Support to Law Enforcement

International Narcotics Control Strategy Report, 1996 Released by the Bureau for International Narcotics and Law Enforcement Affairs, U.S. Department of State Washington, DC, March 1997

FINANCIAL CRIMES AND MONEY LAUNDERING

EXECUTIVE SUMMARY

This chapter provides a global assessment of money laundering and other financial crimes; a review of actions taken and a listing of continuing concerns; a prescription for future action; and, subchapters on about 200 nations and territories, including comparative rankings in terms of their efforts to control/prevent money laundering. The latter include the annual priority rankings, which for 1997 contain a number of upgrades, reflecting our heightened concern about the flow of illicit money through a financial system and/or a government's failure to take the steps needed to remedy these problems.

THE YEAR IN REVIEW

There were a number of significant developments in the money laundering sphere in 1996:

United States agencies began implementing the Presidential Decision Directive announced in October 1995. US agencies drew upon numerous data sources, including the INCSR, reports from investigative and regulatory agencies, and from posts abroad, to assess which money laundering and/or financial crime situations affected US national security interests ­­ including drug trafficking but also contraband smuggling, arms sales, terrorist financing, sanctions violations and sales of weapons of mass destruction. Where deemed necessary, teams of US officials visited governments to secure agreements on actions to be taken.

There was demonstrable progress by several Western Hemisphere governments on actions taken in accord with the agreements on standards and objectives reached through the communique issued at the conclusion of the Summit of the Americas Ministerial Conference on Money Laundering in December 1995, which established an action plan for the 34 governments of this Hemisphere.

There has been continued progress by the Financial Action Task Force (FATF), including the beginning of the second round of mutual evaluations of each of its 26 members. FATF also demonstrated the political will to admonish its own members for shortcomings, notably Turkey and Greece. FATF also approved proposals to update its universally­accepted 40 recommendations to reflect new typologies and methodologies. In addition, evaluations of members of the Caribbean FATF were begun; there was further enhancement of the Asian outreach program; a common forum for major international bankers and government policy makers was organized; and an international conference of financial intelligence units in 1995 led to the establishment of a significant number of such units around the world in 1996.

In 1997, a potentially high­impact initiative external relations program begun by FATF in 1992­93 resulted in agreements with the Council of Europe, the Offshore Group of Banking Supervisors, as well as the CFATF, to secure evaluation by outside experts of many of the governments which FATF and these other groups had worked with to determine whether the majority of financial center countries were adhering to the international consensus on money laundering laws.

The year saw increased cooperation with foreign governments on major money laundering cases; as well as an increase in asset sharing with cooperative governments and an increase in the number of governments with whom the US has mutual legal assistance agreements.

As in 1995, additional financial center governments, adopted broad, new anti­money laundering policies and/or laws, while a number of governments were in the final stages of presenting/adopting new legislation.

However, as discussed more fully in the section on New Concerns, there were negative aspects to 1996, including the further penetration of financial systems around the world by organized crime groups; the use of new drug transit routes across ever more remote countries, most of which have no or few anti­money laundering laws, which may attract crime proceeds to still more easily­manipulated financial systems; the differential between the levels of compliance with international anti­money laundering standards by Asia's rapidly expanding financial centers in non­FATF member countries, as well as in Latin America, compared to the financial centers in the USA, Canada and Western Europe; and the near­polarity of interests by banking/industrial groups and criminal money laundering groups in achieving the fastest possible system for the international transfers of payments.

MONEY LAUNDERING: A CHANGING SCENARIO

International banking continues to evolve, both in terms of the worldwide connections among banks, as well as the increasing sophistication of banking methods. The constant challenge is to ensure that every bank can account for its customers, that every government has laws which ensure the prosecution of financial crimes, and that every society sets a moral and ethical standard for the conduct of commerce.

Many important financial centers have now adopted legislation to curb drug­related money laundering, and the number of governments which have ratified the 1988 UN Convention continued to increase in 1996. But, the race between criminals seeking new venues and oversight bodies seeking more widespread compliance still goes to the crooks.

In 1987, when the first INCSR money laundering chapter was published, the priority concern was with twelve leading financial centers including the United States, United Kingdom, France, Germany, Italy, Switzerland, Hong Kong, Singapore, Panama, the Bahamas, the Cayman Islands, and Colombia. When FATF was founded in September 1989, the belief was that major relief could be achieved through a congruence of laws and policies among 15 major industrialized countries: the US, UK, Germany, France, Italy, Canada, Japan, Netherlands, Australia, Switzerland, Luxembourg, Spain, Sweden, Belgium and Austria. By 1991, FATF had expanded to include all 24 members of the Organization for Economic Cooperation and Development, as well as Hong Kong and Singapore.

The 1988 INCSR noted that Cyprus, for example, was not a priority, while Mexico was treated marginally, Russia was still the heartland of the Soviet empire, and Israel, Turkey, Aruba, the Netherlands Antilles, Antigua and others did not appear on most money laundering maps. Yet, Russia, Turkey and the Netherlands Antilles were raised to High Priority in 1996, where Mexico and Aruba remain continuing concerns; Israel and Antigua are Medium­High priority and Cyprus has been raised to High Priority in 1997.

Now, new trafficking routes in Africa and in the lower regions of the old Soviet regime pose the concern whether traffickers will soon take advantage of the minimally regulated banking systems along these routes. An ever­lengthening list of Low Priority governments include several which were of no concern as recently as two years ago.

Moreover, too many priority financial centers have still not adopted needed legislation or ratified the Convention (the latter include Aruba, Colombia, Mexico, Netherlands Antilles, Nigeria, Singapore, Thailand, Turkey and Venezuela). There is also a substantial question whether the drug trafficking­oriented money laundering laws which many governments adopted in the earlier part of this decade are adequate, given recent developments in money laundering practices, the upswing in non­drug financial crimes, and the need to adapt to new technologies used in banking, as well as extending laws to include non­bank financial institutions.

Organized crime groups are increasingly a factor in major money laundering schemes ­­ and the multiple sources of their proceeds compounds the difficulty of linking the monetary transaction to a unique predicate offense like drug trafficking. Moreover, criminal organizations have distinct patterns of operation which vary from one part of the globe to the next. Russian "mafiya" groups have enlarged their presence in the Western Hemisphere, and are becoming as much a concern as the traditional Italian/Sicilian "mafia", Colombian cartels or the Asian triads and yakuza.

In its 1997 public report on typologies, the FATF noted that organized crime continues to be responsible for a large proportion of the illegal funds entering financial systems. FATF said organized crime groups in Italy, Japan, Colombia, Russia and Eastern Europe, Nigeria and the Far East (among others) were involved in a wide range of criminal activities, including drug trafficking, loan sharking, illegal gambling, fraud, embezzlement, extortion, prostitution, corruption, illegal trafficking in arms and human beings, organized motor car theft and other crimes. FATF also cited a trend in some countries where criminals who were once only engaged in drug trafficking were either broadening their activities to include other proceeds­generating criminal activities or had switched to other financial crimes carrying lower penalties.

However, FATF analysts concluded that drug trafficking and financial crimes (bank fraud, credit card fraud, investment fraud, advance fee fraud, bankruptcy fraud, embezzlement etc) remain the most frequently cited sources of illegal proceeds, with drug trafficking continuing to be the principal generator of illegal funds.

That scenario changes by regions and by countries within regions. Scandinavian experts believe their greater problem is financial crime. Contraband smuggling tends to dominate in some areas; cigarette smuggling, for example, is considered the primary generator of illegal funds in Albania.

Meanwhile, an increasing number of drug traffickers do not directly manage the laundering or conversion of their proceeds, but rely predominantly on professional money brokers. Such brokers are increasingly crafting effective schemes to evade normal monitoring, detection and reporting devices.

We are seeing a proliferation of financial crimes, not limited to drug money laundering. These include the more common types of financial frauds, but, they also include new variations, particularly the use of prime bank guarantees, phony or fictitious letters of credit, counterfeit and/or stolen bonds and other monetary instruments offered as surety for loans, and other scams.

In just the last six months, we have detected a number of offers involving such schemes in this hemisphere. However, some of the more flagrant examples are occurring in Asia. In one instance, financial "fraudsters" obtained the secret telex codes which banks use for bank­to­bank transactions and were able to take $42 million in cash out of Hong Kong and Shanghai Bank in Jakarta. A number of other alleged scams have also involved the principals of Dragon Bank, which is chartered in Vanuatu but operates in Manila and elsewhere. It has now lost its license in Jakarta.

In the wake of the Dragon Bank incident, Embassy officials in Jakarta, Hong Kong and other cities met with US banks, and learned that foreign and national banks in many Asian countries are being confronted on virtually a continuous basis by what are perceived to be financial frauds.

One attempted transfer confirms that the world of banking is truly a world without horizons. We learned that one group proposed to transfer $1.3 billion from a bank in the Caribbean to Indonesia, which heightens the concern to us. These and other attempts are notable, not only for their variation, but because of their higher probability of success.

The "fraudsters" use fake certificates of deposit drawn on other branches of an international bank, which can range from $10 million to $25 million. The "fraudsters" also use fund transfers, which involve real dollars, opening up small accounts into which they then pour millions of dollars. "Fraudsters" will also use counterfeit letters of agreement, drawn on bank letterheads, seemingly vouching for a client from another branch of that bank, or confirming a deal is been approved, etc.

Many of these proposed frauds are easily detected. A request for a loan on a US bank for $36 billion was easily refused, as were telexes which omitted the needed secret codes or had the wrong codes. But all banks in every region have to be concerned that not all of these deals are illegitimate just because they are to be made in currency or the details are thinly documented.

The problem, which creates a temptation to approve such transactions, is that these banks may be turning away legitimate business. Thus, there is concern that US banks operating overseas may be at a competitive disadvantage because they adhere to US standards for knowing your customer, identifying beneficial owners of transactions, refusing suspicious or unusual transactions etc. US banks have been advised informally that the answer is not to lower US standards, here or abroad, but to intensify efforts to ensure that all major financial centers operate within the limits of an international consensus on countermeasures.

This problem is somewhat analogous to the dilemma challenging bankers in Western Europe. As FATF noted in its 1997 report on typologies of money laundering, many European countries report that significant amounts of cash and monetary instruments were being transferred from the former Soviet Union and Eastern European countries. Two difficulties were cited: determining whether the money was capital flight or stemmed from criminal activities, and, if the latter, determining the predicate offense.

How Money Is Laundered. To understand money laundering as it is practiced today on a global basis, one has to appreciate money as a commodity. Professional money launderers differ little in this respect from corporate money managers. A corporate money manager enters the money markets of various countries where the corporation will need national currencies during the next year and buys/sells currencies in a constant effort to improve the manager's average position at the time of payment. Similarly money launderers use a bidding system to buy/sell drug proceeds, especially US dollars. Just as a sound investment portfolio will contain stocks, bonds and other monetary instruments, the money brokers vary their holdings.

Like institutional investors who put a percentage of their money into hedge funds, money brokers and the drug traffickers and other criminals who employ them collaborate to minimize risk. The Cali Cartel, for example, minimizes risk by selling a substantial portion of the drug proceeds it earns from the sale of cocaine in the United States. Mexican traffickers in heroin, cocaine and marijuana do the same, often selling to the same money brokers on behalf of Cali or for their own account. These brokers will convert proceeds for a fee, or, they will buy the proceeds at a discount. Given the high profit margins of the drug trade, discounts of 7­10 percent or even higher, depending upon risk, are common. At the end of the day, Cali and other trafficking groups may own or control 50 per cent or less of the initial drug proceeds.

The following hypothetical example illustrates the options available. Assume that the Cali Cartel is moving $100 million over the rather porous border from the United States to Mexico and operating on a 75 per cent profit margin (earnings minus costs). Just $25 million must reach Colombia to replenish the operating budget. Cali wants to net $60­65 million from the bulk of the cash, or $85­90 million in total. Brokers have a bid or discount range of 10­15 per cent. Cali agents will attempt to sell $25 million on the gray market ­­ supported by Latin and even US businessmen who want to convert pesos or other currencies into dollars ­­ and go into the gray market to avoid exchange rates, or avoid taxes, or, when profit margins are narrow on US goods which can be sold in their countries, to realize higher profits. These currencies, especially pesos, can be readily returned to Colombia. The amounts over which Cali or Mexican traffickers retain actual control will be influenced by prevailing discount rates, investment opportunities, current risk dynamics, and gray market demand, more than it will by the presence or absence of laws. At the same time, the need for fluidity and convertibility, influenced by the strength/weakness of the Mexican peso and the status of US investor confidence, among other factors, will leverage the rate at which Mexican banks will do business with brokers.

Perhaps $25 million more will be "consigned" to allegedly licit importers who use various invoice schemes, at a discount, to legitimize the return of dollars to their countries. The textile trade is a typical cover. For example, a South American clothing manufacturer working with Cali will obtain a permit to export $20 million worth of suits to New York. The manufacturer actually ships $6 million worth of suits to the Aruba Free Zone, where they are repackaged and sent back to Colombia, and sold at discount. Meanwhile, the manufacturer's agent picks up $20 million in drug proceeds in New York and returns it to Colombia, covered by an export license.

The bulk of the $100M will be deposited in Mexican banks, after which a number of schemes can be used. Commonly, the money will be wire­transferred to accounts in the United States. The Mexican banks will then issue checks drawn on its US accounts, payable to individuals or corporations. These checks can be batched for resale in Latin America, or deposited into foreign bank accounts. Enforcement officials believe that as much as $10 billion in Mexican bank drafts is laundered through such schemes each year in Panama alone. While some of the trade is in contraband goods, these checks, certificates of deposit, and other financial instruments have also been used to pay for legitimate shipments. Gold trade in the Aruba Free Zone amounts to more than $200 million a year. The Mexican banks will also issue their own dollar­denominated checks, up to a level which they think will not cause inquiries.

Such brokers offer as much as $500 million to a bank or another broker at a point or two below the official exchange rate. The offer is probably not for a single transaction, but reflects the amount of money this broker has at his disposal. However, transactions are increasing in size. One recent transfer reportedly involved $78 million which went through a US bank in a single transaction.

Why then don't US reports and economic indicators reflect this volume of money transfer? The answer is that these kinds of transactions are designed to fall outside the scope of Treasury and other reporting. For example, US banking law does not require reports on bank to bank transfers (nor are we suggesting it should), let alone transfers from one branch to another of the same bank. Transactions in bulk conducted outside traditional foreign exchange venues are probably escaping conventional monitoring systems.

However, there is also a reverse flow of physical currency back to the US. Flows from Latin America, especially Panama, Paraguay and Mexico, to commercial banks in the US as well as dollars returned to Federal Reserve Banks are in fact in excess of the levels which can be explained by traditional commerce. Research is ongoing as to whether surplus currency at Federal Reserve Banks can be associated with illegal activities, such as money laundering. Currency surpluses in the US are not, in and of themselves, necessarily indicative of money laundering. However, currency does not have to leave a placement site physically. Banks are at least one generation or more beyond the period in which physical money was moved to settle accounts. Dollar settlements are accomplished through reciprocal balances. For example, a Mexican bank wires $50 million to a bank in New York, which gives the Mexican bank instant credit on the latter's New York account because the Mexican bank has simultaneously given the New York bank credit for $50 million at the latter's Mexican facility. Rather than moving physical cash to New York, the Mexican outlet is more likely to transfer physical cash south, as individual checks wind their way through various payment schemes. However, some cash does move back to the US in bulk, carried by Mexican transfer agents who are not required to declare currency when crossing the US border north.

The US economy is one unintended beneficiary of the kinds of swaps and schemes carried out in Mexico. The gray market enables Latin businessmen to buy US goods and services here, or in a free zone like Colon, and pay for it in dollars (or dollars converted to checks and other monetary instruments) which originated in the US drug market.

The use of non­bank financial institutions is not confined to the Western Hemisphere. The 1997 FATF report cited a continuing trend of money launderers moving away from banks to non­banks in many sections of the world. Yet, there has not yet been a parallel effort in many countries to subject these non­bank financial institutions to the same kinds of regulations as banks. In effect, when the money "hits" a bank, the money broker has already achieved first­stage placement, and is now in the process of layering his funds through banks and ultimately integrating his funds into legitimate businesses.

Are the Laws Being Implemented? In the seven years since the 1988 UN Convention was adopted, and particularly since FATF issued its 40 money laundering recommendations in April 1990, dozens of governments have statutorily enacted various countermeasures, as indicated by the charts in this chapter.

The pace of implementation of these laws, and the scope of their application varies. A review of results reported by key financial centers relative to the generation of suspicious transaction reports indicates that several such centers have reporting ratios which are disproportionately small, given the volume of financial activity and diversity of enterprises in their systems. Such minimal results could be an accurate reflection of a low level of suspicious activity, but, such results could also indicate a law which is drawn too narrowly or a banking system which is not giving a good faith compliance.

In addition, it has been difficult to assess the degree to which newer electronic banking practices may render banks more or less vulnerable to money laundering. Few governments have control mechanisms adequate to identifying and tracing such transactions should they occur.

Apart from financial institutions in which officials are complicit in the money laundering transaction, financial institutions are rendered most vulnerable by the combination of correspondent banking relations and electronic transfers. In 1995 the twin problems of regulating wire transfers and tracing wire transfers in pursuit of an investigation were on the threshold of some containment because FATF had reached agreement with the dominant system (SWIFT) and its key members on including in each message critical information needed to identify transmitters and receivers and especially beneficial owners of transactions. Recordkeeping may have improved, however, over the past year there has not appeared to be any diminution of electronic transfers of illicit proceeds. Control efforts are being sorely challenged by the creation of new, independent wire transfer services, some which service small clusters of banks.

CHALLENGES POSED BY A CHANGING BANKING WORLD

Four aspects of modern­day banking are particularly challengingto governments seeking to stop money laundering: correspondent banking, offshore banking, private banking and cybercurrency.

Correspondent Banking. Regulators, money laundering investigators, and international policy making bodies like FATF are facing profound challenges from a banking world which not only knows no geographic horizons and is open 24 hours a day, but is increasingly inter­connected, as large multinational banks extend their reach not only through branch and subsidiary networks but through correspondent relationships that cross the globe.

The concern is not with the growth or dominance of the largest banks, or the extension of their networks, but, whether standards of prudential supervision are met at every juncture in this web of correspondent banking. The emergence of active financial service industries in every jurisdiction capable of becoming active players on the electronic highway of super­banking, places ever more emphasis on vetting transactions at the bank of origin. There is not the confidence today that the scope of current know­your­customer policies are sufficient to actually cover most financial transactions at origination.

The scope of international banking was made clear at the winter meeting in 1995 of the International Bank Security Association. The world's 12 major financial centers except Japan have one or more banks or financial institutions among IBSA's 52 voting members and six associate members, and these banks include many of the world's largest international banks.

An IBSA survey showed that 27 of these 58 banks have headquarters offices and or branches in 146 countries. A separate survey showed that 19 of the 58 members own percentages (and sometimes controlling interest) in 144 other banking institutions. The actual "reach" of these big banks, both in terms of branches and holdings, is far greater as only 27 of the 58 responded to the surveys on branches.

While FATF has conducted an extensive external relations program, which has engaged an estimated 65 governments outside its own 26­member roster, no single agency, not even the UNDCP, has accepted the responsibility for ensuring uniform standards of anti­money laundering enforcement, or bank regulation, among all nations and territories.

Offshore Banking. An agreement of potentially far­reaching consequences on offshore and cross­border banking was made by banking supervisors from 140 countries at the June 1996 International Conference of Banking Supervisors. Their agreement, incorporated into a report by the Basle Committee on Banking Supervision, issued in October, contains 29 recommendations designed to strengthen the effectiveness of supervision by both home and host­country authorities of banks which operate outside their national boundaries.

The report states that, as a starting point, home supervisors must be able to make an assessment of all significant aspects of their banks' operations, using whatever supervisory techniques are needed including on­site inspections. The paper proposes means by which home­country supervisors can obtain the information they need for effective consolidated supervision of an international banking group. The paper addresses impediments to effective consolidated supervision and suggest ways to overcome these barriers. The paper also contains guidelines for determining the effectiveness of home country supervision, for monitoring supervisory standards in host countries, and for dealing with corporate structures which create potential supervisory gaps. There are also guidelines for host country supervision.

The supervisors recognized that some of the recommendations are in conflict with bank secrecy or similar legislation in certain countries. Where there is conflict, the supervisors have agreed to use best efforts to have the conflicting legislation amended. It was agreed that the compliance of individual countries with these recommendations would be reviewed prior to the next international meeting which is scheduled for October 1998.

The Offshore Group of Banking Supervisors (OGBS) has reached agreement with FATF on a protocol for evaluating the effectiveness of the money laundering laws and policies of its members. This is a positive development but OGBS includes only about half of the known offshore banking centers among its members, and there is a continued belief that OGBS remains the best available vehicle for reaching out to these centers, hopefully with an expanded membership.

However, there is also a concern about different kinds of charters for financial facilities being issued in various parts of the world, facilities which are structurally different from the banking houses represented by OGBS. These International Business Corporations, or IBCs, are being chartered with much the same kind of operational latitude enjoyed by offshore banks, but, in many instances, with even less regulatory oversight. Nowhere is the concern about IBCs more prevalent than in the Caribbean. The US has urged governments around the Caribbean Rim and elsewhere to apply more rigorous oversight to these non­bank financial institutions.

Private Banking. Major national and international banks are engaged in fierce competition to attract wealthy individuals and companies as private banking clients. The very term implies that transactions will be confidential, and indeed that private banking customers will be treated differently. Private banking departments are also prepared to offer a seemingly wide range of personal services. The concern here is not that a major bank's officers might secure hard­to­get entertainment tickets, or facilitate high­ticket shopping; those kinds of services have long been traditional with advertising agencies, management consultant services, etc.

The concern is that bank officers, who rely on private banking commissions for their income, will suspend the rules on transactions ­­ not just failing to report transactions as required by various banking and anti­money laundering laws, but, disregarding basic tenets of sound banking and thus negating the transparency which is essential to a bank's prudential supervision of its business.

Cybercurrency. The use of microchip­based electronic money for financial transactions, via smart cards and the internet, has the potential to assume an important place in the future domestic and worldwide payments system. These chip­based electronic cyberpayments systems are emerging very rapidly.

Currency­­paper notes and metal coins­­has always been of particular importance in payments involving illicit activities. Currency attributes include ease of use, wide acceptability, and most importantly from the standpoint of law enforcement ­ anonymity. A significant feature of the new cyberpayments systems is that some systems are being engineered to be an electronic emulation of paper currency. Cybercurrency includes the attributes of conventional currency: a store of value, a medium of exchange, a numeraire, potential anonymity and convenience.

But there are added features: transfer velocity (almost instant electronic transfer from point to point) and substitution of electrons for paper currency and other physical means of payment. Obviously this is an innovative addition to the payments system, but it also requires close attention since the use of microchip and telecommunications technologies adds some significant new dimensions for law enforcement.

Yet currency is not the only monetary instrument innovation. Cyberpayments also comprise other payment components. Already in use or design are cyberchecks, an emulation of paper checks, cybercredit, cyberdebit, etc. The common element is that these systems are designed to provide the transacting parties with immediate, convenient, secure and potentially anonymous means by which to transfer financial value. When fully implemented, this technology will impact users world­wide and provide readily apparent benefits to legitimate commerce; however, it may also have the potential to facilitate the international movement of illicit funds.

Many issues are raised by this new technology, including the issue of whether such payments constitute legal tender and are therefore subject to monetary reporting and supervision measures. There is a question whether reporting regulations must be completely redesigned to include the reporting of currency in electronic form moving to other countries via the Internet or across the border in a smart card or electronic purse. Law enforcement issues likely to arise in this area include fraud, counterfeiting and computer hacking. Moreover, high speed, worldwide transfers that are a facet of the cyberpayment technology add complexity to law enforcement's ability to trace criminal activity and recover illicit proceeds. And there are important international jurisdictional issues. Some cyberpayments systems are being designed to operate internationally and use multiple currencies. Thus, one of the challenges facing law enforcement and the international community will be determing jurisdictional authority in a global economy. The current regulatory/law enforcement framework relies on defined financial and geographic borders. The diminishing of such borders makes enhanced cooperation and coordination among nations critical to ensure that there are consistent policies.

All of these issues were the focus of a conference sponsored by the U.S. Department of the Treasury in September 1996. Addressing key public officials and representatives of the private sector, Secretary Robert Rubin announced the formation of a consumer electronic payments task force composed of the principal agencies in the federal government involved in payments.

Continued Examination by the International Community

The application of these new technologies is still in its infancy. How these systems develop and with what features will depend on the effectiveness and efficiency of these technologies, the market, and consumer acceptance. Therefore, while it may be premature to consider prescriptive solutions to theoretical problems, it is important and timely for governments and the private sector to continue to identify issues that need to be considered and perhaps implemented as markets and technologies mature. Many governments have come to recognize the need for greater and sustained cooperation to explore these issues.

