in 2006, noted that Ireland’s money laundering definition met the FATF requirements. The mutual evaluation report (MER) acknowledged that Ireland achieved a high standing in AML legal structures and international cooperation, although the number of money laundering prosecutions and convictions was low.
The Irish Financial Services Regulatory Authority (IFSRA), the financial regulator, is a component of the Central Bank and Financial Services Authority of Ireland (CBFSAI) and is responsible for supervising the financial institutions for compliance with money laundering procedures. IFSRA is obliged to report any suspected breaches of the Criminal Justice Act 1994 by the institutions it supervises to the FIU and the Revenue Commissioners. Reports cover suspicion of money laundering and terrorist financing, failure to establish identity of customers, failure to retain evidence of identification, and failure to adopt measures to prevent and detect the commission of a money laundering offense. IFSRA also regulates the IFSC companies that conduct banking, insurance, and fund transactions.
Ireland’s FIU receives and analyzes financial disclosures, and disseminates them for investigation. The MER found that although Ireland’s FIU met the requirements of the FATF methodology it had limited technical and human resources to manage and evaluate STRs effectively. In 2006, the FIU received 10,403 STRs. Three people were convicted for money laundering. Information regarding the number of STRs received in 2007 is not yet available. A conviction on charges of money laundering carries a maximum penalty of 14 years’ imprisonment and an unlimited fine. The lengthiest penalty applied for a money laundering conviction to date has been six years.
Ireland estimates that up to 80 percent of STRs may involve tax violations. Value Added Tax (VAT) Intra-Community Missing Trader Fraud is extensive within the EU, and attacks the VAT system, in which criminals obtain VAT registration to acquire goods VAT free from other Member States. They then sell on the goods at VAT inclusive prices and disappear without remitting the VAT paid by their customers to the tax authorities. There is evidence in several fraud investigations that conduit traders involved in the supply chain have established themselves in Ireland.
The Criminal Assets Bureau (CAB), authorized to confiscate the proceeds of crime in cases where there is no criminal conviction, reports to the Minister for Justice and includes experts from the Garda, Tax, Customs, and Social Security Agencies. Under the 1996 Proceeds of Crime Act, authorities may freeze specified property valued in excess of 13,000 euros (approximately U.S. $19,000) for seven years, unless the court is satisfied that all or part of the property is not criminal proceeds. With the consent of the High Court and the parties concerned, the authorities have the power to dispose of assets without having to wait the seven years. As of November 2007, the authorities have executed 14 such consent orders. This Act also allows the authorities to take foreign criminality into account in assessing whether assets are the proceeds of criminal conduct. Under certain circumstances, the High Court can freeze, and, where appropriate, seize the proceeds of crimes.
In 2006, CAB obtained interim and disposal orders on assets valued at approximately 6.8 million euros (approximately U.S. $10 million). The CAB has the authority to cooperate with agencies in other jurisdictions, which strengthens Irish cooperation with asset recovery agencies in the United Kingdom.
With the Criminal Justice (Terrorism Offenses) Act, Ireland’s legislation comports with United Nations Conventions and European Union Framework decisions on combating terrorism. The IFSRA works with the Department of Finance to draft guidance for regulated institutions on combating and preventing terrorist financing. The authorities revised and issued the guidance to institutions upon the passage of the Criminal Justice Act in 2005.
To date, there have been no prosecutions for terrorism offenses under the Criminal Justice Act. The FATF MER noted that the Act neglects to criminalize funding of either a terrorist acting alone or two terrorists acting in concert. The MER also noted inadequate implementation of UN Security Council Resolution (UNSCR) 1373, in that Ireland relies exclusively on an EU listing system without subsidiary mechanisms to deal with terrorists on the list who are European citizens (EU Regulations do not apply for freezing purposes to such persons) or with persons designated as terrorists by other jurisdictions who are not on the EU list.
The Criminal Justice (Terrorism Offenses) Act imposes evidentiary requirements obstructing Ireland from fulfilling its UNSCR 1373 obligation to freeze all funds and assets of individuals who commit terrorist acts whether or not there is evidence that those particular funds are intended for use in terrorist acts. The Garda can apply to the courts to freeze assets when certain evidentiary requirements are met. From 2001 through 2007, Ireland had reported to the European Commission the names of five individuals who maintained a total of seven accounts that were frozen in accordance with the provisions of the European Union’s (EU) Anti-Terrorist Legislation. No designated individuals or entities have surfaced in Ireland’s system since 2004. The aggregate value of the funds frozen was approximately U.S. $6,400.
In July 2005, the United States and Ireland signed instruments on extradition and mutual legal assistance as part of a sequence of bilateral agreements that the United States is concluding with all 25 EU Member States. The instruments supplement and update the 1983 U.S.-Ireland extradition treaty and the 2001 bilateral treaty on mutual legal assistance (MLAT). The 2005 instrument also provides for searches of suspect foreign located bank accounts, joint investigative teams, and testimony by video-link. The 1983 extradition treaty between Ireland and the U.S. is in force, but as of November 2007, the GOI has not completed the ratification process for the 2001 MLAT. In November 2006, for the first time in eighteen extradition requests, Ireland extradited a U.S. citizen.
Ireland is a member of the FATF, and its FIU is a member of the Egmont Group. Ireland is a party to the UN International Convention for the Suppression of the Financing of Terrorism and the 1988 UN Drug Convention. It has signed, but not ratified, the UN Convention against Transnational Organized Crime and the UN Convention against Corruption.
The GOI should enact legislation to prohibit the establishment of “shell” companies. Law enforcement should have a stronger role in identifying the true beneficial owners of shell companies as well as of trusts in the course of investigations. Ireland should increase the technical and human resources provided to the FIU to manage and evaluate STRs effectively. The GOI should enact legislation that covers both funding of a terrorist acting alone and funding of two terrorists acting in concert, as well as legislation fully implementing UNSCR 1373. To this end, Ireland should remove the evidentiary requirements acting as obstacles to full compliance, as well as circulate the UN and the U.S. lists to its regulators and obligated entities. Ireland should continue implementation of its new anti-terrorism legislation and its AML law amendments, and ensure stringent enforcement of all such initiatives. Ireland should ratify the UN Convention against Transnational Organized Crime and the UN Convention against Corruption.
Isle of Man
The Isle of Man (IOM) is a Crown Dependency of the United Kingdom with its own parliament, government, and laws. Its large and sophisticated financial center is potentially vulnerable to money laundering at the layering and integration stages. Most of the illicit funds in the IOM are from fraud schemes and narcotics trafficking in other jurisdictions, including the United Kingdom. The U.S. dollar is the most common currency used for criminal activity in the IOM. Identity theft and Internet abuse are growing segments of financial crime activity.
No current data regarding the entities that comprise the IOM financial industry has been reported. As of September 30, 2004, the IOM’s financial industry consisted of approximately 19 life insurance companies, 25 insurance managers, more than 177 captive insurance companies, 53 licensed banks and two licensed building societies, 82 investment business license holders, 30.1 billion pounds (approximately U.S. $59 billion) in bank deposits, and 164 collective investment schemes with 6.5 billion pounds (approximately U.S. $12.7 billion) of funds under management. There were also 171 licensed corporate service providers.
The IOM criminalized money laundering related to narcotics trafficking in 1987. The Criminal Justice (Money Laundering Offenses) Act 1998, extends the definition of money laundering to cover all serious crimes and led to the creation of the Anti-Money Laundering (AML) Code, which came into force in December 1998. The AML Code has subsequently been replaced by the Criminal Justice (Money Laundering) Code 2007 (the Code), enacted in September 2007. Requirements under the 2007 Code apply to banking, investment, and collective investment schemes, fiduciary services business, insurance, building societies, credit unions, local authorities authorized to raise or borrow money, bureaux de change, estate agents, bookmakers and casinos (excluding online gambling), accountants, notaries and legal practitioners, insurance intermediaries, retirement benefits schemes, administrators and trustees, auditors, the Post Office, and any activity involving money transmission services or check encashment facilities.
The Code requires that obligated entities implement AML policies, procedures, and practices, including employing them for countering terrorist financing. The Code mandates that obligated entities institute procedures to establish customer identification requirements; report suspicious transactions; maintain adequate records; adopt adequate internal controls and communication procedures; provide appropriate training for employees; and establish internal reporting protocols. There is no minimum threshold for obliged entities to file a suspicious transaction report (STR), and safe harbor provisions in the law protect reporting individuals when they file an STR. It is an offense to fail to disclose suspicion of money laundering for all predicate crimes. Failure to comply with the requirements of the Code may bring a fine, imprisonment of up to two years, or both.
The Financial Supervision Commission (FSC) and the Insurance and Pension Authority (IPA) regulate the IOM financial sector. The IPA regulates insurance companies, insurance management companies, general insurance intermediaries, and retirement benefit schemes and their administrators. The FSC is responsible for the licensing, authorization, and supervision of banks, building societies, investment businesses, collective investment schemes, corporate service providers, and companies. The FSC also maintains the Company Registry Database for the IOM, which contains company records dating back to the first company incorporated in 1865. Statutory documents filed by IOM companies can now be searched and purchased online through the FSC’s website.
As IOM’s companion to the AML Code, the FSC has AML Guidance Notes (AMLGN), which the FSC rewrote in 2007. The new guidance reflects evolving international standards, new legislation on the Island, and the new licensee status of Corporate Service Providers and Trust Service Providers. In 2008, the FSC will release the new revised guidance as an “Anti-Money Laundering and the Financing of Terrorism Handbook.”
The FSC has worked with its counterparts from the Crown Dependencies of Guernsey and Jersey. One of these initiatives was a consultation paper called Overriding Principles for a Revised Know Your Customer (KYC) Framework, to develop a more coordinated AML approach. Work between the Crown Dependencies is continuing, to develop a coordinated strategy on money laundering, and to ensure maximum compliance with the revised Financial Action Task Force (FATF) Forty Recommendations on Money Laundering.
Money service businesses (MSBs) not already regulated by the FSC or IPA must register with Customs and Excise. With this, the IOM implemented the first two EU Directives on Money Laundering, and provides for their supervision by Customs and Excise to ensure compliance with the AML Code. In December 2007, the FSC issued a Consultative Paper on the Proposed Regulation of MSBs, including electronic money (e-money) providers. This document will assist the Island in meeting the standards set by the Financial Action Task Force (“FATF”) 40 Recommendations and Nine Special Recommendations on Terrorist Financing. The paper also airs proposals to bring money MSBs and e-money providers under some form of regulation, which would initially be limited.
The IPA, as regulator of the IOM’s insurance and pensions business, issues Anti-Money Laundering Standards for Insurance Businesses (the “Standards”). The Standards are binding upon the industry and include “Overriding Principles” requiring all insurance businesses to check their businesses to determine that they have sufficient information available to prove customer identity. The current set of Standards became effective March 31, 2003. The IPA conducts on-site visits to examine procedures and policies of companies under its supervision.
The Online Gambling Regulation Act 2001 and an accompanying AML (Online Gambling) Code 2002 are supplemented by AML guidance notes issued by the Gambling Control Commission, a regulatory body which provides guidance on the prevention of money laundering in the online gaming sector. The Online Gambling legislation, unique to the gaming industry when it passed, brought regulation to an unregulated gaming environment. The revised version of the Online Gambling and Peer to Peer Gambling AML Code came into force in 2006.
The Companies, Etc. (Amendment) Act 2003 provides for additional supervision for all licensable businesses, e.g., banking, investment, insurance, and corporate service providers. The act abolished future bearer shares after April 1, 2004, and mandates that all existing bearer shares be registered before the bearer can exercise any rights relating to the shares.
The Financial Crime Unit (FCU), under the Department of Home Affairs, the intelligence financial unit (FIU) of the Isle of Man, was formed in April 2000 and evolved from the police Fraud Squad. It is the central point for the collection, analysis, investigation, and dissemination of suspicious transaction reports (STRs) from obligated entities. The FCU’s work is broadly split between financial intelligence, legal co-operation with other jurisdictions in terms of financial investigation, and local financial crime investigation involving serious or complex cases. It is comprised of Police and Customs Officers, Police Support Staff, and other government departments such as Internal Audit and HM Attorney General’s Chambers. The FIU has access to Customs, police, and tax information. The FIU disseminates STRs to the Customs, Tax Administrators, FSC, and the IPA. The FCU is responsible for investigating financial crimes and terrorist financing cases. The FIU received approximately 1,574 suspicious transaction reports in 2007, and 1,653 STRs in 2006. Approximately 45 percent of the STRs are disseminated to the United Kingdom, five percent to other European countries, and seven percent to nonEuropean countries (mainly the U.S.). IOM authorities charged eight people with money laundering offenses in 2007, and investigations are proceeding. Six of the eight have been charged in relation to narcotics, and two to fraud, including wire fraud. In 2006, IOM authorities obtained one conviction for money laundering.
IOM legislation provides powers to constables, including customs officers, to investigate whether a person has benefited from any criminal conduct. These powers allow information to be obtained about that person’s financial affairs. These powers can be used to assist in criminal investigations abroad as well as in the IOM. The Customs and Excise (Amendment) Act 2001 gives various law enforcement and statutory bodies within the IOM the ability to exchange information, where such information would assist them in discharging their functions. The Act also permits Customs and Excise to release information it holds to any agency within or outside the IOM for the purposes of any criminal investigation and proceeding. Such exchanges can be either spontaneous or by request.
The Criminal Justice Acts of 1990 and 1991, as amended, extend the power to freeze and confiscate assets to a wider range of crimes, increase the penalties for a breach of money laundering codes, and repeal the requirement for the Attorney General’s consent prior to disclosure of certain information. The law also lowers the standard for seizing cash from “reasonable grounds” to believe that it was related to drug or terrorism crimes to a “suspicion” of any criminal conduct. Assistance by way of restraint and confiscation of a defendant’s assets is available under the 1990 Act to all countries and territories designated by Order under the Act. Assistance is also available under the 1991 Act to all countries and territories in the form of the provision of evidence for the purposes of criminal investigations and proceedings. The availability of such assistance is not convention-based nor does it require reciprocity.
All charities operating within the IOM are registered and supervised by the Charities Commission.
The Prevention of Terrorism Act 1990 made it an offense to contribute to terrorist organizations or to assist a terrorist organization in the retention or control of terrorist funds. The IOM Terrorism (United Nations Measure) Order 2001 implements UNSCR 1373 by providing for the freezing of terrorist funds, as well as by criminalizing the facilitating or financing of terrorism. The Government of the IOM enacted the Anti-Terrorism and Crime Act, 2003, which enhances reporting by making the failure to report suspicious transactions relating to money intended to finance terrorism an offense. All other UN and EU financial sanctions have been adopted or applied in the IOM, and are administered by Customs and Excise. Institutions are obliged to freeze affected funds and report the facts to Customs and Excise. In December 2001, the FSC issued revised AML guidance notes that include information relevant to terrorism. IOM authorities are reviewing additional amendments that will incorporate the most recent FATF recommendations and EU directives.
The IOM has developed a legal and constitutional framework for combating money laundering and the financing of terrorism. In 2003, the International Monetary Fund (IMF) examined the regulation and supervision of the IOM’s financial sector and found that “the financial regulatory and supervisory system of the Isle of Man complies well with the assessed international standards.”
Application of the 1988 UN Drug Convention was extended to the IOM in 1993. In 2003, the U.S. and the UK agreed to extend to the Isle of Man the U.S.-UK Treaty on Mutual Legal Assistance in Criminal Matters.
The IOM cooperates with international anti-money laundering authorities on regulatory and criminal matters. Under the 1990 Criminal Justice Act, the provision of documents and information is available to all countries and territories for the purposes of investigations into serious or complex fraud. Similar assistance is also available to all countries and territories in relation to drug-trafficking and terrorist investigations. All decisions for assistance are made by the Attorney General of the IOM on a case-by-case basis, depending on the circumstances of the inquiry.
In October 2007, the IOM signed tax information exchange agreements (TIEAs) with each member of the Nordic Council (Denmark, the Faroe Islands, Finland, Greenland, Iceland, Norway, and Sweden) and received commendation from the Organization for Economic Co-operation and Development for its commitment to international standards. The IOM has a fully operational TIEA with the United States and has established protocols with the Internal Revenue Service (IRS) to ensure that information exchange requests are handled smoothly.
Although not a member of the FATF, the Island fully endorses FATF 40 Recommendations and Nine Special Recommendations. The IOM’s experts are assisting the FATF working group that considers matters relating to customer identification and companies’ issues. The IOM is a member of the Offshore Group of Banking Supervisors (OGBS) and Offshore Group of Insurance Supervisors (OGIS). The FCU belongs to the Egmont Group.
Isle of Man officials should continue to support and educate the local financial sector to help it combat current trends in money laundering. The IOM should act on the 2007 Consultative paper with the MSB/e-money regulation proposals that authorities have discussed, and implement the most effective. The IOM should also ensure that the obliged entities understand and respond to their new and revised responsibilities as delineated by the 2007 AML Code. To this end, the FSC should work to release the Anti-Money Laundering and Terrorist Financing Handbook as soon as possible in 2008. The authorities also should continue to work with international AML authorities to deter financial crime and the financing of terrorism and terrorists.
Among its Mediterranean neighbors, Israel stands out economically in terms of its high GDP, per capita income, developed financial markets and diverse capital markets. Nevertheless, Israel is not regarded as a regional financial center. It primarily conducts financial activity with the financial markets of the United States and Europe, and to a lesser extent with the Far East. Israeli National Police (INP) intelligence identifies illicit drugs, gambling, extortion, and fraud as the predicate offenses most closely associated with organized criminal activity. Recent studies conducted by the INP Research Department estimate illegal gambling profits at U.S. $2-3 billion per year and domestic narcotics profits at U.S. $1.5 billion per year. Human trafficking is considered the crime-for-profit with the greatest human toll in Israel, and public corruption the crime with the greatest social toll. As such, these areas are the targets of the most vigorous anti-money laundering (AML) enforcement activity. Israel does not have free trade zones and is not considered an offshore financial center, as offshore banks and other forms of exempt or shell companies are not permitted. Bearer shares, however, are permitted for banks and/or for companies.
In August 2000, Israel enacted its anti-money laundering legislation, the “Prohibition on Money Laundering Law” (PMLL), (Law No. 5760-2000). The PMLL established a framework for an anti-money laundering system, but required the passage of several implementing regulations before the law could fully take effect. Among other things, the PMLL criminalized money laundering and included 18 serious crimes, in addition to offenses described in the prevention of terrorism ordinance, as predicate offenses for money laundering even if committed in a foreign jurisdiction.
The PMLL also provided for the establishment of the Israeli Money Laundering Prohibition Authority (IMPA) under the Ministry of Justice, as the country’s financial intelligence unit (FIU). IMPA became operational in 2002. The PMLL requires financial institutions to report “unusual transactions” to IMPA as soon as possible under the circumstances. Financial institutions must report all transactions that exceed a minimum threshold that varies based on the relevant sectors and the risks that may arise, with more stringent requirements for transactions originating in a high-risk country or territory. IMPA has access to population registration databases, the Real-Estate Database, records of inspections at border crossings, court files, and Israel’s Company Registrar.
In 2001, Israel adopted the Banking Corporations Requirement Regarding Identification, Reporting, and Record Keeping Order. The Order establishes specific procedures for banks with respect to customer identification, record keeping, and the reporting of irregular and suspicious transactions in keeping with the recommendations of the Basel Committee on Banking Supervision. The Supervisor of Banks at the Bank of Israel monitors compliance among banking institutions. Bankers and others are protected by law with respect to their cooperation with law enforcement entities.
Subsequent regulations established the methods of reporting to the Customs Authority (a part of the Israel Tax Authority) monies brought in or out of Israel, and criteria for financial sanctions for violating the law, as well as for appeals. The regulations require the declaration of currency transferred (including cash, travelers’ checks, and banker checks) into or out of Israel for sums above 80,000 new Israeli shekels (NIS) (approximately U.S. $20,000). This applies to any person entering or leaving Israel, and to any person bringing or taking money into or out of Israel by mail or any other methods, including cash couriers. Failure to comply is punishable by up to six months imprisonment or a fine of NIS 202,000 (approximately $50,500), or ten times the amount that was not declared, whichever is higher. Alternatively, an administrative sanction of NIS 101,000 (approximately U.S. $25,250), or five times the amount that was not declared, may be imposed by the Committee for Imposition of Financial Sanctions. In 2003, the Government of Israel (GOI) lowered the threshold for reporting cash transaction reports (CTRs) to NIS 50,000 (approximately U.S. $12,250), lowered the document retention threshold to NIS 10,000 (approximately U.S. $2,500), and imposed more stringent reporting requirements.
Clarifications to the PMLL were approved in Orders 5761-2001 and 5762-2002 requiring that suspicious transactions be reported by members of the stock exchange, portfolio managers, insurers or insurance agents, provident funds and companies managing a provident fund, providers of currency services, and the Postal Bank. Portfolio managers and members of the stock exchange are supervised by the Chairman of the Israel Securities Authority; insurers and insurance agents are under the authority of the Superintendent of Insurance in the Ministry of Finance; provident funds and companies managed by a provident fund are overseen by the Commissioner of the Capital Market in the Ministry of Finance, and the Postal Bank is monitored by the Minister of Communications. The PMLL does not apply at this time to intermediaries, such as lawyers and accountants.
Other subsequent changes to the PMLL authorized: the issuance of regulations requiring financial service providers to identify, report, and keep records for specified transactions for seven years; the establishment of a mechanism for customs officials to input into the IMPA database; the creation of regulations stipulating the time and method of bank reporting; the creation of rules on safeguarding the IMPA database; and rules for requesting and transmitting information between IMPA, the INP and the Israel Security Agency (ISA, or Shin Bet). The PMLL also imposed an obligation on financial service providers to report any IMPA activities perceived as unusual.
Order 5762 added money services businesses (MSB) to the list of entities required to file cash transaction reports (CTRs) and suspicious transaction reports (STRs) by size and type, and required that they preserve transaction records for at least seven years. The PMLL mandates the registration of MSBs through the Providers of Currency Services Registrar at the Ministry of Finance. A person engaging in the provision of currency services without being registered is liable to one year of imprisonment or a fine of NIS 600,000 (U.S. $150,000). In 2004, Israeli courts convicted several MSBs for failure to register with the Registrar of Currency Services, and a number of indictments are still pending. The INP and the Financial Service Providers Regulatory Authority maintain a high level of coordination, routinely exchange information, and have conducted multiple joint enforcement actions.
On July 11, 2007 a draft bill for PMLL (Amendment No. 7) 5776-2007 was published for the purpose of extending Israel’s AML regime to the trade in precious stones (including Israel’s substantial diamond trading industry). The bill passed the first vote in the Knesset on August 16, and has been submitted to committee for review. The amendment defines “dealers in precious stones” as those merchants whose annual transactions reach NIS 50,000 (approximately U.S. $11,800). It places significant obligations on dealers to verify the identity of their clients, report all transactions above a designated threshold (and all unusual client activity) to IMPA, as well as to maintain all transaction records and client identification for at least five years. The Customs Authority continues to intercept unreported diamond shipments, despite the fact that Israel imposes no tariffs on diamond imports.
In October 2006, the Knesset Committee on Constitution, Law and Justice approved an amendment to the Banking Order and the Regulations on the Prohibition on Financing Terrorism. The Order and Regulations were additional steps in the legislation intended to combat the financing of terrorism while maintaining correspondent and other types of banking relationships between Israeli and Palestinian commercial banks. Although the amendment to the Order and the Regulations impose serious obligations on banks to examine clients and file transaction reports, banks are still exempted from criminal liability if, inter alia, they fulfill all of their obligations under the Order (though they are not protected from civil liability). The Banking Order was expanded to cover the prohibition on financing terrorism and includes obligations to check the identification of parties to a transaction against declared terrorists and terrorist organizations, as well as obligations to report by size and type of transaction. The Banking Order sets the minimum size of a transaction that must be reported at NIS 5,000 (approximately U.S. $1,180) for transactions with a high-risk country or territory. The order also includes examples for unusual financial activity suspected to be related to terrorism, such as transfers from countries with no anti-money laundering or counterterrorist finance (AML/CTF) regime to nonprofit organizations (NGOs) within Israel and the occupied territories.
In 2007, Israel took steps to implement Cabinet Decision 4618, passed on January 1, 2006, by creating an interagency “fusion center” and six interagency task forces for pursuing financial crimes. The regulation explicitly instructs the INP and the Shin Bet to target illicit proceeds as a primary objective in the war on organized crime. As Israel does not have legislation preventing financial service companies from disclosing client and ownership information to bank supervisors and law enforcement authorities, the new regulation establishes conditions for the use of such information to avoid its abuse and to set guidelines for the police and security services.
Israel has established systems for identifying, tracing, freezing, seizing, and forfeiting narcotics-related assets, as well as assets derived from or intended for other serious crimes, including the funding of terrorism and trafficking in persons. The law also allows for civil forfeiture when ordered by the District Court. The identification and tracing of such assets is part of the ongoing function of the Israeli intelligence authorities and IMPA. The INP has responsibility for seizing assets and the State Attorney’s Office has authority to freeze assets. Banking institutions cooperate fully, and often freeze suspicious assets according to guidance from the INP and Ministry of Defense. Israel’s International Legal Assistance Law enables Israel to offer full and effective cooperation to authorities in foreign states, including enforcement of foreign forfeiture orders in terror financing cases (both civil and criminal).
In December 2004, the Israeli Parliament adopted the prohibition on terrorist financing law 5765-2004, which is geared to further modernize and enhance Israel’s ability to combat terrorist financing and to cooperate with other countries on such matters. The Law went into effect in August 2005, criminalizing the financing of terrorism as required by United Nations Security Council Resolution (UNSCR) 1373. The Israeli legislative regime criminalizing the financing of terrorism includes provisions of the Defense Regulations State of Emergency/1945, the Prevention of Terrorism Ordinance/1948, the Penal Law/1977, and the PMLL. Under the International Legal Assistance Law of 1998, Israeli courts are empowered to enforce forfeiture orders executed in foreign courts for crimes committed outside Israel.
In December 2007, the Knesset Law Committee approved new regulations enabling the declaration by a ministerial committee of foreign designated terrorists, and legally requiring financial institutions to comply with the foreign designations. The National Security Council legal counsel has responsibility for referring foreign designations to the committee for adoption under Israeli law, and is expected to include entities on the UNSCR 1267 Sanctions Committee consolidated list and entities on the list of Specially Designated Global Terrorists designated by the United States pursuant to E.O. 13224. Once designated, identifying information for the terrorist entity is to be published on the Ministry of Defense website, in two daily newspapers, the Official Gazette of the Israeli Government, and distributed by email to financial institutions. Israel already enforces UNSCR 1267 under its Trade with the Enemy Ordinance of 1939, and regularly notifies financial institutions of restricted entities.
The ISA is responsible for investigating terrorist financing offenses, while the Israel Tax Authority handles investigations originating in customs offenses. Under Israeli law, it is a felony to conceal cash transfers upon entry to the West Bank or Gaza, and the agencies coordinate closely to track funds that enter Israeli ports. Customs and the Ministry of Defense also cooperate in combating trade-based terrorist financing, including goods destined for terrorist entities in the West Bank or Gaza.
The INP reports no indications of an overall increase in financial crime relative to previous years. In 2007, IMPA reported 56 arrests and five prosecutions relating to money laundering and/or terrorist financing. In 2007, IMPA received 10,597 suspicious transaction reports. During this period IMPA disseminated 552 intelligence reports to law enforcement agencies and to foreign FIUs in response to requests, and on its own initiative. In addition, eight different investigations yielded indictments (some of them multiple indictments) and ten resulted in convictions or plea bargains. In 2007, the INP seized approximately U.S. $9 million in suspected criminal assets, a decrease from U.S. $12 million in 2006 and U.S. $75 million seized in 2005.
Israel is a party to the 1988 UN Drug Convention and the UN International Convention for the Suppression of the Financing of Terrorism. In December 2006 Israel ratified the UN Convention against Transnational Organized Crime. The IMPA is a member of the Egmont Group, and Israel has been an active observer in MONEYVAL since 2006. Israel has signed but not yet ratified the UN Convention against Corruption. Israel is the only nonmember of the Council of Europe to become a party to the European Convention on Mutual Assistance in Criminal Matters (in 1967) and its Second Additional Protocol (in 2006), which is designed to provide more effective and modern means of assisting member states in law enforcement matters. There is a Mutual Legal Assistance Treaty in force between the United States and Israel, as well as a bilateral mutual assistance agreement in customs matters. Customs, IMPA, the INP and the Israel Securities Agencies routinely exchange information with U.S. agencies through their regional liaison offices, as well as through the Israel Police Liaison Office in Washington. In 2007, Israel provided unprecedented assistance in sharing evidence critical to the prosecution of terrorist financing cases in the United States, allowing for the first time the testimony of intelligence agents in U.S. courts.
The Government of Israel continued to make progress in strengthening its anti-money laundering and terrorist financing regime in 2007. Israel should continue the aggressive investigation of money laundering activity associated with organized criminal operations and syndicates. Israel should also continue its efforts to address the misuse of the international diamond trade to launder money by approving draft legislation. Under the new terrorist financing amendment, Israel should adopt appropriate foreign designations of terrorist entities in a timely manner.
Italy is fully integrated in the European Union (EU) single market for financial services. Money laundering is a concern both because of the prevalence of homegrown organized crime groups and the recent influx of criminal organizations from abroad, especially from Albania, Romania, Russia, China, and Nigeria.
The heavy involvement in international narcotics trafficking of domestic and Italian-based foreign organized crime groups complicates counternarcotics activities. Italy is both a consumer country and a major transit point for heroin coming from the Near East and Southwest Asia through the Balkans en route to Western/Central Europe and, to a lesser extent, the United States. Italian and ethnic Albanian criminal organizations work together to funnel drugs to Italy and, in many cases, on to third countries. Additional important trafficking groups include other Balkan organized crime entities, as well as Nigerian, Colombian, and other South American trafficking groups.
In addition to the narcotics trade, laundered money originates from a myriad of criminal activities, such as alien smuggling, pirated and counterfeited goods, extortion, and usury. Financial crimes not directly linked to money laundering, such as credit card and Internet fraud, are increasing. Italy is not an offshore financial center.
Money laundering occurs both in the regular banking sector and in the nonbank financial system, including casinos, money transfer houses, and the gold market. Money launderers predominantly use nonbank financial institutions for the illicit export of currency, primarily U.S. dollars and euros, to be laundered in offshore companies. There is a substantial black market for smuggled goods in the country, but it is not funded significantly by narcotics proceeds. According to Italy’s Central Institute of Statistics (ISTAT), Italy’s “underground” economic activity may be as large as 18 percent of the GDP. Much of this “underground activity is not related to organized crime, but is instead part of efforts to avoid taxation.”
According to a 2006 International Monetary Fund evaluation, Italy’s anti-money laundering and counter-terrorist financing system is comprehensive. Money laundering is defined as a criminal offense when laundering relates to a separate, intentional felony offense. All intentional criminal offenses are predicates to the crime of money laundering, regardless of the applicable sentence for the predicate offense. With approximately 600 money laundering convictions a year, Italy has one of the highest rates of successful prosecutions in the world.
