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U.S. Department of State

Diplomacy in Action

2009 INCSR: Country Reports - Honduras through Mexico

Bureau of International Narcotics and Law Enforcement Affairs
February 27, 2009



Honduras is not an important regional or offshore financial center. Money laundering in Honduras stems primarily from significant narcotics trafficking, particularly cocaine, throughout the region. Human smuggling of illegal immigrants into the United States also constitutes a growing source of laundered funds. Laundered proceeds typically pass directly through the formal banking system, but remittance companies, currency exchange houses and automobile and real estate front companies may be increasing. High remittance inflows, which reached more than $2.6 billion, or 20 percent of gross domestic product in 2008, as well as smuggling of contraband goods, may also generate funds that are laundered through the banking system. Honduras however, does not appear to be experiencing an increase in financial crimes such as bank fraud. 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. Some illicit funds may also be laundered through the construction sector. The country’s is vulnerable to the cross-border movement of contraband and illicit proceeds of crime as the citizens of Honduras, Guatemala, El Salvador, and Nicaragua, are permitted immigration inspection-free movement across their respective borders under the Central American Four Agreement, and there is no requirement for reporting border declarations and seizures to the financial intelligence unit. There is still a lack of adequate implementation and enforcement. These factors, combined with the vulnerabilities of a lack of resources for investigations and analysis, corruption within the law enforcement and judicial sectors, contribute to a favorable climate for significant money laundering in Honduras.

There is not a significant black market for smuggled goods, although there is some smuggling of items such as firearms, gasoline, illegally caught lobster and cigarettes. Though there are a growing number of free trade zones with special tax and customs benefits, there is no specific evidence Honduran free trade zone companies are being used in trade-based money-laundering schemes or by financiers of terrorism.

The Government of Honduras enacted its first money laundering legislation (Decree 202-97) enacted in December 1997. It came into force in early 1998 and criminalized the laundering of narcotics related proceeds. That legislation has evolved significantly since then. 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 supersedes the original money laundering laws established in 1998 by strengthening the legal framework and making available investigative and prosecutorial tools. The same decree 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 decree 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 $10,000 or its equivalent. As of 2008 a supplementary reporting form had not been implemented for individuals carrying more than $10,000, due to an unresolved disagreement between the two institutions over responsibility for record keeping. The discussion over the form revealed other weaknesses in cash smuggling enforcement. These include the lack of law enforcement authority for customs agents, and the fact that nondeclaration of more than $10,000 or the equivalent is not a distinct crime, although it is enough to make an individual a suspect. In 2008, ICE and Honduran Customs authorities conducted joint interdiction operations at Toncontin International Airport in Tegucigalpa, focusing on identifying individuals who failed to declare currency in excess of $10,000. The operations resulted in the seizure of over $55,000.

Decree No. 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. According to the decree, 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. 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. However, there is no implementation of AML requirements within the gaming industry.

Decree No. 129-2004 (Financial Systems Law) eliminates any legal 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 bank executives have alleged that their personal security is put at risk if the information they report leads to the prosecution of money launderers.

Congress passed legislation in early 2008 that brings the Government of Honduras (GOH) closer to international legal standards for control of illicit financing, including money laundering and terrorist financing. Major amendments to the money laundering law clarify responsibilities for monitoring nonfinancial entities and a new chapter added to the penal code criminalizes terrorist financing. The amendments to the money laundering law gives the UIF oversight for collecting all suspicious transactions reports from banks, and expands the scope of entities required to report suspicious transactions to the UIF beyond the financial scope of the CNBS. Such entities include real estate agents, used car dealerships, 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 also for analyzing and presenting to prosecutors cases deemed appropriate for prosecution.

The Public Ministry (Attorney General’s Office and police all suffer from inadequate funding, limited capacity, and a lack of personnel and training.) Prosecutors expend the bulk of their limited resources focusing on high-profile crimes related to money laundering, such as narcotics trafficking, trafficking in persons, and cash smuggling. The UIF does not have direct access to law enforcement information in making its analyses, and does not have sufficient operational independence as prosecutors dictate to the UIF which cases to analyze based on suspicious transaction reports. The prosecutor charged with coordination with the UIF rarely visits his counterparts and is no longer working closely with the Office for Management of Seized Assets (OABI.) The number of convictions in 2008 was the lowest since 2003, the first full year that money laundering was a distinct crime in Honduras. In only two separate cases, seven individuals were found guilty of money laundering crimes, and one was absolved. Between 2003 and 2008, a total of 47 individuals were convicted in 32 separate cases. Only two of 54 ongoing investigations in 2007 originated from atypical financial reports.

Lack of coordination at all levels is a key area preventing a higher success rate in investigations and prosecutions. At the ministry level, the Interagency Commission for the Prevention of Money Laundering and Financing of Terrorism (CIPLAFT) was created in 2004 but never got off the ground. The current President of the CNBS does not believe he should be in charge of the CIPLAFT as specified by Presidential Decree, and as such has not convened any meetings. He told the U.S. Embassy in mid-2008 of his intention to propose another ministry take responsibility for the CIPLAFT, but has neither specified which ministry nor formally requested a change to his responsibilities. Although Decree 45-2002 requires that a public prosecutor be assigned to the UIF, the Special Prosecutor for Money Laundering personally acts as coordinator and contact is sporadic and personality-driven. Response times for information sharing between the UIF and the seized assets unit initially improved after a 2006 agreement between the Public Ministry, CNBS, and the UIF to prioritize money laundering cases. However, information sharing has stagnated in the last two years and has a backlog of about a year. In theory, the agreement should have streamlined the number of cases for potential prosecution and allowed many cases to be officially closed. The low number of convictions this year suggests otherwise. 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 growing slower this year due to global economic downturn, but still constitute about 20 percent of GDP and will likely top $2.6 billion in 2008. There has been no evidence to date linking these remittances to the financing of terrorism. The director of the UIF admits that remittances are extremely vulnerable to money laundering, but says Honduras lacks a formal tracking system to measure the extent of proceeds being laundered through formal and informal cross-border financial transfers. The remittance regulations in the new money laundering amendment now require remittance dealers not registered at the CNBS to report suspicious transactions. Once implementing regulations are put in place, the new amendment should give the UIF oversight capacity to properly investigate remittance companies. The CNBS securities superintendent has drafted the implementing regulations. The U.S. Internal Revenue Service (IRS) and Financial Crimes Enforcement Network (FinCEN), which serves as the U.S. financial intelligence unit, have provided comments and the implementing regulations should be activated within the first few months of 2009.

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 the 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 is charged with distributing funds to various law enforcement units and nongovernmental organizations (NGOs). According to the Public Ministry, up to 50 percent of the proceeds gained by auctioning or selling seized goods go to the unit that performed the seizure. An additional 25 percent of the proceeds go to institutions involved in crime prevention and rehabilitation of criminals and the balance goes to OABI’s support budget. In reality, equitable sharing of seized monies has been a continuing problem, and appears at times to be controlled by political influence. Police entities involved in the original investigations rarely see an equitable share of the assets seized and investigators often must ride public buses to conduct investigations. In some cases, entities that have nothing to do with the investigation receive an unjustified portion of the funds.

The OABI is a poorly administered organization, and is constrained by a lack of coordination with public prosecutors who must bring cases to trial before seized assets can be distributed or auctioned. The public prosecutor has said it is no longer working with OABI because of disputes over final forfeiture of assets and disbursement of monies from auctioned assets or bulk cash seizures. 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 and high protection and maintenance fees. With new management and guidelines in place, and the new witness protection law that passed in 2008 which allows the unit to hold all seized assets, OABI could expand its role significantly. Police and prosecutors complain the witness protection law cannot be enforced without the necessary funding.

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. Equally ambiguous is the ability of the prosecutor’s office to seize individual or business assets based on “unexplained enrichment.” Though a recent World Bank report on Honduran compliance with international standards criticized the practice and pointed out that no such legislation exists elsewhere, the prosecutor’s office insists it must act on ambiguous information at times.

Under the Criminal Procedure Code, when goods or monies 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. This places financial pressure on OABI, which is responsible for maintaining assets at high expense while prosecutors investigate and build cases.

As of December 2008, the total value of assets seized since Decree 45-2002 came into effect was approximately $5.9 million, including $4.6 million in tangible assets such as cars, houses, and boats. The total for 2008 barely increased in comparison to 2007 because there has been little to no movement in existing cases and few seizures this year. $750,000 collected from the sale of an abandoned plane in 2007, probably related to narcotics, was used to purchase several cars for public prosecutors and police investigators. 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 was amended in April 2008, and now designates both terrorist financing and asset transfer related to terrorism as crimes. This is a major step to bring Honduras into accordance with the Financial Action Task Force (FATF) Forty-Nine recommendations. The crime of terrorist financing now carries a 20 to 30 year prison sentence, along with a fine of up to $265,000.

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 United States investigations and requests for information pursuant to the 1988 United Nations Drug Convention. No specific written agreement exists between the U.S. 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, the Dominican Republic, Costa Rica, Bolivia, Haiti, Argentina, Saint Vincent and The Grenadines, St. Kitts and Nevis, Belize, and the Cayman Islands. The UIF has reported that bilateral cooperation and information sharing is good across the board.

Honduras is a party to the 1988 UN Drug Convention, the UN Convention against Transnational Organized Crime, the UN Convention for the Suppression of the Financing of Terrorism, and the UN Convention against Corruption. 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), a FATF-style regional body. In 2005, the UIF became a member of the Egmont Group.

The World Bank Financial Sector Assessment Program (FSAP) completed an assessment of Honduran compliance with international money laundering standards in February 2008. The report describes and analyzes anti-money laundering and counterterrorist financing measures, sets out Honduras’ levels of compliance with the FATF Forty-Nine Recommendations. The draft report recognizes that Honduras is close to compliance with a large number of international legislation and norms, but criticizes lack of implementation and enforcement, and a “systematic lack of coordination” between key players. In addition, the report noted that GOH does not require sufficient transparency with regard to the beneficial ownership of legal persons. The UIF will respond to the report on behalf of the Government of Honduras at the CFATF, Plenary meeting in Trinidad and Tobago in May 2009.

The Government of Honduras (GOH) made progress in 2008 by criminalizing terrorist financing and increasing the legal scope of financial entities to be monitored by the UIF. The GOH should ensure that these improvements to money laundering regulations are implemented, enforced, and coordinated in order to bring its anti-money laundering and counterterrorist 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. The GOH should also resolve any ambiguity regarding the seizure of businesses used for criminal purposes and suspicious enrichment of individuals, and should repeal provisions which allow for a waiver of criminal liability for first time legal person offenders. The Government of Honduras should pay special attention to the need for stronger coordination between entities which is the single largest factor inhibiting the fight against money laundering.

Hong Kong

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.

Hong Kong is a free port. As such, there is no significant black market for smuggled goods. According to Hong Kong law enforcement authorities, there is no evidence to suggest smuggling activities in Hong Kong are funded by narcotics proceeds.

Hong Kong has investigated and prosecuted very few money laundering cases involving fund movements outside the formal banking sector. The formal banking sector appears to be the primary means by which criminals attempt to launder funds in Hong Kong. Over the past four years, reported financial crimes have increased. Hong Kong police reported 4,758 (2006) and 4,745 (2007) cases of Deception; Business Fraud cases totaled 34 (2006) and 27 (2007); Forgery and Coinage cases reported totaled 1,149 (2006) and 1,195 (2007). Hong Kong does not keep separate statistics on cases involving U.S. currency. The government expects the current economic downturn to lead to increased financial crime and is tightening its supervision of the banking system.

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 Hong Kong Monetary Authority (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) registered in Hong Kong are established with nominee directors; and many are owned by other IBCs registered in the British Virgin Islands. However, all companies are required to file certain information on an annual basis with the Companies Registry, including annual accounts, details of registered offices, directors, the company secretary, charges, a register of members and debenture holders (depending on the category of companies to which a company belongs). In addition, these companies are subject to additional regulatory controls if they engage in certain business activities. For example, if a company carries out banking/securities/insurance business, it must conduct customer due diligence on all corporate entities and trust arrangements, in particular, identifying their beneficial owners for the purpose of complying with the AML/CTF requirements of the HKMA, SFC, and/or OCI. The AML/CTF guidelines published by these three regulators require companies to have procedures in place to monitor the identity of all principal shareholders, directors, account signatories and the beneficial owner of the corporate customer. Bearer shares are not permitted for companies registered in Hong Kong.

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 two ordinances provide for the tracing, restraint and confiscation of proceeds derived from drug trafficking and other serious crimes. The legislation also criminalizes the act of dealing with property while knowing or having reasonable grounds to believe that such property represents proceeds of drug trafficking and other indictable offenses. 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). Hong Kong enacted the United Nations (Anti-Terrorism Measures) Ordinance (UNATMO) (Cap. 575) in 2002 to criminalize terrorism and terrorist financing. UNATMO was amended in 2004 to allow Hong Kong to freeze the nonfund property of terrorists and terrorist organizations.

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). There is no minimum threshold that compels reporting. 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. No laws in Hong Kong contain secrecy provisions that prohibit authorized institutions from disclosing client and ownership information to the HKMA and the law enforcement agencies.

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 HKMA is responsible for supervising and examining compliance of financial institutions that are authorized under Hong Kong’s Banking Ordinance. The 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 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. An HKMA directive 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.

Designated Non-Financial Businesses and Professions as defined by FATF (i.e. lawyers, accountants, estate agents, trust and company service providers and dealers in precious stones and metals) are not subject to specific statutory AML/CTF requirements. However, under the DTROP, the OSCO and the UNATMO, suspicious transaction reporting requirements are applicable to all persons. Lawyers, accountants, practitioners in nonfinancial institutions, dealers in precious stones and precious metals are all obliged by law, as are all persons, to make a suspicious transaction report to the JFIU if they come across any property known or suspected to be proceeds of drug trafficking, crimes, or terrorism. Under the DTROP, the OSCO and the UNATMO, all persons are required to report his/her knowledge or suspicion of crime proceeds or terrorist property; failure to report such suspicion or knowledge is a criminal offense. The reporting requirement exists irrespective of the value of the proceeds or property, and the circumstances by which the person comes across such knowledge or suspicion.

In addition, the professional bodies or regulators of Hong Kong lawyers, accountants, estate agents, trust and company service providers have issued AML/CTF guidelines and encourage their members to comply. During 2008, the Narcotics Division of the Hong Kong Security Bureau and the JFIU have conducted regular outreach and capacity building programs for these sectors including seminars, guidelines, leaflets and Announcements in the Public Interest on television and radio.

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 to 20,000 RMB (approximately $3000) 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.

Despite Hong Kong’s efforts to encourage capital shifts to the banking industry, Chinese capital controls continue to encourage entities in both Hong Kong and Mainland China to use underground financial systems to avoid Chinese 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 (approximately. $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 indicated 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. While Chinese police action in late 2007 appears to have dealt a blow to underground banking systems, the lack of strong Hong Kong government oversight of moneychangers and remittance agents was highlighted in the FATF/APG Mutual Evaluation Report, published in June 2008. The global economic slowdown and a dramatic drop in Hong Kong housing and equity prices are likely to have contributed as much to declining crossborder flows as to stricter enforcement on the part of the Chinese and Hong Kong authorities.

To facilitate effective processing of suspicious transaction reports, the Joint Financial Investigation Unit (JFIU), staffed by the HKP and Customs and Excise Department, has been in operation since 1989. It collects and processes suspicious transaction reports, analyzes the information contained therein, and disseminates the reports to the appropriate law enforcement units for further investigation. 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.

The Hong Kong JFIU is housed in a separate, secure area in the Narcotics Bureau within the Police Headquarters Complex. It is treated as a separate unit and acts independently from other police units in order to preserve its autonomy and independence. While the JFIU is considered a separate and distinct unit, it does not have any independent or devolved budget. Day-to-day operating costs are met from the budgets of the Police and Customs and Excise Departments. JFIU receives disclosures, conducts analysis on them, and in suitable cases distributes them to investigation units. JFIU can distribute cases to all Hong Kong law enforcement agencies, similar overseas bodies and in certain circumstances regulatory bodies in Hong Kong.

The JFIU has direct access to the records and databases maintained within the Police and Customs and Excise Departments. It also has direct access to the databases of the Transport Department, the Companies Registry and the Land Registry. Access to records maintained by other government agencies can be granted upon JFIU’s written request and in the case of the tax authority, a court order. Financial institutions are obligated to provide the JFIU with any information relating to a suspicious transaction that it has reported. However, the JFIU does not have access to the databases of financial institutions. If more detailed information is required in respect of suspicious transaction reports, the financial institution must be formally subpoenaed. Section 12(6) of the UNATMO and Sections 25A (9) of both the DTROP and the OSCO allow for the dissemination of information to domestic and foreign agencies to combat crime and terrorism. Hong Kong legislation does not require JFIU to enter into MOUs with overseas counterparts for the purpose of information exchange. Up to the end of October 2008, the JFIU had received 12,560 STRs in 2008, of which 2,101 had been referred to law enforcement agencies for further investigation. 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.

The Hong Kong Police have a number of dedicated units responsible for investigating financial crime. The Commercial Crime Bureau and Narcotics Bureau are the primary units responsible for investigating money laundering and terrorist financing cases. Serious Crimes Squads in Police Districts are responsible for investigating less serious financial crimes. Resources and training are adequate for their current mission. The Independent Commission Against Commission (ICAC) investigates money laundering cases related to corruption while the Financial Investigation Group (FIG) of the Customs and Excise Department is responsible for money laundering investigations related to drug trafficking and organized crime.

As of the end of September 2008, Hong Kong law enforcement agencies had prosecuted 267 persons for financial crimes. However, the HKP has not reported any financially significant cases during 2008. Hong Kong Customs and Excise reported two arrests and one prosecution for money laundering since January 1, 2008.

Under the DTRoP and the 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.

Hong Kong normally confiscates crime proceeds only after conviction in a court of law. However, the court may allow property seized on being imported into Hong Kong to be forfeited, if it is satisfied that such property is related to drug trafficking. The court may, on an application by the Secretary for Justice, order the forfeiture of terrorist property. An order may be made under either of these provisions independent of any criminal proceedings with which the property concerned is connected. The civil standard of proof applies in these proceedings. There are provisions under DTROP and OSCO to trace, seize and freeze assets without undue delay. The system for freezing and forfeiture of terrorist property is provided for under the UNATMO.

The year-end running balance for assets frozen and seized and the accumulative amounts of assets forfeited with reference to narcotics-related (DTROP) and criminal-related (OSCO) offenses for the past five years are provided below. There is a progressive increase in the confiscation for criminal-related offenses, reflecting additional efforts made by Hong Kong law enforcement agencies. No terrorist-related assets have been frozen, seized, and/or forfeited. Banks and other financial institutions cooperate with law enforcement efforts to seize or freeze bank accounts. According to JFIU figures as of September 30, 2008, the value of assets under restraint (pending confiscation proceedings) was $306.42 million, and the value of assets under a court confiscation order but not yet paid to the government was $10.07 million. JFIU also reported that, as of September 30, 2008, $58.44 million had been confiscated and paid to the government since the enactment of DTRoP and OSCO. The value of assets under restraint (pending confiscation proceedings) for 2007 was $265.44 million. The value of assets under a court confiscation order but not yet paid to the government was $10.96 million in 2007. The value of assets confiscated and paid to the government in 2007 was $56.18 million. No figures were available for 2008. Hong Kong has shared confiscated assets with the United States.

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. There has been no legislation to comport with special Recommendation Nine on cash couriers.

To help deal with anti-money laundering (AML) issues from a practical perspective and reflect business needs, the Hong Kong Monetary Authority (HKMA) established an Industry Working Group on AML. Three subgroups have been established to share experiences and consider the way forward on issues such as politically exposed persons (PEPs), 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. However, Hong Kong’s 2008 FATF/APG Mutual Evaluation pointed to lack of sufficient oversight of informal financial entities, including remittance agents and money changers. Hong Kong authorities are expected to submit a proposal in early 2009 to increase supervision of these entities.

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 SFC and the 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. There are no special provisions in Hong Kong law to monitor the financial activities of charitable or nonprofit agencies.

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 report, which was discussed at FATF’s June 2008 Plenary meeting, praised Hong Kong’s AML and CTR regime but identified a lack of oversight for remittance agents and money changers, and the designated nonfinancial business and professions such as accountants and lawyers, the lack of statutory backing for customer due diligence and record keeping requirements for financial institutions, and gaps in Hong Kong’s legal framework to fully implement the United Nations Terrorist Financing Convention. Hong Kong is required to submit a report on its progress toward addressing these deficiencies in June 2010. Hong Kong plans to conduct a comprehensive review of its legal and regulatory regime and introduce specific measures to improve its ability to prevent, detect, investigate, enforce and prosecute money laundering and terrorist financing activities. The initial phase of the review will focus on the AML/CTF regulatory regime for the financial services sectors. Consultation with the concerned sectors is expected to follow publication of concrete proposals early in 2009. To ensure that the AML/CTF measures do not conflict with policies to promote Hong Kong as an international financial centre, the Financial Services and the Treasury Bureau has taken over from the Security Bureau the overall coordinating role for AML/CTF policies within the Administration, beginning in October 2008.

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.

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 25 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. Apart from exchange of intelligence and other information permissible at the law enforcement level, documentary evidence may also be provided pursuant to money laundering and terrorist financing investigations or proceedings pursuant to requests made under the operative agreement with the United States on mutual legal assistance. Hong Kong provides similar assistance to jurisdictions that have operative bilateral or multilateral agreements with United States or on the basis of reciprocity under the MLAA.

In 2008, Hong Kong Customs conducted two successful joint operations with the U.S. Drug Enforcement Agency (USDEA) and U.S. Immigration and Customs Enforcement (USICE). For the joint operation with DEA, crime proceeds of approximately HKD 8 million held by the key member of a drug-related money-laundering syndicate was restrained under the MLAA in Hong Kong in August 2008. The arrested person was eventually extradited to the United States in October 2008. For the joint operation with USICE, a subject from Taiwan was successfully extradited to the United State in August 2008. ICAC has responded to a Letter of Request regarding a corruption case involving a principal official of the Macau SAR for the production of bank records.

The Government of Hong Kong should further strengthen its anti-money laundering/counterterrorist financing regime by requiring more stringent customer due diligence and record keeping requirements for financial institutions; mandating more suspicious transaction reporting by lawyers and accountants, as well as by business establishments, such as auto dealerships, real estate companies, and jewelry stores ;establishing threshold reporting requirements for currency transactions; and putting into place “structuring” provisions to counterevasion efforts. . Hong Kong should institute mandatory oversight for remittance agents and money changers, and the designated nonfinancial business and professions such as accountants and lawyers. It should also establish mandatory cross-border currency reporting requirements and address trade-based money laundering, as well as monitor the financial activities of charitable or nonprofit agencies. . 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.


Because of Hungary’s advantageous and pivotal location in central Europe, a cash-based economy, and a well-developed financial services industry, money laundering in Hungary is related to a variety of criminal activities, including illicit narcotics-trafficking, prostitution, trafficking in persons, and organized crime. Criminal organizations (especially those from Russia and Ukraine) have become well-established in Hungary. Several factors contribute to the prevalence of organized crime in Hungary. First, Hungary shares borders with seven other countries and is within the borders of the European Union (EU), thereby making it one of the largest markets for organized criminal activity. Second, as a transshipment country, Hungary’s most vulnerable borders are the non-EU eastern and southern ones, such as those with Ukraine (cigarette and human trafficking) and Serbia (drug and arms trafficking), as well as Romania (human trafficking and prostitution). Finally, compared to other countries in the region, Hungary has a well-developed transportation system, facilitating the operation of criminal enterprises. Other prevalent economic and financial crimes include official corruption, tax evasion, real estate fraud, and identity theft (copying/theft of bankcards). Money laundering reportedly has not increased in recent years though there have been some isolated, albeit well-publicized, cases.

The Government of Hungary (GOH) has worked continuously to improve its anti-money laundering/counterterrorist financing (AML/CTF) enforcement regime and to implement the Financial Action Task Force (FATF) Forty Recommendations and the Nine Special Recommendations on Terrorist Financing.

A provision on the money laundering offense [Section 303 of the Hungarian Criminal Code (HCC) as amended by Act XXVII of 2007 (Act XXVII)] enlarges 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 also addresses problems that have occurred within 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 suspicious transaction report (STRs) that are reportedly of low quality. Act XXVII 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.

The Government of Hungary (GOH) bans offshore financial centers, including casinos, by Act CXII of 1996 on Credit Institutions (Act CXII). 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 bans the use of any indigenous alternative remittance systems that bypass, in whole or in part, financial institutions. The GOH has prohibited the use of anonymous savings booklets since 2001. Act CXX of 2001 eliminates bearer shares and requires that all such shares be transferred to identifiable shares. All shares now are 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 12 billion HUF (approximately $60,200,000) for 2.82 million owners, corresponding to an average account size of 4,250 HUF (approximately $21). 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.

Hungary re-codified its original anti-money laundering (AML) legislation, Act XV of 2003 on the Prevention and Impeding of Money Laundering. The implementing regulations entered into force in August 2006. These measures ensure uniform implementation with regard to the definition of “politically exposed persons” (PEPs), the technical criteria for simplified customer due diligence (CDD) 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). The AML/CTF Act was published on November 28, 2007, and entered into force on December 15, 2007. The AML/CTF Act establishes the legislative framework for preventing and combating terrorist financing and complies with international AML standards and requirements. The AML/CTF Act expands the scope of covered entities to cover the following professions: financial services, investment services, the insurance industry, commodity exchange services, postal money orders and transfers, real estate agents, auditors, accountants, tax advisors, casinos, jewelry merchants, 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 CDD and establishes detailed rules, including simplified as well as enhanced CDD for low- or high-risk customers or business relationships, and appropriate procedures to determine whether a person is a PEP. The AML/CTF Act also addresses originator information accompanying transfers of funds. The Act contains provisions on internal training and communication procedures, detailing special protocols for lawyers and notaries. Safe harbor provisions protect individuals executing their AML/CTF reporting obligations.

Obliged entities must send a 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 the effectiveness of the AML/CTF measures can be evaluated.

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 the banks’ internal control mechanisms as well as to supervision by the Hungarian Financial Supervisory Authority (HFSA). 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 HUF (approximately $2,500), whether in a single transaction or derived from consecutive separate transactions. Exchange booths must file STRs for suspicious transactions in any amount.

Act No. XLVIII of 2007 states the Hungarian customs authorities should record the declarations of travelers entering or leaving the European Community with cash totaling or exceeding 10,000 euros (approximately $13,500) 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 FIU.

Hungary’s financial regulatory body, the 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. In certain cases, DNFBP supervisory functions are performed by self-regulatory bodies: the Hungarian Bar Association with respect to lawyers, the Hungarian Association of Notaries Public with respect to notaries public, and the Chamber of Hungarian Auditors and Auditing Activities with respect to auditors. The Hungarian Trade Licensing Office is the supervisory authority with respect to natural and legal persons trading in goods and allowing cash payments above the amount of 3.6 million forints (approximately $18,000).

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. The HFSA established a standing AML/CTF working group that includes representatives of financial institutions and their associations.

Hungary’s FIU, the Central Criminal Investigation Bureau (CCIB) was originally established in 1995 as a unit under the Hungarian National Police (HNP) where it was named the National Bureau of Investigation’s Anti-Money Laundering Department (ORFK). A January 2008 amendment to Act XIX of 1998 on the Hungarian Criminal Procedure transfers the authority to investigate money laundering crimes and noncompliance with AML/CTF laws from the HNP to the HCFG. As a result, the ORFK was transferred from the HNP to the HCFG and renamed the CCIB. The FIU no longer performs investigations on its own. STR data is forwarded to the HNP for investigation. This organizational restructuring of the FIU has caused substantial change in its daily operations, due primarily to a large turnover in personnel. In 2008, many senior officials (including the FIU head) and analysts were replaced by newer, less experienced staff from the HCFG. In addition, the Hungarian FIU’s Egmont membership was temporarily suspended for three months in early 2008 pending review of the FIU’s new operational status. Despite these events, the FIU is currently operating smoothly and exchanging information with counterpart Egmont FIUs.

The FIU serves as the national center for receiving and analyzing STRs and other information regarding potential money laundering or terrorist financing. It is also responsible for disseminating that information to the competent authorities. STR reporting is scheduled to become electronic by the end of 2008, and will include software for risk analysis and statistical data processing. In 2006, the FIU received 9,999 STRs, and opened 193 cases based upon STRs received. From January 1, 2007 until December 15, 2007, the FIU received 9,475 STRs, opened 40 cases, and confiscated 971,681,352 HUF (approximately $5,500,000). Between January 1 and November 27, 2008, the FIU received 9,512 STRs. During this same period, the CCIB opened 12 new criminal money laundering investigations, seized proceeds in the amount of 4,580,479 euro (approximately $6,100,000), and froze a total of 7,037,877 euro (approximately $9,400,000) in proceeds in bank accounts. The FIU also supported 97 ongoing criminal investigations.

The HFSA and other supervisory bodies have started to provide increased outreach and guidance to financial institutions on their reporting obligations. The FIU provides AML/CTF training for the employees of financial institutions and other obliged entities, especially savings banks, in order to improve the quality of STRs filed.

Sections 151-156 of the Hungarian Code of Criminal Procedure, Act 19 of 1998, contain provisions on asset forfeiture. Under these provisions, assets used to commit crimes, that pose a danger to public safety, or that 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. In case of suspicious transactions, the FIU freezes the assets and informs the bank whether it will pursue an investigation. In domestic cases, the FIU has 24 hours to inform the bank of its intentions. For nondomestic transactions, the timeframe is extended to 48 hours. 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. An Asset Recovery Unit will soon be established within the HNP Financial Crimes Division. This change will require an amendment to Decree III of 2008 on Jurisdiction of Investigative Authority, and Act CXXX of 2003 on Cooperation between EU Member States in Criminal Matters.