At its June 1996 plenary, the FATF adopted a new recommendation (#13) stating that "countries should pay special attention to money laundering threats inherent in new or developing technologies that might favor anonymity, and take measures, if needed, to prevent their use in money laundering schemes." At its October 1996 plenary, the FATF agreed to call on SWIFT (the international messaging system for financial transactions) to provide additional information on the originator of financial messages between legitimate financial institutions.

In November 1996 in Paris, FATF, under the chairmanship of the United States, held its annual typologies exercise to identify recent trends in money laundering in FATF member countries as well as non­FATF regions. The meeting was attended by delegates from each of the 26 member nations as well as Interpol and the Organization of American States. This year, it was determined that a discussion of current technology developments in alternative payment methods would be beneficial and appropriate as many of the FATF 40 Recommendations could also apply to cyberpayment systems. This meeting served to continue a dialogue among FATF members and leading international developers and providers of electronic banking and cash payment systems. The meeting was an outgrowth of a FATF meeting held in January of 1996, called the Financial Services Forum, where representatives from governments and the private bank and nonbank sectors met to discuss anti­money laundering measures, in particular the issue of alternative payment systems.

Private sector experts invited by the FATF at the typologies meeting presented an overview of the current technology developments in these payment systems and discussed the issues raised by law enforcement with respect to money laundering. The goals were to increase the knowledge of the FATF about the operations of these systems, advise the industry of law enforcement's potential concerns, and ascertain what steps FATF and the industry could take together to ensure the development of these systems while protecting them from abuse by criminals.

Several other international organizations such as the Organization for Economic Cooperation and Development (OECD) which has recently issued Cryptography Guidelines, the Bank for International Settlements (BIS), the Basle Committee as well as others are involved in the study of cyberpayments.

In addition, at the G­7 Summit in Lyon last June, Heads of States and Governments called for a cooperative study to investigate the implications of recent technological advances that make possible the creation of sophisticated methods for making retail electronic payments. In response the Group of Ten (G­10) countries deputies formed a Working Party in Autumn of 1996 to develop a broad understanding of the international dimensions of policy issues resulting from the development of electronic payment systems.

Money Laundering Simulation Exercise

FinCen is using an automated exercise­based approach to assess the implications of emerging Cyberpayment technologies. It is developing a simulation exercise which will serve to: (1) educate exercise participants on the nature and key characteristics of these emerging technologies; (2) raise general awareness regarding the potential vulnerabilities emerging Cyberpayment technologies to financial crime; (3) explore various avenues for potential criminal applications of these technologies: (4) generate and identify a draft set of potential response strategies for dealing with these key vulnerabilities and (5) consider potential legal, regulatory, and educational action plans associated with selected strategies. The exercise, which is tentatively planned for April of 1997, is to include participants from government, academia, and industry both domestically and abroad.

Other Challenges. Other challenges include counterfeiting of currencies and other monetary instruments, especially bonds; the boom in contraband smuggling; the buying of banks and other financial institutions by suspected criminal groups; the resort by criminals to the use of smaller, less­monitored banks; and the sophisticated use of such new phenomena as direct access and pass­through banking, and electronic cash systems. There is continuing concern, given that financial crimes and money laundering are occurring with varying degrees of regularity in more than 125 jurisdictions, that some governments still have not criminalized all forms of money laundering. Some have not given sufficient regulatory authority to central banks and other institutions; many do not have adequate data systems to monitor trends and methods used in their territories; and many have not made adequate provision for mutual legal assistance.

OTHER NEW CONCERNS OCCASIONED BY THE EVENTS OF 1996

Beyond institutional concerns with correspondent banking, offshore banking, private banking and the use of cybercurrency, other new or more intensified concerns emerged in 1996. Combined with the continuing concerns (see below) which we carry from year to year, and those institutional concerns, the events of 1996 persuade that the international law enforcement and financial communities are still at a considerable distance from bringing this problem under control.

The imperative need to engage financial centers in every corner of the world in the campaign against money laundering is emphatically demonstrated by the events in nations and territories whose financial centers are rapidly expanding and in some other countries well outside the traditional circle of major financial centers.

In 1996, we raised the priority rankings for several governments, coupled with expressed concerns about their lack of laws, their vulnerability, etc. The upgraded countries included Russia, Turkey, the Netherlands Antilles, Antigua, Austria, Cyprus, Israel, Dominican Republic, Cambodia, the Czech Republic, South Africa, the Seychelles and Slovakia.

These concerns have not abated, except perhaps in the Seychelles which repealed its law which would have permitted large­scale deposits with few questions asked. Several governments including Antigua, Austria the Czech Republic, and the Netherlands Antilles adopted new laws which have yet to be effectively tested, while legislation in Russia and Turkey has not yet been brought into force. There are political concerns commanding the attention of Israel and its neighbors, but the financial crime situation has deepened every year for the last several years and must be addressed soon. Like Austria, Cyprus, and even Antigua, Israel has been penetrated by money laundering schemes of Russian criminal organizations.

The Dominican Republic, Cambodia and Slovakia, however distinct and unalike they may be in most respects, are just three among a too­large group of governments which present a sharp challenge to the efforts of the major financial center governments to achieve an effective, working global consensus on anti­money laundering laws and policies. Notwithstanding questions of political will, many governments do not have comparable cadres of trained personnel to draft and implement these kinds of laws, even in commercial banking sectors. Training is indispensable to that international initiative, and, as noted elsewhere in this report, FATF, the United Nations, the European Union, the Council of Europe, as well as individual governments like the US and UK, are increasing their commitment to financial crime­related training.

Some Latin and Asian banking sector representatives have expressed concerns that their existence can be imperiled by cooperating with law enforcement authorities unless they are given immunity from civil and criminal prosecution. The Dragon Bank case in Indonesia demonstrated that these concerns may be well founded, unless appropriate legislation is in place. While the UK's Standard Chartered Bank maintained that it provided banking data at the request of the government, there is no "safe harbor" provision in Indonesian law and SCB was found in violation of that government's strict bank secrecy laws. While 15 of the 20 High Priority and 9 of the 16 Medium High Priority countries have laws providing disclosure protection, only 8 of the 22 Medium priority and only 7 of the remaining group of more than 150 governments provide a "safe harbor." In sum, bankers who cooperate with law enforcement are safe from bank secrecy prosecution in less than one­fourth of the world's financial community.

There are also cultural barriers to overcome. Secrecy has been a hallmark of Asian banking for centuries, and Asian bankers and businessmen are simply not accustomed to asking or answering the myriad personal questions which routinely fill American data banks. Criminal enterprise aside, quite upstanding Asian businessmen are accustomed to dealing in large sums of currency, and to moving their funds quite freely around Asia without government oversight. Some governments, like Indonesia, not only lack money laundering laws, they have only the most rudimentary forms of banking regulation. Concerned parliamentarians and government officials in Thailand have tried for the last four years to muster the political support to pass anti­money laundering legislation and success is not yet in sight.

The bounds which governments have self­imposed on their ability to prosecute money laundering cases stemming from a proliferating list of crimes by requiring prior conviction on a drug trafficking offense were evident in many countries.

New or newly­expanded drug trafficking routes through the Asian sectors of the former Soviet Union, including Azerbaijan, Kazakstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan, and similar new routings through the nether regions of Africa, such as Zimbabwe, Swaziland, and Mozambique raise concerns that the primitive banking systems in these countries are quite vulnerable to exploitation by narcotics traffickers and other criminals.

The year saw a proliferation of financial crimes, beyond drug money laundering, continuing a trend of the 1990's which prompted FATF in 1996 to amend its 40 recommendations and advise governments that reporting of suspicious transactions should be mandatory.

Several European officials are voicing concern about the European Monetary Union and the conversion to a single currency, the Euro. The concern is whether sufficient controls have been put into place to prevent or at least diminish conversions of stocks of currency held by crime groups, from national currencies into the Euro and/or the US dollar or even dollars into Euros. Some Dutch officials, for example, prefer that all guilder conversions take place in Holland to reduce such conversions and speculation.

Much of the focus of experts and bodies like FATF has really been on the so­called placement stage, the initial point of entry into the financial system, and, of late, into the layering stage at which funds are moved from non­banks to banks and/or into other monetary instruments. The evidence is that organized crime groups, drug traffickers, and money brokers are now engaging the integration stage, at which they invest their now laundered proceeds into legitimate businesses. Such business can not only generate additional profits and serve as additional conduits through which to move the proceeds of crime, but, in the form of bank acquisitions, give criminal elements great leverage on a given financial system.

Continuing Concerns

Over one hundred governments have ratified the 1988 UN Convention, including the majority of high to medium priority governments. However, inconsistent enforcement of its anti­money laundering provisions is an important factor in the continued high level of global financial crime.

Sixteen of the 64 eligible governments ranked as High, Medium­High or Medium Priority money laundering concerns by the US Government in 1997 have not ratified the 1988 UN Convention. Thus, one­fourth of the world's important financial center countries have not ratified this universal accord six years after its entry into force.

Too many affected or vulnerable governments have not criminalized all forms of money laundering and financial crime, nor given sufficient authority to banking regulatory bodies. There is need for an intensified education and persuasion effort by the world's major financial institutions and organizations, some of which have been allies in the fight against money laundering, to ensure a higher level of compliance on a global basis.

Too many governments continue to place limitations on money laundering countermeasures, particularly the requirement that the offense of money laundering must be predicated upon conviction for a drug trafficking offense.

Too many governments still refuse to share information about financial transactions with other governments to facilitate multinational money laundering investigations.

There is need for enhanced bilateral and multilateral international communications to inform governments and financial systems in some systematic and ongoing way about the methods and typologies of drug and non­drug related money laundering and financial crime.

The layering and integration stages of money laundering are using more sophisticated money laundering techniques. Cash is now being held in bulk or placed into the financial system through exchange houses and other non­bank financial institutions. Not only is it moved through wire transfers but also through innumerable varieties of licit and illicit financial instruments, including letters of credit, bonds and other securities, and prime bank notes and guarantees, without a parallel increase in the capability of the far­flung elements of the world's financial system to verify the beneficiaries or authenticity of such instruments.

The electronic highway now links banks and non­bank financial institutions (NBFIs) worldwide to facilitate expanding world trade and financial services, placing ever­greater priority on banks of origin to establish the identity of beneficial owners and their sources of funds. There are few controls on electronic transfers, and, compounding the problem, the bank or non­bank of origin is increasingly based outside major financial centers in jurisdictions which do not adequately control money laundering and other financial crimes.

Narcotics money launderers have adapted the invoicing schemes used by contraband smugglers and are similarly manipulating commercial trade practices to move and convert illegal proceeds. The vast proceeds generated by both types of crime magnify the need for control mechanisms to address non­drug­related financial crimes.

There is emerging concern about new banking practices, such as direct access banking which permits customers to process transactions directly through their accounts by computer operating off software provided by the bank. This system limits the bank's ability to monitor account activity, such as of joint accounts and pass­through banking schemes which have been a traditional method of layering. Beneficial owners of funds can now manipulate the identity of the ultimate recipient of the funds without the review by bank officers. Pass­through banking by itself poses myriad problems for regulators, by creating the ability of depositors unilaterally to create accounts within accounts, or even to provide quasi­banking services to off­line customers in a kind of bank within a bank. These new bank services can limit the utility of systems in place to have both originator and recipient information travel with the electronic funds transfer.

There is continuing concern that the need for capital of many financial systems overwhelms prudent banking practices and safeguards, with respect to deposits, loans and underwriting practices, and contributes to the increasing problem of takeovers of banks and non­bank financial institutions by criminal groups.

The concern about the concentration of economic power in drug cartels and other criminal organizations, and its potential translation into political power now embraces the Caribbean, Europe, the Middle East and Asia as well as the Americas.

Professional money laundering specialists sell high quality services, contacts, experience and knowledge of money movements, supported by the latest electronic technology, to any trafficker or other criminal willing to pay their lucrative fees. This practice continues to make enforcement more difficult, especially through the commingling of licit and illicit funds from many sources, and the worldwide dispersion of funds, far from the predicate crime scene.

Non­bank financial systems are still unevenly regulated in most parts of the world, especially at the placement stage for cash. The US, which is taking a leadership role in monitoring financial transactions through non­bank financial institutions, is still drafting the regulations that would subject them to federal regulation. Non­bank financial institutions include a wide variety of exchange houses, check cashing services, insurers, mortgagors, brokers, importers, exporters and other trading companies, gold and precious metal dealers, casinos, express delivery services and other money movers of varying degrees of sophistication and capability. Even less regulated are the underground banking systems, like the "chop" houses of the Orient, and the "hundi" and "hawala" systems of Europe, South Asia and the Middle East.

Asset forfeiture laws have not kept pace with anti­money laundering investigative authority, much less with traffickers' wide­ranging schemes. There is a conspicuous gap between the number of institutions and accounts identified by government investigations with money laundering and the authority of many governments to seize and forfeit drug and money laundering proceeds.

Many banking systems remain obliged to inform account holders that the government is investigating them and may seize their accounts, providing criminals the opportunity to move assets and leave town.

There is an urgent need to prescribe corporate as well as individual sanctions, including actions against financial institutions that repeatedly fail to take prudent measures to prevent their institutions from being used to launder money.

There is need for continuous fine­tuning of bilateral and multilateral strategies, which define responsibilities and objectives on a country­by­country basis, and set specific goals for cooperating with the varying money laundering and money transit countries.

Many governments and financial systems continue to rely on voluntary reporting mechanisms, despite the inadequacy of voluntary control systems. Reports from government after government demonstrate that the adoption of mandatory controls has not caused declines in legitimate deposits or resulted in threats from traffickers.

Prudential supervision of many domestic banking systems has improved with respect to money laundering, but foreign branch offices, subsidiaries and other foreign operations continue to figure prominently in drug and other money laundering and financial crime. There is a particular need for major international banks to ensure that governments and regulatory agencies in all jurisdictions they serve are enforcing the same high standards as home jurisdictions and governments.

Many governments seek to superimpose money laundering controls on systems which still employ loose incorporation standards and permit bearer share ownership, which vitiate the impact of these controls.

The implementation of free trade agreements and regional compacts, creating trading and economic zones which transcend national borders could increase the use of international trade as a mechanism for laundering proceeds of criminal enterprises. The impact of the liberalization of border and other customs controls, liberalized banking procedures within these zones, and freedom of access within the zones creates additional potential risks for the future.

There is a need for countries which cooperate on money laundering investigations and prosecutions to share forfeited proceeds so as to reflect equitably their respective contributions. A "finder's keepers" approach is unfair and fails to provide an incentive for multinational efforts.

WHAT WE NEED TO DO

In an electronic world in which the banking system operates through chain­linked computers 24 hours a day, there must be increased emphasis upon thorough vetting of personal, company and financial institution accounts at the bank of origin, wherever in the world it is located. There is no substitute for a thoroughly applied know­your­customer policy, especially as applied to those placing currency into the system and converting it to an account susceptible to immediate transfer outside the jurisdiction.

Considerable attention must be focused on establishing international standards, on obtaining agreements to exchange information, establishing linkages for cooperative investigations, and on overcoming political resistance in various key countries to ensure such cooperation.

Governments need laws which: establish corporate criminal liability for bank and non­bank financial institutions; apply to all manner of financial transactions not limited to cash at the teller's window; apply reporting and anti­money laundering laws to a long list of predicate offenses not limited to drug trafficking; criminalize investments in legitimate industry if the proceeds were derived from illegal acts; and enable the sharing of financial and corporate ownership information with law enforcement agencies and judicial authorities.

But governments also need strategies, end­games which project change and progress along the same continuum as the changes in both financial system procedures and the methods criminals develop to exploit them­­strategies which focus on specific governments and specific financial systems.

Over time, a number of actions can be seen as needed on a continuing basis to keep pace with the dynamics of money laundering in a high­tech world. Continuous action is needed on each category in 1996, and for the foreseeable future.

1. Constant Monitoring of Money Laundering Patterns, Trends, Typologies. More sophisticated techniques, involving both bank and non­bank financial institutions, in a wider array of traditional and non­traditional financial center countries, have complicated identification, tracing and investigation. Information exchanges have been improving, but critical gaps in know­how must be closed in tandem with improved cooperation. There is a high priority need to share data, even critical intelligence. The pervasive corruption in some systems remains a barrier to information sharing.

2. Analysis of Money Management Practices. We need improved information from more countries on what factors influence traffickers and their money managers to use particular systems in specific countries, to keep reserves in cash vs other monetary instruments, to invest rather than park funds. Interviews of arrested drug money managers are producing detailed profiles of money management schemes. The best data so far applies to the cocaine trade, but we need to develop the same level of knowledge about heroin and marijuana syndicates.

3. Analysis of Non­Drug Related Money Laundering and Other Financial Crimes. Traffickers seldom invent new methods or practices of handling and investing money. In general, they rely on techniques perfected by corporations and individuals to shelter proceeds from taxation or to avoid strict currency controls. Terrorists, arms dealers, and other criminals, similarly rely on standard measures used to shelter funds from taxation by legitimate enterprises. We need to identify the parallels between drug money laundering and financial crimes of every description and achieve an equal capability to investigate and prosecute such crimes. A number of governments are willing to impose new restrictions on drug­related financial crimes, but hesitate to apply such strictures to other forms of financial crime.

4. Equating Economic Power with Political Clout. The increasing concentrations of wealth among criminal groups in a number of jurisdictions is a concern, not only because of possible impacts on investments, real estate values, legitimate commerce and government integrity, but also because these organizations have the wealth to make large campaign contributions to candidates who in turn agree to assist the criminals. We need to assess the national security and political implications of these shifts and accumulations of wealth for all financial centers where such wealth is being concentrated. Illicit funds and corrupt officials represent a continuing threat to democracy in literally every region of the world.

5. Eliminating Systemic Weaknesses. We need banks to maintain the same kinds of records on clients which are also financial institutions, as they do for other customers, and to report suspicious transactions by such clients when the same financial institutions are named repeatedly in investigation after investigation. Some currently available but underutilized mechanisms include revocation of licenses, changes in ownership and management, levying of fines, and prosecution. But, perhaps the most intrinsic weakness is the lack of qualified personnel, not only in government regulatory agencies but also within many banking system, who are trained, not just in implementing and managing such oversight systems, but, in handling today's complex monetary transactions. The stepped­up training reported on in recent international meetings is encouraging but more must be done.

6. Assessing The Trafficker as Entrepreneur. We need to explore the extent to which criminal organizations are penetrating legitimate financial and other businesses, using their vast resources to gain control and to influence economic, financial and business decisions. More data, and systematic analysis are needed on the role played by the trafficker and money launderer in foreign exchange markets, including their use of and creation of gray markets. There is good reason to question the overt as well as covert ownership of banks and financial institutions in many parts of the world.

7. Analyzing the Impact of Money Laundering on National Governments and Economies. The interplay between political and structural factors in a country upon its receptivity to money laundering, and that of money laundering on the political life and economic life of the jurisdiction, need to be better understood. Among the questions that need to be analyzed are the extent to which structural macro­economic factors such as commodity deflation, sustained high levels of unemployment, and recession have in making a country susceptible to becoming a money laundering haven. At the sectoral level, we need to determine the influence of black markets on legitimate enterprises. At the institutional level, we need to identify the major factors that may influence bankers and other financial managers in some jurisdictions to be more likely to accept money they have reason to believe is tainted. As we better identify where money laundering is most likely to have a macro­economic or political impact, we need to evaluate the potential effectiveness of economic countermeasures. These could include limiting or excluding access to the global financial system of entities or states identified as major problems.

8. Regulating Exchange Houses and Remittance Systems. There is ample evidence that the various "hundi, hawala, and chop" remittance systems, so essential to economic life in the Middle East, South and East Asia, are being used by drug traffickers, just like the "cambios" of Latin America, and non­bank institutions of all kinds in the Western financial community. They serve vital functions for key sectors of many economies. Systems for regulating them to discourage their use to launder the proceeds of crime are essential, but will fail unless they take into account the very informality that makes them effective and desirable.

9. Concentrating Efforts for Maximum Effectiveness. Enforcement operations have proven we can disrupt cartel operations. But these organizations are resilient and recover quickly. We need to develop more effective strategies for disruption in order to achieve the destabilization of criminal organizations.

10. Pursuing A Continuously Evolving Strategy. For much of the last decade, concerned governments operated under a strategy which involved a handful of key countries whose cooperation was essential and/or which were drug money laundering centers. But the traffickers have changed tactics and moved to new locales. Banks are but one portal. They also use securities brokers, insurance companies, import and export companies. Every means the worlds of business and finance have to offer, linked by wireless and facsimile transmissions, are today used by traffickers and the managers of their illicit proceeds. Financial regulation, supervision and enforcement needs to expand both to cover transactions that transcend national boundaries and to cover the widening array of types of financial service businesses. There is a need for a more comprehensive threat assessment; e.g., just how real is the threat that money brokers will increase their manipulation of second and third­tier banking systems?

11. The United Nations Drug Control Program (UNDCP) should intensify its efforts to ensure that all significant financial center countries are implementing fully the anti­money laundering and asset forfeiture provisions of the 1988 UN Convention. As an immediate priority, UNDCP should focus on securing ratification by the significant financial center governments which have not yet ratified the Convention.

12. The Financial Action Task Force, working with the Offshore Group of Banking Supervisors and other relevant organizations, should continue to focus attention on offshore banking. FATF has been quite effective in reaching out to this group; a majority of offshore banking centers are either members of FATF or the Caribbean FATF, or, have participated in FATF/CFATF seminars which provided guidance on adopting/implementing FATF and UN guidance. The agreement in Paris in February 1997 to undertake compatible mutual evaluations of these constituencies should be given a high priority for early implementation. More analysis is needed of the methods used to move money through offshore banks, and OGBS should be supported in efforts to include as many offshore banking centers as possible within its membership, and, a parallel effort to evaluate progress by its members.

13. The adoption by governments of information standards, such as those recommended by FATF and the SWIFT banking information network is a welcome if not yet universal step. Many more governments need to cooperate in adopting regulations to help curb the misuse of electronic transfer and payment mechanisms to launder illicit funds.

14. Governments and banking systems alike must be more vigilant in efforts to detect counterfeit currency and other monetary instruments. The schemes involving counterfeit bonds and other securities, usually as collateral, suggest there is the need for an international clearinghouse to assist banking and financial systems outside the major centers in determining the authenticity of offered documents.

15. Governments and banking systems must exert greater efforts to identify and prevent a wide range of financial crimes, not just drug and non­drug money laundering, but also financial frauds, such as prime bank guarantees. Again, the history of such frauds suggests a need for a clearinghouse which can assist financial houses in identifying customers and authenticating documents.

16. Consolidated supervision of the international banking system must become a reality for the global financial community. The recent steps proposed by the Basle Committee are encouraging, and FATF, the Council of Europe, the European Union, UNDCP and key financial center governments should make every effort to see that as many barriers are lowered as possible before the world's banking supervisors meet again in October, 1988.

BILATERAL ACTIVITIES

PRESIDENTIAL DECISION DIRECTIVE (PDD) 42

The President, in his address to the United Nations General Assembly on its 50th anniversary called for international cooperation to address the threat posed by money laundering, narcotics trafficking and terrorism, noting that the forces of international crime "jeopardize the global trend toward peace and freedom, undermine fragile democracies, sap the strength from developing countries, (and) threaten our efforts to build a safer, more prosperous world." Declaring international crime a threat to the national security interest of the United States in Presidential Decision Directive (PDD) 42, the President ordered the Departments of Justice, State and Treasury, the Coast Guard, National Security Council, Intelligence Community, and other federal agencies to step­up and integrate their efforts against international crime syndicates and money laundering.

A key component of PDD­42 was the imposition of sanctions under the International Emergency Economic Powers Act (IEEPA), blocking the assets of the leaders, cohorts and front companies of identified Colombian narcotics traffickers in the U.S. and in U.S. banks overseas. IEEPA authorizes the Secretary of the Treasury to impose sanctions, including freezing assets held in U.S. financial institutions, against nations and entities deemed to pose a threat to the national security, foreign policy or economy of the United States. Executive Order 12978, signed by President Clinton on October 21, 1995 under authority of IEEPA finds that the activities of significant foreign narcotics traffickers centered in Colombia and the unparalleled violence, corruption, and harm that they cause constitute an unusual and extraordinary threat to the United States' national security and economy. In addition, U.S. individuals and companies are barred from engaging in financial transactions or trade with those identified individuals or enterprises linked to the Colombian Cali Cartel.

On January 15, 1997 the Treasury Department identified an additional 21 businesses and 57 individuals determined to be directly involved with illegal traffickers and their so­called legitimate business fronts. This brings to a total of 359 the number of businesses and individuals whose assets have been blocked since 1995 under authority of the President's Executive Order. As part of the PDD 42 process an interagency group is reviewing whether measures can be taken against other international criminal cartels.