Italy has strict laws on the control of currency deposits in banks. In June of 2007, the Ministry of Finance issued a decree bringing Italy into compliance with EU regulation 1889/2005 on controls of cash entering or leaving the European Community. Banks must identify their customers and record any transaction that exceeds 5000 euros (approximately U.S. $7,300). The previous threshold was 12,500 euros (approximately U.S. $18,250). Bank of Italy mandatory guidelines require the reporting of all suspicious cash transactions and other activity, such as a third party payment on an international transaction. Italian law prohibits the use of cash or negotiable bearer instruments for transferring money in amounts in excess of 5,000 euros (approximately U.S. $7,300), except through authorized intermediaries or brokers.
Banks and other financial institutions are required to maintain for ten years records necessary to reconstruct significant transactions, including information about the point of origin of funds transfers and related messages sent to or from Italy. Banks operating in Italy must record account data on their own standardized customer databases established within the framework of the anti-money laundering regulation. A “banker negligence” law makes individual bankers responsible if their institutions launder money. The law protects bankers and others with respect to their cooperation with law enforcement entities.
Italy has addressed the problem of international transportation of illegal-source currency and monetary instruments by applying the 10,000 euros (U.S. $14,700) equivalent reporting requirement to cross-border transport of domestic and foreign currencies and negotiable bearer instruments. Reporting is mandatory for cross-border transactions involving negotiable bearer monetary instruments. Financial institutions are required to maintain a uniform anti-money laundering database for all transactions (including wire transfers) over 5,000 euros ($7,300) and to submit this data monthly to the Italian Foreign Exchange Office (Ufficio Italiano dei Cambi, or UIC). The data is aggregated by class of transaction, and any reference to customers is removed. The UIC analyzes the data and can request specific transaction details if warranted. In 2008, this operation will be handled by the newly created Financial Intelligence Unit.
In 2005, the UIC received 8,576 suspicious transaction reports (STRs) related to money laundering and 482 related to terrorist financing. Italian law requires that the Anti-Mafia Investigative Unit (DIA) and the Guardia di Finanza (GdF) be informed about almost all STRs, including those that the UIC does not pursue further. The UIC does, however, have the authority to perform a degree of filtering before passing STRs to law enforcement. Law enforcement opened 328 investigations based on STRs, which resulted in 103 prosecutions.
Because of Italy’s banking controls, narcotics traffickers are using different ways of laundering drug proceeds. To deter nontraditional money laundering, the Government of Italy (GOI) has enacted a decree to broaden the category of institutions and professionals subject to anti-money laundering regulations. The list now includes accountants, debt collectors, exchange houses, insurance companies, casinos, real estate agents, brokerage firms, gold and valuables dealers and importers, auction houses, art galleries, antiques dealers, labor advisors, lawyers, and notaries. The required implementing regulations for the decree, as far as nonfinancial businesses and professions are concerned, were issued in February 2006 and came into force in April 2006 (Ministerial Decrees no. 141, 142 and 143 of 3.02.2006). However, while Italy now has comprehensive internal auditing and training requirements for its (broadly-defined) financial sector, implementation of these measures by nonbank financial institutions lags behind that of banks, as evidenced by the relatively low number of STRs filed by nonbank financial institutions. As of 2005, according to UIC data, banking institutions submit about 80 percent of all STRs. Money remittance operators submit 13.5 percent of the total number of STRs, and all other sectors together account for less than ten percent.
Until January 1, 2008, the UIC served as Italy’s financial intelligence unit (FIU). An arm of the Bank of Italy (BoI), the UIC received and analyzed STRs filed by covered institutions, and then forwarded them to either the Anti-Mafia Investigative Unit (DIA) or the Guardia di Finanza (GdF) (financial police) for further investigation. The UIC compiles a register of financial and nonfinancial intermediaries that carry on activities that could be exposed to money laundering. The UIC has access to banks’ customer databases. Investigators from the GdF and other Italian law enforcement agencies must obtain a court order prior to being granted access to the archive. The UIC also performed supervisory and regulatory functions such as issuing decrees, regulations, and circulars. It does not require a court order to compel supervised institutions to provide details on regulated transactions. A special currency branch of the GdF is the Italian law enforcement agency with primary jurisdiction for conducting financial investigations in Italy. On January 1, 2008 Italy opened a Financial Intelligence Unit at the Bank of Italy that will assume the responsibilities of the UIC.
Italy has established reliable systems for identifying, tracing, freezing, seizing, and forfeiting assets from narcotics trafficking and other serious crimes, including terrorism. These assets include currency accounts, real estate, vehicles, vessels, drugs, legitimate businesses used to launder drug money, and other instruments of crime. Under anti-Mafia legislation, seized financial and nonfinancial assets of organized crime groups can be forfeited. The law allows for forfeiture in both civil and criminal cases. Through October 2004, Italian law enforcement seized more than 160 million euros (approximately $U.S. 233 million) in forfeited assets due to money laundering.
Italy does not have any significant legal loopholes that allow traffickers and other criminals to shield assets. However, the burden of proof is on the Italian government to make a case in court that assets are related to narcotics trafficking or other serious crimes. Law enforcement officials have adequate powers and resources to trace and seize assets; however, their efforts can be affected by which local magistrate is working a particular case. Funds from asset forfeitures are entered into the general State accounts. Italy shares assets with member states of the Council of Europe and is involved in negotiations within the EU to enhance asset tracing and seizure.
In October 2001, Italy passed a law decree (subsequently converted into law) that created the Financial Security Committee (FSC), charged with coordinating GOI efforts to track and interdict terrorist financing. FSC members include the Ministries of Finance, Foreign Affairs, Home Affairs, and Justice; the BoI; UIC; CONSOB (Italy’s securities market regulator); GdF; the Carabinieri; the National Anti-Mafia Directorate (DNA); and the DIA. The Committee has far-reaching powers that include waiving provisions of the Official Secrecy Act to obtain information from all government ministries.
A second October 2001 law decree (also converted into law) made financing of terrorist activity a criminal offense, with prison terms of between seven and fifteen years. The legislation also requires financial institutions to report suspicious activity related to terrorist financing. Both measures facilitate the freezing of terrorist assets. Per FSC data as of December 2004, 57 accounts had been frozen belonging to 55 persons, totaling U.S. $528,000 under United Nations (UN) resolutions relating to terrorist financing. Data for 2005 through 2007 has not been reported. The GOI cooperates fully with efforts by the United States to trace and seize assets. Italy is second in the EU only to the United Kingdom in the number of individual terrorists and terrorist organizations the country has submitted to the UN 1267 Sanctions Committee for designation.
The UIC disseminates to financial institutions the EU, UN, and U.S. Government lists of terrorist groups and individuals. The UIC may provisionally suspend for 48 hours transactions suspected of involving money laundering or terrorist financing. The courts must then act to freeze or seize the assets. Under Italian law, financial and economic assets linked to terrorists can be directly frozen by the financial intermediary holding them, should the owner be listed under EU regulation. Moreover, assets can be seized through a criminal sequestration order. Courts may issue such orders when authorities are investigating crimes linked to international terrorism or by applying administrative seizure measures originally conceived to fight the Mafia. The sequestration order may be issued with respect to any asset, resource, or item of property, provided that these are goods or resources linked to the criminal activities under investigation.
Law no. 15 of January 29, 2006, gave the government authority to implement the EU’s Third Money Laundering Directive (Directive 2005/60/EC) and to issue provisions to make more effective the freezing of nonfinancial assets belonging to listed terrorist groups and individuals. Legislative Decree 231 of November 21, 2007 implements elements of the Third Money Laundering Directive.
In Italy, the term “alternative remittance system” refers to regulated nonbank institutions such as money transfer businesses. Informal remittance systems do exist, primarily to serve Italy’s significant immigrant communities, and in some cases are used by Italy-based drug trafficking organizations to transfer narcotics proceeds.
Italy does not regulate charities as such. Primarily for tax purposes, in 1997 Italy created a category of “not-for-profit organizations of social utility” (ONLUS). Such organizations can be associations, foundations or fundraising committees. To be classified as an ONLUS, the organization must register with the Finance Ministry and prepare an annual report. There are currently 19,000 registered entities in the ONLUS category. Established in 2000, the ONLUS Agency issues guidelines and drafts legislation for the nonprofit sector, alerts other authorities of violations of existing obligations, and confirms de-listings from the ONLUS registry. The ONLUS Agency cooperates with the Finance Ministry in reviewing the conditions for being an ONLUS. The ONLUS Agency has reviewed 1,500 entities and recommended the dissolution of several that were not in compliance with Italian law. Italian authorities believe that there is a low risk of terrorist financing in the Italian nonprofit sector.
Italian cooperation with the United States on money laundering has been exemplary. The United States and Italy have signed a customs mutual assistance agreement, as well as extradition and mutual legal assistance treaties. Both in response to requests under the mutual legal assistance treaty (MLAT) and on an informal basis, Italy provides the United States records related to narcotics-trafficking, terrorism and terrorist financing investigations and proceedings. Italy also cooperates closely with U.S. law enforcement agencies and other governments investigating illicit financing related to these and other serious crimes. Currently, assets can only be shared bilaterally if agreement is reached on a case-specific basis. In May 2006, however, the U.S. and Italy signed a new bilateral instrument on mutual legal assistance as part of the process of implementing the U.S./EU Agreement on Mutual Legal Assistance, signed in June 2003. Once ratified, the new U.S./Italy bilateral instrument on mutual legal assistance will provide for asset forfeiture and sharing.
Italy is a party to the 1988 UN Drug Convention, the UN International Convention for the Suppression of the Financing of Terrorism, the UN Convention against Transnational Organized Crime, and the Council of Europe Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds from Crime. Italy has also signed, but has not yet ratified, the UN Convention against Corruption.
Italy is an active member of the Financial Action Task Force (FATF). Italy co-chaired FATF’s International Cooperation Working Group in 2007. Italy’s FIU, the UIC, is a member of the Egmont Group. The UIC has been authorized to conclude information-sharing agreements concerning suspicious financial transactions with other countries. To date, the FIU has signed memoranda of understanding with 12 analogs, primarily in Europe and is negotiating agreements with 8 other FIUs, primarily in Asia. Italy has a number of bilateral agreements with foreign governments in the areas of investigative cooperation on narcotics trafficking and organized crime. Reportedly, there is no known instance of refusal to cooperate with foreign governments.
The Government of Italy is firmly committed to the fight against money laundering and terrorist financing, both domestically and internationally. However, given the relatively low number of STRs being filed by nonbank financial institutions, the GOI should improve its training efforts and supervision in this sector. Italian law enforcement agencies should take additional steps to understand and identify underground finance and value transfer methodologies employed by Italy’s burgeoning immigrant communities. The GOI should also continue its active participation in multilateral efforts dedicated to the global fight against money laundering and terrorist financing.
Jamaica, the foremost producer and exporter of marijuana in the Caribbean, is also a major transit country for cocaine flowing from South America to the United States and other international destinations. In addition to profits from domestic marijuana trafficking, payments for cocaine and weapons pass through Jamaica in the form of bulk cash shipments back to South America. These illegal drug flows must be legitimated and therefore make Jamaica susceptible to money laundering activities and other financial crimes. In 2007, there was not a significant increase in the occurrence of financial crimes; however, there was a noticeable upsurge in advance fee scams and other related fraud schemes, including unregulated “investment clubs.” The Government of Jamaica (GOJ) is also becoming increasingly concerned by the high rate of trade-based money laundering and has plans to attack this problem in 2008.
Jamaica is neither an offshore financial center, nor is it a major money laundering country. Currently, Jamaican banking authorities do not license offshore banks or other forms of exempt or shell companies, nor are nominee or anonymous directors and trustees allowed for companies registered in Jamaica. Financial institutions are prohibited from maintaining anonymous, numbered or fictitious accounts under the 2007 Proceeds of Crime Act. As part of its political campaign, the new government, which took office in September, promoted the idea of turning Kingston into an offshore financial center. If this plan were to come to fruition, it could increase Jamaica’s vulnerability to money laundering. The GOJ does not encourage or facilitate money laundering, nor has any senior official been investigated or charged with the laundering of proceeds from illegal activity. Public corruption, particularly in the Customs Service, provides opportunities for trade-based money laundering. The majority of funds being laundered in Jamaica are from drug traffickers and elements of organized crime, mainly the profits obtained in their overseas criminal activities. There is no evidence of terrorist financing in Jamaica.
Due to scrutiny by banking regulators, Jamaican financial instruments are considered an unattractive mechanism for laundering money. As a result, much of the proceeds from drug trafficking and other criminal activity are used to acquire tangible assets such as real estate or luxury cars, as well as legitimate businesses. Over the last year a significant amount of assets have flowed into new, unregulated financial investment clubs and loan schemes, which are ripe for exploitation by criminal elements. There is a significant black market for smuggled goods, which is due to tax evasion. Further complicating the ability of the GOJ to track and prevent money laundering and the transit of illegal currency through Jamaica are the hundreds of millions of U.S. dollars in remittances sent home by the substantial Jamaican population overseas.
There is a free trade zone in Montego Bay, which has a small cluster of information technology companies, and one gaming entity that focuses on international gambling. There is no indication that this free zone is being used for trade-based money laundering or terrorist financing. Domestic casino gambling, Para mutual wagering and lotteries are permitted in Jamaica, and are regulated by the Betting Gaming and Lotteries Commission.
The Proceeds of Crime Act (POCA), which became effective in May 2007, incorporates the existing provisions of its predecessor legislation (the Money Laundering Act and the Drug Offences Forfeiture of Proceeds Act), and now allows for both civil and criminal forfeiture of assets related to criminal activity. The POCA criminalizes money laundering related to narcotics offenses, fraud, firearms trafficking, human trafficking, terrorist financing and corruption, and applies to all property or assets associated with an individual convicted or suspected of involvement with a crime. This includes legitimate businesses used to launder drug money or support terrorist activity. Bank secrecy laws exist; however, there are provisions under GOJ law to enable law enforcement access to banking information.
The POCA establishes a five-year record-keeping requirement for both transactions and client identification records, and requires financial institutions to report all currency transactions over U.S. $15,000. Money transfer or remittance companies have a reporting threshold of U.S. $5,000, while for exchange bureaus the threshold is U.S. $8,000. The POCA requires banks, credit unions, merchant banks, wire-transfer companies, exchange bureaus, mortgage companies, insurance companies, brokers and other intermediaries, securities dealers, and investment advisors to report suspicious transactions of any amount to Jamaica’s financial intelligence unit (FIU), which is a unit within the Ministry of Finance’s Financial Investigations Division (FID). Based on its analysis of cash threshold reports and suspicious transaction reports (STRs), the FIU forwards cases to the Financial Crimes Unit of the FID for further investigation. There is also a Financial Crimes Division established within the Jamaica Constabulary Force, and it is unclear how its investigative responsibilities for financial crimes are shared with the Financial Crimes Unit of the FID.
Jamaica’s central bank, the Bank of Jamaica, supervises the financial sector for compliance with anti-money laundering and counter-terrorist financing provisions. Although the POCA permits the Minister of Finance to add nonbanking institutions to the list of obligated reporting entities, a court decision that has been pending for months has thus far tied the government’s hands with respect to a growing number of currently unregulated “investment clubs, some of which are suspected to serve as covers for Ponzi schemes.
The FID was originally created by a merger, within the Ministry of Finance, the Revenue Protection Department, and the Financial Crimes Unit. The merger resulted in a division with seven distinct units. The FID currently consists of 14 forensic examiners, six police officers who have full arrest powers, a director and five administrative staff. The FID is working with the United Kingdom and Ireland to develop a comprehensive, in-house capacity for training the additional staff members it was authorized to meet its additional duties under POCA. The FID currently needs additional lawyers, forensic accountants, police officers and intelligence analysts. In the past, FID staff enjoyed a salary premium that made the positions more attractive. Recent changes have raised civil service salaries in line with current salary levels at the FID, and without revision to its pay scale, the FID’s ability to recruit qualified and motivated staff will remain limited.
The FID has access to data from other government sources, which include the national vehicle registry, property tax rolls, duty and transfer rolls, various tax databases, national land register, and cross border currency declarations. Direct information access to these databases is limited to a small number of people within the FID. Indirect access is available through an internal mechanism that funnels requests to authorized users. Companion legislation to the POCA, the FID Act, which was supposed to have been enacted in 2007, remains stalled. The FID Act would bring Jamaica’s regulations fully in line with the international standards of the Egmont Group, and allow for information exchange between the FID and other FIUs.
In mid-2007, the FID and the Tax Administrative Directorate (TAAD) signed a protocol for cooperation on investigations that have a nexus to criminal tax evasion. Because both entities suffer from a lack of adequate resources, it remains to be seen if the protocol can overcome competing priorities (such as revenue collection obligations, a main focus of the GOJ) and permit TAAD staff to assist the FID with money laundering investigations.
Jamaica has an ongoing education program to ensure compliance with the mandatory suspicious transaction reporting requirements. Reporting individuals are protected by law with respect to their cooperation with law enforcement entities. The FID reports that nonbank financial institutions have a 70 percent compliance rate with money laundering controls. There are currently no statistics available on the numbers of STRs, cases and convictions for 2007.
The Jamaican Parliament’s 2004 amendments to the Bank of Jamaica Act, the Banking Act, the Financial Institutions Act, and the Building Societies Act improve the governance, examination and supervision of commercial banks and other financial institutions by the Bank of Jamaica. Amendments to the Financial Services Commission Act, which governs financial entities supervised by the Financial Services Commission, expand the powers of the authorities to share information, particularly with overseas regulators and law enforcement agencies. The amended Acts provide the legal and policy parameters for the licensing and supervision of financial institutions, and lay a complementary foundation to the POCA. Guidelines issued by the Bank of Jamaica caution financial institutions against initiating or maintaining relationships with persons or businesses that do not meet the standards of the Financial Action Task Force.
The GOJ requires customs declaration of currency or monetary instruments over U.S. $10,000 or its equivalent. The Kingston-based Airport Interdiction Task Force, a joint law enforcement effort by the United States, United Kingdom, Canada and Jamaica, began operations in mid-2007. The Task Force focuses, in part, on efforts to combat the movement of large amounts of cash often in shipments totaling hundreds of thousands of U.S. dollars through Jamaica.
The POCA expands the confiscation powers of the GOJ and permits, upon conviction, the forfeiture of assets assessed to have been received by the convicted party within the six years preceding the conviction. Under the POCA, the Office of the Public Prosecutor and the FID have the authority to bring asset freezing and forfeiture orders before the court. However, both agencies are lacking in staff and resources, and few of the prosecutors have received substantive training on financial crimes.
Under the POCA, the proposed division of forfeited assets would distribute assets equally among the Ministry of National Security, the Ministry of Finance, and the Ministry of Justice. An Assets Recovery Agency (ARA) will be established within the FID to manage seized and forfeited assets. There is currently no data available on the amount of seizures and forfeitures of assets for 2007. In 2006, U.S. $2 million was seized and U.S. $1.5 million was forfeited. Nondrug related assets go to a consolidated or general fund, while drug related assets are placed into a forfeited asset fund, which benefits law enforcement.
The Terrorism Prevention Act of 2005 criminalizes the financing of terrorism, consistent with UN Security Council Resolution 1373. Under the Terrorism Prevention Act, the GOJ has the authority to identify, freeze, and seize terrorist finance-related assets. The FID has the responsibility for investigating terrorist financing. The FID is currently updating its FIU database and will be implementing a system to cross-reference reports from the U.S. Treasury Department’s Office of Foreign Asset Control (OFAC) and the UN Sanctions Committee. Additionally, the Ministry of Foreign Affairs and Foreign Trade circulates to all relevant agencies the names of suspected terrorists and terrorist organizations listed on the UN 1267 Sanctions Committee consolidated list. To date, no accounts owned by those included on the UN consolidated list have been identified in Jamaica, nor has the GOJ encountered any misuse of charitable or nonprofit entities as conduits for the financing of terrorism.
Jamaica and the United States have a Mutual Legal Assistance Treaty that entered into force in 1995, as well as an agreement for the sharing of forfeited assets, which became effective in 2001. Jamaica is a party to the 1988 UN Drug Convention, the UN International Convention for the Suppression of the Financing of Terrorism, the Inter-American Convention against Corruption, and the UN Convention against Transnational Organized Crime. The GOJ has signed, but not ratified, the UN Convention against Corruption. Jamaica is a member of the Caribbean Financial Action Task Force (CFATF) and the Organization of American States Inter-American Drug Abuse Control Commission (OAS/CICAD) Experts Group to Control Money Laundering. Until the FID Act is passed, the FID will not meet the membership requirements of the Egmont Group.
The Government of Jamaica has moved forward in its efforts to combat money laundering and terrorist financing with the passage of the Proceeds of Crime Act, and should now ensure that the Act is fully implemented. The GOJ should resolve whether the POCA and other financial regulations apply to “investment clubs” and other alternative schemes. The GOJ should ensure the swift passage of the FID Act to qualify the FIU within the Financial Investigations Division to meet the international standards of the Egmont Group and exchange information with other FIUs. In addition, the GOJ should grant the FID adequate resources to enable it to hire an appropriate number of staff to allow for the additional work it now faces with the implementation of the POCA. The GOJ should also ensure that a duality of functions does not exist in the investigative responsibilities of the Financial Crimes Unit of the FID and the Financial Crimes Division of the Jamaican Constabulary Force. The GOJ should also ratify the UN Convention against Corruption.
Japan is the world’s second largest economy and an important world financial center. Although the Japanese government continues to strengthen legal institutions to permit more effective enforcement of financial transaction laws, Japan still faces substantial risk of money laundering by organized crime and other domestic and international criminal elements. The principal sources of laundered funds are drug trafficking and financial crimes: illicit gambling, loan-sharking, extortion, abuse of legitimate corporate activities, Internet fraud activities, and all types of property related crimes, which are often linked to Japan’s criminal organizations. U.S. law enforcement investigations periodically show a link between drug-related money laundering activities in the U.S. and bank accounts in Japan.
On March 29, 2007, Japan’s government enacted new money laundering “Law for Prevention of Transfer of Criminal Proceeds.” Referred to in the press as the Gatekeeper Bill, after the Financial Action Task Force (FATF) Gatekeeper Initiative, and designed to bring Japan into closer compliance with the FATF Forty Recommendations, the bill’s passage marked significant changes in Japan’s anti-money laundering landscape. In addition to the financial institutions previously regulated, the new statutes expanded the types of nonfinancial businesses and professions under the law’s purview, including real estate agents, private mail box agencies, dealers of precious metals and stones; and, certain types of trust and company service providers. They must conduct customer due diligence, confirm client identity, retain customer verification records, and report Suspicious Transaction Reports (STRs) to the authorities. Legal and accounting professionals such as judicial scriveners and certified public accounts are now subject to customer due diligence and record keeping, but not STR reporting. However, the bill stipulates that, “confirmation of the identity of the clients and retention of records (of transaction and identity verification) by lawyers shall be prescribed by the Japan Federation Bar Association’s regulation,” permitting lawyers to remain outside the law’s new parameters. Accordingly, the bar association drafted and now enforces “Rules Regarding the Verification of Clients’ Identity and Record-Keeping.”
Drug-related money laundering was first criminalized under the Anti-Drug Special Law that took effect July 1992. This law also mandates the filing of STRs for suspected proceeds of drug offenses, and authorizes controlled drug deliveries. The legislation also creates a system to confiscate illegal profits gained through drug crimes. The seizure provisions apply to tangible and intangible assets, direct illegal profit, substitute assets, and criminally derived property that have been commingled with legitimate assets.
The narrow scope of the Anti-Drug Special Law and the burden required of law enforcement to prove a direct link between money and assets to specific drug activity limits the law’s effectiveness. As a result, Japanese police and prosecutors have undertaken few investigations and prosecutions of suspected money laundering. Many Japanese officials in the law enforcement community, including Japanese Customs, believe that Japan’s organized crime groups have been taking advantage of this limitation to launder money.
Japan expanded its money laundering law beyond narcotics trafficking to include money laundering predicate offenses such as murder, aggravated assault, extortion, theft, fraud, and kidnapping when it passed the 1999 Anti-Organized Crime Law (AOCL), which took effect in February 2000. The law extends the confiscation laws to include additional money laundering predicate offenses and value-based forfeitures, and enhances the suspicious transaction reporting system.
The AOCL was partially revised in June of 2002 by the “Act on Punishment of Financing to Offenses of Public Intimidation,” which specifically added the financing of terrorism to the list of money laundering predicates. A further amendment to the AOCL submitted to the Diet for approval in 2004, designed to expand the predicate offenses for money laundering from approximately 200 offenses to nearly 350 offenses, with almost all offenses punishable by imprisonment, has yet to be approved.
Japan’s Financial Services Agency (FSA) supervises all financial institutions and the Securities and Exchange Surveillance Commission supervises securities transactions. The FSA classifies and analyzes information on suspicious transactions reported by financial institutions, and provides law enforcement authorities with information relevant to their investigation. Japanese banks and financial institutions are required by law to record and report the identity of customers engaged in large currency transactions. There are no secrecy laws that prevent disclosure of client and ownership information to bank supervisors and law enforcement authorities.
To facilitate the exchange of information related to suspected money laundering activity, the FSA established the Japan Financial Intelligence Office (JAFIO) on February 1, 2000, as Japan’s financial intelligence unit. Under the 2007 anti-money laundering law, on April 1, 2007, JAFIO relocated from the FSA to the National Police Agency, where it is known as the Japan Financial Intelligence Center (JAFIC). Correspondingly, JAFIC’s staff grew from 17 to 43 personnel, with an emphasis on strengthened analytical functions. JAFIC receives STRs from specified business operators through the competent administrative authorities, analyzes them, and disseminates intelligence deemed useful to criminal investigations to the law enforcement community.
In 2006, JAFIC received 113,860 STRs, up from the 98,935 STRs received in 2005. In 2006, some 82 percent of the reports were submitted by banks, 7 percent by credit cooperatives, 9 percent from the country’s large postal savings system, 0.7 percent from nonbank money lenders, and almost none from insurance companies. In 2006, JAFIC disseminated 71,241 STRs to law enforcement, up from 66,812 STRs disseminated in 2005. Of these, 143 money laundering cases went to prosecutors, up from 112 in 2005. The amount of money confiscated or forfeited in 2006 was 6.07 billion yen (U.S. $52 million), up from 4.46 billion yen (U.S. $39 million) in 2005.
As of 2007, JAFIC has concluded international cooperation agreements with numerous counterpart FIU’s (Australia, Belgium, Brazil, Canada, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, Thailand, the United Kingdom, and the United States). These agreements establish cooperative frameworks for the exchange of financial intelligence related to money laundering and terrorist financing. Japanese financial institutions have cooperated with law enforcement agencies, including U.S. and other foreign government agencies investigating financial crimes related to narcotics.
In 2006, Japan concluded a Mutual Legal Assistance Treaty (MLAT) with the Republic of Korea, and is currently negotiating MLAT texts with China and Russia. In 2003, the United States and Japan concluded a Mutual Legal Assistance Treaty (MLAT), which took effect in July of 2006. In 2007 the U.S.-Japan MLAT was used for the first time in furtherance of two separate money laundering investigations where the predicate crimes (Nigerian bank fraud) first occurred overseas, then moved to the U.S., with the money subsequently laundered in Japan; the cases are still pending.
Although Japan has not adopted “due diligence” or “banker negligence” laws to make individual bankers legally responsible if their institutions launder money, there are administrative guidelines that require due diligence. In a high-profile 2006 court case, however, the Tokyo District Court ruled to acquit a Credit Suisse banker of knowingly assisting an organized crime group to launder money despite doubts about whether the banker performed proper customer due diligence. Japanese law does not protect bankers and other financial institution employees who cooperate with law enforcement entities.
In April 2002, the Diet enacted the Law on Customer Identification and Retention of Records on Transactions with Customers by Financial Institutions (a “know your customer” law). The law reinforced and codified the customer identification and record-keeping procedures that banks had practiced for years. The Foreign Exchange and Foreign Trade law was revised in January 2007, so that financial institutions are required to make positive customer identification for both domestic transactions and transfers abroad in amounts of more than 100,000 yen (approximately $900). Banks and financial institutions are required to maintain customer identification records for seven years. In January 2007, an amendment to the rule on Customer Identification by Financial Institutions came into force, whereby financial institutions are now required to identify the originators of wire transfers of over 100,000 yen.
In 2004, the FSA cited Citibank Japan’s failure to properly screen clients under anti-money laundering mandates as one of a list of problems that caused the FSA to shut down Citibank Japan’s private banking unit. In February 2004, the FSA disciplined Standard Chartered Bank for failing to properly check customer identities and for violating the obligation to report suspicious transactions. In January 2007, the Federal Reserve ordered Japan’s Sumitomo Mitsui Banking Corp.’s New York branch to address anti-money laundering deficiencies, only a month after similarly citing Bank of Tokyo-Mitsubishi UFJ for anti-money laundering shortcomings.
The Foreign Exchange and Foreign Trade Law requires travelers entering and departing Japan to report physically transported currency and monetary instruments (including securities and gold weighing over one kilogram) exceeding one million yen (approximately U.S. $8,475), or its equivalent in foreign currency, to customs authorities. Failure to submit a report, or submitting a false or fraudulent one, can result in a fine of up to 200,000 yen (approximately $1,695) or six months’ imprisonment. Efforts by authorities to counter bulk cash smuggling in Japan are not yet matched by a commensurate commitment in necessary resources.
In response to the events of September 11, 2001 the FSA used the anti-money laundering framework provided in the Anti-Organized Crime Law to require financial institutions to report transactions where funds appeared either to stem from criminal proceeds or to be linked to individuals and/or entities suspected to have relations with terrorist activities. The 2002 Act on Punishment of Financing of Offenses of Public Intimidation, enacted in July 2002, added terrorist financing to the list of predicate offenses for money laundering, and provided for the freezing of terrorism-related assets. Japan signed the UN International Convention for the Suppression of the Financing of Terrorism on October 30, 2001, and became a party on June 11, 2002.
After September 11, 2001, Japan has regularly searched for and designated for asset freeze any accounts that might be linked to all the suspected terrorists and terrorist organizations listed on the UN 1267 Sanctions Committee’s consolidated list and the list of individuals and entities under UNSCR 1373.
Underground banking systems operate widely in Japan, especially in immigrant communities. Such systems violate the Banking Law. There have been a large number of investigations into underground banking networks. Reportedly, substantial illicit proceeds have been transferred abroad, particularly to China, North and South Korea, and Peru. In November 2004, the Diet approved legislation banning the sale of bank accounts, in a bid to prevent the use of purchased accounts for fraud or money laundering.
Japan has not enacted laws that allow for sharing of seized narcotics assets with other countries. However, the Japanese government fully cooperates with efforts by the United States and other countries to trace and seize assets, and makes use of tips on the flow of drug-derived assets from foreign law enforcement efforts to trace funds and seize bank accounts.
Japan is a party to the 1988 UN Drug Convention and has signed but not ratified the UN Transnational Organized Crime Convention. Ratification of this convention would require amendments to Japan’s criminal code to permit charges of conspiracy, which is not currently an offense. Minority political parties and Japan’s law society have blocked this amendment on at least three occasions. Japan is a member of the Financial Action Task Force. JAFIO (now JAFIC) joined the Egmont Group of FIUs in 2000. Japan is also a member of the Asia/Pacific Group against Money Laundering, and is scheduled for a second round mutual evaluation in 2008.
In 2002, Japan’s FSA and the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission signed a nonbinding Statement of Intent (SOI) concerning cooperation and the exchange of information related to securities law violations. In January 2006 the FSA and the U.S. SEC and CFTC signed an amendment to their SOI to include financial derivatives. Japan is a signatory but not a party to the UN Convention against Corruption. Japan is listed 17 out of 179 countries surveyed in Transparency International’s 2007 Corruption Perception Index.