Act IV of 1978, Article 261, criminalizes terrorist acts. Hungary criminalizes 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 Section 9 of Act XXVII, states that any person sponsoring activities of a terrorist or a terrorist group by collecting funds or providing material assets or any other support or facilitation faces five to ten years imprisonment. The GOH distributes the updates of the UN designated terrorist lists to obligated entities (2007 Act 108). Additionally, supervised institutions and the general public can 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 Executive Order 13224 on the HFSA homepage. Act CLXXX of 2007 establishes the legal framework for freezing assets/funds related to terrorist financing. According to the Act, the FIU examines whether the certain persons and entities subject to the EU’s economic and financial restrictive measures have funds or economic resources in Hungary. 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.

The GOH is a member of Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL), and Hungary’s FIU is a member of the Egmont Group. Hungary is a party to the UN 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 significant progress regarding international communication. Despite its progress, the Government of Hungary 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, which recent conferences organized by the Prosecution Office have been promoting. The police and FIU should have the option to extend their 24-hour time limit for the freezing of assets. The capacity and knowledge of employees of financial institutions and other obliged entities must be raised to improve the quality of STRs filed, in particular those which may be related to terrorist financing. The GOH also should take steps to strengthen its anti-terrorist financing laws.


India’s emerging role in regional financial transactions, its large system of informal cross-border money flows, large underground economy, widespread use of hawala, and historically disadvantageous tax administration all contribute to the country’s vulnerability to money laundering activities. While most money laundering in India aims to facilitate widespread tax avoidance, criminal activity contributes substantially. 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. The 2008 terrorist attacks in Mumbai intensified concerns about terrorist financing in India.

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 whose deep roots in South Asia make it popular among all strata of Indian society, not only immigrant workers. The hawala system can provide the same remittance service as a bank with little or no documentation, at lower rates and with faster delivery, while providing anonymity and security for its customers. Hawala can also be used to avoid currency or capital flow restrictions and to avoid government scrutiny in financial transactions. 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.

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 countervaluation—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.

The Government of India (GOI) neither regulates hawala dealers nor requires them to register with the government. The Reserve Bank of India (RBI), India’s central bank, argues that hawala dealers cannot be regulated since they operate illegally and therefore cannot be registered, easily monitored, and regulated. Indian analysts also note that hawala operators are often protected by politicians and corrupt officials.

According to Indian observers, funds transferred through the hawala market are equal to between 30 to 40 percent of the formal market. The RBI estimates that remittances to India sent through legal, formal channels in 2007-2008 amounted to $42.6 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. According to estimates by the World Bank, in 2007, India overtook China and Mexico to become the top country for remittance inflows.

The Indian government has expanded its regulation of the formal 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 (NRIs) are permitted to receive cash payments up to the equivalent of $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 nonbank money transfer operations like currency exchange kiosks and wire transfer services.

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. All Indian states have implemented the national VAT mandate.

In the aftermath of the September 11 terrorist attacks in the United States, in January 2003 India joined the global community in addressing concerns about money laundering and terrorist finance by implementing the Prevention of Money Laundering Act (PMLA). 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 that are listed in a schedule to the Act. However, the Financial Action Task Force (FATF), an international standard setting body on combating illicit finance, recommends a much larger group of predicate offenses, including organized crime, fraud, smuggling, and insider trading. The FATF has also recommended that India lower the monetary threshold for activity to be considered a crime. Penalties for offenses under the PMLA include imprisonment for three to seven years and fines as high as the equivalent of $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 the equivalent of $20,000 and keep a record of all transactions dating back 10 years. All banks and finance companies must report monthly to the FIU a list of all cash transactions (single or linked) of over $20,000 and its equivalent in foreign currencies. All the private banks and most of the larger public banks have also implemented appropriate software to create alerts when the transactions are inconsistent with risk categorization and updated profile of customers. Indian outlets of wire transfer services and casinos have also been ordered to report their transactions every month. Individual cash transactions below the equivalent of $1,000 need not be reported.

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 passed the Prevention of Terrorism Act (POTA), which criminalized 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.

In October 2008, the Indian Supreme Court ordered lower courts to abide by the decisions of the POTA Central Review Committee. In a May 2005 decision, the Committee recommended that POTA charges be dropped against 131 people accused of setting on fire a train car at the Godhra railway station in the State of Gujarat on February 27, 2002. The incident killed 59 people and sparked widespread communal riots in Gujarat. The Supreme Court October 2008 order may allow the Godhra accused, as well as several POTA detainees in other states, to receive bail

As part of the PMLA mandate, India’s financial intelligence unit (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 three years, the FIU has become fully operational and disseminates report analysis to law enforcement and intelligence agencies to investigate and prevent money laundering and curb financial crimes. The FIU consists of a staff of forty-three officers, headed by an Indian Administrative Service Director of equal rank to a Joint Secretary in the GOI ministries. The FIU has been active in providing relevant financial analysis and money laundering investigative training to its staff members as well as bank officials so that suspicious transaction reports (STRs) are carefully reviewed and efficiently processed.

According to the FIU’s Annual Report, which covers March 2007-2008, the FIU received more than 2,733 STRs, of which about 1,396 were shared with relevant law enforcement and intelligence 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 the 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 the 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 Director has authority to levy penalties on reporting entities for noncompliance to the provisions of the PMLA.

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. The FIU maintains regular contact with government departments that receive information about STRs, including the Central Board of Direct Taxes, Enforcement Directorate, Narcotics Control Bureau, and intelligence agencies.

In June 2007, India’s FIU was admitted as a member of the Egmont Group. Admission into the Egmont Group is seen by the Indian government as a major step forward by India to join the international community in its fight against money laundering and terrorist financing. The FIU has signed some bilateral MOUs (including with Brazil, Mauritius, and the Philippines) to further facilitate and expedite financial intelligence information sharing. In FY 2007-08, the FIU received requests for information from foreign FIUs for 39 cases and requested information from foreign FIUs in 13 cases.

Under the MOF, the Enforcement Directorate is responsible for investigations and prosecutions of money laundering cases. In 2007-2008, 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. 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 with aspirations that in a two-year probationary period it will adopt FATF core recommendations towards gaining full membership. These recommendations focus on meeting international standards for the criminalization of money laundering, customer due diligence, record-keeping, suspicious transaction reporting, criminalization of terrorist financing, and suspicious transaction reporting relating to terrorist financing. 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 and transition them from observer to full member within this international body. In October 2008, the GOI tabled a bill in Parliament to amend the PMLA. Under the proposed new legislation, insider trading and market manipulation will be treated as a laundering offence and warrant stricter punishment. Offences related to human trafficking, smuggling of migrants, counterfeiting, piracy, environmental crimes, and over-invoicing and under-invoicing under the Customs Act will also be punishable under the PMLA. Credit card payment gateways such as Visa and Mastercard, money changers, money transfer service providers like Western Union, and casinos will also be subject to India’s money laundering legislation and face mandatory reporting obligations. Fraud and theft offences have been included as scheduled offences under the PMLA if committed with cross-border implications. The draft legislation also empowers the Enforcement Directorate to “search premises immediately after the offence is committed.” The bill also enables the GOI to return the confiscated property to the requesting country in order to implement the provisions of the United Nation’s Convention against Corruption. While these amendments to the PMLA broaden the scope of predicate offences and criminalize terrorist financing, the legislation falls short of certain FATF recommendations, including retaining a high value threshold on many of the offenses, unless they are cross-border offenses.

The financial services sector is supervised and regulated by the Reserve Bank of India, the Securities and Exchange Board of India (SEBI), and the Insurance Regulatory and Development Authority (IRDA). SEBI, IRDA, 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. Notably, there is no requirement that SEBI-regulated entities screen collected KYC data, under the presumption that in any noncash transaction, Indian banks have already screened the parties or, if coming from abroad, they have registered with SEBI as a foreign institutional investor.

Prompted by the RBI’s 2002 notice to commercial banks to adopt due diligence rules, most 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 exposed persons (PEPs) who reside outside of India and identify the source of these funds before accepting deposits of more than $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 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. No shell bank exists in India nor is permitted to operate under Indian laws. The RBI guidelines impose an obligation on the banks that, as far as reasonably possible, their respondent banks do not offer services to shell institutions.

The financial institutions that operate overseas branches or subsidiaries have been advised to implement the more rigorous anti-money laundering standard—either the Indian law or the host country obligations. Companies are registered under the provisions of the Companies Act and are regulated by the Registrar of Companies. India does not allow bearer shares. Listed companies are subjected to further regulations/restrictions by stock exchanges and supervision of the SEBI. Stock exchanges and other intermediaries are required to comply with the provisions of the PMLA and the rules in respect of client companies.

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.

To prevent the abuse of charities for money laundering or terrorism finance, the Foreign Contributions Regulation Act of 1976 requires any nongovernmental entity to register or request permission from the MHA before receiving foreign donations. The government requires registered entities to submit annual reports documenting foreign contributions and their use.

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 counterterrorist 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 Indian government is now considering a proposal to replace the FCRA with the Foreign Contribution Regulation (FCR) Bill of 2006 to regulate existing laws governing contributions from abroad and check the use of foreign funds for subversive activities by terrorist and anti-national organizations. The FCR Bill was introduced in Parliament in December 2006 and then referred to the Parliamentary Standing Committee on Home Affairs for further debate. The bill provides for closer government monitoring, additional registration requirements, and expands the classification of individuals banned from accepting any foreign contribution. Meanwhile, the Parliamentary Standing Committee has recently indicated that the legislation should be amended to define the term “foreign source” more clearly in relation to Indian companies that have more than 50 percent foreign holding. The committee also suggested that companies with foreign holdings over 50 percent should be excluded from the purview of the term in the proposed law.

The UNSCR 1267 Sanctions Committee’s consolidated list is routinely circulated to all financial institutions by the RBI, as are other terrorist watch lists adopted by the UN. Prior to the terrorist attacks in Mumbai during late November 2008, India lacked both an adequate legal authority and enforcement mechanism for freezing the funds of terrorist entities. In response to the attacks, India’s parliament in December 2008 enacted an amendment to the UAPA containing provisions to address these deficiencies, including an explicit authority to freeze the funds of terrorist entities designated under UNSCR 1373. However, it is too soon to assess the implementation of this amendment and the impact it will have on India’s ability to combat terrorism finance.

The GOI is a party to the 1988 UN Drug Convention and the UN Convention for the Suppression of the Financing of Terrorism. It is a signatory to, but has not yet ratified, the UN Convention against Transnational Organized Crime and the UN Convention against Corruption. India has signed and ratified a number of mutual legal assistance treaties with many countries, including the United States.

The Government of India should pass the PMLA amendments in Parliament in order to strengthen its AML/CTF regime and to work towards full membership in the FATF. Further steps in tax reform will also assist in negating the popularity of hawala and in reducing money laundering, fraud, and financial crimes. India should become a party to the UN Conventions against Transnational Organized Crime and Corruption. Also, India should pass the Foreign Contribution Regulation Bill for regulating nongovernmental 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 gaps in financial system regulation, a cash-based economy, a lack of effective law enforcement, and the increasingly sophisticated tactics of major indigenous terrorist groups, such as Jemaah Islamiya, and their financiers from abroad. 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 goods, illegal logging, and corruption. Indonesia also has a long history of smuggling, a practice facilitated by thousands of miles of un-patrolled coastline, weak law enforcement and poor customs infrastructure. The proceeds of illicit activities are easily moved offshore and repatriated as required for commercial and personal needs. Indonesia is emerging from a period marked by weak rule of law and extreme levels of corruption. Corruption remains a very significant issue for all aspects of Indonesian society and a challenge for anti-money laundering and counter terrorism finance (AML/CTF) implementation.

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 (AML) 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 address the Financial Action Task Force’s (FATF’s) concerns about the money laundering situation in the country. 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 a suspicious transactions report (STR) to three days or less after the discovery of an indication of a suspicious transaction.

However, the amendment contains a number of significant deficiencies. The direct and indirect provision of funds to a terrorist organization is not comprehensively covered and there is no clear legal obligation to report STRs related to terrorist financing. In addition, since passage, the ML offence has not yet been used to pursue the proceeds of a wide range of predicate offences. This ineffective implementation is in part due to the narrow scope of the ML offence, as well as the Indonesian government’s continuing use of alternative indictments and enforcement capacity issues. 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 (RP) (approximately $85,340).

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 Government of Indonesia (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 and has not yet passed. The amendment 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.

On April 17, 2007, Indonesia adopted a National Strategy 2007-2011 for the prevention and eradication of money laundering. The GOI held two National Coordination Committee meetings in December 2007 and May 2008 to coordinate implementation of the national strategy.

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 reports directly to the President. The core FIU functions outlined in Article 26 of their anti-money laundering law states that PPATK shall receive, analyze, evaluate and disseminate currency and suspicious financial transaction reports to law enforcement agencies, provide advice and assistance to relevant authorities, and issue publications. In addition, PPATK prepares and offers recommendations to provide direction for national policy in the area of prevention and eradication of money laundering and other serious crimes.

As of December 31, 2008, the PPATK had received a total of 23,056 STRs from banks and nonbank financial institutions. Approximately 11,000 of these STRs were received during 2008. The agency also reported that it had received over 6.3 million cash transaction reports (CTRs) from banks, moneychangers, rural banks, insurance companies, and securities companies. PPATK has submitted a total of 612 cases to various law enforcement agencies based on their analysis of 1,215 STRs.

A number of deficiencies in Indonesia’s AML law have resulted in weak customer due diligence (CDD) standards for Indonesian financial institutions. These institutions have no explicit requirement to perform diligence when money laundering or terrorism finance is suspected and there is also no clear provision in the law to prohibit the continuing operation of anonymous accounts. Requirements for confirming whether a person acting on behalf of a legal person is so authorized are also not set out in current laws or regulations.

The 2008 Asia Pacific Group (APG) mutual evaluation of Indonesia notes that since 2004, there have been 176 money laundering investigations, investigations, 19 prosecutions and 11 convictions. Most of the prosecuted money laundering cases have been limited to the proceeds of corruption or fraud. There are few investigations and prosecutions of money laundering cases in parallel with predicate offences. Sentences included imprisonment of up to six to eight years and fines up to IDR 500 million (approximately $42,600).

The Indonesian National Police (POLRI) is the competent authority for investigating money laundering and terrorist finance offenses, while POLRI, the Corruption Eradication Commission (KPK), Customs and various other agencies are responsible for predicate offences. The POLRI, as a matter of priority, has trained a significant number of its officers for AML/CTV. However, given the size of the country and the money laundering and terror finance threat level, POLRI lacks capacity to proactively initiate investigations. Although the POLRI has successfully arrested over 400 terrorists in recent years, the agency has not investigated terrorist financing related to those cases.

The Transnational Crime Coordination Center reports that the POLRI conducted 133 inquiries in 2008 (through September) of financial crimes that have money laundering as an element. PPATK reports there has been one case that has resulted in successful prosecution in 2008. The case, brought in central Jakarta court in January 2008, involved money laundering and banking fraud and included three defendants. The defendants collected funds from customers without a license and were suspected of laundering the fraudulent proceeds. They received sentences ranging from 8-12 years imprisonment and individual fines of Rp 10 billion (approximately $852,700).

The PPATK actively pursues broader cooperation with relevant GOI agencies. The PPATK has signed a total of 22 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—Financial Institutions (BAPEPAM-LK), 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 Commission, 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, the Province of Aceh, the Commodity Futures Trading Supervisory Agency, Elections Supervisory Body, Banking University Perbanas Surabaya, University of Surabaya, and Gajah Mada University .

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. Financial institutions and their employees are provided with necessary “safe harbor” provisions for reporting STRs.

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. Bank Indonesia Regulation No. 5/23/PBI/2003 extended their KYC principles to rural 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. Similar regulations for nonbank financial institutions have also been implemented. The decree of the head of the Capital Market and Financial Institutions Supervisory Agency No. KEP-313/BL/2007, dated August 28, 2007, amended Regulation No. V.D.10 to strengthen KYC principles.

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 Rp (approximately $9,370) 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 than 100 million Rp in cash (approximately $8,524) to declare such transactions to Customs. This information is to be declared on the Indonesian Customs Declaration (BC3.2). The cash declaration requirements do not 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 end-October 2008, the PPATK has received more than 2,764 cross border of cash reports from Customs. The reports were derived from airports in Jakarta and Denpasar, the seaports of Batam and Tanjung Balai Karimun, Bandung, Batam, Denpasar, Medan and Dumai. Despite these reports, detection and investigative capacity remain weak. As of July 2007, 20 investigations were initiated from cross-border reports. 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. Banking legislation pending with the Indonesian House of Representatives would allow BI to take freezing action on its own authority. BI officials expect this legislation to be approved in 2009. 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. Indonesia has a draft asset forfeiture bill, which, if enacted, would give a wide range of powers to investigating officials to identify and trace property.

The PPATK significantly supports the KPK with financial intelligence information. In December 2004 the newly elected President of Indonesia signed a Presidential Instruction to all agencies to intensify efforts in combating corruption in line with their respective functions and roles. The instruction also dictates the establishment of a national Plan of Action combating corruption for the years 2004 through to 2009. The Plan contains three components; namely preventive measures, repressive measures, and monitoring and evaluation, and is seen by the Indonesian authorities as a sustainable and transparent approach to combating corruption in an integrated and coordinated fashion. Indonesia is ranked 126 of 180 countries in Transparency International’s 2008 Corruption Perception Index.

Comprehensive figures for assets frozen, seized and/or forfeited are not compiled in a central location. The Corruption Eradication Commission reports that it seized, froze or confiscated assets in corruption-related cases in the amount of 404 billion Rp (approximately $34.5 million) in 2008, through October 31. This compares to assets of 45 billion Rp (approximately $3.8 million) in 2007 and 12.7 billion (approximately $1.1 million) Rp in 2006.

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). Members have been chosen in 2008 for a new Witness and Victim Protection Body, established by this law. Indonesia’s AML Law and Government Implementing Regulation No. 57/2003 also provide protection to whistleblowers and witnesses. An additional implementing regulation, No. 44/2008, issued May 2008, addressed provision of compensation, restitution and assistance to witnesses and victims. Despite this progress, the lack of an independent budget or dedicated facilities has hampered the newly established body from fulfilling its mandate.

The October 18, 2002 emergency counterterrorism 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 PPATK issued Decision No. Kep. 13/1.02.2/PPATK/02/08, dated February 4, 2008, regarding Guidelines on Identification of Suspicious Financial Transactions related to Terrorism Financing for Financial Service Providers. Indonesia’s commitment to overcoming terrorism is evidenced by its success in apprehending terrorists, with 423 arrests and 367 convictions of terrorists in recent years.

There is very weak transparency and governance in the Non Profit Organization (NPO) sector and few measures in place to prevent and detect the abuse of NPOs possibly involved in terror finance. According to the Asia Pacific Group 2008 mutual evaluation, “There is no effective regulation, oversight or supervision of NPOs in Indonesia, either by government agencies or by self regulatory bodies within the NPO sector. Efforts to implement some regulatory controls over the sector have been ineffective. Although the PPATK has reached out to the NPO sector to raise awareness of terror finance risks, NPO regulators have not taken up issues of transparency, good governance and compliance with laws and regulations.” Indonesia also has yet to complete a review of its domestic NPO sector, as requested by the APG.

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. This is an urgently needed development, as large scale unregulated informal remittance channels continue to operate without adequate registration, oversight, and investigations. BI issued circular letter 8/32/DASB on December 20, 2006, requiring registration of nonbank money remitters since January 1, 2007. BI intends to issue another circular in 2008 that will replace this registration system with a licensing system, effective January 1, 2009. Currently 13 nonbank money remitters have registered with BI, and several others have pending registration applications. 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 PPATK issued Decision no. KEP-47/1.02/PPATK/06/2008, dated June 2, 2008, regarding Guidelines on the Identification of High Risk Products, Customers, Business and Countries for Financial Service Providers. The GOI has initiated a dialogue with charities and nonprofit entities to enhance regulation and oversight of those sectors.

BI also issued the following provisions concerning money changers to improve implementation of Recommendation 5 on Customer Due Diligence and Record Keeping: BI Regulation No. 9/11/PBI/2007, dated September 5, 2007; BI Circular Letter No. 9/23/DPM, dated October 8, 2007, concerning the permit procedure, implementation of KYC principles, supervision, reporting and imposition of sanctions for nonbank money changers; BI Circular Letter No. 9/36/DPND, dated December 19, 2007, concerning the permit and reporting procedures for banks which perform business activity as money changers; and BI Circular Letter No. 9/38/DPBPR, dated December 28, 2007, concerning the permit and reporting procedure for rural banks and sharia rural banks which perform business activity as money changers. PPATK and BI carried out an authorized money changer awareness campaign during the second half of 2007 and the first half of 2008, in collaboration with the Millennium Challenge Corporation Threshold Program and USAID.

BI has effective legal powers and policies in place to ensure that shell banks are not permitted, although there is no explicit legislative prohibition on establishing a shell bank in Indonesia. The bank licensing procedures followed by BI effectively precludes establishment of a shell bank and BI Regulation 3/10/PBI/2003 as amended by 5/21/PBI/2002 provides that banks in Indonesia are required to refuse to open an account and/or conduct transactions with any prospective customer incorporated as a shell bank.

Bearer shares appear to remain a feature of the Indonesian financial system, as the law previously permitted both bearer and registered shares. The new Limited Liability Company Law (Law 40/2007), August 16, 2007, prohibits bearer shares. This provision, in conjunction with the new Investment Law, prevents parties from making nominee arrangements. Complete implementing regulations have not yet been issued for the new law and the process for removing bearer shares from the system is not clear. Previously issued bearer shares appear to remain valid.

The GOI has established special economic zones to attract both foreign and domestic investment. In 2007, the House of Representatives approved establishment of free trade zones (FTZs) in the Batam, Bintan and Karimun islands. The GOI established a Batam- Bintan- Karimun Free Trade Zone Council and has made preparations for the implementation of free trade zone regulations. Batam Island, located just south of Singapore, has long been a bonded zone in which investment incentives have been offered to foreign and domestic companies. In 2007, 973 domestic companies, foreign companies and joint ventures had invested more than $1 billion in the zone. Numerous Indonesian authorities perform supervision over firms located in the special economic zones (the Investment Coordinating Board, the Ministry of Laws and Human Rights, the Ministry of Manpower, the Ministry of Finance). Supervision includes confirming identities of investors. In Batam, other authorities exercising supervision include the Batam Industrial Development Authority and the Municipality of Batam. The GOI is currently in the process of drafting regulations providing wider authority for Customs & Excise officials to regulate the flow of goods through the new Batam FTZ, given the FTZ’s vulnerability to smuggling.

Indonesia is an active member of the Asia/Pacific Group on Money Laundering (APG), and in 2008 served as the co-chair. The APG conducted its second mutual evaluation of Indonesia in November 2007 and the report was 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 27 MOUs, 25 of which were 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 Indonesia 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. Indonesia is a party to the UN 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.

The Government of Indonesia has made progress in constructing an AML regime. However, despite the continuing threat of terrorism in the country and numerous arrests related to terrorism, efforts to combat terrorist financing have been weak and should be strengthened. Sustained public awareness campaigns, new bank and financial institution disclosure requirements, and the PPATK’s support for Indonesia’s first credible anticorruption drive has led to increased public awareness of financial crimes. Increased prosecution of high-profile corruption cases in 2008 was an important advance in the GOI’s efforts to eradicate pervasive corruption. Further investment in human and technical capacity and greater interagency cooperation are needed to develop a truly effective anti-money laundering regime. Authorities should ensure that the PPATK is able to have access, directly or indirectly, to required financial, administrative and law enforcement information on a timely basis. Indonesian police and customs authorities should be encouraged to initiate money laundering investigations at the “street level” and not be dependent on financial intelligence filed with the PPATK. Law enforcement agencies should systematically investigate money laundering in parallel with their investigations of predicate offenses. The highest levels of GOI leadership should continue to demonstrate strong support for strengthening Indonesia’s anti-money laundering regime. For example, Indonesia has not established comprehensive controls or oversight over the provision of wire transfers. This is a significant shortcoming in preventative measures for the financial system. Indonesia’s cross-border currency declarations should also cover bearer negotiable instruments. Considerably more enforcement is needed to protect Indonesia’s extraordinarily long and porous borders. Indonesia should establish clear legal mechanisms and administrative or judicial processes to trace and freeze assets of entities included on the UNSCR 1267 Consolidated List and to implement its obligations under UNSCR 1373. 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, but does have a large free trade zone on Kish Island. Iran’s economy is marked by a bloated and inefficient state sector and over-reliance on the petroleum industry. Large oil and gas reserves provide 85 percent of government revenue, and state-centered policies have caused major distortions in the economy. A combination of price controls and subsidies continue to weigh down the economy, and, along with widespread corruption, have undermined the potential for private sector-led growth. High oil prices in recent years have enabled Iran to amass nearly $70 billion in foreign exchange reserves, but the economy only experienced moderate growth during this period and is vulnerable to a sustained drop in the value of oil.


After the Iranian Revolution of 1979, the Government of Iran (GOI) nationalized the country’s banks. Today, Iran’s state-owned banks include Bank Refah, Bank Melli Iran, Bank Saderat, Bank Tejarat, Bank Mellat, Bank Sepah, Bank Kargoshaee, Export Development Bank of Iran, and Post Bank of Iran, as well as three specialized institutions, Bank Keshavrzi, Bank Maskan and Bank of Industry and Mines. Iran has established an international banking network, with many large state-owned banks establishing foreign branches in Europe, the Middle East, and Asia. 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.

In 1984, the Department of State designated Iran as a state sponsor of international terrorism. Iran continues to provide resources and guidance to multiple terrorist organizations and has worked to thwart stability in Iraq. Hamas, Hizballah, and the Palestinian Islamic Jihad (PIJ) maintain representative offices in Tehran in part to help coordinate Iranian financing and training.

On October 11, 2007, the FATF released a statement of concern that “Iran’s lack of a comprehensive anti-money laundering/counterterrorist finance regime represents a significant vulnerability within the international financial system.” The FATF has subsequently issued three additional statements, the most recent of which was released on October 16, 2008. The statement expressed concerns that Iran’s failure to “to address the risk of terrorist financing continues to pose a serious threat to the integrity of the international financial system” and urged all jurisdictions to “strengthen preventive measures to protect their financial sectors.”

In a number of cases, Iran has used its state-owned banks to channel funds to terrorist organizations. For example, between 2001 and 2006, Bank Saderat transferred $50 million from the Central Bank of Iran through Bank Saderat’s subsidiary in London to its branch in Beirut for the benefit of Hizballah fronts that support acts of violence. Hizballah also used Bank Saderat to send funds to other terrorist organizations, including Hamas, which itself had substantial assets deposited in Bank Saderat as of early 2005.

Elements of Iran’s Islamic Revolutionary Guard Corps (IRGC) have been directly involved in the planning and support of terrorist acts throughout the world, including in the Middle East, Europe and Central Asia, and Latin America. The IRGC-Qods Force, which has been designated by the U.S. Department of the Treasury under Executive Order 13224 for providing material support to the Taliban and other terrorist groups, is the Iranian regime’s primary mechanism for cultivating and supporting terrorist and militant groups abroad. Qods Force-supported groups include: Lebanese Hizballah; Palestinian terrorists; certain Iraqi Shi’a militant groups; and Islamic militants in Afghanistan and elsewhere. The Qods Force is especially active in the Levant, providing Lebanese Hizballah with funding, weapons and training. It has a long history of supporting Hizballah’s military, paramilitary and terrorist activities, and provides Hizballah with more than $100 to $200 million in funding each year. The Qods Force continues to provide the Taliban in Afghanistan with limited weapons, funding, logistics and training in support of anti-U.S. and anti-coalition activities.

Iran’s defiance of the international community over its nuclear program and the role of Iranian banks in facilitating proliferation activity have also led to a number of international multilateral actions on Iran’s financial sector. Since July 2006, the United Nations Security Council (UNSC) has passed five related resolutions, three of which call for financial restrictions on Iran.

Numerous countries around the world have restricted their financial and business dealings with Iran in response to both the UNSC measures on Iran’s nuclear development and proliferation activities, as well as the FATF statements on Iran’s lack of adequate AML/CTF controls. Many of the world’s leading financial institutions have essentially stopped dealing with Iranian banks, in any currency, and Iranian companies and businesses are facing increased difficulty in obtaining letters of credit.

In addition, some jurisdictions, including the United States, the European Union (EU), and Australia have adopted preventive measures beyond the UNSCRs and FATF statements towards safeguarding against illicit finance threats from Iran. The U.S. Department of the Treasury has designated four Iranian banks (Banks Sepah, Melli, Mellat, and the Export Development Bank of Iran) under Executive Order (E.O.) 13382 for supporting proliferation. An additional bank, Iran’s Bank Saderat, was designated by Treasury under E.O. 13224 for providing financial services to the terrorist groups Hizballah, Hamas, and PIJ. Treasury’s Financial Crimes Enforcement Network (FinCEN) in both October 2007 and March 2008 issued advisories on the risk to the international financial system posed by Iranian financial institutions, as warned by the FATF. Most recently, in November 2008, Treasury revoked the license authorizing “U-turn” transfers involving Iran, thus terminating Iran’s ability to access the U.S. financial system indirectly via non-Iranian foreign banks.

The EU in June 2008 imposed sanctions on Bank Melli (Iran’s largest bank) that froze its Europe-based assets and prevented it from doing business in EU states. The EU also imposed a heightened financial monitoring requirement on all transactions involving Bank Saderat. On October 15, 2008, Australia announced sanctions on Banks Melli and Saderat that similarly prevented both banks from doing business with Australian entities.