In his U.N. address, President Clinton stated that the United States was moving to take extraordinary steps against money launderers. To implement PDD 42, U.S. agencies identified nations where money laundering has important implications for U.S. national security and where expanded cooperation would significantly strengthen U.S. anti­money laundering efforts. Several of these nations have been approached by U.S. interagency teams in an effort to increase cooperation bilaterally as well as multilaterally and to reduce the threat posed by money laundering.

In response to the President's directive a comprehensive package of legislation was formulated to substantially assist U.S. law enforcement agencies in their efforts against drug traffickers, terrorists, and other international crime syndicates as well as to counter money laundering. The International Crime Control Act of 1996 ("ICCA") was sent to the U.S. Congress on September 27, 1996. The ICCA was devised to enhance the U.S. ability to go after violent international criminals by vigorously investigating and prosecuting them, taking their money, and depriving them of their ability to cross America's borders and strike at its domestic institutions.

TRAINING AND TECHNICAL ASSISTANCE

DEPARTMENT OF STATE

The Department of State's Bureau for International Narcotics and Law Enforcement Affairs, Office of International Criminal Justice (INL/ICJ) has developed a $18.2 million program of multi­agency training to address international organized crime, financial crimes, and narcotics trafficking. Specifically the FY96 program drew on $5 million in FY96 ESF, $8 million in Freedom Support Act (FSA) and $5.2 million in Support for Eastern European Democracies (SEED) funds. ATF, DEA, DSS, FBI, FinCEN, FLETC, ICITAP, IRS, US Secret Service Department of Justice/OPDAT and the US Customs Service, in cooperation with INL/ICJ offered law enforcement and criminal justice programs primarily in Eastern Europe, the New Independent States (NIS) and Latin America.

INL­funded programs to combat international financial crimes, including money laundering, included the FBI's white collar and financial fraud program, FLETC's international banking and financial fraud institute program, IRS Criminal Investigations Division training on money laundering and financial fraud, FBI's internal controls, DEA's drug money laundering investigations, FINCEN's initiatives to establish Financial Investigative Units (FIUs), and the US Secret Service programs in credit card fraud and counterfeiting. These advanced training programs have been designed for law enforcement officers from Central Europe, the NIS and Latin America.

One of the key elements of U.S. success in drafting legislation, investigating and prosecuting international financial crimes, from money laundering to bank fraud to counterfeiting of financial documents is interagency cooperation. Several INL sponsored programs have modelled such cooperation for foreign governments. For example, INL at the request of the Central Bank of Russia has put together a team of experts from U.S. regulatory agencies (Federal Reserve Board and Office of the Comptroller of the Currency) the Department of Justice Criminal Division and federal law enforcement agencies (IRS/CID, FBI, USSS, Customs, and FINCEN) to work with the Russian Central Bank, the Ministry of Interior, the Procuracy and other responsible Russian agencies. IRS/CID has taken the lead on organizing similar interagency teams to brief foreign officials on the task force approach to investigations and prosecutions.

DRUG ENFORCEMENT ADMINISTRATION

DEA conducted training programs in asset forfeiture and money laundering at eight international sites. Officials from Malta, Albania, Cyprus, Greece, Israel, Turkey, Spain, Italy, France and Ireland participated in DEA's program in Malta. Ecuador, Bolivia, Chile, Colombia, Paraguay, Peru and Venezuela sent officials to the DEA regional program in Ecuador.

DEA trained officials from Kazakhstan, Kyrgyzstan, Tajikistan and Turkmenistan in a program within Kazakhstan.

Officials from key offshore centers ­­ Isle of Man, Guernsey and Jersey ­­ as well as officials from England, Scotland, Wales and Ireland attended the DEA London program.

Single country training programs were conducted in St. Petersburg, San Salvador, Kuala Lumpur and Interlaken.

INTERNAL REVENUE SERVICE

IRS Criminal Investigation Division special agents have developed, and continue to develop international training courses for law enforcement authorities ranging from Financial Investigative Techniques to the Utilization of Suspicious Activity and Currency Transaction Reports to Managing Multi­agency Money Laundering Investigations.

The IRS Criminal Investigation Division provided several Financial Investigative Techniques training courses in St. Petersburg, Russia, Estonia and Mexico. The IRS has also participated in eight money laundering courses at the International Law Enforcement Academy (ILEA), in Budapest, Hungary. These courses included participants from Estonia, Lithuania, Slovakia, Russia, Ukraine, Albania, Kyrgyztan, Moldova and Poland. Training materials covered basic financial investigative techniques which are designed to provide police officers with a general understanding and appreciation of financial crimes.

The Internal Revenue Service's Criminal Investigation Division conducted international money laundering training in Mexico City, Mexico. This training, which was conducted in conjunction with FinCEN, centered on the application, analysis and use of Suspicious Activity Reports (SAR's).

Three regional money laundering seminars were held in Port of Spain, Trinidad, San Salvador, El Salvador, and Brasilia, Brazil. These regional seminars concentrated on countries located in the Caribbean, Central and South America. The first of these was held in Port of Spain during the week of January 13­17, 1997. The participants included high level government and law enforcement representatives from Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Netherlands Antilles, Dominica, Cayman Islands, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and Grenadines, Suriname, Turks and Caicos, and Trinidad and Tobago. The second seminar was held in El Salvador the week of February 3­7, 1997. The participants in this conference included high level representatives from Costa Rica, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, and the Dominican Republic. The third seminar was held in Brasilia, Brazil the week of March 17­21, 1997. The participants in this conference included similar delegations from Colombia, Venezuela, Peru, Bolivia, Paraguay, Uruguay, Chile, Argentina and Ecuador.

The focus of the Internal Revenue Service's training seminars was: a) To establish an awareness of the overall threat posed money laundering and its impact on these regions; and b) to foster an atmosphere of cooperation and exchange between these countries and the US in a joint effort to combat global laundering activities.

At the request of the governments of Guatemala and Peru, IRS­CID provided one of its Special Agents to render advice on high level investigations currently underway in these countries.

FINANCIAL CRIMES ENFORCEMENT NETWORK (FINCEN)

FinCen's international training program has two main components(1) instruction provided to a vast array of government officials, financial regulators and others on the subjects of money laundering and FinCEN's mission and operation; and (2) training on finanacial intelligence analysis and creation and operation of financial intelligence units, modeled after FinCen and other intelligence units throughout the world.

FinCEN works closely with other agencies in supporting US interests overseas. It participates in the Department of State Democracy and Law Program in Russia, the NIS, Eastern Europe as well as Ecuador and Panama. FinCEN's involvement encompasses (1) advising officials on how to establish advanced systems for detecting, preventing and prosecuting financial crimes; (2) recommending ways in which to develop a partnership between government and financial institutions to prevent money laundering, (3) offering specialized training and technical assistance in computer systems architecture and operation; and (4) providing assessments of money laundering regulations and procedures. While much of FinCEN's international training is done abroad, increasingly FinCEN is providing training and technical assistance to foreign senior officials at its headquarters in Vienna, Virginia.

In April 1997, FinCen and Interpol will co­host the '6th Meeting of the Working Group on the Analysis of Financial Records' in Buenos Aires, Argentina. Several countries will make presentations on the examination of suspicious activity reports from financial institutions.

For the first time both India and Egypt have approached FinCEN with an interest in addressing money laundering. India has expressed an interest in enacting anti­money laundering legislation, which may include the establishment of a Financial Intelligence Unit. FinCEN has responded to a request for a participant in a conference sponsored by the Indian Law Institute on drug­related issues (affiliated with India's Supreme Court) to be held in early 1997 and expects to receive additional request for support (especially for training and technical assistance) in mid­1997. In addition, Egypt has formally requested anti­money laundering training from FinCEN sometime this year. As a first step, Egypt envisions FinCEN training five members of the Administrative Control Authority in money laundering topics, including financial investigations and establishing a Financial Intelligence Unit (FIU).

During 1996, FinCEN made appreciable progress in facilitating moves by Japan and China to become more active in countering international money laundering.

Japan's National Police Agency (NPA) sent several of its officials­­from the Deputy Commissioner General to various computer experts­­ to consult with FinCEN on how to provide for communication links and a system for data storage and analysis needed to effectively work financial data. One FinCEN representative visited the NPA headquarters in Tokyo during 1996 to discuss continue FinCEN­NPA cooperation . As a result, the training and technical assistance provide by FinCEN throughout 1996 allowed the NPA to develop strong arguments for the enactment of legislation authorizing the NPA to more activley investigate financial crime in Japan.

China's Public Security Bureau accepted FinCEN's invitation for a closer relationship and sent two high­level delegations to visit FinCEN for technical assistance and briefings during 1996. Importantly, those two delegations also included representatives of the Peoples Bank of China and the Bank of China, the former having been tasked by the State Council of China to draft that nation's first laws and regulations designed to counter international money laundering. FinCEN representatives visited Beijing in 1996 for extensive discussions on money laundering matters.

FinCEN provided assistance to other Asian nations, such as Hong Kong, Singapore and the Philippines. During 1996, FinCEN provided lectures and briefing material for the Royal Hong Kong Police's highly­acclaimed course, open to all Asian nations, on countering financial crime. It supported dealings of Treasury Assistant Secretary (Enforcement) with the Philippines' Minister of Finance on how to improve that Asian nation's ability to cope with increases in money laundering. And FinCEN's Director met with two Philippine officials to demonstrate the benefits of a financial intelligence unit and to advise them on how to organize such an entity.

FinCen continues to lead an effort under the auspices of the Egmont Group to develop a curriculum(a) on financial crimes and money laundering intelligence analysis and (b) on creating and operating a Financial Intelligence Unit. The objective is to have an initial pilot course offered by mid­1997 at several venues internationally. In addition, FinCEN developed a secure web site prototype for use by the FIU members of Egmont which will permit members to access information within a protected environment on FIUs (missions, organization, and capabilities), money laundering trends, financial analysis tools, and technological developments. The prototype was demonstrated and accepted at the fourth meeting of the Egmont Group in November 1996 in Rome. FinCEN experts are traveling to many of the Egmont member countries to help with the set­up and train operators in its use. It will become operational in the first half of 1997.

The Pakistani Anti­Narcotics Force (P­ANF) has requested informal discussions regarding the review of their draft anti­money laundering legislation, the FATF 40 recommendations and anti­money laundering training. A FinCEN representative will travel to Pakistan in early 1997 to comply with this request. It is anticipated that Pakistan will make a formal request to additional technical assistance. Preliminary discussions with P­ANF officials suggest that an additional visit to Pakistan to provide this assistance will take place later in 1997.

A multi­agency working group on Nigerian crime is considering a FinCEN recommendation that an assessment be made of the organization and functions of the Central Bank of Nigeria, particularly as it relates to the prevention and detection of money launderers using the banking system and non­bank financial institutions. Nigeria is currently seeking information on enforcement strategies and creation of a financial intelligence unit from the U.S. In November 1996, the Mauritania Minister of Justice visited FInCEN to discuss money laundering issues.

FinCEN participated in the Southern African Development Community Finance Ministers Workshop in May 1996, Finance Ministers from Botswana, Malawi, Mauritius, Namibia, South Africa, Zambia, Lesotho, Swaziland, Mozambique and Zimbabwe discussed the legal framework for money laundering. FinCEN also participated in the Commonwealth Southern and Eastern African Money Laundering Seminar in October, jointly sponsored by the Commonwealth Secretariat and the Financial Action Task Force.

In continuing its anti­money laundering efforts throughout the Western Hemisphere, FinCEN made presentations at the seminar "The Investigation of Money Laundering" sponsored by the Chilean National Drug Council during December 1996; and at money laundering conferences sponsored by the Private Bankers Association of Paraguay and Panama.

During 1996, FinCEN provided technical assistance and training to Panama in connection with Panama's establishment of its financial analysis unit (FAU). FInCEN assisted the FAU staff by developing installing and customizing a Local Area Database Network at the FAU. The database will aid the analyst in collecting and analyzing the financial law enforcement, public information, the FAU obtains from various sources. FinCEN implemented the new software and hardware and provided the FAU staff with the initial database training. In furtherance of its training strategy in Panama, FinCEN sent two money laundering experts fluent in Spanish to participate in a money laundering conference co­sponsored by the Panama Bankers' Association and the FAU. This conference was intended to help bridge the communications between the Panama FAU and the Panamanian banking community. In March 1997, FinCEN will provide additional "focused" analytical hands­on database training for the FAU staff.

In October 1996, FinCEN hosted a visit with officials from the Money Laundering Directorate, Secretaria de Hacienda y Credito Publico. The officials were briefed on all planned technical and training strategies for Mexico intelligence analysts. In November 1996, FinCEN hosted a meeting with Mexico's Ambassador to the U.S., who was briefed on all planned technical and training strategies planned during 1997. As a result of these visits, Mexico's President Zedillo was briefed on the progress of USG assistance to Mexico in the area of anti­money laundering initiatives. In December 1996, FinCEN coordinated with IRS in providing training related to Suspicious Activity Reporting and Financial Investigations. During the upcoming year, FinCEN plans to provide and/or assist in providing to the Mexican financial intelligence unit several components of training. These components include: Technical Services and Training: Mexican Banking and Financial Institutions and Regulatory Authority Training; and Financial Law Enforcement Analyst Training: Theory and Concepts.

TREATIES AND AGREEMENTS

Mutual legal assistance treaties (MLATs) which are negotiated by the Department of State in cooperation with the Department of Justice to facilitate cooperation in criminal matters, including money laundering and asset forfeiture, are in force with 22 governments including: Argentina, the Bahamas, Canada, Italy, Jamaica, Mexico, Morocco, the Netherlands, Panama, the Philippines, Spain, Switzerland, Thailand, Turkey, the United Kingdom, the United Kingdom with respect to its Caribbean dependent territories (the Cayman Islands, Anguilla, British Virgin Islands, the Turks and Caicos Islands and Montserrat), and Uruguay. MLATs have been signed but not brought into force with thirteen other governments: Antigua, Austria, Barbados, Belgium, Colombia, Dominica, Grenada, Hungary, Nigeria, Poland, South Korea, St. Lucia and Trinidad and Tobago. Similar treaties are in various stages of negotiation elsewhere. The US also has signed the OAS Mutual Legal Assistance Treaty.

In addition, the US has entered into executive agreements on forfeiture cooperation, including: (1) a drug­related forfeiture agreement with Hong Kong; and (2) a forfeiture cooperation and asset sharing agreement with the Netherlands which is also in effect for the Netherlands Antilles but not yet in effect with Aruba. (See below for asset sharing)

Financial Information Exchange Agreements (FIEAs) are bilateral Executive Agreements which facilitate the exchange of currency transaction information between governments. The FIEA provides a mechanism for exchanges of such information between Treasury Department and the other government's Finance Ministry. The ability to quickly exchange currency transaction information in money laundering matters aids in achieving mutual enforcement goals. The United States has FIEAs in effect with Colombia, Ecuador, Panama, Peru, Venezuela, Paraguay, and Mexico. Each FIEA requires that both parties enact or have legislation which requires the reporting or recording of large currency transactions conducted at financial institutions. The Financial Crimes Enforcement Network (FinCEN) has also signed a Memorandum of Understanding (MOU) with the Government of Argentina.

US Customs has mutual assistance agreements with Argentina, Australia, Austria, Belarus, Belgium, Canada, Cyprus, Czechoslovakia (now extended to the Czech Republic and Slovakia), Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, Italy, Korea, Mexico, Mongolia, New Zealand, Norway, Poland, Portugal, Russia, Spain, Sweden, Ukraine and United Kingdom. Customs has negotiated agreements which are not yet in force with Honduras, Ireland, Israel, Netherlands, and Turkey.

ASSET SHARING

Pursuant to the provisions of the 1988 US law, the Departments of Justice, State and Treasury have aggressively sought to encourage foreign governments to cooperate in joint investigations of drug trafficking and money laundering, offering the inducement of sharing in forfeited assets. A parallel goal has been to encourage spending of these assets to improve narcotics law enforcement. The long term goal has been to encourage governments to improve asset forfeiture laws and procedures, and undertake independent investigations.

From 1989 through December 1996, the international asset sharing program administered by Justice resulted in the forfeiture in the US of $130,964,103.72 of which $47,596,328.18 was shared with foreign governments which cooperated in the investigations. In 1996, the Department of Justice transferred forfeited proceeds to: Canada ($207,142.72), the Cayman Islands ($12,470.87), Isle of Man ($335,862.39), Luxembourg ($1,000,000), Switzerland ($2,787,077.02, and the United Kingdom ($1,002.045.53). Prior recipients of shared assets (1989­1995) include: Argentina, the Bahamas, British Virgin Islands, Canada, Cayman Islands, Colombia, Costa Rica, Ecuador, Egypt, Guatemala, Guernsey, Hungary, Israel, Liechtenstein, Paraguay, Romania, St. Maarten, Switzerland, United Kingdom and Venezuela.

To date, Canada, Switzerland, the Isle of Jersey (Channel Islands) and the United Kingdom are the only jurisdictions that have shared forfeited assets with the United States as the result of the assistance of the United States to forfeitures effected under their own laws.

MULTILATERAL ACTIVITIES

FINANCIAL ACTION TASK FORCE (FATF) YEAR IN REVIEW:

The Financial Action Task Force (FATF) was established by the G­7 Economic Summit in Paris in 1989 to examine measures to combat money laundering worldwide. In April 1990, the FATF issued a report with 40 Recommendations for establishing a framework of comprehensive programs to address money laundering and facilitate greater international cooperation. FATF membership comprises 26 jurisdictions and two regional organizations, representing the world's major financial centers. Member jurisdictions are committed to adopting and implementing the 40 FATF Recommendations and agree to have their implementation progress evaluated by other FATF members.

In 1996, the FATF focused on several major areas in its fight against global money laundering. An experts group met to assess current trends and methods in money laundering, emerging threats, and effective countermeasures. A special segment of the meeting focused on the vulnerabilities in new payment system technologies, sometimes referred to as "cyberpayment" systems. Experts from the financial sector were invited to give presentations and to participate in a discussion of this issue. A public version of the report presenting the conclusions of the experts group meeting is expected to be issued in early 1997.

In 1996, the second round of mutual evaluations was initiated, focusing on the effectiveness of each member's anti­money laundering measures in practice. Six second round mutual evaluations were conducted during 1996, with four planned for 1997.

The United States' Presidency of the FATF was successfully concluded in June 1996 with a number of significant accomplishments. During the U.S. Presidency, the stocktaking review of the 40 Recommendations was completed resulting in the following major changes: Money laundering predicate offenses were extended beyond drug trafficking to include other serious crimes as well. The reporting of suspicious transactions by financial institutions was made mandatory.

Applicable financial recommendations were extended to apply to non­financial businesses. Attention was drawn to the money laundering implications of emerging payment technologies. A new statement of support was included calling for more effective investigative techniques to aid law enforcement in following illicit proceeds from the street to the kingpins of criminal organizations.

In January 1996, the U.S. President of the FATF, former Treasury Under Secretary for Enforcement Ronald K. Noble, chaired the FATF's first­ever Financial Services Forum which included representatives of financial institutions from FATF member nations. The purpose of this meeting was to create a partnership between governments and the financial services industry in instituting global anti­money laundering measures. At the January meeting, discussion focused on changing trends in money laundering, how to best provide feedback to financial institutions, views of the industry on the 40 FATF Recommendations, and implications of new payment technology developments.

For the first time in FATF's history, the organization applied Recommendation 21 to a jurisdiction. On February 1, 1996, a press release was issued condemning the Economic Development Act passed by the Seychelles, legislation which created an environment conducive to money laundering and offered protection to criminals from prosecution, extradition, and seizure of assets. In applying Recommendation 21, the press release called for "financial institutions to give special attention to transactions" originating in the Seychelles,

At the final FATF plenary chaired by the U.S. in June 1996, for the first time, the FATF issued a public edition of its annual "Typologies Report" presenting current trends and methods in money laundering. This was one important result of the Financial Services Forum, where the financial sector requested more feedback and information on current money laundering methods identified by law enforcement.

In July 1996, Director General Fernando Carpentieri of the Italian Ministry of the Treasury assumed the FATF Presidency for the FATF's eighth round of work during 1996­1997.

In September 1996, Recommendation 21 was applied for a second time; this time to Turkey, the only FATF member which had not yet passed anti­money laundering legislation. However, following enactment of Turkey's law on the Prevention of Money Laundering on November 19, 1996, the FATF issued a press release on December 12, 1996, welcoming the new legislation and lifting the application of Recommendation 21 to Turkey. Turkey's prompt enactment of its anti­money laundering law following FATF action attests to the influence of the FATF in bringing about changes needed to counter money laundering throughout the world.

Through its external relations program the FATF continues to encourage non­member countries to adopt and implement the anti­money laundering measures outlined in the 40 Recommendations. During 1996, the FATF conducted a second high­level mission to Russia to further promote anti­money laundering action there. In addition, the FATF co­sponsored a Money Laundering Seminar with the Black Sea Economic Cooperation (BSEC) in April 1996 in Istanbul, Turkey, and co­sponsored a Southern and Eastern African Money Laundering Conference with the Commonwealth Secretariat in October 1996 in Capetown, South Africa.

A second BSEC/FATF Money Laundering Seminar is planned to be conducted in April 1997 to further promote anti­money laundering measures in the Black Sea region.

In November 1996, an experts group met in Hong Kong to assess money laundering trends and methods specific to the Asia/Pacific region and counteractions indicated. The FATF Asia Secretariat has created an Asia/Pacific Steering Group on Money Laundering to encourage stronger anti­money laundering action in the region through adoption and implementation of the 40 FATF Recommendations. The FATF Asia Secretariat conducted missions to the Philippines, China, and Indonesia during 1996. During 1997, the FATF Asia Secretariat anticipates conducting missions to Viet Nam and Malaysia, as well as follow­up missions to the Philippines and Indonesia.

The FATF continues to coordinate extensively with other international organizations involved in combating money laundering and to mutually foster efforts in this area.

CARIBBEAN FINANCIAL ACTION TASK FORCE (CFATF)

The importance of the Caribbean Financial Action Task Force (CFATF) in regional anti­money laundering initiatives continues to increase. The CFATF requires its member jurisdictions to implement the FATF 40 Recommendations as well as an additional 19 Recommendations specific to the region. In addition to the principal officer provided by the United Kingdom, the U.S. Treasury Department provided staff in 1996 to the CFATF Secretariat, housed in Trinidad and Tobago.

In October 1996, the CFATF adopted a Memorandum of Understanding (MOU) which formalizes the organization by delineating its mission, objectives, and membership requirements. A total of 21 members, including several Central American countries new to the CFATF, signed the MOU and these countries now comprise the membership of the CFATF. Additional countries are expected to sign the MOU in the near future. The five FATF countries which have provided financial and other support to the CFATF since its inception (Canada, France, the Netherlands, United Kingdom, and the United States), are now referred to as Cooperating and Supporting Nations and issued a Joint Statement of Cooperation and Support at the October 1996 CFATF Council Meeting.

During 1996, the first mutual evaluation conducted by the CFATF was completed and the evaluation report was adopted by the CFATF plenary. Several other CFATF mutual evaluations are in process. In addition, the CFATF will conduct its first typologies exercise in February 1997 immediately following a CFATF technical plenary. The typologies exercise will be conducted to assess current trends in money laundering in the region and effective countermeasures. In addition to the FATF, the CFATF also cooperates extensively with other international bodies.

SUMMIT OF THE AMERICAS

In recognition of the serious threat that money laundering poses throughout the hemisphere, and as part of the Summit process, a hemispheric Ministerial Conference was held in Buenos Aires, Argentina on December 1­2, 1995, which was attended by representatives of 29 of the 34 countries of the hemisphere.

At the conclusion of the conference, the ministers in attendance, representing their respective Central Banks and Finance, Justice, and Interior Ministries, endorsed the Buenos Aires Communique. This communique sets forth a series of specific actions that each country commits to undertake in the legal, regulatory and law enforcement areas to establish an effective anti­money laundering program and, thereby, to combat money laundering on a hemispheric basis.

The Ministers who adopted the Communique in Buenos Aires recognized that only the full and effective implementation of each step of the Plan of Action embodied in the coordinated hemispheric response to money laundering can guarantee its success. Therefore, section F.1. of the Communique urged Summit governments to press ahead with the Plan of Action and to submit to ongoing assessments of the implementation of the Communique within the framework of the OAS. The OAS gave one of its specialized bodies, the Inter­American Drug Abuse Control Council (CICAD), a central role in implementing the provisions of the communique.

The CICAD Group of Experts on Money Laundering

The OAS/CICAD Secretariat agreed to a proposal by Chile to reconvene the Group of Experts who developed the OAS model regulations on money laundering to develop a plan of action that will set out the role of CICAD regarding implementation of the communique. The Group of Experts was reconvened and met in Washington, D.C. on June 17­20, 1996. The Group of Experts approved and disseminated a money laundering questionnaire, drafted by the OAS/CICAD Secretariat and based on the ministerial communique as one component of the assessment process. The experts group then agreed to make its expertise available to the Permanent Council Working Group which is studying the feasibility of a hemispheric convention on money laundering.