The Government of Japan has many legal tools and agencies in place to successfully detect, investigate, and combat money laundering. However, there have been few successful money laundering prosecutions and convictions. To strengthen its money laundering regime, Japan should stringently enforce the Anti-Organized Crime Law, and amend the law with regard to charges of conspiracy. The narrow scope of the Anti-Drug Special Law has limited the law’s effectiveness. Japan should also enact penalties for noncompliance with the customer identification provisions of the Foreign Exchange and Trade Law, adopt measures to share seized assets with foreign governments, and enact banker “due diligence” provisions. Japan should continue to combat underground financial networks. Since Japan is a major trading power and the misuse of trade is often the facilitator in alternative remittance systems and value transfer schemes, Japan should take steps to identify and combat trade-based money laundering. Japan should also become a party to the UN Transnational Organized Crime Convention and the UN Convention against Corruption.
The Bailiwick of Jersey (BOJ), one of the Channel Islands, is an international financial center offering a sophisticated array of offshore services. A Crown Dependency of the United Kingdom, it relies on the United Kingdom for its defense and international relations. Due to Jersey’s investment services, most of the illicit money in Jersey is derived from foreign criminal activity. Domestically, local drug trafficking and corruption of politically exposed persons (PEPs) are sources of illicit proceeds found in the country. Money laundering mostly occurs within Jersey’s banking system, investment companies, and local trust companies.
The financial services industry consists of 48 banks; 1,086 funds; 953 trust companies (2005 statistic), and 175 insurance companies (2006 statistic), which are largely captive insurance companies. The menu of services includes investment advice, dealing management companies, and mutual fund companies. In addition to financial services, companies offer corporate services, such as special purpose vehicles for debt restructuring and employee share ownership schemes. For high net worth individuals, there are wealth management services. All regulated entities can sell their services to both residents and nonresidents. All financial businesses must have a presence in Jersey, and management must also be in Jersey. However, although Jersey does not provide offshore licenses, it administers a number of companies registered in other jurisdictions. These companies, known as “exempt companies,” do not pay Jersey income tax and their services are only available to nonresidents.
The Jersey Finance and Economics Committee is the government body responsible for administering the law, regulating, supervising, promoting, and developing the Island’s finance industry. The financial Services Commission (FSC) is the financial services regulator. In 2003, the International Monetary Fund (IMF) assessed Jersey’s anti-money laundering (AML) regime. The IMF reported that it found the FSC to be in compliance with international standards. The IMF has scheduled a review and assessment of Jersey’s financial frameworks for October 2008.
Jersey’s main AML laws are the Drug Trafficking Offenses (Jersey) Law of 1988, which criminalizes money laundering related to narcotics trafficking, and the Proceeds of Crime (Jersey) Law, 1999, which extends the predicate offenses for money laundering to all offenses punishable by at least one year in prison. The FSC has recently formed a dedicated AML Unit to lead the Island’s operational AML and counter-terrorist financing (CTF) strategy. The AML Unit will devise and implement a registration scheme for currently unregulated nonfinancial services businesses and professions entering an oversight regime for the first time. Under amendments being made to the Proceeds of Crime (Jersey) Law 1999, businesses such as estate agents and dealers in high value goods will, for the first time, have AML regulation. The AML Unit has also taken specific responsibility regulating money service business such as bureaux de change, check cashers, and money transmitters.
In May and July 2007, in preparation for the upcoming IMF assessment and with Council of Ministers approval, the AML/CTF Strategy Group issued three consultation papers proposing to extend and update Jersey’s AML framework to comply with the international standards. In October 2007, the FSC published a Consultation Paper proposing amendments to current legislation and introducing new secondary legislation. The Consultation Paper discusses the proposed legislative changes with regard to the Trust Company Business and Investment Business secondary legislation on accounts, audits, and reports. The paper also discusses requirements on Trust Company Business with respect to the safekeeping of customer money.
Financial institutions must report suspicious transactions under the narcotics trafficking, terrorism, and anti-money laundering laws. There is no threshold for filing a suspicious transaction report (STR), and the reporting individual is protected from criminal and civil charges by safe harbor provisions in the law. Banks and other financial service companies must maintain financial records of their customers for a minimum of 10 years after completion of business. The FSC has issued AML Guidance Notes that the courts take into account when considering whether or not an offense has been committed under the Money Laundering Order. Upon conviction of money laundering, a person could receive imprisonment of one year or more.
After consultation with the financial services industry, the FSC issued a position paper (jointly with Guernsey and Isle of Man counterparts) proposing to further tighten the essential due diligence requirements that financial institutions must meet regarding their customers. The position paper states the FSC’s intention to insist on the responsibility of all financial institutions to verify the identity of their customers, regardless of the action of intermediaries. The paper also states an intention to require a progressive program to obtain verification documentation for customer relationships established before the Proceeds of Crime (Jersey) Law came into force in 1999. Each year working groups review specific portions of these principles and draft AML Guidance Notes to incorporate changes.
Following the extensive consultation with the Funds Sector, and approval by the State of Jersey in November 2007, the FSC published Codes of Practice for Fund Services Business. The Code consists of seven high level principles for the conduct of fund services business, together with more detailed requirements in relation to each principle.
Approximately 30,000 Jersey companies have registered with the Registrar of Companies, which is the Director General of the FSC. In addition to public filing requirements relating to shareholders, the FSC requires each company to provide the Commission with details of the ultimate individual beneficial owner of each Jersey-registered company. The Registrar keeps the information in confidence.
The Joint Financial Crime Unit (JFCU), Jersey’s financial intelligence unit (FIU), is responsible for receiving, investigating, and disseminating STRs. The unit includes Jersey Police and Customs officers and a financial crime analyst. In 2006, the JFCU received 1,034 STRs. Approximately 25 percent of the STRs filed result in further police investigations. Reports filed in the first six months of 2007 indicate a 32 percent increase in the number of STRs submitted to the JFCU by financial institutions compared to the three-year average for this same period. In the first six months of 2007, Jersey has held more than 2.5 million pounds (approximately $4.9 million) in bank or trust company accounts pending police investigation of suspicious activity. The FIU also responds to requests for financial information from other FIUs. In the first six months of 2007, the JFCU received 219 requests for assistance from counterparts in other jurisdictions.
The Enforcement Division of the Jersey’s Financial Services Commission (FSC) responded to 10 requests for assistance from overseas regulators during 2006 and issued public statements concerning nine illegal Internet based businesses that purported to have a Jersey connection. Jersey’s law enforcement and regulatory agencies have extensive powers to cooperate with one another, and regularly do so. The FSC cooperates with regulatory authorities, for example, to ensure that financial institutions meet AML obligations.
The JFCU, in conjunction with the Attorney Generals Office, trace, seize and freeze assets. A confiscation order can be obtained if the link to a crime is proven. If the criminal has benefited from a crime, legitimate assets can be forfeited to meet a confiscation order. There is no period of time ascribed to the action of freezing until the assets are released. Frozen assets are confiscated by the Attorney Generals Office on application to the Court. Proceeds from asset seizures and forfeitures are placed in two funds. Drug-trafficking proceeds go to one fund, and the proceeds of other crimes go to the second fund. The drug-trafficking funds are used to support harm reduction programs, education initiatives, and to assist law enforcement in the fight against drug trafficking. Only limited civil forfeiture is allowed in relation to cash proceeds of drug trafficking located at the ports.
Alternate remittance systems do not appear to be prevalent in Jersey.
The Corruption (Jersey) Law 2005 was passed in alignment with the Council of Europe Criminal Law Convention on Corruption. The new corruption law came into force in February 2007. Articles 2, 3, and 4 of this law were amended in November 2007.
On July 1, 2005, the European Union Savings Tax Directive (ESD) came into force. The ESD is an agreement between the Member States of the European Union (EU) to automatically exchange information with other Member States about EU tax resident individuals who earn income in one EU Member State but reside in another. Although not part of the EU, the three UK Crown Dependencies (Jersey, Guernsey and Isle of Man) have voluntarily agreed to apply the same measures to those in the ESD and have elected to implement the withholding tax option (also known as the “retention tax option”) within the Crown Dependencies.
Under the retention tax option, each financial services provider will automatically deduct tax from interest and other savings income paid to EU resident individuals. The tax will then be submitted to local and Member States tax authorities annually. The tax authorities receive a bulk payment but do not receive personal details of individual customers. If individuals elect the exchange of information option, then no tax is deducted from their interest payments, but details of the customer’s identity, residence, paying agent, level and time period of savings, and income received by the financial services provider will be reported to local tax authorities where the account is held and then forwarded to the country where the customer resides.
Jersey signed the Tax Information Exchange Agreement (TIEA) with the United States in 2002, and plans to sign the same agreements with other countries, thus meeting international obligations to cooperate in financial investigations.
Jersey criminalized money laundering related to terrorist activity with the Prevention of Terrorism (Jersey) Law 1996. The Terrorism (Jersey) Law 2002, which entered into force in January 2003, enhances the powers of the Island authorities to investigate terrorist offenses, to cooperate with law enforcement agencies in other jurisdictions, and to seize assets. Jersey does not circulate the names of suspected terrorists and terrorist organizations listed on the UN 1267 Sanctions Committee’s consolidated list, the list of Specially Designated Global Terrorists designated by the United States pursuant to E.O. 13224, the EU designated list, or any other government’s list. However, Jersey expects its institutions to gather information of designated entities from the Internet and other public sources. Jersey authorities have instituted sanction orders freezing accounts of individuals connected with terrorist activity.
The FSC has reached agreements on information exchange with securities regulators in Germany, France, and the United States. The FSC has a memorandum of understanding for information exchange with Belgium. Registrar information is available, under appropriate circumstances and in accordance with the law, to U.S. and other investigators. In 2007, the FSC has signed a memorandum of understanding with British Virgin Islands Financial Services Commission that will further cooperation between the two regulatory bodies. Application of the 1988 UN Drug Convention was extended to Jersey on July 7, 1997.
Jersey is a member of the Offshore Group of Insurance Supervisors (OGIS) and the Offshore Group of Banking Supervisors (OGBS). It works with the Basel Committee on Banking Supervision and the Financial Action Task Force. The JFCU is a member of the Egmont Group.
The Bailiwick of Jersey should continue to enhance compliance with international standards. Jersey should ensure that all entities, within all sectors, are subject to reporting requirements. The FSC should work to ensure that the AML Unit has enough resources to function effectively, and to provide outreach and guidance to the sectors it regulates. This is especially true for the newest DNFBPs required to file reports. Jersey should mandate the same AML/CTF requirements over its “exempt” companies that it does over the rest of the obliged sectors. The FSC should distribute the UN, European Union and U.S. lists of designated suspected terrorist and terrorist-supporting entities to the obliged entities and not rely on the entities stay current through Internet research.
Jordan is not a regional or offshore financial center and is not considered a major venue for international criminal activity. However, Jordan’s long and often remote desert borders and proximity to Iraq make it susceptible to smuggling bulk cash, fuel, narcotics, cigarettes, and other contraband. The influx of refugees has caused an increase in cross border criminal activity. Jordan boasts a thriving “import-export” community of brokers, traders, and entrepreneurs that regionally are involved with value transfer via trade and customs fraud.
In August 2001, the Central Bank of Jordan, which regulates banks and financial institutions, issued anti-money laundering regulations designed to meet some of the Financial Action Task Force (FATF) Forty Recommendations on Money Laundering. Since that time, money laundering has been considered an “unlawful activity” subject to criminal prosecution. After the lifting of Iraqi sanctions, there have been few reports of money laundering through Jordanian banks. On July 17, 2007, Jordan enacted a comprehensive anti-money laundering law (AML). The law, Law No. 46 for the Year 2007, created a committee known as the National Committee on Anti-Money Laundering (NCAML). The committee is chaired by the Governor of the Central Bank of Jordan and has as members: the Deputy Governor of the Central Bank named by the Governor of the Central Bank to serve as deputy chairman of the committee, the Secretary General of the Ministry of Justice, the Secretary General of the Ministry of the Interior, the Secretary General of the Ministry of Finance, the Secretary General of the Ministry of Social Development (which overseas charitable organizations), the Director of the Insurance Commission, the Controller General of Companies, a Commissioner of the Securities Commission, and the head of the Anti-Money Laundering Unit. The Anti-Money Laundering Unit (AMLU), formerly the Central Bank’s Suspicious Transaction Follow-Up Unit, was formed immediately on passage of the law and designated as the Government of Jordan’s (GOJ) financial intelligence unit (FIU). The AMLU is staffed with a director, outreach officer, chief counsel, and one analyst. It is anticipated that during 2008, the unit’s staff will be augmented to include a minimum of seven analysts and liaison personnel from the two national law enforcement agencies, public prosecutors, and other regulatory entities.
The AMLU is designated as an independent entity, but is housed at present in the Central Bank of Jordan. It is organized on a general administrative FIU model. It is responsible for receiving suspicious activity reports (SARs) from obligated entities designated in the law, analyzing them, requesting additional information related to the activity and reporting it to the prosecutor general for further action. Involvement of the AMLU in assisting criminal investigations is dependent on public prosecutors. At the end of 2007, the AMLU was working to establish formal ties through memoranda of understanding with competent GOJ authorities possessing the necessary databases and resources pertinent to pursuing financial intelligence analysis and money laundering investigations.
The 2007 AML law criminalizes money laundering and stipulates as predicate offenses any felony crime or any crime stated in international agreements to which Jordan is a party, whether such crimes are committed inside or outside the Kingdom, provided that the act committed is subject to penalty in the country in which it occurs. The Central Bank of Jordan previously instructed financial institutions to be particularly careful when handling foreign currency transactions, especially if the amounts involved are large or if the source of funds is in question. The new law requires obligated entities to: undertake due diligence in identifying customers; refrain from dealing with anonymous persons or shell banks; report to the AMLU any suspicious transaction, completed or not; and comply with instructions issued by competent regulatory parties to implement provisions of the law. The Ministries of Justice, Interior, Finance, and Social Development, as well as the Insurance Commission, Controller General of Companies, and Securities Commission all have a part in regulating various other nonfinancial institutions through issued regulations and instructions. The AMLU is obligated to work with these entities to ensure that a comprehensive approach to AML/CTF is undertaken in keeping with international standards and best practices.
Financial institutions are required under the new law to report all suspicious transactions whether the transaction was completed or not. This includes banks, foreign exchange companies, money transfer companies, stock brokerages, insurance companies, credit companies, and any company whose articles of association state that their activities include debt collection and payment services, leasing services, investment and financial asset management, real estate trading and development, and trading in precious metals and stones. Lawyers and accountants are not considered to be obligated entities under the law.
All obligated entities are required to conduct due diligence to identify customers, their activities, legal status, and beneficiaries and follow-up on transactions that are conducted through an ongoing relationship. Business dealings with anonymous persons, persons using fictitious names or shell banks are prohibited. Obligated entities are required to comply with instructions issued by competent regulatory authorities as listed in the law. Disclosure to the customer or the customer’s beneficiary of STRs and/or verifications or investigations by competent authorities is prohibited. They are also required to respond to any inquiry from the AMLU regarding STRs or requests for assistance from other competent judicial, regulatory, administrative, or security authorities needing information to perform their responsibilities.
Jordanian officials report that financial institutions file suspicious transaction reports and cooperate with prosecutors’ requests for information related to narcotics trafficking and terrorism cases. The AMLU received over 30 SARs in 2007, two of which were forwarded for prosecution. There were no arrests or convictions for money laundering or terrorist financing in Jordan in 2007. The standard for forwarding SARs is potentially a problem in the existing law.
The Banking Law of 2000 (as amended in 2003) allows judges to waive bank secrecy provisions in any number of criminal cases, including suspected money laundering and terrorist financing. An October 8, 2001 revision to the Penal Code criminalized terrorist activities, specifically financing of terrorist organizations. Guidelines issued by the Central Bank state that banks should research all sanctions lists relating to terrorist financing including those issued by individual countries and other relevant authorities. The Central Bank may not circulate names on sanctions lists to banks unless the names are included on the UNSCR 1267 Sanctions Committee’s consolidated list. No such assets have been identified to date. Banks and other financial institutions are required to maintain records for a period of five years.
One significant challenge facing the GOJ is determining which law enforcement entity will be tasked to conduct financial investigations relating to AML/CTF. Since the AML law was only implemented in July 2007, law enforcement agencies and public prosecutors are still deliberating the issue.
There are six public free trade zones in Jordan: the Zarqa Free Zone, the Sahab Free Zone, the Queen Alia International Airport Free Zone; the Al-Karak Free Zone, the Al-Karama Free Zone and the Aqaba Free Zone. All of the six list their investment activities as “industrial, commercial, service, and touristic.” There are 32 private free trade zones, a number of which are related to the aviation industry. Other free trade zones list their activities as industrial, agricultural, pharmaceutical, training of human capital, and multi-purpose. All free trade zones are regulated by the Jordan Free Zones Corporation in the Ministry of Finance and are guided by the Law of Free Zones Corporation No. 32 for 1984 (and amendments). Regulations state that companies and individuals using the zones must be identified and registered with the Corporation.
Although the 2007 AML law requires reporting of cross-border movement of money if the value exceeds a threshold amount set by the NCAML, no threshold amount was set by the end of 2007. The law also provides for the creation of cross-border currency and monetary instruments declaration forms, and the AMLU is working on the creation of the form. However, the declaration requirement applies only for the entry of money into the Kingdom and not outgoing. The Customs Department is responsible for archiving the declaration forms once implemented. In December 2004, the United States and Jordan signed an Agreement regarding Mutual Assistance between their Customs Administrations that provides for mutual assistance with respect to customs offenses and the sharing and disposition of forfeited assets. The AML law authorizes Customs “to seize or restrain” undeclared money crossing the border and report same to the AMLU which will decide whether the money should be returned or the case referred to the judiciary.
Jordan is a party to the 1988 UN Drug Convention, the UN International Convention for the Suppression of the Financing of Terrorism, and the UN Convention against Corruption. Jordan has signed but has yet to ratify the UN Convention against Transnational Organized Crime. Jordan is a charter member of the Middle East and North Africa Financial Action Task Force (MENAFATF) and in 2007 Jordan held the presidency of MENAFATF. Jordan’s AMLU aspires to membership in the Egmont Group of Financial Intelligence Units.
The new AML law provides judicial authorities the legal basis to cooperate with foreign judicial authorities in providing assistance in foreign investigations, extradition, and freezing and seizing of funds related to money laundering in accordance with current legislation and bilateral or multilateral agreements to which Jordan is a part based on reciprocity. Judicial authorities may order implementation of requests by foreign judicial authorities to confiscate proceeds of crime relating to money laundering and to distribute such proceeds in accordance with bilateral or multilateral agreements. Jordan’s Anti-drugs Law allows the courts to seize proceeds of crime derived from acts proscribed by the law. The Economic Crimes Law gives both prosecutors and the courts the authority to seize the assets of any person who has committed a crime under that law for a period of three months while an investigation is underway. Jordan’s penal code further provides prosecutors the authority to confiscate “all things” derived from a felony or intended misdemeanor.
In light of the 2007 AML law, the Government of Jordan’s NCAML and the AMLU should conduct a comprehensive evaluation of Jordan’s capabilities in preventing money laundering and enforcing its new law in accordance with international standards and best practices. Jordanian law enforcement and customs should examine forms of bulk cash smuggling relating to terrorist financing and trade-based money laundering and incorporate prevention and investigative strategies that meet the requirements of complex financial investigations. The GOJ should ratify the UN Convention against Transnational Organized Crime.
Kenya is developing into a major money laundering country. As a regional financial and trade center for Eastern, Central, and Southern Africa, Kenya’s economy has large formal and informal sectors. Kenya’s use as a transit point for international drug traffickers is increasing. Domestic drug abuse is also increasing, especially in Coast Province. Narcotics proceeds are being laundered in Kenya, although the volume has not yet been determined. Kenya has no offshore banking or Free Trade Zones. There is no significant black market for smuggled goods in Kenya. However, Kenya serves as the major transit country for Uganda, Tanzania, Rwanda, Burundi, northern Democratic Republic of Congo (DRC), and Southern Sudan. Goods marked for transit to these northern corridor countries avoid Kenyan customs duties, but have been known to be sold in Kenya.
Many entities in Kenya are involved in exporting and importing goods, including a reported 800 registered, international nongovernmental organizations (NGOs) managing over U.S. $1 billion annually. International organizations operating in the conflict areas of the region—Southern Sudan, Somalia, Burundi and DRC—keep all their dollars in Kenyan banks.
Annual remittances from expatriate Kenyans are estimated at U.S. $680-780 million. Individual Kenyans and foreign residents also transfer money in and out of Kenya. Nairobi’s Eastleigh Estate has become an informal hub for remittances by the Somalia Diaspora, transmitting millions of dollars every day from Europe, Canada and the U.S. to Mogadishu. Many transfers are executed via formal channels such as wire services and banks, but there is also a thriving network of cash-based, unrecorded transfers that the Government of Kenya (GOK) cannot track. Expatriates primarily use this system to send and receive remittances internationally. The large Somali refugee population in Kenya uses a hawala system to send and receive remittances. The GOK has no means to monitor hawala transfers. Kenya does not have an effective legal regime to address money laundering. The GOK has no regulations to freeze/seize criminal or terrorist accounts, and has not passed a law that explicitly outlaws money laundering and creates a financial intelligence unit (FIU).
Section 49 of the Narcotic Drugs and Psychotropic Substance Control Act of 1994 criminalizes money laundering related to narcotics trafficking. The offense is punishable by a maximum prison sentence of 14 years. However, Kenya has never seen a conviction for the laundering of proceeds from narcotics trafficking. Money laundering is a criminal offense, through a patchwork of laws and guidance that the GOK has cobbled together, including the 1994 Act, Legal Notice No. 4 of 2001, the Central Bank of Kenya (CBK) Guidelines on Prevention of Money Laundering, and enabling provisions of other laws. Kenya has not developed an effective anti-money laundering (AML) regime.
In November 2006, the GOK published a proposed Proceeds of Crime and Anti-Money Laundering Bill, a revised version of a 2004 law. The proposed law declares itself to be “An act of Parliament to provide for the offence of money laundering and to introduce measures for combating the offence, to provide for the identification, tracing, freezing, seizure and confiscation of the proceeds of crime.” It defines “proceeds of crime” as any property or economic advantage derived or realized, directly or indirectly, as a result of or in connection with an offence. The draft legislation provides for criminal and civil restraint, seizure and forfeiture. In addition, the proposed bill authorizes the establishment of an FIU and requires financial institutions and nonfinancial businesses or professions, including casinos, real estate agencies, precious metals and stones dealers, and legal professionals and accountants, to file suspicious transaction reports above a certain threshold. The bill also identifies 30 other statutes for the GOK to amend so that they will be consistent with the bill when it is passed.
This bill has deficiencies. It does not mention terrorism, nor does it specifically define “offense” or “crime.” The proposed legislation does not explicitly authorize the seizure of legitimate businesses used to launder money. The requirement that only suspicious transactions above a certain threshold are reported is inconsistent with international standards, which call for suspicious transaction reports to have no monetary threshold. The GOK tabled the bill in Parliament in November 2007, but Parliament never took the bill up, and it lapsed when Parliament recessed on December 8. The government will need to republish and resubmit the bill in the Tenth Parliament in 2008.
The CBK is the regulatory and supervisory authority for Kenya’s deposit-taking institutions and has oversight for more than 50 such entities, as well as mortgage companies and other financial institutions. The Minister of Home Affairs supervises casinos, although its regulation of this sector is ineffective.
CBK regulations require deposit-taking institutions to verify the identity of new customers opening an account or conducting a transaction. The Banking Act amendment of December 2001 authorizes the CBK to disclose financial information to any monetary or financial regulatory authority within or outside Kenya. In 2002, the Kenya Bankers Association (KBA) issued guidelines requiring banks to report suspicious transactions to the CBK. These guidelines do not have the force of law, and only a handful of suspicious transactions have been reported so far. Under the regulations, banks must maintain records of transactions over U.S. $100,000 and international transfers over U.S. $50,000, and report them to the CBK. A law enforcement agency can demand information from any financial institution, if it has obtained a court order. Some commercial banks and foreign exchange bureaus file suspicious transaction reports voluntarily, but they run the risk of civil litigation, as there are no adequate “safe harbor” provisions for reporting such transactions to the CBK. A court ruling to penalize a commercial bank in 2002 for disclosing information to the CBK in response to a court order, made banks wary of reporting suspicious transactions. In a November 2007 decision that will likely further chill banks’ willingness to report suspicious transactions, a judge ordered Barclays Bank to pay a customer Kenya Shillings (Sh) 400,000 (approximately U.S. $6,107) for violating confidentiality by providing details on the customer’s specimen signature to the British High Commission without her consent for processing a visa application.
These regulations do not cover nonbank financial institutions such as money remitters, casinos, or investment companies, and there is no enforcement mechanism behind the regulations. Kenya lacks the institutional capacity, investigative skill and equipment to conduct complex investigations independently. There have been no arrests or prosecutions for money laundering or terrorist financing.
There are 95 foreign exchange bureaus under GOK supervision. The Central Bank of Kenya Act (Cap 491) regulates forex bureaus, which are authorized dealers of currency. The CBK subsequently recognized that several bureaus violated the Forex Bureau Guidelines, including dealing in third party checks and executing telegraphic transfers without CBK approval. The checks and transfers may have been used for fraud, tax evasion and money laundering. In response, the CBK’s Banking Supervision Department issued Central Bank Circular No. 1 of 2005 instructing all forex bureaus to immediately cease dealing in telegraphic transfers and third party checks. These new guidelines, which fall under Section 33K of the Central Bank of Kenya Act, took effect on January 1, 2007.
Kenya has little in the way of cross-border currency controls. GOK regulations require that any amount of cash above U.S. $5,000 be disclosed at the point of entry or exit for record-keeping purposes only, but this provision is rarely enforced, and authorities keep no record of cash smuggling attempts. The CBK guidelines call for currency exchange bureaus to furnish daily reports on any single foreign exchange transaction above U.S. $10,000, and on cumulative daily foreign exchange inflows and outflows above U.S. $100,000. Guidelines require that foreign exchange dealers ensure that cross-border payments have no connection to illegal financial transactions.
Recent investigations illustrate Kenya’s vulnerability to money laundering. The Charterhouse Bank investigations in 2006 and 2007 revealed that the proceeds of large-scale evasion of import duties and taxes had been laundered through the banking system since at least 1999. In addition, the smuggled and/or under-invoiced goods may have also been marketed through the normal wholesale and retail sectors. Charterhouse Bank managers had conspired with depositors to evade import duties and taxes and launder the proceeds totaling approximately $500 million from 1999 to 2006. In June 2006, a Member of Parliament tabled a 2004 initial investigation report on Charterhouse Bank by a special CBK investigations team indicating account irregularities, tax evasion and money laundering by some of the bank’s clients. The Ministry of Finance temporarily closed the bank to prevent a run, and the CBK placed Charterhouse Bank under statutory management to preserve records and prevent removal of funds. Subsequent audits and investigations covering the period 1999-2006 found that Charterhouse Bank had violated the CBK’s know-your-customer procedures in over 80 percent of its accounts, and were missing basic details such as the customer’s name, address, ID photo, or signature cards. Charterhouse Bank also violated the Banking Act and the CBK’s Prudential Guidelines by not properly maintaining records for foreign currency transactions. Available evidence makes clear that the bank management had, on a large scale, consistently evaded and ignored normal internal controls by allowing many irregular activities to occur. The bank management’s continual violation of CBK prudential guideline CBK/PG/08 requirements to report suspicious transactions, and its efforts to conceal them from CBK examiners, also indicate that bank officials were complicit in these suspicious transactions. The perpetrators demonstrated an understanding of AML controls, transferring funds to the United States and the United Kingdom in increments just below reporting thresholds of the receiving banks for large currency transactions. The Minister of Finance advised Charterhouse and the CBK that the Ministry would not renew the bank’s license to operate after December 31, 2006. (Bank licenses are annual and expire automatically at the end of each year if not renewed.) The courts rejected Charterhouse owners’ legal challenges, and the bank remained closed.
This case illustrates that criminals have been taking advantage of Kenya’s inadequate AML regime for years by evading oversight and/or by reportedly paying off enforcement officials, other government officials, and politicians. There are strong indications that other Kenyan banks are also involved in similar activities. Reportedly, Kenya’s financial system may be laundering over U.S. $100 million each year. However, in 2006 and 2007 there were not any reported money laundering related arrests, prosecutions, or convictions.
Kenya has not criminalized the financing of terrorism as required by the United Nations Security Council Resolution 1373 and the UN International Convention for the Suppression of Financing of Terrorism, to which it is a party. In April 2003, the GOK introduced the Suppression of Terrorism Bill into Parliament. After objections from some public groups that the bill unfairly targeted the Muslim community and unduly restricted civil rights, the GOK withdrew the bill. The GOK drafted the Anti-Terrorism Bill in 2006, which contains provisions that would strengthen the GOK’s ability to combat terrorism. It also revises the controversial text, but Muslim and human rights groups remain convinced the government could use it to commit human rights violations. The GOK published the bill and submitted it to Parliament in 2007, but Parliament took no action and the bill will have to be resubmitted to the tenth Parliament in 2008.
The GOK requires all charitable and nonprofit organizations to register with the government and submit annual reports to the GOK’s oversight body, the National Non-Governmental Organization Coordination Bureau. NGOs that are noncompliant with the annual reporting requirements can have their registrations revoked; however, the government rarely imposes such penalties. The GOK revoked the registration of some NGOs with Islamic links in 1998 after the bombing of the U.S. Embassy in Nairobi, only to later re-register them. The Non-Governmental Organization Coordination Bureau lacks the capacity to monitor NGOs, and observers suspect that charities and other nonprofit organizations handling millions of dollars are filing inaccurate or no annual reports. The Bureau made some progress towards strengthening its capacity to review NGO registrations and annual reports for suspicious activities in 2007.
Drug trafficking-related asset seizure and forfeiture laws and their enforcement are weak and disjointed. With the exception of intercepted drugs and narcotics, seizures of assets are rare. At present, the government entities responsible for tracing and seizing assets are the Central Bank of Kenya Banking Fraud Investigation Unit, the Kenya Police Anti-Narcotics and Anti-Terrorism Police Units, the Kenya Revenue Authority (KRA), and the Kenya Anti-Corruption Commission (KACC). To demand bank account records or to seize an account, the police must present evidence linking the deposits to a criminal violation and obtain a court warrant. This process is difficult to keep confidential, and as a result of leaks, serves to warn account holders of investigations. Account holders then move their accounts or contest the warrants.
The CBK does not circulate the list of individuals and entities on the United Nations (UN) 1267 Sanctions Committee’s consolidated list or the United States Office of Foreign Asset Control (OFAC) designated list to the financial institutions it regulates. Instead, the CBK uses its bank inspection process to search for names on the OFAC list of designated people and entities. The CBK and the GOK have no authority to seize or freeze accounts without a court warrant. To date, the CBK has not notified the United States Government of any bank customers identified on the OFAC list. There is currently no law specifically authorizing the seizure of the financial assets of terrorists.
