International Narcotics Control Strategy Report

International Narcotics Control Strategy Report   -2006
Released by the Bureau of International Narcotics and Law Enforcement Affairs
March 2006

Kuwait

Kuwait, although not a major regional financial center, is experiencing unprecedented economic growth that is enhancing the country’s regional financial influence. Money laundering is not believed to be a significant problem, and that which does take place is reported to be generated largely as revenues from drug and alcohol smuggling into the country and the sale of counterfeit goods.

Kuwait has nine commercial banks, including two Islamic banks, all of which provide traditional banking services comparable to Western-style commercial banks. Kuwait also has two specialized banks, the Kuwait Real Estate Bank (KREB), which is in the process of converting to an Islamic bank, and the government-owned Industrial Bank of Kuwait. Both of these banks provide medium and long-term financing. With the conversion of KREB, there will be three Islamic banks, including the Kuwait Finance House (KFH) and Bubyan Islamic Bank. As of May 31, 2004, KFH came fully under the supervision of CBK. The Bubiyan Islamic Bank was established by the Kuwaiti Investment Authority (KIA) and is in the process of being formed, after its May 2004 initial public offering. Since before the terrorist attacks of September 11, 2001, the CBK has been working on bringing Islamic financial institutions under its supervision.

The banking sector was opened to foreign competition under the 2001 Direct Foreign Investment Law, and the Central Bank of Kuwait (CBK) has already granted licenses to four foreign banks. However, while foreign banks may now operate in Kuwait, they are restricted to opening only one branch. BNP Paribas, National Bank of Abu Dhabi and HSBC are already doing business in Kuwait, while Citibank expects to begin operations in 2006.

On March 10, 2002, the Emir (Head of State) of Kuwait signed Law No. 35, which criminalizes money laundering. The law stipulates that banks and financial institutions may not keep or open any anonymous accounts or accounts in fictitious or symbolic names, and that banks must require proper identification of 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 training and establish internal control systems, and report any suspicious transactions.

Law No. 35/2002 designates the Office of Public Prosecution (OPP) as the sole authority to receive suspicious transaction reports and take appropriate action on money laundering operations. Reports of suspicious transactions are then referred from the OPP to the Central Bank of Kuwait (CBK) for analysis. The 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. Law 35/2002 does not cite terrorist financing as a crime; however, the definition of criminal activity is broad.

The law includes articles on international cooperation, and on monitoring cash and precious metals transactions. Currency smuggling into Kuwait is also outlawed under Law No. 35/2002, although reporting requirements are not uniformly enforced at ports of entry. Provisions of Article 4 of Law No. 35/2002 state that every person shall, upon entering the country, inform the customs authorities of any national or foreign currency, gold bullion, or any other precious materials in his/her possession, valued in excess of Kuwait dinars 3,000 (approximately $10,000). However, the law does not require individuals to file customs declarations when carrying cash or precious metals out of Kuwait. The law authorizes the Minister of Finance to set forth the resolutions necessary to ensure its implementation. The Minister of Finance, as stipulated by Law No. 35/2002, can issue resolutions to enhance combating money laundering operations, without actually amending the legislation. Several cases have been opened under Law No. 35/2002, but the majority of them were closed after investigations did not disclose prosecutable offenses. Only two cases have gone to court. The cases reportedly involved money smuggling and failure to report currency transactions, and did not involve banks. Amendments to Law 35/2002 are under discussion but have yet to be finalized.

In addition to Law No. 35/2002, anti-money laundering reporting requirements and other rules are contained in the CBK’s 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 CBK all cash transactions in excess of $10,000 (Article 20). In addition, the CBK distributed detailed instructions and guidelines to help bank employees identify suspicious transactions. At the Central Bank’s instructions, banks are no longer required to block assets for 48 hours on suspected accounts in an effort to avoid "tipping off" suspected accountholders. The Central Bank, upon notification from the Ministry of Foreign Affairs (MFA), issues circulars to units subject to supervision requiring them to freeze the assets of suspected terrorists and terrorist organizations listed on the UN 1267 Sanctions Committee’s consolidated list and the list of Specially Designated Global Terrorists designated by the U.S. pursuant to E.O. 13224. 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.

In addition, CBK issued circular No. (2/sb/95/2003) in 2003, which is directed toward money changing companies (they are permitted to engage in wire transfers, selling and buying drafts and travelers’ checks), and contains similar instructions with respect to combating money laundering and suspicious activities reporting guidelines. A similar order (31/2003) was issued by the Kuwait Stock Market to all companies under its jurisdiction. There are about 130 money exchange businesses (MEBs) operating in Kuwait (authorized only to exchange foreign currency), none of which are companies, and therefore, are not under the supervision of the CBK but rather under the Ministry of Commerce and Industry. The CBK has reached an agreement with the Ministry of Commerce and Industry to enforce all anti-money laundering (AML) laws and regulations in supervising such businesses. Furthermore, the Ministry will work diligently to encourage the MEBs to apply for and obtain company licenses and register with the CBK.

The Ministry of Commerce and Industry also supervises 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. Since September 2002, 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.

The supervision of anti-money laundering responsibilities on the part of the Ministry of Commerce and Industry is carried out by its Office of Combating Money Laundering Operations (OMLO), which was established in 2003 to improve private sector awareness and compliance with the provisions of Law No. 35/2002.The office currently has about 2,500 companies under its supervision. All new companies seeking a business license are required to receive AML awareness training from the OMLO before a license is granted. The OMLO also conducts both mandatory follow-up visits and unannounced inspections.