In addition, the experts also discussed the importance of Financial Intelligence Units, or FlUs, which serve as centers for the collection, analysis, and sharing of all relevant information related to money laundering and agreed that the role of FIUs should be studied in detail at the next meeting. The Group of Experts also discussed the possibility of conducting a typologies exercise, which involves the collation and analysis of money laundering methods, trends and patterns, in order to exchange information and develop countermeasures.

The Group of Experts will meet again this year to: a) analyze the results of the questionnaire; b) develop on­going assessment procedures; c) consider in detail the desirability of establishing FHJs and if so agreed, make a recommendation to amend the OAS Model Regulations on Money Laundering accordingly, d) to discuss development of a typologies exercise.

Joint Organization of American States/Inter­American Development Bank Training and Technical Assistance Initiative

Finance Ministers of the Western Hemisphere met in New Orleans on May 18, 1996 to address common challenges to achieve stable and sustainable growth in our countries and to move forward on a program to build more open, transparent and integrated financial markets. Recognizing the threat that money laundering presents to the integrity of financial markets, and economic and political systems, the Finance Ministers reaffirmed the shared commitment to intensified action to combat money laundering. A joint communique was endorsed in which the Finance Ministers reaffirmed their commitment, to combat financial crime as outlined in the Buenos Aires Communique. In addition, the Ministers called on the Inter­American Development Bank, in conjunction with the OAS, to establish a comprehensive training and technical assistance program to support nations in their implementation of commitments in the Buenos Aires communique.

The OAS and Inter­American Development Bank (IDB) agreed to work together on the establishment of a comprehensive training and technical assistance program under their joint Memorandum of Understanding. Shortly afterwards, in parallel to the June 1996 reconvening of the OAS/CICAD Experts Group on Money Laundering, OAS/CICAD presented a pilot project proposal to the IDB.

The objective of the proposal on technical assistance and training is to assist member ­countries in their efforts to strengthen their banking supervision, regulation and operational capabilities to control money laundering. The program detailed in the proposal focuses on training and technical assistance to the banking sector. The initial program emphasizes training in the detection of suspicious transactions, the prevention of money laundering through know your customer policies, and adherence to national laws and regulations.

As currently configured, the proposal calls for a pilot training program for five countries, Argentina, Colombia and Uruguay, Costa Rica and Mexico. The program will be funded by IDB, but managed by OAS/CICAD. Training will initially consist of a series of training seminars for banking supervisors and members of banking associations. Once trained, these officials would then initiate training programs for banking employees and other relevant officials. The goal is to help prevent the exploitation of the banking sector by money launderers. The proposal is currently awaiting final IDB approval.

FINANCIAL INTELLIGENCE UNITS AND THE EGMONT GROUP

FinCEN took a number of steps forward in the effort to create an international network of anti­money laundering agencies known as "financial intelligence units" or "FlUs". This effort has been undertaken primarily through its key role in establishing the Egmont Group as a framework for contact and coordination among these units.

In April 1996, FinCEN brought together the score of FlUs that already exist, along with several units "under development", at a meeting of the Egmont Group in San Francisco. This third conference of the group was scheduled to follow directly a FinCEN INTERPOL/FOPAC conference on FIIFJS. Holding both of these conferences in proximity to each other and within the Western Hemisphere permitted a number of countries of the region to attend (namely, Argentina, Aruba, the Bahamas, Bolivia, Chile, Colombia, the Dominican Republic, Haiti, Mexico, Panama, Trinidad, Uruguay, and Venezuela) that had not previously had the opportunity to do so. During the conferences, the participants were able to learn about the­concept of the financial intelligence unit and to meet representatives of a variety of these organizations.

Building on these conferences and the momentum started by the Summit of the Americas Ministerial communique on money laundering (signed in Buenos Aires in December 1995), several of these countries subsequently launched serious initiatives in 1996 to establish FlUs. Argentina, Colombia, Mexico, and Panama all sought and received assistance from FinCEN on how best to establish units in those countries. These same countries sent representatives to FinCEN during the year to take part in week­long FIU orientation programs for foreign counterpart agencies.

In 1996, FIUs became operational in Aruba, Panama, and the Netherlands Antilles in the Western Hemisphere. Europe saw FIUs become operational in the Czech Republic and Slovakia, while Poland worked on legislation to create such a unit. Croatia, assisted by the FIU in Slovenia, began developing a unit of its own. Switzerland worked to overcome obstacles posed by its federal system to establish a Swiss FIU by the end of 1997. Greece and Cyprus both have legislation that calls for creation of FIUS; however, by the end of the year had not yet realized their plans. Russia is considering the establishment of an FIU as part of its overall anti­money laundering program, although this measure was not included in the most recent version of the anti­money laundering legislation. Outside the Western Hemisphere and Europe, the Republic of South Africa, with the help of Australia, drafted legislation that will eventually create a unit following the Australian model. In mid­November 1996, the Baltic States signed a declaration in Riga, Latvia, that called for the coordinated establishment of anti­money laundering programs in those three countries. Included in the declaration was the mention of the creation of an FIU as an integral part of the programs. The European Union, the Financial Action Task Force (FATF), and the United Nations Drug Control Policy Office also signed the declaration. Going beyond FATF Recommendation 24, this declaration thus becomes the first truly international instrument to recognize explicitly the need for such a unit as part of an anti­money laundering program.

The fourth meeting of the Egmont Group also took place in November 1996 in Rome. With over thirty countries in attendance, along with four international organizations, the Egmont Group seemed to move one step closer to becoming the primary framework for cooperation among FlUs. The conference came to an agreement on the definition of an FIU, a definition that will likely facilitate the establishment of new units by setting a minimum standard for such a unit. FinCEN played a key role in developing this definition and furthered the effort to increase communication by presenting a prototype secure web site for use by the FIU members of Egmont. The "Egmont Secure Web" was accepted by the group and will become operational in the first half of 1997.

FinCEN continued working with the INTERPOL Proceeds of Crime Group (FOPAC) on an analytical project to assess the money laundering situation in the countries of Eastern Europe and the former Soviet Union. In 1996, FinCEN and FOPAC representatives visited four countries, including Belarus, Ukraine, Czech Republic, and Slovakia. In at least one case (Latvia), the draft report produced as part of this project caused the subject country to take significant action toward modifying and improving its inadequate system of anti­money laundering measures.

ENFORCEMENT: Significant Cases

Hawala Banking Scheme. Two Indian nationals pled guilty to the structuring of thirty­nine separate transactions totaling nearly $5 million, through corporate accounts utilizing the "Hawala" or underground banking system. In addition, one defendant pled guilty to Conspiracy to launder at least $100,000 in currency from narcotic sales. The defendants were sentenced to 37 and 21 months in prison respectively, fined $125,000 each, and ordered to forfeit $135,772 to the government. The foundation of the Hawala system is a worldwide extended family that consists of extensive Indian and Pakistani networks spread throughout Europe and the Middle East as well as South Asia. Historically used as a foreign worker remittance system, the system has been used in recent times to evade taxes, circumvent currency exchange restrictions, and to launder monies from illegal business.

The case originated with a tip from a local bank which indicated that a number of suspicious currency deposits were being made into two corporate accounts. The investigation revealed that the two defendants had been utilizing a number of personal bank accounts to move currency. However, they had recently switched over to corporate accounts after banking authorities had questioned their banking activity. The defendants would transfer monies between the United States and India without regard to the source of the funds. The unique aspect of the case was the method in which funds were transferred to India. Monies were given to the defendants in increments greater than $10,000. These funds would then "structured" into their bank accounts in amounts less than $10,000. A facsimile would be transmitted to India bearing the names and addresses of the persons in India who were to receive the monies. Their respective counterparts in India would then arrange the delivery of the requisite amount of rupees to the designated individuals. On occasion the defendants would periodically wire transfer the deposited monies to one of any number of accounts located in Hong Kong, or Singapore. Once these transfers were made, individuals would travel from India to Hong Kong or Singapore, withdraw the funds in currency, and purchase gold. The gold was smuggled back into India where it would be sold on the black market for a substantial profit.

The Milkman. A major marijuana trafficker and seventeen other co­defendants pled guilty to narcotic and money laundering offenses in a case concluded in 1996. The major trafficker, nicknamed "lechero" or "the milkman" because he also delivered milk, as well as bundles of marijuana to his customers. The operation expanded to the point the "milkman" was transporting tons of marijuana; he admitted distributing more than 200,000 pounds of marijuana, which was transported via trailers, using produce and aluminum cans to cover the illicit cargo. The marijuana was obtained from sources in Colombia and Mexico.

The trafficker is now cooperating with US authorities, and provided information leading to the identification of the Mexican supplier, who maintained an extensive network of bank accounts in the US and Mexico. The supplier also owned a Mexican currency exchange house, used to launder drug proceeds. The Mexican supplier and eight other defendants were indicted for importing more than 100,000 pounds of marijuana and 2.5 tons of cocaine into the United States. The supplier was also indicted on charges of laundering approximately $12 million in narcotic proceeds; he pled guilty to both trafficking and money laundering charges, and was sentenced to 240 months in prison.

Information provided by the supplier led to the investigation of a Hidalgo County, Texas, sheriff, who was alleged to have provided high­level narcotics traffickers with special treatment while they were incarcerated. After bribing jail employees to provide favors, the Mexican supplier was paying the sheriff a fee of $5,000 per month and $1,000 for every visit by his family or girlfriend. The sheriff, who also received sports cars, watches and a flat­bed trailer, was given about $200,000 total, part of which was used to construct a pavilion on the sheriff's cattle ranch. The sheriff and three other personnel were indicted on charges of racketeering, bribery, money laundering and other charges, and, found guilty, the sheriff was sentenced to 84 months in prison and fined $20,000, in addition to paying a judgment of $151,000 on the racketeering conviction.

Radio Station Owners Convicted of Drug and Money Laundering Charges.

Two owners of a Tucson Spanish­language radio station were convicted of conspiracy to sell marijuana and laundering drug money, and, on January 16, 1996, were sentenced in Federal Court to terms ranging from 192 to 300 months in prison. The Tucson jury further determined that the father and son should forfeit their interest in a real estate parcel, and $500,000 laundered through the radio station's bank account. The two were also ordered to forfeit $3.13 million and $1.45 million respectively in narcotics proceeds. In addition, they were sentenced to terms of incarceration of 300 months and 192 months in prison respectively. The conviction resulted from a joint investigative effort which involved agents of IRS Criminal Investigation Division, US Customs Service, FBI, as well as state and local law enforcement agencies. The investigation, which was initiated in 1992, disclosed that the owners were major suppliers of marijuana to the Columbus, Ohio area. Estimates are that sales exceeded 12,000 pounds of marijuana valued at over $5.6 million. Analysis of the radio station's bank account revealed the owners to have deposited $750,000 into the accounts in cash and cashiers checks.

The three week trial began on May 16, 1995. During the course of the trial employees of the radio station testified that the owners would bring in large sums of cash, at least once a month. The employees were directed to purchase cashiers checks in amounts under $10,000. The cashiers checks would then be deposited in the radio stations bank accounts. An Accountant testified that he had personally prepared and filed income tax returns with the Secretary de Hacienda (Mexican Tax Authorities) on behalf of the radio station owners. These statements were made in an effort to show that the large sums of cash received by the owners were proceeds of legitimate economic activity in Mexico on which taxes had already been paid. The accountant further testified that bank records were records that came from his files and were authentic. A representative of the Mexican Secretary de Hacienda was called to testify and refute the accountant's testimony. The Mexican official testified that no documents had been prepared and filed by the accountant on behalf of the station owners. The official also found the Hacienda tax stamps to be fraudulent, and the bank records were not authentic. The accountant was ordered arrested following his testimony. The accountant was indicted and later found guilty on seven counts of false declarations. He is currently awaiting sentencing.

Retired Bank Executive Convicted of Money Laundering. A Detroit jury convicted a retired bank executive and his son on money laundering and drug charges, and, on November 8, 1996, they were sentenced to 186 months and 54 months respectively. In addition, the bank executive was ordered to forfeit his home valued at $400,000 and $2.0 million in cash. This was a joint investigation which included DEA and IRS Criminal Investigation Division agents.

The case involved a Jamaican cocaine, heroin, and money laundering organization based in Detroit, Michigan. The principal defendant had been employed as a bank executive at the Gulf Bank of Kuwait at their New York City branch. Between the years 1984 and 1992 the bank executive, while acting in that capacity is believed to have laundered approximately $7.0 million. The moneys were deposited into secret bank accounts located in the Cayman Islands, and Kuwait. Both defendants are awaiting sentencing.

In 1993, a cooperating individual assisted law enforcement officials in arranging a money laundering 'sting" operation with the bank executive. An undercover agent posing as a narcotics dealer needed to move $3.0 million in cash out of the country. During the course of several undercover meetings the defendants agreed to transfer monies abroad in increments of $100,000. Assurances were made by the defendants that the transfers would be kept secret. In addition, the defendant offered to sell his home to undercover agents for $425,000 in cash. He also offered to sell his Rolls Royce automobile for $199,000 in cash.

In April, 1994 undercover agents made a delivery of $100,000 in cash to the defendant. The defendant arranged the deposit of the funds into a Michigan bank account of his automobile export corporation. Automobiles were purchased with the monies and shipped to the country of Kuwait. The Kuwait customers were instructed to wire transfer their payments to Barclays Bank in London, England. Once the balance was over $90,000 the defendant gave the undercover agent a power of attorney over the account.

MONEY LAUNDERING COMPARATIVE CHARTS

Each year, a committee of officials from each of the United States agencies meets on a weekly basis, from December through February, to consider assessments of the drug and non­drug money laundering situations in more than 200 nations and territories, including steps taken or not taken to address those situations; conformance of laws and policies with international standards; the effectiveness with which the government has acted, and, whether the government has the political will to take needed actions. The evaluation criteria are cited below.

The INCSR assigns priorities to more than 200 nations and territories, using six differential categories ranging from High Priority to No Priority.

INCSR rankings draw upon a number of factors which indicate (1) the nature of the money laundering situation in this nation/territory, i.e., drugs, contraband, etc., (2) why the US regards this situation as having international ramifications; (3) the situation's impact on US interests; (4) whether the government taken appropriate legislative actions to address specific problems; (5) whether the laws are being effectively implemented; and (6) where US interests are involved, the degree of cooperation between the government and USG agencies. There are about two dozen subfactors which are considered. Those factors are explained below.

A government can have comprehensive laws on its books and conduct aggressive enforcement efforts, but still be ranked a high priority if the volume of money laundering continues to be substantial and/or continued vigilance and effective enforcement by a government is essential to the effectiveness of the overall international effort.

When the severity of the money laundering problem places a government in the top three categories, and other deficiencies exist, the rankings indicate that these governments should take immediate action and will receive near­term priority attention from the USG. As one goes down through the rankings, remedial actions have less impact upon the US.

Ranking a government High Priority or Medium­High reflects a USG belief that near­term remedial action by that government is needed to deal with the problems cited in the individual summaries which follow the charts.

SELECTION CRITERIA

As any financial system can be penetrated, every country and territory has the potential of becoming a money laundering center. There is no precise measure of vulnerability for any financial system, but a check list of what drug money managers reportedly look for provides a basic guide.

• Failure to criminalize money laundering from all serious crime or limiting the offense to narrow predicates, such as conviction of a drug trafficking offense, thus abetting efforts to commingle funds.
• Rigid bank secrecy that cannot be penetrated for authorized law enforcement investigations.
• Minimal or no identification requirements to conduct financial transactions, or widespread or protected use of anonymous, nominee, numbered or trustee accounts.
• No required disclosure of the beneficial owner of an account or the true beneficiary of a transaction.
• Lack of effective monitoring of currency movements.
• No recording requirements for large cash transactions.
• No mandatory requirement for reporting suspicious transactions, or a pattern of inconsistent reporting under a voluntary system, or a lack of uniform guidelines from which to identify suspicious transactions.
• Use of monetary instruments payable to bearers.
• Well­established non­bank financial systems, especially where regulation and monitoring are lax.
• Patterns of evasion of exchange controls by nominally legitimate businesses.
• Ease of incorporation, especially where ownership can be held through nominees or bearer shares, or where off­the­shelf corporations can be acquired.
• Limited or weak bank regulatory controls, especially in countries where the monetary or bank supervisory authority is understaffed, underskilled or uncommitted.
• Well established offshore or tax­haven banking systems, especially countries where such banks and accounts can be readily established with minimal background investigations.
• Extensive foreign banking operations, especially where there is significant wire transfer activity or multiple branches of the foreign banks, or limited audit authority over foreign­owned banks or institutions.
• Limited asset seizure or confiscation capability.
• Limited narcotics and money laundering enforcement and investigative capabilities.
• Countries with free trade zones where there is little government presence or other oversight authority.
• Patterns of official corruption or a laissez­faire attitude toward the business and banking communities.
• Countries where the dollar is readily acceptable, especially countries where banks and other financial institutions allow dollar deposits.
• Well­established access to international bullion trading centers in New York, Istanbul, Zurich, Dubai and Bombay.
• Countries where there is a significant trade in or export of gems, particularly diamonds.

ECONOMIC FACTORS

The strength, vitality and freedom of economies can serve as indicators of the relative vulnerability of a financial system to penetration by money launderers.

The 1996 data base introduces the element of relative black market activity, ranking virtually all sovereign governments on a scale of 1­5, with percentage of GDP as the defining factor.

Analysts assessing vulnerability can also use the existence of parallel economies as a measure, i.e., whether the parallel economy is seen as a major or minor factor in a given money laundering situation or is not significant.

There have been no empirical studies of this element, but, confirmed information on money laundering practices indicates that the parallel economy is a major factor in money laundering in a number of areas, including: Burma, Dominican Republic, Poland, Colombia, Hong Kong, Mexico, Nigeria, Panama, Russia, Thailand, Venezuela, Pakistan, India and the United States (the fungible economy which operates on both sides of the border with Mexico). Parallel economies are considered a minor factor in the money laundering situations in: Bolivia, Chile, China, Ecuador, Greece, Guatemala, Hungary, Korea, Kuwait, Lebanon, Macau, Taiwan, Italy, Netherlands, Turkey, United Kingdom, Argentina, Brazil, Costa Rica, Cyprus, Japan, Paraguay, Uruguay, Cote D'Ivoire, and St. Vincent and the Grenadines. Parallel economies were not considered a significant money laundering factor in the other governments in the High, Medium­High, Medium and Low­Medium categories. There were not sufficient data to draw conclusions about the governments in the Low and No Priority categories.

1997 CHANGES IN INCSR RANKINGS

UPGRADES

Cyprus--Medium­High to High

China, PR--Medium to Medium­High

Dominican Republic--Medium to Medium­High

Taiwan--Medium to Medium­High

Peru--Medium to Medium­High

Australia--Low­Medium to Medium*

Indonesia--Low to Medium

South Africa--Low­Medium to Medium

Vanuatu--Low­Medium to Medium

Jamaica--Low to Low­Medium

St Kitts & Nevis--Low to Low­Medium

Azerbaijan--No Priority to Low

Benin--No Priority to Low

Dominica--No Priority to Low

El Salvador--No Priority to Low

Guyana--No Priority to Low

Kyrgyztan--No Priority to Low

Mozambique--No Priority to Low

North Korea--No Priority to Low

Western Samoa--No Priority to Low

Uzbekistan--No Priority to Low

Zimbabwe--No Priority to Low

DOWNGRADES

Montserrat--Medium to Low­Medium

Morocco--Medium to Low­Medium

Slovakia--Medium to Low­Medium

Denmark--Low­Medium to Low

* As noted in the 1996 INCSR text, Australia has been ranked consistently at the Medium level, and was inadvertently dropped one rank in the 1996 table. There has been no change in the perspective.

EXPANSION OF THE INCSR DATA BASE

From 1986 through 1995, the money laundering chapter data table listed comparative data on 10 elements for the 17 High Priority and 16 Medium­High Priority governments.

To give a fuller understanding of where governments stand in relation to each other on the broad range of elements which define legislative activity and identify other characteristics which can have relationship to money laundering activity, the 1997 INCSR data tables incorporate 16 elements for more than 190 governments.

COMPARISON TABLE: GLOSSARY OF TERMS

1. Criminalized Drug Money Laundering

The government has enacted laws criminalizing the offense of money laundering related to drug trafficking.

2. Record Large Transactions

By law or regulation, banks are required to maintain records of large transactions in currency or other monetary instruments. An effective know­your­customer policy is considered a prerequisite in this category.

3. Maintain Records Over Time

By law or regulation, banks are required to keep records, especially of large or unusual transactions, for a specified period of time, e.g., five years. An effective know­your­customer policy is considered a prerequisite in this category.

4. Report Suspicious Transactions

By law or regulation, banks are required (or permitted) to record and report suspicious or unusual transactions to designated authorities. An effective know­your­customer policy is considered a prerequisite in this category.

5. System of Identifying and Forfeiting Assets

The government has enacted laws authorizing the tracing, freezing, seizure and forfeiture of assets identified as relating to or being generated by money laundering activities.

6. Asset Sharing

By law, regulation or bilateral agreement, the government permits sharing of seized assets with third party governments which assisted in the conduct of the underlying investigation.

7. Cooperates with Domestic Law Enforcement

By law or regulation, banks are required to cooperate with authorized law enforcement investigations into money laundering or the predicate offense, including production of bank records, or otherwise lifting the veil of bank secrecy.

8. Cooperates with International Law Enforcement

By law or regulation, banks are permitted/required to cooperate with authorized investigations involving or initiated by third party governments, including sharing of records or other financial data.

9. International Transportation of Currency

By law or regulation, the government, in cooperation with banks, controls or monitors the flow of currency and monetary instruments crossing its borders. Of critical weight here are the presence or absence of wire transfer regulations and use of reports completed by each person transiting the country and reports of monetary instrument transmitters.

10. Mutual Legal Assistance

By law or through treaty, the government is agreed to provide and receive mutual legal assistance, including the sharing of records and data.

11. Non­Drug Money Laundering

The government has extended anti­money laundering statutes and regulations to include non­drug­related money laundering.

12. Non­Bank Financial Institutions

By law or regulation, the government requires non­bank financial institutions to meet the same customer identification standards and adhere to the same reporting requirements that it imposes on banks.

13. Disclosure Protection

By law, the government provides a "safe harbor" defense to banks or other financial institutions and their employees who provide otherwise confidential banking data to authorities in pursuit of authorized investigations.

14. Offshore Banking

By law or regulation, the government authorizes the licensing of offshore banking facilities.

15. 1988 UN Convention

The government has formally ratified the 1988 United Nations Convention Against Illicit Trafficking in Narcotic and Psychotropic Substances.

16. Compliance

The government is meeting the goals of the 1988 UN Convention, in terms of the effective application of implementing legislation.

Click here for charts: Rayburn

HIGH PRIORITY COUNTRIES

Aruba and The Netherlands Antilles (High) Although they are distinct jurisdictions with separate governments, Aruba and the Netherlands Antilles, which are part of the Kingdom of the Netherlands, are treated together in this chapter not only because both are considered High priority and have similar money laundering situations, but, much of the remedial legislation needed must be enacted by both.

Money laundering organizations appear to be directing large cash deposits into new building and land development projects. There are increasing indications that money launderers are utilizing legitimate businesses as straw purchasers. On Bonaire, certain groups have attempted to provide unconventional financial services to hotel facilities who are in need of refinancing. In some cases this assistance has been refused, when the recipient has identified the provider as a money launderer. The Governments of Aruba (GOA), the Netherlands Antilles (GONA), and the Netherlands (which comprise the Kingdom of the Netherlands) have passed various anti­criminal activity legislation which are expected to be implemented in early 1997. Apart from combatting international and local drug trafficking and money laundering activities, the new laws are expected to broaden the investigatory powers of local enforcement agencies with regard to search and seizures, extradition of nationals, money laundering, including the identification of suspicious financial transactions, and questioning and detaining of suspects.

Offshore corporate banking facilities, secret bank accounts, casino/resort complexes, high volume American tourism, and stable currencies continue to make Aruba and the Netherlands Antilles attractive to money laundering organizations. Local governments with the assistance of Dutch officials are attempting to enact legislation that would place more controls on banking and financial institutions and give local law enforcement officials greater authority to investigate money laundering activities and suspicious money transactions.

In December 1993, Aruba criminalized money laundering related to both narcotics and non­drug offenses. On December 20, 1995, the Aruban parliament passed additional money laundering legislation designed to require unusual transaction reports, create a reporting center (MOT) and establish customer identification requirements. These ordinances became effective on February 1, 1996, and the MOT became operational on March 1, 1996. The MOT has received approximately 1,700 unusual transaction reports since its inception. Despite these legislative changes, money laundering fostered by the casinos, offshore banking, the Aruba Free Zone, and resort industries appears to be flourishing. Although having a money laundering law for two years, the Arubans have not prosecuted any money launderers.