Kenya is a party to the 1988 UN Drug Convention, the UN International Convention for the Suppression of the Financing of Terrorism, the UN Convention against Transnational Organized Crime, and the UN Convention against Corruption. Kenya ranks 150 out of 180 countries on the 2007 Transparency International Corruption Perceptions Index. Kenya is a member of the Eastern and Southern African Anti-Money Laundering Group (ESAAMLG), a Financial Action Task Force (FATF)-style regional body. Kenya has an informal arrangement with the United States for the exchange of information relating to narcotics, terrorist financing, and other serious crime investigations. Kenya has cooperated with the United States and the United Kingdom.
The GOK should criminalize the financing of terrorism and pass a law authorizing the government to seize the financial assets of terrorists and convict individuals or groups that finance terrorist activity. Kenyan authorities should take steps to ensure that NGOs and suspect charities and nonprofit organizations follow internationally recognized transparency standards and file complete and accurate annual reports. The GOK should pass and enact the proposed Proceeds of Crime and Anti-Money Laundering bill, including the creation of an FIU. The CBK, law enforcement agencies, and the Ministry of Finance should improve coordination to enforce existing laws and regulations to combat money laundering, tax evasion, corruption, and smuggling. The Minister of Finance should revoke or refuse to renew the license of any bank found to have knowingly laundered money, and encourage the CBK to tighten its examinations and audits of banks. Kenyan law enforcement should be more proactive in investigating money laundering and related crimes, and customs should exert control of Kenya’s borders.
Korea, Democratic Peoples Republic of
For decades, citizens of the Democratic People’s Republic of Korea (DPRK) have been apprehended in international investigations trafficking in narcotics and other forms of criminal behavior, including passing counterfeit U.S. currency (including U.S. $100 “super notes”) and trading in counterfeit products, such as cigarettes and pharmaceuticals. There is substantial evidence that North Korean governmental entities and officials have been involved in the laundering of the proceeds of narcotics trafficking and other illicit activities and that they continue to be engaged in counterfeiting and other illegal activities through a number of front companies. The illegal revenue provides desperately needed hard currency for the economy of the DPRK. On October 25, 2006 the Standing Committee of the Supreme People’s Assembly of the DPRK adopted a law “On the Prevention of Money Laundering.” The law states the DPRK has made it its “consistent policy to prohibit money laundering,” but the law is significantly deficient in most important respects and there is no evidence that it has been implemented.
On September 15, 2005, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) designated Macau-based Banco Delta Asia (BDA) as a primary money laundering concern under Section 311 of the USA PATRIOT Act and issued a proposed rule regarding the bank, citing the bank’s systemic failures to safeguard against money laundering and other financial crimes. In its designation of BDA as a primary money laundering concern, FinCEN cited in the Federal Register that “the involvement of North Korean Government agencies and front companies in a wide variety of illegal activities, including drug trafficking and the counterfeiting of goods and currency” and noted that North Korea has been positively linked to nearly 50 drug seizures in 20 different countries since 1990. Treasury finalized the Section 311 rule in March 2007, prohibiting U.S. financial institutions from opening or maintaining correspondent accounts for or on behalf of BDA. This rule remains in effect. Following the Section 311 designation of BDA, the Macau Monetary Authority (MMA) froze approximately U.S. $25 million in North Korean-related accounts at the bank. The MMA subsequently lifted the freeze on these funds following the issuance of the final rule.
The DPRK became a party to the 1988 UN Drug Convention during 2007. It still is not a party to the UN Convention against Transnational Organized Crime, the UN Convention against Corruption, or the UN International Convention for the Suppression of the Financing of Terrorism. North Korea is not a participant in any FATF-style regional body. The DPRK should develop a viable anti-money laundering/counter-terrorist financing regime that comports with international stands. The U.S. Department of State has designated North Korea as a State Sponsor of Terrorism.
Korea, Republic of
The Republic of Korea (ROK) has not been considered an attractive location for international financial crimes or terrorist financing due to foreign exchange controls that are gradually being phased out by 2009. Most money laundering appears to be associated with domestic criminal activity or corruption and official bribery. Laundering the proceeds from illegal game rooms, customs fraud, exploiting zero VAT rates applied to gold bars, trade-based money laundering, counterfeit goods and intellectual property rights violations are all areas of concern. Moreover, criminal groups based in South Korea maintain international associations with others involved in human trafficking, contraband smuggling and related organized crime. As law enforcement authorities have gained more expertise investigating money laundering and financial crimes, they have become more cognizant of the problem.
On the whole, the South Korean government has been a willing partner in the fight against financial crime, and has pursued international agreements toward that end. The Financial Transactions Reports Act (FTRA), passed in September 2001, requires financial institutions to report suspicious transactions to the Korea Financial Intelligence Unit (KoFIU), which operates within the Ministry of Finance and Economy. The KoFIU was officially launched in November 2001, and is composed of 60 experts from various agencies, including the Ministry of Finance and Economy, the Justice Ministry, the Financial Supervisory Commission, the Bank of Korea, the National Tax Service, the National Police Agency, and the Korea Customs Service. KoFIU analyzes suspicious transaction reports (STRs) and forwards information deemed to require further investigation to the Public Prosecutor’s office, and, as of 2007, also to the Korean police. The Financial Transaction Reporting Act Amendment Bill was submitted to the National Assembly in January 2007. If passed, this bill will expand the coverage of AML measures to nonfinancial businesses and professions, including casinos, and require financial institutions to file an STR when it is suspected that those funds are related to terrorism.
In 2007, the KoFIU upgraded its anti-money-laundering monitoring system by introducing the Korea Financial Intelligence System based on scoring and data mining methods, in addition to continued Suspicious Transaction Reports (STR), Currency Transaction Reports (CTR) and Customer Due Diligence (CDD) reports. Beginning in January 2006, financial institutions have been required to report within 24 hours all cash transactions of 50 million Korean won (approximately U.S. $54,350) or more by individuals to KoFIU. That reporting threshold will be lowered to 30 million won (approximately U.S. $32,610) in 2008 and to 20 million won (approximately U.S. $21,740) in 2010. Since January 2006, financial institutions have also been required to perform enhanced customer due diligence, thereby strengthening customer identification requirements set out in the Real Name Financial Transaction and Guarantee of Secrecy Act. Under the enhanced due diligence guidelines, financial institutions must identify and verify customer identification data, including address and telephone numbers, when opening an account or conducting transactions of 20 million won or more.
The STR system was strengthened in 2004 with the introduction of a new online electronic reporting system and the lowering of the monetary threshold under which financial institutions must file STRs from 50 to 20 million won. Reporting entities may file STRs regarding transactions below this threshold. In addition, KoFIU announced that it would consider lowering or removing the threshold for obligatory STR reporting. Improper disclosure of financial reports is punishable by up to five years imprisonment and a fine of up to 30 million won. Between January 1, 2002, and September 30, 2007, KoFIU received a total of 80,417 STRs from financial institutions. The number of such cases has continued to climb noticeably each year, from 275 STRs in 2002, to 1,744 in 2003, 4,680 in 2004, 13,459 in 2005, and 24,149 in 2006. In the first nine months of 2007, there were 36,110 STRs submitted to KoFIU, a 120 percent increase over the same period in 2006. Since 2002 through the end of September 2007, KoFIU has analyzed 79,325 of these reports and provided 7,184 reports to law enforcement agencies, including the Public Prosecutor’s Office (PPO), National Police Agency (NPA), National Tax Service (NTS), Korea Customs Service (KCS), and the Financial Supervisory Commission (FSC). Of the 7,184 cases referred to law enforcement agencies, investigations have been completed in 3,661 cases, with 1,402 cases resulting in indictments and prosecutions for money laundering.
In addition, KoFIU supervises and inspects the implementation of internal reporting systems established by financial institutions and is charged with coordinating the efforts of other government bodies. Officials charged with investigating money laundering and financial crimes are beginning to widen their scope to include crimes related to commodities trading and industrial smuggling, and continue to search for possible links of such illegal activities to international terrorist activity. In 2007, KoFIU continued to strengthen advanced anti-money laundering measures (such as the STR and CTR systems), and became an observer to the Financial Action Task Force (FATF) in July 2006. The KoFIU also encouraged financial institutions including small-scale credit unions and cooperatives to adopt a differentiated risk-based due diligence system, focusing on types of customers and transactions, by offering them comprehensive training programs.
Money laundering controls are applied to nonbanking financial institutions, such as exchange houses, stock brokerages, casinos, insurance companies, merchant banks, mutual savings, finance companies, credit unions, credit cooperatives, trust companies, and securities companies. Following the late-2005 arrest of a Korean business executive charged with laundering 8.3 billion won (U.S. $8.17 million) to be used to bribe politicians and bureaucrats, the KoFIU in January 2007 submitted to the National Assembly a revision bill of the Financial Transaction Reports Act to impose anti-money laundering obligations on casinos. KOFIU plans to expand the obligation to intermediaries such as lawyers, accountants, or broker/dealers, currently not covered by Korea’s money laundering controls. Any traveler carrying more than U.S. $10,000 or the equivalent in other foreign currency is required to report the currency to the Korea Customs Service.
Money laundering related to narcotics trafficking has been criminalized since 1995, and financial institutions have been required to report transactions known to be connected to narcotics trafficking to the Public Prosecutor’s Office since 1997. All financial transactions using anonymous, fictitious, and nominee names have been banned since the 1997 enactment of the Real Name Financial Transaction and Guarantee of Secrecy Act. The Act also requires that, apart from judicial requests for information, persons working in financial institutions are not to provide or reveal to others any information or data on the contents of financial transactions without receiving a written request or consent from the parties involved. However, secrecy laws do not apply when such information must be provided for submission to a court or as a result of a warrant issued by the judiciary.
In a move designed to broaden its anti-money laundering regime, the ROK also criminalized the laundering of the proceeds from 38 additional offenses, including economic crimes, bribery, organized crime, and illegal capital flight, through the Proceeds of Crime Act (POCA), enacted in September 2001. The POCA provides for imprisonment and/or a fine for anyone receiving, disguising, or disposing of criminal funds. The legislation also provides for confiscation and forfeiture of illegal proceeds.
South Korea still lacks specific legislation on terrorist financing although, as noted above, the Suppression of the Financing of Terrorism Bill was submitted to the National Assembly in January 2007. As of December 2007, three versions of the new counter-terrorism bill were pending in Korea’s unicameral legislature, the National Assembly. The proposed Suppression of the Financing of Terrorism bill is crafted to allow the Korean Government additional latitude in fighting terrorism The Suppression of the Financing of Terrorism bill would also permit the government to seize legitimate businesses that support terrorist activity. Currently, under the special act against illicit drug trafficking and other related laws, legitimate businesses can be seized if they are used to launder drug money, but businesses supporting terrorist activity cannot be seized unless other crimes are committed.
Previous attempts to pass similar CTF legislation have not succeeded. Many politicians and nongovernmental organizations (NGOs), recalling past civil rights abuses in Korea by former administrations, oppose the passage of counterterrorism legislation because of fears about possible misuse by the National Intelligence Service and other government agencies.
If passed, the new laws amending the Financial Transactions Reporting Act and the bill Suppression of the Financing of Terrorism would not be enforceable for 12 months. Moreover, the legislation would not correct some potential shortcomings regarding key elements on the criminalization of terrorist financing and suspicious transaction reporting-including excessively high thresholds for reporting all types of suspicious activity. In addition, they may leave some gaps on existing requirements to identify beneficial owners.
Through KoFIU, the government circulates to its financial institutions the names of suspected terrorists and terrorist organizations listed on the UN 1267 Sanctions Committee’s consolidated list, the list of Specially Designated Global Terrorists designated by the United States pursuant to E.O. 13224, and those listed by the European Union under relevant authorities. Korea implemented regulations on October 9, 2001, to freeze financial assets of Taliban-related authorities designated by the UN Security Council. The government then revised the regulations, agreeing to list immediately all U.S. Government-requested terrorist designations under U.S. Executive Order 13224 of December 12, 2002. No listed terrorists are known to be maintaining financial accounts in Korea and there have been no cases of terrorist financing identified since 2002.
Korean government authorities continue to investigate the underground “hawala” system used primarily to send illegal remittances abroad by South Korea’s approximately 30,000 foreigners from the Middle East as well as thousands of undocumented foreign workers (mainly ethnic Koreans from Mongolia, Uzbekistan, and Russia). Currently, gamblers who bet abroad often use alternative remittance and payment systems; however, government authorities have criminalized those activities through the Foreign Exchange Regulation Act and other laws. According to an October 2007 report by the Korea Customs Service, there were 1,311 investigations into underground remittances amounting to 2.2 trillion won (approximately U.S. $1.84 billion) in 2003, 1,917 cases totaling 3.66 trillion won (approximately U.S. $3.2 billion) in 2004, 1,901 cases worth 3.56 trillion won (approximately U.S. $3.47 billion) in 2005, 1,924 cases totaling 2.7 trillion (approximately U.S. $2.8 billion) in 2006, and 1,199 cases totaling 1.2 trillion won (approximately U.S. $1.3 billion) in the first half of 2007. The majority of early underground remittance cases were related to the U.S. through 2004; but between 2005 and June 2007, the bulk of cases involved China (35.4 percent, approximately U.S. $2.87 billion), followed by Japan (34.9 percent, approximately U.S. $2.83 billion) and the U.S. (18 percent, U.S. $1.46 billion).
South Korea actively cooperates with the United States and other countries to trace and seize assets. The Anti-Public Corruption Forfeiture Act of 1994 provides for the forfeiture of the proceeds of assets derived from corruption. In November 2001, Korea established a system for identifying, tracing, freezing, seizing, and forfeiting narcotics-related and/or other assets of serious crimes. Under the system, KoFIU is responsible for analyzing and providing information on STRs that require further investigation. The Bank Account Tracing Team under the Narcotics Investigation Department of the Seoul District Prosecutor’s Office (established in April 2002) is responsible for tracing and seizing drug-related assets. The Korean Government established six additional new bank account tracking teams in 2004 to serve out of the District Prosecutor’s offices in the metropolitan cities of Busan, Daegu, Kwangju, Incheon, Daejon, and Ulsan, to expand its reach. Its legal framework does not allow civil forfeiture.
Korea continues to address the problem of the transportation of counterfeit international currency. The Bank of Korea reported that through September 2007, there were 518 reported cases of counterfeit dollars worth U.S. $1,052,050. Bank experts confirm that the amount of forged U.S. currency is on a decline.
South Korea has a number of free economic zones (FEZs) that enjoy certain tax privileges. However, companies operating within them are subject to the same general laws on financial transactions as companies operating elsewhere, and there is no indication these FEZs are being used in trade-based money laundering schemes or for terrorist financing. Korea mandates extensive entrance screening to determine companies’ eligibility to participate in FEZ areas, and firms are subject to standard disclosure rules and criminal laws. In 2007 Korea had seven FEZs, as a result of the June 2004 re-categorization of the three port cities of Busan, Incheon, and Kwangyang as FEZs. They were re-categorized from their previous designation of “customs-free areas” to avoid confusion from the earlier dual system of production-focused FEZs, and logistics-oriented “customs-free zones.” Incheon International Airport is slated to become the eighth FEZ.
Korea is a party to the 1988 UN Drug Convention and, in December 2000, signed, but has not yet ratified, the UN Convention against Transnational Organized Crime. Korea is a party to the UN International Convention for Suppression of the Financing of Terrorism. The ROK also signed in December 2003, but has not ratified, the UN Convention against Corruption. Korea is an active member of the Asia/Pacific Group on Money Laundering (APG). Korea also became a member of the Egmont Group in 2002. An extradition treaty between the United States and the ROK entered into force in December 1999. The United States and the ROK cooperate in judicial matters under a Mutual Legal Assistance Treaty, which entered into force in 1997. In addition, the FIU continues to actively pursue information-sharing agreements with a number of countries, and had signed memoranda of understanding with 34 countries-the latest being Malaysia-in April 2007.
The Government of Korea should continue to move forward to adopt and implement its pending counter-terrorism legislation and amendments to the Financial Transaction Reporting Act. Among other priorities, the government should extend its anti-money laundering regime to intermediaries such as lawyers, accountants, broker/dealers and informal lending widely recognized as potential blind spots. Korea should lower the high monetary threshold for reporting suspicious transactions and extend the reporting obligation to attempted transactions. The Republic of Korea should continue its policy of active participation in international anti-money laundering efforts, both bilaterally and in multilateral fora. Spurred by enhanced local and international concern, Korean law enforcement officials and policymakers now understand the potential negative impact of such activity on their country, and have begun to take steps to combat its growth. Their efforts will become increasingly important due to the rapid growth and greater integration of Korea’s financial sector into the world economy.
Kuwait continues to experience unprecedented economic growth that is enhancing the country’s regional financial influence, which may make the market susceptible to money laundering. However, money laundering is not believed to be a significant problem, and reportedly that which does take place is generated largely as revenues from drug and alcohol smuggling into the country and the sale of counterfeit goods. However, Kuwait-based terrorist financing, specifically the ongoing threat of charity misuse, continues to be a concern.
Kuwait has ten private local commercial banks, including three Islamic banks, all of which provide traditional banking services comparable to Western-style commercial banks. Kuwait also has one specialized bank, the government-owned Industrial Bank of Kuwait, which provides medium and long-term financing. The three Islamic banks are the Kuwait Finance House (KFH), Boubyan Islamic Bank, and the Kuwait Real Estate Bank (KREB).
The Kuwaiti banking sector was opened to foreign competition in 2001 under the Direct Foreign Investment Law. The Central Bank of Kuwait (CBK) has granted licenses to five foreign banks: BNP Paribas, HSBC, Citibank, the National Bank of Abu Dhabi, and Qatar National Bank. However, the National Bank of Abu Dhabi and Qatar National Bank have not opened offices. Although foreign banks may operate in Kuwait, they are limited to one branch each.
On March 10, 2002, the Emir (Head of State) of Kuwait signed Law No. 35/2002, commonly referred to as Law No. 35, which criminalized money laundering. Law 35 does not criminalize terrorist financing. The law stipulates that banks and financial institutions may not keep or open anonymous accounts or accounts in fictitious or symbolic names and that banks must require proper identification of both regular and occasional clients. The law also requires banks to keep all records of transactions and customer identification information for a minimum of five years, conduct anti-money laundering and terrorist financing training to all levels of employees, and establish proper internal control systems.
Law No. 35 also requires banks to report suspicious transactions to the Office of Public Prosecution (OPP). The OPP is the sole authority that has been designated by law to receive suspicious transaction reports (STRs) and to take appropriate action on money laundering operations. Reports of suspicious transactions are then referred to the CBK for analysis. The anti-money laundering law provides for a penalty of up to seven years imprisonment in addition to fines and asset confiscation. The penalty is doubled if an organized group commits the crime, or if the offender took advantage of his influence or his professional position. Moreover, banks and financial institutions may face a steep fine (approximately $3.3 million) if found in violation of the law.
The law includes articles on international cooperation and the monitoring of cash and precious metals transactions. Currency smuggling into Kuwait is also outlawed under Law No. 35, although cash reporting requirements are not uniformly enforced at ports of entry. Provisions of Article 4 of Law No. 35 require travelers to disclose any national or foreign currency, gold bullion, or other precious materials in their possession valued in excess of 3,000 Kuwaiti dinars (approximately U.S. $10,000) to customs authorities upon entering the country. However, the law does not require individuals to file declaration forms when carrying cash or precious metals out of Kuwait. Several cases have been opened under Law No. 35, but only two cases have gone to court. The cases reportedly involved money smuggling and failure to report currency transactions and did not involve banks.
The National Committee for Anti-Money Laundering and the Combating of Terrorist Financing (AML/CTF) is responsible for administering Kuwait’s AML/CTF regime. In April 2004, the Ministry of Finance issued Ministerial Decision No. 11 (MD No. 11/224), which transferred the chairmanship of the National Committee, formerly headed by the Minister of Finance, to the Governor of the Central Bank of Kuwait. The Committee is comprised of representatives from the Ministries of Interior, Foreign Affairs, Commerce and Industry, Finance, and Labor and Social Affairs; the Office of Public Prosecution; the Kuwait Stock Exchange; the General Customs Authority; the Union of Kuwaiti Banks; and CBK.
Since its inception, the National Committee has pursued its mandate of drawing up the country’s strategy and policy with regard to anti-money laundering and terrorist financing; drafting the necessary legislation and amendments to Law No. 35, along with pertinent regulations; coordinating between the concerned ministries and agencies in matters related to combating money laundering and terrorist financing; following up on domestic, regional, and international developments and making needed recommendations in this regard; setting up appropriate channels of communication with regional and international institutions and organizations; and representing Kuwait in domestic, regional, and international meetings and conferences. In addition, the Chairman is entrusted with issuing regulations and procedures that he deems appropriate for the Committee’s duties, responsibilities, and organization of its activities.
Kuwait, however, has been unable to fully implement its anti-money laundering law stipulations due in part to structural inconsistencies within the law itself, and the unwillingness of government officials to undertake the necessary steps to rectify such shortfalls. Kuwait’s financial intelligence unit (FIU) is not an independent body in accordance with international standards, but rather is under the direct supervision of the Central Bank of Kuwait. In addition, vague delineation of the roles and responsibilities of the government entities involved continues to hinder the overall effectiveness of Kuwait’s anti-money laundering regime. Cognizant of these shortcomings, the National Committee continues to promise to revise Law No. 35 in a manner that would bring Kuwait into compliance with international standards, and would criminalize terrorist financing.
In addition to Law No. 35, anti-money laundering reporting requirements and other rules are contained in CBK instructions No. (2/sb/92/2002), which took effect on December 1, 2002, superseding instructions No. (2/sb/50/97). The revised instructions provide for, inter alia, customer identification and the prohibition of anonymous or fictitious accounts (Articles 1-5); the requirement to keep records of all banking transactions for five years (Article 7); electronic transactions (Article 8); the requirement to investigate transactions that are unusually large or have no apparent economic or lawful purpose (Article 10); the requirement to establish internal controls and policies to combat money laundering and terrorist financing, including the establishment of internal units to oversee compliance with relevant regulations (Article 14 and 15); and the requirement to report to the CBK all cash transactions in excess of the equivalent of $10,000 (Article 20). In addition, the CBK distributed detailed instructions and guidelines to help bank employees identify suspicious transactions. At the Central Bank’s instructions, in an effort to avoid “tipping off” suspected accountholders, banks are no longer required to block assets for 48 hours on suspected accounts. The Central Bank, upon notification from the Ministry of Foreign Affairs (MFA), issues circulars to units subject to supervision requiring them to freeze the assets of suspected terrorists and terrorist organizations listed on the UNSCR 1267 Sanctions Committee’s consolidated list. Financial entities are instructed to freeze any such assets immediately and for an indefinite period of time, pending further instructions from the Central Bank, which in turn receives its designation guidance from the MFA.
On June 23, 2003, the CBK issued Resolution No. 1/191/2003, establishing the Kuwaiti Financial Inquiries Unit as the FIU within the Central Bank. The FIU is comprised of seven part-time Central Bank officials and headed by the Central Bank Governor. Among its responsibilities, the FIU is to receive and analyze reports of suspected money laundering activities from the OPP, establish a database of suspicious transactions, conduct anti-money laundering training, and carry out domestic and international exchanges of information in cooperation with the OPP. Law No. 35/2002 did not mandate the FIU to act as the central or sole unit for the receipt, analysis, and dissemination of STRs; instead, these functions were divided between the FIU and OPP.
Banks in Kuwait are required to file STRs with the OPP, rather than directly with the FIU. However, based on a memorandum of understanding with the Central Bank, STRs are referred from the OPP to the FIU for analysis. The FIU conducts analysis and reports any findings to the OPP for the initiation of a criminal case, if necessary. The FIU’s access to information is limited, due to its inability to share information abroad without prior approval from the OPP. Kuwaiti officials agree that the current limits on information sharing by the FIU will be addressed by draft amendments to the law, which was revised by the National Committee in 2006 and is currently under governmental review.
There are about 148 money exchange businesses (MEBs) operating in Kuwait that are authorized to exchange foreign currency only. MEBs are not formal financial institutions, so they fall under the supervision of the Ministry of Commerce and Industry (MOCI) rather than the Central Bank. The CBK has reached an agreement that tasks the MOCI with the enforcement of all anti-money laundering (AML) laws and regulations in supervising such businesses. This agreement also stipulates that the MOCI must encourage MEBs to apply for and obtain company licenses, and to register with the CBK.
The MOCI’s Office of Combating Money Laundering Operations was established in 2003 and supervises approximately 2,500 insurance agents, brokers and companies; investment companies; exchange bureaus; jewelry establishments (including gold, metal and other precious commodity traders); brokers in the Kuwait Stock Exchange; and other financial brokers. All new companies seeking a business license are required to receive AML awareness training from the MOCI before a license is granted. These firms must abide by all regulations concerning customer identification, record keeping of all transactions for five years, establishment of internal control systems, and the reporting of suspicious transactions. MOCI conducts both mandatory follow-up visits and unannounced inspections to ensure continued compliance. The Office of Combating Money Laundering Operations is also actively engaged in a public awareness campaign to increase understanding about the dangers of money laundering.
Businesses found to be in violation of the provisions of Law No. 35/2002 receive an official warning from MOCI for the first offense. The second and third violations result in closure for two weeks and one month respectively. The fourth violation results in revocation of the license and closure of the business. Reportedly, four exchange houses were closed in 2006 for violating MOCI’s instructions, and one case was referred to the Public Prosecutor’s Office for violation of customer contracts.
In August 2002, the Kuwaiti Ministry of Social Affairs and Labor (MOSAL) issued a ministerial decree creating the Department of Charitable Organizations (DCO). The primary responsibilities of the department are to receive applications for registration from charitable organizations, monitor their operations, and establish a new accounting system to ensure that such organizations comply with the law both at home and abroad. The DCO has established guidelines for charities explaining donation collection procedures and regulating financial activities. The DCO is also charged with conducting periodic inspections to ensure that charities maintain administrative, accounting, and organizational standards in accordance with Kuwaiti law. The DCO mandates the certification of charities’ financial activities by external auditors and limits the ability to transfer funds abroad only to select charities approved by MOSAL. MOSAL also requires all transfers of funds abroad to be made between authorized charity officials. Banks and money exchange businesses (MEBs) are not allowed to transfer any charitable funds outside of Kuwait without prior permission from MOSAL. In addition, any such wire transactions must be reported to the CBK, which maintains a database of all transactions conducted by charities. Unauthorized public donations, including Zakat (alms) collections in mosques, are also prohibited.
In 2005, MOSAL introduced a pilot program requiring charities to raise donations through the sale of government-provided coupons during the Muslim holy month of Ramadan. MOSAL continued this program and in 2007 implemented collection of donations through a voucher system and electronic bank transfers. Plans are underway to further encourage the electronic collection of funds using a combination of electronic kiosks, hand-held collection machines, and text messaging. These devices will generate an electronic record of the funds collected, which will then be subject to MOSAL supervision.
Kuwait is a member of the Gulf Cooperation Council (GCC), which is itself a member of the Financial Action Task Force (FATF). Kuwait is also a member of the Middle East and North Africa Financial Action Task Force (MENAFATF), a FATF-style regional body that was established in November 2004. Kuwait has played an active role in the MENAFATF through its participation in the drafting of regulations and guidelines pertaining to charities oversight and cash couriers
Kuwait is a party to the 1988 UN Drug Convention. In May 2006, Kuwait ratified the UN Convention against Transnational Organized Crime. In February 2007, Kuwait ratified the UN Convention against Corruption. Kuwait has not signed the UN International Convention for the Suppression of the Financing of Terrorism.
The Government of Kuwait should significantly accelerate its ongoing efforts to revise Law No. 35/2002 to criminalize terrorist financing; strengthen charity oversight, especially in overseas operations; develop an independent FIU that meets international standards including the sharing of information with foreign FIUs, as well as sharing between the government and financial institutions. Kuwait should implement and enforce a uniform cash declaration policy for inbound and outbound travelers. Kuwait, like many other countries in the Gulf, relies on STRs to initiate money laundering investigations. As a result, there are few investigations or prosecutions. Instead, Kuwaiti law enforcement and customs authorities should be proactive in identifying suspect behavior that could be indicative of money laundering and/or terrorist financing, such as the use of underground financial systems. Kuwait should become a party to the UN International Convention for the Suppression of the Financing of Terrorism.
Laos is neither an important regional financial center, nor an offshore financial center. Although the extent of the money laundering risks are unknown, illegal timber sales, corruption, cross-border smuggling of goods, illicit proceeds from the sale of methamphetamine (ATS) known locally as “ya ba” (crazy medicine), and domestic crime can be sources of laundered funds. There are continued reports of illicit funds being diverted into some hotel construction, resort development, and industrial tree cropping projects. Anecdotal evidence indicates that large cash deposits related to illicit activities are generally made across the border in Thailand.
The Lao banking sector is dominated by state-owned commercial banks in need of continued reform. Although some foreign banks have branches in Laos, the classic “offshore” banks are not permitted. The small scale and poor financial condition of Lao banks may make them more likely to be venues for certain kinds of illicit transactions. These banks are not optimal for moving large amounts of money in any single transaction, due to the visibility of such movements in the existing small-scale, low-tech environment. Reportedly, there has been no notable increase in financial crimes. There have been no money laundering investigations initiated to date. There is smuggling of consumer goods across the Mekong and in areas near the Chinese border in the north, which could be associated with trade-based money laundering. This smuggling activity is an easy way to avoid paying customs duties and the inconvenience of undergoing weigh station inspections near the Lao and Chinese borders. There are two special economic zones in Savannakhet Province, one each near the Thai and Vietnamese borders on the recently opened Danang-Bangkok highway. Both are awaiting tenants and there is no indication they are currently used to launder money or finance terrorism. China has leased a similar special economic zone in Luang Nam Tha Province on the China-Thailand Highway at Boten. Within the zone is a casino that potentially could be utilized to launder funds, though there is no evidence that the gaming facility is currently being employed for that purpose. All foreign investment in Laos must first be approved by the government’s Ministry of Planning and Investment, which provides due diligence on companies seeking to invest in Laos. Due to general poverty, lack of human capacity, and weak governance, the ability to successfully discover companies bent on illicit transactions is suspect.
Money laundering is a criminal offense in Laos and covered in at least two separate decrees. The penal code contains a provision adopted in November 2005 that criminalizes money laundering and provides sentencing guidelines. On March 27, 2006, the Prime Minister’s Office issued a detailed decree, No. 55/PM, on anti-money laundering, based on a model law provided by the Asian Development Bank. Because of the unique nature of Lao governance, the decree is roughly equivalent to a law and is much easier to change than a law passed by the National Assembly. However, it is unclear if the decrees have the same legal effect as provisions in the penal code. One provision of the decree criminalizes money laundering in relation to all crimes with a prison sentence of a year or more. In addition, the decree specifically criminalizes money laundering with respect to: terrorism; financing of terrorism; human trafficking and smuggling; sexual exploitation; human exportation or illegal migration; the production, sales, and possession of narcotic drugs; illicit arms and dynamite trafficking; concealment and trafficking of people’s property; corruption; the receipt and giving of bribes; swindling; embezzlement; robbery; property theft; counterfeiting money and its use; murder and grievous bodily injury; illegal apprehension and detention; violation of state tax rules and regulations; extortion; as well as check forgery and the illicit use of false checks, bonds, and other financial instruments. The GOL is considering drafting an AML/CTF law to create a comprehensive AML/CTF regime in line with the international standards as set out by the FATF.
A revision to the penal law in November 2005 includes Article 58/2 which makes financing terrorism punishable by fines of 10 to 50 million Kip (approximately U.S. $10,000-$50,000,), prison sentences from 10 to 20 years, and the possibility of the death penalty. The Bank of Laos has circulated lists of individuals and entities on the UN 1267 Sanctions Committee’s consolidated list.