Businesses that are found to be in violation of provisions of Law No. 35/2002 receive an official warning from the Ministry 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, three exchange houses were closed recently, one for operating without a license and the other two for violating instructions from the Ministry.

In April 2004, the Ministry of Finance issued Ministerial Decision No. 11 (MD No. 11/224), which transferred the chairmanship of the National Committee for Anti-Money Laundering and the Combating of the Financing of Terrorism, formerly headed by the Minister of Finance, to the Governor of the CBK. The Committee is comprised of representatives of the Ministries of Interior, Foreign Affairs, Commerce and Industry, and Finance, Labor and Social Affairs, Office of Public Prosecution, Kuwait Stock Exchange, General Customs Authority, the Union of Kuwaiti Banks, and the CBK. The National Committee is in the process of finalizing a draft legal review of Law No. 35/2002 to ensure its compliance with current international standards.

Since its inception, the National Committee has been pursuing its mandate of: drawing up the country’s strategy and policy with regard to anti-money laundering and terrorist financing; drafting the necessary legislation and amendments to Law No. 35/2002, along with pertinent regulations; coordinating between the concerned ministries and agencies in matters related to combating money laundering and terrorist financing; following up on domestic, regional, and international developments and making needed recommendations in this regard; setting up appropriate channels of communication with regional and international institutions and organizations; and representing Kuwait in domestic, regional, and international meetings and conferences. In addition, the Chairman is entrusted with issuing regulations and procedures that he deems appropriate for the Committee duties and responsibilities and the organization of its activities.

In August 2002, the Kuwaiti Ministry of Social Affairs and Labor issued a ministerial decree creating the Department of Charitable Organizations. 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 insure that such organizations comply with the law both at home and abroad. The Department has established guidelines for charities explaining donation collection procedures and regulating financial activities. The Department is also charged with conducting periodic inspections to insure that charities maintain administrative, accounting, and organizational standards according to Kuwaiti law. Further, the Department mandates the certification of charities’ financial activities by external auditors, and limits the ability to transfer funds abroad to select charities approved by the Ministry. The Ministry also requires all fund transfers abroad to be made between authorized charity officials. Banks and money exchange businesses (MEBs) are not allowed to transfer any charitable funds outside of Kuwait without prior permission from the Ministry. In addition, any such wire transactions must be reported to the CBK, which maintains a monthly database of all transactions conducted by charities. Unauthorized public donations, including zakat (alms) collections in mosques, are also prohibited. During the 2005 Ramadan season, the Ministry introduced a new pilot program requiring charities to raise donations through the sale of government-provided coupons.

On June 23, 2003, the CBK issued Resolution No. 1/191/2003, establishing the Kuwaiti Financial Inquiries Unit (KFIU) as an independent entity within the Central Bank. The KFIU is comprised of seven part-time CBK officials and headed by the Central Bank Governor. The responsibilities of the KFIU are to receive and analyze reports of suspected money laundering from the OPP, to establish a database of suspicious transactions, to conduct anti-money laundering training, and to carry out domestic and international exchanges of information in cooperation with the OPP. Although the KFIU 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 suspicious transaction reports (STRs); instead, these critical functions were divided between the KFIU and OPP.

Banks in Kuwait are required to file STRs with the OPP, rather than directly with the KFIU. However, based on an MOU with the Central Bank, STRs are referred from the OPP to the KFIU for analysis. The KFIU conducts analysis and reports any findings to the OPP for the initiation of a criminal case, if necessary. The KFIU’s access to information is limited, due to its inability to share information abroad without the approval of the OPP. Kuwaiti officials agree that the current limits on information sharing by the FIU are a problem that requires amending of the law, currently under revision by the National Committee.

Kuwait is a member of the Gulf Cooperation Council (GCC), which is itself a member of the Financial Action Task Force (FATF). In November 2004, Kuwait signed the memorandum of understanding governing the establishment of the Middle East and North Africa Financial Action Task Force (MENAFATF), a FATF-style regional body. Kuwait has played an active role in the MENAFATF through its participation in the drafting of regulations and guidelines pertaining to charities oversight and cash couriers. In December 2005, the CBK hosted a training seminar for those who will be conducting mutual evaluations of MENAFATF members. The Kuwait General Administration of Customs also hosted a separate conference in December 2005 on combating cash smuggling. Kuwait is a party to the 1988 UN Drug Convention. It has signed, but not yet ratified, the UN Convention against Transnational Organized Crime. It has not signed the UN International Convention for the Suppression of the Financing of Terrorism.

Kuwait is making progress in enforcing its anti-money laundering program. However, it should significantly accelerate its ongoing efforts to revise its 2002 anti-money laundering law (Law No. 35/2002), improve the sharing of financial information, strengthen the structure and responsibilities of the KFIU, secure Egmont Group membership for the KFIU, and criminalize terrorist financing. Kuwait’s National Committee on Combating Money Laundering and Terrorist Financing should complete its analysis of the 2002 law and amend it to conform to current international standards. Kuwait should expand the practice of in-bound currency reporting to include all ports of entry. Kuwait should also make outbound currency and precious metals declarations mandatory. More interagency cooperation and coordination between the KFIU and other concerned parties, including Customs, could yield significant improvements in proactive investigations and international information exchange. The KFIU should be allowed to independently share financial information with its foreign counterparts, and receive, analyze, and disseminate suspicious transaction reports without obtaining prior authorization from the OPP. Kuwait should continue to enhance its charity oversight efforts, including increased coordination and diligence with third countries and organizations receiving assistance from Kuwaiti charities. Kuwait should become a party to both the UN Convention against Transnational Organized Crime and the UN International Convention for the Suppression of the Financing of Terrorism.