It has been a standard practice for Iranian financial institutions to conceal their identity to evade detection when conducting transactions. For example, Bank Sepah has requested that its name be removed from transactions in order to make it more difficult for intermediary financial institutions to determine the true parties to a transaction. In addition, when Iranian assets were targeted in Europe, branches of Iranian state-owned banks in Europe took steps to disguise ownership of assets on their books in order to protect assets from future actions. The Central Bank of Iran (CBI), the sole Iranian entity that regulates all Iranian banks, has not only engaged in deceptive practices itself—such as asking for its name to be removed from transactions—but has also encouraged such practices among Iran’s state-owned banks. Further, between January and March 2008, the Central Bank of Iran handled tens of millions of dollars in transactions to and from the accounts of U.S. and UN-designated banks held at the CBI.

Illicit finance threats stemming from Iran are not limited to Iran’s use of the international financial system, but are also prevalent inside the jurisdiction, itself. Iran has a large underground economy, spurred by restrictive taxation, widespread smuggling, currency exchange controls, capital flight, and a large Iranian expatriate community. The World Bank reports that about 19 percent of Iran’s GDP pertains to unofficial economic activities. Reportedly, a prominent Iranian banking official estimates that money laundering encompasses an estimated 20 percent of Iran’s economy. Other reports have found that approximately $12 billion is laundered annually via smuggling commodities in Iran and another $6 billion laundered by international criminal networks.

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 Iran’s import-export market as well as 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 entrepreneurship, as the bonyads enjoy favored status, including exemption from taxes, the granting of favorable exchange rates, and lack of accounting oversight by the Iranian government.

On October 25, 2007, the United States designated Iran’s Revolutionary Guards Corps (IRGC—the armed guardian of Iran’s theocracy) as a proliferator of weapons of mass destruction, and the elite Qods Force 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 141 out of 180 countries listed in Transparency International’s 2008 Corruption Perception Index. Despite some limited attempts at reforming bonyads and other entities, there has been little transparency or substantive progress.

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. This 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 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. Reportedly, Iranian investments in Dubai may be in excess of U.S. $350 billion.

A new Iranian money laundering law was approved by the Islamic Parliament on January 22, 2008 and the Guardian Council on February 6, 2008. The law creates a High Council on Anti-Money Laundering chaired by the Minister of Economic Affairs and Finance. Membership in the High Council includes the Ministers of Commerce, Intelligence, Interior, and the Governor of the Central Bank of Iran. The High Council would serve to coordinate and collect information and evidence concerning money laundering offenses, but an operational Financial Intelligence Unit (FIU)—High Council or otherwise—has yet to be established. Nonetheless, the new anti-money laundering law falls significantly short of meeting international standards, particularly with respect to the lack of a corresponding effort to address the risk of terrorism finance emanating from Iran.

According to reports, any individual or business engaging in transfers or transactions of foreign currency into or out of Iran must abide by Central Bank of Iran regulations, including registration and licensing. The regulations and circulars address money transfer businesses, including hawaladars; however, Iran’s merchant community makes active use of hawala and moneylenders. Counter valuation in hawala transactions is often accomplished via trade, thus trade-based money laundering is likely a prevalent form of money laundering. Many hawaladars and traditional bazaari are linked directly to the regional hawala hub in Dubai. Over 400,000 Iranians reside in Dubai, with approximately 7,500 Iranian-owned companies based there.

Iran is a party to the 1988 UN Drug Convention and has signed, but not yet ratified, the UN Convention against Transnational Organized Crime and the UN Convention against Corruption. Iran is not a signatory to the UN Convention for the Suppression of the Financing of Terrorism.

The Government of Iran has engaged with the FATF and should vigorously pursue the implementation of a viable anti-money laundering and terrorist finance regime, including effective legislation and proper regulations that adhere to international standards and seeks to address the risk of terrorism finance emanating from Iran. Above all, the GOI should cease its financial and material support of terrorist organizations and terrorism, as well as its abuse of the international financial system to facilitate proliferation. 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 anticorruption law with strict penalties and enforcement, applying it equally to figures with close ties to the government, ruling class, business leaders, and the clerical communities. Iran should become a party to the UN Convention against Transnational Organized Crime, the UN Convention against Corruption, and the UN Convention for the Suppression of the Financing of Terrorism.


Iraq’s economy is primarily cash-based, and there is little data available on the extent of money laundering in the country. Smuggling is endemic, involving consumer goods, cigarettes, and petroleum products. Bulk cash smuggling, counterfeit currency, trafficking in persons, and intellectual property rights violations are also major problems. There is a large market in Iraq for stolen automobiles from Europe and the United States. Ransoms from kidnappings and extortion cost Iraqi citizens millions of dollars each year, and the funds are often used to finance terrorist networks. Trade-based money laundering, customs fraud, and value transfer are found in the underground economy. Hawala networks, both licensed and unlicensed, are widely used for legitimate and illegitimate purposes. There is little regulation and supervision of the formal and informal financial sectors, resulting in weak internal private sector controls. Under its Stand-by Arrangement with the International Monetary Fund, the Central Bank of Iraq (CBI) has completed half of the necessary prudential regulations and is to finalize the remainder, including anti-money laundering regulations.

Oil production is the main source of revenue for the Iraqi government, but theft and diversion of oil products to the black market are pervasive. In 2006, the World Bank and the Iraqi Ministry of Oil’s Office of Inspector General estimated that the Iraqi government loses tens of millions of dollars each year to the smuggling or diversion of refined oil products. In 2006 the State Department estimated that up to 10 percent of the refined petroleum products produced in Iraq are diverted to the black market or smuggled out of Iraq and sold for a profit. At one point in 2007 the diversion of refined petroleum products produced at the Baiji Oil Refinery was so prevalent that the Pentagon estimated that up to 70 percent of the fuel processed there was lost to the black market. It’s believed that the funds generated by this criminal activity, possibly as much as $2 billion a year, went toward payments to corrupt officials, funding insurgent activities, and other criminal activities. Consequently, the Iraqi Army, supported by Coalition Forces, began “Operation Honest Hands” on February 12, 2007, and assumed control of security at the Baiji oil refinery complex. Within a few months of the start of the operation, the number of daily tanker loads recorded as shipped by the refinery increased from 20 to 200 per day. Nonetheless, the Baiji Oil Refinery remains a significant money laundering and terrorist financing threat.

Fraudulent investment schemes are also on the rise in Iraq. For example, in 2008 there was an investment scam in the Basra area that netted the perpetrator tens of millions of dollars in a “Ponzi” scheme involving a fake investment company promising investors huge returns of between 200 to 300 percent every six months. When the scheme collapsed, the owner of the investment company fled Iraq with the remaining money.

Corruption is pervasive and impacts all facets of Iraqi society, government, and institutions. The high level of corruption in Iraq poses threats to the developing Iraqi financial system as it facilitates money laundering and the financing of terrorism. Transparency International’s 2008 International Corruption Perception index ranked Iraq as 178 out of 180 countries surveyed, demonstrating no change from the previous year. However, Iraq is taking demonstrable steps to combat corruption, including acceding to the UN Convention Against Corruption, ratifying the Extractive Industries Transparency Initiative, and removing corrupt or incompetent Inspectors General from their positions. Iraq does not have a Mutual Legal Assistance Treaty with the United States and U.S. law enforcement agencies indicate that cooperation with Iraqi counterparts had been somewhat sporadic but is increasing.

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.

CPA Order No. 93, the “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 regarding financial transactions. The law also criminalizes money laundering, financing crime (including the financing of terrorism), and structuring cash 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 also required to verify the identity of non-account holders performing a transaction or series of transactions whose value is equal to or greater than five million Iraqi dinars (approximately $4,250). Beneficial owners must be identified upon account opening and for transactions exceeding ten million Iraqi dinars (approximately $8,500). Records must be maintained by financial institutions for a period of 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. Reports of suspicious transactions are to be completed for any transaction over four million Iraqi dinars (approximately $3,400) that are 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 or which has no apparent business or other lawful purpose. The “tipping off” of customers by bank employees where a transaction has generated a report of suspicious transaction is prohibited. Bank employees are protected from liability for cooperating with the government. Willful violations of the reporting requirement may result in fines or imprisonment.

CPA Order No. 94, the “Banking Law of 2004,” gives the CBI the authority 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, Sulaymaniyah, Mosul, and Basra.

The CBI headquarters in Baghdad also houses Iraq’s financial intelligence unit, the Money Laundering Reporting Office (MLRO). The MLRO is responsible for the collection and analysis of suspicious transactions and forwards the results of their analysis to law enforcement authorities. The MLRO’s primary Iraqi law enforcement contact is with the Ministry of Interior’s Financial Crimes Unit. The CBI branches are responsible for the licensing and examining of public and private banks, and the licensing of money exchangers and money transmitters. The CBI is required to conduct examinations of public banks every six months and private banks every three months. Order No. 94 gives the CBI administrative enforcement authority including the removal of institution management and revocation of bank licenses. While the banks ostensibly provide traditional banking services such as lending to the community, in practice they collect funds and send the excess reserves to the CBI in Baghdad where they receive, as of late 2008, a 15 percent return on the deposits. There is no time limit for funds to be held in the CBI for accrual of interest. Outside of this relationship, there is poor communication between the CBI and Iraq’s public and private banks, particularly with respect to money laundering, terrorist financing, and other potential risks. The formal financial sector continues to develop. Approximately 33 private banks and seven state-owned banks are operating in Iraq. The state-owned banks still control a majority of the banking sector.

The CBI is still experiencing challenges with communications between its various offices. Efforts are underway to modernize the banking technology utilized by the CBI, but the effort has borne little fruit to date. In particular there is a lack of an adequate electronic payment and wire transfer systems. Electronic payment systems are being introduced in Iraq, including payment of pensions by a “Smart Card” (embedded microchip) and electronic transfers by private banks, but these programs are at an early stage. There is little institutional knowledge in the CBI regarding implementing Iraq’s anti-money laundering/countering the financing of terrorism (AML/CTF) legislation and combating systemic money laundering and terrorist finance threats. In addition, the economy is still largely cash-based. The CBI faces lingering societal distrust of banks by the Iraqi people based on their experiences during the Saddam Hussein regime.

Bulk cash smuggling is a significant problem in Iraq. The CBI is considering issuance of regulations to require currency transaction reports be filed for the cross-border transfer of currency in amounts exceeding 15 million Iraqi dinars (approximately $12,750). Neither Iraqis nor foreigners are permitted to carry more than $10,000 in U.S. currency when exiting Iraq. Overseas currency speculation regarding the new Iraqi dinar is widespread often involving fraudulent schemes. It is illegal under Iraqi law to export dinars. Another vulnerability to Iraq’s AML/CTF regime is that money exchangers and money transmitters, including hawaladars, are largely unregulated. Because of the efficiency and easy access of the money exchange business and money transmitters, most people in Iraq use these businesses to conduct international business. Some conventional banks can take weeks or months to conduct simple funds transfers while similar international transactions can be done rapidly and efficiently through the informal money exchange and transfer services. Although money exchangers and transmitters are required to be licensed by the CBI, the level of supervision and enforcement is minimal. Money exchangers are not subject to the same level of supervision as banks nor are they required to report suspicious transactions to the CBI. The level of training on AML/CTF given by the CBI to managers and operators of money exchanges and money transmitter businesses is inadequate. The MLRO, in its present form, is unable to provide adequate training and guidance on AML/CTF issues to the banking institutions it oversees, let alone the money transmitter or money exchange businesses in Iraq. Because the MLRO is part of the CBI, it also suffers from the same shortcomings as the CBI regarding communication with the CBI branches outside of Baghdad and the private banks. Furthermore, the MLRO has no criminal investigative authority.

The MLRO, which was formed in mid-2006, is weak and requires significant funding, support and training in order to adequately monitor the formal and informal financial systems in Iraq. The MLRO is understaffed with only 29 personnel, who have rudimentary accounting capabilities and computer skills. Additionally, the MLRO’s computer equipment is outdated and access to the internet and the appropriate software is inadequate. The MLRO receives little support from the Iraqi law enforcement agencies. Although, the MLRO is empowered to exchange information with other Iraqi and foreign government agencies, those contacts are limited. All financial institutions in Iraq are required to report suspicious financial transactions, including potential money laundering and terrorist financing, but only a few reports have been submitted since the MLRO’s establishment.

The predicate offenses for the crime of money laundering 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 dinars (approximately $34,000) 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 dinars (approximately $17,500) or two years imprisonment or both and structuring transactions to avoid reporting requirements of up to 10 million dinars (approximately $8,500) or one year imprisonment or both. No arrests or prosecutions for crimes covered under the AMLA have been reported.

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 property traceable to the property, or any property gained as a result of such an offense, without prejudging the rights of bona fide third parties. The courts can order confiscation of property, but 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 ongoing and if the defendant is acquitted, the government returns the money it acquired from the sale of the goods to the defendant. While the case is ongoing, 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 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 hinders the government’s ability to identify and freeze assets linked to illicit activities.

Iraq has four free trade zones: the Basra/Khor al-Zubair seaport; Ninewa/Falafel area; Sulaymaniyah; and al-Qaim, located in western Al Anbar province. Under the Free Trade Zone (FZ) Authority Law, goods imported or exported from the FZ are generally exempt from all taxes and duties, unless the goods are to be imported for use in 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 the foundation and construction phases. Value transfer via trade goods is a significant problem in Iraq and the surrounding region

The CBI distributes the UN 1267 Sanction Committee’s consolidated list of suspected terrorist organizations to the various banks under its supervision as mandated by the AMLA. However, no asset seizures or any other information pertaining to the names on this list has been reported. Currently there is no legislation in Iraq that allows the GOI to freeze and confiscate terrorist assets without delay under civil proceedings. This represents a significant shortfall in the GOI’s AML/CTF regime and in the international standards set by the Financial Action Task Force (FATF)

Iraq became a member of the Middle East and North Africa Financial Action Task Force (MENAFATF) in September 2005. However, neither representatives from the MLRO nor the CBI have attended a MENAFATF plenary meeting or its training workshops since 2007. Iraq also has not yet undergone a mutual evaluation of its compliance with the FATF standards. Iraq is a party to the 1988 UN Drug Convention, the UN Convention against Corruption, and the UN Convention against Transnational Organized Crime. It is not a party to the UN Convention for the Suppression of the Financing of Terrorism.

The Government of Iraq has the foundation needed to support the fight against terrorist financing and money laundering, but needs to implement existing legislation, bolster the relevant agencies in Iraq’s AML/CTF regime, and issue or establish the proper regulations and legislation related to combating systemic money laundering and terrorist financing threats in Iraq. The CBI should be particularly cautious about granting licenses to banks from jurisdictions of concern; the MLRO needs proper training, equipment, and direction; the Iraqi financial sector needs to adopt and use AML/CTF standards and best practices; the GOI should pass legislation that allows Iraq to freeze and confiscate terrorist assets; Iraq needs to participate fully in the MENAFATF by attending its plenary meetings, taking advantage of its training opportunities and implementing the FATF’s international standards; Iraqi law enforcement and the judiciary need to enhance their ability to soundly interpret, apply, and enforce the legal principles of the AMLA and therefore better conduct investigations; Iraqi law enforcement, border authorities, and customs service should continue to strengthen border enforcement and identify and pursue smuggling, trade-based money laundering, and terrorist financing networks; and, the GOI should make a concerted effort to combat the corruption that hinders development and impedes an effective anti-money laundering and counterterrorist financing regime. Iraq should become a party to the UN Convention for the Suppression of the Financing of Terrorism.


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. Ireland estimates that up to 80 percent of suspicious reports filed may involve tax violations.

The Government of Ireland (GOI) established the Shannon Free Zone 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 criminals use the Shannon Free Zone 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 2008, 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, to Ireland’s financial intelligence unit (FIU), and to the Revenue (Tax) Department, as required by law. Reporting entities must submit the STR before the suspicious transaction is finalized. There are no 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. A conviction on charges of money laundering carries a maximum penalty of 14 years in prison and an unlimited fine. 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 ($17,000). 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 2007, the ODCE secured the conviction of 28 company directors and other individuals for breaching various requirements of the Company Act. An additional 14 company officers were disqualified from eligibility for a lead position in companies for periods ranging from one to 12 years.

Since June 15, 2007, Ireland has required travelers transporting more than 10,000 euros ($13,000) 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 has access to these reports as well. The ability to travel between Ireland and the U.K. without a passport poses a unique challenge for Irish law enforcement officials

As of November 2008, the European Commission had referred Ireland to the European Court of Justice for non-implementation of the Third EU Money Laundering Directive. The Government of Ireland (GOI) is likely to implement new legislation to address current shortcomings in customer due diligence, the identification of beneficial owners, politically exposed persons, and the designation of trusts. The Financial Action Task Force (FATF) conducted a mutual evaluation of Ireland in 2005. The mutual evaluation report (MER), published in 2006, acknowledged that although Ireland achieved a high standing in AML legal structures and international cooperation, 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 technically complied with the FATF Recommendations, it had limited technical and human resources to manage and evaluate STRs effectively. In 2007, the FIU received 11,145 STRs. Authorities convicted five people of money laundering and charged 11 others. Information regarding the number of STRs received in 2008 is not yet available. The lengthiest penalty applied for a money laundering conviction to date has been six years.

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 ($17,000) 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. In 2007, the authorities executed 16 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 2007, CAB obtained interim and disposal orders on assets valued at approximately 10.7 million euros ($14 million). The CAB has the authority to cooperate with agencies in other jurisdictions, strengthening 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. 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 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 2008, 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 $6,400.

A mutual legal assistance treaty (MLAT) between Ireland and the U.S. was signed in 2001. The United States and Ireland have also signed instruments to supplement and update that treaty as part of a sequence of bilateral agreements that the United States is concluding with all EU Member States. As of November 2008, the GOI had enacted legislation to bring the U.S.-EU MLAT and the U.S.-Ireland MLAT into force. Routine authorizations enabling notes to be exchanged still need to be executed; upon completion, the MLATs will enter fully into force.

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 Government of Ireland should enact legislation to prohibit the establishment of “shell” companies and give law enforcement a stronger role in identifying the true beneficial owners of shell companies as well as of trusts in the course of investigations. Irish authorities should increase the technical and human resources provided to the FIU to manage and evaluate STRs effectively. Ireland 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. Ireland should ratify the UN Convention against Transnational Organized Crime and the UN Convention against Corruption.

Isle of Man

Isle of Man (IOM) is a British crown dependency, and while it has its own parliament, government, and laws, the United Kingdom (UK) remains constitutionally responsible for its defense and international representation. Offshore banking, manufacturing, and tourism are key sectors of the economy. The government offers incentives to high-technology companies and financial institutions to locate on the island. 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 UK. Identity theft and Internet abuse are growing segments of financial crime activity. The U.S. dollar is the most common currency used for criminal activity in the IOM.

As of December 31, 2008, there were 40 Banking, Building Society and Class 1 deposit taking license holders; 81 Investment Business and Class 2 investment business license holders; 61 Managers of Collective Investment Schemes and Class 3 services to collective investment schemes license holders; 204 Corporate Service Provider and Class 4 corporate services license holders; and 131 Trust Service Providers and Class 5 trust services license holders.

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 leads to the creation of the Anti-Money Laundering Code, which came into force in December 1998. The Anti-Money Laundering Code was subsequently replaced by the Criminal Justice (Money Laundering) Code 2007, enacted in September 2007. In December 2008, the Criminal Justice (Money Laundering) Code 2008 (the Code) came into force. The Code revokes and replaces the Anti-Money Laundering Code 2007 and contains anti-money laundering (AML) provisions in line with the Financial Action Task Force’s (FATF) Forty-Nine Recommendations.

The Code requires obligated entities to implement anti-money laundering/counterterrorist financing (AML/CTF) policies, procedures, and practices. 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 the filing of a suspicious transaction report (STR); and safe harbor provisions in the law protect reporting individuals when they file an STR. Failure to report suspicions of money laundering for all predicate crimes is a criminal offense. 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 1865. Statutory documents filed by IOM companies can now be searched and purchased online through the FSC’s website. In 2008, both the IPA and the FSC introduced revised regulations and guidance notes for their respective areas of supervision

The FSC has been undertaking a review of the AML/CTF regulations for its license holders as part of the Consolidation and Review of Regulatory Legislation (CAROL) Project. The output of CAROL has been a number of new acts and secondary legislation, which came into force on August 1, 2008. These changes revise the regulatory landscape for all financial services entities and activities regulated by the FSC, essentially all entities and activities other than those relating to insurance and pensions. The new Financial Services Rule Book 2008 details the requirements relating to AML/CTF with further guidance being found in the Anti-Money Laundering and Countering the Financing of Terrorism Handbook. The main thrust of the Rule Book and Handbook has been to further develop the provisions relating to a risk-based approach to customer due diligence and to politically exposed persons (PEPs) in line with developments elsewhere around the globe.

The Insurance (Anti-Money Laundering) Regulations 2008 and the accompanying Guidance Notes on Anti-Money Laundering and Preventing of Terrorist Financing—for Insurers (Long Term Business) were produced by the IPA in the early part of 2008, and came into effect on September 1, 2008. The Regulations and Guidance Notes are derived from the previous Anti-Money Laundering Standards but also incorporate provisions relating to a more risk-based approach to customer due diligence and to dealing with PEPs.

The Isle of Man Law Society has produced the Guidance Notes 2008, which came into force on August 1, 2008. The Guidance Notes provide guidance to the legal profession on compliance with the Code. Following the implementation of the Code and the adoption of the Guidance Notes 2008, the position of advocates when they undertake relevant business is analogous to that applicable to solicitors in England and Wales.

Money service businesses (MSBs) not already regulated by the FSC or IPA must register with Customs and Excise. In December 2007, the FSC issued a Consultative Paper on the Proposed Regulation of MSBs, including electronic money (e-money) providers. This document assists the Island in meeting the standards set by the FATF Recommendations.

The Online Gambling Regulation Act 2001 and an accompanying AML (Online Gambling) Code 2002 are supplemented by AML guidance notes issued by the Gambling Supervision Commission (GSC), a regulatory body which provides guidance on the prevention of money laundering in the online gaming sector. The GSC was transferred from the Department of Home Affairs to the Treasury in 2007. In January, 2009, the Treasury is planning to introduce the new Gaming Control Bill to the Parliament. The Bill is primarily intended to make the GSC a Statutory Board, placing it on a level similar to the other regulatory bodies of the Treasury. The Bill also expands the constitution, status and authority of the GSC, and amends a number of minor issues that have arisen from application of the existing gaming legislative framework.

The Financial Services Act 2008 received Royal Assent in July 2008 and came into force on August 1, 2008. It was accompanied by consolidated secondary legislation and a new Rule Book. Transitional provisions allow existing license holders to continue carrying out regulated activities under their current licenses until January 1, 2009, at which time new licenses will be issued and the new Rule Book will fully apply. However, the new AML rules contained in the new Rule Book apply to all license holders beginning on August 1, 2008. The Act offers the Government ample flexibility to allow the regulations to be updated and improved in an ever changing economic environment. One of the significant improvements made to the regime provides for a new intermediate power to be granted to the FSC to formally warn a director or controller who is required to be fit and proper, but whose actions are questionable. This power would be appropriate where a formal sanction is warranted; stopping short of a “not fit and proper” direction, for example, where there is insufficient evidence to make such a direction. The Act also extends the FSC’s powers in regard to investigation, inspection and power to require information, to include, in controlled circumstances, requests made by other regulators.

The new Act and Regulations have been the subjects of much consultation between the FSC and license holders, reflecting the Government’s objective to ensure that any new rules are workable and represent a practical balance between regulatory constraints and the freedom required in order to promote business growth.

The Isle of Man’s financial intelligence unit (FIU), the Financial Crime Unit (FCU), was formed in April 2000 under the Department of Home Affairs and evolved from the police Fraud Squad. The FIU consists of personnel from Police and Customs with support personnel such as analysts and accountants provided by the Government Civil Service. The FCU is the national center for receiving, analyzing and disseminating STRs and other relevant intelligence. Annual statistics on STR information are published in the report of the Chief Constable of the Isle of Man. In 2006, the FIU received 1,651 STRs, down from 2,265 in 2005 and 2,315 in 2004. In 2007, the number continued to decline, to 1,561 STRs, 59 percent of which came from banks and an additional 21 percent from insurance service providers. The FCU has direct access on a real time basis to a wide range of intelligence databases, both nationally and internationally. Typologies and trends are fed back to the industry though lectures and presentations given by the FCU and in joint presentations and seminars with regulators.

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 new Proceeds of Crime Act 2008 came into force on October 1, 2008. The Act allows the recovery of property which is or represents property obtained through unlawful conduct, or which is intended to be used in unlawful conduct. It also provides for confiscation orders in relation to persons who benefit from criminal conduct and for restraint orders to prohibit dealing with property. Among others, the Act contains provisions concerning money laundering and the importation and exportation of cash; plus, provisions to give effect to overseas requests and orders related to property found or believed to be obtained through criminal conduct.

The Prevention of Terrorism Act 1990 makes 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 makes the failure to report suspicious transactions relating to money intended to finance terrorism an offense. All other UN and European Union 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.

All charities operating within the IOM are registered and supervised by the Charities Commission. In May 2008, the Chief Secretary’s Office published a consultation paper, “Charities and other Non-Profit Organizations,” which was an invitation to comment on options for the registration, regulation and monitoring of such bodies to prevent their possible use in the financing of terrorism. There is no suggestion that nonprofit organizations in the Isle of Man are being used for such purposes. The IOM government reviewed the regulation of this type of organization to ensure the Island’s system is not vulnerable to abuse in future by international elements.

In 2008, the International Monetary Fund (IMF) examined the regulation and supervision of the IOM’s financial sector. This represented the most comprehensive review of the Island’s regulatory and AML/CTF framework to date. The results of the assessment are due to be published in 2009.

The FSC continues to work with the Crown Dependencies Guernsey and Jersey to develop a coordinated strategy on money laundering, and to ensure maximum compliance with the FATF Recommendations.

Although not a member of the FATF, the Island fully endorses the FATF 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 is a member of the Egmont Group.

The IOM cooperates with international AML 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, 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.

As part of its continuing program of developing closer economic and taxation co-operation with other countries, the Isle of Man concluded agreements with the Government of Australia on January 29, 2009. The two agreements are: a tax information exchange agreement based on the Organization for Economic Co-operation and Development (OECD) model; and an agreement addressing the allocation of taxing rights over certain income of individuals and the establishment of a mutual agreement procedure in respect to transfer pricing adjustments. Previously, the IOM signed tax information exchange agreements (TIEAs) with each member of the Nordic Council and the United States, where it has established protocols with the Internal Revenue Service (IRS) to ensure that information exchange requests are handled smoothly.

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 Isle of Man has had AML/CTF legislation in place for well over a decade. The new regulatory regime consolidates and simplifies the old regime and provides a transparent and user-friendly regulatory environment, further promoting the Isle of Man as a leading offshore market. The IOM should act on the 2007 Consultative paper containing the MSB/e-money regulation proposals and implement those most effective. Isle of Man officials should continue to support and educate the local financial sector to help it combat current trends in money laundering and terrorist financing. The IOM should ensure that obliged entities understand and respond to their new and revised responsibilities. The authorities also should continue to work with international AML/CTF authorities to deter financial crime and the financing of terrorism and terrorists.


Israel has a 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 markets of the United States and Europe, and to a lesser extent with the Far East. There has been no significant change in the Israeli anti-money laundering and combating of terrorism financing (AML/CTF) law for 2008 and the Israeli National Police (INP) reports no indication of an increase in financial crime relative to previous years. A 2008 report by MONEYVAL, a FATF-style regional body, states that the overall threat of money laundering and terrorist financing in Israel is “considerable,” with more than $5 billion in illicit proceeds generated through illegal drugs, gambling, extortion, fraud, and human trafficking. Criminal groups in Israel with ties to the former Soviet Union, United States, and European Union often utilize a maze of offshore shell companies and bearer shares to obscure beneficial owners. Recent studies conducted by the INP Research Department estimate illegal gambling profits at over $2 billion per year and domestic narcotics profits at $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 enforcement activity. Black market penetration in Israel remains low and is comparable in scale to that of western, industrialized nations. While there have been some reports of trade-based money laundering, Israeli enforcement capacity is adequate to keep the problem to minimum levels. With the exception of a few isolated incidents involving the sales of drugs in the United States by Israeli organized crime, Israel’s illicit drug trade is domestically focused and has little to no connection with illegal drug sales in the United States. 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 AML 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. 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 Registrar of Companies.

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 methods of reporting to the Customs Authority (an agency 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 $20,500). 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 $52,000), or ten times the amount that was not declared, whichever is higher. Alternatively, an administrative sanction of NIS 101,000 (approximately $26,000), or five times the amount that was not declared, may be imposed by the Committee for Imposition of Financial Sanctions. In May 2008, Agents from U.S. Immigration and Customs Enforcement (ICE) and officers from U.S. Customs and Border Protection (CBP) conducted joint bulk currency interdiction operations with Israeli law enforcement counterparts in Israel and at U.S. airports as part of the Department of Homeland Security’s (DHS) “Hands Across the World” initiative. The coordinated law enforcement effort resulted in an arrest and two seizures in the United States and 14 seizures in Israel. The combined seizures totaled nearly $500,000 in cash, negotiable checks, gold and diamonds. In 2003, the Government of Israel (GOI) lowered the threshold for reporting cash transaction reports (CTRs) to NIS 50,000 (approximately $12,800), lowered the document retention threshold to NIS 10,000 (approximately $2,570), 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.

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 (approximately $154,000). According to MONEVAL, there are exemptions that allow intermediaries such as accountants, attorneys and rabbis to not disclose who their clients are if transactions are less than the equivalent of $69,000 in one day.