A six-person Anti-Money Laundering Intelligence Unit (AMLIU) was formally established as an independent unit within the Bank of Laos on May 14, 2007, replacing the previous ad hoc Financial Intelligence Unit (FIU). According to the GOL report presented at the July 2007 Asia-Pacific Group plenary, the AMLIU Director and staff “have an action plan to develop full functionality of the AMLIU and to implement provisions of the Decree on Prevention of Money Laundering”. The AMLIU acts as an FIU and supervises financial institutions for their compliance with anti-money laundering/counter-terrorist financing decrees and regulations. The AMLIU has no criminal investigative responsibilities, nor does it have any agreements with other FIUs. It is currently beginning a process to set up a National Coordinating Committee that will allow the AMLIU to interact with other relevant Lao governmental agencies such as the Ministry of Public Security. It does not yet have the technology to access the databases of local banks directly. The AMLIU created a five-part, 48-question suspicious transaction report (STR) form and distributed it to all banks along with guidance on October 15, 2007. While banks are required to report suspicious transactions, there have been no reports in 2007 to date, nor have there been any arrests for terrorist financing or money laundering.
The guidance issued by the AMLIU related to suspicious transactions, Bank of Lao No. 66/AMLIU, dated October 15, 2007, does not contain any thresholds for reporting STRs. Instead, it requires financial institutions to take into account a wide range of factors that could indicate an illegal transaction. However, any transaction over U.S. $10,000 is in practice considered worthy of further investigation. Reporting officers are protected against any suit or action related to the reporting process. While the 2006 decree on money laundering specifically applies to nonbank financial institutions (NBFI), the AMLIU is currently working only with commercial banks as it implements the STR form. It will expand its oversight once the necessary agreements with other supervising agencies are in place. Effective adoption of the STR system is likely to take a number of years. Cultural norms are such that it is unlikely that banks and NBFIs will soon begin generating reports related to customers perceived as being either influential, politically powerful, or coming from prominent families.
Lao law restricts the export of the national currency, the kip, limiting residents and nonresidents to 5,000,000 kip per trip (approximately U.S. $500). Larger amounts may be approved by the Bank of Laos. It is likely that the currency restrictions and undeveloped banking sector encourage the use of alternative remittance systems. When carrying cash across international borders, Laos requires a declaration for amounts over U.S. $5,000 when brought into the country and when being taken out. Failure to show a declaration of incoming cash when exporting it could lead to seizure of the money or a fine. As customs procedures in Laos are undeveloped and open to corruption, enforcing this decree will require political will, development of a professional customs service, compensation reform, further training, and increased capital investments. The Prime Minister’s decree on money laundering specifically authorizes asset seizures when connected to money laundering and related crimes. The authority is broadly worded. It is not clear which government authority has responsibility for asset seizures; although indications are that the Ministry of Justice would take the lead. The Government of Laos continues to build a framework of law and institutions; however, at this stage of development, enforcement of enacted legislation and decrees is weak. No legal asset seizures related to narcotics trafficking or terrorism was reported in 2007. A considerable number of assets are reportedly seized by police counternarcotics units from suspected drug traffickers, but these assets usually remain in the custody of the police. Laos is currently drafting a law that will allow for the selling of such seized assets, but, until such a law is passed, most of these assets remain under police custody.
Laos’ decree on money laundering authorizes the government to cooperate with foreign governments to deter money laundering of any sort, with caveats for the protection of national security and sovereignty. There are no specific agreements with the United States relating to the exchange of information on money laundering. The Bank of Laos has coordinated with the Embassy on a number of cases related to counterfeit U.S. currency.
The GOL is a party to the 1988 UN Drug Convention and the UN Convention against Transnational Organized Crime. The GOL participates in Association of Southeast Asian Nations (ASEAN) regional conferences on money laundering. Laos moved from observer status to membership in the Asia Pacific Anti-Money Laundering Group during the July 2007 Annual Meeting.
To comport with international standards, the Government of Laos should enact comprehensive anti-money laundering/counter-terrorist financing legislation, as decrees are not recognized by international organizations as having the force of law. Such legislation would include, but not be limited to, the promulgation of implementing regulations, the establishment of a viable financial intelligence unit, increasing the number and type of obligated entities, prohibition against “tipping-off”, and safe harbor for those reporting suspicious financial transactions to the FIU. Laos should become a party to the UN International Convention for the Suppression of Financing of Terrorism and ratify the UN Convention against Corruption.
Latvia is a growing regional financial center that has a large number of commercial banks with a sizeable nonresident deposit base. Sources of laundered money in Latvia primarily involve tax evasion, but also include counterfeiting, corruption, white-collar crime, extortion, financial/banking crimes, stolen cars, contraband smuggling, and prostitution. Some proceeds of tax evasion appear to originate from outside of Latvia. A portion of domestically obtained criminal proceeds is thought to derive from organized crime. Reportedly, Russian organized crime is active in Latvia. State Narcotics Police have reportedly not found a significant link between smuggled goods on the black market and narcotics proceeds. Currency transactions involving international narcotics trafficking proceeds do not include significant amounts of United States currency and apparently do not derive from illegal drug sales in the United States. However, U.S. law enforcement agencies think that there are ties between U.S criminal elements and the Latvian financial sector, that involve the establishment of U.S.-based shell companies to launder narcotics money through the Latvian financial sector. U.S. law enforcement agencies continue to cooperate with Latvian counterparts on matters of money laundering and affiliated crimes. As Latvia’s banking controls tighten, regulators report a pattern of certain accounts moving to Lithuania and Estonia. Regulators assert that alleged criminal activity is moving to these two countries as easier places to conduct business. However, there is insufficient data available for United States authorities to assess this claim.
Latvia is not an offshore financial center, although four special economic zones exist in Latvia providing a variety of significant tax incentives for the manufacturing, outsourcing, logistics centers, and transshipment of goods to other free trade zones. These zones are located at the free ports of Ventspils, Riga, and Liepaja, and in the inland city of Rezekne near the Russian and Belarusian borders. Though there have been instances of reported cigarette smuggling to and from warehouses in the free trade zones, there have been no confirmed cases of the zones being used for money laundering schemes or by the financiers of terrorism. Latvia’s banking regulator, the Financial and Capital Market Commission (FCMC), states that the zones are covered by the same regulatory oversight and enterprise registration regulations that exist for nonzone areas.
The Government of Latvia (GOL) criminalized money laundering for all serious crimes in 1998. Latvia’s new anti-money laundering (AML) law, The Law on Prevention of Money Laundering and Terrorist Financing is before the Parliament, which is expected to enact it in 2008. Entities subject to the law include credit and financial institutions, tax advisors, external accountants, sworn auditors and lawyers, notaries, company service providers, real estate agents, and lottery and gambling organizers. This new law introduces a risk-based approach, where entities must assess the client’s risk for anti-money laundering and terrorist financing, then choose between simplified and enhanced customer due diligence. The law includes compulsory identification of customers who pay cash for transactions of 15,000 euros (approximately U.S. $21,600) or more.
The law requires financial institutions to gather customer identification and institutes record keeping requirements. Financial institutions must keep transaction and identification data for at least five years after ending a business relationship with a client. Institutions engaging in financial transactions must report both suspicious activities and unusual transactions, including large cash transactions, to the financial intelligence unit (FIU). Suspicious transactions must be reported immediately. Financial institutions receive a list of indicators that, when present, activate the reporting requirement for an unusual transaction. Obliged entities must also file an unusual activity report using the indicator list as a basis if there is suspicion regarding laundering or attempted laundering of the proceeds from crime or terrorist financing.
Obliged entities must also report cash transactions. This requirement applies regardless of whether there is one large transaction or several smaller transactions equal to or exceeding 40,000 lats (approximately U.S. $80,000). The new Law on Prevention of Money Laundering and Terrorist Financing will reduce this amount to 15,000 euros (approximately U.S. $21,600) if it passes the 2008 Parliament readings without modification. Financial institutions have the ability to freeze accounts if they suspect money laundering or terrorist financing. If a financial institution finds the activity of an account questionable, it may close the account on its own initiative. Negligent money laundering is illegal in Latvia, and deliberately providing false information about a beneficial owner to a credit or financial institution is also illegal.
Additional amendments to the criminal law enhance the ability of Latvian law enforcement agencies to share information with one another and with Latvia’s FCMC. Latvia’s Criminal Procedures Law removes many procedural hurdles that had previously served as obstacles to law enforcement agencies aggressively investigating and prosecuting financial crimes. For example, prosecutors no longer need to prove willful blindness of the criminal origin of funds before charging a person or institution with a financial crime.
Council of Ministers Regulation 55, which was replaced by 233, created what is now the Council for Development of the Financial Sector, a coordinator of AML and counter-terrorist financing (CTF) issues on the state level. The Prime Minister chairs this body.
Latvia underwent a joint Council of Europe Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL)/ International Monetary Fund (IMF) evaluation in March 2006 which assessed the country’s AML regulatory and legal framework. Approved as MONEYVAL’s third-round evaluation of Latvia in September 2006, MONEYVAL published the mutual evaluation report (MER) report in June 2007. On the 49 recommendations, 47 of which were applicable, Latvia received 26 ratings of at least “largely compliant,” and only five ratings of “noncompliant.”
Latvian legislation instituting a cross-border currency declaration requirement took effect on July 1, 2006. The law obliges all persons transporting more than 10,000 euros (approximately U.S. $14,700) in cash or monetary instruments into or out of Latvia, with the exception of into or out of other European Union (EU) member states, to declare the money to a customs officer, or, where there is no customs checkpoint, to a border guard. People moving within the EU are not required to declare. Latvian government agencies share these declarations amongst themselves.
Banks are not allowed to open accounts without conducting customer due diligence and obtaining client identification documents for both residents and nonresidents. When conducting due diligence on legal entities, banks must collect information on incorporation and registration. Sanctions against banks for noncompliance provide for fines up to 100,000 lats (approximately U.S. $200,000). Latvia does not have secrecy laws that prevent the disclosure of client and ownership information to bank supervisors or law enforcement officers. Safe harbor provisions protect reporting individuals.
The Bank of Latvia supervises the currency exchange sector. The FCMC serves as the GOL’s unified public financial services regulator, overseeing commercial banks and nonbank financial institutions, the Riga Stock Exchange, and insurance companies. The FCMC conducts regular audits of credit institutions. It also applies sanctions to companies that fail to file mandatory reports of unusual transactions and to those that submit incomplete or deficient information on both the economic activities of businesses, and deficiencies in internal controls of banks. The FIU also works to ensure accurate reporting by determining if it has received corresponding suspicious transactions reports (STRs) when suspicious transactions occur between Latvian banks.
The FCMC has distributed regulations for customer identification and detecting unusual transactions, as well as regulations regarding internal control mechanisms that financial institutions should have in place. The FCMC has the authority to share information with Latvian law enforcement agencies and receive data on potential financial crime patterns uncovered by police or prosecutors. New regulations, drafted by FCMC, in accordance with the adopted Law on the Prevention of Money Laundering and Terrorist Financing should be finalized in early 2008. The Gambling and Lotteries Law states gaming and lottery organizers’ rights and obligations in relation to the prevention of legalization of proceeds from criminal activities. Organizers are subject to restrictions and must submit suspicious or unusual transaction reports. They also perform other AML activities as required by Latvian law. The MONEYVAL MER found compliance with requirements of both the European Parliament Directives and the Financial Action Task Force (FATF) 40 Recommendations and Nine Special Recommendations on Terrorist Financing.
In addition to the legislative and regulatory requirements in place, the Association of Latvian Commercial Banks (ALCB) plays an active role in setting standards on AML issues for Latvian banks. The ALCB has adopted the regulations on the “Prevention of Money Laundering” as guidance, as well as a “Declaration on Taking Aggressive Action against Money Laundering,” which all Latvian banks signed. The ACLB has also adopted a voluntary measure, which all of the banks observe, to limit cash withdrawals from automated teller machines to 1,000 lats (approximately U.S. $2,000) per day. In October 2007, ALCB approved an “Action Plan to Enhance Transparency of Offshore Customers Serviced by Banks in Latvia on a Compliance Officers Level.” Latvia expects to have fully implemented the action plan by July 2008. In addition to acting as an industry representative to government and the regulator, the ACLB organizes regular education courses on AML/CTF issues for bank employees. In the year and a half since the training program began, more than 110 AML/CTF professionals successfully passed a five-day extensive training program and examination. A total of 360 professionals have passed examinations for all of the offered AML/CTF training courses.
The Office for the Prevention of the Laundering of Proceeds Derived from Criminal Activity, known as the Control Service, is Latvia’s FIU. Although it is part of the Latvian Prosecutor General’s Office, its budget is separate. The Control Service has the overall responsibility for coordination, application and assessment of Latvia’s AML policy and its effectiveness. The Control Service received approximately 27,000 reports in 2006. During the first 10 months of 2007 the Latvian FIU received 27,389 reports of suspicious and unusual financial transactions. The Control Service, between January and October, sent 126 cases, which include 1604 reports about suspicious and unusual financial transactions, to law enforcement authorities.
Latvia has taken steps to remedy the situation described by the MER, in which “The vast bulk of the suspicious transaction reports filed are based on the Cabinet of Ministers list of indicators of unusual transactions and the FIU list of indicators/examples. Only a very small minority of the reports are based on suspicions formed under other circumstances. The assessors were informed that the financial institutions follow the FIU list and automatically report transactions that meet at least one of the examples (although the indicators are only examples). This would suggest that the financial institutions may be relying too heavily on the lists provided and might not be exercising appropriate discretion on the circumstances that are not covered by the lists of indicators. This could result in overdependence on the indicators/examples results and submission to the Control Service of significant numbers of reports with little or no value for FIU analytical purposes. It was not possible for the assessors to determine whether or not financial institutions were giving sufficient attention to identifying and reporting real (as distinct from indicator-based) suspicious transactions, as there were some conflicting indications. The assessors were not provided by the Control Service with statistics separating indicator-based STRs from reports based on direct suspicion.” The new draft legislation defines a suspicious transaction, but does not list indicators for determining suspicious transactions, forcing the obliged entities to themselves execute transaction analyses.
Latvia has also taken steps to ensure effective implementation of the draft law by providing training to explain the intent and issues to the law’s subjects. Both individual financial institutions and entire sectors, such as tax consultants, have received this training. The ALCB organizes five-day seminars for this purpose, and certifies the attending staff. The ALCB provided two such trainings in 2007.
The Control Service conducts a preliminary investigation of the suspicious and unusual reports. It may then forward the information to law enforcement authorities that investigate money laundering cases. The Control Service can disseminate case information to a specialized Anti-Money Laundering Investigation Unit of the Economic Police within the State Police; and the Office for the Combat of Organized Crime. The FIU can also disseminate information to the Financial Police (under the State Revenue Service of the Ministry of Finance); the Bureau for the Prevention and Combat of Corruption (Anti-Corruption Bureau, KNAB) for crimes committed by public officials; the Security Police (for cases concerning terrorism and terrorist financing); and other law enforcement authorities. According to the draft law, the FIU will have to decide within 14 days of receiving a report whether there are grounds to open a case. If the FIU decides to open a case, it will have the authority to suspend the transaction for 30 days. During the 30 days, the FIU will gather information on the transaction and the parties involved. If the FIU determines grounds for starting a criminal procedure, the FIU can further suspend the transaction for up to 45 days.
The Control Service has access to all state and municipal databases. It does not have direct access to the databases of financial institutions, but requests data as needed. The Control Service shares data with other FIUs and has cooperation agreements on information exchange with FIUs in sixteen countries. Latvia has also signed multilateral agreements with several EU countries to automatically exchange information with the EU financial intelligence units using FIU. The Control Service is a member of the Egmont Group of financial intelligence units.
In 2006, the Latvian FIU issued 125 orders to freeze assets, freezing a total of 12.6 million lats (approximately U.S. $23.5 million). During the first 10 months of 2007 the Latvian FIU issued 80 freezing orders for the total amount of U.S. $12.24 million. Latvia’s FIU reports that cooperation from the banking community to trace and freeze assets has been excellent.
The adoption of Latvia’s 2005 Criminal Procedures Law provides measures for the seizure and forfeiture of assets. The law enables law enforcement authorities to identify, trace, and confiscate criminal proceeds. Investigators can initiate an action for the seizure of assets recovered during a criminal investigation concurrently with the investigation itself—they do not need to wait until the investigation is complete. During the first 10 months of 2007, the courts returned 14 decisions, leading to the confiscation of approximately U.S. $2.57 million worth of assets on behalf of the state. Proceeds from asset seizures and forfeitures go into the state treasury.
The Prosecutor General’s Office maintains a specialized staff to prosecute cases linked to money laundering. The seven staff prosecutors have undergone a special clearance process. In 2006, the Prosecutor General’s Office received ten money laundering cases for the prosecution of 47 individuals. In three of the cases, four individuals received convictions and sentences including time in jail. During the first 10 months of 2007 the Prosecutor’s Office received 11 money laundering cases for the prosecution of 40 individuals, and reviewed eight money laundering cases resulting in the sentencing of 12 people.
The GOL has initiated measures aimed at combating the financing of terrorism. Article 88-1 of the Criminal Code criminalizes terrorist financing, and meets the United Nations Security Council Resolution (UNSCR) 1373 requirements. It has issued regulations to implement the sanctions imposed by UNSCR 1267. The regulations require that financial institutions report to the Control Service, transactions related to any individual or organization on the UNSCR 1267 Sanctions Committee’s consolidated list or on other terrorist lists, including those shared with Latvia by international partners. The Control Service maintains consolidated terrorist finance and watch-lists and regularly distributes these to financial and nonfinancial institutions, as well as to their supervisory bodies. On several occasions, Latvian financial institutions have temporarily frozen monetary funds associated with names on terrorist finance watch lists, including those issued by the U.S. Office of Foreign Assets Control (OFAC), although authorities have found no confirmed matches to names on the list. Article 17 of the AML law authorizes the Control Service to freeze the funds of persons included on one of the terrorist lists for up to six months. Latvia employs the same freezing mechanism with regard to terrorist assets as it uses with those relating to other crimes but includes involvement by the Latvian Security Police. Authorities handle associated investigations, asset and property seizures, in accordance with the Criminal Procedures Law.
Latvia took swift action to improve its AML/CTF regime after the United States outlined concerns in a Notices of Proposed Rulemaking against two Latvian banks on April 26, 2005, under Section 311 of the USA PATRIOT Act. According to the IMF/MONEYVAL MER, “At one point in 2005, 13 of the 23 Latvian banks were subject by the FCMC to the legal status of intensified supervision due to deficiencies in their AML/CTF systems, as the FCMC pursued strong measures to clean up the banking system.” On August 14, 2006, the United States issued a final rule imposing a special measure against one of the two banks, VEF Banka, as a financial institution of primary money laundering concern. This measure, specific to VEF Banka, is still in effect.
Latvia permits only conventional money remitters (such as Western Union and Moneygram). The remitters work through the banks and not as separate entities. Alternative remittance services are prohibited in Latvia. The Control Service has not detected any cases of charitable or nonprofit entities used as conduits for terrorist financing in Latvia
Latvia is a party to the UN International Convention for the Suppression of the Financing of Terrorism and eleven other multilateral counter-terrorism conventions. Latvia is a party to the 1988 UN Drug Convention, the UN Convention against Transnational Organized Crime, and the UN Convention against Corruption. A Mutual Legal Assistance Treaty (MLAT) has been in force between the United States and Latvia since 1999. Latvia is a member of the Council of Europe’s Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL).
The GOL should enact additional amendments to its legislation to tighten its AML framework. It should continue to implement and make full use of the 2005 amendments to its Criminal Procedures Law and upon enactment, actively implement and vigorously enforce the new AML law. Supervisory authorities should draft necessary implementing regulations in advance and perform outreach so that upon enactment of the legislation, the obliged entities will be able to comport with the law’s requirements. Latvia needs to strengthen its risk-based approach to AML/CTF and take steps to further enhance the preventative aspects of its AML/CTF regime, including improved customer due diligence requirements and increased scrutiny of higher risk categories of transactions, clients and countries. The GOL should continue to take steps to increase information sharing and cooperation between law enforcement agencies at the working level. The GOL should also strengthen its ability to aggressively prosecute and convict those involved in financial crimes.
Lebanon is a financial hub for banking activities in the Middle East and eastern Mediterranean. It has one of the more sophisticated banking sectors in the region. The banking sector continues to record an increase in deposits. As of October 2007, there were 65 banks (51 commercial banks, 11 investment banks, and three Islamic banks) operating in Lebanon with total deposits of U.S. $70 billion. One U.S. bank (Citibank) and four U.S bank representative offices operate in Lebanon: American Express Bank, the Bank of New York, JP Morgan Chase Bank National Association, and Morgan Guarantee Trust Co. of New York.
The Central Bank of Lebanon, Banque du Liban, regulates all financial institutions and money exchange houses. Lebanon imposes no controls on the movement of capital. It has a substantial influx of remittances from expatriate workers and family members, estimated by banking sources to reach U.S. $4 to 5 billion yearly. Such family ties are reportedly involved in underground finance and trade-based money laundering.
Laundered criminal proceeds come primarily from domestic criminal activity, which is largely controlled by organized crime. In May 2007, members of the terrorist group Fatah Al-Islam stole $150,000 from a BankMed branch in Tripoli in northern Lebanon. There is some smuggling of cigarettes and pirated software, but this does not generate large amounts of funds that are laundered through the banking system. There is a black market for counterfeit goods and pirated software, CDs, and DVDs. Lebanese customs officials have had some recent success in combating counterfeit and pirated goods. The illicit narcotics trade is not a principal source of money laundering proceeds.
Offshore banking, trust and insurance companies are not permitted in Lebanon. Legislative Decree No. 46 of 1983 restricts offshore companies’ activity to negotiating and signing advisory and services agreements, in addition to sale and purchase contracts of products and goods, all concerning business conducted outside of Lebanon or in the Lebanese Customs Free Zone. Thus, offshore companies are barred from engaging in activities such as industry, banking, and insurance. All offshore companies must register with the Beirut Commercial Registrar, and the owners of an offshore company must submit a copy of their identification. Moreover, the Beirut Commercial Registrar keeps a special register, in which all information about the offshore company is retained. A draft law amending legislation on offshore companies to comply with World Trade Organization’s standards was still pending in Parliament as of early November 2007.
There are currently two free trade zones operating in Lebanon, at the Ports of Beirut and Tripoli. The free trade zones fall under the supervision of Customs. Exporters moving goods into and out of the free zones submit a detailed manifest to Customs. Customs is expected to report suspected trade-based money laundering or terrorist financing to the Special Investigation Commission (SIC), Lebanon’s financial intelligence unit (FIU). Companies using the free trade zone must be registered and must submit appropriate documentation, which is kept on file for a minimum of five years. Lebanon has no cross-border currency reporting requirements. However, since January 2003, Customs checks travelers randomly and notifies the SIC upon discovery of large amounts of cash.
In 2004, Lebanon passed a law requiring diamond traders to seek proper certification of origin for imported diamonds; the Ministry of Economy and Trade (MOET) is in charge of issuing certification for re-exported diamonds. This law was designed to prevent the trafficking of “conflict diamonds” and allowed Lebanon to participate in the Kimberley Process in September 2005. Prior to this, Lebanon passed a decree in August 2003 prohibiting imports of rough diamonds from countries that are participants in the Kimberley Process. There have been consistent reports that some Lebanese diamond brokers in Africa are engaged in the laundering of diamonds—the most condensed form of physical wealth in the world. However, the Kimberley Process office in Lebanon stressed that importers or exporters of rough diamonds must submit an application to MOET to import or export rough diamonds according to the Kimberley Process procedure. The Beirut International Airport is the sole entry point for rough diamonds. The Kimberley Process office at the Beirut International Airport monitors and physically checks the quantities of rough diamonds imported, making sure that imports carry a Kimberley Process certification issued by the country of origin. It also checks on exports of rough diamonds from Lebanon to other member countries of the Kimberley Process. In 2007, Customs had two cases where they seized smuggled rough diamonds that were not carrying the Kimberley certification. Customs kept the rough diamonds in custody and notified the Kimberley Process office at MOET. The Kimberley Process Committee referred the two cases to the State Prosecutor, and both cases are now in the Lebanese court. Yet these safeguards do not address the issue of smuggled diamonds, the purchase of fraudulently obtained Kimberley Process certificates, the laundering of diamonds, or value transfer via the diamond trade.
Lebanon has a large expatriate community throughout the Middle East, Africa, and parts of Latin America. They often work as brokers and traders. Many Lebanese “import-export” concerns are found in free trade zones. Some of these Lebanese brokers network via family ties and are involved with underground finance and trade-based money laundering. Informal remittances and value transfer in the form of trade goods add substantially to the remittance flows from expatriates via official banking channels. For example, expatriate Lebanese brokers are actively involved in the trade of counterfeit goods in the tri-border region of South America and the smuggling and laundering of diamonds in Africa. There are also reports that many in the Lebanese expatriate business community willingly or unwillingly give “charitable donations” to representatives of Hizballah (which is based in Lebanon). The funds are then repatriated or laundered back to Lebanon.
Lebanon has continued to make progress toward developing an effective money laundering and terrorist financing regime by incorporating the Financial Action Task Force (FATF) Recommendations. Lebanon enacted Law No. 318 in 2001. Law No. 318 created a framework for lifting bank secrecy, broadening the criminalization of money laundering beyond drugs, mandating suspicious transaction reporting, requiring financial institutions to obtain customer identification information, and facilitating access to banking information and records by judicial authorities. Under this law, money laundering is a criminal offense and punishable by imprisonment for a period of three to seven years and by a fine of no less than 20 million Lebanese pounds (approximately $13,270). The provisions of Law No. 318 expand the type of financial institutions subject to the provisions of the Banking Secrecy Law of 1956, to include institutions such as exchange offices, financial intermediation companies, leasing companies, mutual funds, insurance companies, companies promoting and selling real estate and construction, and dealers in high-value commodities. In addition, Law No. 318 requires companies engaged in transactions for high-value items (i.e., precious metals, antiquities) and real estate to also report suspicious transactions.
These companies are also required to ascertain, through official documents, the identity and address of each client and must keep photocopies of these documents as well as photocopies of the operation-related documents for a period of no less than five years. The Central Bank regulates private couriers who transport currency. Western Union and Money Gram are licensed by the Central Bank and are subject to the provisions of this law. Charitable and nonprofit organizations must be registered with the Ministry of Interior and are required to have proper corporate governance, including audited financial statements. These organizations are also subject to the same suspicious reporting requirements.
All financial institutions and money exchange houses are regulated by Law No. 318 which clarifies the Central Bank’s powers to: require financial institutions to identify all clients, including transient clients; maintain records of customer identification information; request information about the beneficial owners of accounts; conduct internal audits; and exercise due diligence in conducting transactions for clients.
Law No. 318 also established the Special Investigation Commission (SIC), Lebanon’s FIU. SIC is an independent entity with judicial status that can investigate money laundering operations and monitor compliance of banks and other financial institutions with the provisions of Law No. 318. The SIC serves as the key element of Lebanon’s anti-money laundering regime and has been the critical driving force behind the implementation process. The SIC is responsible for receiving and investigating reports of suspicious transactions. The SIC is the only entity with the authority to lift bank secrecy for administrative and judicial agencies, and it is the administrative body through which foreign FIU requests for assistance are processed
Since its inception, the SIC has been active in providing support to international criminal case referrals. From January through October 2007, the SIC investigated 182 cases involving allegations of money laundering, terrorism, and terrorist financing activities. Two of the 182 cases were related to terrorist financing. Bank secrecy regulations were lifted in 41 instances. Four cases were transmitted by the SIC to the general state prosecutor for further investigation. As of November 2007, no cases were transmitted by the general state prosecutor to the penal judge. The general state prosecutor reported seven cases to the SIC. Four cases were related to embezzlement and counterfeiting charges, one case to fraud, another to terrorism, and the last one to Interpol intelligence. From January to October 2007, the SIC froze the accounts of three individuals totaling approximately $50,000 in three of the 182 cases investigated.
During 2003, Lebanon adopted additional measures to strengthen efforts to combat money laundering and terrorist financing, such as establishing anti-money laundering units in customs and the police. In 2003, Lebanon joined the Egmont Group of financial intelligence units. The SIC has reported increased inter-agency cooperation with other Lebanese law enforcement units, such as Customs and Police, as well as with the office of the general state prosecutor. In 2005, a SIC Remote Access Communication system was put in place for the exchange of information between the SIC, Customs, the Internal Security Forces (ISF) anti-money laundering and terrorist financing unit, and the general state prosecutor. The cooperation led to an increase in the number of suspicious transactions reports (STRs), and, as a result, the SIC initiated several investigations in 2007.
To more effectively combat money laundering and terrorist financing, Lebanon also adopted two laws in 2003: Laws 547 and 553. Law 547 expanded Article One of Law No. 318, criminalizing any funds resulting from the financing or contribution to the financing of terrorism or terrorist acts or organizations, based on the definition of terrorism as it appears in the Lebanese Penal Code. Law 547 also criminalized acts of theft or embezzlement of public or private funds, as well as the appropriation of such funds by fraudulent means, counterfeiting, or breach of trust by banks and financial institutions for such acts that fall within the scope of their activities. It also criminalized counterfeiting of money, credit cards, debit cards, and charge cards, or any official document or commercial paper, including checks. Law 553 added an article to the Penal Code (Article 316) on terrorist financing, which stipulates that any person who voluntarily, either directly or indirectly, finances or contributes to terrorist organizations or terrorists acts is punishable by imprisonment with hard labor for a period not less than three years and not more than seven years, as well as a fine not less than the amount contributed but not exceeding three times that amount.
Lebanese law allows for property forfeiture in civil as well as criminal proceedings. The Government of Lebanon (GOL) enforces existing drug-related asset seizure and forfeiture laws. Current law provides for the confiscation of assets the court determines to be related to or proceeding from money laundering or terrorist financing. In addition, vehicles used to transport narcotics can be seized. Legitimate businesses established from illegal proceeds after passage of Law 318 are also subject to seizure. Forfeitures are transferred to the Lebanese Treasury. In cases where proceeds are owed to a foreign government, the GOL returns the proceeds to the concerned government. In February 2007, two persons were convicted for laundering money.
Lebanon was one of the founding members of the Middle East and North Africa Financial Action Task Force (MENAFATF) and assumed its presidency through 2005. There is no information available on Lebanon’s mutual evaluation by MENAFATF.
The SIC circulates to all financial institutions the names of suspected terrorists and terrorist organizations on the UNSCR 1267 Sanctions Committee’s consolidated list, the list of Specially Designated Global Terrorists designated by the U.S. pursuant to E.O. 13224 and those that European Union have designated under their relevant authorities. As of early November 2007, SIC signed seventeen memoranda of understanding with counterpart FIUs concerning international cooperation.
In September 2007 the Lebanese Cabinet established a national committee that is chaired by the Ministry of Interior to suppress the financing of terrorism. The Cabinet also expanded membership of The National Committee for coordinating AML policies to include representatives from five Ministries: Justice, Finance, Interior, Foreign Affairs, and Economy, in addition to a representative from Beirut Stock Exchange. Yet prosecutions and convictions are still lacking. The end of the Syrian military occupation in April 2005 and the gradual decline of Syrian influence over the economy (both licit and illicit), security services, and political life in Lebanon may present an opportunity for the GOL to further strengthen its efforts against money laundering, corruption, and terrorist financing.