Responding to the allegations of money laundering in Aruba, the Royal Dutch Government and the Government of Aruba appoint a number of commissions to investigate such issues as (1) the law enforcement situation on the island; (2) criminal activities in the Free Zone; (3) money laundering through casinos; (4) money laundering through offshore companies; and (5) currency inflow/outflow. As a result of the DeRuiter Commission report, the Aruban police chief and his deputy will be replaced as will the Dutch Attorney General in Aruba. The Government of Aruba has accepted each of the recommendations of the Aruba Free Zone Commission and the Commission on the gaming industry which issued their reports in July 1996. The recommendations include a tightening of supervision of the Free Zone and the gaming industry; strengthening the requirements for licensing, establishment of identification procedures, and the inclusion of casinos as financial institutions under the ordinances requiring the reporting of unusual transactions and requiring identification for financial services; and the establishment of cross­border currency reporting requirements.

The Central Bank of Aruba currently lacks the full range of necessary powers to check the compliance of financial institutions with anti­money laundering measures or sanction the institutions when breaches occur. At present, the Central Bank has no authority to carry out on­site inspections of offshore banks. Currently, if the Central Bank finds that an institution is not complying, it can direct the institutions to do so, and if that fails, the Central Bank can make a public announcement of the failure to comply ­­ a limited and ineffectual sanction. The prudential supervision authority of the Central Bank should be brought into accord with international standards. The government has indicated that legislation to strengthen the Central Bank's authority should be enacted by mid­1997.

The Netherlands Antilles parliament has approved laws that permit the establishment of a law enforcement entity designed to detect activities involving money laundering. On November 1, 1996, the MOT was established in the Netherlands as a reporting center for unusual financial transactions.

Aruba and the Netherlands Antilles have yet to ratify the 1988 UN Convention because the revised penal code and code of criminal procedures have yet to become effective. The revisions will extend the opportunities for confiscation, seizure and freezing of assets, as well as broaden the investigative powers of enforcement agencies with respect to asset seizure and extradition. Both governments must act before these revisions become effective.

Canada. (High) Canada's advanced financial sector, lack of mandatory reporting requirements and proximity to the U.S. make it attractive to drug money launderers. Drug­related and other criminal money laundering in Canada occurs either from profits generated through drug sales in Canada or from drug money generated abroad, primarily in the United States. Canada has no cross­border currency reporting requirement. Authorities report a high level of voluntary reporting of suspicious transactions.

The first Canada­U.S. money laundering conference was held in Windsor, Ontario in May, where finance department officials said they are considering strengthening Canada's money laundering laws and imposing a reporting requirement on transactions over C$ 10,000. The Canadian Bankers Association has said it supports this proposal. Other regulatory changes under consideration include expanding the type of financial records kept by currency exchanges, improving customer identification verification requirements, and expanding the list of institutions subject to record­keeping requirements to include casinos.

According to the Solicitor General, drug­related and other criminal money laundering in Canada takes place in banks and deposit­taking institutions, currency exchange houses, front companies, real estate transactions and gold shops. Banks are the most commonly used means of laundering and moving drug money because of branches located in traditional tax haven countries in the Caribbean. The RCMP and the Canadian Bankers Association have a memorandum of understanding under which charter bank branches report suspicious transactions. However, this does not cover other financial institutions.

Currency exchange houses, particularly ones located near the U.S. border, are suspected of moving large amounts of drug money between the U.S. and Canada. Currency exchanges are not required to report large transactions to authorities although they are required to keep records of such transactions for five years. Bulk currency shipments continue to be an alternative for money launderers. Commonly, U.S. dollars are smuggled to and from the U.S. and Canada, where they are deposited into local accounts so they may be wire transferred to third countries.

Canada and the U.S. traditionally cooperate closely on law enforcement matters and have a mutual legal assistance treaty and a customs mutual assistance agreement. While Canada has seized record amounts of currency in recent years, actual forfeitures are negligible by comparison because Canadian law requires proof of a direct link between seized property or currency and specific drug transactions.

CARIBBEAN DEPENDENT TERRITORIES (UK)

The United Kingdom's Caribbean Dependent Territories (CDT) consist of Anguilla, the British Virgin Islands, Cayman Islands, Montserrat and Turks and Caicos.

Cayman Islands (High) The increasingly­sophisticated banking industry in the Cayman Islands has now become a major factor in the $5 trillion mutual funds industry. An estimated $1 trillion or 20% of fund activity is through offshore funds. The Cayman Islands, already one of the major offshore banking centers in the world, and address of record for more than 26,000 companies, has become one of the largest and most successful of these offshore funds. Cayman bankers reported at a meeting in February 1997 that the 104 mutual fund administrators licensed by Caymans now control 1,300 regulated funds with assets of more than $100 billion. Many of the major fund administrators in Cayman are branches or subsidiaries of international banks, and the funds primarily attract institutional investors (large corporations, financial institutions, and pension plans) and high net worth individuals (the lowest investment averages $48,000). Caymans has imposed a due diligence convention on administrators and requires detailed disclosures on directors, trustees and employees of licensed funds.

The Cayman Islands, with easy access of a large offshore financial community to shell banking companies, continues to be the most attractive of the CDTs for persons wanting to launder illicit money from drug trafficking or other criminal activity. A 1995 Caribbean Financial Action Task Force (CFATF) evaluation of Caymans was complimentary about the efforts by the GOCI to tackle this problem. The Government of the Cayman Islands, which led other Caribbean governments in adopting broad­scope anti­money laundering laws, including mandatory disclosure of suspicious transactions, enacted a Proceeds of Criminal Conduct Law in December, 1996, an all­crimes money laundering law which is equivalent to British legislation on the subject.

Similar legislation is expected to be introduced in 1997 regarding the other CDTs. Anguilla and BVI are ranked low priority in terms of money laundering problems and TCI is ranked no priority. Montserrat, ranked Low­Medium priority, has seen a significant reduction in business following a restructuring of its off­shore industry, including revised legislation since 1990. With the exception of Montserrat, where normal business has been interrupted by volcanic activity, all the CDTs are introducing "gateway" provisions in their financial services legislation to facilitate regulatory cooperation and will be introducing further regulations to provide greater transparency in respect to corporate ownership.

Colombia. (High) Money laundering remains a corollary of the cocaine trade in Colombia. A 1995 law makes money laundering a crime, but the legislation is weak and the judicial system is unwilling to attempt enforcement. These factors, coupled with inadequate regulation of the financial and banking industry, ease money laundering of narcotics profits into legitimate business.

Colombia is taking action to overcome at least the legal barriers. On December 12, 1996, the Colombian Congress adopted an administration­sponsored bill to strengthen asset seizure and forfeiture laws. The bill makes asset forfeiture retroactive to the date on which the original criminal activity generating ill­gotten assets became a crime. The bill was signed into law 333 on December 19, 1996. The law, as passed, is a good one and could prove to be a valuable tool. But, before we can evaluate the Government's commitment to implement it, the legislation must stand the review of the Constitutional Court ­­ a test which some Colombian observers believe the law was designed to fail. Moreover, the first attempts to implement the law have failed utterly. For example, the hold on the assets of family and friends of the Rodriguez Orejuela brothers was lifted at the time of their sentencings, and these assets are now available to them once more.

Strengthened money laundering legislation, part of an anti­narcotics reform package, and increased sentences for narcotrafficking were debated in the regular 1996 congressional sessions, and will be taken up again in extraordinary session in 1997. The 1995 law only provides for the prosecution of third parties involved in money laundering, which is controlled by cocaine traffickers, and not for the prosecution of the beneficial owners of the illicit funds. There have been no successful prosecutions under the 1995 law, although Colombia has prosecuted some individuals under a separate statute for "illicit enrichment" and has fined some financial institutions for failing to meet transaction reporting requirements.

Until the needed laws are implemented, Colombia remains one of the most important drug money laundering situations in the world. The recently­imposed Geographic Targeting Order in New York City/New Jersey, targeting cash remissions to Colombia in excess of US$750 by licensed money remitters again illustrates the multitude of means by which US drug cash can be returned to Colombia, and underscores the importance which the USG attaches to a Colombian review and targetting of remitters operating in Colombia with or without licenses. Until then, the anti­money laundering regime is largely illusory; on paper, it appears to attach the problem from a regulatory, investigative and prosecutorial perspective but the reality is that there have been few or no actual anti­money laundering enforcement actions undertaken by Colombia during the past year, and none that did not rely almost exclusively on USG assistance.

Colombian financial institutions conduct currency transactions involving drug trafficking proceeds which include significant amounts of US currency. However, the Colombian economy is also affected by the substantial trade for dollars by Colombian businessmen seeking to buy goods in the US, the Colon Free Zone and other markets.

Colombia has withdrawn from the Caribbean Financial Action Task Force and has applied for observer status.

Cyprus (High) Despite passage of new laws, the priority for Cyprus is being raised from Medium­High to High, reflecting the US belief that Cyprus is a high­risk area for money laundering. The money laundering of most concern is not related primarily to narcotics; narcotics­related money laundering has been a crime in Cyprus since 1992. Once only a locale where Middle East groups of various persuasions met and sometimes exchanged funds, Cyprus today is receiver and conduit for funds generated by an array of crimes, in particular funds controlled by Russian "mafiya" and other criminals. Cyprus has also been a conduit for moving funds in violation of United Nations sanctions.

Concerns about the demonstrated vulnerability of the Cypriot financial system are heightened by an appreciation of the systems size and diversity, and the well­established linkages between its banks and those in mainland Europe.

Cyprus is an important regional financial center and has a growing offshore banking sector comprised of over 25 banks. Offshore banks may not accept foreign currency cash deposits unless accompanied by the appropriate customs declaration form. Like domestic banks, offshore banks are required to notify the central bank of any cash deposits over usd 10,000 in local or foreign currencies. However, Central Bank controls over the offshores is not considered to be a stringent as that over the domestic banking sector.

Russian "mafia" figures have been linked to business activity in Cyprus. For example, in 1996, there were more than 22,000 offshore companies registered in Cyprus; the majority of these are owned by East Europeans, with 2,000 being registered by Russians. Reports surface periodically in the local press about the companies being used to launder money which is plausible, given that ownership of offshore companies can remain anonymous, with the name of the true owner being known only to the Central Bank.

In April, the Parliament enacted implementing legislation related to Cyprus' obligations under the Council of Europe Convention (on laundering, search, seizure and confiscation of the proceeds from crime), which had been ratified last year. The new law ("the Prevention and Suppression of Money Laundering Activities Law of 1996") consolidates into one statute all the provisions of the (1988) UN Convention and the Council of Europe Convention. The new law, based on British law and EU directives, in effect implements the Council of Europe Convention. The Act gives authorities the power to confiscate or freeze proceeds from a broadened category of serious crime, now defined to include inter alia murder, arms smuggling, sale of stolen goods and blackmail, as well as narcotics trafficking.

The law specifies actions which banks are now obliged to take to deter money laundering, including know your customer policies, maintenance of transaction records, and training employees in detecting suspicious transactions which must be reported. The Act also provides for the formation of a special unit against money laundering whose function will be to gather, classify and evaluate information relevant to money laundering offenses, and to conduct investigations if warranted. This unit will receive suspicious transaction reports from the financial community.

The new law criminalizing money laundering applies to drug­related money laundering; premeditated murder; illicit importation, exportation, purchasing, selling, disposition, possession, transfer and trafficking of arms and munitions; offenses with respect to importation, exportation, purchasing, selling, disposition, possession, transfer of stolen objects, pieces of art, of antiquities, of tokens of cultural heritage; the abduction of a minor or of a mentally retarded person or of any other person against his will for any unlawful purpose; the detachment of money or of property of any other kind by use or threat of use of force or other illicit act; and any other offense or allegation of an offense subject to imprisonment for a period exceeding the twenty­four months and which the Council of Ministers may prescribe by regulations as a predicate offense.

The new legislation also empowers the Central Bank and other supervisory authorities to issue "guidance notes" (regulations) to persons/organizations within their supervisory responsibility and report non­compliance with the provisions of the law to the attorney general for action. All circulars and recommendations that have been or will be issued by the central bank of Cyprus are now legally binding on banks.

In addition to this new money laundering legislation, there are other aspects of Cypriot law which affect money launderers. Restrictions on foreign ownership of property and controls on currency and bullion transiting Cyprus are among the measures which discourage efforts to launder money through the domestic economy. For the time being, Cyprus law strictly controls the amount of money that residents and non­residents can take out of the country each year, although liberalization of the financial system is strongly supported by the government and is likely to occur in 1997. The Central Bank of Cyprus approves foreign currency accounts by authorized dealers and monetary activities in general. Cyprus customs and excise department closely monitors more stringent currency declaration requirements for transiting passengers.

Reporting requirements are being drafted by the central bank in line with the new law against money laundering. Change is not measurable at this time, as regulations are still being drafted to implement the new money laundering regime. The Association of Banks will be included in the "policy advisory authority" that will be established as part of the new money laundering legislation.

The new anti­money laundering law represents one of the first steps taken by a government in the Middle East. It remains to be seen how strongly Cyprus means to implement the law, and whether it has the determination to set up the financial intelligence unit called for in the law.

Germany (High) Germany is an important regional financial center and is increasingly becoming a venue for money laundering. Money laundering is the product of such activities as smuggling, gambling, and the sex­slave traffic as well as narcotics. It is unclear how large the relative importance of narcotics related money laundering is compared with other illegal activities. Germany is not considered a tax haven or offshore banking center. Money laundering occurs primarily in the banking system. Both local and international organizations are involved.

During 1996, German authorities observed a new trend consisting of trans­border courier movements of large sums of cash, usually US dollars to be exchanged for Deutsche marks and then deposited into German bank accounts. (Large trans­border cash movements are not subject to any reporting requirements under German law). The authorities detected 827 significant cash transports totalling some dm 78.5 million between October 1995 and September 1996. The majority of these transports involved Russian, Polish, and former Soviet Union nationals arriving at major German airports. Courier arrivals at the German­Polish border also accounted for many of these cash movements. The German police also noted a possible shift by Turkish drug organizations in Germany toward increased movements of cash drug proceeds by couriers back to Turkey rather than use of transfers via Turkish banks in Germany as was previously the norm.

Money laundering is a criminal offense. Banks are required to maintain records necessary to reconstruct activities of more than dm 20,000 (US$ 13,300). Banks are legally obligated to report suspicious transactions to state authorities. bankers are protected by law with respect to their cooperation with law enforcement agencies. Germany cooperates with the United States and other countries on investigations into narcotics­related financial crimes.

There are no controls on the amount of currency brought into or taken out of Germany. German authorities view this lack of currency import/export reporting requirements as a significant loophole in the law and a major impediment to effective investigation.

The current money laundering law is being amended so as to cover non­banking institutions. The German government expects to ratify this amendment in 1997.

According to Germany's Customs Criminal Investigations Office, German public prosecutors opened 376 preliminary criminal investigations in 1996 concerning suspicious transactions totalling dm 1 billion. Eighty percent of these leads came from reports that German financial institutions reported of suspicious or large (i.e., dm 20,000 or more) transactions. The four chief locations for these transactions were Stuttgart, Dresden, Hannover, and Magdeburg (in descending order). Public prosecutors could establish immediate links to criminal activity in 25 of the 376 cases. Most of these 25 cases were drug­related.

Germany has not established a separate system for identifying, tracing, freezing, seizing or forfeiting narcotics­related assets. Furthermore, no laws exist that would allow Germany to share seized narcotics assets with other countries. The German authorities do not envisage a change in this policy.

All assets used as instruments of crime (e.g., vehicles, bank accounts, and legitimate businesses) are liable to seizure. The proceeds from narcotics­related seizures and forfeitures go to the state governments. forfeitures are difficult in Germany, because the burden of proof is on the prosecutor. The law only allows for criminal forfeiture.

The German government effectively enforces existing drug­related asset seizure and forfeiture law. Government agencies responsible for enforcement include the state prosecuting attorney, the police, and customs authorities. The police have adequate resources to conduct seizures. The exact value of all assets seized by the state governments is unknown, but dm 10 million (US$ 6.6) were seized in connection with money laundering offenses in 1995 compared with dm 20 million (US$ 13.3) in 1994 (figures for 1996 are not yet available).

Hong Kong (High) Hong Kong's primary role in the international drug trade is that of a money laundering base. This activity occurs through traditional banking networks as well as non­bank facilities such as remittance centers and money changers. In addition, criminal elements both within and outside Hong Kong use the territory's well­developed financial networks to finance and arrange shipments of narcotics originating in southeast Asia to the United States and other markets. While not a signatory, Hong Kong continues its vigorous and generally effective efforts to meet the goals and objectives of the 1988 UN Convention. Cooperation between the United States and Hong Kong on matters reLating to drug trafficking and money laundering has been excellent. On December 20, the U.S. and Hong Kong signed an agreement for the surrender of fugitive offenders (extradition agreement) and the two sides have initialled a mutual legal assistance agreement that will take the place of the existing bilateral narcotics agreement when the latter expires on June 30, 1997.

The government recognizes that, as one of the world's most developed financial centers with extensive international networks, Hong Kong's financial system attracts money launderers. Hong Kong's proximity to major drug­producing countries in Asia add to the attraction. Low taxation rates, simple procedures for company registration, and the absence of controls on the amount of money that can enter and leave the territory all add to Hong Kong's attractiveness to money launderers. There is no credible evidence that local trafficking organizations exert control over Hong Kong financial institutions. Money laundering is not limited to narcotics­related activities, but also involves the proceeds from other criminal activities.

The government has sought to use the investigation, confiscation, and restraint provisions embodied in the drug trafficking (recovery of proceeds) ordinance to deprive traffickers of their profits. In 1996, assets valued at over US$1 million were confiscated and assets valued at over US$12 million were restrained pending additional investigation. Drug traffickers continue to use Hong Kong's largely unregulated non­banking sector (remittance centers and money changers) to launder drug proceeds. The Hong Kong government is in the process of establishing guidelines for these non­bank entities that will require them to establish suitable policies to discourage money laundering activity, including proper customer identification, record keeping, and procedures for reporting suspicious transactions.

Hong Kong's position as one of Asia's major financial and commercial centers results in individuals inside the territory playing a role in the financing of the international heroin trade. Although Hong Kong has long been a center for transshipment of both legitimate trade and contraband originating in China, local law enforcement officials assert that most heroin shipments financed by Hong Kong criminal elements or others using the territory's banking networks do not transit Hong Kong. There are indications that the proliferation of transit routes in East and Southeast Asia are reducing the use of Hong Kong as a drug transit point.

In November, Part IV­A of the Drug Trafficking Recovery of Proceeds Ordinance came into operation, empowering the Hong Kong Police and Customs and Excise Service to detain property which is being imported and exported and has been shown to be the proceeds of drug trafficking.

All bilateral narcotics agreements will lapse on June 30, 1997 on the eve of Hong Kong's reversion to Chinese sovereignty. To avoid a lapse in its counternarcotics cooperation, Hong Kong is currently negotiating a network of bilateral mutual legal assistance agreements which will continue beyond the transition and incorporate the components of existing bilateral narcotics agreements. The U.S.­Hong Kong mutual legal assistance agreement has not been signed and must ultimately be approved by the Sino­British Joint Liaison Group (JLG); once JLG approval has been obtained, the agreement will take effect as soon as the implementing legislation for mutual legal assistance agreements has been enacted by Hong Kong's legislature and the agreement has been approved by the U.S. Senate. Similar agreements with other countries, including Australia, also await JLG approval and enactment of Hong Kong's implementing legislation.

On December 20, the U.S. and Hong Kong signed an agreement for the surrender of fugitive offenders (extradition agreement), which will remain in force after the 1997 reversion to Chinese sovereignty. The agreement establishes important procedural principles and provides for the surrender of fugitive offenders, including those involved in narcotics trafficking. The U.S.­Hong Kong agreement marks the sixth such agreement Hong Kong has signed in this important area of cooperation against international crime; the other five were signed with the Netherlands, Canada, Australia, Malaysia, and the Philippines. The U.S.­Hong Kong extradition agreement will come into force after ratification by the U.S. Senate and following the enactment in Hong Kong of localized legislation on the surrender of fugitive offenders. This enabling legislation, the fugitive offenders bill, was introduced into Hong Kong's legislative council in December.

The United States government continues to stress joint investigations with Hong Kong law enforcement officials to develop prosecutable cases either in Hong Kong or the United States against the major Hong Kong­based traffickers. These traffickers are responsible for financing and brokering multi­hundred kilogram shipments of heroin, methamphetamine, and marijuana not only to the United States, but to Southeast Asian and European countries as well.

Hong Kong authorities are studying possible avenues for addressing other weak spots in their counternarcotics legislation, such as the absence of effective controls on non­bank remittance centers and money changers that U.S. law enforcement authorities believe are utilized by criminal elements to launder the proceeds from narcotics trafficking. Hong Kong continues to play an active role in the Financial Action Task Force (FATF) and in the FATF Asian task force.

Hong Kong government authorities recognize that the territory's reputation as a financial center depends, in part, on its willingness to take action against money laundering activities. Money laundering is a criminal offense under both the Drug Trafficking (Recovery of Proceeds) Ordinance (DTROP) and the Organized and Serious Crimes Ordinance (OSCO). The DTROP was amended in 1995 to bring its provisions for tracing, restraining, and confiscating proceeds derived from drug trafficking into line with the 1988 UN convention. Hong Kong laws do not provide for civil forfeiture.

Reporting of serious financial transactions to the joint financial intelligence unit (a joint police and customs and excise department unit) is an explicit legal obligation of financial institutions under the ordinances. No mandatory reporting requirements exist for deposits over a specific amount. Rather, guidelines issued by the Hong Kong monetary authority require financial institutions to observe specific standards and procedures for record­keeping, customer identification, and to pay special attention to all complex, unusually large transactions. Banking records must be kept for six years; those pertaining to ongoing investigations or that have been subject to disclosure are required to be retained until the pertinent case is closed. Hong Kong has successfully adopted most of the 40 financial action task force recommendations for combatting money laundering. In 1996, assets valued at over usd 1 million were confiscated and assets valued at over usd 12 million were restrained pending additional investigation. In addition, tighter scrutiny of suspicious transactions resulted in a total of 3,718 reports being filed by banking authorities in the first eleven months of 1996 ­­ a 107 percent increase over the number of reports filed in 1995.

There is growing anecdotal evidence that tighter scrutiny of funds flowing through the banking system is encouraging many traffickers to turn to non­bank institutions ­­ such as remittance centers and money changers ­­ to launder illicit proceeds. Hong Kong currently does not regulate the operations of these non­bank entities which, in addition to being less vulnerable to outside scrutiny, are often less expensive than regular banks. To discourage the use of these institutions by criminals, Hong Kong authorities are issuing guidelines for money changers and remittance centers, modeled on those applying to the banking sector, that will: require proper customer identification procedures; improve record­keeping; and establish reporting procedures for suspicious transactions.

Italy. (High) Italy serves as a significant money laundering center for both narcotics and other illicit funds. The Italian banking and non­banking systems are used by local and South American drug traffickers primarily to launder proceeds from heroin and cocaine drug activities.

Italy's 1994 comprehensive money laundering law is fully consistent with the FATF forty recommendations and the European Union money laundering directive. Italy continues to cooperate closely with the U.S. on financial crimes related to narcotics, including major joint operations such as Green Ice and Universal Gold.

Italy has an established system for identifying, tracing, freezing, seizing and forfeiting narcotics related assets. Italy is committed under the council of Europe convention procedures to share such assets with other governments. There are no new laws under consideration. Under existing regulations, businesses used for money laundering can be seized and the government has the authority to forfeit such assets. However, criminals have in some cases used family members to shield assets. Proceeds from seizures go to the Italian treasury. The law also allows for civil forfeiture of assets as a precautionary measure separate from a criminal conviction.

The GOI fully enforces drug­related asset seizure and forfeiture laws. The Guardia di Finanza has the lead and has adequate legal and technical means at its disposal for the task. In 1995, the GOI seized over $1.5 billion in assets from organized crime and narcotics figures. The GOI cooperates fully with the U.S. and other countries and exploits tips from other governments regarding the flow of drug derived assets. Italy is engaged with other governments in negotiations to harmonize asset tracing and seizure efforts and has laws permitting the sharing of seized assets with other countries. Banks, while not actively resisting, have provided surprisingly few reports of suspicious activities to the government. While traffickers have not taken any retaliatory actions, fear is often cited as a reason why banks, especially in the South, have made so few reports to the government.

Throughout 1996, anti­Mafia efforts continued. The Supreme Council of Magistrate nominated Florence prosecutor Pier Luigi Vigna chief anti­Mafia prosecutor. Several components of the Italian intelligence community have been tasked to conduct financial investigations. Finally, Italian agencies are investigating the Mafia's use of the foreign exchange and securities markets as well as the use of cybercurrency in money laundering.