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, 2007 and was submitted to committee for review. Having been approved by the Constitution, Law and Justice Committee, the bill is ready to be brought again before the plenum of the Knesset (legislative body) for the second and third readings. If it passes it will bring the AML regime within the precious stones sector in line with international standards. The amendment defines “dealers in precious stones” as those merchants whose annual transactions reach NIS 50,000 (approximately $12,800). 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 December 2004, the Israeli Parliament adopted the prohibition on terrorist financing law 5765-2004, which further modernized and enhanced 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 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 $1,280) 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. Banks are required to file suspicious transaction reports with the IMPA and their adherence to the Banking Order is adequately regulated by the Banking Supervision Department at the Bank of Israel, the Central Bank. The Bank of Israel is adequately staffed and trained and has fined Israeli commercial banks in the past for failing to report suspicious data as required by law.

In October 2006, the U.S. Department of Treasury, the Federal Deposit Insurance Corporation, and the New York State Banking Department penalized Israel Discount Bank $12 million to settle charges that its AML procedures were lax. The action was specifically related to the transfer of billions of dollars of illicit funds from Brazil to Israel Discount Bank’s New York offices. In December, 2008 the Bank of Israel also ordered that Israel Discount Bank pay nearly $1 million in fines over the institution’s poor money laundering controls.

In 2008, Israel finished implementing all but one mandate of Cabinet Decision 4618, passed on January 1, 2006. Yet to be established is an academy for interdisciplinary enforcement studies; however, an interagency “fusion center” and six interagency task forces for pursuing financial crimes are now fully operational. The regulation explicitly instructs the INP and the Israeli Security Agency, known as 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). The IMPA reports that about NIS 4.6 million ($1.2 million) was forfeited or collected in penalties related to illicit narcotics-related actions.

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 committee instructed the Israeli National Security Council (NSC) to develop a procedure to incorporate foreign designations into Israel’s regime for domestic designations. In this new procedure, the National Security Council legal counsel has responsibility for referring foreign designations to the committee for adoption under Israeli law. As of late 2008, the procedure remains under review for final approval by all of the Israeli Security Services. After vetting through these agencies, the NSC will submit the procedure to the Knesset Law Committee for final approval. Once in effect, the NSC 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. Thereafter identifying information for the terrorist entity will 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 Shin Bet 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.

Through regulation of the Ministry of Finance, the PMLL prohibits any unlicensed money changers or providers of currency services. Among other definitions, the PMLL defines a provider of currency as one who receives financial assets in one state in exchange for making available financial assets in another state. This definition has broad scope and therefore restricts hawala, hundi, or alternative remittance systems. A person engaging in provision of currency services without proper registration is liable to one year imprisonment or a fine of NIS 600,000 (approximately $154,300). Israel’s Law of Non-Profit Organizations allows for the creation of “Public Welfare” organizations, known as amitot in Hebrew. Israel acknowledges that these entities can be used as conduits for the financing of terrorism or other illicit activity and therefore it rigorously regulates the sector. The Registrar of Trusts is charged with oversight of amitot and maintains the power to demand clarification of financial statements, investigation, closure and can petition the court to liquidate such organizations that it believes violate the law. Furthermore, the Registrar of Trusts is empowered to turn over such information as it deems appropriate to enable law-enforcement to conduct criminal investigations. The IMPA reports that approximately 700 extensive audits of high-income amitot are carried out annually.

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. The INP reports no indications of an overall increase in financial crime relative to previous years. Total criminal assets seized by the INP in 2008 were reportedly $3.2 million. This is a sharp decrease from previous years. In 2008, IMPA reported approximately 100 arrests and ten prosecutions relating to money laundering and/or terrorist financing. In 2008, IMPA received 17,152 suspicious transaction reports. During this period IMPA disseminated 529 intelligence reports to law enforcement agencies and to foreign FIUs. For 2008, the IMPA reports that about NIS 7.7 million ($2 million) was frozen or forfeited in AML/CTF-related actions

Israel has a Mutual Legal Assistance Treaty with the United States, 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. Israel provides assistance in sharing information related to terrorist financing cases.

Israel is a party to the 1988 UN Drug Convention, the UN Convention against Transnational Crime, and the UN International Convention for the Suppression of the Financing of Terrorism. Israel has signed but not yet ratified the UN Convention against Corruption. The IMPA is a member of the Egmont Group, and Israel has been an active observer in MONEYVAL since 2006. 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.

The Government of Israel has developed an AML/CTF financial regulatory sector and enforcement capacity that compares with advanced, industrialized nations. Israel remains deficient, however, in regulating its diamond trade, intermediaries such as accountants and lawyers, other nonbank sectors, and fully incorporating UNSC 1267 designations into its domestic regime due primarily to political uncertainty in the Knesset, which have prevented timely implementation. Authorities should be vigilant in ensuring draft legislation and proposed measures are approved by final act of the Knesset following the establishment of a new government in 2009. Israel should continue its aggressive investigation of money laundering activity associated with organized criminal groups. Israel should ratify the UN Convention against Corruption.


Italy is not an offshore financial center. Italy is part of the Euro area and is fully integrated into the European Union (EU) single market for financial services. Money laundering is a concern because of the prevalence of homegrown organized crime groups as well as criminal organizations from abroad, especially from Albania, Bulgaria, China, Israel, Romania and Russia.

The heavy involvement of organized crime groups in narcotics-trafficking complicates narcotics-related anti-money laundering (AML) activities because of the sophistication of the laundering methods used by these groups. Italy is both a consumer country and a major transit point for heroin coming from South 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 myriad criminal activities, such as alien smuggling, contraband cigarette smuggling, counterfeit goods, extortion, human trafficking, and usury. Financial crimes not directly linked to money laundering, such as credit card fraud, Internet fraud, and phishing have increased over the past year.

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 export of undeclared or illicitly obtained currency—primarily U.S. dollars and euros—for laundering in offshore companies. There is a substantial black market for smuggled goods in the country, but it is not believed to be funded significantly by narcotics proceeds. Italy’s underground economy is an estimated 20-27 percent of Italian GDP, totaling about 309 to 417 billion euros (approximately $417,150,000,000 to $562,950,000,000), though a substantial fraction of this total is related to tax evasion of otherwise legitimate commerce.

Legislative decree 109 of 2007 provides for the permanent establishment of the Financial Security Committee (FSC), originally created in 2001. The FSC’s activities include prevention of money laundering and terrorist financing, and implementing international economic sanctions. The Committee is chaired by the Director General of the Treasury. Other FSC members include the Ministries of Foreign Affairs, Home Affairs, and Justice; the Bank of Italy; the Unita’ di Informazione Finanziaria (UIF), Italy’s financial intelligence unit (FIU); CONSOB, Italy’s securities market regulator; the Guardia di Finanza or Financial Police (GdF); the Carabinieri (paramilitary police); the National Anti-Mafia Directorate (DNA); and the Anti-mafia Administration or Direzione Investigativa Antimafia (DIA). The Committee has far-reaching powers that include waiving provisions of the Official Secrecy Act to obtain information from all government ministries. Legislative decree 109 also empowers the FSC to submit proposals to the competent UN or EU authorities on the listing or de-listing of individuals or entities subject to restrictions on financial transactions and/or asset freezes.

Italy’s anti-money laundering and counterterrorist financing (AML/CTF) regime 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. It should be noted that Italian law does not allow someone to be prosecuted for laundering the proceeds of crimes they themselves committed. This reflects Italian concern with possible double jeopardy. In other words, a person can only be prosecuted for laundering the proceeds of crimes committed by other persons. The law protects bankers and others with respect to their cooperation with law enforcement entities.

Legislative decree 231 of 2007 broadens the range of predicate offenses for money laundering and requires covered entities to report self-money laundering to the UIF through STRs. The decree also enhances penalties for the transfer of property when the subject knows the property was derived from criminal activity, as well as the concealment or disguise of the true origin of any property.

The Ministry of Economy and Finance is in charge of general policy making and coordination in the AML/CTF arena. It also has sanctioning powers related to specific AML requirements (e.g., record keeping requirements and cash transaction limitations). In 2007, 1,676 administrative proceedings were settled by ministerial decrees, resulting in fines and penalties of 16.4 million euros (approximately $22,140,000). Since the introduction of AML laws in 1991, approximately 27,880 administrative proceedings have been settled, with sanctions imposed to date totaling about 98 million euros (approximately $132,300,000).

Italy has strict laws on the control of currency deposits in banks. Banks must identify their customers and record any transaction that exceeds 15,000 euros (approximately $20,250). Bank of Italy mandatory guidelines require the reporting of all suspicious transactions, with special attention paid to cash anomalies. Italian law prohibits the use of cash or negotiable bearer instruments for transferring money in amounts in excess of 12,500 euros (approximately $16,900), except in transactions performed by banks, e-money institutions (which issue electronic money over the Internet for e-commerce) and the postal service.

Legislative decree 231 of 2007 reviews the customer due diligence (CDD) requirements, following a risk-based approach, and indicates those cases where enhanced or simplified CDD applies. Obliged entities now must obtain senior management approval before establishing a business relationship with a politically exposed person (PEP) and must take adequate measures to establish the source of funds involved in any transaction with a PEP. Legislative Decree 231 introduces the notion of a beneficial owner, which refers to the natural person who ultimately owns or controls an account and/or the person on whose behalf a transaction is being conducted. It also includes those persons who exercise effective control over a legal person or arrangement. Banks and other financial institutions must identify the beneficial owners of accounts they open and be able to track the transactions they conduct. Anonymous accounts are prohibited, as are bearer passbooks with a balance exceeding 12,500 euros (approximately $16,900). Italy prohibits financial institutions from entering into correspondent banking relationships with shell banks or with a bank known to permit its accounts to be used by a shell bank.

Banks and other financial institutions are required to maintain records necessary to reconstruct significant transactions for ten years. This includes 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 in standardized customer databases. A “banker negligence” law makes individual bankers responsible if their institutions launder money. The legal responsibility to submit STRs is not exclusive to bankers, though the Italian judiciary metes out more severe punishment to bankers for noncompliance. Financial institutions are required to maintain a centralized electronic AML database for all transactions (including wire transfers) over 15,000 euros (approximately $20,250) and to submit this data monthly to the UIF. The data is aggregated by class of transaction, and any reference to customers is removed. The UIF analyzes the data and can request specific transaction details if warranted.

To deter nontraditional money laundering, the Government of Italy (GOI) enacted a decree in 2004 to broaden the category of institutions and professionals subject to AML 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 necessary implementing regulations for the designated nonbank financial businesses and professions (DNFBPs) came into force in April 2006 (Ministerial Decrees no. 141, 142 and 143 of 3.02.2006). Italy now has comprehensive internal auditing and training requirements for its broadly-defined financial sector. However, implementation of AML/CTF measures by nonbank financial institutions lags behind that of financial institutions, as evidenced by the continuing relatively low number of STRs filed by DNFBPs. The issue of client confidentiality for attorneys remains unresolved so compliance with AML/CTF provisions is uneven in that sector.

Italy has addressed the problem of international transportation of illegal-source currency and monetary instruments by applying the 10,000 euro-equivalent (approximately $13,500) reporting requirement to cross-border transport of domestic and foreign currencies and negotiable bearer instruments. Italy has a declaration system, rather than disclosure, and the fines for failure to declare a cross-border transaction or transport of funds may be up to 40 percent of the amount beyond the threshold.

Responsibility for ensuring compliance with AML/CTF varies by sector. The Bank of Italy supervises banks both on-site and off-site, as well as nonbank financial intermediaries. The Ministry of Justice exercises general oversight of some DNFBPs (e.g., attorneys, accountants, and notaries) though day-to-day supervision is provided by professional organizations. The Ministry of Interior is responsible for other nonfinancial businesses and professions (e.g., casinos, entities engaged in the custody and transportation of cash and other valuables, real estate agents, and collection agencies). ISVAP (Institute for Insurance Industry Oversight) monitors the insurance industry. In 2007, ISVAP performed 19 inspections of insurance entities, an increase of 72 percent over the previous year. In May 2008, the Bank of Italy conducted its first cycle of on-site AML inspections of bank branches located in high risk areas. The Bank of Italy completed 319 such inspections through October of 2008, and plans to expand the program nationwide in 2009.

On January 1, 2008, the UIF replaced the Ufficio Italiano dei Cambi (UIC) as Italy’s FIU. The UIF is an autonomous entity within the Bank of Italy with approximately 90 employees. The UIF performs advisory functions on AML/CTF legislation. It also proposes and updates indicators of anomalous activity and analyzes financial information. The UIF has access to the banks’ customer databases and does not require a court order to compel supervised institutions to provide details on regulated transactions. It submits its financial analyses on STRs to law enforcement agencies, including the DIA and GdF, for further investigation and/or prosecution. The UIF received 11,994 STRs in 2007 from credit and financial institutions, and 6,664 in the first half of 2008. In 2007 the UIF sent 11,513 money laundering reports to law enforcement authorities for further investigation. Through the first half of 2008 the equivalent figure was 5,823. STRs resulted in 217 cases of judicial follow up in 2007, and 56 cases in the first half of 2008. The UIF received only 216 STRs from DNFBPs in 2007, and 54 through June 2008. In 2007, the FIU received 335 STRs related to terrorist financing, of which 211 were forwarded to law enforcement for further investigation. Through June 30, 2008, the UIF had received 146 terrorist financing-related STRs. The UIF may provisionally suspend for five days suspected money laundering or terrorist financing transactions, rather than the 48 hour period to which the UIC was restricted.

A special currency branch of the GdF is the law enforcement agency with primary jurisdiction for conducting financial investigations. Investigators from the GdF and other law enforcement agencies must obtain a court order prior to being granted access to bank records or databases. In 2007, the GdF carried out 341 AML inspections, which resulted in 47 administrative violations, as well as 362 criminal violations and 618 legally reported subjects (analogous to being advised one is the target of an investigation). In 2007, there were also 1,225 AML/CTF inspections related to money transfers, which resulted in 866 legally reported subjects and 14 arrests.

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. 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, with judicial concurrence. Funds from asset forfeitures are entered into the general state accounts. Italy shares assets with member states of the Council of Europe. Currently, assets can be shared bilaterally only if agreement is reached on a case-specific basis. Legislative decree 109 of 2007 gives the Agenzia del Demanio (State Property Agency) the responsibility to manage frozen terrorist-related assets, in addition to its previous responsibility for sequestered criminal assets.

The financing of terrorist activity has been a criminal offense since 2001, with prison terms of between seven and 15 years. Financial institutions, including DNFBPs, are required to report suspicious activity related to terrorist financing. Italy currently has frozen $6,238,186 in assets in 29 accounts, belonging to persons designated terrorists under UNSCRs 1333, 1390 and 1373. The GOI cooperates fully with efforts by the United States to trace and seize assets. The UIF disseminates the EU, UN, and U.S. Government lists of terrorist groups and individuals to financial institutions. Following the UIF’s provisional suspension for five days of suspected money laundering or terrorist financing transactions, the courts must act to freeze or seize the assets. Under Italian law and EU regulation, financial and economic assets linked to terrorists designated by the EU can be directly frozen by the financial intermediary holding them. Assets can be seized through a criminal sequestration order.

Italy does not regulate charities per se. 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 ONLUS classification conditions. 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 there is a low risk of terrorist financing in the Italian nonprofit sector.

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, they are used by Italy-based drug-trafficking organizations to transfer narcotics proceeds.

As a member of the Egmont Group, Italy’s UIF shares information on suspicious financial transactions with other countries’ FIUs. To date Italy has never refused a request for assistance in providing information to another nation’s FIU. In 2007, Italy responded to 448 requests for information from foreign FIUs, resulting in 990 reported persons. Italy has a number of bilateral agreements with foreign governments in the areas of investigative cooperation on narcotics-trafficking and organized crime. The United States and Italy have signed a customs 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. In May 2006, the U.S. and GOI 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 and brought into force, the new U.S./Italy bilateral treaty will allow for greater mutual assistance in the seizure and forfeiture of assets as well as the sharing of those forfeited assets. As of November 2008, Italy has not ratified this treaty.

Italy is a member of the Financial Action Task Force (FATF) and held the FATF presidency from 1997 to 1998. Italy is a party to the 1988 UN Drug Convention, the UN Convention for the Suppression of the Financing of Terrorism, and UN Convention against Transnational Organized Crime. Italy has signed, but not yet ratified, the UN Convention against Corruption.

The Government of Italy appears committed to the fight against money laundering and terrorist financing, both domestically and internationally. 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 and should clarify attorney/client privilege. Italy should take steps to allow for civil in rem forfeiture of criminal proceeds. Italy should add car dealerships to the list of entities required to submit STRs, as they are notably absent. 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. Italy also should ensure its new regulations on PEPs are enforced, to prevent money laundering and counter corruption. The GOI should ratify both the UN Convention against Corruption and the bilateral instrument on Mutual Legal Assistance. Finally, Italy should continue its active participation in multilateral fora dedicated to the global fight against money laundering and terrorist financing and its assistance to jurisdictions with nascent or developing AML/CTF regimes.


Jamaica is the foremost producer and exporter of marijuana in the Caribbean, and an active transit route 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. The majority of funds being laundered in Jamaica are from drug traffickers and organized crime groups, which need to legitimize both profits from overseas criminal activity as well as domestic fraud and extortion schemes. Proceeds from drug trafficking and other criminal activity are used to acquire tangible assets and are moved back into legitimate markets through unregulated investments and hidden in remittance flows. Public corruption, particularly in the Customs Service, provides opportunities for trade- based money laundering. The Government of Jamaica (GOJ) continues to advance its plans to turn Kingston into an offshore financial center, and to license high-end casino gaming. If actuated Jamaica’s vulnerability to money laundering will markedly increase.

To date, Jamaica has not been considered a major money laundering country. Jamaican banking authorities currently 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. The GOJ does not encourage or facilitate money laundering. However, as evidenced by the collapse of several Ponzi fraud schemes in 2008, and several other incidents, it is clear that Jamaica is not exempt from the use by many criminals of offshore banks to launder funds from crimes with a nexus to the United States and European countries, often with an objective of various types of tax fraud. In 2008, the former junior energy minister, and two co-defendants were indicted on money laundering, fraud and corruption charges. Also, in July 2008 four individuals were charged in connection with a large lottery scam. Due to scrutiny by banking regulators, Jamaican financial instruments are considered an unattractive mechanism for laundering money. Bulk cash smuggling of U.S. currency occurs, and funds are exchanged at a steep discount by street-side vendors. Despite efforts by the Customs Service and Tax Administration to clamp down on internal corruption, there is a significant black market for smuggled goods, which is due to tax evasion. 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. In August 2008, the GOJ announced plans to license high-end casino gaming at large (1000+ room) resorts. Before these casinos open for business the GOJ must improve the regulatory capacity of its Gaming Commission to prevent criminal elements from exploiting these cash intensive businesses. Currently, casinos and other cash businesses have not been designated as subject to anti-money laundering and terrorist financing regulations. The Ministry of National Security should make this a priority.

In 2007, The GOJ passed into law the Proceeds of Crime Act (POCA), The POCA allows for both criminal and civil forfeiture and 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. Police and Customs continue to use the Dangerous Drug Act rather than POCA to seize and forfeit (post-conviction) criminal assets. Also, there has been little, if any, use of the civil forfeiture regime enacted as part of the POCA, which is regrettable in that the law could serve as a model for forfeiture actions in other Caribbean countries. Training of investigators and prosecutors in utilizing these laws should be a priority. Jamaica initiated prosecution of its first human trafficking case in 2008.

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 $15,000. Money transfer or remittance companies have a reporting threshold of $5,000, while for exchange bureaus the threshold is $8,000. The Customs Service has a reporting threshold of $10,000. However, data collected by Customs is not shared regularly with either the Ministry of Finance Financial Investigation Division (FID) or Tax Authorities. 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. 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, but it is unclear how its investigative responsibilities for financial crimes are shared with the Financial Crimes Unit of the FID. There is not a basis for the sharing of such information with foreign authorities, since Jamaica’s FIU is not a member of the Egmont Group.

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. STRs and CTRs are collected manually. There were 177 referrals to the Jamaica Constabulary Force Financial Investigative Unit. 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 (FATF).

Jamaica’s central bank, the Bank of Jamaica, supervises the financial sector for compliance with anti-money laundering and counterterrorist financing provisions. In 2008 two major unregulated investment schemes, estimated to involve assets of up to $800 million, collapsed and there was an upsurge in advanced fee and lottery scams, which defrauded U.S. victims of more than $25 million. Although the POCA permits the Minister of Finance to add nonbanking institutions to the list of obligated reporting entities, the GOJ chose to wait out a lengthy court decision and did not take aggressive action to bring these nonbank institutions under its regulatory control and there are indications that these schemes were vehicles for money laundering. As a result, by the time the government moved against the institutions, the Ponzi schemes were close to collapsing. In 2008, there was an increase in the occurrence of financial crimes; however, there was not a commensurate increase in the investigation of these crimes by the FID.

Although not implicated in the theft of funds from the FID evidence vault, in early 2008, the Minister of Finance removed the FID Director and two of the FID’s most experienced investigators. Since that time, the FID, which was already facing human and financial operating resource challenges, has been under reconstruction. 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 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 remains stalled.

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. Since POCA’s inception there have been four convictions for money laundering offenses and more than $1.1 million seized.

Under the POCA, forfeited assets return to the consolidated Fund. 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 Act does contemplate that forfeited assets should be distributed equally among the Ministry of National Security, the Ministry of Finance, and the Ministry of Justice. Plans to establish an Assets Recovery Agency (ARA) within the FID to manage seized and forfeited assets remain unfulfilled.

The Terrorism Prevention Act (TPA) of 2005 criminalizes the financing of terrorism, consistent with United Nations (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. Amendments to the TPA to bring nonprofit organizations and charities within the coverage of TPA are pending, and should be passed.

The Government of Jamaica appointed an action-oriented Commissioner of Customs in 2008 who has worked to control trade based money laundering, tax evasion, and corruption.

Jamaica and the United States have a Mutual Legal Assistance Treaty (MLAT) that entered into force in 1995, as well as an agreement for the sharing of forfeited assets, which became effective in 2001. In July 2008, Norris Nembhard, a designated foreign narcotics kingpin under the Foreign Narcotics Kingpin Act was extradited to the United States and the National Commercial Bank was charged with violations of the Money Laundering Act involving $27 million of Nembhard’s drug proceeds. Jamaica is a party to the 1988 UN Drug Convention, the UN Convention for the Suppression of the Financing of Terrorism, the UN Convention against Transnational Organized Crime, and the UN Convention against Corruption. Jamaica is a member of the Caribbean Financial Action Task Force (CFATF), a FATF-style regional body, 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 should move to improve regulatory and oversight capacities before establishing an offshore financial center and licensing high-end casino gaming. The GOJ should ensure the swift passage of the FID Act to qualify the FIU to meet the international standards for membership in the Egmont group and exchange information with other FIUs. Without a strong FID, with staff vetted to international standards, the GOJ will continue to have only limited success in attacking and dismantling organized crime through the seizure and civil forfeiture of criminal assets. In addition, the GOJ must provide the FID with strong, politically independent leadership and grant its Director the adequate resources needed to enable the FID to vet, hire, and train an appropriate number of staff 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.


Japan is the world’s second largest economy. 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. In general, the domestic crime rate is very low in Japan and the police are well aware of the money laundering (ML) schemes used in Japan. According to the National Police Agency (NPA), most of the narcotics consumed are smuggled in from overseas and often distributed by criminal organizations, including the Boryokudan, commonly known in the English-speaking world as “yakuza.” U.S. law enforcement investigations periodically show a link between drug-related money laundering activities in the U.S. and bank accounts in Japan. In 2006, organized crime groups were involved in around 40 percent of the money laundering cases. The major sources of illicit proceeds include prostitution, illicit gambling and “loan-sharking.” Recently, remittance frauds have been discovered, some of them also involve organized crime groups.

Financial fraud schemes are increasing in Japan. There are four major types of fraud: i) “Ore-ore fraud” where phone calls are made to victims by swindlers pretending to be a relative, police officer, or practicing attorney under the pretext that they immediately need money to pay for something such as an automobile accident, and convince victims to transfer the money to a certain savings account; ii) fictitious billing fraud uses postal services or the Internet to send documents or e-mails demanding money and valuables based on fictitious bills, by which the general public is sometimes persuaded to transfer money to designated accounts; iii) loan-guarantee fraud is a method of fraud where a letter supposedly meant as a proposal is sent to the victim, persuading the victim to transfer money to designated accounts under the pretext of a guarantee deposit for loans and iv) refund fraud where swindlers pretending to be tax officers instruct people on the procedure for tax refunds and have victims use ATMs to transfer money to designated accounts.

In 2008 Japan underwent its third comprehensive FATF Mutual Evaluation of its implementation of the 40 plus 9 recommendations. Japan’s FATF review concluded that Japan was fully compliant with only four recommendations, with notably deficient performances on recommendations specific to financial institutions. According the FATF mutual evaluation report, some of the deficiencies include a failure to meet international standards on customer due diligence, politically exposed persons, correspondent banking, new technologies, designated nonfinancial businesses and professions, internal controls and audits, and beneficial ownership disclosures. While noting Japan’s good faith efforts, among FATF’s fundamental conclusions is that “more training and investigatory resources are needed for AML/CTF law enforcement authorities.”

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 suspicious transaction reports (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 these limitations and have been successfully laundering drug proceeds. The FATF review notes, “The number of prosecutions regarding money laundering cases remains low, especially in light of the problems related to drug consumption and organized crime organizations located in Japan. The low number of conviction in money laundering cases, including prosecutions of legal persons, has a negative effect on the overall effectiveness of the criminalization of money laundering.”

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 was submitted to the Diet for approval in October 2005, and would expand the predicate offenses for money laundering from approximately 200 offenses to nearly 350 offenses, with almost all offenses punishable by imprisonment.

On March 29, 2007, Japan’s government enacted the “Law for Prevention of Transfer of Criminal Proceeds.” The legislation, designed to bring Japan into closer compliance with the FATF 40 plus 9 recommendations, marked significant changes in Japan’s anti-money laundering landscape. In addition to the financial institutions previously regulated, effective March 1, 2008, the new statute expands the types of nonfinancial businesses and professions under the law’s purview to include real estate agents, private mail box agencies, dealers of precious metals and stones; and certain types of trust and company service providers. Covered entities 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 law delegates CDD rulemaking to Japan Federation Bar Association, which drafted and now enforces “Rules Regarding the Verification of Clients’ Identity and Record-Keeping.” In its evaluation, FATF characterized these “Rules” as allowing for exemptions from CDD obligations that were “unclear” and could be “interpreted as exempting a large number of transactions from CDD.”

Japan’s Financial Services Agency (FSA) supervises all financial institutions. 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.

In a high-profile 2006 court case, 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 $1,120). The CDD requirements of the Prevention of the Transfer of Criminal Proceeds Act, which require financial institutions to verify customer identification data for natural and legal persons, effectively prohibit the opening of anonymous accounts or account in fictitious names. 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.

The customer due diligence framework does not fully address the issue of authorized persons, representatives and beneficiaries or of beneficial ownership. There is no requirement for financial institutions to gather information on the purpose and intended nature of the business relationship or to conduct ongoing due diligence on these relationships. And since Japan is not implementing an AML/CTF risk-based approach, there are no provisions that mandate enhanced due diligence for higher-risk customers, business relationships and transactions or authorize simplified due diligence.

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). The JAFIC has 41 personnel under the supervision of the Director General of Organized Crime Department and Councilor for Prevention of Money Laundering.

JAFIC receives an increasing number of STRs (approximately 99,000 in 2005, 114,000 in 2006 and more than 158,000 in 2007). It undertakes a primary analysis that involves automatic cross-matching between the STR data and other information in its databases, and then circulates approximately 60 percent of the STRs received to law enforcement agencies, including the police, public prosecutors, customs, coast guard, and the SESC (Securities and Exchange Surveillance Commission) within the FSA. The FATF Mutual Evaluation noted that the FIU needed to improve its analytic capacity and tactical and strategic analysis of STRs, using appropriate analytic tools. Reportedly, an in-depth analysis involving the development of a comprehensive intelligence file derived from STR and including cross-matching police, administrative and open source databases, is undertaken on an increasing number of STRs. JAFIC has good access to law enforcement and other information. JAFIC receives STRs from financial institutions and specified business operators including Shinkin banks (cooperative regional financial institutions serving small and medium enterprises and local residents), insurance companies, securities companies, trust companies, financial leasing companies, credit card companies, money and currency exchangers. Since March 2008, a new electronic reporting system has been implemented which permits STRs to be sent directly to the FIU.

The main law enforcement bodies involved are the Prefectural Police and the Public Prosecutor’s Office. Both are responsible for AML/CTF investigations and, according to the FATF evaluation, have adequate powers.

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 $11,235) or its equivalent in foreign currency, to customs authorities. Failure to submit a report, or submitting one that is false or fraudulent, can result in a fine of up to 200,000 yen (approximately $2,250) or six months’ imprisonment. The declaration requirement applies only to carriage by an individual, not to other forms of physical cross border movement of currency and bearer instruments. Moreover, few resources are devoted to enforcement of cross-border currency declaration requirements. FATF underscored this ongoing area of concern, concluding, “Customs only focuses on smuggling and trafficking control and does not have AML/CTF enforcement capabilities. As a consequence, no report on cross-border currencies movements has been made to JAFIC.”

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, criminalized terrorism and terrorist financing, added terrorist financing to the list of predicate offenses for money laundering, and provided for the freezing of terrorism-related assets. The terrorism finance offense does not cover collection of funds by nonterrorists, nor does it criminalize the indirect collection or provision of funds. The law has not yet been applied, and it is unclear whether its wording covers collecting or providing funds for any purpose other than committing terrorist acts, such as to support terrorist organizations or individual terrorists. In addition, the offense is limited to “funds” and does not cover other financial and nonfinancial assets.

Terrorist financing risks in the Non-Profit Organization (NPO) sector are relatively low in Japan. According to the FATF mutual evaluation, NPOs are subject to a high degree of transparency and public accountability for their operations and there is a generally comprehensive regime of licensing, registration or oversight. While there is a wide range of national, regional and activity-specific regulators for NPOs, coordination between regulators and investigation agencies is generally effective. However, Japan has not yet conducted any specific outreach to the NPO sector to raise awareness about risks of abuse for terrorist financing and relevant AML/CTF preventive measures.