Lebanon is a party to the 1988 UN Drug Convention, although it has expressed reservations to several sections relating to bank secrecy. It has signed and ratified the UN Convention against Transnational Organized Crime. Lebanon is not a party to the UN Convention against Corruption or the UN International Convention for the Suppression of the Financing of Terrorism.
The GOL should encourage more efficient cooperation between financial investigators and other concerned parties, such as police and customs, which could yield significant improvements in initiating and conducting investigations The GOL should become a party to the UN Convention against Corruption and the UN International Convention for the Suppression of Terrorist Financing. Per FATF Special Recommendation Nine on bulk cash smuggling, the GOL should mandate and enforce cross-border currency reporting. Lebanese law enforcement authorities should examine domestic ties to the international network of Lebanese brokers and traders that are commonly found in underground finance, trade fraud, and trade-based money laundering.
The Principality of Liechtenstein has a well-developed offshore financial services sector, liberal incorporation and corporate governance rules, relatively low tax rates, and a tradition of strict bank secrecy. All of these conditions have contributed significantly to the ability of financial intermediaries in Liechtenstein to attract funds from abroad. These same conditions have historically made the country attractive to money launderers using the system to launder their proceeds from fraud. Although accusations of misuse of Liechtenstein’s banking system persist, the principality has made substantial progress in its efforts against money laundering in recent years.
Liechtenstein’s financial services sector includes 16 banks, three nonbank financial companies, 16 public investment companies, and a number of insurance and reinsurance companies. The three largest banks control ninety percent of the market. Liechtenstein’s 230 licensed fiduciary companies and 60 lawyers serve as nominees for or manage more than 75,000 entities (mostly corporations or trusts) available primarily to nonresidents of Liechtenstein. Approximately one third of these entities hold controlling interests in separate entities chartered outside of Liechtenstein. Laws permit corporations to issue bearer shares.
Narcotics-related money laundering has been a criminal offense in Liechtenstein since 1993, and the number of predicate offenses for money laundering has increased over time. The Government of Liechtenstein (GOL) is reviewing the Criminal Code to further expand the list of predicate offenses. Article 165 criminalizes laundering one’s own funds and imposes penalties for money laundering.
Liechtenstein enacted its first general anti-money laundering (AML) legislation in 1996. Although this law applied some money laundering controls to financial institutions and intermediaries operating in Liechtenstein, the AML regime at that time suffered from serious systemic problems and deficiencies. In response to international pressure, beginning in 2000, the GOL took legislative and administrative steps to improve its AML regime.
Liechtenstein’s primary piece of AML legislation, the Due Diligence Act (DDA), applies to banks, e-money institutions, casinos, dealers in high-value goods, and a number of other entities. Along with the Due Diligence Ordinance, the DDA sets out the basic requirements of the AML regime in accordance with the Financial Action Task Force (FATF) 40 Recommendations and Nine Special Recommendations on Terrorist Financing in the areas of customer identification, suspicious transaction reporting, and record keeping. The DDA prohibits banks and postal institutions from engaging in business relationships with shell banks and from maintaining bearer-payable passbooks, accounts, and deposits. Legislation does not, however, address negligent money laundering. The suspicious-transaction reporting requirement applies to banks, insurers, financial advisers, postal services, exchange offices, attorneys, financial regulators, casinos, and other entities. The GOL has reformed its suspicious transaction reporting system to permit reporting for a much broader range of offenses than in the past. The reporting requirement now uses the basis of a suspicion, rather than the previous standard of “a strong suspicion.”
The GOL announced in August 2007, that it would implement legislation enacting EU regulations requiring that money transfers above 15,000 euros (U.S. $17,678) include information on the identity of the sender, including his or her name, address, and account number. The proposed measures, to take effect by early 2008, will ensure that this information will be immediately available to appropriate law enforcement authorities. The information will assist them in detecting, investigating, and prosecuting money launderers, terrorist financiers, and other criminals.
The Financial Market Authority (FMA) serves as Liechtenstein’s central financial supervisory authority. FMA has assumed the responsibilities of several former administrative bodies, including the Financial Supervisory Authority and the Due Diligence Unit, both of which once exercised responsibility over money laundering issues. FMA reports exclusively to the Liechtenstein Parliament, making it independent from Liechtenstein’s government. The FMA supervises a large variety of financial actors, including banks, finance companies, insurance companies, currency exchange offices, and real estate brokers. FMA works closely with Liechtenstein’s financial intelligence unit (FIU), the Office of the Prosecutor, and the police.
Liechtenstein’s FIU, known as the Einheit fuer Finanzinformationen (EFFI), receives, analyzes and disseminates suspicious transaction reports (STRs) relating to money laundering and terrorist financing. The EFFI became operational in March 2001. The EFFI has its own database as well as access to various governmental databases. However, EFFI cannot seek additional financial information unrelated to a filed suspicious transaction reports (STR.)
In 2006, the FIU received 163 STRs. Of the total of 163 STRs, banks submitted 84, professional trustees submitted 65, lawyers submitted nine, and investment companies and the Postal Service submitted one apiece. Three STRs were submitted by Liechtenstein authorities or the FMA. U.S. nationals identified as subjects of STRs comprised four percent. In 2006, the FIU received 139 inquiries from 21 different FIUs and sent 158 inquiries to 23 different FIUs. Information regarding the number of STRs received in 2007 is not yet available.
STRs have generated several successful money laundering investigations. EFFI works closely with the prosecutor’s office and law enforcement authorities, in particular with a special economic and organized crime unit of the National Police known as EWOK. Police can use special investigative measures when authorized to do so by a Special Investigative Judge.
Liechtenstein has legislation to seize, freeze, and share forfeited assets with cooperating countries. The Special Law on Mutual Assistance in International Criminal Matters gives priority to international agreements. Money laundering is an extraditable offense, and Liechtenstein grants legal assistance on the basis of dual criminality. Article 235A provides for the sharing of confiscated assets. Liechtenstein has not adopted the EU-driven policy of reversing the burden of proof (i.e., forcing a defendant to prove assets were legally obtained instead of the state being required to prove their illicit nature.)
A series of amendments to Liechtenstein laws, along with amendments to the Criminal Code and the Code of Criminal Procedure, criminalize terrorist financing. Liechtenstein has implemented United Nations Security Council Resolutions (UNSCRs) 1267 and 1333. The GOL can freeze the accounts of individuals and entities that are designated pursuant to these UNSCRs. The GOL updates its implementing ordinances regularly.
The GOL has improved its international cooperation provisions in both administrative and judicial matters. A mutual legal assistance treaty (MLAT) between Liechtenstein and the United States entered into force on August 1, 2003. The U. S. Department of Justice has acknowledged Liechtenstein’s cooperation in the Al-Taqwa Bank case and in other fraud and narcotics cases. The FIU has in place memoranda of understanding (MOUs) with nine FIUs, and seven others are under negotiation.
Liechtenstein is a member of the Council of Europe Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL), which discussed the most recent Liechtenstein assessment at its September 2007 plenary. However, the report is not yet available. EFFI is a member of the Egmont Group. The GOL is a party to the Council of Europe Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds from Crime and the UN International Convention for the Suppression of the Financing of Terrorism. On March 9, 2007, Liechtenstein acceded to the 1988 UN Drug Convention. Liechtenstein has also signed, but not yet ratified, the UN Convention against Transnational Organized Crime and the UN Convention against Corruption. Liechtenstein has endorsed the Basel Committee’s “Core Principles for Effective Banking Supervision” and has adopted the EU Convention on the Suppression of Terrorism.
The Government of Liechtenstein has made consistent progress in addressing the shortcomings in its AML regime. It should continue to build upon the foundation of its evolving anti-money laundering and counter-terrorist financing regime. Liechtenstein should ratify the UN Convention against Transnational Organized Crime and the UN Convention against Corruption. Liechtenstein should enact and implement legislation requiring the reporting of cross-border currency movements and ensure that trustees and other fiduciaries comply fully with all aspects of AML legislation and attendant regulations, including the obligation to report suspicious transactions. The GOL should prohibit the issuance and use of corporate bearer shares. The FIU should have access to additional financial information. While Liechtenstein recognizes the rights of third parties and protects uninvolved parties in matters of confiscation, the government should distinguish between bona fide third parties and others. Liechtenstein should consider discarding its list of predicate offenses in favor of an all-crimes approach.
Despite its standing as the second-smallest member of the European Union (EU), Luxembourg is one of the largest financial centers in the world. While Luxembourg is not a major hub for illicit narcotics distribution, the size and sophistication of its financial sector create opportunities for money laundering, tax evasion, and other financial crimes. Luxembourg is an offshore financial center. Although there are a handful of domestic banks operating in the country, the majority of banks registered in Luxembourg are foreign subsidiaries of banks in Germany, Belgium, France, Italy, and Switzerland. A significant share of Luxembourg’s suspicious transaction reports (STRs) are generated from transactions involving clients in these countries.
Luxembourg’s strict bank secrecy laws allow international financial institutions to benefit from and operate a wide range of services and activities. With over U.S. $3.1 trillion in domiciled assets, Luxembourg is the second largest mutual fund investment center in the world, after the United States. As of October 2007, 157 registered banks existed, with a collective balance sheet total reaching approximately U.S. $1.38 trillion. In addition, as of January 2007, a total of 2,238 “undertakings for collective investment” (UCIs), or mutual fund companies, whose net assets had reached over approximately U.S. $2.66 trillion operated from Luxembourg or traded on the Luxembourg stock exchange. Luxembourg has approximately 15,000 holding companies, 95 insurance companies, and 260 reinsurance companies. In January 2006, the Luxembourg Stock Exchange listed over 39,000 securities issued by nearly 4,100 entities from 105 countries. Luxembourg also has 116 registered venture capital funds (Societe d’investissement en capital a risqué, or “SICAR”).
The Law of July 7, 1989, updated in 1998 and 2004, serves as Luxembourg’s primary anti-money laundering (AML) and counter-terrorist financing (CTF) law, criminalizing the laundering of proceeds for an extensive list of predicate offenses, including narcotics trafficking. The laws implement the EU’s money laundering directives and provide customer identification, recordkeeping, and suspicious transaction reporting requirements. Corruption, weapons offenses, fraud committed against the EU and organized crime are on Luxembourg’s list of predicate offenses for money laundering. The entities subject to money laundering regulations include banks, pension funds, insurance brokers, UCIs, management companies, external auditors, accountants, notaries, lawyers, casinos, gaming establishments, real estate agents, tax and economic advisors, domiciliary agents, insurance providers, and dealers in high-value goods such as jewelry and vehicles All obliged entities are required to file STRs with the financial intelligence unit (FIU). The current AML law does not cover SICAR entities.
The law also imposes strict “know your customer” (KYC) requirements on obliged entities for all customers, including beneficial owners, trading in goods worth at least 15,000 euros (U.S. $21,900). If the transaction or business relationship is remotely based, the law details measures required for customer identification. Entities must proactively monitor their customers for potential risk. Luxembourg’s laws also prohibit “tipping off”. Financial institutions must also ensure adequate internal organization and employee training, and must cooperate with authorities, The banking community generally cooperates with enforcement efforts to trace funds and seize or freeze bank accounts.
Although Luxembourg is well known for its strict banking secrecy laws, banking secrecy laws do not apply in investigations and prosecutions of money laundering and other criminal cases. A court order is not necessary for the competent authorities to investigate account information in suspected money laundering cases or in response to an STR. Financial professionals have a legal obligation to cooperate with the public prosecutor in investigating such cases. To obtain a conviction for money laundering, prosecutors must prove criminal intent rather than negligence. Negligence, however, is subject to scrutiny by competent authority, with sanctions for noncompliance varying from 1,250 to 1,250,000 euros (U.S. $1,825 to $1,825,000) and, potentially, forfeiture of the professional license. Luxembourg’s regulatory authorities believe these fines to be stiff enough so as to encourage strict compliance.
On November 9, 2007, the Council of Government approved Bill 5811 to implement the Third EU Money Laundering directive. However, by year’s end, the bill had not gone to the full chamber for deliberation.
At the close of 2007, Parliament was considering Bill 5756, which would bring Luxembourg into conformity with the first recommendation of the Financial Action Task Force (FATF) 40 Recommendations and Nine Special Recommendations. This recommendation encourages countries to criminalize money laundering and “apply the crime of money laundering to all serious offenses, with a view to including the widest range of predicate offenses.” Bill 5756, when enacted, will widen the scope of predicate offenses in Luxembourg law and set forth minimum sentence guidelines for money laundering offenses to comport with the FATF recommendations. This bill was introduced into Parliament in August 2007, but was not scheduled for a vote at the end of 2007.
The Financial Supervision Commission (Commission de Surveillance du Secteur Financier or CSSF) is an independent body under the Ministry of Finance that acts as the supervisory authority for banks, credit institutions, the securities market, some pension funds, financial sector professionals, and other financial sector entities covered by the country’s AML/CTF laws. Banks must undergo audits under CSSF supervision. All entities involved in oversight functions, including registered independent auditors, in-house bank auditors, and the CSSF, can obtain the identities of the beneficial owners of accounts. The CSSF establishes the standards for and grants “financial sector professional” (“professionnel du secteur fiancier,” or PSF) status to financial sector entities. Originally covering only individual financial sector professionals having access to customer information subject to bank secrecy laws, the CSSF recently established a sub-category for service providers with potential access to that information, such as transaction-clearing houses, information technology consultants, and data warehousing services. With this status, banks have the flexibility to outsource some services while guaranteeing continued compliance with banking secrecy laws to their customers. The CSSF regulates the PSF status tightly, frequently issuing circulars and updating accreditation requirements. Accordingly, the PSF holds coveted status in the Luxembourg financial community.
The Luxembourg Central Bank oversees the payment and securities settlement system, and the Insurance Commissioner’s Office (Commissariat aux Assurances or CAA), also under the Ministry of Finance, is the regulatory authority for the insurance sector.
Under the direction of the Ministry of the Treasury, the CSSF has established a committee, the Anti-Money Laundering Steering Committee (Comite de Pilotage Anti-Blanchiment or COPILAB), composed of supervisory and law enforcement authorities, the financial intelligence unit (FIU), and financial industry representatives. The committee meets monthly to develop a common public-private approach to strengthen Luxembourg’s AML regime.
Luxembourg’s laws and regulations do not distinguish between onshore and offshore activities. Foreign institutions seeking establishment in Luxembourg must demonstrate prior establishment in a foreign country and meet stringent minimum capital requirements. Nominee (anonymous) directors are not permitted. Companies must maintain a registered office in Luxembourg, and authorities perform background checks on all applicants. A government registry publicly lists company directors.
Luxembourg permits bearer shares. Officials contend that bearer shares do not pose a money laundering concern because of KYC laws that require banks to know the identities of beneficial owners. Banks must undergo annual audits under CSSF supervision.
Luxembourg’s FIU, (Cellule de Renseignement Financier), is part of the State Prosecutor’s Office and housed within Luxembourg’s Ministry of Justice. The FIU consists of three State Prosecutors and one analyst. The FIU State Prosecutors pursue economic and financial crimes in Luxembourg, and spend significant portions of their time preparing for cases involving financial crimes. They are also occasionally called upon to prosecute cases not involving financial crimes.
The FIU receives and analyzes the STRs from all obliged entities. The FIU provides members of the financial community with access to updated information on money laundering and terrorist financing practices. The FIU issues circulars to all financial sector-related professionals who are not regulated under the CSSF as well as notifies the financial sector about terrorist financing designations promulgated by the EU and United Nations (UN).
By late November 2007, obliged institutions filed a total of 679 STRs, compared to a total of 754 in 2006. The number of individuals referenced in STRs has decreased dramatically from 2,471 in 2004 to 1,452 in 2006, which the FIU attributes to increased financial sector confidence in KYC practices. Among the individuals referenced in STRs in 2006, 28 resided in the United States. Of 255 confirmed cases of suspicious activity in 2006, 34 related to organized crime (including terrorist financing), 14 to narcotics-related money laundering, and 24 were related to corruption.
The FIU works with the AML Unit of the Judicial Police. Luxembourg prosecuted three money laundering cases in 2006 and four in 2007. Three were of particular note: In May 2006, two individuals were convicted of laundering narcotics-trafficking proceeds and received sentences of 72 months and 12 months of imprisonment respectively. In November 2006, five individuals were acquitted of money laundering charges when the court found that the State had not sufficiently established the linkage between the funds and either narcotics trafficking or an organized crime enterprise. The government seeks to close this legal vulnerability with Bill 5756, which expands the list of predicate offenses. Also in November 2006, a Dutch lawyer for a convicted drug trafficker was acquitted of attempted money laundering charges in November 2006, but an appellate court overturned the acquittal in May 2007. The defendant appealed his conviction to Luxembourg’s Supreme Court, which should reach a judgment in 2008.
Luxembourg law only allows for criminal forfeitures and public takings. Narcotics related proceeds are pooled in a special fund to invest in anti-drug abuse programs. Luxembourg can confiscate funds found to be the result of money laundering even if they are not the proceeds of a crime. The Government of Luxembourg (GOL) can, on a case-by-case basis, freeze and seize assets, including assets belonging to legitimate businesses used for money laundering. The FIU freezes assets and issues blocking orders when necessary. The government has adequate police powers and resources to trace, seize, and freeze assets without undue delay. Luxembourg has independently frozen several accounts. This has resulted in court challenges by the account holders, after which nearly all of the assets were subsequently released. Luxembourg has a comprehensive system not only for the seizure and forfeiture of criminal assets, but also for the sharing of those assets with other governments. Bill 5019, of August 2007, allows Luxembourg to seize assets on the basis of a foreign criminal conviction, even when there is no specific treaty in place with that country.
The Ministry of Justice studies and reports on potential abuses of charitable and nonprofit entities. Justice and Home Affairs ministers from Luxembourg and other EU member states agreed in early December 2005, to take into account five principles with regard to implementing FATF Special Recommendation VIII on nonprofit organizations: safeguarding the integrity of the sector; dialogue with stakeholders; continuing knowledge development of the sector; transparency, accountability and good governance; and effective, proportional oversight.
Luxembourg’s authorities have not found evidence of the widespread use of alternative remittance systems or trade-based money laundering. Luxembourg government officials maintain that because AML rules would apply to such systems, they are not considering separate legislative or regulatory initiatives to address them.
The GOL actively disseminates to its financial institutions information concerning suspected individuals and entities on the United Nations Security Council Resolution 1267 Sanctions Committee’s consolidated list and the list of Specially Designated Global Terrorists designated by the United States pursuant to Executive Order 13224. Luxembourg’s authorities can and do take action against groups targeted through the EU designation process and the UN. Luxembourg does not have legal authority to independently designate terrorist groups or individuals. The government has been working on legislation with regard to this issue for more than three years, but the legislation remains in the drafting process. Government prosecutors are confident that they could use existing judicial authority if any institution were to identify a terrorist financier. Although bilateral freeze requests have a limit of three months, designations under the EU, UN, or international investigation processes continue to be subject to freezes for an indefinite time period. .
Luxembourg’s laws facilitating international cooperation in money laundering include the Act of August 8, 2000, which enhances and simplifies procedures on international judicial cooperation in criminal matters; and the Law of June 14, 2001, which ratifies the Council of Europe Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds from Crime. During its EU Presidency, Luxembourg shepherded the draft of the Third Money Laundering and Terrorist Financing Directive through the EU’s legislative process. Luxembourg expects to transpose this Directive into national law in 2008 with the passage of Bill 5811.
Luxembourg cooperates with, and provides assistance to foreign governments in their efforts to trace, freeze, seize and forfeit assets. During 2007, Luxembourg responded to four mutual legal assistance treaty requests from the U.S. and in return requested U.S. government assistance in three cases. Dialogue and other bilateral proceedings between Luxembourg and the United States have been extensive. Upon request from the United States, Luxembourg froze the bank accounts of individuals suspected of involvement in terrorism. Luxembourg also worked closely with the U.S. Department of Justice throughout 2007, on several drug-related money laundering cases as well as one possible terrorist financing case. In October 2006, the United States and Luxembourg announced a sharing agreement in which they would divide equally 11,366,265 euros (then approximately $14,548,820) of forfeited assets of two convicted American narcotics traffickers who had deposited the monies in Luxembourg bank accounts. Luxembourg has placed a priority on progressing with the legal instruments implementing the extradition and mutual legal assistance agreements the United States signed with the European Union in 2003. In December 2007, the Luxembourg Parliament gave final approval to both the bilateral U.S.-Luxembourg and multilateral U.S.-EU extradition and mutual legal assistance agreements.
Luxembourg is a party to the 1988 UN Drug Convention and the UN International Convention for the Suppression of the Financing of Terrorism but has not yet ratified the UN Convention against Transnational Organized Crime. On November 6, 2007, Luxembourg ratified the UN Convention against Corruption.
Luxembourg is a member of the Financial Action Task Force (FATF), which, in a 2004 report, commented that Luxembourg was “broadly compliant with almost all of the FATF Recommendations.” The Luxembourg FIU is a member of the Egmont Group. Luxembourg and the United States have had a mutual legal assistance treaty (MLAT) since February 2001. Luxembourg has consistently provided training and assistance in money laundering matters to officials in countries whose regimes are in the development stage.
The Government of Luxembourg has enacted laws and adopted practices that help prevent the abuse of its bank secrecy laws and has enacted a comprehensive legal and supervisory anti-money laundering regime. Luxembourg has steadily enacted AML/CTF laws, policies, and procedures. However, the scarce number of financial crime cases is of concern, particularly for a country that has such a large financial sector. Luxembourg should take action to delineate in legislation regulatory, financial intelligence, and prosecutorial activities among governmental entities in the fight against money laundering and terrorist financing. The situation is most acute regarding the lack of a distinct legal framework for the FIU whose staff, activities, and authorities are divided among at least four different ministries. The State Prosecutors in the FIU should be exempt from nonfinancial crime duties and the FIU should increase the number of analytical staff to effectively analyze and disseminate the volume of STRs that the FIU receives. Luxembourg should pass legislation creating the authority for it to independently designate those who finance terrorism. Luxembourg would be well served to have the authority to designate suspected terrorists. Luxembourg should also enact legislation to address the continued use of bearer shares and consider specifically extending AML legislation to include SICAR entities. Luxembourg should become a party to the UN Convention against Transnational Organized Crime.
Under the one country/two systems principle that underlies Macau’s 1999 reversion to the People’s Republic of China, Macau has substantial autonomy in all areas of governance except defense and foreign affairs. Macau’s free port, a lack of foreign exchange controls, limited institutional capacity and a rapidly expanding economy based on gambling and tourism create an environment that can be exploited for money laundering purposes. Macau is a gateway to China, and can be used as a transit point to remit funds and criminal proceeds to and from China. Macau’s economy is heavily dependent on gaming. The gaming sector continues to be a significant vulnerability. Macau’s offshore financial sector is not fully developed.
The primary money laundering methods in Macau’s financial system are wire transfers; currency exchange/cash conversion; bulk movement of cash; the use of casinos to remit or launder money; and the use of nominees, trusts, family members, or third parties to transfer cash. Most of these cases are related to financial fraud, bribery, embezzlement, organized crime, counterfeiting, and drug-related crimes. There have been no reported instances of terrorism-related financial crimes. Crimes related to financial fraud appear to be increasing, while drug-related crimes are becoming less common.
Macau has taken several steps over the past three years to improve its institutional capacity to tackle money laundering. On March 23, 2006, the Macau Special Administrative Region (MSAR) Government passed a 12-article bill on the prevention and repression of money laundering that incorporates aspects of the revised FATF Forty Recommendations. The law expands the number of sectors covered by Macau’s previous anti-money laundering (AML) legislation, includes provisions on due diligence, and broadens the definition of money laundering to include all serious predicate crimes. The AML law also authorizes the establishment of a financial intelligence unit (FIU), which began operations in November 2006. The law provides for 2-8 years imprisonment for money laundering offenses, and if a criminal is involved in organized crime or triad-related money laundering, increases the penalties by one-half. The new law also allows for fines to be added to the time served and eliminates a provision reducing time served for good behavior.
The 2006 law also extends the obligation of suspicious transaction reporting to lawyers, notaries, accountants, auditors, tax consultants and offshore companies. Covered businesses and individuals must meet various obligations, such as the duty to confirm the identity of their clients and the nature of their transactions. Businesses must reject clients that refuse to reveal their identities or type of business dealings. The law obliges covered entities, including casinos, to send suspicious transaction reports (STRs) to the relevant authorities and cooperate in any follow-up investigations.
On March 30, 2006, the MSAR also passed new counterterrorism legislation aimed at strengthening measures to counter terrorist financing (CTF). The law partially implements UNSCR 1373 by making it illegal to conceal or handle finances on behalf of terrorist organizations. Individuals are liable even if they are not members of designated terrorist organizations themselves. The legislation also allows prosecution of persons who commit terrorist acts outside of Macau in certain cases, and would mandate stiff penalties. However, the legislation does not authorize the freezing of terrorist assets outside normal legal channels, nor does it discuss international cooperation on terrorist financing. In January 2005, the Monetary Authority of Macau issued a circular to all banks and other authorized institutions requiring them to maintain a database of suspected terrorists and terrorist organizations.
Macau’s financial system is governed by the 1993 Financial System Act and amendments, which lay out regulations to prevent use of the banking system for money laundering. The Act imposes requirements for the mandatory identification and registration of financial institution shareholders, customer identification, and external audits that include reviews of compliance with anti-money laundering statutes. The 1997 Law on Organized Crime criminalizes money laundering for the proceeds of all domestic and foreign criminal activities, and contains provisions for the freezing of suspect assets and instrumentalities of crime. Legal entities may be civilly liable for money laundering offenses, and their employees may be criminally liable.
The 1998 Ordinance on Money Laundering sets forth requirements for reporting suspicious transactions to the Judiciary Police and other appropriate supervisory authorities. These reporting requirements apply to all legal entities supervised by the regulatory agencies of the MSAR, including pawnbrokers, antique dealers, art dealers, jewelers, and real estate agents. In October 2002, the Judiciary Police set up the Fraud Investigation Section to receive suspicious transaction reports (STRs) in Macau and to undertake subsequent investigations. In 2006, the newly established Financial Intelligence Unit (FIU) assumed responsibility for receiving STRs and forwarding actionable reports to the Judiciary Police for investigation. In November 2003, the Monetary Authority of Macau issued a circular to banks, requiring that STRs be accompanied by a table specifying the transaction types and money laundering methods, in line with the collection categories identified by the Asia/Pacific Group on Money Laundering. Macau law provides for forfeiture of cash and assets that assist in or are intended for the commission of a crime. There is no significant difference between the regulation and supervision of onshore and of offshore financial activities.
On September 15, 2005, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) designated Macau-based Banco Delta Asia (BDA) as a primary money laundering concern under Section 311 of the USA PATRIOT Act and issued a proposed rule regarding the bank, In its designation of BDA as a primary money laundering concern, FinCEN cited in the Federal Register that “the involvement of North Korean Government agencies and front companies in a wide variety of illegal activities, including drug trafficking and the counterfeiting of goods and currency” and noted that North Korea has been positively linked to nearly 50 drug seizures in 20 different countries since 1990. Following an investigation of BDA conducted with the cooperation of the Macanese authorities, Treasury finalized the Section 311 rule in March 2007, prohibiting U.S. financial institutions from opening or maintaining correspondent accounts for or on behalf of BDA. This rule remains in effect.
Shortly after the U.S. designation, The Monetary Authority took control of Banco Delta Asia and froze approximately U.S. $25 million in accounts linked to North Korea. The Government of Macau announced in March 2007 that it would continue to maintain control over Banco Delta Asia for at least six more months to resolve the Banco Delta Asia situation. In April, 2007, the Macanese authorities released the $25 million North Korean-related funds frozen at BDA. In September, 2007, The Treasury Department’s Financial Crimes Enforcement Network denied two petitions filed on behalf of BDA and its owners to lift the Section 311 Final Rule designating BDA as a “primary money laundering concern.” On September 30, 2007 Macau Monetary Authority announced that Banco Delta Asia would be returned immediately to its shareholders, but continued international restrictions on BDA and its subsidiaries outside of Macau that limit BDA to pataca currency business in Macau.
A Macau Monetary Authority official serves as the head of the FIU. As of October 2007, in addition to the FIU Head, the staff consisted of two officials (seconded from the Insurance Bureau and the Monetary Authority), a judiciary police official, and two information technology staff. The FIU works with the Macau Judicial Police on investigation of suspicious transaction reports (STRs) and with the Public Prosecutors Office on prosecution of offenders. The FIU moved into permanent office space in January 2007 and is accepting STRs from banks, financial institutions and the Gaming Inspectorate.
The gaming sector and related tourism are critical parts of Macau’s economy. Taxes from gaming in the first eleven months of 2007 increased by 48.3 percent from the same period in 2006 and comprised 71percent of government revenue in the first eleven months of 2007. Gaming revenue in the first nine months of 2007 exceeded the 2006 total and account for well over 50 percent of Macau’s GDP. The MSAR ended a long-standing gaming monopoly early in 2002 when it awarded concessions to two additional operators, the U.S.-based Las Vegas Sands and Wynn Corporations. Macau now effectively has six separate casino licensees operating 28 casinos: three concession holders Sociedade de Jogos de Macau (SJM), Galaxy and Wynn: and three sub concession holders: Las Vegas Sands, MGM and PBL/Melco. Las Vegas Sands opened its first casino, the Sands, on May 18, 2004 and its second the Venetian-Macao in September 2007. MGM opened its first Macau casino in December 2007. Wynn opened its casino in September 2006. A consortium including Australia’s PBL and Macau’s Melco operates the Crown casino, which opened in May 2007 and runs several slot machine rooms in Macau. Rapid expansion of the gaming industry in Macau continues; several additional casinos are expected to open in the next few years.
Under the old monopoly framework, organized crime groups were closely associated with the gaming industry through their control of VIP gaming rooms and activities such as racketeering, loan sharking, and prostitution. The VIP rooms catered to clients seeking anonymity within Macau’s gambling establishments, and received minimal official scrutiny. As a result, the gaming industry provided an avenue for the laundering of illicit funds and served as a conduit for the unmonitored transfer of funds out of China. VIP rooms continue to operate and are the primary revenue generators for Macau’s casinos. Although the arrival of international gaming companies has improved management and governance in all aspects of casino operations, concerns about organized crime groups and poorly regulated junket operators associations with VIP rooms remain. The MSAR’s money laundering legislation aims to make money laundering by casinos more difficult by improving oversight, and tightening reporting requirements. On June 7, 2004, Macau’s Legislative Assembly passed legislation allowing casinos and junket operators to make loans, in chips, to customers, in an effort to prevent loan-sharking. The law requires both casinos and junket operators to register with the government.
The Macau criminal code (Decree Law 58/95/M of November 14, 1995, Articles 22, 26, 27, and 286) criminalizes terrorist financing. Macau does not have any provision or procedures for freezing terrorist related funds or assets to fully implement UNSCRs 1267 and 1373. However, although no special mechanism exists and a judicial order is required, the general framework of seizure and forfeiture of funds and assets under the Criminal Code and Criminal Procedure Code do provide the MSAR the authority to freeze terrorist assets. Macau financial authorities direct the institutions they supervise to conduct searches for terrorist assets, using the consolidated list provided by the UN 1267 Sanctions Committee and the list of Specially Designated Global Terrorists designated by the United States pursuant to E.O. 13224. No terrorist assets were identified in 2007.