Mexico. (High) Mexico ranks among the top money laundering countries in the Western Hemisphere, along with the United States, Colombia, Panama and Venezuela. Mexico is an important financial center in the region, and, given the primary methods used to move narcotics proceeds in the mid­90's, Mexico's financial system has become the indispensable money laundering center for criminal organizations throughout the Americas. US officials consider Mexico the money laundering haven of choice for initial placement of US currency into the world's financial system.

Mexican officials acknowledge that they have lost the first round against money launderers because the system is permeated by suborned officials. Their goal now is to broaden and define legal sanctions against money laundering.

Several factors combine to create a serious money laundering problem for Mexico, including: the emergence of a closer working relationship between Colombian and Mexican drug cartels; endemic corruption within Mexican political, judicial, and law enforcement systems; inadequately trained law enforcement agents who must enforce criminal and fiscal tax laws regarding money laundering; a lengthy land border shared with the United States which facilitates smuggling currency into Mexico from the U.S.; lax fiscal regulation coupled with resistance by Mexican banks and money exchange houses to new legislation designed to regulate money transactions; and the ready acceptance of US dollars which are shipped in bulk into Mexico.

Moving drug proceeds from the United States into Mexico can be accomplished through relatively simple and direct means. Currently, bulk shipment of US currency is the most popular method. US dollars derived from drug sales are concealed and transported by either courier or cargo, either by land or air, often in the same vehicles used to transport drugs into the United States. There is a currency and monetary instrument report required for cash coming into Mexico, but this regulation is seldom enforced. In Mexico, the financial sector easily and conveniently absorbs the cash. Once placed into the banking system, the drug money can be transferred to virtually any international location. In 1996, Operation Zorro II, led by DEA, illustrated the prominence of bulk currency shipment from the Southern California area into Mexico. Drug cash was collected on the streets of Los Angeles and stashed in safehouses controlled by Mexican traffickers until it was driven across the border in private vehicles with hidden compartments. Seizures of large amounts of US currency in the US and in Mexico confirm this trend. A portion of the money is not placed into the Mexican banking sector; some bulk cash is sent to Colombia and other cash is sent back to the United States.

Mexico's financial institutions are being used for large U.S. dollar cash transactions which are derived from narcotics and non­narcotics proceeds. Money is laundered in both banking and non­banking financial systems. A number of investment firms and legitimate businesses have been implicated in money laundering schemes. Both Mexican and international narcotrafficking organizations use Mexican financial facilities to launder proceeds from cocaine, opiates, and cannabis trafficking in and through Mexico.

Money laundering also occurs on a large scale in the many casas de cambio along the border. Casas de cambio and other businesses with the capacity to wire transfer funds can accept large amounts of cash and send wires out of the country, or deposit it into the business' bank account and then transferring it through several transactions, or convert cash into checks or other negotiable instruments.

Mexican bank drafts are increasingly a financial instrument of choice of money launderers, particularly along the U.S.­Mexico border. U.S. currency is first smuggled into Mexico and then exchanged for Mexican back drafts. The drafts are then transported or mailed into the United States and deposited or exchanged for U.S. cashier's checks.

If deposited into U.S. bank accounts, the laundered funds can be transferred by wire anywhere. Because Mexican bank drafts are not recognized as bearer instruments by the U.S. Treasury, a currency monetary instrument report (CMIR) does not have to be filed when bank drafts are transported across the border. In addition, a currency transaction report (CTR) is not required when bank drafts are deposited in U.S. banks. This makes Mexican bank drafts an excellent vehicle for laundering illegal funds.

Mexican banks use their banking relationships with U.S. banks to clear bank drafts. The clearing bank is usually chosen by the purchaser of the draft, who, unlike the Mexican bank, is not required to have an account at the correspondent U.S. bank. It is estimated that over 500,000 Mexican bank drafts enter the U.S. annually. Analysis of one Arizona bank's activity in clearing bank drafts on behalf of three Mexican banks revealed that the average value of the drafts was US$65,000 and that is was not unusual to clear drafts in the $200,000 ­ $400,000 range.

Money laundering is now a criminal offense in Mexico. The penal reform bill which became law in May, 1996, makes money laundering a criminal, as well as fiscal, offense. Under Article 400 of the penal reform law, sentences of five to fifteen years and fines of 1,000 to 5,000 minimum wage days are applicable. (Note: minimum wage in Mexico City is currently about US$3.50 per day.) Financial institution officers and employees who willfully assist or cooperate in money laundering crimes are subject to the same penalties. Fines and sentences for government officials found guilty of facilitating money laundering shall be increased by half. Both the recently enacted criminal legislation and fiscal regulations apply to all types of money laundering, narcotics­related or otherwise.

The GOM has committed to enhance the new legislation by implementing USG recommendations on cash transaction and suspicious transaction reporting requirements.

Mexico's new federal law against organized crime, passed in November 1996, allows authorities to confiscate all material used in the production or transportation of any illicit item and the proceeds of those violations, and establishes regulations governing the securing of assets subject to confiscation. Article 29­33 of this law sets forth provisions and guidelines for seizing and forfeiting narcotrafficker assets. This new law identifies organized crime by types of criminal activity, but does not include money laundering, which, although considered an organized crime activity, is covered separately under the penal reform law. Legitimate businesses may be seized for laundering money, if the connection to illicit activity can be shown. It remains to be seen whether this law will be applied in a general or limited manner.

The organized crime law requires a hearing where the burden of proof is on the accused to prove that the assets were purchased with legitimate funds or that the money was obtained through legitimate business activities. The law apparently places the burden of proof on the property owner to establish that the property subject to forfeiture is of legitimate origin.

The GOM has provisions for asset sharing between agencies of the government. Mexico's policy with regard to sharing assets with other countries, however, is unclear. Within the GOM, the proceeds are divided up among the agencies which had a part in the seizure, based on a pro­rata share relative to their participation in the investigation. This is similar to the sharing process among federal, state, and local law enforcement agencies in the United States. Due to its lead role in asset forfeiture, the PGR will likely be the principal beneficiary of asset sharing in Mexico. The PGR is charged with the responsibility to trace and seize assets, and has been one of the primary beneficiaries of Mexico's asset seizure policies, as is evidenced by a number of seized aircraft and aviation facilities that have been turned over to them. PGR has adequate police powers to enforce asset seizure laws, but may be lacking in resources to carry out this mission. GOM response to USG requests to trace and seize assets has been good. In 1996, for example, they responded effectively to our request to go after real estate and other assets owned by Juan Garcia Abrego. From October 1, 1995 through September 30, 1996, the GOM seized assets valued at a total of usd 4,638,012.

Fiscal regulations require banks and other financial institutions to know, record, and report the identity of customers engaging in suspicious currency transactions. The same regulations require banks and financial institutions to maintain adequate time records necessary to reconstruct significant transactions through financial institutions. Fiscal regulations for non­financial firms are loose, however, and are only applied should the company be audited. Financial institutions dealing in international currency transactions, on the other hand, are required to complete and maintain records of all such transactions.

Hacienda has drafted proposed suspicious transaction requirement (STR) regulations, which were scheduled to take effect on January 1, 1997. Under the proposed CTR/STR regulations, Mexico will require financial institutions to report suspicious transactions. Banks will also be required to file currency transaction reports (CTR), effective the third quarter of 1997. There are mandatory penalties for failure to report. The new legislation also provides legal protection to financial officers who cooperate with law enforcement personnel. The transportation of currency into Mexico of amounts greater than US$10,000 must be reported to GOM authorities. Airline forms filled out by incoming passengers to Mexico now include an explicit question regarding such transportation.

The Mexican banking community cooperates with GOM efforts to trace and seize bank accounts, but only because of existing legal requirements to do so. There have been no reported retaliatory actions by narcotraffickers to money laundering investigations or asset seizures, although attempts at bribery have been reported.

Mexico signed a mutual legal assistance treaty (MLAT) with the United States in 1987 and a Financial Information Exchange Agreement with the US Treasury in October 1994. Mexico keeps financial investigation case files which are made available to USG law enforcement agencies through the MLAT.

The GOM Secretariat of Treasury's (Hacienda) money laundering section conducted 68 money laundering audits in 1996. As a result of these audits, it completed twenty­one money laundering investigations involving 82 subjects, whom they referred to the Attorney General's office (PGR) for prosecution. The PGR, however, has yet to report the status of the judicial progress of these investigations. Hacienda provided testimony to U.S. courts in two money laundering cases in 1996. During 1996, Hacienda's money laundering division provided referral information to the USG on 26 money laundering cases in Mexico. Nine of these cases were concluded in 1996. In 1996, Hacienda conducted 40 joint investigations with the USG, plus 97 GOM unilateral investigations, resulting in 13 convictions. The Secretariat of Treasury's money laundering directorate has cooperated with USCS and IRS in the investigation of financial crimes related to narcotics. Major investigations conducted during 1996 include the following: in May, testimony and financial records provided by Hacienda resulted in the conviction in the United States of five persons for money laundering; more than US$800,000 in assets were seized.

During 1996, the GOM also worked closely with the US Postal Service. The Mexico Postal Service, in cooperation with FinCEN, is reviewing and taking action on specific items reLating to the theft and misuse of US postal money orders. The US Postal Service will work with its Mexican counterpart to establish mechanisms to validate data and document exchange to detect and correct irregular situations in the transporting and cashing of international postal money orders.

In addition to these cases, the GOM has seized large bulk shipments of cash dollars, indicating a new alternative to more traditional methods of moving funds through the laundering process, such as wire transfers. In July, the Mexican Federal Judicial Police (MFJP) based in Torreon, Coahuila, seized US$1,892,200 in two canvas money bags from two couriers who were waiting to board an airplane at the Torreon airport. The suspects informed police that they were employed by Probursa, a Mexican financial institution, to transport US$400,000 contained in two sealed money bags from Torreon to Mazatlan, Sinaloa, and claimed no knowledge of the additional US$1,429,200. Based on legitimate documentation, Federal agents returned the US$400,000 to Probursa, but initiated forfeiture proceedings for the remainder.

The Netherlands (High) The Netherlands is a major international financial center and, as such, offers opportunities for laundering funds generated from a variety of illicit or fraudulent activities, including narcotics trafficking. Money laundering is done through the banking system, money exchange houses, casinos, credit card companies, and insurance and securities firms. Money laundered in the Netherlands is considered most likely to be owned by major drug cartels and international organized crime. Illicit activities involving money laundering are often related to the sale of heroin, cocaine or cannabis. Some of the money laundered is probably locally owned and derived especially from the illegal production and sale of cannabis products or designer drugs like mdma (XTC). A considerable portion of the illicit money laundered in the Netherlands is believed to have been generated through activities involving fraud.

The Dutch government has taken steps inspired by Financial Action Task Force (FATF) initiatives, including financial transaction reporting requirements, against money laundering through the banking system, money changing operations, casinos and other operations involving large amounts of money. Financial exchange houses (money exchanges) have been regulated since January 1995. In 1996, commercial service rendering organizations, e.g., accountants, lawyers, and notaries, agreed to establish money laundering reporting requirements within their professions. Most recently, proposals have been made to amend money laundering legislation to also include the Netherlands central bank (NB) in compulsory suspect transaction reporting requirements.

Dutch financial institutions normally deal with significant amounts of US currency deriving from legitimate business operations. Some illicit currency transactions may well involve profits in dollars from illegal drug sales in Europe or elsewhere. While there is no evidence of any U.S.­earned drug proceeds being laundered in the Netherlands, it cannot be ruled out.

Encouraging, facilitating, or engaging in money laundering, regardless of the origin of the funds involved, is not a separate criminal offense. It is currently dealt with as a fencing offense under the Dutch penal code. This means that, in arresting and prosecuting money launderers, law enforcers first have to prove the underlying offense (drug trafficking, burglary), before being able to address the offense of money laundering. This poses a real problem when criminals (in particular from Russia) launder their money through large real estate transactions, or when criminals are arrested for laundering money only. Dutch money laundering prosecutors strongly advocate including money laundering in the economic offenses act (wet economische delicten), which would make it easier to prosecute criminals because of the reversed burden of proof dictated by the act.

Money laundering legislation is in compliance with the EU money laundering directive and FATF recommendations. The Dutch are members of both EU and FATF.

Dutch money laundering legislation targets transactions over 25,000 Dutch guilders or the foreign equivalent (one dollar equals about 1.70 guilders). Since February 1, 1994, all financial institutions, including money exchanges, must report transactions over 25,000 guilders or any transactions under that amount which appear suspicious. In a further tightening of legislation in 1995, the Dutch government put cambios (bureaux de change/money exchanges) under the jurisdiction of Dutch banking legislation. Cambios are now required to obtain an operations license from the Netherlands central bank. Proposals have also recently been made to include the Netherlands central bank in compulsory suspect transaction reporting requirements.

Separate legislation, which came into effect in February 1994, has made it compulsory to check the identification documents of customers more frequently and for more types of transactions. Financial services can be provided only if the client's identity is established at the time or identity has been established previously. A distinction is made between situations where identification is compulsory (when a single transaction or a series of transactions exceed 25,000 guilders) and those situations in which identification is not compulsory.

Identification may be demanded if the transaction is considered unusual for some reason. A refusal to show identification or identification which makes the transaction appear unusual or suspect is reported to the unusual transactions disclosure office (MOT). Information provided by a financial institution cannot be used against it, and there are protections for the financial institution against civil lawsuits as a result of the disclosure. The MOT is a special office operating independently from law enforcement and judicial authorities but under the jurisdiction of the Ministry of Justice.

Information is passed on to the financial police desk (FINPOL) of the Centrale Recherche Informatiedienst (Dutch national criminal intelligence service) only if the disclosure office believes that its own investigation has revealed a case of money laundering or an indictable offense.

The justice ministry recently reported on the activities of the money laundering disclosure office (MOT), from its inception in 1995 and the first half of 1996. Total suspect transactions reported to the MOT (mostly from banks and money exchange offices) have grown to 16,125 in 1995, with the number of reports to the MOT during the first half of 1996 at 6,863. Despite the impressive number of suspect transactions reported for MOT screening, only a relatively small portion (14 percent or 2,218 in 1995) have provided enough indication for follow­up investigations by the Dutch financial police desk (FINPOL). An even smaller share (0.5 percent) finally led to arrests and prosecution. Most of the "unusual" financial transactions were made by Dutch, Belgian, and German citizens, although there has been an alarming increase in transactions by individuals from the former soviet union.

The Dutch government does not have controls on the amount of money which can be brought into or leave the country in bulk. The problem of international transportation of illegal currency and monetary instruments is dealt with in the money laundering guidelines for banking and securities transactions.

In 1995, the Dutch government put money exchange offices under the jurisdiction of Dutch banking legislation. In 1996, commercial service rendering organizations (accountants, lawyers, etc.) also established money laundering reporting requirements within their professions.

Nigeria. (High) The size of Nigeria's population, land area and economy makes it a powerful force in West Africa. Its position as a major trans­shipment point for international narcotics traffic, and the largest transit country in Africa, coupled with rampant corruption in government agencies including law enforcement, customs and immigration, has led to an increase in financial crimes of all types, including bank fraud, advance fee fraud, and money laundering. Financial fraud has had a devastating effect on Nigeria's banking and financial sector and the economy as a whole.

Attempts to restructure the banking sector in Nigeria and impose stricter regulation have led to some improvements in preventing money laundering through the banking system. The GON has encouraged the monitoring of large cash transactions, increased transparency in financial arrangements and the tracking and reporting of suspicious financial activities.

As a supplement to the money laundering decree passed in 1995 the central bank of Nigeria published guidance notes for banks on money laundering. Actual enforcement of improved control mechanisms remains inconsistent and records keeping is often lax.

Despite these efforts, illegal financial activities continue unabated. Nigerian money laundering organizations have quickly adapted to increased monitoring of financial transactions and have found new ways to avoid detection. Some have altered and expanded their operations to include businesses in neighboring countries which act as fronts. The large sums involved in financial criminal activity in Nigeria have resulted in a situation where criminals are better funded than law enforcement agencies.

Money laundering is a criminal offense in Nigeria. banks and financial institutions are required to report financial transactions of naira 500,000 (approximately US$ 6,500) or more and are encouraged to report suspicious financial activity. The NDLEA is empowered to stop transactions on the accounts of suspected money launderers. Banks are required to make transaction records available for review by NDLEA officials. Over the past two years, the GON has taken steps to prosecute suspected money launderers, including the establishment of tribunals to try cases involving financial fraud and narcotics trafficking. No convictions on money laundering charges have been reported.

The money laundering decree of 1995 provides for the seizure and forfeiture of drug­related assets. Several businesses belonging to suspected narcotics traffickers and money launderers have been seized. Some properties remain in forfeiture, others have been conditionally returned to their owners or management. The GON record for enforcing legislation permitting asset seizure and forfeiture is mixed. While GON policy supports enforcement of the money laundering decree permitting asset seizure, enforcement mechanisms are weak and hindered by corruption, bureaucracy and an overloaded judicial system. Enforcement agencies and prosecutors are underfunded and lack the necessary training to fully carry out legislation. attempts at enforcement are further hindered by the lack of cooperation between law enforcement and other government agencies.

Panama. (High) The money laundering problem in Panama has been exacerbated by weak controls on cash and commodity imports/exports through the Colon Free Zone; weak incorporation regulations; and a dollar­based economy. The current administration and the banking community are aware of the potentially destructive impact of narcotics trafficking and narcotics­related money laundering on their country's political and economic stability, and has taken a number of steps to combat the problem.

Panama passed new money laundering legislation in November of 1995, amending decree law 41 of 1990. New regulations implemented in 1996 were decree 234 and accord 2­96. Both of the new regulations will implement existing law 46 which was established in November 1995. The new laws require companies other than banks to report transactions over US$10,000 to the Financial Analysis Unit (FAU); requires Colon Free Zone businesses to report individual transactions to the CFZ directorate and send summary lists to the FAU as well.

The FAU became fully operational in July 1996 and has begun analyzing suspicious transactions. The GOP's financial investigative unit, under the PTJ, will be fully operational in early 1997. These two institutions will better equip the public prosecutor's office in criminal investigations and prosecutions.

The Panamanian Banking Association recommended in August, 1996, that Panama accede to the Basel agreement and that Article 65 of the banking law (Cabinet Decree 238 of 1970) be changed to give the banking commission the power to inspect accounts. GOP officials have pledged to propose legislation in 1997, which would effectively nullify Article 65 of the banking law and create total transparency between the banking community and GOP regulatory agencies. Currently, bankers sit as members of the Commission which oversees their banks.

However, the exclusive focus on drug­related financial crime is seen as limiting Panama's ability to prosecute the newer forms of money laundering, especially where the actual drug transaction occurred in another country. Money laundering crimes continue to be tied to the "drug nexus" and there is not legislation currently on the assembly's calendar that would affect that prosecution requirement.

Money laundering in Panama is quite diversified. In addition to cash transactions through banks and contraband smuggling, money launderers are investing drug and other dollars in legitimate businesses, particularly construction. Much of the money laundering in Panama is third hand, after being passed through banks in Panama and the U.S. The Colon Free Zone (CFZ) is still a significant money laundering center. Some money laundering techniques involve the use of presigned and prestamped blank invoices made out to fictitious companies, and fraudulent invoices over/under representing goods shipped. Both methods are designed to cover money transfers. In addition to cash deposits being placed into CFZ businesses, traffickers and smugglers are making large deposits of third­party checks drawn on US banks, where cash deposits have accumulated through the use of various structuring techniques. Many of these checks have been transported from Colombia to Panama, and are intended to give a legitimate "cover" to transactions.

In 1996, the GOP and USG collaborated closely on a major money laundering investigation involving Colon Free Zone merchants Israel Murdoch and Alberto Laila. The investigation resulted in convictions in both the U.S. and Panama. The GOP and USG also collaborated on the Castrillon Henao case, involving drug smuggling and money laundering, resulting in seizures of properties and bank accounts. The GOP also cooperated with the Canadian government in another major money laundering case in the Colon free zone. This investigation resulted in the arrests of four significant money launderers and the closure of five businesses. The case came to trial in 1996, and a verdict is expected in early 1997.

The US and GOP worked together to establish the FAU. The USG procured hardware and software, installed the equipment, and provided database training. The USG will provide additional technical assistance to aid the analysts in collecting and analyzing the financial, law enforcement and public information obtained from various sources. The USG participated in an anti­money laundering conference in December, jointly sponsored by the Panama Bankers Association and the FAU, which helped bridge the communications gap between the financial community and FAU.

Russia. (High) Continued growth of economic crimes in the financial sector, inefficient tax and government enforcement mechanisms, and the prevalence of capital flight suggest significant money laundering activity that warrants immediate remedial action by Russian authorities. Prime Minister Viktor Chernomyrdin stated that Russia's illegal or semi­legal economy accounts for between 20­50 percent of total economic activity. Interior Minister Anatoliy Kulikov estimates that up to $300 billion has been smuggled out of Russian in the last five years. This shadow economy is a breeding ground for corruption, money laundering, a source for further criminality, criminals and organized crime. Therefore, Russia continues to merit a "high" rating.

Conversion of illegally derived proceeds to legal assets typically stems from crime of domestic origin rather than foreign­ capital controls, perceived fragility of the banking sector and political instability suggest that Russia is a relatively risky turntable for international money laundering operations.

Evidence of money laundering in Russia is derived from indirect indicators: financial crimes, off­shore operations, capital flight abroad, and criminal influence in bank operations. According to one Russian law enforcement official, the number of economic ("white collar) crimes in the financial sector increased to an estimated 8,000 in the first half of 1996, compared to 13,900 for the whole of 1995. These crimes include fraud, securities forgery, illegal trading operations, and violations of currency controls. Criminal elements reportedly continue to play a role in commercial enterprises, including the ownership or control of banks. A Russian law enforcement official once estimated that at one time 550 of Russia's nearly 3,000 banks were controlled by organized crime. Banks, foreign exchange houses, and other financial services institutions may be involved in money laundering. The implications of such activity go beyond money laundering. They can undermine the strength and stability of Russia's financial system by contributing to the widespread perception that some banks are untrustworthy, depriving the financial system and industry of resources and investment.

Offshore business activity by Russians has been considerable, most notably the offshore activity in Cyprus, with which Russia has an advantageous bilateral tax treaty. In recent years 3,000 offshore companies have been established by Russians in Cyprus, according to one report. Finally, the flight of capital offshore continues. According to recent balance of payments statistics, in the first half of 1996 nearly usd 6 billion was extended by Russian entities as "loans or credits" abroad, which could be largely unregistered capital flight.

Russian government authorities are concerned with the development of money laundering and are taking actions to address the problem. Specifically in the banking sector, the Central Bank of Russia (CBR) has tightened its policy on issuing new licenses and is closely monitoring existing banks. In the early 1990's banking licenses were issued liberally, with low capital requirements. The CBR is much more strict in issuing licenses, examining the background of the owners and managers, and has substantially increased capital requirements. Surveillance of existing banks also has become more rigorous. In recent years, the CBR has revoked the licenses of 885 banks, 200 of which in the first ten months of 1996, reducing the number of banks to 2,053.

Russian officials have worked with FATF and U.S. government agencies to put into place more effective regulations and procedures to combat money laundering. A new criminal code includes specific sanctions for money laundering. The government has submitted a comprehensive draft law on money laundering to the Russian state Duma. The draft legislation which has been positively reviewed by FATF would provide a legal framework to combat money laundering in accordance with international standards. The bill contains record keeping and customer identification as well as suspicious transaction reporting requirements. Still, the bill has not moved quickly through the legislative process, and it appears unlikely to become law before mid­1997.

Singapore (High) Singapore is an important regional financial center. It is also a significant money laundering center, as was borne out by the authorities' seizure of US$20 million in just one case in 1996. Singapore is not viewed as a tax haven but its financial institutions draw considerable capital from the region. Bank secrecy laws make information sharing difficult, but not insurmountable, under Singapore's confiscation of benefits act. USG officials believe significant laundering occurs both in the banking system and in the non­bank financial system of exchange houses (essentially an underground banking system). Penalties for money laundering are onerous, including seizure of the account.

Singapore is not a signatory to the U.N. convention, but it is a member of FATF. Narcotics­associated money laundering is a criminal offense, in conformity with the U.N. Convention. Bankers can be held personally liable in money laundering cases. Under the Drug Trafficking (confiscation of benefits) Act of 1992, banks must report suspicious transactions. Banks must positively identify customers engaging in large currency transactions. There are no controls or reporting requirements on amounts of currency that can be brought into or out of Singapore. Banks maintain adequate records to respond quickly to GOS inquiries in narcotics­related cases. In 1996, GOS brought less­regulated exchange houses under more control through amending the Money Changers and Remitters Act, which calls for these organizations to keep better records and increases the penalties for wrongdoing.