Japan has established a comprehensive mechanism to confiscate, freeze and seize the proceeds of crime; however the regime does not appear to be fully and effectively implemented. As to the freezing of terrorist assets, a system based on a licensing system prior to carrying out certain transactions has been implemented under the Foreign Exchange Act. This system does not cover domestic funds that are not intended to leave Japan, but does cover transactions in foreign currency, or with a nonresident in Japan, as well as overseas transactions. It does not allow for freezing without delay in the absence of an attempted transaction, so that financial institutions are not required to screen their customer database and freeze designated funds or assets. For transactions in domestic currency within Japan that do not involve a nonresident, Japan can freeze terrorist funds under the Act on the Punishment of Financing of Offences of Public Intimidation and the Act on the Punishment of Organized Crime. However, this mechanism also reaches only funds, not other kinds of assets, and does not allow Japan to freeze terrorist assets without delay.

After September 11, 2001, Japan has regularly designated for asset freezing all the suspected terrorists and terrorist organizations listed on the UN 1267 Sanctions Committee’s consolidated list, and have also designated a number of entities and persons of other countries listed under UNSCR 1373. However, the FATF determined that the limitations of Japan’s asset freezing system, described above, result in “gaps in the implementation of the UNSCRs 1267, 1373 and successor resolutions.” Japan is a party to the UN Convention for the Suppression of the Financing of Terrorism.

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.

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 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 but is not a party to the UN Convention against Corruption or to the UN Convention against Transnational Organized Crime. Ratification of the latter 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 and the Asia/Pacific Group against Money Laundering. The JAFIC is a member of the Egmont Group.

The Government of Japan has many legal tools and programs in place to successfully detect, investigate, and combat money laundering and terror finance. However, the number of investigations, prosecutions, and convictions for money laundering remain low in relation to the amount of illicit drugs consumed and other predicate offenses. To strengthen its AML/CTF regime, Japan should make serious efforts to follow the comprehensive recommendations in the 2008 FATF mutual evaluation. Increased emphasis should be given to combating underground financial networks that are not subject to financial transparency safeguards. Since Japan is a major trading power and the misuse of trade is often the facilitator in alternative remittance systems, underground finance, 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 (UK), it relies on the UK 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. Political corruption and suspicious activity related to financial re-structuring of infrastructure industries such as oil, gas and transportation are emerging trends. Money laundering mostly occurs within Jersey’s banking system, investment companies, and local trust companies.

The financial services industry is a key sector and provides 60 percent of Jersey’s gross domestic product. It consists of 51 banks; 1,452 funds; trust companies; money services businesses (MSBs); and insurance companies, 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. Alternate remittance systems do not appear to be prevalent in Jersey.

In October 2008, the International Monetary Fund (IMF) assessed Jersey’s anti-money laundering /counterterrorist financing (AML/CTF) regime as well as the banking, insurance and securities sectors; the results are expected to be published in 2009. In anticipation of the assessment, Jersey took numerous steps to enhance its AML/CTF regime to bring it into greater compliance with the Financial Action Task Force (FATF) standards through issuance of consultation and position papers; enactment of new primary and secondary legislation, key amendments, orders, and regulations; and outreach to regulated entities.

The AML/CTF Strategy Group was established in Jersey in 2007 to provide a forum for the Jersey agencies represented on the group to liaise, discuss and develop coordinated strategies and policies to enhance Jersey’s capability to prevent and detect financial crime and terrorist financing. The Strategy Group is chaired by the Chief Executive of the States, and the financial Services Commission (FSC) provides the secretariat for the group. The group comprises officers from the following government departments and agencies: the Chief Minister’s Department, the Economic Development Department, the Law Officers’ Department, the Joint Financial Crimes Unit, the Police Force, the Customs and Immigration Service, the FSC, and the Shadow Gambling Commission.

Jersey’s main anti-money laundering (AML) laws are the Drug Trafficking Offenses (Jersey) Law 1988, which criminalizes money laundering related to narcotics trafficking; and the Proceeds of Crime (Jersey) Law 1999 (POCL), which extends the predicate offenses for money laundering to all offenses punishable by at least one year in prison. Both laws were amended in 2008 to enhance various provisions, including those regarding the failure to report knowledge or suspicion of money laundering and the enforcement of external confiscation orders. Also, the Money Laundering (Jersey) Order 2008, issued pursuant to the POCL, contains detailed provisions addressing several preventive measures, including customer due diligence measures and recordkeeping and reporting requirements. Additionally, in September 2008, the Proceeds of Crime (Supervisory Bodies) (Jersey) Law 2008 came into force and provides for one or more supervisory bodies to be tasked with monitoring, and ensuring AML/CTF compliance by lawyers, accountants, estate agents and high-value goods dealers who take cash payments of more than 15,000 euros (approximately $20,250) per transaction or linked transactions, or their sterling equivalent.

The Corruption (Jersey) Law 2005 came into force in February 2007. Certain definitions contained in 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 as those in the ESD and have elected to implement the withholding tax option (also known as the “retention tax option”) within the Crown Dependencies.

The Jersey Economic Development Department is the government body responsible for administering the law, and regulating, supervising, promoting, and developing Jersey’s finance industry. The FSC is the financial services regulator. The FSC formed a dedicated AML Unit to lead Jersey’s operational AML/CTF strategy. The AML Unit is responsible for monitoring compliance with legislation and Codes of Practice by MSBs such as bureaux de change, check cashers, and money transmitters; lawyers; accountants; estate agents; high-value goods dealers; and nonprofit organizations. The AML Unit also supports the FSC’s Supervision Divisions, which are responsible for oversight of businesses supervised by the FSC with the exception of MSBs. 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.

Approximately 33,000 Jersey companies have registered with the Registrar of Companies, the Director General of the FSC. In addition to public filing requirements relating to shareholders, the FSC requires each company to provide the FSC with details of the ultimate individual beneficial owner of each Jersey-registered company. The Registrar keeps the information in confidence.

Following 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.

Financial institutions must report suspicious transactions under the narcotics trafficking, terrorism, and AML laws. There is no threshold for filing a suspicious activity report (SAR), 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 ten years after completion of business.

The Joint Financial Crimes Unit (JFCU), Jersey’s financial intelligence unit (FIU), includes Jersey Police and Customs officers. The FIU is responsible for receiving, investigating, and disseminating SARs. In 2007, the JFCU received 1,517 SARs, the majority of which were received from banks, although a growing number are submitted by fund managers. Approximately 25 percent of the SARs filed result in further police investigations. Reports filed in the first six months of 2007 indicate a 32 percent increase in the number of SARs 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 held more than 2.5 million pounds (approximately $4,900,000) 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 2007, the JFCU received 687 requests for assistance from counterparts in other jurisdictions.

The JFCU, in conjunction with the Attorney Generals Office, traces, seizes and freezes 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. Assets may be frozen for an indefinite period. Frozen assets are confiscated by the Attorney General’s 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 and 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.

Jersey criminalizes money laundering related to terrorist activity through the Prevention of Terrorism (Jersey) Law 1996. The Terrorism (Jersey) Law 2002, which entered into force in January 2003, and was amended in 2008, enhances the powers of the 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, nor any other government’s lists, although the FSC website has links to various websites that contain such. In addition, the Chief Minister’s Department website includes a page for international sanctions that includes links to the UN and U.K. consolidated lists, the latter of which includes all of the persons listed in the UN consolidated list, as well as EU and UK designations. Jersey expects its institutions to gather information on designated entities from these or other Internet websites, and other public sources. Jersey authorities have instituted sanction orders freezing accounts of individuals connected with terrorist activity.

In August 2008, the Non-Profit Organizations (Jersey) Law of 2008 came into force. The law provides for the registration and monitoring of nonprofit organizations by the FSC and is specifically designed to prevent and combat the misuse of nonprofit organizations by terrorists. The FSC plans to do further work with the sector to include issuing publications, conducting training, and coordinating with relevant organizations such as the Association of Jersey Charities.

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. The FSC has reached agreements on information exchange with securities regulators in Germany, France, and the United States; and 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 signed a memorandum of understanding with the 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. The FSC should ensure the AML Unit has enough resources to function effectively, and to provide outreach and guidance to the sectors it regulates, especially the newest entities required to file reports. The FSC should distribute the UN lists of designated terrorists and terrorist organizations to the obliged entities and not expect the entities to stay current through their own Internet research.


Jordan is not a regional or offshore financial center and is not considered a major venue for international criminal activity. Jordan does have a well developed financial sector with significant banking relationships in the Middle-East. Jordan’s long and remote desert borders and nexus to Iraq, Syria, and the West Bank make it susceptible to the smuggling of bulk cash, fuel, narcotics, cigarettes, and counterfeit goods and contraband, although there is insufficient information available from the Government of Jordan (GOJ) to quantify these crimes.

Jordan boasts a thriving “import-export” community of brokers, traders, and entrepreneurs that regionally are involved with value transfer via trade and customs fraud. Illicit narcotics, psychotropic substances, and chemical precursors are not known to be major components of criminality in Jordan. There are some indications of use of Jordan for money laundering of illicit funds derived from narcotics activity in the U.S. and possibly Europe via bulk cash smuggling for criminal elements involving Jordanians in those areas. However, it is thought that the major sources of illicit funds in Jordan are most likely to be related to customs fraud, tax fraud and intellectual property rights (IPR) violations due to Jordan’s dependence on imports and its limited natural resources and manufacturing base. A wide array of pirated or counterfeit goods is for sale on the streets of Jordan. One phenomenon that surfaced during 2008 was the use of gold in lieu of cash for movement of liquid assets. The scheme involves persons crossing into Jordan at land and seaports, making an admission of trying to enter multi-kilo quantities of gold to inspecting customs authorities, paying a fine and then re-exporting the gold at the entry point thus creating a declaration document to lend legitimacy to the movement of the high-value precious metal.

Inquiries and assessments conducted during 2008 reveal that Jordan is vulnerable to trade-based money laundering, bulk cash smuggling, and alternate remittance systems. Data on the prevalence of these activities was not available for two reasons: recognition of these methodologies in Jordan is relatively new; and it is a common practice in Jordan for individuals and businesses of all types to first contact the General Intelligence Directorate if suspicions of certain crimes surface. Offenses that the populace perceives as crimes relating to national security fall into that category. Money laundering and terrorist financing are categorized in this way. Details of these cases are rarely published or revealed. In 2008, there was an increase in securities-related financial crimes due to the discovery of a number of major Ponzi schemes in which thousands of investors lost investments. By year’s end there were over 50,000 complaints filed relating to these schemes. Although the GOJ has revealed no indicators of the use of hawala or other alternative remittance systems, Jordan’s sizeable foreign worker population and Jordanian enclaves in the U.S., Europe, and Arabian Gulf countries, and are thought to use this form of cash transfer methodology to move legal and illicit funds both out of and into Jordan.

In August 2001, the Central Bank of Jordan (CBJ), which regulates Jordan’s 27 banks as well as its financial institutions, including money services businesses, issued anti-money laundering regulations designed to meet some of the FATF 40 Recommendations on Money Laundering. Subsequently, money laundering has been considered an “unlawful activity” subject to criminal prosecution. Jordan’s banking laws prohibit registration of offshore banks or shell companies. In 2002, money laundering was criminalized related to insurance operations.

On July 17, 2007, Jordan enacted Law No. 46 for the Year 2007—the Anti Money Laundering Law (AML) that criminalizes money laundering. The AML Law does not cover financing of terrorism, but it criminalizes money laundering and stipulates as predicate offenses to that crime all felony crimes 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 criminal penalty in the country in which it occurs. Felony crimes are those for which a penalty of three years or more of incarceration is attached. With this approach, several of the 20 crimes recommended by the FATF for inclusion in AML legislation do not meet the penalty level for major crimes and therefore are excluded as predicate offenses for money laundering under Jordan’s current AML Law. The most noteworthy of these are: financing of terrorism, smuggling, extortion, intellectual property rights violations, sexual exploitation of children, trafficking in persons, trafficking in stolen property, and environmental crimes. 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. The AML Law provides immunity against confidentiality sanctions for obligated entities that report suspicious transactions based on the AML Law. The effectiveness of the AML Law remains untested as there have been no prosecutions for money laundering based on either the CBJ regulations or the AML Law.

The AML law created the National Committee on Anti-Money Laundering (NCAML) as well as the Anti-Money Laundering Unit (AMLU) as Jordan’s financial intelligence unit. The NCAML is chaired by the Governor of the Central Bank of Jordan and has as members: a Deputy Governor of the Central Bank named by the CBJ Governor 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 NCAML is responsible for: formulating general AML policy, supervising the implementation of tasks of the AMLU, facilitating and coordinating exchange of information related to money laundering, participating in international fora, proposing necessary regulations for implementation of the AML Law, coordinating and assigning competent parties to generate statistical reports related to the AML program of the GOJ, and approving and adopting a budget for the AMLU.

The Ministries of Justice, Interior, Finance, and Social Development, as well as the Insurance Commission, Controller General of Companies, and Jordan 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 comprehensive anti-money laundering/countering the financing of terrorism (AML/CTF) approach is undertaken in keeping with international standards and best practices. Of the regulatory entities of the GOJ, the Central Bank of Jordan, the Jordan Securities Commission, and the Insurance Commission of Jordan are best staffed and trained to conduct compliance investigations. These entities have issued implementing instructions to the regulated entities under their purview concerning AML/CTF requirements, which have the force of law. The extent of the use of the formal financial system for money laundering or terrorist financing is difficult to measure due to the lack of reporting data available that clearly identifies these offenses. Since the AML Law is still relatively new, some agencies of these cabinet level entities lack coordination in the overall AML/CTF effort in Jordan.

The CBJ has a well developed bank supervision department whose procedures, until the recent past, focused almost exclusively on safety and soundness. However, the CBJ did instruct 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 AML Law requires obligated entities to: undertake due diligence in identifying customers; refrain from dealing with anonymous persons or shell banks; report any suspicious transaction to the AMLU; and comply with instructions issued by competent regulatory parties to implement provisions of the law. The CBJ drafted an AML/CTF dedicated bank examination manual in 2008, but had not officially adopted it by the end of the year.

Financial institutions are required under the AML Law to report all suspicious transactions whether the transaction was completed or not via suspicious transaction reports (STRs) sent to the AMLU. Entities required to report suspicious transactions include: banks, foreign exchange companies, money transfer companies, stock brokerages, insurance companies, credit companies, and any company whose articles of association state that its activities include debt collection and payment services, leasing services, investment and financial asset management companies, real estate trading and development entities, and companies 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.

GOJ officials report that financial institutions have been filing suspicious transaction reports and cooperate with prosecutors’ requests for information related to narcotics trafficking and terrorism cases. Most reporting is done by banking institutions which have well-developed AML compliance programs. During 2008, only a few STRs came from all the other types of obligated entities. There were no arrests or convictions for money laundering or terrorist financing in Jordan in 2008. The standard for forwarding STRs is a potential problem in the existing law and will require significant outreach resources to educate obligated entities. The banking, securities, and insurance sectors are the best regulated obligated entities and those that have been best educated regarding recognizing indicators of money laundering and terrorist financing, but there is still much to be done with the other obligated sectors. The money services business (MSB) sector is the riskiest obligated sector and lacks sufficient regulatory oversight and verification of compliance with reporting suspicious transactions of the AML Law. Real estate businesses and precious metals and stones dealers are also under-regulated and are generally unknowledgeable of their responsibilities to report suspicious transactions. Charitable associations, although not specified as obligated entities, occupy another troublesome sector, which requires better regulatory supervision and oversight. There are over 1,000 nonprofit organizations registered in Jordan, the majority of which are charitable organizations. Oversight responsibility for these rests with the Ministry of Social Development, which is understaffed and incapable of verifying the financial activities of all of the organizations. A new Associations Law is currently in the legislative process; however, its provisions to safeguard against abuse for money laundering and terrorist financing may be insufficient.

The AMLU was formed immediately upon passage and enactment of the AML Law. The financial intelligence unit is designated by law as an independent entity within the organizational structure of the Central Bank of Jordan. It is also physically located in and operationally funded for 2009 by the CBJ. The AMLU also uses the CBJ server and database for all information technology needs. The AMLU was staffed with the same personnel that made up the CBJ’s Suspicious Transaction Follow-Up Unit, in existence for several years, and is composed of a director, an outreach officer, one attorney, and one analyst. Since the enactment of the AML Law, there has been no increase in staffing of the AMLU. A comprehensive FIU development plan was informally adopted for the AMLU prior to the implementation of the AML Law. However, follow-through on this plan has been stymied due to administrative hurdles. In order for the AMLU to be fully staffed, funded, and functional, by-laws governing its administration must be approved by the NCAML, submitted to the GOJ Cabinet, and published in Jordan’s Official Gazette. The NCAML did not approve the by-laws until September 2008 at which time they were forwarded to the GOJ Cabinet for ratification and implementing procedures. By the end of 2008, the AMLU by-laws had not been ratified by the Cabinet. Until the AMLU by-laws are published in the Official Gazette, the personnel assigned to the AMLU remain employees of the CBJ seconded to the AMLU and no additional personnel may be hired. Plans to second additional analysts to the AMLU from other GOJ agencies have not materialized. Due to the absence of legally established administrative by-laws, the AMLU director seeks the approval of the Governor or Vice-Governor of the CBJ for administrative decisions. These conditions have raised questions concerning AMLU independence and freedom from political influence as an FIU. Although the AMLU has made overtures to sponsoring countries stating its desire to become a member of the Egmont Group of Financial Intelligence Units, it is unlikely that it can gain membership until 2011 at the earliest.

The AMLU is organized on a general administrative FIU model and is responsible for receiving STRs from the obligated entities designated in the AML Law, analyzing them, requesting additional information related to the reported activity and forwarding the information to the prosecutor general for further action if there is sufficient cause to believe the transaction is related to money laundering or other financial crime activity. The AMLU does not have criminal investigative and/or direct regulatory responsibility, but it is authorized to require any information needed from obligated entities stipulated in the AML Law considered necessary for the performance of its duties if the needed information is related to information already received by the AMLU. Involvement of the AMLU in assisting criminal investigations is dependent on the will of public prosecutors to use it. It is authorized to request and coordinate with judicial parties, regulatory and supervisory authorities, and security (law enforcement) authorities. Suspicious transactions identified as potentially related to terrorist financing are outside of the AMLU’s purview.

At the end of 2008, the AMLU continued to work toward establishment of formal ties through memoranda of understanding with competent GOJ authorities possessing the necessary databases and records pertinent to pursuing financial intelligence analysis and money laundering investigations. The AMLU received approximately 160 STRs in 2008 of which five were forwarded to prosecutors for further action. Only two of those indicated the possibility of money laundering. No prosecutions for money laundering have occurred in Jordan since the enactment of the 2007 AML law. Due to lack of knowledge of the AML law, uncertainty about the role of the AMLU with its limited personnel and functional capability, few prosecutors have considered using the AMLU to assist in criminal prosecutions or to charge financial crime violators with money laundering.

One significant challenge facing the GOJ is determining how law enforcement entities are tasked to conduct financial investigations relating to money laundering and terrorist financing. Since the AML law was only implemented in July 2007, law enforcement agencies and public prosecutors are still deliberating the issue. There is no specific GOJ agency designated as the lead entity for investigating financial crimes. Although the AMLU is required by law to forward findings developed from STRs to the public prosecutors of the Ministry of Justice, prosecutors of the State Security court also investigate and prosecute financial crimes, particularly those that deal with national security. In Jordan, a civil law country, prosecutors lead all criminal investigations. Investigative field work needed by prosecutors for criminal investigations is shared between several GOJ law enforcement agencies dependent on the predicate offense generating money laundering activity: the Public Security Department (PSD—national police service), the General Intelligence Directorate (GID—both a criminal investigative agency and intelligence service; investigation of all terrorist activity falls to the GID), and the Directorate of Military Security (DMS) of the Jordan Armed Forces. Jordan Customs also conducts criminal investigations and has its own prosecutors, but penalties for customs violations fall below the level of a major crime (penalty in excess of three years). Nearly all customs violations including commercial fraud are decided as administrative cases and seldom accrue criminal penalties including incarceration. The concept of forwarding large monetary value customs fraud cases to public prosecutors for criminal investigation and prosecution has not taken root in Jordan’s legal system. This anomaly leaves the possibility of forfeiture of proceeds of customs related criminal activity to the Kingdom totally unexploited.

Notwithstanding the lack of emphasis on pursuing money laundering or terrorist financing investigations, the GOJ has welcomed training to learn how to do so. During 2008, approximately 250 criminal investigators, prosecutors, financial sector regulators and customs officials were trained in recognizing money laundering and terrorist financing typologies. Of those 250, approximately 154 criminal investigators, prosecutors, judges, and customs officers were trained in using financial investigative techniques in investigations. In each training event, AMLU personnel assisted in training participants on the function of the AMLU and FIUs in general.

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 Special Economic Zone (ASEZ). All six list their investment activities as “industrial, commercial, service, and tourist.” 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. With the exception of ASEZ, 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. The Aqaba Special Economic Zone is controlled by a ministerial level authority. The Aqaba Special Economic Zone Authority (ASEZA) encompasses all of the port city of Aqaba and is bounded by Saudi Arabia on the south, Israel on the west and is a short ferry ride across the Gulf of Aqaba (Red Sea) to Egypt. ASEZA has its own customs authority, which operates separately from Jordan Customs and processes all merchandise and commodities destined for businesses in the zone. It also processes all passengers entering the zone. Jordan Customs processes all shipments of goods in transit to areas outside the zone. Awareness of the methodologies and threat of trade-based money laundering and bulk cash smuggling is lacking on the part of both ASEZA Customs and Jordan Customs. However, both entities have taken steps to improve inspection and control procedures to detect these crimes. Thus far there have been no criminal cases involving the free trade zones of Jordan that indicate they were used for trade-based money laundering or bulk cash smuggling.

The 2007 AML law requires reporting of inbound cross-border movement of money if the value exceeds a threshold amount set by the NCAML. The threshold amount was set by the NCAML at 10,000 Jordanian Dinars (approximately $14,200). However, the threshold amount has not been officially established or transmitted to border control authorities for enforcement. The law also provides for the creation of cross-border currency and monetary instruments declaration forms, and although a multi-agency committee has worked on the creation of the form since the passage of the AML Law, it was not in publication by the end of 2008. The declaration requirement applies only to the entry of money into the Kingdom and not exiting. Jordan Customs is responsible for archiving the declaration forms once implemented. By the end of 2008, no mechanism had been set up to either enforce the cross border declaration requirements of the AML Law. 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. Collaboration on mutual money laundering related customs cases has been sparse and has been limited mostly to minimal intelligence sharing. The AML Law authorizes Customs “to seize or restrain” undeclared money crossing the border and report it to the AMLU which will decide whether the money should be returned or the case referred to the judiciary. In all known cases of detention of undeclared funds discovered during customs processing, the money has been returned to the importer.

Seizure and forfeiture of assets related to criminal activity including money laundering and terrorist financing are authorized under a combination of statutes principal of which are: the Penal Code, the Economic Crimes Law, the Anti Money Laundering Law, the Narcotics and Psychotropic Substances Law and the Prevention of Terrorism Act of 2006. Jordan’s Anti-drugs Law allows the courts to seize proceeds and instrumentalities of crime derived from acts proscribed by the law. The Economic Crimes Law gives both prosecutors and the courts the authority to seize from any person proceeds generated by criminal activity 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. GOJ officials claim that Jordan’s cornucopia of seizure laws is sufficient to accomplish the purposes of FATF Recommendation 3 regarding authority to “confiscate property laundered, proceeds from money laundering or predicate offences, instrumentalities used in or intended for use in the commission of these offences, or property of corresponding value . . .” These statutes concentrate primarily on the proceeds of crime and not the means or instrumentalities used to commit a predicate offense to money laundering or the financing of terrorism. The multi-statute approach to freezing, confiscating or seizing of assets makes it unclear as to whether investigators may specifically trace and seize assets related to criminal activity. The GOJ has been advised by both Council of Europe and U.S. Government advisors that since this position is untested, it would be better to amend current or draft new legislation which clearly complies with FATF Recommendation 3. The GOJ publishes no statistics related to freezing, seizing, forfeiting, or confiscating the proceeds or instrumentalities of crime, and it is believed that there is no tracking mechanism for such since there is not a statutory provision for an asset forfeiture fund or civil forfeiture in Jordan.

An October 8, 2001 revision to the Penal Code criminalized terrorist activities and the financing of terrorist acts. The Prevention of Terrorism Act of 2006 also prohibits the financing of terrorist acts. However, Jordan has no legislation that prohibits financing of terrorist organizations or groups. Guidelines issued by the CBJ 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 in order to facilitate investigations.

Jordan is a party to the 1988 UN Drug Convention, the UN 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. The GOJ received a MENAFATF Mutual Evaluation in July 2008. The report of that evaluation will not become public until the MENAFATF plenary session in spring 2009, but it is anticipated that a multitude of deficiencies will be detailed.

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. There was no indication in 2008 that these provisions of the AML Law have been used by the GOJ.

In light of identified statutory and procedural deficiencies, 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. Sufficient time has passed since the implementation of the AML Law for the GOJ to have accomplished numerous steps in its FIU implementation plan, but there has been little advancement in the AML/CTF regime. Many of the steps in the FIU implementation plan require action or approval of the NCAML which has not steadily moved forward in addressing the necessary requirements needed for compliance with the FATF 40+9 recommendations. In spite of numerous criminal cases involving large financial value, no prosecutions of money laundering have occurred since the passage of the AML Law. GOJ prosecutorial, law enforcement and customs entities 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. These entities should also request the NCAML and the GOJ Cabinet to move ahead aggressively in approving the AMLU by-laws so that this unit can assume its vital role in assisting criminal investigations. Jordan should also establish and implement a viable asset forfeiture regime, Charitable and nonprofit organizations should have better supervision and oversight. Per FATF Special Recommendation IX, Jordan’s cross-border currency reporting should include outbound declarations. Jordan should become a party to the UN Convention against Transnational Organized Crime and should draft, pass and implement legislation which meets international standards concerning the financing of terrorism as it is committed to do by virtue of its membership in the United Nations and in MENAFATF. The AML Law should be amended to include as predicate offenses to money laundering all crimes indicated by the FATF Forty Recommendations as well as any offense or act that causes a loss of revenue to the Kingdom in excess of 10,000 Jordanian Dinars (approximately $14,200). Many offenses that generate large illicit sums that are currently outside of the reach of the AML Law’s definition of money laundering could be targeted. This would improve the financial sector in Jordan thus helping the Kingdom to comport with international standards.


Kenya is developing into a major money laundering country with an undetermined amount of narcotics proceeds laundered—the effect of increasing drug abuse especially in Coast Province and Nairobi. Kenya’s use as a transit point for international drug traffickers is increasing. 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 authorities acknowledge that they are sold in Kenya. There is a black market for smuggled goods in Kenya. Many entities in Kenya are involved in exporting and importing goods, including nonprofit entities. Kenya has no offshore banking or Free Trade Zones.

As a regional financial and trade center for Eastern, Central, and Southern Africa, Kenya’s economy has large formal and informal sectors. Annual remittances from expatriate Kenyans are estimated at $570 million to $1 billion. Residents of Kenya, including foreigners, also transfer money into and out of Kenya. Nairobi’s Eastleigh Estate has become an informal remittance hub for the Somali diaspora, transmitting millions of dollars every day from Europe, Canada and the U.S. to points throughout Somalia. Although banks, wire services and other formal channels execute funds transfers, there are also thriving, informal networks of hawala and other alternative remittance systems using cash-based, unreported transfers that the Government of Kenya (GOK) cannot track. Expatriates, in particular the large Somali refugee population, primarily use hawala to send and receive remittances internationally.

The GOK has not passed a law that explicitly outlaws money laundering and creates a financial intelligence unit (FIU). The most recent legislation regarding drugs is the Criminal Procedure Code (Amendment) Bill passed in Parliament on December 16, 2008 which seeks to strengthen the definition of “drug-related offense” However, this bill does not address the criminalization of proceeds from the sale of illegal drugs and by the end of 2008, had not yet been signed into law by the President.

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 had a conviction for the laundering of proceeds from narcotics trafficking. The GOK has cobbled together a series of laws and guidance, 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 that it uses to fight money laundering. However, 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 (STRs). Section 42 of the bill requires institutions to monitor all transactions, pay attention to unusual patterns of transactions, and report any suspicious transaction. Over and above this, the reporting institution must file reports of all cash transactions exceeding the equivalent of U.S. $10,000 in any currency. 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 a number of 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 GOK tabled the bill in Parliament in November 2007, but Parliament never took the bill up, and it lapsed when Parliament recessed in December. The government republished and resubmitted the bill during the Tenth Parliament in 2008. This time, the bill made it through the second reading, one step from final passage, before it stalled. New parliamentary standing orders will enable this legislation to proceed from the point where parliament left it when the Eleventh Parliament reconvenes in 2009.

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 had been reported by the end of 2008. Under the regulations, banks must maintain records of transactions over $100,000 and international transfers over $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 STRs 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 2002 court ruling that penalized a commercial bank for disclosing information to the CBK in response to a court order made banks wary of reporting suspicious transactions. 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.

There are 95 foreign exchange bureaus under GOK supervision. The Central Bank of Kenya Act (Cap 491) regulates foreign exchange bureaus, which are authorized dealers of currency. The CBK subsequently recognized that several bureaus violated portions of 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 foreign exchange 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.

A reported 800 registered, international nongovernmental organizations (NGOs) manage over $1 billion annually. International organizations operating in the conflict areas of the region—Southern Sudan, Somalia, Burundi and DRC—keep their money in Kenyan banks. 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 do not comply 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.