The Macau legislature passed a counter-terrorism law in April 2002 to facilitate Macau’s compliance with UNSCR 1373. The legislation criminalizes violations of UN Security Council resolutions, including counterterrorism resolutions, and strengthens counter-terrorist financing provisions. When China ratified the UN International Convention for the Suppression of the Financing of Terrorism, China stipulated that the Convention would apply to the MSAR
Increased attention to financial crimes in Macau since the events of September 11, 2001, has led to a general increase in the number of suspicious transaction reports (STRs); however, the number of STRs remains relatively low. Macau’s Judiciary Police received 109 STRs in 2004, 194 in 2005, 396 STRs from January to September 2006, and 557 STRs from January to September 2007. In 2004 Macau opened ten money laundering cases but prosecuted none. In 2005 Macau opened nine money laundering cases and prosecuted two. Since the entry into force of the new AML law in April 2006, the Macau Public Prosecutions office has received 23 suspected cases of money laundering from the FIU. Of these, 14 have been referred for investigation by the Judicial Police or the Commission Against Corruption. Since 2005, the Judicial Police have referred three money laundering cases to the Public Prosecutions office.
In May 2002, the Macau Monetary Authority revised its anti-money laundering regulations for banks to bring them into greater conformity with international practices. Guidance also was issued for banks, moneychangers, and remittance agents, addressing record keeping and suspicious transaction reporting for cash transactions over U.S. $2,500. For such transactions, banks, insurance companies, and moneychangers must perform customer due diligence. However for casinos, Macau requires customer due diligence only for transactions above U.S. $62,500. In 2003, the Macau Monetary Authority examined all moneychangers and remittance companies to determine their compliance with these regulations. The Monetary Authority of Macau, in coordination with the IMF, updated its bank inspection manuals to strengthen anti-money laundering provisions. The Monetary Authority inspects banks every two years, including their adherence to anti-money laundering regulations. There is no requirement to report large sums of cash carried into Macau. The Macau Customs Service has the authority to conduct physical searches and detain suspicious persons and executes random checks on cross-border movement of cash, including record keeping when the amount of cash carried over the border exceeds US$38,500. However, there is no central database for such reports. Mainland China does restrict the transport of RMB out of China. Persons may carry no more than RMB 20,000 (approximately U.S. $2,750) per day out of China. According to the Macau Prosecutors Office, this Chinese requirement limits the number of people carrying large amounts of cash into Macau.
The United States has no law enforcement cooperation agreements with Macau, though informal cooperation between the United States and Macau routinely takes place. The Judiciary Police have been cooperating with law enforcement authorities in other jurisdictions through the Macau branch of Interpol, to suppress cross-border money laundering. In addition to Interpol, the Fraud Investigation Section of the Judiciary Police has established direct communication and information sharing with authorities in Hong Kong and Mainland China. In July 2006, the MSAR enacted the Law on Judicial Cooperation in Criminal Matters, enabling the MSAR to enter into more formal judicial and law enforcement cooperation relationships with other countries. The law became effective in November 2006. Macau’s FIU has not yet established MOUs on information sharing with other jurisdictions but is currently negotiating with FIUs from Hong Kong, China, Portugal, Japan, Korea, and Sri Lanka.
The Monetary Authority of Macau also cooperates internationally with other financial authorities. It has signed memoranda of understanding with the People’s Bank of China, China’s Central Bank, the China Insurance Regulatory Commission, the China Banking Regulatory Commission, the Hong Kong Monetary Authority, the Hong Kong Securities and Futures Commission, the Insurance Authority of Hong Kong, and Portuguese bodies including the Bank of Portugal, the Banco de Cabo Verde and the Instituto de Seguros de Portugal.
Macau participates in a number of regional and international organizations. It is a member of the Asia/Pacific Group on Money Laundering (APG), the Offshore Group of Banking Supervisors, the International Association of Insurance Supervisors, the Offshore Group of Insurance Supervisors, the Asian Association of Insurance Commissioners, the International Association of Insurance Fraud Agencies, and the South East Asia, New Zealand and Australia Forum of Banking Supervisors (SEAZA). In 2003, Macau hosted the annual meeting of the APG, which adopted the revised FATF Forty Recommendations and a strategic plan for anti-money laundering efforts in the region from 2003 to 2006. In ratifying the 1988 UN Drug Convention, the UN Convention against Transnational Organized Crime, and the UN Convention against Corruption China in each case specified that the treaty would apply to the MSAR. Macau officials have taken a number of steps in the past three years to raise industry awareness of money laundering. The Macau Monetary Authority trains banks on anti-money laundering measures on a regular basis.
In December 2006, the Asia Pacific Group (APG) and Offshore Group of Banking Supervisors (OGBS) conducted a joint Mutual Evaluation of the anti-money laundering and combating the financing of terrorism measures in place in Macau The Mutual Evaluation Report stated that Macau was noncompliant with FATF Special Recommendation IX, in that Macau should have measures in place to detect the physical cross border transport of currency and bearer-negotiable instruments. Macau does not require reporting of the movement of currency above any threshold level across its borders, or reporting of large currency transactions above any threshold level. Macau’s AML/CTF regime is also deficient in a number of other respects, including: the lack of a mechanism to confiscate, freeze, and forfeit proceeds of crime independent of criminal process; the lack of ability to freeze terrorist funds; failure to establish an independent FIU, which was established only as a special project entity with a term of three years; the lack of requirements for financial institutions to verify the identify of persons on whose behalf a customer is acting to understand the ownership and control structure of customers, or to examine the background and purpose of transactions with no economic or visible lawful purpose; the failure to develop a risk assessment of, and risk based approach to the gaming sector; and the lack of adequate legal framework for requiring Designated Non-Financial Business and Professions, including casinos and gaming concessionaires to report suspicious transactions.
Macau should continue to improve its ability to implement and enforce existing laws and regulations. Macau should ensure that regulations, structures, and training are adequate to prevent money laundering in the gaming industry, including implementing regulations to prevent money laundering in casinos, especially regulations to improve oversight of VIP rooms. The MSAR should take steps to implement the new FATF Special Recommendation IX, adopted by the FATF in October 2004, requiring countries to put in place detection and declaration systems for cross-border bulk currency movement. Macau should establish asset freezing mechanisms and procedures to fully implement UN Security Council Resolutions 1267 and 1373. This process should not be linked to the criminal process and should include the ability to freeze terrorist assets without delay. Macau should increase public awareness of the money laundering problem, improve interagency coordination and training, and boost cooperation between the MSAR and the private sector in combating money laundering. Macau should institutionalize its Financial Intelligence Unit by making it a permanent, statutory body and ensure the FIU meets Egmont Group standards for information sharing. Macau’s Judicial Police have limited resources devoted to AML/CTF investigations. Additional manpower would allow for more investigations and enforcement action.
Malaysia is not a regional center for money laundering. A range of significant money laundering and terrorist financing risks in Malaysia are being addressed through the implementation of the country’s Anti-Money Laundering Act and other AML/CTF measures. Malaysia has long porous land and sea borders and its open economy and strategic geographic position influence money laundering and terrorist finance in the region. Drug trafficking is the main source of illegal proceeds in Malaysia. Malaysia is primarily used as a transit country to transfer drugs originating from the Golden Triangle and Europe, including heroin, amphetamine type substances and ketamine. Authorities also highlight illegal proceeds from corruption as well as a wide range of predicate offenses including fraud, illegal gambling, credit card fraud, counterfeiting, forgery, human trafficking, extortion, and smuggling. Money laundering techniques include placing criminal proceeds into the banking system, using nominees, the use of front companies, purchasing insurance products and high value goods and real property, investment in capital markets, and the use of moneychangers. Smuggling of goods subject to high tariffs is a major source of illicit funds. Malaysia has a significant informal remittance sector.
The GOM has a well-developed AML/CTF framework. Malaysia’s National Coordination Committee to Counter Money Laundering (NCC), comprised of members from 13 government agencies, oversaw the drafting of Malaysia’s Anti-Money Laundering Act of 2001 (AMLA). The NCC is responsible for the development of the national AML/CTF program, including the coordination of national-wide AML/CTF efforts.
In February 2007, the APG conducted its second Mutual Evaluation on Malaysia. The evaluation was based on all FATF recommendations; Malaysia received ratings of “compliant” or “largely compliant” on 33 of the 49 FATF Recommendations, 15 ratings of “partially compliant;” and one rating of “noncompliant” with Special Recommendation on Terrorist Financing IX on cash couriers.
Subsequent to the mutual evaluation, the NCC established a task force comprised of the Royal Malaysian Customs, Immigration Department, Ministry of Internal Security, and Bank Negara Malaysia to formulate action plans to achieve full compliance with Special Recommendation IX. Malaysia’s relatively lax customs inspection at ports of entry and its extensive coastlines, particularly along the east coast of Sabah in Borneo, serve to increase its vulnerability to smuggling, including cash smuggling.
On March 6, 2007, Malaysia enacted amendments to five different pieces of legislation: the AMLA, now called the Anti-Money Laundering and Anti-Terrorism Financing Act (AMLATF), the Penal Code, the Subordinate Courts Act, the Courts of Judicature Act, and the Criminal Procedure Code. These amendments impose penalties for terrorist acts, allow for the forfeiture of terrorist-related assets, allow for the prosecution of individuals who have provided material support for terrorists, expand the use of wiretaps and other surveillance of terrorist suspects, and permit video testimony in terrorist cases.
In 2002, the AMLA provided for the establishment of a financial intelligence unit in Malaysia. The Unit Perisikan Kewangan (UPW), located in the Central Bank, Bank Negara Malaysia (BNM), is tasked with receiving and analyzing information, and sharing financial intelligence with the appropriate enforcement agencies for further investigations. The UPW cooperates with other relevant agencies to identify and investigate suspicious transactions. A comprehensive supervisory framework has been implemented to audit financial institutions’ compliance with the AMLA and its subsidiary legislation and relevant guidelines. Currently, BNM maintains 383 examiners who are responsible for money laundering inspections for both onshore and offshore financial institutions.
Malaysia’s financial institutions have strict “know your customer” rules under the AMLA. Every transaction, regardless of its size, is recorded. Reporting institutions must maintain records for at least six years and report any suspicious transactions to the UPW. If the reporting institution deems a transaction suspicious it must report that transaction to the UPW promptly regardless of the transaction size. In addition, cash threshold reporting (CTR) requirements above RM 50,000 (approximately U.S. $14,900) were imposed upon banking institutions effective as of September 2006. UPW officials indicate that they receive regular reports from the AMLA reporting institutions. Reporting individuals and their institutions are protected by statute with respect to their cooperation with law enforcement. While Malaysia’s bank secrecy laws prevent general access to financial information, those secrecy provisions are overridden in the case of reporting of suspicious transactions or criminal investigations.
Malaysia has adopted banker negligence (due diligence) laws that make individual bankers responsible if their institutions launder money or finance terrorists. Both reporting institutions and individuals are required to adopt internal compliance programs to guard against any offense. Under the AMLA, any person or group that engages in, attempts to engage in, or abets the commission of money laundering or financing of terrorism is subject to criminal sanction. All reporting institutions are subject to review by the UPW. Under the AMLA, reporting institutions include financial institutions from the conventional, Islamic, and offshore sectors as well as nonfinancial businesses and professions such as lawyers, notaries public, accountants, company secretaries, and Malaysia’s one licensed casino. In 2005, reporting obligations were imposed upon licensed gaming outlets, notaries public, offshore trading agents, and listing sponsors. Phased-in reporting requirements for stock brokers and futures brokers were expanded in 2005, and in 2006, reporting requirements were extended to money lenders, pawnbrokers, registered estate agents, trust companies, unit trust management companies, fund managers, futures fund managers, nonbank remittance service providers, and nonbank affiliated issuers of debit and credit cards. In 2007, the AMLA was further extended to insurance financial advisers, moneylenders in the state of Sabah, E-money issuers and leasing and factoring businesses.
In mid-2007, Islamic banking assets were RM 144 billion (approximately U.S. $43 billion), accounting for 12 percent of the total assets in the banking sector, up from 11.8 percent in mid-2006 and 11.6 percent in mid-2005. Malaysia’s growing Islamic finance sector is subject to the same supervision to combat financial crime as the commercial banks.
In 1998, Malaysia imposed foreign exchange controls that restricted the flow of the local currency from Malaysia. Onshore banks must record cross-border transfers over RM 10,000 (approximately U.S. $3,000). An individual form is completed for each transfer above RM 200,000 (approximately U.S. $60,000). The thresholds for the bulk register for transactions were raised in October 2007. Recording is now done in a bulk register for transactions between U.S. $3,000 and $60,000. Banks are obligated to record the amount and purpose of these transactions.
While Malaysia’s offshore banking center on the island of Labuan has different regulations for the establishment and operation of offshore businesses, it is subject to the same anti-money laundering laws as those governing onshore financial service providers. Malaysia’s Labuan Offshore Financial Services Authority (LOFSA) serves as a member of the Offshore Group of Banking Supervisors. Offshore banks, insurance companies, trust companies, trading agents, and listing sponsors are required to file suspicious transaction reports under the country’s anti-money laundering law. LOFSA is under the authority of the Ministry of Finance and works closely with BNM. LOFSA licenses offshore banks, banking companies, trusts, and insurance companies and performs stringent background checks before granting an offshore license. The financial institutions operating in Labuan are generally among the largest international banks and insurers. Nominee (anonymous) directors are not permitted for offshore banks, trusts or insurance companies. Labuan had 6,152 registered offshore companies as of September 30, 2007. Bearer instruments are strictly prohibited in Labuan.
Offshore companies must be established through a trust company. Trust companies are required by law to establish true beneficial owners and submit suspicious transaction reports. There is no requirement to publish the true identity of the beneficial owner of international corporations; however, LOFSA requires all organizations operating in Labuan to disclose information on its beneficial owner or owners, as part of its procedures for applying for a license to operate as an offshore company. LOFSA maintains financial information on licensed entities, releasing it either with the consent of those entities or upon investigation.
In November 2005, LOFSA revoked the license of the “Blue Chip Pathfinder” Private Fund for “evidence that Swift Securities Investments Ltd had contravened the terms of the consent and acted in a manner that was detrimental to the interests of mutual fund investors.” The Fund has since been terminated. Also in 2005, LOFSA revoked the investment banking license of Swift Securities Investments Ltd for “contravening the provisions of the license.”
In April 2006, LOFSA announced that it had subscribed to a service which provides structured intelligence on high and heightened risk individuals and entities, including terrorists, money launderers, politically exposed persons, arms dealers, sanctioned entities, and others, to gather information on their networks and associates. LOFSA now uses this service as part of its licensing application process.
The Free Zone Act of 1990 is the enabling legislation for free trade zones in Malaysia. The zones are divided into Free Industrial Zones (FIZ), where manufacturing and assembly takes place, and Free Commercial Zones (FCZ), generally for warehousing commercial stock. The Minister of Finance may designate any suitable area as an FIZ or FCZ. Currently there are 13 FIZs and 12 FCZs in Malaysia. The Minister of Finance may appoint any federal, state, or local government agency or entity as an authority to administer, maintain, and operate any free trade zone. Companies wishing to operate in an FTZ or FCZ must apply for a license and be approved. The time needed to obtain such licenses from the administrative authority to operate in a particular free trade zone depends on the type of activity. Clearance time ranges from two to eight weeks. There is no indication that Malaysia’s free industrial and free commercial zones are being used for trade-based money laundering schemes or by the financiers of terrorism. Rather, these zones are dominated by large international manufacturers such as Dell and Intel, which are attracted to the zones because they offer preferential tax and tariff treatment.
The UPW has been a member of the Egmont Group since July 2003. Prior to 2007, UPW had signed memoranda of understanding (MOUs) on the sharing of financial intelligence with the FIUs of Australia, Indonesia, Thailand, the Philippines and China. In 2007,and early 2008, an additional seven MOUs were signed with the United Kingdom, United States, Japan, Republic of Korea, Sweden, Chile and Sri Lanka. Malaysia is a member of the Asia/Pacific Group (APG) on Money Laundering, a FATF-style regional body.
In April 2002, the GOM passed the Mutual Assistance in Criminal Matters Act (MACMA), and in July 2006 concluded a Mutual Legal Assistance Treaty with the United States. Malaysia concluded a similar treaty among like-minded ASEAN member countries in November 2004. In October 2006, Malaysia ratified treaties with China and Australia regarding the provision of mutual assistance in criminal matters. An extradition treaty was also signed with Australia. The mutual assistance treaties enable States Parties to assist each other in investigations, prosecutions, and proceedings related to criminal matters, including terrorism, drug trafficking, fraud, money laundering and human trafficking.
Malaysia made its first money laundering arrest in 2004. As of October 2007, the Attorney General’s Chambers had prosecuted 29 money laundering cases, involving a total of 829 charges with a cumulative total of RM 273.6 million (approximately U.S. $83.7 million). Out of the 29 cases, there were three convictions.
Malaysia is a party to the 1988 UN Drug Convention and the UN Convention against Transnational Organized Crime. Malaysia has signed but has not yet ratified the UN Convention against Corruption. On May 29, 2007, the Government of Malaysia (GOM) became a party to the UN International Convention for the Suppression of the Financing of Terrorism.
The GOM has cooperated closely with U.S. law enforcement in investigating terrorist-related cases since the signing of a joint declaration to combat international terrorism with the United States in May 2002. The GOM recently improved legislation enabling it to comprehensively freeze assets under the UNSCRs 1267 and 1373. The Ministry of International Security has the authority to identify and freeze the assets of terrorists and terrorist organizations listed on the UN 1267 Sanctions Committee’s consolidated list and, whenever a new designee is added, the UPW issues immediate orders to all licensed financial institutions, both onshore and offshore, to do so. At the same time, the UPW also disseminates information on persons and entities designated unilaterally by other countries, including the United States, to these institutions. Since 2003 Bank Negara Malaysia has issued 43 circulars and nine accounts have been frozen amounting to approximately U.S. $76,400.
Malaysian authorities have highlighted risks from terrorist groups and terrorist financing. A number of terrorist organizations have been active on Malaysian territory, and authorities have taken action against Jemaah Islamiah. Terrorist financing in Malaysia is predominantly carried out using cash and relies on trusted networks. While Malaysia has recently improved the legislative framework to criminalize terrorist financing, there have been no investigations, prosecutions or convictions relating to terrorist financing under this new scheme. The Ministry of Foreign Affairs opened the Southeast Asia Regional Centre for Counter-Terrorism (SEARCCT) in August 2003. SEARCCT coordinates courses and seminars on combating terrorism and terrorist finance.
The GOM has rules regulating charities and other nonprofit entities. The Registrar of Societies is the principal government official who supervises and controls charitable organizations, with input from the Inland Revenue Board (IRB) and occasionally the Companies Commission of Malaysia (CCM). The Registrar mandates that every registered society of a charitable nature submit its annual returns, including its financial statements. Should activities deemed suspicious be found, the Registrar may revoke the nonprofit organization’s (NPO) registration or file a suspicious transaction report. Registering as a NPO can be bureaucratic and time-consuming. One organization reported that getting registered took nine months and required multiple personal interviews to answer questions about its mission and its methods. Some NPOs reportedly register as “companies” instead, a quick and inexpensive process requiring capital of approximately 60 cents and annual financial statements.
In March 2006, the UPW completed a review of the nonprofit sector with the Registrar, the IRB, and the CCM, in an effort to ensure that the laws and regulations were adequate to mitigate the risks of nonprofit organizations as conduits for terrorist financing. BNM reports that the review did not show any significant regulatory weaknesses; however, the GOM is considering measures to enhance the monitoring of fundraising, including increased disclosure requirements of how funds are spent.
Malaysia’s tax law allows a tax credit, which encourages the reporting of contributions, for Zakat (alms) to mosques or registered Islamic charitable organizations. Islamic Zakat contributions can be taken as payroll deductions, which help prevent the abuse of charitable giving. There is no similar tax credit for nonMuslims.
The Government of Malaysia should continue to enhance its cooperation on a regional, multilateral, and international basis. The GOM should improve enforcement of regulations regarding its free trade zones, which remain vulnerable to the financing of terrorism and money laundering. Given that cash smuggling is a major method used by terrorist financers to move money in support of their activities, as a priority matter, Malaysian authorities should establish and adhere to a cross border currency declaration system that meets purpose and intent of the FATF Special Recommendation IX on bulk cash smuggling. There is a significant informal remittance sector in Malaysia that is not subject to AML/CTF controls and which may be vulnerable to misuse for money laundering and terrorist financing. Law enforcement and customs authorities should examine trade based money laundering and invoice manipulation and their relationship to underground finance and informal remittance systems. Malaysia should ratify the UN Convention against Corruption.
Mexico is a major drug-producing and drug-transit country. It also serves as one of the major conduits for proceeds from illegal drug sales leaving the United States. The illicit drug trade is the principal source of funds laundered through the Mexican financial system. Other major sources of illegal proceeds being laundered include corruption, kidnapping, trafficking in firearms and immigrants, and other crimes. The smuggling of bulk shipments of U.S. currency into Mexico and the movement of the cash back into the United States via couriers, armored vehicles, and wire transfers remain favored methods for laundering drug proceeds.
According to U.S. law enforcement officials, Mexico remains one of the most challenging money laundering jurisdictions for the United States, especially with regard to the investigation of money laundering activities involving the cross-border smuggling of bulk currency derived from drug transactions and other transnational criminal activity. Sophisticated and well-organized drug trafficking organizations based in Mexico are able to take advantage of the extensive U.S.-Mexico border and the large flow of licit remittances. In addition, the combination of a sophisticated financial sector and relatively weak regulatory controls facilitates the concealment and movement of drug proceeds. U.S. officials estimate that since 2003, as much as U.S. $22 billion may have been repatriated to Mexico from the United States by drug trafficking organizations. In April 2006, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a warning to the U.S. financial sector on the potential use of certain Mexican financial institutions, including Mexican casas de cambio (licensed foreign exchange offices) and centros cambiarios (unlicensed foreign exchange offices), to facilitate bulk cash smuggling. Corruption is also a concern: in recent years, various Mexican officials have come under investigation for alleged money laundering activities.
Currently, there are 39 commercial banks and 71 foreign financial representative offices operating in Mexico, as well as 94 insurance companies, 160 credit unions, and 25 casas de cambio. Commercial banks, foreign exchange companies, and general commercial establishments are allowed to offer money exchange services. Although the underground economy is estimated to account for 20-40 percent of Mexico’s gross domestic product, the informal economy is considered to be much less significant with regard to money laundering than the criminal-driven segments of the economy. Beginning in 2005, permits were issued for casinos to operate in Mexico. National lotteries, horse races, and sport pools are also legal. Casinos, as well as offshore banks, lawyers, accountants, couriers, and brokers, are currently not subject to anti-money laundering reporting requirements.
From 2000 to 2006, remittances from the United State to Mexico grew from U.S. $6.6 billion to nearly U.S. $24 billion a year; in 2007, the increase is estimated at less than two percent. Many U.S. banks have partnered with their Mexican counterparts to develop systems to simplify and expedite the transfer of money, including wider acceptance by U.S. banks of the “matricula consular,” an identification card issued by Mexican consular offices to Mexican citizens residing in the United States that has been criticized as insecure. In some cases, the sender or the recipient can simply provide the matricula consular as identification to execute a remittance, often without having to open a bank account. While this makes licit remittances more accessible, it also leaves the system open to potential money laundering and exploitation by organized crime groups. The U.S. Embassy estimates that in 2007, electronic transfers accounted for 90 percent of all remittances to Mexico. It is likely that few first-tier commercial banks will reach down to serve low-income clients who receive such remittances, with cajas populares and cajas solidarias (financial cooperatives that function as credit unions) being the likely candidates to fill this gap. This presents a new set of concerns over whether this system will present potential money laundering opportunities for bulk currency transactions.
The Tax Code and Article 400 bis of the Federal Penal Code criminalize money laundering related to any serious crime. Money laundering is punishable by imprisonment of five to fifteen years and a fine. Penalties are increased when a government official in charge of the prevention, investigation, or prosecution of money laundering commits the offense. Mexico’s all-crimes approach to money laundering criminalizes the laundering of the proceeds of any intentional act or omission, regardless of whether or not that act or omission carries a prison term. Rather than applying to proceeds of criminal offenses, the statute applies to “the proceeds of an illicit activity”, which is defined as resources, rights, or goods of any nature for which there exists well-founded certainty that they are derived directly or indirectly from or represent the earnings derived from the commission of any crime, and for which no legitimate origin can be established. This construction of the predicate offense allows prosecutors, upon demonstrating criminality, to shift the burden of proof to the defendant to establish the legitimate origin of the property. An offense committed outside of Mexico may also constitute a predicate for money laundering offense. Because criminal proceeds generated abroad would have an effect in Mexico when laundered in or through its national territory, the laundering of those proceeds could be prosecuted under Mexican law.
The Banking and Securities Commission (CNBV) regulates and supervises banks, limited scope financial companies, securities brokerage firms, foreign exchange firms, and mutual funds. The Tax Authority (SAT) supervises nonlicensed foreign exchange retail centers and money remitters. The CNBV has the remit to impose administrative sanctions for noncompliance, revoke licenses, and conduct on-site inspections and off-site monitoring of regulated entities. The CNBV is also responsible for issuing regulations. Regulations require banks and other financial institutions (including mutual savings companies, insurance companies, securities brokers, retirement and investment funds, financial leasing and factoring funds, casas de cambio, centros cambiarios, and money remittance businesses) to know and identify customers and maintain records of transactions.
In 2004, the Ministry of the Treasury (SHCP) reorganized and renamed its financial intelligence unit (FIU), the Unidad de Inteligencia Financiera (UIF). The UIF’s personnel number approximately 50 and are comprised mostly of forensic accountants, lawyers, and analysts. Regulated entities must report to the UIF any suspicious transactions, currency transactions over U.S. $10,000 (except for centros cambiarios, which are subject to a U.S. $3,000 threshold), and transactions involving employees of financial institutions who engage in suspicious activity. Banks also require occasional customers performing transactions equivalent to or exceeding U.S. $3,000 in value to be identified, so that the transactions can be aggregated daily to prevent circumvention of the requirements to file cash transaction reports (CTRs) and suspicious transaction reports (STRs). A 2005 provision of the tax law requires real estate brokerages, attorney, notaries, accountants, and dealers in precious metals and stones to report all transactions exceeding U.S. $10,000 to the SAT, which shares that information with the UIF. In 2006, nonprofit organizations were made subject to reporting requirements for donations greater than U.S. $10,000. Financial institutions have also implemented programs for screening new employees and verifying the character and qualifications of their board members and high-ranking officers.
In 2000, Mexico amended its Customs Law to reduce the threshold for reporting inbound cross-border transportation of currency or monetary instruments from $20,000 to $10,000. At the same time, it established a requirement for the reporting of outbound cross-border transportation of currency or monetary instruments of U.S. $10,000 or more. These reports are received by the UIF and cover a wider range of monetary instruments (e.g. bank drafts) than those required by the United States. As a result of the cooperation between Mexican Customs, the Financial Crimes Unit of the Office of the Deputy Attorney General against Organized Crimes (SIEDO), and various U.S. agencies, Mexico has seized over U.S. $60 million in bulk currency shipments leaving Mexico City’s international airport since 2002.
The UIF is responsible for receiving, analyzing, and disseminating STRs and CTRs, as well as reports on the cross-border movements of currency. The UIF also reviews all crimes linked to Mexico’s financial system and examines the financial activities of public officials. In 2007, the UIF received approximately 38,400 STRs and 5,607,000 CTRs. Following the analysis of CTRs, STRs, and reports on the cross-border movements of currency, the UIF sends reports that are deemed to merit further investigation, and have been approved by the SHCP’s legal counsel, to the Office of the Attorney General (PGR). From 2004 to December 2007, the UIF sent 89 cases to the PGR for its consideration for prosecution. The PGR’s special financial crimes unit (within SIEDO) works closely with the UIF in money laundering investigations. UIF personnel also have working-level relationships with other federal law enforcement entities, including the Federal Investigative Agency (AFI) and the Federal Police (PFP), to help it support the PGR’s investigations of criminal activities with ties to money laundering. In 2006, the UIF signed Memoranda of Understanding (MOUs) with the Economy Secretariat and the Mexican immigration authorities that provide access to their databases. The UIF has also signed agreements with the CNBV and the National Commission of Insurance and Finance (CNSF) to coordinate to prevent money laundering and terrorist financing. The UIF is currently finalizing similar negotiations with the SHCP and the National Savings Commission (CONSAR).
In 2007, U.S. authorities observed a significant increase in the number of complex money laundering investigations by SIEDO, with support from the UIF and coordinated with U.S. officials. As of November 2007, SIEDO had initiated 142 criminal investigations into money laundering cases, 77 of which were brought to trial. One high profile case was the September 2007 arrest of
Sandra Avila Beltran (also known as the “Queen of the Pacific”), who was indicted in the United States in 2004 on separate drug smuggling charges. Avila Beltran is the niece of drug-kingpin Miguel Angel Felix Gallardo, who is serving a long sentence for drug smuggling and for the 1985 murder of DEA agent Enrique Camarena. She is also the niece of Juan José Quintero Payan, who was extradited to the United States on drug smuggling charges. Avila Beltran shielded her narcotics-related financial activities behind legitimate and successful businesses in Mexico, including a string of tanning and beauty salons and a real estate company with multiple locations. The Government of Mexico (GOM) demonstrated that she had forged cocaine trafficking and financial deals between Mexican and Colombian traffickers over the last decade. The Avila Beltran case highlighted the difficulty of prosecuting those involved in the financial aspects of the drug trade.
Another complex case was the GOM-initiated raids in December against Victor Emilio Cazares Salazar (also known as Victor Emilio Cazares Gastellum), at the same time as the U.S. Treasury’s Office of Foreign Assets Control (OFAC) designated his sister, Mexican money launderer Blanca Margarita Cazares Salazar, as a specially designated narcotics traffickers subject to sanctions pursuant to the Foreign Narcotics Kingpin Designation Act. The sequencing represents Mexico’s aggressive pursuit of an important money laundering function in conjunction with U.S. Government (USG) efforts, including the February 2007 U.S. indictment of Victor Cazares Salazar. Blanca Cazares Salazar and her widespread money laundering organization acted as fronts for her brother and Mexican drug kingpin Ismael Zambada Garcia (also known as “Mayo Zambada”), leaders of Mexico’s Sinaloa Cartel. Victor Emilio Cazares Salazar’s narcotics funds spawned a complex, interlocking network of businesses located throughout Mexico, including three Tijuana-based money service businesses and a chain of approximately 20 jewelry and cosmetics boutiques located in eight Mexican states, as well as importation firms, restaurants, mobile phone services, and money service businesses in Sinaloa, Jalisco, Baja California, and Mexico City.
Although the United States and Mexico both have asset forfeiture laws and provisions for seizing assets abroad derived from criminal activity, U.S. requests of Mexico for the seizure, forfeiture, and repatriation of criminal assets have rarely met with success. Currently, Mexico does not have a civil forfeiture regime and can only forfeit assets upon a final criminal conviction; it can also seize assets administratively if they are deemed to be “abandoned” or unclaimed. Draft legislation pending in the Mexican Congress includes constitutional changes that would enable a forfeiture regime similar to Colombia’s law of extinguishment of ownership (“extinción de dominio”). If passed, any asset seizure regime will require considerable implementation efforts.