Singapore has internal procedures for identifying, tracing, freezing, seizing and forfeiting narcotics­related assets. The usg worked closely with GOS counterparts in identifying several major accounts which the GOS froze in August 1994, leading to the seizure of US$20 million in 1996. Conveyances, bank accounts, and businesses can be seized under the law, and the proceeds go to the government. The USG knows of no loopholes to shield assets, although the law does protect the assets of innocent third parties.

Singapore's counter­narcotics bureau is responsible for tracing and seizing assets, with the assistance of the commercial affairs division of the ministry of finance. Limited information sharing in money laundering cases is available under the 1992 legislation; however, enabling legislation requires that the GOS conclude an MOU or MLAT with foreign governments in order to gain access to such information. The GOS is willing to enter into such an agreement with the USG; we have provided a draft designation agreement and hope to complete negotiations in 1997, the first stage of which is scheduled for late March/early April.

Switzerland (High) In June 1996, the federal government presented a third package of measures which would extend the money laundering regulations to non­banking financial institutions and establish an obligation to report suspicious transactions. Under these measures the federal government would decide within five days after suspicious transactions have been reported to it if the financial institution can release the frozen assets or not. The Parliament will probably consider these measures in the spring of 1997.

One of the world's leading financial centers, Switzerland's long­established laws respecting bank secrecy made its banking system a significant target for money­laundering operations, not limited to drug trafficking proceeds. Concern about this phenomenon spurred the Swiss government to sponsor legislation designed to curb any such abuses.

Money laundering in Switzerland derives from all three major drugs: cocaine, heroin, and cannabis. While Switzerland serves as a transit point for money, funds are also converted here. The major traffickers themselves are generally not present in Switzerland during these transactions. Switzerland is in fact more important as a tax haven than as a money­laundering site, since Swiss law does not allow legal assistance if tax evasion is the only alleged crime. Money laundering has involved both banks and non­banking financial institutions. U.S. and Swiss authorities have cooperated closely in many important cases. In excess of US$425 million has been frozen in Swiss banking institutions since 1990 and was identified primarily via narcotics investigations by the U.S. Drug enforcement agency.

Switzerland has signed the 1988 UN convention, and the Swiss government intends to seek ratification in 1998. Switzerland is a member of the FATF and has moved to implement effectively FATF recommendations. Switzerland routinely coordinates and exchanges information on money laundering cases with other countries, primarily with the U.S.

The Swiss penal code has explicitly recognized money laundering as a criminal offense since August 1990. the failure by banks or agents to exercise due diligence in identifying the beneficial owner of assets entrusted to their care also carries criminal sanctions. This first package of measures permitted Switzerland to participate actively in international cooperation, but did not deter money laundering itself. Consequently, the federal Council and the Parliament adopted a second package of measures which came into force on August 1, 1994. These measures criminalize membership in or support of a criminal organization. The change in the law facilitates confiscation of illicitly acquired assets without having to establish an exact linkage between a given asset and a specific crime. In addition, the revised penal code allows bank employees to report suspicious transactions without fear of vioLating the bank secrecy regulations.

In 1995, a federal administrative body was created to lead the fight against organized crime. This office coordinates operations between the cantons, collects and distributes information on organized crime, and develops contacts with similar bodies abroad.

To implement FATF recommendations, the Swiss Banking Commission prepared a "circular letter" which took effect in 1992. Swiss banks are already self­regulated on the issue of customer identification through the "due­diligence" convention of 1987. This "due­diligence" convention requires Swiss bankers to identify the beneficial owner of accounts and provides sanctions against banks which fail to live up to the convention. The convention was renewed in 1992 and strengthened to conform with FATF recommendations and the "circular letter".

Banks are required to maintain records of currency transactions of SFR 100,000 or more. They are not, however, required to report this data to a central authority. The Banking Commission, in consultation with the banks, plans to lower this threshold to SFR 25,000. There are no controls on the amount of currency which can be brought into or out of Switzerland. Non­banking financial institutions, such as exchange houses, are not affected by the due diligence convention or by the circular letter from the federal banking commission, since the commission has no authority over them. They are, however, subject to the penal code, notably the code's prohibition of money laundering and its requirement for due diligence in identifying the beneficial owner of assets.

Switzerland has ratified the Council of Europe convention on money laundering and confiscation of criminal wealth. The convention became effective September 1, 1993. However, nothing in Swiss legislation on asset forfeiture or seizure is specifically linked to narcotics trafficking, but instead focuses on criminal activity in general. The new law which came into force on August 1, 1994, allows confiscation of assets equivalent in value to the wealth derived from criminal activity. Judges have authority to estimate the amount of wealth that a criminal earned illegally. The court can then order confiscation of assets up to the established amount of criminal wealth, without having to prove that these assets derive from crime. If assets are forfeited, the proceeds go to the canton's general budget in which the legal action took place. The measure introduced in August 1994 also shifts the burden of the proof vis­a­vis the acquisition of wealth to the accused.

Cantonal magistrates have the authority to trace, freeze, and eventually confiscate assets. They take action whenever they are convinced that the wealth was derived from criminal activity. Again, there are no special measures for narcotics trafficking. No statistics are available concerning the amount of assets forfeited or seized. The degree of aggressiveness displayed by cantonal authorities varies from canton to canton. Resources dedicated to tracking and seizing assets also vary among the cantons.

Swiss authorities cooperate actively with U.S. Law enforcement agencies in accordance with the mutual legal assistance treaty (MLAT). They insist that formal requirements of legal cooperation be fulfilled; however, cantonal officials will act to freeze funds, based on their own initiative, if probable cause is established through police channels. When that is done, Swiss authorities move quickly and effectively. We share information with Swiss authorities, and they regularly act on such information.

Swiss authorities have broad support for efforts to trace and seize criminal wealth. The banks have accepted these efforts. There is no record of traffickers undertaking retaliatory actions related to money laundering investigations, Swiss government cooperation with the U.S. Government, or seizure of assets.

Thailand (High) Thailand is a prominent regional financial center, which has yet to adopt the safeguards which should have accompanied its accelerated financial expansion ­­ thus increasing its vulnerability to financial crime, not limited to drug­related money laundering.

Rapid economic growth, increased real estate investment and an active stock market coupled with the presence of international financial institutions continue to make Thailand an attractive investment site. Similarly, Thailand­based foreign investment in the region is a consequence of comparatively rapid economic growth and burgeoning investment capital and Thailand's more advanced banking and financial service sectors. An offshore banking facility in Bangkok specifically designed to meet the needs of outside investors in these neighboring countries was created in 1992.

Outside of the official financial system, an extensive informal and less regulated financial system exists, sometimes referred to as an "underground banking system." Large amounts of money from illicit drug trafficking, smuggling of commodities such as oil and arms, and from gambling, prostitution, counterfeiting and other illegal practices have created a situation where, in the opinion of most international experts, money laundering is inevitable and relatively widespread.

Unfortunately, none of the last three governments has been able to enact anti­money laundering legislation. A committee set up under the authority of the Prime Minister's office completed draft legislation in the spring of 1995. This legislation was not introduced in parliament due to the dissolution of the government in may of that year. Following the July 1995 elections, the draft legislation was considered by all relevant agencies and approved by cabinet in principle in 1996. When the last government fell and elections were held this past November (resulting in the formation of another coalition), the draft law was being reviewed by the Council of State. Normally, pending legislation is moved back to square one in the vetting process after the fall of a government and the election of a new coalition. This could happen to the current draft law but senior officials in the new government have said that legislation will be introduced quickly into the new parliament. This promise of continued movement on the draft law was made during the visits of president clinton and director of drug policy mccaffrey in late November. To date we have seen no action on the draft law by the new government.

Since there is an absence of appropriate money laundering legislation and current bank secrecy practices make it nearly impossible for the Royal Thai Government itself to obtain financial information required for narcotics­related financial investigations, little action has been taken to target the financial underpinnings of illegal activities including drug trafficking and other forms of smuggling. The issue is not the government's willingness to share information, so much as the inability under the present legal situation to obtain information.

Thailand has participated in meetings of FATF, consulted with the governments of the United States, Great Britain and Australia and with the United Nations to gain information regarding money laundering laws and control systems. Thailand's current efforts to enact money laundering legislation are, in part, a response to the urgings of the FATF and other foreign countries, including Dublin Group members. Thai leaders are also desirous of becoming a party to the 1988 UN Convention on drugs. Passage of appropriate money laundering legislation will be required to move toward accession to the 1988 UN Convention.

Pending the passage of the money laundering legislation discussed above, the only drug­related law reLating to assets is the 1991 asset seizure law. The draft money laundering legislation will most probably initially criminalize only drug­related money laundering, although Thai officials and members of the drafting committee have indicated that this initial restriction believed necessary to get the legislation passed into law should in the future be relaxed to cover money laundering of funds from any illicit source. The legislation drafting committee has studied a number of different legal models including UN and oas model regulations and has built in bank reporting requirements in the law as well as provisions protecting bankers from consequences of their compliance with the reporting requirements. One area of concern, according to US experts, is the lack of specific language in the draft legislation covering the sharing of information internationally.

An asset seizure law was passed in 1991 and implemented in 1992. Until 1995 progress appeared slow in gaining convictions under the law. In September 1995, Thai authorities completed the first successful prosecutions under the asset seizure and conspiracy statutes. According to Thai officials, the newness of the legislation and the government's desire to present very solid cases accounted for the apparent slowness of implementation leading to these initial successes. Since 1995, the pace of activity under the law has increased.

The property examination committee of the ONCB is the body having primary responsibility for action under the asset seizure law. As of late this year a total of 196 cases involving in excess of 12 million dollars in assets have been brought under the asset seizure law. ONCB property examination committee officials have received good cooperation from banks and other financial institutions in instances where seizure orders have been issued, but absent legislation requiring them to do so banks will not necessarily provide information to law enforcement officials to assist in investigations. Under the asset seizure and conspiracy laws, enforcement officials are not permitted to open investigations or bring charges reLating to assets connected to drug­related crimes committed before the implementation date of the act. As time passes, this limitation will diminish in importance.

Turkey (High) After years of prodding from the international community, especially its fellow members of the Financial Action Task Force, Turkey finally passed a law in November 1996 which criminalizes money laundering and meets minimum FATF standards, including controlled delivery. However, this new law does not become effective until implementing regulations are adopted.

When in force, the new laws would criminalize the laundering of proceeds of a number of serious offenses, including but not limited to arms and drug smuggling, traffic in human organs and terrorist activity. Penalties include multi­year prison sentences and fines in the amount of the criminal proceeds. a significant drop from the original version of the bill, which called for finds up to three times that amount.

To demonstrate its dissatisfaction with Turkey prior to the passage of the new law, the FATF in 1996 invoked its Recommendation 21, which urges other financial centers to take note of a government's failure to adopt needed laws and policies on money laundering. No further action was taken by FATF in 1997, given the passage of the law, but Turkey has been put on notice that FATF could consider further action if the implementing regulations are not adopted.

Turkey is an emerging regional financial center. The Istanbul stock market is relatively large for the region, and the Turkish banking sector is well developed. Although proceeds from smuggling heroin through Turkey are a significant source of illicit funds, money laundering is not primarily related to narcotics proceeds. Illegal crossborder trade ("suitcase trade") of commercial goods is also a major source of funds which are then laundered. Some illicit funds are generally assumed to be laundered through casinos or the construction industry. With the new money laundering legislation, it is expected that money laundering now occuring in the banking system will move to the non­bank financial system of informal currency exchange houses.

United States currency is the currency of choice for international narcotics sales. Currency transactions involving international narcotics trafficking proceeds would therefore include significant amounts of U.S. currency.

The new law requires financial institutions to report suspicious transactions. Banks and other financial institutions are required to know, record, and report the identities of customers engaging in currency transactions over one billion Turkish lira (currently usd ten thousand). Banks and other financial institutions are required to maintain records necessary to reconstruct significant transactions. Turkey has adopted laws that make individual bankers responsible if their institutions launder money. Money laundering controls are applied to non­banking financial institutions.

Financial institutions report suspicious transactions as they occur. Bankers and others are protected by law with respect to their cooperation with law enforcement entities.

International transportation of illegal­source currency and monetary instruments has not been a major focus of the TNP. With the anti­money laundering legislation in place, this should be enforced more vigorously. There are controls on the amount of currency that can be brought into or taken out of the country.

Turkey is still in the process of developing systems for identifying, tracing, freezing, seizing and forfeiting narcotics­ related assets. Major points of the current legislation include: seizure of all assets and properties to the amount of the criminal proceeds, or amount of the criminal fine; and freezing of claims and assets during investigation and trial of money laundering cases.

United Kingdom (High) The continuing vulnerability of British financial institutions is due to Britain's leading role in European finance and the significant international connections of certain British financial institutions. Money laundering includes narcotics proceeds converted in the UK and transited through the country. The Channel Islands and the Isle of Man also have offshore banking facilities and corporate registration businesses which facilitate money laundering.

HM Treasury and other authorities prosecute money laundering vigorously and cooperate extensively with other governments, as do the Channel Islands and Isle of Man governments. Some British Crown territories in Caribbean have enacted stricter anti­money laundering legislation based on the British model, and the Foreign Office has announced plans to encourage more territories to do the same.

On January 1, 1997, the Drug Trafficking Act of 1994 came into effect. The Act enables courts in England and Wales to freeze and confiscate the proceeds of drug trafficking on behalf of 144 other countries and territories.

Venezuela (High) Venezuela continues to be a major drug money laundering center due to its proximity to Colombia as well as to the size and sophistication of its financial markets. Money laundering is closely linked to cocaine trafficking by Colombian organizations but, while the narcotics proceeds are primarily owned by Colombians or other third­country nationals, the money laundering networks are generally run by Venezuelans. Most money laundering occurs through commercial banks, exchange houses, gambling sites, fraudulently invoiced foreign trade, contraband and real estate transactions. Laundering transactions usually involve the exchange of US dollars, in cash or in monetary instruments such as postal money orders) for Colombian pesos or Venezuelan bolivares.

The government enacted the Organic Drug Law in 1993 which was intended to bring Venezuela into compliance with international standards on issues such as drug trafficking, money laundering and chemical control. The law criminalized money laundering linked to drug trafficking, which greatly limits its utility. In 1996, the Congress drafted an organized crime bill which would criminalize money laundering from any illicit activity; passage of this law would greatly facilitate law enforcement actions against money laundering. The Venezuelan Congress is also considering legislation to regulate casinos, and a criminal justice reform bill.

The casinos bill would impose cash transaction reporting requirements on casinos as well as impose regulatory oversight of gambling activities. The organized crime bill which will broaden the criminalization of money laundering to any illicit activity and will introduce conspiracy provisions into Venezuelan criminal law. Both bills will be considered for final approval by Congress early in 1997.

The 1993 The law authorizes the Ministry of Finance to receive and allocate assets as instructed by the National Drug Commission (CONACUID). The government has not made use of the provisions, due to the lack of coordination between the judicial and executive branches over asset disposal.

Regulations to implement the asset seizure provision were approved in June, 1996, and CONACUID was given authority to divide proceeds among police agencies. The U.S. has shared assets with Venezuela.

The 1993 law applies to all financial institutions as well as non­financial business such as real estate brokers. Banks and other financial institutions are required to self­initiate reports on suspicious transactions. The Superintendency of Banks must monitor financial institutions to ensure they develop international control policies and conduct audits to ensure compliance. The law imposes a due diligence principle on directors and officers of financial institutions and prohibits the use of anonymous accounts. Complete identification of account holders is mandatory and records must be maintained for five years, for all account transactions. Financial institutions are prohibited from telling account holders if they are under invetigation, and financial institutions and their employees are protected from civil liability when they report suspicious transactions.

The enactment of the 1993 organic drug law was thought to be a major step toward in compliance with the 1988 UN convention and other international agreements. In practice, few banks or other financial institutions have complied fully with the requirements. Moreover, the Venezuelan criminal justice system has not made effective use of the money laundering statutes of the 1993 organic drug law. In October 1993, the Venezuelan national guard investigated and arrested 35 members of a major money laundering organization ("Sinforoso Caballero") which was laundering millions of U.S. dollars in drug proceeds through money exchange houses located near the Colombian border. However, in December 1993 jurisdiction in the case was removed from the original judge in Caracas, and, after bouncing around the Venezuelan judicial system, ended up back in the State of Tachira where most of the defendants reside. In May 1994, the Tachira judge dismissed the arrest warrants only six working days after having received jurisdiction in the case. This was widely believed to have been a result of judicial corruption, and the GOV immediately appealed the decision. The Venezuelan Supreme Court overturned this decision in December 1994 and reopened the case for prosecution. However, jurisdictional problems continue to hamper prosecution of the case during 1996.

The 1993 organic drug law established procedures for the seizure of assets from narcotraffickers. The law authorizes the ministry of finance to receive the assets and allocate them to government agencies involved in drug prevention, treatment, control and repression, as instructed by CONACUID. However, in practice, the GOV has not made use of these provisions due to the lack of coordination between the judiciary and the executive branch over the disposal of assets. In June 1996, the GOV approved regulations to implement the asset seizure provisions, officially designating CONACUID as the authority responsible to divide proceeds among police agencies. The U.S. has shared assets with the Venezuelan government on a case­specific basis.

The Central Bank of Venezuela is required to design and develop a database on all foreign currency transactions and to provide information on such transactions to the ptj or other law enforcement agencies. The Ministry of Justice and the Office of Notaries are required to maintain computerized databases on real estate transactions and to maintain special vigilance over any cash transactions.

The Ministry of Finance is required to exercise control over trade in precious metals, stones, and jewelry as well as monitor invoicing of export/import transactions and commercial loans that are not considered normal business operations.

Venezuela and the U.S. signed a "Kerry amendment" agreement in November 1990 for the exchange of information on cash transactions in excess of US$10,000. However, the agreement applies only to transactions in foreign currencies (including the U.S. dollar) but does not cover cash transactions in Venezuelan bolivares.

MEDIUM HIGH PRIORITY COUNTRIES & GOVERNMENTS

EASTERN CARIBBEAN REGIONAL SUMMARY

The decline of traditional monoculture economies and the continuing development of "offshore" financial services have enhanced the vulnerability of the Eastern Caribbean to the lure of drug money. The Caribbean has long been regarded as a haven for money laundering operations, which pre­dated the narcotrafficking boom, but developed in parallel to the expansion of drug trafficking and transit. Official estimates suggest that as much as 50 billion dollars of an annual 500 billion dollars in annual world­wide drug profits are laundered through the Caribbean as a whole.

In the Eastern Caribbean, where the phenomenon is newer than elsewhere in the region, few jurisdictions have been able to develop adequate mechanisms for regulation and oversight which would help prevent money laundering in the offshore financial services industry. Many jurisdictions lack strict licensing and supervisory procedures for offshore financial institutions. These shortcomings are often compounded by local law enforcement authorities' lack of resources, expertise, and technical capacity. In addition, laundering techniques are becoming increasingly varied, with growing use of non­bank financial institutions, commercial businesses, and lotteries. All of these factors together have made the Caribbean an attractive place for money launderers and criminal elements to do business. For example, Russian organized crime organizations continued to make inroads in the Caribbean in 1996 by establishing banks to launder money from drug trafficking and other criminal activity. The expansion of cyber­banking in the region also strained the regulatory capabilities of local governments, creating new avenues for laundering of criminal proceeds.

The Heads of Government of the regional organization, CARICOM have issued strong statements calling for enhanced efforts to counter money laundering. In July 1995, CARICOM Prime Ministers agreed on the coordination of money laundering laws. CARICOM member states' central banks have promulgated guidance notes to bankers for money laundering prevention. According to these guidelines, bankers are encouraged to practice due diligence in dealing with clients, to keep good records, and to remain vigilant for suspicious transactions. There were, however, no reports of successful prosecutions for money laundering in any of the eastern Caribbean nations, although some countries instituted proceedings to restrain the assets of accused drug traffickers pending completion of their trials.

In view of these developments, the Caribbean Financial Action Task Force (CFATF) will be conducting a study of regional money laundering methods, trends and patterns and will be considering the revision of its 19 Recommendations, which (with the 40 FATF Recommendations) provide anti­money laundering guidance in the financial/regulatory, legal and law enforcement areas.

As a result of regional meetings in 1990 and 1992, Caribbean Basin states and territories joined to create the Caribbean Financial Action Task Force (CFATF) modeled on the Paris­based FATF. In 1994, a Secretariat was established in Port of Spain, Trinidad to promote anti­money laundering measures in its members and to serve as a coordinator and focal point for donor assistance. Eastern Caribbean countries have begun to implement CFATF/FATF recommendations for strengthening legislation, regulatory mechanisms, and international cooperation reLating to anti­money laundering. All 26 jurisdictions carried out self­assessments in 1994­95, with results presented at the annual regional meeting in 1995. Following the completion of mutual evaluation questionnaires, CFATF mutual evaluations have been scheduled for Barbados, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines in 1997. The Eastern Caribbean Central bank has so far limited itself to reguLating domestic banks, with bank officials maintaining that it lacks the resources to monitor offshore banks. There has been some discussion within the region on expanding the Central Bank's role in reguLating offshore banks, but this would require high­ level political decision and an increase in resources.

Antigua and Barbuda (Medium­High) Antigua, with an active offshore financial services industry and limited regulatory capabilities, has been one of the more vulnerable financial centers in the Caribbean. In 1996, the government took a number of steps to reduce its attractiveness to money launderers, passing sound money laundering prevention legislation, suspending issuance of offshore banking licenses, and raising bank capitalization requirements. Further steps are needed to ensure that the new laws are enforced, but the government has moved to create the institutional capabilities through the establishment in 1996 of a Special Advisor to the Prime Minister on Money Laundering and Counternarcotics. The Special Advisor's office is hiring personnel and looking to establish a financial regulatory unit with enhanced capabilities to vet bank applications and monitor banking activities.

Until the passage in December 1996 of the Money Laundering (Prevention) Act and the accompanying decisions to suspend issuance of licenses, the offshore banking sector in Antigua had been largely unregulated. Strict bank secrecy laws have protected the confidentiality of depositors, except in cases of violation of Antiguan law, which includes drug cases. This loosely regulated environment had led in recent years to a substantial increase in the number of offshore banks registered in Antigua to 42. Several of these banks have links to Russia, generating growing concern about investors and depositors with funds of questionable origin. Antigua's casino industry has likewise provided an opportunity for non­bank money laundering.

Recognizing the potential risks and possibilities of exploitation, the Antiguan Government has now clearly signaled its intention to reduce Antigua's vulnerability and put in place the necessary legislation and personnel to monitor the offshore sector. The passage of the anti­ money laundering law represents a major step, but one which will need to be complemented by a comprehensive effort to implement its provisions. The government has conveyed its desire for international assistance to develop appropriate regulatory institutions, and U.S. officials are reviewing possibilities to assist Antigua with training and equipment.

Antigua's new anti­money laundering legislation criminalizes money laundering beyond drug trafficking and related offenses; imposes customer identification, recordkeeping and reporting requirements on financial institutions; extends the scope of activities of financial institutions beyond banking; protects representatives of financial institutions from civil, criminal and/or administrative liability for complying with disclosure regulations; makes it a criminal offense if the financial institution fails to comply with disclosure requirements; permits assistance to foreign countries in money laundering investigations; requires the Minister of Finance to appoint a supervisory authority; and requires the reporting of outbound currency and other negotiable instruments if the value exceeds $50,000.

To complement its new money­laundering legislation, the Government has promised that it will take further steps to modernize and expand Antigua's criminal code with respect to money laundering and narcotics. The government proposes to complement existing asset seizure laws to allow government to confiscate all proceeds from drug­related offenses, equipment used in such offenses, and funds suspected of being laundered through Antigua. Seized assets would be used to pay for implementation of the national drug and money laundering policy. Government officials are said to be developing a comprehensive conspiracy law, which would shift the burden of proof in the favor of law enforcement.

The impact of the recently passed anti­money laundering legislation will depend on whether the enacted laws are systematically enforced and cases of money laundering are prosecuted. If past experience can be a guide, political will is a factor believed to be inhibiting effective enforcement. Since April 1994, US Department of Justice attorneys have attempted to work with the Antiguan government to enforce a May 1994 criminal forfeiture order for $7.5 million entered by the US District Court in Boston against John E. Fitzgerald, a convicted racketeer and drug money launderer. Instead of enforcing the forfeiture order, the Antiguan government appears to have obtained the funds from Swiss American Bank where the funds were on deposit. The funds were then transferred directly into the national treasury. Repeated requests for explanations and documents have gone unanswered.

(Note: Reports on other East Caribbean governments are found in succeeding sections, according to their rankings.)

ARGENTINA. (Medium High) Most money laundering in Argentina is probably not narcotics­related and money laundering proceeds are probably not controlled primarily by narcotics trafficking organizations. Bribery, contraband, and tax evasion likely generate more funds which are laundered through the financial system. Argentina is neither a tax haven nor an important off­shore banking center.