Kenya has little in the way of cross-border currency controls. GOK regulations require that any amount of cash above $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 $10,000, and on cumulative daily foreign exchange inflows and outflows above $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, showing 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.. 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. Charterhouse Bank also violated the Banking Act and the CBK’s Prudential Guidelines by not properly maintaining records for foreign currency transactions. Available evidence made clear that the bank management had, on a large scale, consistently evaded and ignored normal internal controls by allowing many irregular activities to occur. 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, which were missing basic details such as the customer’s name, address, ID photo, or signature cards. 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. and understood AML controls. The Ministry did not renew the bank’s license to operate once it expired.

There are strong indications that other Kenyan banks are involved in similar activities. Reportedly, Kenya’s financial system may be laundering over $100 million each year. The GOK did not report any money laundering-related arrests, prosecutions, or convictions for 2007 or 2008. 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.

Laws related to the seizure and forfeiture of drug trafficking-related assets are weak and disjointed. With the exception of intercepted drugs and narcotics, seizures of assets are rare. Kenya has no regulations to freeze or seize criminal or terrorist accounts. 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.

Kenya has not criminalized the financing of terrorism as required by the United Nations Security Council Resolution (UNSCR) 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 revised the controversial text, but Muslim and human rights groups remained concerned that 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. Following expressions of concern about the legislation from some Muslim members of Parliament, the bill, now renamed the Prevention of Organized Crime Bill, was not resubmitted to Parliament in 2008. The government has advised that the bill has been withdrawn for further consultations.

The CBK does not circulate the list of individuals and entities on the UN 1267 Sanctions Committee’s consolidated list or the United States Office of Foreign Assets Control (OFAC) list of specially designated nationals to financial institutions. Instead, the CBK uses its bank inspection process to search for names of designated individuals and entities on the OFAC list. The CBK and the GOK have no authority to seize or freeze accounts without a court warrant. Kenya has no law specifically authorizing the seizure of the financial assets of terrorists.

Kenya is a party to the 1988 UN Drug Convention, the UN Convention for the Suppression of the Financing of Terrorism, the UN Convention against Transnational Organized Crime, and the UN Convention against Corruption. Kenya is a member of the Eastern and Southern African Anti-Money Laundering Group (ESAAMLG), a Financial Action Task Force (FATF)-style regional body, and holds the Presidency for the administrative year of August 2008-August 2009. Kenya has an informal arrangement with the United States for the exchange of information relating to narcotics, terrorist financing, and other serious crime investigations, and has cooperated with the United States and the United Kingdom in such situations. Kenya ranks 147 out of 180 countries on the 2008 Transparency International Corruption Perceptions Index.

The Government of Kenya should pass and enact the proposed Proceeds of Crime and Anti-Money Laundering bill, and create an FIU. The GOK should criminalize the financing of terrorism and pass a law authorizing the government to seize the financial assets of terrorists. Kenyan authorities should take steps to ensure that NGOs, suspect charities and nonprofit organizations follow internationally recognized transparency standards and file complete and accurate annual reports. 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 its customs authorities should exert control over 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 patented pharmaceuticals such as Viagra and Cialis. 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 other illegal activities, including activities related to counterfeiting, through a number of front companies. The illegal revenue provides desperately needed foreign 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 a “consistent policy to prohibit money laundering,” However, the law is significantly deficient in most important respects, and reportedly 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 “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.” 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 in 2007. It is not a party to the UN Convention against Transnational Organized Crime or the UN Convention against Corruption. It has signed, but not ratified, the UN Convention for the Suppression of the Financing of Terrorism. North Korea is not a participant in any FATF-style regional body.

On October 11, 2008 the United States Government formally removed North Korea from the U.S. list of state sponsors of terrorism. The DPRK should develop a viable anti-money laundering/counterterrorist financing regime that comports with international standards.

Korea, Republic of

The Republic of Korea (ROK) is not considered an attractive location for international financial crimes or terrorist financing. 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 vulnerability. 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.

The South Korean government has been a willing partner in the fight against financial crime, and has pursued international agreements toward that end. Forty kinds of serious crimes are predicate offences in Korea—two crimes under the Act on Special Cases Concerning the Prevention of Illegal Trafficking in Narcotics (1993) and 38 additional kinds of crimes under Proceeds of Crime Act (POCA), which was enacted in 2001 to broaden Korea’s anti-money laundering regime by criminalizing the laundering of proceeds from additional offenses, including economic crimes, bribery, organized crime, and illegal capital flight. In addition, the concealment and disguise of property owned legally for the purpose of tax evasion, illegal refunds, customs evasion or smuggling is considered to be money laundering for the purposes of reporting of suspicious transaction reports (STRs) to KoFIU. The POCA provides for imprisonment and/or a fine for anyone receiving, disguising, or disposing of criminal funds, and also provides for confiscation and forfeiture of illegal proceeds. Financial institutions are required to report transactions known to be connected to narcotics trafficking to the Public Prosecutor’s Office.

In Korea, financial institutions are required to conduct customer due diligence (CDD) under the Act on Real Name Financial Transactions and Guarantee of Secrecy (“Real Name Financial Transaction Act”) (effective 1993) and the Financial Transaction Reports Act (effective January 2006), as amended (effective December 22, 2008). The Real Name Financial Transaction Act effectively prohibits anonymous accounts and accounts in obviously fictitious names and requires financial institutions to identify and verify the identify of their customers, while the Financial Transaction Reports Act requires financial institutions to conduct CDD and to report suspicious transactions to the Korea Financial Intelligence Unit (KoFIU).

The Financial Transaction Reports Act also requires financial institutions to file suspicious transaction reports (STRs) with the Korea Financial Intelligence Unit (KoFIU). A cash transaction reports (CTR) system was implemented in January 2006. The initial threshold of KRW 50 million (U.S. $43,067) was lowered to KRW 30 million (U.S. $25,840) in January 2008 and will be further reduced to KRW 20 million (U.S. $17,227) in January 2010. The STR system was strengthened in 2004 with the introduction of a new online electronic reporting system and the lowering of the mandatory STR threshold from 50 to 20 million won. Reporting entities may file STRs for transactions below this threshold.

Money laundering controls are applied to banking and nonbank financial institutions, such as exchange houses, stock brokerages, casinos, insurance companies, merchant banks, mutual savings banks, finance companies, credit unions, credit cooperatives, trust companies, and securities companies. To strengthen Korea’s AML/CTF regime, the Financial Transaction Reporting Act was amended in December 2007 (effective December 22, 2008) to establish risk-based enhanced CDD requirements; criminalize terrorist financing and establish STR obligations regarding terrorist financing; and impose AML/CTF obligations on designated nonfinancial businesses and professionals. CDD requires financial institutions to identify and verify customer identification data, including address and telephone numbers when opening an account or conducting occasional transactions of 20 million won or more. After the December 22, 2008 effective date of the Financial Transaction Reports Act amendments, KoFIU plans to expand the obligation to intermediaries, such as lawyers, accountants, or broker/dealers, not previously covered by Korea’s money laundering controls. Any traveler entering Korea carrying more than $10,000 (or the equivalent in other foreign currency) is required to report the currency to the Korea Customs Service.

KoFIU was established in 2001 pursuant to the Financial Transaction Reports Act and its Presidential Enforcement Decree within the Ministry of Finance and Economy (MOFE), but was transferred in February 2008 to the Financial Services Commission (FSC). It is comprised of experts from various agencies, including the Ministry of Strategy and Finance, the Justice Ministry, the Financial Services Commission, the Bank of Korea, the National Tax Service, the National Police Agency, and the Korea Customs Service, and its independence and autonomy are guaranteed by law. It analyzes suspicious transaction reports (STRs) and currency transaction reports (CTRs), and forwards information deemed to require further investigation to appropriate law enforcement and other agencies, including the Public Prosecutor’s Office (PPO); the National Police Agency; National Tax Service; Korea Customs Service; Financial Services Commission (FSC); and the National Election Commission. KoFIU also exchanges information with foreign FIUs.

In addition to receiving, analyzing and disseminating STRs and CTRs, KoFIU supervises and inspects the implementation of internal reporting systems established by financial institutions, and is responsible for 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 between domestic illegal activities and international terrorist activity. In 2007, KoFIU upgraded its anti-money-laundering monitoring system by introducing the Korea Financial Intelligence System, based on scoring and data mining methods. KoFIU also encourages financial institutions, including small-scale credit unions and cooperatives, to adopt a risk-based due diligence system, focusing on types of customers and transactions, by offering those institutions training programs, and conducts education and training on financial institutions’ AML/CTF obligations.

Improper disclosure of financial reports is punishable by up to five years imprisonment and a fine of up to 30 million won. The Real Name Financial Transaction and Guarantee of Secrecy Act 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.

South Korea joined the international community’s fight against terrorism finance through enactment of the Prohibition of Financing for Offenses of Public Intimidation Act in December 2007. The Act took effect in December 2008 and is intended to implement the UN Convention for the Suppression of the Financing of Terrorism, to which South Korea has been a party since 2004. Under the Act, funds for public intimidation offenses are identified as, “any funds or assets collected, provided, delivered, or kept for use in any of the following acts committed with the intention to intimidate the public or to interfere with the exercise of rights of a national, local, or foreign government.” An amendment expanding the ROKG’s ability to confiscate funds related to terrorism was also submitted to the National Assembly in November 2008. The amendment adds the Prohibition act to the list of laws covered under POCA. As a result, the ROKG will not only be able to confiscate the direct proceeds of terrorism but also funds and assets (e.g. stocks and bonds) derived from those proceeds.

South Korea’s Financial Services Commission may designate an individual or a group when it is necessary to prevent offenses in order to implement a generally accepted international law or an international treaty Korea is a party to, or when prevention contributes to international efforts to maintain global peace and security. The new CTF legislation is subject to the same excessively high thresholds that apply to reporting all types of suspicious activity, and also lacks requirements to identify actual beneficiaries of transactions. It is unclear whether it criminalizes the sole raising of terrorist funds.

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. KoFIU 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. No listed terrorist-related accounts have been reported in Korea. However, since 2003, Korea has detained or deported more than 70 people suspected of having ties to international terrorist networks.

Korean government authorities continue to investigate the underground “hawala” system, used primarily to send illegal remittances abroad by South Korea’s approximately 30,000 documented foreign workers 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 $1.84 billion) in 2003, 1,917 cases totaling 3.66 trillion Won (approximately $3.2 billion) in 2004, 1,901 cases worth 3.56 trillion Won (approximately $3.47 billion) in 2005, and 1,924 cases totaling 2.7 trillion Won (approximately $2.8 billion) in 2006. A similar report by the Korea Customs Service is not available for 2008. However, according to statistics provided by the Customs Service, there were 2,364 cases in 2007 totaling 2.39 trillion Won (approximately $2.57 billion) and 1,890 cases totaling 2.7 trillion Won (approximately $2.51 billion) from January through October 2008. Through 2004, the majority of early underground remittance cases related to the U.S. Between 2005 and June 2007, the bulk of cases involved China (35.4 percent, approximately $2.87 billion), followed by Japan (34.9 percent, approximately $2.83 billion) and the U.S. (18 percent, $1.46 billion). Through the first ten months of 2008, China’s portion of underground remittance cases remained largest (47.6 percent, approximately $1.72 billion), followed by Japan (18.6 percent, approximately $27.4 million), and the U.S. (8.3 percent, approximately $158.3 million). Although Japan accounted for more than twice as many cases as the U.S., its transactions amounted to only 17 percent of the dollar value of U.S. cases.

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 bank account tracking teams in 2004 to serve 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 2008, there were 1,191 counterfeit bills found by South Korean banks worth $224,000. The 2008 dollar amount represents a 79 percent decrease from the same period in 2007. 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 reportedly 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 has been incorporated into the FEZs.

Korea is a party to the 1988 UN Drug Convention, the UN Convention for Suppression of the Financing of Terrorism in December and the UN Convention against Corruption, but is not a party to the UN Convention against Transnational Organized Crime. Korea is an active member of the Asia/Pacific Group on Money Laundering (APG) and its FIU 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 36 countries. Korea became an observer to the Financial Action Task Force (FATF) in July 2006 and is working to complete the accession process and obtain full membership.

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 eliminate 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. The ROKG efforts will become increasingly important due to the continued growth and greater integration of Korea’s financial sector into the world economy. The ROKG should become a party to the UN Convention against Transnational Organized Crime.


Despite its geographic location in the Gulf region, money laundering is not believed to be a significant problem in Kuwait. Illicit funds reportedly are generated largely as revenues from drug and alcohol smuggling into the country and the sale of counterfeit goods. The potential for the financing of terrorism through the misuse of charities continues to be a major concern.

Kuwait has ten private local commercial banks, including three Islamic banks; the Kuwait Finance House (KFH), Boubyan Islamic Bank, and Kuwait International Bank, all of which provide conventional banking services comparable to Western-style commercial banks. Kuwait also has one specialized bank, Industrial Bank of Kuwait, a government-owned bank that provides medium and long-term financing. On June 11, 2008 the Central Bank of Kuwait (CBK) authorized the Bank of Kuwait and the Middle East (BKME) to become an Islamic bank, which will increase the number of Islamic banks in Kuwait to four. The Commercial Bank of Kuwait has filed an application to convert to an Islamic bank. Legislation to launch another Islamic bank is pending in Parliament. The bank will be approximately 50 percent owned by the Government of Kuwait (GOK). These additions demonstrate the rapid growth of Islamic banking in Kuwait.

The Kuwaiti banking sector opened to foreign competition under Kuwait’s 2001 Foreign Direct Investment Law, which enabled foreigners to own up to 49 percent of existing or newly formed Kuwaiti banks, subject to approval by the CBK. In January 2004, the National Assembly gave final approval to a bill permitting 100 percent foreign ownership of banks. However, foreign-owned banks which are restricted to opening only one branch can only offer investment banking services and are prohibited from competing in the retail banking sector. In August 2004, BNP Paribas was the first foreign bank granted a license to operate in Kuwait, followed by HSBC in October 2005, Citibank in late 2006, Abu Dhabi National Bank and Qatar National Bank in 2007, and Doha Bank in 2008. Gulf Bank, Kuwait’s second largest lender, sought assistance from the Central Bank of Kuwait in October 2008 after a client defaulted on approximately $1.4 billion of liabilities related to euro-dollar derivatives contracts. On November 20, Gulf Bank announced a recapitalization plan, giving priority to existing shareholders, but with the government controlled Kuwait Investment Authority serving as buyer of last resort. The crisis at Gulf Bank prompted the Parliament to enact legislation guaranteeing all deposits in all banks operating in Kuwait. CBK recently approved an additional three foreign banks to open branches in Kuwait, Al-Mashreq Bank, Al-Rajhi Bank and Bank of Muscat.

On March 10, 2002, the Emir of Kuwait (Head of State) signed Law No. 35, which criminalized money laundering. Law No. 35 does not specifically cite terrorist financing as a crime. 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 requires banks to file suspicious transactions reports (STRs) to the Office of Public Prosecution (OPP), which in turn will refer reports of suspicious transactions 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 criminalized under Law No. 35, although cash reporting requirements are not uniformly enforced at ports of entry (except at Kuwait International Airport and Al-Abdali Border Exit). 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 $10,900) 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. There has only been one case of currency smuggling reported in 2008, which has not gone to court. The case reportedly involved smuggling of counterfeit U.S. dollar bills, Euros and GCC currencies.

The National Committee for Anti-Money Laundering and the Combating of Terrorist Financing is responsible for administering Kuwait’s anti-money laundering/combating terrorist financing (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 the Central Bank.

The National Committee is mandated with 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; following up on domestic, regional, and international developments and making needed recommendations; 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 implement fully its current anti-money laundering law due in part to structural inconsistencies within the law itself. Kuwait’s Financial Intelligence Unit (FIU) is not an independent body in accordance with the current international standards, but rather is under the direct supervision of the Central Bank of Kuwait. In addition, vague delineations of the roles and responsibilities of the government entities involved continue to hinder the overall effectiveness of Kuwait’s anti-money laundering regime. Cognizant of these shortcomings, the National Committee drafted a revision of Law No. 35 that would bring Kuwait into compliance with international standards, and would criminalize terrorist financing. According to Kuwaiti officials, the draft law was referred to the Council of Ministers on August 18, 2008 and is still pending cabinet approval and submission to Kuwait’s National Assembly for ratification.

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 terrorism finance, including the establishment of internal units to oversee compliance with relevant regulations (Article 14 and 15); and the requirement to report to the Central Bank all cash transactions in excess of approximately $10,000 (Article 20). In addition, the Central Bank distributed detailed instructions and guidelines to help bank employees identify suspicious transactions. At the Central Bank’s instructions, banks are no longer required to block assets for 48 hours on suspected accounts in an effort to avoid “tipping off” suspected accountholders. The CBK, 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 UN 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 (KFIU) within the Central Bank, which would act as Kuwait’s FIU. The KFIU is comprised of seven part-time CBK staff and headed by the Central Bank Governor. The responsibilities of the FIU are 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. Although the Unit should act as the country’s financial intelligence unit, Law No. 35/2002 did not mandate the KFIU to act as the central or sole unit for the receipt, analysis, and dissemination of STRs; Banks in Kuwait are required to file STRs with the OPP, rather than directly with the FIU. However, based on an MOU with the Central Bank, STRs are referred from the OPP to the FIU for financial 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 have to be addressed by amending the law, which was revised by the National Committee in 2006 and is currently under governmental review. The KFIU is not a member of the Egmont Group.

There are about 148 money exchange businesses (MEBs) operating in Kuwait that are authorized to exchange foreign currency only. None of these MEBs are formal financial institutions, and therefore are 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. MOCI is working to 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. Businesses that are 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, 14 exchange houses were closed in 2007-2008 for violating MOCI’s instructions, and two cases were 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 new 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 according to 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. There are currently 10 charities approved by MOSAL. MOSAL also requires all transfers of funds abroad to be made between authorized charity officials. MFA reportedly monitors all transactions funneled to charities abroad. 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 monthly database of all transactions conducted by charities. Despite these restrictions, in June 2008, the U.S. Department of the Treasury designated the Kuwait-based Revival of Islamic Heritage Society (RIHS) for providing financial and material support to al Qaida and al Qaida affiliates, including Lashkar e-Tayyiba, Jemaah Islamiyah, and Al-Itihaad al-Islamiya and for providing financial support for acts of terrorism.

Unauthorized public donations, including Zakat (alms) collections in mosques, are also prohibited except during the Islamic holy month of Ramadan. The donations are supervised by MOSAL. In 2005, the MOSAL introduced a pilot program requiring charities to raise donations through the sale of government-provided coupons during Ramadan. MOSAL continued this program in 2006 and in 2007 implemented the collection of donations through a voucher system and electronic bank transfers. The GOK plans to encourage the electronic collection of charitable funds using a combination of electronic kiosks, hand-held collection machines, and text messaging are being reviewed by the Legal Committee at the Cabinet Council and expected to be approved soon. Such devices would 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). In addition, it is a member of the Middle East and North Africa Financial Action Task Force (MENAFATF). Kuwait has played an active role in the MENAFATF, particularly through its participation in drafting regulations and guidelines pertaining to charities oversight and cash couriers.

Kuwait is a party to the 1988 UN Drug Convention, the UN Convention against Transnational Organized Crime and the UN Convention against Corruption. It is not a party to the UN Convention for the Suppression of the Financing of Terrorism. Kuwait and the United States do not have a mutual legal assistance agreement.

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 its overseas operations; develop an independent FIU that meets international standards including the sharing of information with foreign FIUs; and improve international information sharing, as well as sharing between the government and financial institutions. More interagency cooperation and coordination between the Kuwaiti Financial Intelligence Unit and other concerned parties could yield significant improvements in proactive investigations and international information exchange. The Kuwaiti Financial Inquiries Unit should be able to independently share financial information with its foreign counterparts, and receive, analyze and disseminate suspicious transaction reports without obtaining prior authorization from the Office of the Public Prosecutor. Pursuant to FATF Special Recommendation IX, Kuwait should implement and enforce a uniform cash declaration policy for inbound and outbound travelers for all its ports. There are minimal money laundering investigations and prosecutions in Kuwait. Similar to many other countries in the Gulf, Kuwait primarily relies too heavily on STRs to initiate money laundering investigations. Rather, Kuwaiti law enforcement and customs authorities should be more active in identifying suspect behavior that could be indicative of money laundering during their routine investigations of predicate offenses. Enhanced training for most sectors involved in Kuwait’s anti-money laundering efforts is required. Kuwait should become a party to the UN 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, or perhaps in China.

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” banking is not permitted. In 2008 three new private commercial banks became operational, including the ANZV Bank, an Australian-Lao joint venture arising from Australia-based ANZ’s purchase of the Vientiane Commercial Bank. The small scale and poor financial condition of Lao banks may make them more likely 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-Mukdahan (Thailand) 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 Namtha 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. At least two other major new casinos are under construction as 2008, one in the northern province of Bokeo (Chinese financed) and one in the southern province of Savannakhet (Macao financed). There are reports that more casinos are on the way. 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 anti-money laundering measures are included in at least two separate decrees. The penal code contains a provision adopted in November 2005 (Article 64) that criminalizes money laundering and provides sentencing guidelines. On March 27, 2006, the Prime Minister 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, but it is much easier to change than a law passed by the National Assembly. However, the decrees don’t have the same legal effect as provisions in the penal code. One Annex of the decree lists predicate offences for money laundering in relation to all crimes with a prison sentence of a year or more. In addition, the decree specifically lists the following predicate offences as serious offences with respect to money laundering: 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 still considering drafting an AML law in order to create a comprehensive AML regime in line with the international standards established 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 $1,7,000-$5,800 ), 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 coordinated list.

The Anti-Money Laundering Intelligence Unit (AMLIU) was formally established as a unit within the Bank of Laos on May 14, 2007, replacing the previous ad hoc Pre-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.” This Action Plan was finalized by the AMLIU in 2008. Furthermore, the Bank of Lao established a national fourteen member AML Working Group in 2008, composed of representatives of key GOL ministries and agencies, including Ministry of Defense, Ministry of Finance, Ministry of Public Security, Ministry of Industry and Commerce, Prime Minister’s Office, Office of the Supreme Peoples’ Court and the Government Inspection Committee, to improve communications and coordination on AML issues within Laos. It is currently beginning a process to set up a National Coordinating Committee that will provide a mechanism for coordination and policy development at a senior level within government The AMLIU, which has a staff of eight, acts as an FIU and supervises financial institutions for their compliance with anti-money laundering decrees and regulations. The AMLIU has no criminal investigative responsibilities, nor does it have any agreements with other FIUs. It does not yet have the technology to store and analyze financial reports or to provide for electronic reporting by banks. 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. The AMLIU followed up with the commercial banks in 2008 with a series of meetings to review these regulations. Banks are required to report suspicious transactions (STRs), of which 10 were reported in 2008, although there were no 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, and 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. The decree on AML requires any transaction over $10,000 to be reported by banks and others to AMLIU but in practice no large cash reporting is taking place due to the lack of technology. Reporting officers are protected against any suit or action related to the reporting process. While the 2006 decree on ant-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 and cash reporting 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. However, the 10 STRs received by the AMLIU in 2008 represent a modest beginning. On September 16 2008 the BOL issued Guideline No. 02/BOL on ‘AML Procedures and Operational Controls of Reporting Institutions under Supervision of the Bank of Lao’ to give clarity to banks and other reporting institutions on their responsibilities and obligations on prevention of money laundering.

Lao law restricts the export of the national currency, the kip, limiting residents and nonresidents to 5,000,000 kip per trip (approximately $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 $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 provides for application of deterring measures, including freezing and confiscation of assets subject to appropriate laws and regulations specifically. The authority is broadly worded. It is not clear which government authority has responsibility for asset seizures, although indications are that the Prosecutor’s Office would take the lead. The GOL 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 were reported in 2008. 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. However, the new “Law on Drugs and Article 146 of the Penal Code” promulgated in early 2008 does now allow for the seizure of assets from drug traffickers (Article 35) but the procedures for actually selling such assets and accounting for the funds have yet to be developed or implemented. Currently, most such 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 Lao 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 and became a party to the UN Convention for the Suppression of Financing of Terrorism in September. 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 Group on Money Laundering. (APG) during the July, 2007 annual plenary in Perth, Australia and attended the 2008 plenary in Bali, Indonesia.

In order to comport with international standards, the GOL should enact comprehensive anti-money laundering/counterterrorist 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, strengthening of the nascent financial intelligence unit, an increase in the number and type of obligated entities, a prohibition against “tipping off”, safe harbor provisions for those reporting suspicious financial transactions to the FIU, criminal penalties for opening or operating false name accounts and for structuring cash transactions to avoid the cash reporting threshold. Guidance to all reporting entities and the issuance of AML policy, procedure, and operational controls for banks should be issued and the GOL should encourage further development of domestic AML coordination mechanisms. The GOL should also fully implement the UN Convention on Transnational Organized Crime and become a party to 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 and corruption, but also include to a lesser degree counterfeiting, 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. Reportedly, Russian organized crime is active in Latvia, and authorities believe that a portion of domestically obtained criminal proceeds derives from organized crime. 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 have determined that some U.S criminal elements utilize the Latvian financial sector to launder narcotics proceeds. 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 other banks in the region and assert that alleged criminal activity is moving to places where it is easier 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.

In 2004, the Government of Latvia (GOL) criminalized money laundering for all crimes listed in the Criminal Law of the Latvian Republic. Latvia’s new anti-money laundering (AML) law, The Law on Prevention of Money Laundering and Terrorist Financing, has been in force since August 2008 and Latvia updated the acts relevant to enforcement at the end of 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, lottery and gambling organizers and sectors listed in the European Commission directive. Other sectors not specifically indicated in this law also have a duty to comply with the requirements of AML in reporting unusual or suspicious transactions, and are also subject to legal remedies. The new law introduces a risk-based approach: 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 states that obliged entities must identify all clients, both long term and those who wish to carry out individual transactions. The identification requirement includes compulsory identification of customers who pay cash for transactions of 15,000 euros (approximately $18,800) or more.

The law requires obliged entities to gather customer identification and institutes record keeping requirements. Entities must retain 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 and unusual transactions must be reported immediately. Obliged entities must also file an unusual activity report using the indicator list provided by the FIU if there appears to be laundering or attempted laundering of the proceeds from crime or terrorist financing.

Obliged entities must also report cash transactions. This requirement applies regardless of size or number of transactions. Depending on the situation and the business, the reporting threshold may vary from 1000 lats to 40,000 lats (approximately $2000-$80,000). Entities subject to the law have the ability to freeze accounts if they suspect money laundering or terrorist financing. If they find the activity of an account questionable, they may close the account on their own initiative. Negligent money laundering is illegal in Latvia and authorities can prosecute. Deliberately providing false information about a beneficial owner to a credit or financial institution is also illegal.

By establishing a framework to improve the flow of information, the new AML law removes many procedural hurdles that had stymied law enforcement agencies responsible for investigating and prosecuting financial crimes. The FIU can now share information directly with Latvian law enforcement agencies instead of submitting it through the Prosecutor General’s office. The law also authorizes the Latvian FIU to exchange information with any government.

The Council for Development of the Financial Sector (formerly the Anti-money Laundering Council) is the coordinator of AML and counterterrorist financing (CTF) issues on the state level. The Prime Minister chairs this body and it continued to meet during 2008.

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 $12,500) in cash or monetary instruments between Latvia and any non-European Union (EU) member state, 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 exempt from any declaration requirement. Latvian government agencies share these declarations amongst themselves.

Banks may not 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 identify and verify the customer, establish the identity of the beneficial owner of a company, determine the reason for the opening of the account, define the expected transactions and monitor transactions as they are made. Sanctions levied against banks for noncompliance reach fines up to 100,000 lats (approximately $175,000). 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 number and size of the nonresident accounts continues to represent a significant AML/CTF vulnerability given the inherent problems associated with establishing accounts based on non-face-to-face relationships. According to the FCMC, as of June 2008 nonresident deposits amounted to approximately $10 billion, or just under 45 percent of total deposits in Latvia.

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 (part of OMX NASDAQ), and the insurance sector, which includes insurance companies, reinsurance companies and insurance intermediaries. The FCMC conducts regular audits of credit institutions. It also levies financial sanctions on 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 whether it has received corresponding suspicious transactions reports (STRs) when suspicious transactions occur between Latvian banks.

The “Regulations for Enhanced Customer Due Diligence,” in force since August 2008, define when financial institutions must perform enhanced customer due diligence, the performance procedure for and the minimum extent of enhanced customer due diligence at the beginning of or during a business relationship, the categories of risk, the special measures of enhanced due diligence, and the performance procedure as it applies to customer transactions. If a customer does not meet minimum standards, a bank must terminate its relationship with that customer within 45 days of the determination. Banks must also identify customers who have no account or relationship with the bank, but wish to make transactions. The FCMC has the authority to share information with Latvian law enforcement agencies and receive data regarding potential financial crime patterns uncovered by police or prosecutors.

The Gambling and Lotteries Law outlines gaming and lottery organizers’ rights and obligations in relation to preventing money laundering. Organizers have certain restrictions and must submit suspicious or unusual transaction reports to the FIU. They also must perform other AML activities as required by Latvian law. The Lottery and Gaming Supervisory Inspection Commission is currently updating Suspicious Activity Report (SAR) indicator guidelines for organizers based on technology and product changes in the gaming industry. The mutual evaluation report of Latvia (MER) conducted by the Council of Europe Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL) and the International Monetary Fund and adopted by the MONEYVAL plenary in 2006, found compliance with 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 and actively participated in the creation of the new AML law. The ALCB has adopted regulations entitled “Prevention of Money Laundering” as guidance, as well as a “Declaration on Taking Aggressive Action against Money Laundering,” which all Latvian banks signed in 2004. The ALCB 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 $1,800) per day. In 2008, the ALCB Council approved an “Action Plan to Enhance Transparency of Offshore Customers Serviced by Banks in Latvia.” In addition to acting as an industry representative to government and regulator, the ACLB organizes regular education courses on AML/CTF issues for bank employees. Since 2005, 476 professionals from banks, insurance companies, leasing companies, the Latvian Post Office, business school and finance and auditing companies have been trained in Basic, Advanced or Expert certificate courses, which include a five-day extensive training program followed by an examination.