In 2001, pursuant to a USG request, the GOM seized assets valued at millions of dollars in Mexico from Alyn Richard Wage, who was charged in the United States in a major fraud case (the “Tri-West” case). These assets were found by a U.S. court to be proceeds of the fraud and were the subject of a final order of forfeiture in the United States. For several years, the USG has sought the assistance of the Mexican courts to enforce the U.S. forfeiture order and repatriate the assets to the United States to compensate the victims of the fraud. In October 2007, the PGR filed a petition, with supporting documents from the USG, asking the court to recognize and enforce the U.S. forfeiture order, employing the argument of “abandoned funds.” The case remains without resolution.
Another significant case involves Zhenli Ye Gon. Approximately $207 million was seized in March 2007 from his Mexico City residence. The funds seized reportedly included dollars, Mexican pesos, euros, Hong Kong dollars, and Mexican gold bullion coins. GOM authorities also seized two dwellings and seven vehicles. The Drug Enforcement Administration (DEA) has described the seizure as the largest ever of drug money anywhere in the world. These funds have been forfeited under the same argument of “abandoned funds”. Zhenli was arrested in the United States in July 2007 and is accused of trafficking tons of pseudoephedrine and other chemicals to supply Mexican methamphetamine labs.
In 2007, after nearly three years of consideration, Mexico criminalized terrorist financing, with punishments of up to 40 years in prison. The new law amends the Federal Penal Code to link terrorist financing to money laundering and establish international terrorism as a predicate crime when it is committed in Mexico to inflict damage on a foreign state. The GOM has responded positively to international and USG efforts to identify and block terrorist-related funds, and it continues to monitor suspicious financial transactions, although no such assets have been frozen to date.
Mexico has developed a broad network of bilateral agreements and regularly meets in bilateral law enforcement working groups with its counterparts within the U.S. law enforcement community. The U.S.-Mexico Mutual Legal Assistance Treaty (MLAT) entered into force in 1991. Mexico and the United States also implement other bilateral treaties and agreements for cooperation in law enforcement issues, including the Financial Information Exchange Agreement (FIEA) and the Memorandum of Understanding (MOU) for the exchange of information on the cross-border movement of currency and monetary instruments.
Mexico is a member of the Financial Action Task Force (FATF) and the Financial Action Task Force for South America (GAFISUD). The GOM currently holds the GAFISUD presidency. In addition to its membership in the FATF and GAFISUD, Mexico participates in the Caribbean Financial Action Task Force (CFATF) as a cooperating and supporting nation. Mexico will undergo a FATF mutual evaluation in January 2008. The UIF is a member of the Egmont Group, and Mexico participates in the Organization of American States’ Inter-American Drug Abuse Control Commission’s (OAS/CICAD) Experts Group to Control Money Laundering. The GOM is a party to the 1988 UN Drug Convention, the UN Convention against Transnational Organized Crime, the UN Convention against Corruption, the UN International Convention for the Suppression of the Financing of Terrorism, and the Inter-American Convention against Terrorism.
The GOM has made fighting money laundering and drug trafficking one of its top priorities, and has made progress in combating these crimes over the course of 2007. However, Mexico continues to face challenges with respect to is anti-money laundering and counter-terrorist financing regime, particularly with its ability to prosecute and convict money launderers. To create a more effective regime, Mexico should fully implement and improve its mechanisms for asset forfeiture; increase personnel responsible for the initiation, investigation, and prosecution of money laundering cases; control the bulk smuggling of currency across its borders; monitor remittance systems for possible exploitation; and improve the regulation of centros cambiarios. The GOM should also ensure that its newly-adopted counter-terrorist financing law is fully implemented.
Moldova is not considered an important regional financial center. The Government of Moldova (GOM) monitors money flows through right-bank Moldova (the territory it controls), but does not exercise control over the breakaway region of Transnistria. Transnistrian authorities do not submit to GOM financial controls and maintain an independent banking system not licensed by the National Bank of Moldova. Moldovan incomes are generally low. Criminal proceeds laundered in Moldova derive substantially from tax evasion, contraband smuggling, foreign criminal activity, and, to a lesser extent, domestic criminal activity and corruption. Money laundering proceeds are controlled by small, poorly-organized domestic criminal groups. These small groups are in turn supervised by larger and better-organized foreign crime syndicates from Russia, Ukraine, and Israel, among others.
Money laundering has occurred in the banking system and through exchange houses in Moldova, and in the offshore financial centers in Transnistria and throughout the region. The amount of money laundering occurring via alternative remittance systems is reportedly not significant. The number of financial crimes unrelated to money laundering, such as bank fraud, embezzlement, corruption, and forgery of bankcards, especially through international offshore zones, has decreased. During 2006, several cases involved bank fraud and the misuse of bankcards. Although the number of financial crimes has not increased, investigations have revealed a diversification of financial and economic-related crimes.
Although a significant black market exists in Moldova, especially smuggling of goods at the Moldovan-Ukrainian border alongside Transnistria, narcotics proceeds are not a significant funding source of this market. Contraband smuggling generates funds that are laundered through the banking system. Often funds are first laundered through Transnistrian banks, next transferred to Moldovan institutions, and then transferred to other countries.
Moldova is not considered an offshore financial center. The Moldovan financial system has 15 banks, including three foreign-owned banks that are regulated in the same manner as Moldovan commercial banks. Offshore banks are not permitted to operate in Moldova. Shell companies are not allowed by law, although they exist on a de facto basis. Nominee directors and trustees are not allowed. Internet gaming sites do exist, although no statistics are currently available on the number of sites in operation. Internet gaming is subject to the same regulations as domestic casinos. The Ministry of Finance currently licenses five casinos, although they are reportedly not well regulated or controlled.
Moldova currently has six free trade zones (FTZs). Certain free-trade zones are infrequently used. Goods from abroad are imported to the free economic zones and resold without payment of customs duties of the country of origin or of Moldova. The goods are then exported to other countries with documentation, indicating Moldovan origin. According to the Moldova’s financial intelligence unit (FIU), the Service for Preventing and Combating Money Laundering and Terrorism Financing, no reports have been filed alleging that the free zones have been used in trade-based money laundering schemes or for terrorist financing. Supervision of the FTZs is conducted by a GOM agency, the Free Trade Zone Administration (FTZA). Companies operating in free-trade zones are also subject to inspections, controls, and investigations by inspectors from the Customs Service and the Center for Combating Economic Crime and Corruption (CCECC).
Money laundering is a separate criminal offense in the Moldovan Criminal Code, Art. 243, and under the Law on Preventing and Combating Money Laundering and Terrorism, No.190-XVI, passed on July 26, 2007. The legislation takes an “all serious crimes” approach. Serious crimes are defined as those punishable by a fine of 500 to 1,000 conventional units (U.S. $900 to $1,800) or by imprisonment of up to five years. The fine or imprisonment may be accompanied by a prohibition to hold certain positions or to practice a certain activity for a period of two to five years.
On April 10, 2007, President Vladimir Voronin proposed to the Moldovan Parliament draft amendments to the tax code and other financial regulations aimed at “liberalizing the economy.” On April 27, the Parliament adopted these tax-code amendments intended to regulate Moldova’s informal economy, forgive tax debts and stimulate investments. Some provisions of the financial package raised concerns as they could facilitate money laundering and terrorist financing. Of particular concern was a capital-amnesty provision allowing individuals and legal entities (corporations, partnerships, etc.) to legalize previously undeclared cash and noncash assets, including real estate and stocks. According to the proposed legislation, the GOM would encourage asset declaration by ensuring the confidentiality of all transactions and protecting filers from any future fiscal investigations. Additionally, those taking advantage of the amnesty would be under no obligation to declare the origins of their declared assets. The law also stipulated that transaction information could not be shared with the CCECC or the Moldovan Tax Inspectorate. Most worrisome, the legislation exempted declared assets from Moldova’s fiscal, customs and current money laundering and terrorist financing legislation.
Following recommendations from the international community, on July 20, 2007, the Moldovan Parliament adopted Law 2298, a package of tax-code reforms, which included amendments to the capital-amnesty law. The amendment closed loopholes in the capital-amnesty law, eliminating explicitly the exemption of amnesty-related transactions from Moldova’s anti-money laundering law. A week later, Parliament separately adopted the new anti-money laundering bill, the Law on Preventing and Combating Money Laundering and Terrorism. Since their passage, GOM authorities have issued numerous regulations, decisions, and laws that are related to the tax-amnesty/capital-legalization law and the new money laundering law. On August 15, 2007, the National Bank of Moldova issued two decisions focusing on the activity of financial institutions related to capital legalization and the transfer or export from the Republic of Moldova of legalized funds by individuals.
Article 12 of the Law on Preventing and Combating Money Laundering and Terrorism regulates the limitations of bank secrecy. Thus, information obtained from reporting entities can be used only with the purpose of preventing money laundering and terrorist financing. The forwarding of information regarding clients or ownership information to the CCECC, criminal investigative authorities, prosecutorial entities, or to the courts in an effort to prevent or combat money laundering activities is not classified as disclosure of commercial bank or professional secrets, as long as the forwarding of information is carried out in accordance with legal provisions.
All banks and nonbanking financial institutions are supervised and examined for compliance with anti-money laundering/counter-terrorist financing (AML/CTF) laws and regulations by the CCECC, which has the authority to investigate money laundering and terrorist financing. Under the Law on Preventing and Combating Money Laundering and Terrorism, the National Bank of Moldova (NBM) supervises banks, exchange houses, and representatives of foreign banks. Moreover, based on the July 2007 amendment of Law No. 192 from December 11, 1998, on the Securities Commission, three institutions dealing with oversight of financial markets—the National Commission on Securities, the Inspectorate for Supervision of Insurance Companies and Retirement Funds, and the National Service for Supervision of Citizen’s Savings and Lending Associations—were merged into one agency, the National Commission on Financial Markets (NCFM). The NCFM’s jurisdiction includes nonbanking financial entities, such as institutions issuing securities, investors, the National Bureau of Insurance of Vehicles of Moldova, members of saving and lending associations, and clients of micro-financing organizations. Additionally, the NCFM oversees professional participants in the nonbanking financial sector that have license to carry out activities in the following fields: securities market, insurance market, micro-financing, private pension funds, mortgage organizations, and credit-history bureaus. The Licensing Chamber checks the compliance of companies applying for business licenses, and specifically oversees casinos and gambling facilities.
Banks, exchange houses, stock brokerages, casinos, insurance companies, lawyers, notaries, accountants, and lotteries and institutions organizing or displaying lotteries are required to know, record, and report the identity of customers engaging in significant transactions. The reporting entities are obligated to report suspicious transactions to the FIU within 24 hours. In addition, single transactions or multiple transactions undertaken in 30 calendar days that exceed MDL 500,000 (approximately U.S. $45,000) must be reported to the FIU. The Law on Preventing and Combating Money Laundering and Terrorism also requires that financial institutions maintain records and documentation of accounts account holders and basic documentation (including business correspondence) for a period of at least seven years after the termination of business relations or the closing of the account.
Moldova’s FIU is a quasi-independent unit within the CCECC. Decree No. 111 of September 15, 2003, establishes the FIU as an administrative and analytical body that collects, maintains, and analyzes reports from reporting institutions. It also conducts criminal investigations and has regulatory authority to develop draft laws. The FIU is staffed with 14 inspectors. Although housed within the CCECC building, a separate locked door separates its offices from other CCECC employees. The heads of the FIU and the CCECC maintain that other CCECC employees have no access to records collected by the FIU. However, the leadership of the FIU is ultimately under the supervision of the director of the CCECC. While the CCECC budget covers the financial needs of the FIU, the FIU is also supported technically and financially by international organizations. The head of the FIU reports that the unit is adequately staffed, with low turnover, good working conditions and newly renovated offices. However, it analytical functions are limited without a database, which it currently cannot afford.
The CCECC and the FIU are the lead agencies responsible for investigating financial crimes, including money laundering. Other agencies that share jurisdiction over the investigation of financial crimes include the Prosecutor General’s Office, the Ministry of Interior and the Customs Service. The Security and Intelligence Service (SIS) investigates terrorist financing. The FIU has formed a task force with the Prosecutor General’s Office, the Ministry of the Interior (MOI), the Customs Service, the NBM, the National Securities Commission, the SIS, and the Ministry of Information Development to share information and discuss investigations. The FIU has signed interagency agreements with other law enforcement agencies and ministries with databases to exchange law-enforcement information.
In 2007, the FIU received reports on approximately 9 million financial transactions, of which 165,199 were considered suspicious. This number of suspicious transactions is misleading, however, since GOM officials categorize all transactions involving Transnistria as suspicious.
In 2007, the FIU initiated eleven criminal cases related to financial fraud; four cases carried money laundering charges. The FIU identified two major types of criminal activity in 2006 and during the first six months of 2007. In the first instance, criminals used financial transactions that appeared to be legitimate to launder or clean criminal proceeds. In the second instance, criminals used the FTZs to create illegal profits by reducing the value of imported goods. In 2007, the FIU imposed fines and sanctions totaling MDL 550,000 (approximately U.S. $49,600). The FIU reports that no arrests of individuals were conducted in 2006 or during the first six months of 2007 for money laundering violations. Late in 2007, a Moldovan court tried a criminal case charging the defendant with money laundering violations. The defendant was found guilty and sentenced to 15 years imprisonment. The FIU and CCECC have made no arrests nor pursued prosecutions involving terrorist financing.
Law No. 1569 of December 2002 on the transportation of currency stipulates that persons are obliged to report in writing to Moldovan customs officials the amount of currency that they are transporting when that amount exceeds 10,000 euros. If the amount of outbound currency is more than 10,000 euros, the carrier of the currency will have to report the outbound currency in a special declaration form provided by customs officials at the border. In addition to the special declaration, the currency carrier must provide documents detailing the source of the money. The carrier also must present a special permission for outbound cash currency transportation issued by a duly authorized bank or by the NBM. The Customs Service operates a special database that includes all declarations. The Customs Service shares the information in the database with other governmental agencies, including the FIU.
The Moldovan Criminal Code provides for the seizure and confiscation of assets related to all serious crimes, including terrorist financing. The provisions may be applied to goods belonging to persons who knowingly accepted things acquired illegally, even when the state declines to prosecute. However, it remains unclear whether asset forfeiture may be invoked against those unwittingly involved in or tied to an illegal activity. If it can be shown that the assets were used in the commission of a crime or result from a crime, they can be confiscated. Legitimate businesses can be seized if they were used to launder drug money, support terrorist activity, or are otherwise related to other criminal proceeds. The Criminal Code allows for civil as well as criminal forfeiture.
The Prosecutor General’s Office has expressed its willingness to pursue an initiative to amend the Constitution to allow a more effective use of asset forfeiture. The Constitution currently incorporates a presumption that any property owned by an individual was legally acquired. This presumption has acted to inhibit the use of the existing asset forfeiture laws. Subsequent to a constitutional amendment, the Prosecutor General’s Office plans generally to update the laws governing the identification of criminal assets and the use of asset forfeiture.
The FIU, CCECC, Tax Inspectorate, Customs Service and prosecutor’s offices to the extent of their jurisdiction are responsible for tracing, seizing and freezing assets. Assets seized by law enforcement are incorporated into the state budget, not a separate fund. In 2007, issued decisions freezing and seizing assets totaling MDL 14.8 million (approximately U.S. $1.3 million).
The banking community generally cooperates with enforcement efforts of the FIU and the CCECC to trace funds and seize or freeze bank accounts. However, the GOM currently lacks adequate resources, training, and experience to trace and seize assets effectively. The GOM does not have a national system for freezing terrorist assets. The GOM has no separate law providing for the sharing with other countries of assets seized from narcotics and other serious crimes. However, nothing in the current legal structure would prohibit such activity.
Article 279 of the Moldovan Criminal Code criminalizes terrorist financing. It is defined as a “serious crime.” Moldova regulates efforts to combat terrorist financing in the Law on Combating Terrorism, enacted on November 12, 2001. Article 2 defines terrorist financing, and Article 8/1 authorizes suspension of terrorist and related financial operations. This statute is separate from the aforementioned money laundering law, which contains other relevant provisions.
In 2007, the CCECC issued a decree on actions to be taken to enforce the provisions of the Law on Preventing and Combating Money Laundering and Terrorism. The CCECC decree listed groups worthy of particular focus given possible money laundering or terrorist financing concerns. These groups included countries that may produce narcotics; countries that do not have legal provisions against money laundering and terrorist financing; countries with a high crime rate and corruption; countries operating offshore centers; and persons, groups, and entities identified as participating in terrorist activities. The decree was developed on the basis of Moldova’s national interests and U.S. and UN lists of designated terrorists. Currently, the Moldovan authorities have not frozen, seized, or forfeited assets related to terrorism and terrorist financing. Reportedly, no indigenous alternative remittance systems exist in Moldova, although the use of cash couriers is common. No special measures have been taken to investigate misuse of charitable or nonprofit entities.
In December 2006, the GOM signed a $24.7 million Threshold Country Program with the Millennium Challenge Corporation that focuses on anti-corruption measures. The GOM requested funding to address areas of persistent corruption including the judiciary, health care system, tax, customs and law enforcement. Moldova is listed as 111 out of 180 countries in Transparency International’s 2007 Corruption Perception Index.
The GOM has no bilateral agreement with the United States for the exchange of information regarding money laundering, terrorism, or terrorist financing investigations and proceedings. However, Moldovan authorities continue to solicit USG assistance on individual cases and cooperate with U.S. law enforcement personnel when presented with requests for information or assistance. The FIU has entered into bilateral agreements to exchange information with financial intelligence units of Albania, Belarus, Bulgaria, Croatia, Estonia, Georgia, Indonesia, Korea, Lebanon, Lithuania, Macedonia, Romania, Russia, and Ukraine.
Moldova is a party to the 1988 UN Drug Convention, the International Convention for the Suppression of the Financing of Terrorism, and the UN Convention against Transnational Organized Crime. On October 1, 2007, the GOM ratified the UN Convention against Corruption. Moldova has signed an agreement with CIS member states for the exchange of information on criminal matters, including money laundering. In 2004, the CCECC was accepted as an observer at the Eurasian Group on Combating Money Laundering. Moldova is a member of the Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL). The FIU is currently pursuing membership in the Egmont Group of financial intelligence units.
The Government of Moldova should continue to enhance its existing anti-money laundering and counter-terrorist financing regime. The GOM should ensure that the FIU and law enforcement agencies have sufficient resources, training, and tools to adequately analyze and investigate suspected cases of money laundering and terrorist financing. Moldova should improve the mechanisms for sharing information and forfeiting assets. Border enforcement and antismuggling enforcement should be priorities. The GOM should continue the momentum of its anticorruption efforts.
The second-smallest country in Europe, the Principality of Monaco is known for its tradition of bank secrecy, network of casinos, and favorable tax regime. Money laundering offenses relate mainly to offenses committed abroad. Russian organized crime and the Italian Mafia reportedly have laundered money in Monaco. The Principality is also reported not to face the ordinary forms of organized crime. Existing crime does not seem to generate significant illegal proceeds, with the exception of fraud and offenses under the “Law on Checks.” Monaco remains on an Organization for Economic Cooperation and Development (OECD) list of so-called “noncooperative” countries in terms of provision of tax information.
Monaco has a population of approximately 32,000, of which fewer than 7,000 are Monegasque nationals. Monaco’s approximately 60 banks and financial institutions hold more than 300,000 accounts and manage total assets of about 70 billion euros (approximately U.S. $102.8 billion). Approximately 85 percent of the banking customers are nonresident. In 2005, the financial sector represented 15 percent of Monaco’s economic activity. The high prices for land throughout the Principality result in a real estate sector of considerable import. There are five casinos run by the Société des Bains de Mer, in which the state holds a majority interest.
Monaco’s banking sector is linked to the French banking sector through the Franco-Monegasque Exchange Control Convention, signed in 1945 and supplemented periodically, most recently in 2001. Through this convention, Monaco operates under the banking legislation and regulations issued by the French Banking and Financial Regulations Committee, including Article 57 of France’s 1984 law regarding banking secrecy. The majority of entities in Monaco’s banking sector concentrate on portfolio management and private banking. Subsidiaries of foreign banks operating in Monaco may withhold customer information from their parent banks.
Banking laws do not allow anonymous accounts, but Monaco does permit the existence of alias accounts, which allow account owners to use pseudonyms in lieu of their real names. Cashiers do not know the clients, but the banks know the identities of the customers and retain client identification information. Article 8 of Sovereign Order 632 of August 2006 clarifies the circumstances under which pseudonyms can be used by banks.
Prior approval is required to engage in any economic activity in Monaco, regardless of its nature. The Monegasque authorities issue approvals based on the type of business to be engaged in, the location, and the length of time authorized. This approval is personal and may not be re-assigned. Any change in the terms requires the issuance of a new approval.
Although the French Banking Commission supervises Monegasque credit institutions, Monaco shoulders the responsibility for legislating and enforcing measures to counter money laundering and terrorist financing. The Finance Counselor, located within the Government Council, is responsible for anti-money laundering and counter-terrorist financing (AML/CTF) implementation and policy.
Money laundering in Monaco is a crime under Act 1.162 of July 7, 1993, “On the Participation of Financial Institutions in the Fight against Money Laundering,” and Section 218-3 of the Criminal Code, amended by Act 1.253 of July 12, 2002, “Relating to the Participation of Financial Undertakings in Countering Money Laundering and the Financing of Terrorism.” On November 9, 2006, Section 218-3 of the Criminal Code was modified to adopt an “all crimes” approach to money laundering.
Monaco’s anti-money laundering legislation, as amended, requires banks, insurance companies, stockbrokers, corporate service providers, portfolio managers, some trustees, and institutions within the offshore sector to report suspicious transactions to Monaco’s financial intelligence unit (FIU), and to disclose the identities of those involved. Casino operators must alert the government of suspicious gambling payments possibly derived from drug trafficking or organized crime. The law imposes a five to ten-year jail sentence for anyone convicted of using illicit funds to purchase property, which itself is subject to confiscation. Act 1.162, as amended, institutes procedural requirements regarding internal compliance, client identification, and retention and maintenance of records. Sovereign Order 16.615 of January 2005 and Sovereign Order 631 of August 2006 mandate additional customer identification measures. Designated nonfinancial businesses and professions, such as lawyers, notaries, accountants, real estate brokers, and dealers in precious metals and stones, are not subject to reporting or record-keeping requirements.
Offshore companies are subject to the same due diligence and suspicious reporting obligations as banking institutions, and Monegasque authorities conduct on-site audits. Act 1.253 strengthens the “know your client” obligations for casinos and obliges companies responsible for the management and administration of foreign entities not only to report suspicions to Monaco’s FIU, but also to implement internal AML/CTF procedures. The FIU monitors these activities.
Monaco’s FIU, the Service d’Information et de Controle sur les Circuits Financiers (SICCFIN), receives suspicious transaction reports, analyzes them, and forwards them to the prosecutor when they relate to drug trafficking, organized crime, terrorism, terrorist organizations, or the funding thereof. SICCFIN also supervises the implementation of AML legislation. Under Article 4 of Law 1.162, SICCFIN may suspend a transaction for twelve hours and advise the judicial authorities to investigate. SICCFIN has received between 200 and 400 suspicious transaction reports (STRs) annually from 2000 to 2006. In 2006, SICCFIN received 395 STRs, about 50 percent of which were submitted by banks and other financial institutions. SICCFIN received 60 requests for financial information from other FIUs in 2006. No statistics are currently available on the number of reports or requests received by SICCFIN in 2007.
Investigations and prosecutions are handled by the two-officer Money Laundering Unit (Unite de Lutte au Blanchiment) within the police. The Organized Crime Group (Groupe de Repression du Banditisme) may also handle cases. Seven police officers have been designated to work on money laundering cases. Four prosecutions for money laundering have taken place in Monaco, which have resulted in three convictions.
Monaco’s legislation allows for the confiscation of property of illicit origin as well as a percentage of co-mingled illegally acquired and legitimate property. Authorities must obtain a court order to confiscate assets. Confiscation of property related to money laundering is restricted to the offenses listed in the Criminal Code. Authorities have seized assets exceeding 11.7 million euros (approximately U.S. $17 million) in value as of year-end 2006. Monaco and the United States signed a seized asset sharing agreement in March 2007.
In July and August 2002, the Government of Monaco (GOM) passed Act 1.253 and promulgated two Sovereign Orders intended to implement United Nations Security Council Resolution 1373 by outlawing terrorism and its financing. Monaco passed additional Sovereign Orders in April and August of that year, importing into Monegasque law the obligations of the UN International Convention for the Suppression of the Financing of Terrorism. In 2006, Monaco further amended domestic law to implement these obligations.
The Securities Regulatory Commissions of Monaco and France signed a memorandum of understanding (MOU) in March 2002 on the sharing of information between the two bodies. The GOM considers this MOU an important tool to combat financial crime, particularly money laundering. SICCFIN has signed information exchange agreements with over 20 foreign FIUs. In March 2007, Monaco ratified the European Convention on Mutual Assistance in Criminal Matters. Monaco has neither signed nor ratified the European Convention on Extradition, although it has concluded 15 extradition treaties with various countries. To date, there have been no extraditions on the grounds of money laundering, although the GOM has extradited criminals guilty of other offenses, mainly to Russia.
Monaco is a member of the Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL). SICCFIN is a member of the Egmont Group of financial intelligence units. Monaco is a party to the 1988 UN Drug Convention, the UN International Convention for the Suppression of the Financing of Terrorism, and the UN Convention against Transnational Organized Crime. The GOM has neither signed nor ratified the UN Convention against Corruption.
The Government of Monaco should amend its legislation to implement full corporate criminal liability. The Principality should continue to enhance its anti-money laundering and confiscation regimes by fully applying its AML/CTF reporting, customer identification, and record-keeping requirements to all trustees and gaming houses. The GOM should also consider extending AML/CTF regulations to designated nonfinancial businesses and professions. SICCFIN should have the authority to forward reports and disseminate information to law enforcement even when the report or information obtained does not relate specifically to drug trafficking, organized crime, or terrorist activity or financing. Monaco should become a party to the UN Convention against Corruption.
Morocco is not a regional financial center, but money laundering is a concern due to its narcotics trade, vast informal sector, trafficking in persons, and large level of remittances from Moroccans living abroad. According to the 2007 World Drug Report by the United Nations Office on Drugs and Crime (UNODC), Morocco remains a principal producer and exporter of cannabis, while credible estimates of Morocco’s informal sector range between 17 and 40 percent of GDP. In 2006, remittances from Moroccans living abroad valued $5.4 billion, approximately nine percent of GDP. Although the true extent of the money laundering problem in the country is unknown, conditions exist for it to occur. In the past few years, the Kingdom of Morocco has taken a series of steps to address the problem, most notably the enactment of a comprehensive anti-money laundering (AML) bill in May 2007 and the establishment of a Financial Intelligence Unit, expected to become operational in Rabat in early 2008.
The predominant use of cash, informal value transfer systems and remittances from abroad all help fuel Morocco’s informal sector. Bulk cash smuggling is also a problem. There are unverified reports of trade-based money laundering, including under-and over-invoicing and the purchase of smuggled goods. Most businesses are cash-based with little invoicing or paper trail. Cash-based transactions in connection with cannabis trafficking are of particular concern. According to the UNODC, Morocco remains the world’s principal producer of cannabis, with revenues estimated at over $13 billion annually. While some of the narcotics proceeds are laundered in Morocco, most proceeds are thought to be laundered in Europe.
Unregulated money exchanges remain a problem in Morocco and were a prime impetus for Morocco’s recent AML legislation. Although the legislation targets previously unregulated cash transfers, the country’s vast informal sector creates conditions for this practice to continue. The Moroccan financial sector is underdeveloped, consisting of 16 banks, five government-owned specialized financial institutions, approximately 30 credit agencies, and 12 leasing companies. The monetary authorities in Morocco are the Ministry of Finance and the Central Bank—Bank Al Maghrib—that monitors and regulates the banking system. A separate Foreign Exchange Office regulates international transactions.
Since 2003, Morocco has taken a series of steps to tighten its AML controls. In December 2003, the Central Bank issued Memorandum No. 36, in advance of pending AML legislation that instructed banks and other financial institutions under its control to conduct internal analysis and investigations into financial transactions. The measures called for the reporting of suspicious transactions, retention of suspicious activity reports, and mandated “know your customer” procedures. In 2007, Morocco’s AML efforts took a significant step forward with parliamentary passage and promulgation of a comprehensive AML law, which draws heavily from Financial Action Task Force (FATF) recommendations. The law requires the reporting of suspicious financial transactions by all responsible parties, both public and private, who in the exercise of their work, carry out or advise on the movement of funds possibly related to drug trafficking, human trafficking, arms trafficking, corruption, terrorism, tax evasion, or forgery. There were no prosecutions for money laundering in Morocco in 2007.
Morocco has a free trade zone in Tangier, with customs exemptions for goods manufactured in the zone for export abroad. There have been no reports of trade-based money laundering schemes or terrorist financing activities using the Tangier free zone or the zone’s offshore banks, which are regulated by an interagency commission chaired by the Ministry of Finance.
While there have been no verified reports of international or domestic terrorist networks using the Moroccan narcotics trade to finance terrorist organizations and operations in Morocco, investigations into the Ansar Al Mahdi and Al Qaeda in the Islamic Maghreb (AQIM) terrorist organizations are ongoing. At least two suspects arrested as part of the Ansar Al Mahdi cell were accused of providing financing to the cell.
Morocco has a relatively effective system for disseminating U.S. Government (USG) and United Nations Security Council Resolution (UNSCR) terrorist freeze lists to the financial sector and law enforcement. Morocco has provided detailed and timely reports requested by the UNSCR 1267 Sanctions Committee and some accounts have been administratively frozen (based on the U.S. list of Specially Designated Global Terrorists, designated pursuant to Executive Order 13224). In 1993, a mutual legal assistance treaty between Morocco and the United States entered into force.
Morocco is a party to the 1988 UN Drug Convention, the UN International Convention for the Suppression of Financing of Terrorism, and the UN Convention against Transnational Organized Crime. On May 9, 2007, Morocco ratified the UN Convention against Corruption. Morocco is ranked 72 out of 179 countries surveyed in Transparency International’s 2007 International Corruption Perception Index. Morocco has ratified or acceded to 11 of the 12 UN and international conventions and treaties related to counterterrorism. Morocco is a charter member of the Middle East and North Africa Financial Action Task Force (MENAFATF).
In June 2003, Morocco adopted a comprehensive counterterrorism bill. This bill provided the legal basis for lifting bank secrecy to obtain information on suspected terrorists, allowed suspect accounts to be frozen, and permitted the prosecution of terrorist finance-related crimes. The law also provided for the seizure and confiscation of terrorist assets, and called for increased international cooperation with regard to foreign requests for freezing assets of suspected terrorist entities. The counterterrorism law brought Morocco into compliance with UNSCR 1373 requirements for the criminalization of the financing of terrorism. Other AML controls include legislation prohibiting anonymous bank accounts and foreign currency controls that require declarations to be filed when transporting currency across the border.
The Government of Morocco should continue to implement anti-money laundering/counter-terrorist financing (AML/CTF) programs and policies that adhere to world standards, including a viable FIU that receives, analyzes, and disseminates financial intelligence. The informal economy is very significant in Morocco and authorities are likely to face major challenges as the new AML regime is implemented. Police and customs authorities, in particular, should receive training on recognizing money laundering methodologies, including trade-based laundering and informal value transfer systems.