The Office for the Prevention of the Laundering of Proceeds Derived from Criminal Activity, known as the Control Service, is Latvia’s FIU. Although the Control Service is part of the Latvian Prosecutor General’s Office, which monitors it, its budget is separate. The Control Service is responsible for coordination, application and assessment of Latvia’s AML policy and overall effectiveness. Latvia’s FIU received over 34,000 reports in 2007. During the first 10 months of 2008 the Control Service received nearly 29,000 reports of suspicious and unusual financial transactions, and sent 117 cases, encompassing more than 2100 financial transactions, to law enforcement authorities.

Through the new AML law Latvia has addressed concerns described by the MER, in particular a concern regarding over-reliance on lists of either examples of suspicious transactions or indicators for unusual transactions for STR filing, as opposed to examination of actual transactions. The new AML law mandates reporting on unusual transactions and that this reporting must be analyzed by the FIU. The law does not define a list of indicators for identifying suspicious activities or filing Suspicious Activity Reports (SARs), and authorities explain the types of suspicious transactions through training. These institutions file SARs based on their analysis and findings.

Latvia has taken steps to ensure effective implementation of the new AML law by providing training to explain the intent and details 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 five such trainings in 2008.

The Control Service conducts a preliminary analysis of the suspicious and unusual reports. It may then forward the information to law enforcement authorities that investigate money laundering and other criminal cases. The Control Service can disseminate case information to a specialized Anti-Money Laundering Investigation Unit of the Economic Police within the State Police, as well as 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.

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 information with other FIUs and has cooperation agreements on information exchange with FIUs in eighteen countries. The Control Service is a member of the Egmont Group of financial intelligence units. The FIU has the power to suspend debit operations in an account if it believes that any crime, including terrorist financing or money laundering, has been attempted or committed. If a bank exercises its right to refrain from executing a transaction and reports this to the FIU, it is then the FIU’s decision whether to freeze the assets for 60 days or to allow the transaction to proceed. If the FIU issues a freezing order, it must forward the case to law enforcement or the Prosecutor’s Office within 10 business days.

In 2007 the Latvian FIU issued 94 freezing orders for the total amount of 6,5 million lats (approximately $11.4 million). In the first 10 months of 2008 the FIU issued 75 orders to freeze assets, with a total of over 1.5 million lats (approximately $2.6 million). Latvia’s FIU reports that cooperation from the banking community in tracing and freezing 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 2008, the courts returned 9 decisions, leading to the seizure of more than $7 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 2007, the Prosecutor General’s Office received 27 money laundering cases for the prosecution of 53 individuals. The court examined twelve cases, and convicted 20 individuals, four of whom received sentences that included jail time. During the first 10 months of 2008 the Prosecutor’s Office received 12 money laundering cases for the prosecution of 17 individuals, and 11 money laundering cases were examined by the court resulting in the sentencing of 18 people, five of whom were sentenced to prison.

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 accounts and funds of persons included on one of the terrorist lists for up to six months. The Control Service can also freeze accounts if it suspects terrorist financing. The AML law authorizes the Control Service to freeze the funds of persons designated on one of the terrorist lists for up to six months. If there is a case of possible terrorism financing, but the entity in question is not on one of the lists, the FIU can freeze funds for 45 days, which is the same interval as allowed for other crimes.

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.

In April 2005, the United States outlined concerns in a Notices of Proposed Rulemaking against two Latvian banks, under Section 311 of the USA PATRIOT Act. Both banks were found to lack adequate AML/CTF controls and were used by criminal elements to facilitate money laundering, particularly through shell companies. However, the FCMC pursued strong measures to clean up the banking system. In August 2006, the United States rescinded the Proposed Notice of Rulemaking for one of the banks, but issued a final rule imposing a special measure against the second bank, 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 some 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 Convention for the Suppression of the Financing of Terrorism and eleven other multilateral counterterrorism 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 MONEYVAL, a FATF-style regional body. In December 2007, MONEYVAL approved Latvia’s progress report, which addressed shortcomings identified in the MER, and outlined Latvia’s plan to attain full compliance with the FATF Recommendations.

Despite the legislative and regulatory improvements, Latvia still faces significant money laundering threats tied to corruption, organized crime and nonresident account holders. 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 continue to actively implement and vigorously enforce the new AML law. It is also vital that competent authorities be provided adequate resources and staffing to carry out their duties under the new AML law. Latvia should continue to strengthen its risk-based approach to AML/CTF and take steps to further enhance the preventative aspects of its AML/CTF regime, including ensuring effective implementation of 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 also should work toward increasing its authorities’ ability and effectiveness in aggressively prosecuting and convicting those involved in financial crimes.


Lebanon is a financial hub for banking activities in the Middle East and eastern Mediterranean and has one of the more sophisticated banking sectors in the region. The banking sector continues to record an increase in deposits and as of late 2008, there were 66 banks (50 commercial banks, 12 investment banks, and four Islamic banks) operating in Lebanon with total deposits of $76 billion. Banque du Liban, the Central Bank of Lebanon (CBL), regulates all financial institutions and money exchange houses.

Lebanon faces significant money laundering and terrorist financing vulnerabilities. For example, Lebanon has a substantial influx of remittances from expatriate workers and family members, estimated by banking sources to reach $5 to $5.5 billion yearly. It has been reported that a number of these family ties are involved in underground finance and trade-based money laundering (TBML). Laundered criminal proceeds come primarily from domestic criminal activity and organized crime. In May 2007, for example, members of the terrorist group Fatah Al-Islam stole $150,000 from a BankMed branch in the northern city of Tripoli just before launching an attack against the Lebanese Armed Forces (LAF) surrounding the Nahr El-Bared refugee camp. There is some smuggling of cigarettes and pirated software, but the sale of these goods does not generate large amounts of funds that are then laundered through the formal banking system. There is a black market for stolen cars, counterfeit goods and pirated software, CDs, and DVDs. The domestic illicit narcotics trade is not a principal source of money laundering proceeds.

In 2001, Lebanon enacted its anti-money laundering (AML) legislation, Law No. 318. This legislation 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 $13,315). 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, etc.) and real estate to report suspicious transactions. These companies are also required to ascertain the client’s identity and address and retain records for a minimum of five years.

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. The Central Bank regulates private couriers who transport currency. Money service businesses, such as Western Union and Money Gram, must be 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 activity reporting requirements.

Law No. 318 also established Lebanon’s financial intelligence unit (FIU), the Special Investigation Commission (SIC). The SIC is an independent entity with judicial status that receives reports of suspicious transactions, investigates money laundering operations, monitors compliance of banks and other financial institutions, and issues financial advisories pursuant to the provisions of Law No. 318. The SIC serves as the key element of Lebanon’s anti-money laundering/countering the finance of terrorism (AML/CTF) regime and is the only entity with the authority to lift bank secrecy for administrative and judicial agencies. It is also the administrative body through which foreign FIU requests for assistance are processed. The SIC joined the Egmont Group of FIUs in 2003.

Although offshore banking, trust and insurance companies are not permitted in Lebanon, the government enacted Law No. 19 on September 5, 2008, expanding existing provisions regarding activities of offshore companies and transactions committed outside Lebanon or in the Lebanese Customs Free Zone. 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 maintains a special register, containing all relevant information about offshore companies.

There are two free trade zones (FTZ) operating in Lebanon: the Port of Beirut and the Port of Tripoli. FTZs fall under the supervision of the Customs Authority. Exporters moving goods into and out of the free zones submit a detailed manifest to Customs. Customs is required to inform the SIC on suspected TBML or terrorist financing, however, high-levels of corruption within Customs create vulnerabilities for TBML and other threats. Companies using the FTZ 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, presenting a significant cash-smuggling vulnerability. However, since January 2003, Customs staff checks travelers randomly and notifies the SIC upon discovery of unspecified large amounts of cash.

In February 2004, Lebanon passed Law No. 645 requiring diamond traders to seek proper certification of origin for imported diamonds, and 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 legislation, Lebanon had passed a decree in August 2003 prohibiting imports of rough diamonds from countries that are not participants in the Kimberley Process. Nonetheless, 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. The Kimberley Process office in Lebanon notes, however, that according to the Kimberley Process procedure, diamond dealers must submit an application to MOET in order to import or export rough diamonds. The Beirut International Airport is the sole entry point for rough diamonds, and the Kimberley Process office at the Beirut International Airport monitors and physically checks the quantities of rough diamonds imported, ensuring that importers have a Kimberley Process certification issued by the country of origin. This office 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 did not have a 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. As of late 2008, no additional cases of illegal diamond trade were reported. However, existing 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, Australia, and parts of Latin America. They often work as brokers and traders, some of which network via family ties and are involved with underground finance and TBML. 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, some expatriate Lebanese brokers are actively involved in the trade of counterfeit goods in the tri-border region of South America, where the borders of Argentina, Brazil and Paraguay intersect, and the smuggling and laundering of diamonds in Africa. There are also reports that some in the Lebanese expatriate business community willingly or unwillingly give “charitable donations” to representatives of Hizballah, a U.S. designated foreign terrorist organization based in Lebanon.

Since its inception, the SIC has been active in providing support to international criminal case referrals. From January through October 2008, the SIC investigated 153 cases involving allegations of money laundering, terrorism, and terrorist financing activities. Out of the 153 cases, three of them were related to terrorist financing, and the SIC froze the accounts of eleven individuals totaling approximately $38,000. Additionally, bank secrecy regulations were lifted in 48 instances, and eight cases were transmitted by the SIC to the general state prosecutor for further investigation. As of October 2008, two cases were transmitted by the general state prosecutor to the penal judge. The general state prosecutor reported 15 cases to the SIC, three of which were related to embezzlement and counterfeiting charges, one to fraud, another to terrorism, two to drugs, and one to organized crime. However, as of late 2008 there has not been any money laundering convictions.

Throughout 2003, Lebanon adopted additional measures to strengthen efforts to combat money laundering and terrorist financing through a variety of ways, including the establishment of AML units in customs and the police. According to the SIC, inter-agency cooperation with other Lebanese law enforcement units, including customs, police, and the office of the general state prosecutor has increased. In 2005, a SIC Remote Access Communication system was created 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. By late 2008, continued cooperation led to the transfer of over 75 suspicious transactions reports (STRs) to the SIC, allowing it to initiate several investigations based on the information.

In 2003, Lebanon also adopted 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. Such definition does not apply to Hizballah, which is considered a legitimate political party—represented by members of Parliament and a Cabinet minister—and resistance organization in Lebanon. The widespread view of Hizballah as a legitimate resistance organization, and thus not subject to Lebanese anti- terror financing laws, poses terrorist financing threats.

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 expanded the definition of Article 316 of the Penal Code on terrorist financing, which stipulates that any person who voluntarily, either directly or indirectly, finances or contributes to terrorist organizations or terrorist acts is punishable by imprisonment with hard labor for a period not less than three years and not more than seven years, and 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, allowing for the confiscation of assets determined to be related to or proceeding from money laundering or terrorist financing. Both vehicles helped to transport illegal goods, such as drugs, as well as legitimate businesses established from illegal proceeds are also subject to seizure under Law 318. Forfeitures are then transferred to the Lebanese Treasury.

The SIC circulates the names of suspected terrorists individuals and terrorist organizations on the UNSCR 1267 Sanctions Committee’s consolidated list, and the list of Specially Designated Global Terrorists designated by the U.S. pursuant to Executive Order 13224, and by the European Union under their relevant authorities to all financial institutions. As of early November 2008, the SIC signed nineteen memoranda of understanding with counterpart FIUs concerning international cooperation. Lebanon does not have a mutual legal assistance agreement with the United States.

In September 2007 the Lebanese Cabinet established a National Committee to suppress the financing of terrorism, chaired by the Ministry of Interior. The Cabinet expanded membership of The National Committee for coordinating AML policies to include representatives from the Ministries of Justice, Finance, Interior, Foreign Affairs, Economy, and a representative from the Beirut Stock Exchange. On October 8, 2008, the Parliament approved Law 32, which expanded the scope of investigators’ field of inquiry, granting them greater authority to include funds originating from corruption activities into money laundering cases.

Lebanon is a member of the Middle East and North Africa Financial Action Task Force (MENAFATF) and is scheduled to undergo its first MENAFATF Mutual Evaluation. Lebanon is a party to the 1988 UN Drug Convention, and the UN Convention against Transnational Organized Crime. On October 8, 2008, the Parliament agreed that Lebanon would adhere to standards of the UN Convention against Corruption, although it is not currently a party to that instrument. Lebanon is not a party to the UN International Convention for the Suppression of the Financing of Terrorism.

The Government of Lebanon should encourage more efficient cooperation between financial investigators and other relevant agencies such as customs, police, and internal security forces. There should be more emphasis on linking predicate offenses to money laundering and not an over-reliance on suspicious transaction reports filed by financial institutions to initiate investigations. 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 TBML. Although the number of suspicious transaction reports filed and subsequent money laundering investigations coordinated by the SIC have steadily increased, 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. The GOL should pass legislation to mandate and enforce cross-border currency reporting, upholding FATF Special Recommendation IX. Finally, the GOL should become a party to the UN International Convention for the Suppression of Terrorist Financing and to the UN Convention against Corruption.


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 significantly contribute 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. 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 15 banks, three nonbank financial companies, 16 public investment companies, and a number of insurance and reinsurance companies. The three largest banks control 90 percent of the market. Liechtenstein’s 389 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.

Liechtenstein’s anti-money laundering/counterterrorist financing (AML/CTF) regime was evaluated in 2007 by the Council of Europe’s Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL), a Financial Action Task Force (FATF)-style regional body. The evaluation notes that fiscal offenses, including serious and organized fiscal fraud, are not predicate offenses for money laundering in Liechtenstein. The report also recommends Liechtenstein provide for criminal liability for corporate entities. Additional, as yet uncorrected, items are noted throughout this report. Liechtenstein remains on an Organization for Economic Cooperation and Development (OECD) list of “noncooperative” countries in terms of provision of tax information.

Narcotics-related money laundering has been a criminal offense in Liechtenstein since 1993. Under Article 165 of the Criminal Code, money laundering is punishable by imprisonment of up to five years or a fine of up to 360,000 Swiss francs (approximately $322,250). Under Article 278a, a member of a criminal organization is subject to a punishment of up to ten years imprisonment. In principle, violations of the Due Diligence Act are punished with imprisonment of up to six months or a fine of up to 360,000 Swiss francs (approximately $322,250). The Office of the Prosecutor and the Court of Justice are responsible for investigating these offenses. The National Police also maintains a special unit for combating economic crimes.

Liechtenstein enacted its first general anti-money laundering (AML) legislation in 1996. Although this law applies 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, the Government of Liechtenstein (GOL) took legislative and administrative steps to improve its AML regime.

Since 2000, far-reaching legislative reforms have been undertaken in the course of strengthening and modernizing the financial center, such as the creation of the financial intelligence unit (FIU) in 2001 and the Financial Market Authority (FMA) in 2005. Other key reforms include the total revision of and subsequent amendments to the Mutual Legal Assistance Act (2000 and 2006); several amendments to the Insurance Supervision Act (2002 and 2005); the counterterrorism package (2003); the total revision of the Due Diligence Act (2004) and the Investment Undertakings Act (2005); the creation of an Asset Management Act (2005) and a Market Abuse Act (2006); several amendments to the Narcotics Act (2006); key changes to the Banking Act (2006 and 2007); and the total revision of the Securities Prospectus Act (2007) and the Pension Funds Act.

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 FATF Forty-Nine Recommendations in the areas of customer identification, suspicious transaction reporting, and record keeping. Liechtenstein has established an overall risk-based approach that requires financial institutions to build and keep up to date a profile for each long-term customer. The DDA prohibits banks and postal institutions from engaging in business relationships with shell banks and from maintaining bearer-payable passbooks, accounts, and deposits.

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.” However, the 2007 MONEYVAL mutual evaluation identifies Liechtenstein’s rules on “tipping off” the subject of a suspicious transaction report (STR) as inadequate. Filers of STRs are prohibited from “tipping off” only for a period of 20 days. The report also recommends the STR requirement encompass attempted occasional transactions.

On June 23, 2008, the GOL announced it would implement legislation requiring that money transfers above 25,000 Swiss francs (approximately $17,900) include information on the identity of the sender, including his or her name, address, and account number. The proposed measures 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 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 FIU, the Office of the Prosecutor, and the police.

Liechtenstein’s FIU, the Einheit fuer Finanzinformationen (EFFI), receives, analyzes and disseminates STRs relating to money laundering and terrorist financing. The EFFI has access to various governmental databases. However, EFFI cannot seek additional financial information unrelated to filed STRs. In 2007, the EFFI received 207 STRs, a 27 percent increase compared to the 163 STRs in 2006. Banks submitted 130 STRs, professional trustees submitted 64, lawyers six, investment companies three, and the Postal Service one. Three STRs were submitted by Liechtenstein authorities and the FMA. Three percent of the subjects of STRs were U.S. nationals. In 2007, the FIU received 140 inquiries from 24 FIUs and sent 127 inquiries to 24 FIUs. Information regarding the number of STRs received in 2008 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. However, the 2007 MONEYVAL evaluation of Liechtenstein notes the number of investigations triggered by the FIU is low. The report also notes Liechtenstein’s tendency to transfer cases to the authorities of the jurisdiction where the offense occurred keeps the judiciary from developing its own experience and jurisprudence in money laundering matters. There have been only two prosecutions in Liechtenstein for autonomous money laundering and no convictions.

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 253a of the Code of Criminal Procedure provides for the sharing of confiscated assets. Liechtenstein has not adopted the 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 UNSCRs 1267 and 1333. The GOL can freeze the accounts of individuals and entities that are designated pursuant to these UNSCRs, and as of 2007, had blocked approximately $150,000 worth of terrorist assets under the 1267 regime. The GOL has not, however, established a national terrorist list, and therefore lacks measures to freeze and manage assets suspected of belonging to suspected terrorists that are not on a UN list. The GOL updates its implementing ordinances regularly.

The GOL is reviewing the Criminal Code to further expand the list of predicate offenses, including terrorist financing activities. The revision is expected to implement the following articles to the Criminal Code: draft Article 278b will allow punishment of leaders of a terrorist group with five to fifteen years imprisonment, and members or financial supporters of a terrorist group with imprisonment of one to ten years; draft Article 278c will list terrorist offenses; and draft Article 278d will address terrorist financing. There have been no terrorist financing cases yet.

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 with nine FIUs, and seven others are under negotiation.

Liechtenstein is a member of MONEYVAL, and EFFI is a member of the Egmont Group. The GOL is a party to the UN Convention for the Suppression of the Financing of Terrorism. On March 9, 2007, Liechtenstein acceded to the 1988 UN Drug Convention, and on February 20, 2008, it ratified the UN Convention against Transnational Organized Crime. Liechtenstein is not a party to the UN Convention against Corruption.

While the Government of Liechtenstein has made progress in addressing the shortcomings in its AML regime, it should continue to build upon the foundation of its evolving AML/CTF regime. The GOL should prohibit the issuance and use of corporate bearer shares and establish the criminal liability of corporate entities. Liechtenstein also should expand its list of predicate offenses to ensure all appropriate crimes are addressed, as well as prohibit “ tipping of”—a practice that permits account holders to transfer funds in question and mitigates thorough investigation by law enforcement and the possibility of criminal prosecution. The FIU should have access to additional financial information related to STRs. Liechtenstein also should consider creating a national terrorist list, which would allow for the implementation of UNSCRs that do not include a list, such as UNSCR 1373. 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 ratify the UN Convention against Corruption.


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 $2,400,000,000,000 in domiciled assets, Luxembourg is the second largest mutual fund investment center in the world, after the United States. As of October 2008, 154 registered banks existed, with a collective balance sheet total reaching approximately $1,300,000,000,000. In addition, as of September 2008, a total of 3,322 “undertakings for collective investment” (UCIs), or mutual fund companies, whose net assets had reached over approximately $2,400,000,000,000 operated from Luxembourg or traded on the Luxembourg stock exchange. Luxembourg has approximately 15,000 holding companies, 95 insurance companies, and 260 reinsurance companies. According to the latest figures available (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 (Société d’investissement en capital à risqué, or “SICAR”).

The Government of Luxembourg (GOL) has enacted laws and adopted practices that help prevent the abuse of its bank secrecy laws and has implemented a comprehensive legal and supervisory AML regime. The Law of July 7, 1989, updated in 1998 and 2004, serves as Luxembourg’s primary anti-money laundering (AML) and counterterrorist financing (CTF) law, criminalizing the laundering of proceeds for an extensive list of predicate offenses, including narcotics-trafficking. The laws provide customer identification, recordkeeping, and STR 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 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 (approximately $20,250). 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 ensure adequate internal organization and employee training, and must cooperate with authorities.

A new law, issued on July 17, 2008, contains further provisions on customer due diligence and other internal risk management measures to prevent money laundering and terrorist financing. This legislation also requires that proper, accurate, and current information be available about the contracting party to ensure transparency. This law widens the scope of predicate offenses and sets forth minimum sentencing guidelines for money laundering offenses to comport with the Financial Action Task Force (FATF) recommendations.

Although Luxembourg is well known for its strict banking secrecy laws, these laws do not apply in investigations and prosecutions of money laundering and other crimes. 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 a competent authority, with sanctions for noncompliance varying from 1,250 to 1,250,000 euros (approximately $1,700 to $1,687,500) to, potentially, forfeiture of the professional license. Luxembourg’s regulatory authorities believe these fines to be stiff enough so as to encourage strict compliance.

The Financial Supervision Commission, Commission de Surveillance du Secteur Financier (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” (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. As of October 31, 2008, a total of 260 PSFs operate in Luxembourg.

The Luxembourg Central Bank oversees the payment and securities settlement system, and the Insurance Commissioner’s Office, Commissariat aux Assurances, (CAA), under the Ministry of Finance, is the regulatory authority for the insurance sector.

SICAR entities are covered by a law adopted in July 2007. Adopted at the same time was a law regulating markets dealing in financial instruments. Two grand-ducal regulations augment the law. The first outlines organizational requirements and rules of conduct in the financial sector; and the second establishes the need to keep an official listing for financial instruments.

Under the direction of the Ministry of the Treasury, the CSSF has established the Anti-Money Laundering Steering Committee, Comité de Pilotage Anti-Blanchiment (COPILAB), composed of supervisory and law enforcement authorities, the 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. Companies must maintain a registered office in Luxembourg. Authorities perform background checks on all applicants and a government registry publicly lists company directors. Nominee (anonymous) directors are not permitted.

Luxembourg permits bearer shares. Officials contend that bearer shares do not pose a money laundering concern because KYC laws require banks to know the identities of beneficial owners.

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 four 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 2008, obliged institutions filed a total of 901 STRs, compared to a total of 811 in 2007. This increase of STRs is mainly due to the establishment of PayPal in Luxembourg in July 2007. So far in 2008, 238 STRs have been submitted by PayPal. The banking sector submits the largest volume of STRs. STRs submitted by the fund investment sector remain rare despite the general economic evolution of that sector. In 2007, 225 information requests were received from foreign authorities, compared to 180 in 2006. Since 85 percent of the subjects of STRs reside abroad, the efficiency of Luxembourg’s AML system heavily depends on the international cooperation between FIUs and between judicial authorities. The 2008 statistics on the number of U.S. residents referenced in STRs are not available yet. Among the individuals referenced in STRs in 2007, 67 resided in the U.S. Of the 343 cases of suspicious activity in 2007, 32 percent related to organized crime (including terrorist financing) and eight percent involved suspected narcotics-related money laundering.

The GOL prosecuted three money laundering cases in 2006 and four in 2007. In May 2006, two individuals were convicted of laundering narcotics-trafficking proceeds and received sentences of 72 months and 12 months of imprisonment. 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 closed this legal vulnerability with Bill 5756, which expands the list of predicate offenses. Also in November 2006, a Dutch lawyer representing a convicted drug trafficker was acquitted of attempted money laundering charges, but an appellate court overturned the acquittal in May 2007. The defendant appealed his conviction to Luxembourg’s Supreme Court, which handed down a suspended sentence of four years and a 10,000 euro (approximately $13,500) fine. The money was confiscated by the Luxembourg authorities.

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 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. The banking community generally cooperates with enforcement efforts to trace funds and seize or freeze bank accounts. 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. The GOL 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 agreed in early December 2005, to take into account five principles with regard to 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. 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 UNSCR 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 both the UN and EU designation processes. 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 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 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 (MLAT) requests from the U.S. Government (USG) and in return requested USG assistance in three cases. Dialogue and other bilateral proceedings between Luxembourg and the United States have been extensive. Upon request from the USG, 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 USG and the GOL 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 USG signed with the EU 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, the UN Convention for the Suppression of the Financing of Terrorism, and the UN Convention against Corruption. On May 12, 2008, Luxembourg ratified the UN Convention against Transnational Organized Crime.

Luxembourg is a member of the FATF, and the Luxembourg FIU is a member of the Egmont Group. Luxembourg and the United States have had a 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.

However, the scarce number of financial crime cases is of concern, particularly for a country that has such a large financial sector. The GOL 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 the FIU receives. The GOL should pass legislation creating the authority for it to independently designate those who finance terrorism as it would be well served to have such authority. The GOL also should enact legislation to address the continued use of bearer shares. The GOL should continue its efforts to assist jurisdictions with nascent or immature AML/CTF regimes.


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, and a rapidly expanding economy based on gambling and tourism create an environment that can be exploited for money laundering purposes. Macau’s limited institutional capacity is a particular concern. The Macau Special Administrative Region (MSAR) is a gateway to China, and can be used as a transit point to remit funds and criminal proceeds to and from China. Further, Macau’s economy is heavily dependent on gaming. The gaming sector continues to be a significant vulnerability. However, Macau is not a significant offshore financial center.

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. Crimes that occur in Macau include financial fraud, bribery, embezzlement, organized crime, counterfeiting, and drug-related crimes. However, 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.

The gaming sector and related tourism are critical parts of Macau’s economy. Taxes from gaming in the first eleven months of 2008 increased by 38 percent from the same period in 2007 and comprised 77 percent of government revenue in the first eleven months of 2008. Gaming revenue in the first nine months of 2008 exceeded the 2007 total and account for well over 60 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 31 casinos, the three concession holders: Sociedade de Jogos de Macau (SJM), Galaxy and Wynn, and three sub-concession holders: Las Vegas Sands, MGM and PBL/Melco.

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 are 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 in Macau 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.

Macau has taken steps over the past four years to improve its regulatory structure and institutional capacity to tackle money laundering. On March 23, 2006, the Macau Special Administrative Region Government (MSARG) 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 interim establishment of a financial intelligence unit (FIU) for a term of three years, which began operation 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.

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 MSARG, 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 STRs in Macau and to undertake subsequent investigations. In 2006, the newly established 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.

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 outside normal judicial proceedings to fully implement UNSCRs 1267 and 1373. 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 MSARG 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 2008.

The Macau legislature passed a counterterrorism 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 counterterrorist 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. On March 30, 2006, the MSARG passed additional counterterrorism legislation aimed at strengthening measures to counterterrorist 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.

A Macau Monetary Authority official serves as the head of the FIU. The FIU has been expanding since its inception and now consists of more than ten staff, including members seconded from the Insurance Bureau, Monetary Authority and Judicial police. The FIU will continue to hire additional staff in 2009. The FIU works with the Macau Judicial Police on investigation of 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 three-year authorization for the FIU expires in 2009. FIU officials have assured the U.S. government that the organization will not be disbanded at the end of the current authorization. The government says it is planning to submit legislation institutionalizing the FIU in 2009. Alternatively, the organization could be authorized for an additional three years.

Increased attention to financial crimes in Macau since the events of September 11, 2001, has led to a general increase in the number of STRs; however, the number of STRs remains relatively low when compared others in the region. 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. Figures for 2008 were unavailable. 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 through 2007, the Macau Public Prosecutions office received 23 suspected cases of money laundering from the FIU. Of these, 14 were referred for investigation by the Judicial Police or the Commission Against Corruption. Figures for 2008 were unavailable. Between 2005 and 2007, the Judicial Police referred three money laundering cases to the Public Prosecutions office. The MSARG has not shared information on the disposition of these cases.

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 $62,500. In 2003, the Monetary Authority of Macau (AMCM) examined all moneychangers and remittance companies to determine their compliance with these regulations. The AMCM, in coordination with the IMF, updated its bank inspection manuals to strengthen anti-money laundering provisions. The AMCM inspects banks every two years, including their adherence to anti-money laundering regulations.

Former Secretary for Public Works and Transportation, Ao Man Long, was arrested December 2006 and charged with taking bribes and engaging in irregular financial activities, including corruption, money laundering, and abuse of power. The Macau Commission Against Corruption (CAC) reported that Ao had received bribes from real estate and construction companies in excess of $23 million in return for contracts and approvals in 20 public works projects. Ao, assisted by family members and others, used shell companies in Hong Kong and the British Virgin Islands to launder money. On January 30, 2008, Ao was convicted on 40 counts of bribe taking, 13 counts of money laundering, one count of holding assets from unknown sources and one count of incorrect declaration of assets. He was sentenced to 27 years in prison and U.S. $31.5 million of his assets were seized, including assets not directly linked to his corruption and money laundering cases. Ao’s wife, Chan Meng-leng was sentenced in absentia to 23 years in jail. His father (Ao Vong-kong), younger brother (Ao Man-fu) and sister-in-law (Chan Wa-choi) were convicted of 6-14 counts of money laundering, and were sentenced to 10-18 years. Three Macau businessmen were also convicted of bribery in connection with the case. The businessmen and Ao’s family have appealed their convictions, Ao Man Long has not. The cooperation of the Hong Kong authorities was instrumental in the investigation of the case.

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 U.S. $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 Renminbi (RMB) 20,000 (approximately $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 formal 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, mainland China, Portugal, Japan, Korea, and Sri Lanka.

The Monetary Authority of Macau cooperates 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.

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 Macau 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 Macau 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. Those restrictions remain in place.

In December 2006, the Asia Pacific Group (APG) and Offshore Group of Banking Supervisors (OGBS) conducted a joint Mutual Evaluation of anti-money laundering and combating financing of terrorism measures in place in Macau. The Mutual Evaluation Report stated that Macau was noncompliant with FATF Special Recommendation IX, and encouraged Macau to enact measures 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 was also rated as 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 specific ability to freeze terrorist funds; failure to establish an independent and permanent FIU; the lack of requirements for financial institutions to verify the identify the beneficial owners of transactions made by third parties, 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 and enforcing regulations to prevent money laundering in casinos, especially regulations to improve oversight of VIP rooms. The MSAR should, 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 MSARG and the private sector in combating money laundering. Macau should institutionalize its Financial Intelligence Unit by making it a permanent, statutory body. Macau should pursue membership in the Egmont Group, and, in the meantime, ensure the FIU meets Egmont Group standards for information sharing. Macau should devote additional resources to compiling data on financial crimes, including money laundering and terrorist financing, and make that information available to appropriate partners. Macau’s Judicial Police have limited resources devoted to AML/CTF investigations. Additional manpower would allow for more investigations and enforcement action.


Malaysia is a growing regional financial center vulnerable to money laundering. Malaysia has developed an anti-money laundering and counterterrorist finance (AML/CTF) framework based on the country’s Anti-Money Laundering and Anti-Terrorism Financing Act (AMLATFA). Malaysia’s has long porous land and sea borders and its 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, which among others, include heroin, amphetamine type substances and ketamine. Other sources of illegal proceeds include corruption, theft, fraud, smuggling, forgery, and illegal gambling. Money laundering techniques include the use of front companies, purchasing high value goods and real property, investment in capital markets, and the use of money changers. Smuggling of goods subject to high tariffs is a source of illicit funds. Malaysia still has a significant informal remittance sector; however, Bank Negara Malaysia (BNM), the Central Bank, actively promotes the migration of informal remittance channels to the formal channels.

Malaysia’s National Coordination Committee to Counter Money Laundering (NCC), comprised of members from 15 government agencies, is responsible for the development of the national AML/CTF program, including the coordination of national-wide AML/CTF efforts.

In February 2007, the Asia/Pacific Group on Money Laundering (APG) conducted its second Mutual Evaluation on Malaysia. The evaluation was based on all FATF recommendations. Malaysia’s AML/CTF regime was found to be in compliance with the majority of the FATF’s Forty Plus Nine Recommendations. Malaysia was found “noncompliant” with Special Recommendation on Terrorist Financing IX on cash couriers—a serious deficiency in view of Malaysia’s long and porous borders. In addition, the evaluation identified a number of deficiencies specific to Malaysia’s offshore banking center on the island of Labuan, including insufficient resources committed to AML/CTF compliance and constraints on the powers of Labuan’s financial authority to both access and share bank customer information.

Subsequent to the second mutual evaluation, the NCC established a task force comprised of the Royal Malaysian Customs, Immigration Department, Home Ministry, and Bank Negara Malaysia to develop and implement national policies and measures to address physical cross-border transportation of currency and bearer negotiable instruments in line with Special Recommendation IX. This initiative is intended to improve Malaysia’s relatively lax customs inspection at ports of entry, particularly along the east coast of Sabah in Borneo where extensive coastlines increase its vulnerability to smuggling, including cash smuggling.

The AMLATFA provides for the establishment of a financial intelligence unit (FIU) in Malaysia. The FIU was established in 2001 within the Central Bank. The FIU is tasked with receiving and analyzing information and sharing financial intelligence with the appropriate enforcement agencies for further investigation. The FIU cooperates with other relevant agencies to identify and investigate suspicious transactions. A comprehensive supervisory framework has been implemented to supervise financial institutions’ compliance with the AMLATFA and its subsidiary legislation and relevant guidelines. Currently, BNM maintains 365 examiners who supervise the financial institutions under its purview.

Under the AMLATFA, reporting institutions cover a wide range of institutions, including financial institutions from the conventional, Islamic, and offshore sectors, offshore listing sponsors and trading agents, stock brokers, futures brokers, unit trust management companies, fund managers, futures fund managers, money lenders and pawnbrokers, nonbank remittance service providers, nonbank affiliated charge and credit card issuers, insurance financial advisers, e-money issuers and leasing and factoring businesses, as well as nonfinancial businesses and professions including lawyers, notaries public, accountants, company secretaries, licensed casinos, licensed gaming outlets, registered estate agents, trust companies and dealers in precious metals and precious stones.

These reporting institutions are subject to strict customer due diligence (CDD) rules under the AMLATFA. Every transaction, regardless of its size, is recorded. Reporting institutions must maintain records for at least six years and promptly report any suspicious transactions to the FIU, regardless of the amount of transaction. In addition, a cash threshold reporting (CTR) requirement above RM 50,000 (approximately $14,000) was imposed upon banking institutions. FIU officials indicate that they receive regular reports from the AMLATFA reporting institutions. Reporting individuals and their institutions are protected by statute with respect to their reporting and 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 suspicious transactions reporting, currency transactions reporting, or in relation to criminal investigations.

Despite these robust CDD and reporting requirements, the APG 2007 mutual evaluation assessed Malaysia as only “partially compliant” on Special Recommendation IV covering the obligation to report suspicions of terrorist financing. Malaysia has introduced but not yet enacted amendments to the AMLATFA to address this deficiency.

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 AMLATFA, 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 supervision and examination by the respective supervisory authorities or the FIU. Malaysia has implemented a comprehensive supervisory framework to supervise reporting institutions’ compliance with the AMLATFA and its subsidiary legislation as well as the relevant guidelines. Currently, BNM maintains a large pool of examiners who are involved in the supervision of the financial institutions under the purview of BNM, including branches and subsidiaries located in Labuan, Malaysia’s offshore financial services center.

Malaysia’s growing Islamic finance sector is subject to the same regulatory requirements and supervision to combat financial crime as the conventional banks. As of end September 2008, in terms of market share, the assets of the Islamic banking system constitute 16.6 percent of the total banking assets, up from 12 percent in mid-2007.

In 1998, Malaysia imposed foreign exchange controls that restricted the flow of the local currency from Malaysia. Malaysia progressively liberalized the exchange control policy while pursuing measures to combat AML/CTF effectively. Most recently, rules were amended on October 1, 2007 to require an individual form to be completed for each transfer above RM 200,000 (approximately $56,000). In addition, banks are obligated to record the amount and purpose of transactions ranging between the equivalent of $2,800 and $56,000.

BNM monitors and assesses remittance service providers (RSPs) to facilitate accessible and inexpensive remittance service in an effort to promote the use of these formal channels. Liberalizations and approvals enacted since 2002 have resulted in the establishment of 30 RSPs with more than 800 branches throughout Malaysia. RSPs are subject to the AML/CTF requirements under the AMLATFA and are under the supervision of BNM. The APG’s most recent mutual evaluation of Malaysia in 2007 reported that Malaysia features large scale, unregulated remittance channels and that the jurisdiction requires a strategy to support channeling remittances into formal channels. Due to this and other concerns regarding limited implementation of CDD and record keeping requirements for RSPs, the APG assessed Malaysia as “partially compliant” with Special Recommendation VI on alternative remittances.

While Malaysia’s offshore financial center on the island of Labuan has different regulations for the establishment and operation of offshore businesses, it is subject to the same AML/CTF laws as those governing onshore financial service providers. Malaysia’s Labuan Offshore Financial Services Authority (LOFSA) is under the authority of the Ministry of Finance and licenses offshore banks, trust companies, and insurance companies and performs background checks before granting an offshore license. LOFSA is responsible for ensuring AML/CTF compliance on Labuan. However, the APG’s 2007 mutual evaluation of Malaysia reported that the LOFSA has devoted insufficient resources to this mission.

Labuan’s 59 offshore banks (including 10 investment banks), insurance companies, trust companies, trading agents, and listing sponsors are subject to all AML/CTF requirements, including the filing of suspicious transaction reports under the AMLATFA. Through LOFSA, Malaysia is a member of the Offshore Group of Banking Supervisors and works closely with BNM. The financial institutions operating in Labuan are generally among the largest international banks and insurers. Nominee (anonymous) directors are not permitted for offshore banks or for trust or insurance companies. As of October 2008, Labuan has 6,802 registered offshore companies. 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 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. According to the 2007 MER, LOFSA has only one AML/CTF compliance officer—a fact that may explain why the number of STRs that are reported by LOFSA’s banks and trust companies are negligible.

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 17 FIZs and 17 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 FIZ 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. The 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.

Malaysia made its first money laundering arrest in 2004. As of October 2008, the Attorney General’s Chambers had prosecuted 62 money laundering cases, involving a total of 2,392 charges with a cumulative total of RM 744.98 million ($225.7 million). These money laundering cases include self-laundering cases where the criminals who committed the predicate offences dealt/laundered the proceeds themselves. Out of the 62 cases, there have been four convictions. Most of the other cases are ongoing. In 2008, there were enforcement actions by Bank Negara Malaysia which resulted in advisories to the public to be cautious of investment schemes promoted on the internet, through phone calls or through seminars conducted by individuals or companies that are not licensed or authorized to accept deposits or to conduct foreign currency dealings.

In April 2002, the GOM passed the Mutual Assistance in Criminal Matters Act (MACMA), and in July 2006 concluded a Mutual Legal Assistance Treaty (MLAT) with the United States. The treaty came into force in January, 2009. 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. 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.

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. In 2007, the GOM improved the relevant legislation, enabling it to comprehensively freeze assets under the UNSRs 1267 and 1373. The Home Ministry has the authority to declare, by way of order published in the Gazette, terrorists and terrorist organizations listed on the UN 1267 Sanctions Committee’s consolidated list as designated entities whose properties are to be frozen. To ensure immediate action to freeze assets of designated entities/individuals, the FIU disseminates electronically an updated UN consolidated list as well as orders or circulars to financial institutions. At the same time, the FIU 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 $76,400. In 2008, an investigation in Canada tracked about $1.6 million from Canada to an account at a Malaysian-incorporated bank in Kuala Lumpur. The account facilitated the transfer of funds to the Liberation Tigers of Tamil Eelam (LTTE), a designated foreign terrorist organization.

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.

In March 2007, at the initiation of the NCC, Malaysia enacted amendments to five different pieces of legislation: the AMLA (now known as the AMLATFA), the Penal Code, the Subordinate Courts Act, the Courts of Judicature Act, and the Criminal Procedure Code. Predicate offenses for money laundering were expanded from 219 to 223. Moreover, the amendments impose penalties for terrorist acts, allow for the forfeiture of terrorist-related assets, allows 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. This enabled Malaysia to accede to the UN Convention for the Suppression of the Financing of Terrorism. To date, Malaysia has not initiated prosecution of any terrorist suspects or supporters using these amended laws, but instead has continued to use the Internal Security Act which allows for detention without trial. Malaysia is also a party to the 1988 UN Drug Convention, the UN Convention against Transnational Organized Crime, and the UN Convention against Corruption.

The GOM has rules regulating charities and other nonprofit entities. The Registrar of Societies (ROS) is the principal government official who supervises and controls charitable organizations registered as societies, while those registered as companies limited by guarantee fall under the oversight of the Companies Commission of Malaysia, with input from the Inland Revenue Board. The Registrar mandates that every registered society of a charitable nature submits 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 an NPO as a society 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 a “company limited by guarantee,” a quick and inexpensive process requiring capital of approximately 60 cents and audited financial statements

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, increasing transparency and oversight to help prevent the abuse of charitable giving. Non-Muslims also are allowed a similar tax credit for donations to charitable organizations approved under the Income Tax Act.

The Government of Malaysia continues to enhance its cooperation on a regional, multilateral, and international basis. BNM has signed memoranda of understanding (MOUs) on the sharing of financial intelligence with the FIUs of Australia, Indonesia, Thailand, the Philippines, China, the United Kingdom, United States, Japan, Republic of Korea, Sweden, Chile, Sri Lanka, Brunei, Peru, Bangladesh, Canada, and India.

Malaysia is an active member of the Asia/Pacific Group (APG) on Money Laundering, a regional body designed along the lines of the Financial Action Task Force (FATF). As a member of the APG Donor & Provider Group for Technical Assistance Malaysia works with the World Bank, International Monetary Fund, Asian Development Bank, United Nation Counter-Terrorism Committee Executive Directorate, United Nations Office on Drugs and Crime, the Australian FIU (AUSTRAC), and others to provide technical assistance programs in various ASEAN member countries. Currently, Malaysia is working with the United States to help develop an effective FIU in Afghanistan.

In July 2006, Malaysia was selected as the co-chair of the APG Implementation Issues Working Group (IIWG), which is mandated to provide strategic support to members in implementing FATF Forty Plus Nine Recommendations. As a co-chair, Malaysia has helped develop the Strategic Implementation Planning Framework, which aims to provide post-mutual evaluation implementation assistance to jurisdictions.

Since being accepted as an Egmont Group member in 2003, the FIU in has been elected as the Asia Chair for the Egmont Committee for two consecutive terms (2006-2008 and 2008-2010). In this regard, Malaysia participates as co-sponsor for a number of jurisdictions applying for Egmont Group membership as well as representing the Egmont Group in a number of meetings organized by the APG.

The Government of Malaysia should continue its involvement in AML/CTF matters on a regional, multilateral, and international basis. In addition, Malaysia should improve AML/CTF oversight in Labuan and endow LOFSA with sufficient resources to carry out adequate supervision, particularly over its banks, IBCs, and trust companies. Given that cash smuggling is a major method used by terrorist financers to move money in support of their activities, as a priority matter, the task force established under the NCC should continue its efforts to develop and implement national policies and measures to address physical cross border transportation of currency and bearer negotiable instruments in line with the FATF Special Recommendation IX on bulk cash smuggling. BNM also should continue its efforts to encourage the use of formal rather than informal remittances which are not subject to AML/CTF controls and may pose vulnerabilities for 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. More effort should be made in identifying, investigating, and prosecuting terror financing.


Mexico is a major drug-producing and drug-transit country and is also one of the major conduits for proceeds from illegal drug sales leaving the United States. Proceeds from 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 persons, and other crimes. The smuggling of bulk shipments of U.S. currency into Mexico and the repatriation of the cash into the United States via couriers, armored vehicles, and wire transfers remain favored methods for laundering drug proceeds. In addition, criminal organizations have established networks with criminal groups based in other countries to facilitate and develop new methods to launder illicit funds.

Investigation of money laundering activities involving the cross-border smuggling of bulk currency derived from drug transactions remains a challenge for U.S. law enforcement officials. 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 legitimate remittances. 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 $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 cambios (licensed foreign exchange offices) and centros cambiarios (unlicensed foreign exchange offices), to facilitate bulk cash smuggling.

Corruption is also of concern: in the last year, various Mexican government officials have come under investigation for alleged corruption and money laundering activities. The Government of Mexico (GOM) took on internal corruption in 2008 and launched a “cleaning operation” aimed at ending corruption inside its enforcement agencies, including the Office of the Attorney General—Special Unit for Organized Crime (PGR-SIEDO), the Secretariat for Public Security (SPP), the Federal Preventive Police (PFP), and the Federal Investigative Agency (AFI). In November 2008, PGR agents apprehended the former Deputy Attorney General of SIEDO. To date, eight enforcement agents from PFP and PGR have been apprehended and accused of leaking confidential information to drug cartels.

In January 2008, the International Monetary Fund (IMF) conducted a mutual evaluation of Mexico on behalf of the Financial Action Task Force (FATF). The evaluation noted improvements to the GOM’s AML/CTF regime and identified deficiencies, including a lack of criminal liability for legal persons and a lack of investigations for money laundering and cross-border cash smuggling.

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 valued at $10,000 or greater. Customs authorities send these reports to the financial intelligence unit (FIU) and cover a wide range of monetary instruments including bank drafts. 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 $60 million in bulk currency shipments leaving Mexico City’s international airport since 2002. As of November 2008, bulk-cash seizures amount to $53 billion.

Currently, there are 46 banks including 6 development banks and 71 foreign financial representative offices operating in Mexico, as well as 95 insurance companies, 479 investment companies, 155 credit unions, and 24 casas de cambio. The number of casas de cambio will likely decline due to actions the Mexican authorities have taken against those with serious AML/CTF violations and the closure of correspondent accounts in the United States. Commercial banks, foreign exchange companies, and general commercial establishments may offer money exchange services. The Ministry of the Interior (SEGOB) issues temporary licenses for national lotteries, casinos, horse races, and sport pools, but these operations as well as lawyers, accountants, real estate agents, dealers of precious metals and stones, and couriers are currently not subject to anti-money laundering reporting requirements. Although the underground economy is estimated to account for 20-40 percent of Mexico’s gross domestic product, the informality of that economy is considered to be much less significant with regard to money laundering than the criminally-driven segments of the economy.

From 2000 to 2007, inbound remittances grew from $6.6 billion to $24 billion a year. However, remittances have declined by 3.7 percent from January through September 2008 compared with the same period in 2007. 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 his/her 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. In 2007, electronic transfers accounted for 95 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) as 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. 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. Money laundering is punishable by imprisonment of five to fifteen years and a fine. Penalties increase when a government official in charge of the prevention, investigation, or prosecution of money laundering commits the offense. 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 offense for money laundering. 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.

Four supervisory agencies are responsible for the compliance with AML/CTF requirements. For AML/CTF purposes, there are four main supervisory agencies: the National Banking and Securities Commission (CNBV), the National Insurance and Bonds Commission (CNSF), the National Retirement Savings System Commission (CONSAR), and the Tax Administration Service (SAT). The CNBV regulates and supervises banks, limited scope financial companies, securities brokerage firms, foreign exchange firms, and mutual funds and subscribes to a risk-based approach to supervision. The CNBV also has the remit to impose administrative sanctions for noncompliance, revoke licenses, and conduct on-site inspections and off-site monitoring of regulated entities. The SAT supervises centros cambiarios (nonlicensed foreign exchange retail centers), money remitters, and unregulated sofomes (multiple purpose financial companies). 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 $10,000 to the SAT, which shares the information with the FIU. According to the SAT, there are 882 registered money transmitters and 4380 unlicensed centros cambiarios. In 2006, nonprofit organizations were made subject to reporting requirements for donations greater than $10,000.

The Ministry of Finance, through the Banking, Securities and Savings Unit (UBVA), is responsible for issuing regulations and criteria to interpret anti-money laundering (AML) 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, and centros cambiarios to conduct customer due diligence. The regulations impose customer identification requirements on a range of categories of clients which includes legal persons, individuals, beneficiary owner information and specific provisions for nationals and foreigners. Regulations require enhanced due diligence for higher-risk customers including politically exposed persons. Banks also require identification of occasional customers performing transactions equivalent to or exceeding $500 in value, so that banks can aggregate the transactions daily to prevent circumvention of cash transaction reports (CTRs) and suspicious transaction reports (STRs) filing requirements. Institutions must maintain records of transactions for a period of ten years. Financial institutions have also implemented programs for screening new employees and verifying the character and qualifications of their board members and high-ranking officers. These institutions have also implemented regular training for their employees on money laundering. With regard to wire transfers, financial institutions are required to obtain originator information. However, the threshold for identification of occasional customers is $3,000 and does not include the obligation to aggregate lower transactions for a single customer over a period of time. No guidelines have been issued to assist financial institutions with meeting this obligation. In addition, money remitters are not subject to wire transfer regulations.

The UBVA drafted a multifaceted reform which is under review by the Improvement Regulatory Commission (COFEMER), and observers expect approval in early 2009. The reform, when effective, will harmonize the rules and standards between larger banks and other smaller financial institutions such as credit unions, centros cambiarios, and sofoles (limited purpose lending companies) undergoing deregulation and transitioning to sofomes. Sofomes can be subject to or exempt from regulation depending upon their financial activities. The CNBV will supervise the regulated sofomes that maintain a financial relationship with credit institutions and controlling companies of financial groups, and the SAT will supervise the unregulated sofomes. There are currently 13 regulated sofomes and 634 unregulated sofomes. There are no AML/CTF regulations and supervision has not commenced for these institutions as of yet.

The UBVA draft reform also includes regulations for prepaid cards and travelers checks. The government will provide banks and other financial entities the authority to exchange information among themselves regarding money laundering and terrorist financing without violating bank secrecy provisions. The new regulations will require entities to provide more details, such as complete address and other relevant information in the reports submitted to the FIU. The implementing rules will also include a specific definition between “user” (for remittances, casas de cambio, and centros cambiarios) and “customer” (a person who signs a contract or has a bank account).

When implemented, the reform will reduce the threshold to identify a user of cash operations, travelers checks or prepaid cards from $3,000 to $500. For operations larger than $3,000, the reform will require foreign exchange houses, centros cambiarios, and money transmitters to create a complete file of the user. Financial institutions will need to monitor and identify operations in pesos using a threshold of 300,000 pesos (approximately $21,600) for individuals and 500,000 pesos (approximately $36,000) for companies; formerly, institutions conducted such monitoring exclusively in dollars. To improve the detection of money laundering, financial entities will have 30 days to report fractioned operations exceeding $10,000. The reform will also enable Mexico to identify those sectors that do not comply with money laundering preventive measures.

In 2004, the Ministry of the Treasury (SHCP) reorganized and renamed its financial intelligence unit (FIU), the Unidad de Inteligencia Financiera (UIF). The UIF has approximately 70 staff, but officials expect this number to increase to 150 next year. Forensic accountants, lawyers, and analysts comprise the majority of FIU staff. Regulated entities must report to the UIF any suspicious transactions, currency transactions over $10,000 (except for centros cambiarios, which are subject to a $3,000 threshold), and transactions involving employees of financial institutions who engage in suspicious activity.

The UIF is responsible for receiving, analyzing, and disseminating STRs and CTRs, as well as reports on the cross-border movements of currency. In 2008, UIF received 36,934 STRs and 6,513,147 CTRs. Following the analysis of the reports, the UIF sends reports that are deemed to merit further investigation, and have been approved by the SHCP’s legal counsel, to the PGR. The UIF sends an average of 60 cases per month 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. From 2004 through 2007, 17 criminals have been convicted of money laundering, and $4.5 billion have been seized by the PGR’s financial crimes unit. The UIF also reviews all crimes linked to Mexico’s financial system and examines the financial activities of public officials. In 2007 and 2008, U.S. authorities observed a significant increase in the number of complex money laundering investigations by SIEDO, with support from the UIF and in coordination with U.S. officials. The number of investigations rose from 152 in 2004 to 198 as of October 2008. In 2007, 85 of 112 apprehension orders corresponded to money laundering operations.

The PGR’s special financial crimes unit is understaffed. The lack of personnel—including more field investigators, prosecutors, and auditors- monetary resources, a comprehensive and modern database, technological equipment, as well as the vulnerability of its facilities undermine the unit’s efforts. Of the estimated $25 billion* circulating illegally in the banking system, the PGR is only able to attack one percent of this amount. During the past three months the unit was able to seize between $60 and $70 million. So far, efforts have targeted only key states, such as Tamaulipas, Sinaloa, Nuevo Leon, Mexico City, and Jalisco, but the PGR believes there is reason to refocus on other regions such as the southern states of Quintana Roo and Yucatan, where authorities have detected large movements of illicit resources.

[*This figure has been revised since its original posting to the website. See version as submitted to Congress.]

In 2006, the UIF signed Memoranda of Understanding (MOUs) with the Economy Secretariat and the Mexican immigration authorities that provides 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).

At the end of 2008, the GOM enacted legislation to reorganize Mexico’s law enforcement agencies that attempts to create synergy among the different levels of local, state, and federal law enforcement agencies to combat drug cartels and other organized crime groups. The law will create a National Public Safety Council (to provide assistance to victims of crime, bolster law enforcement institutions, and evaluate the effectiveness of public safety programs) and a National Intelligence Center.

Agencies involved in AML/CTF efforts are currently drafting an AML/CTF National Strategy, anticipated to be issued in 2009. The Strategy will outline Mexico’s AML/CTF short and long range objectives and the strategies that the GOM will implement to meet them. It will also establish an interagency coordination group which will examine emerging money laundering trends and identify and propose legal and regulatory measures to mitigate gaps. In August 2008, the GOM approved an Integral Strategy Against Organized Crime. The strategy focuses on the isolation, neutralization, and ultimate disbandment of organized crime through the abolition of their operational, logistical, commercial and financial networks.

There have been a number of noteworthy cases in 2008. In the beginning of 2008, the U.S. Government froze funds belonging to the Mexican money exchange house Casa de Cambio Puebla as part of a money laundering case filed in U.S. District Court in Miami against Venezuelan national Pedro Jose Benavides Natera, who participated in a complex money laundering scheme. Criminals used clean funds to purchase high-performance turbo-prop aircraft for drug smuggling operations. Drug proceeds from Venezuela were sent to Casa de Cambio Puebla where cooperating individuals sent the funds on to the U.S., into buffer accounts, operated by individuals who served as fronts for Venezuelan drug traffickers. The buffer account holders then transferred funds to aircraft brokers for the purchase of aircraft. The criminals then cancelled the aircraft registrations and had the aircraft shipped to front men in Venezuela.

In October 2008, at a mansion in Desierto de los Leones near Mexico City, PGR and PFP apprehended 15 major drug dealers and money launderers, 11 of them Colombians, with links to the Beltran Leyva brothers. The leader of the group, Teodoro Mauricio aka “El Gaviota”, is under investigation for money laundering and narcotics trafficking. These apprehensions are part of an ongoing investigation initiated in 2005 of a group of Colombian traffickers in Mexico linked to the Cali-based Norte Valle Cartel.

In November 2008, SIEDO arrested Jaime Gonzalez Duran, aka “The Hummer”, one of the most wanted criminals in Mexico and allegedly one of the leaders and founders of the criminal group “Los Zetas” (considered to be the armed branch of the Gulf Cartel). Gonzalez was apprehended in Reynosa, Tamaulipas where he had smuggled drugs into the U.S., on organized crime, drug smuggling, money laundering, and possession of weapons charges.

Mexico has asset forfeiture laws and provisions for seizing assets abroad derived from criminal activity, and U.S. requests to Mexico for the seizure, forfeiture, and repatriation of criminal assets have occasionally met with success. 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. However, 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). The legislation would provide for seizing and forfeiting assets used by organized criminals in executing drug trafficking, money laundering, kidnapping, car robbery, embezzlement, and trafficking of persons. Currently, these assets remain untouched by enforcement authorities and the state even when criminals are convicted and sentenced to prison. The legislation would permit specialized judges to authorize an asset forfeiture procedure independently of the criminal process being followed against an alleged criminal, and before a final ruling or conviction. Prosecutors from the Attorney General’s Office would have access to financial, tax, and real estate information through the CNBV, SAT, and notaries. For assets marked for seizure and forfeiture located abroad, Mexico would request international legal assistance under international treaties and reciprocal cooperation mechanisms. The law would also include sanctions against individuals leasing or renting an asset or property to organized crime with the knowledge that it will be used to commit illegal acts.

Senators amended a Presidential proposal to prevent corruption and abuse of power by PGR prosecutors. In addition to that proposal, there are also Senatorial initiatives. One proposes that forfeited assets be included in a fund to prevent and pursue felonies and organized crime. The Service for the Administration of Forfeited Assets would allocate resources to the corresponding authorities and to cover damages to the victims. The three major political parties are discussing the initiatives with the intention of to achieving consensus and approving the law in early 2009. Mexico City’s local congress drafted a similar extincion de dominio law, which was approved at the end of November 2008.

In 2007, Mexico criminalized terrorist financing, with punishments of up to 40 years in prison. The 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 law also imposes sanctions against an individual or individuals who conceal a terrorist or a person who threatens to commit a terrorist act. The UBVA distributes the list of individuals and entities that have been included in the UN 1267 Sanction Committee’s consolidated list to other government agencies and to financial institutions through the CNBV. 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 its law enforcement authorities regularly meet in bilateral law enforcement working groups with their U.S. counterparts. 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 party to the 1988 UN Drug Convention; the UN Convention against Transnational Organized Crime; the UN Convention against Corruption; and the UN Convention for the Suppression of the Financing of Terrorism. Mexico is a member of the FATF and the Financial Action Task Force for South America (GAFISUD), a FATF-style regional body, of which Mexico currently holds the presidency. In addition to its membership in the FATF and GAFISUD, Mexico participates in another FATF-style regional body, the Caribbean Financial Action Task Force (CFATF), as a cooperating and supporting nation. The UIF is a member of the Egmont Group of Financial Intelligence Units.

The Government of Mexico (GOM) has made fighting money laundering and drug trafficking one of its top priorities, and has made substantial progress in combating these crimes over the course of 2008. However, Mexico continues to face challenges with respect to is anti-money laundering and counterterrorist financing regime, particularly with its ability to prosecute and convict money launderers.. The GOM should amend its legislation to ensure that legal persons can be held criminally liable for money laundering and terrorism financing. Mexico should also amend its terrorist financing legislation to fully comport with the UN Convention for the Suppression of Terrorist Financing; and enact legislation and procedures to freeze terrorist assets of those designated by the UN Al-Qaida and Taliban Sanctions Committee. To create a more effective regime, Mexico should fully implement and improve its mechanisms for asset forfeiture, control the bulk smuggling of currency across its borders, monitor remittance systems for possible exploitation, improve the regulation and supervision of money transmitters, unlicensed currency exchange centers, centros de cambiarios and gambling centers, and extend AML/CTF requirements to designated nonfinancial businesses and professions.

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