In September 1996, as part of the administration's policy initiatives, President Menem submitted to the Congress a legislative proposal to criminalize the laundering of proceeds of crime, broadening the scope of the law beyond just narcotics money laundering. The administration has also proposed creation of an interagency committee, chaired by the Ministry of Justice (along the lines of the USG's FinCEN), to gather information on and recommend prosecution of suspected money laundering cases.

Separately, in May 1996, the Central Bank of Argentina instructed financial institutions to report large transactions. The GOA hosted the Summit of the Americas ministerial conference on money laundering in December 1995 in Buenos Aires and, with the USG, co­chaired the money laundering panel at the Summit of the Americas follow­up meeting in Jamaica in May 1996. The GOA also sent participants to the October 1996 American Bankers Association/American Bar Association money laundering enforcement seminar.

Money laundering occurs in both the banking system and in non­bank financial institutions.

Money laundering is a criminal offense when narcotics is involved (decree 1849/90). Under draft money laundering legislation which President Menem sent to the congress on 09/26/96, GOA will punish laundering of assets related to terrorism, trafficking in narcotics, humans, human organs and crimes against public administration. The legislation proposes creation of an interagency money laundering commission under the Minister of Justice. The chair of the commission is appointed by the President. Members include the counter­narcotics secretary, the intelligence secretary, the head of internal security, and representatives of the central bank, the securities commission, the customs service, the internal revenue service, the superintendency of insurance and the public prosecutor. Data are reported to central bank of Argentina on transactions of $10,000 or more. Bankers and others are protected in practice.

While the GOA has conducted a number of money laundering investigations during 1996, we are not aware of any arrests or convictions.

The Argentine banking association has commented extensively about the large fines proposed as part of the draft money laundering legislation, and has objected to some of the discretionary power of the proposed interagency money laundering commission.

Austria (Medium­High) Austria is not considered an important regional financial center, offshore tax haven, or banking center. There is no direct evidence that money laundering related to narcotics trafficking is occurring in Austria. Trade in other contraband is not considered a significant problem. However, there is concern, expressed in both Vienna and Moscow about financial operations of Russian criminals, some of whom are believed to be operating in Austria.

Within the banking system, anonymity exists only for passbook savings accounts. In 1996 Austria abolished anonymous securities accounts. Anonymity of passbook savings accounts remains, but Austria may be forced to abolish such accounts to conform to European Union regulations. However, the utility of such accounts for money laundering is limited. Those accounts are available only to citizens and permanent residents of Austria. Wire transfers from such accounts are not permitted. Each transaction requires a personal appearance at the bank with the passbook, and withdrawals can only be made in cash. For transactions over 200,000 schillings (approximately US$ 20,000) the customer has to be identified unless a permanent business relationship exists.

Bankers must report suspicious transactions. Reporting of suspicious transactions, however, applies only to financial institutions, leaving other sectors, such as real estate, automobile sales, and attorneys' services vulnerable to exploitation by money launderers.

The Banking Act of 1994 prohibited money laundering, and money laundering was added to the Austrian penal code. The act requires identification of customers without a permanent business relationship with the bank for transactions over 200,000 schillings (approximately US$ 20,000). Banking records must be maintained for at least five years after the termination of the business relationship with the customer.

Financial institutions are required to report transactions to the Austrian authorities on the basis of a well­founded suspicion, or upon request by the authorities. Bankers are not liable for damage claims resulting from delays in completing suspicious transactions. Individual bankers are held legally responsible if their institutions launder money.

Austria cooperates with U.S. authorities and other governments in investigating financial crimes related to narcotics. In the first half of 1996, 13.6 million schillings (about US$ 1.3 million) were frozen for suspected money laundering. No statistics on number of arrests are available.

Austrian financial institutions showed little resistance to the abolition of anonymous securities accounts. Abolition of anonymous passbook savings accounts, however, will face strong political opposition because of the attachment by Austrian savers to such accounts going back several generations. Bankers are also opposed out of fear that account holders will transfer money out of Austria to avoid taxes, and because the task of identifying ownership of the 26 million existing passbook accounts is formidable. An estimated 90% of these passbook accounts are anonymous. While the accounts have a total value estimated at US$150 billion, only 5,000 accounts hold more than US$500,000 and 22.5 million accounts hold less than $10,000.

Austria passed legislation allowing freezing and forfeiture of assets in November, 1996. It has not enacted laws for sharing seized narcotics assets with other governments. The GOA receives proceeds from narcotics­related asset seizures and forfeitures, but the law allows for compensation of crime victims. The asset seizure legislation becomes effective March 1, 1997, so no record of enforcement yet exists. Criminal courts are responsible for tracing and seizing assets. Law enforcement units charged with fighting organized crime are currently underfunded and understaffed. The Austrian government is cooperative with the U.S. and other countries in tracing and seizing assets and in bilateral and multilateral negotiations with other governments to harmonize efforts regarding asset tracing and seizure. National laws do not permit sharing of forfeited assets with other countries. There are no reports of retaliatory actions by traffickers in response to money laundering investigations, government cooperation with the U.S. government, or seizure of assets.

Brazil. (Medium High) It is difficult to gauge money laundering levels in Brazil because the practice is still not defined as a criminal act. Estimates of illegal funds in circulation range from tens of millions to hundreds of billions of dollars.

Legislation which will provide authority to investigate and prosecute money laundering and to create a financial intelligence center was introduced in the Congress in December. A strong economy without question has increased the risk of money laundering in Brazil. There are reports of foreign criminal interests buying up failing businesses (e.g., hotels, air taxi services, and transport, construction and insurance companies) to serve as repositories for laundering illicit profits.

Money laundering is not a criminal offense. The bill before Congress would criminalize all types of money laundering, not just that related to drug trafficking. The bill also contains provisions on customer identification and record keeping, and would require suspicious transaction reporting. The bill provides protection to bankers with respect to their cooperation with law enforcement authorities. The bill also contains provisions addressing international transportation of currency and monetary instruments. Regulations currently exist requiring currency reporting, but they are not rigorously enforced. Not least, the bill contains provisions making corporate officers responsible if their institutions engage in m/l. Also, the bill contains provisions extending m/l controls to non­banking financial institutions.

At public hearings on the proposed m/l legislation, bankers expressed concern about breaking of bank secrecy and about being forced to serve as an extension of the government in enforcing m/l controls. In formal comments to the justice ministry, most banking association comments were of a technical nature, and did not challenge the basic provisions of the bill. The main obstacles to passage are slow action in the congress due to focus on other areas, most notably the presidential reelection amendment.

Without legislation criminalizing money laundering, it is difficult to quantify the various potential sources of money laundering proceeds. Narcotics trafficking is probably the major source, but there are numerous lucrative organized crime activities in Brazil which generate a need to hide illicit profits, such as gambling, arms smuggling, bribery, prostitution, tax fraud and theft of government funds.

Government oversight of the financial system has been poor, leading to extensive bank fraud and the collapse of several banks due to political interference in granting loans.

There is little data on money laundering outside of the banking system, although some prior U.S. investigations implicate the use of Brazilian exchange houses for money laundering. We believe that major financial institutions in Brazil do not knowingly engage in money laundering; however, the amount of funds of illicit origin circuLating here make it a virtual certainty that financial institutions are used for money laundering.

Availability of records to investigators of other countries is a provision of the law currently before the Congress. Currently, records can be made available by means of a judicial order based on a letter rogatory.

Brazil is a signatory to the 1988 UN Convention. Legislation to implement the Convention has been pending since 1991, but recently passed in the lower house of congress. The most notable case involving bilateral cooperation this year was Brazil's request to the U.S. for assistance in locating illegal deposits in U.S. banks of several million dollars stemming from fraudulent claims against the social security system. Brazilian authorities cooperate with other countries to the extent that they are able, given the fact that m/l is not yet a criminal act here.

Asset forfeiture legislation has been in effect for several years. Under the new omnibus drug bill, the burden of proof will be shifted to the defendant to show that seized assets were acquired in a licit fashion. The omnibus drug bill contemplates asset sharing with other countries.

Under current law, any type of asset obtained through drug trafficking is subject to seizure. Under the proposed m/l legislation, businesses used in laundering operations could be subject to seizure. At present, assets are shielded principally through strong bank secrecy provisions, which judges are often reluctant to overcome, even for legitimate law enforcement purposes.

CHINA (Medium High) The People's Republic of China is not currently believed to be a major money laundering country, but Chinese officials are aware of, and concerned about, the possibility that some elements in China may be engaged in money laundering. Officials are also concerned about the sources of some of the funds which are being invested in China and about the lack of regulations governing the many offshore banks being created in the Asia­Pacific region.

There is no money laundering law per se, but Chinese officials cite a law prohibiting covering up the source of assets and lawsagainst fraud as other legal tools to prosecute money laundering offenses. As evidence of China's concern about economic crimes, officials report that Chinese police have participated in international conferences and seminars discussing money laundering. The PRC has also hosted foreign money laundering expe rts conducting training seminars in China.

Costa Rica (Medium High) Money laundering remains a serious, but difficult­ to­quantify, problem in Costa Rica. Some launderers smuggle funds into the country and convert them into Costa Rican colones before depositing them into bank accounts. Widespread suspicion exists that drug trafficking revenues find their way into real estate and tourism developments. Recent liberalization of the banking system has allowed virtually unrestricted exchange of colones at near market rates through commercial banks and other financial institutions. Also, the recent initiation of checking and savings account services at private banks may make such institutions vulnerable to money laundering schemes.

In October, Justice Minister Juan Diego Castro hosted the annual ministerial­level CFATF meeting, at which delegates signed a framework agreement committing their governments to establish national money laundering commissions and to undergo self assessments and mutual evaluations of money­ laundering controls. (In October 1995, Costa Rica became the third CFATF member to undergo a mutual evaluation.)

During the conference, President Figueres signed an executive order formally establishing Costa Rica's "permanent national commission for the control and suppression of money laundering," an inter­ministerial group that had operated informally since 1995.

Costa Rican law establishes drug­related money laundering as a criminal offense. Prosecutors, however, must prove that defendants knew the funds came directly from drug trafficking, thereby making convictions difficult. Nonetheless, in August 1996, an Alajuela court convicted three Colombians of money laundering ­­ the second such conviction in as many years. The defendants, arrested while trying to enter the country in February with $200,000, each received ten­year prison sentences.

The legislative assembly is considering amendments to drug laws that would strengthen money laundering controls by incorporating CICAD model regulations, with appropriate changes to avoid constitutional problems. Legislators are also studying amendments related to banking secrecy, access to account information, and definition of suspicious transactions. Banking secrecy exists, but courts may order banks to reveal information on specific accounts. A 1989 agreement by the General Auditor of Financial Entities (AGEF) exhorts financial institutions to report cash transactions above $10,000, but the directive lacks enforcement mechanisms. The AGEF also requires financial institutions to examine each customer's national identity card or passport. While employees of state banks must report potential crimes of which they have knowledge, the law does not provide them with immunity from civil suits. Costa Rica's anti­drug law requires people entering the country to declare currency above one million colones (about $4,650), but the statute lacks implementation provisions.

Costa Rican laws do not contain mechanisms for sharing in the proceeds of successful, international money­laundering or narcotics­trafficking investigations. Such sharing, however, may be possible under the 1980 un drug convention. The GOCR has enacted legislation and implementing regulations to facilitate the freezing and seizure of drug trafficking and money­laundering assets in Costa Rica. Conadro safeguards, auctions, or distributes confiscated drug­trafficking assets. Among other initiatives, conadro has earmarked $85,000 from the proceeds of seized assets to purchase a special incinerator to destroy illicit drugs. Costa Rica ratified the 1988 un drug convention in September 1990.

The Dominican Republic (Medium High) The priority for the Dominican Republic is raised to Medium High because of concerns about the large cash flows, which could hide money laundering activity, and the potential for exploitation created by the lack of supervision over exchange houses and remittance operations.

The extent to which local drug trafficking organizations are involved in money laundering is unknown. So far the DNCD has not developed evidence that money laundering on a large scale occurs. The DNCD's newly formed financial investigation unit is in the process of developing a data base system for financial investigations.

The CICAD­based legislation and regulations enacted in December of 1995, provide criminal penalties for money laundering, require financial institutions to establish "know your client" programs and to report suspicious and large transactions (US$ 10,000 or more) to the bank superintendent's office, and allow seizure of crime­related assets. Financial institutions must maintain financial transaction records for 5 years and are required to exercise due diligence in deciding whether to report transactions. Institutions and their employees who report in good faith are protected by the law. Travelers leaving the country must report possession of amounts of US$ 10,000 or more. The law gives the superintendent's office broad supervisory and information­gathering authority over all financial institutions in the country, including exchange houses and remittance institutions. The superintendent refers questionable cases to the DNCD for investigation.

India (Medium High) The underground "hawala" system, which has existed in India and throughout Southwest Asia for generations, continues to be a money laundering method of choice for drug traffickers wishing to return their proceeds to that part of the world. There have been a number of scandals involving high­profile political figures in India which focused attention on this system and its facilitation of money movements for terrorists as well as drug traffickers. However, no effective deterrent to the hawala system has been implemented.

The government has attempted to lure money out of the underground channels and into the legitimate economy by liberalizing its policies on gold imports, gold deposits and foreign currency holdings. As a result, hawala activity has been slowed. Profits of hawala dealers have been directly effected because the gap has narrowed between the official exchange rate and the black market price for US dollars, upon which hawala dealers base their fees. It must be noted that the hawala process, which began as a remittance method, is also used to channel legitimate funds. While the long­term effect of these GOI measures is unknown, law enforcement officials believe the hawala system will continue to be used by individuals involved in such illicit activities as tax evasion, drug trafficking, money laundering and arms smuggling.

While there is no actual underground banking system in the United States, the hawala system becomes a linkage in a chain of procedures to make payment in India for goods sold in New York ­­ a procedure not unlike the gray market in dollars and pesos which links Colombian and Panamanian businessmen to the proceeds of drug trafficking. Indian merchants in high­value global trading businesses, such as gold and gem dealers, can make arrangements with Bombay traffickers to receive payment for heroin sold in New York. The New York merchant receives cash or cashiers checks whose value is less than the US$10,000 reporting threshold. The merchant then informs the trafficker in Bombay that payment was received and directs the traffickers to a gem or gold merchant in Bombay who will pay the trafficker in rupees. The merchant receives fees of 3­10% for his services.

Hawala merchants often settle accounts through wire transfers which involve commingled funds from legitimate businesses, or even other illegitimate businesses, making it nearly impossible to trace drug proceeds.

Historically, drug proceeds have also been returned to India in the form of gold, which has significant cultural and religious value in India. Indians often hold wealth in gold to hedge against declines in rupee exchange rates or to shelter income from taxation. Until 1992, gold imports were restricted, which drove up the price. Typically, drug money was taken to the gold markets in Dubai and Abu Dhabi, converted into gold which was then smuggled into India where it was sold on the black market, reportedly at 40% above world gold prices. Invoice manipulation is also widely used to justify movements of money into India, including proceeds of drug sales in Europe and the United States.

While invoicing schemes and income tax evasion are criminal offenses, money laundering per se is not a criminal offense. The government now says anti­money laundering legislation may be introduced to Congress during 1997. A similar promise was made for 1996. India has some related laws; e.g., foreigners must declare amounts of $10,000 or more when entering the country, and bank management must be informed about any transaction for more than US$2,840, and bankers are protected from prosecution when they cooperate with police. Banks are encouraged but not required to report suspicious transactions.

Israel. (Medium­High) Although there are no precise estimates on the scope of money laundering in Israel, we suspect that Israel has become a significant money laundering center, particularly for Russian organized crime. The Israel national police consider adoption of a money laundering law "essential for stemming the tide of drug trafficking and distribution." Israeli officials report that Israeli organized crime has processed drug proceeds through financial institutions in Israel and abroad, using U.S. dollars. Money laundering is not yet a prosecutable crime, and benign banking laws and a policy of not taxing foreign accounts make Israel an attractive safehaven for illicit money. As yet, major money laundering has not been specifically linked to narcotics trafficking.

Israel has not adopted laws or regulations which ensure the availability of adequate records of narcotics investigations to appropriate personnel of USG or other governments, but Israeli law permits cooperation without a formal treaty. On January 7, 1997, the Israeli government approved mutual legal assistance legislation and sent it to the Knesset. This legislation would allow comprehensive reciprocal legal assistance with competent foreign authorities regarding asset forfeiture investigations, the provision of material evidence and witnesses for forfeiture proceedings, the attainment of temporary injunctions or restraining orders vis­a­vis property, and the implementation of forfeiture orders. The 1995 dual taxation treaty between the United States and Israel grants U.S. tax authorities limited access to bank account information.

The GOI has signed, but not yet ratified, the 1988 UN Convention. According to the foreign ministry, the political will to ratify the accord is there but some issues, including Israel's prohibition on extraditing its citizens, are not yet resolved.

Israel has acceded to the European Convention on mutual legal assistance in criminal matters. It has narcotics cooperation agreements with Italy and Turkey which cover law enforcement cooperation, though not specifically with regard to money laundering.

A proposed anti­money laundering law, which has been in preparation for more than six years, was stalled in the Knesset when the government changed hands in June 1996. There is minimal legislative initiative to push this law through anytime during the current Knesset session. Thus, in essence, money laundering is still not illegal in Israel. Under current laws, money laundering is not an independently prosecutable crime; a specific criminal conviction must be obtained before forfeiture proceedings to seize income, property and other "fruit of trafficking" may be instituted. This legal requirement has limited the success of law enforcement agencies in pursuing money laundering cases.

Nonetheless, one of the priority objectives of the Israel national police is to follow up major trafficking convictions with asset­forfeiture proceedings. Israeli law enforcement agencies have established an interagency commission to further the practical application of this legislation. However, several laws make prosecuting money laundering cases difficult. Banking secrecy laws permit banks to divulge information only after the proper court order has been obtained. Moreover, there are no currency controls on large transactions by non­Israeli citizens. Foreign residents with local accounts, for example, are not required to file Israeli tax returns. "Due diligence" and "banker negligence" laws do not apply to money laundering.

An asset forfeiture law, enacted in 1989, allows for the seizure and forfeiture of all financial assets ­­ present and past, up to 8 years ­­ of convicted traffickers and their immediate family. The defendant has the burden of proof to show these assets were legally acquired and not the fruit of trafficking. Legitimate businesses that launder money may be included in forfeiture proceedings only if their owners have been convicted on drug trafficking charges. Under current Israeli law, however, a business proven by its owner to have been established with legitimate money may never be forfeited, even if the owner is convicted of drug trafficking offenses.

All court­forfeited assets are centrally administered by a specific office in the ministry of justice, which may make grants of the seized funds to law enforcement agencies.

The law also permits civil forfeiture of assets which were the result of, or instrumental in, the commission of drug trafficking or production. Civil forfeiture does not require a prior criminal conviction.

The government enforces existing drug­related asset seizure and forfeiture legislation, although very few asset seizure cases come to court and most of those that do are substantially reduced as a result of plea bargains.

Russian criminal elements have exploited Israel's liberal immigration laws to establish themselves in Israel and to continue their activities. Russian organized crime groups are reportedly using various financial institutions to place and receive illicit proceeds through excise tax frauds, health care frauds, arms trafficking, extortion and drug trafficking.

Israel recognizes this problem; in September 1996, the Public Security Minister sent to the Interior Minister a list of 35 international crime bosses from Russia and the Ukraine who have set up bases in Israel and are now running their crime rings from there. Using Israel as a safe base for operations, organized crime bosses launder the proceeds of their European smuggling operations there, and also use Israel to move funds in violation of United Nations economic sanctions. Some mobsters have established themselves as legitimate businessmen and have even met with some Knesset members. The Public Security Minister recommended that the Interior Minister expel the 35 individuals. Media reports suggest that these crime figures represent just the tip of the iceberg.

Israel needs a comprehensive package of anti­money laundering but also anti­racketeering legislation. Perhaps the most difficult task would be to control currency movements, which have strong political and religious aspects. Israel must: criminalize money laundering from all serious crime, not just drug trafficking; require banks to identify customers and record significant transactions; require banks to report suspicious transactions; permit asset sharing; extend controls to non­bank financial institutions; and provide disclosure protection.

Israel needs the intelligence data to crack down on Russian organized crime groups but the process begins with the legal authority to stop their penetration of Israeli banks and the political will to curtail their activities in Israel.

Japan (Medium High) Japan is one of the world's most important financial centers. It also continues to be the only government among the seven major industrialized countries which has not criminalized the laundering of proceeds from all crimes.

Even though money laundering in Japan is probably not primarily related to narcotics, current law limits Japan's money laundering statute to narcotics related crimes. U.S. Customs reports several investigations involving the transfer to the U.S. (in violation of U.S. money laundering law) of proceeds of non­narcotics crimes committed in Japan. Two of these investigations have resulted in substantial seizures of assets located in the U.S. Japanese officials said in early 1996 that the government was considering an expansion of the money laundering statute to include non­narcotics crimes, but no action has been taken to date.

Japan's currency reporting law is geared toward investigating and seizing only exported Japanese yen currency. A desirable change would be to expand the law (which now is virtually unenforced) to cover all currencies.) There is no reporting requirement for foreign currencies or imported currency.

Japan has not reached agreement with the United States on a mechanism for exchanging adequate records in connection with narcotics investigations and proceedings. While DEA and Customs report that informal cooperation is generally good, and records are made available on an informal basis, such informal information may not be used in any judicial proceedings in the U.S.

Japan permits financial institutions to report suspicious transactions to the Ministry of Finance but compliance is voluntary. Police and/or prosecutors may inspect any such documents submitted. The extent of such reporting is unknown, but believed to be small. Bankers and others are protected by law with respect to their cooperation with law enforcement entities.

There were no arrests and/or prosecutions for money laundering during 1996.

The Japanese seizure statute allows the government to seize: (1) only those funds which can be directly linked to a specific drug investigation/violation, i.e., illicit proceeds; (2) any property derived from illicit proceeds; (3) any property obtained in reward for conducting an offense; and (4) any property ruled "fruit of the crime." In the event illicit funds have been commingled with legitimate funds, an amount equivalent to the illicit amount can be seized. The law provides that if illicit property is indistinguishably mixed with legitimate property, the legitimate property equivalent to the amount of the illicit property only may be confiscated. This portion of the law remains untested.

Liechtenstein (Medium­High) On March 21, 1996, the Diet in Vaduz amended Liechtenstein's penal code, making money laundering from all crimes and insider trading punishable by law, and allowing for asset seizures. Banks are now required to submit suspicious transaction reports to the Bank Supervision Body and to inform the prosecutor's office.

Banks are required to exercise due diligence. Bank employees are protected by law with respect to their cooperation with law enforcement entities. The new law also enables officials to seize the profits derived from drug transactions. The law applies not only to banks but also to lawyers, trustees, investment trusts and insurance companies.

A major offshore banking center, Liechtenstein adopted interim legislation criminalizing laundering of money earned from illegal narcotics in 1993. In general, money laundering has involved banks more than non­banking institutions. Since the new money laundering law entered into effect only in May 1996, we have insufficient experience to judge its impact.

In Liechtenstein, identifying and tracing narcotics­related assets is only possible if the government receives reports from the banks or as a result of an international legal assistance request. There are presently no formal provisions for sharing seized narcotics assets with other governments, but this is done on a case­by­case basis.

Liechtenstein has cooperated, when requested, with the law enforcement agencies of the USG and other governments investigating financial crimes related to narcotics.

Pursuant to an MLAT request from the United States, Liechtenstein has blocked a bank account containing US$ 8 million in the name of an Ecuadorian endowment fund. The GOL conducted its own investigation of a second account sought by the US and located and froze another US$ 9 million.

Liechtenstein is not a signatory of the 1988 UN convention and does not participate in FATF. Liechtenstein has not entered into bilateral agreements for the exchange of information on money­laundering. As a member of the European Economic Area, however, Liechtenstein is bound to EU guidelines against money laundering.

Luxembourg (Medium­High) Luxembourg is an important international banking and financial center with approximately 230 international banks and investment houses represented. The Government of Luxembourg (GOL) works aggressively to deter money laundering by drug traffickers. In 1997, the GOL and the banking community will be working together in order to expand the money laundering laws to include other criminal activities as well as narcotic trafficking. Illicit drug production and trafficking do not pose significant problems for Luxembourg, but small amounts of drugs transit the country. The GOL authorities believe there are relatively few drug users in Luxembourg, but they remain concerned about drug abuse, especially among the youth.

The GOL has worked diligently to strengthen its money laundering laws by broadening the penal code's definition of illegal money laundering to include laundering of proceeds derived from any criminal activity, rather than just narcotics­related activity. In doing so, the GOL has organized the efforts of the local and international banking community located in Luxembourg to assist in that effort. Most recently, this effort has included bank and governmental officials discussing the establishment of "indicators" for bank accounts which may become suspect after an account is established. Prior to this time, efforts were solely related to investigations of persons attempting to open new accounts. The change in the law incorporating "other criminal activities" is a priority item for the GOL to pass into law in 1997.

In December 1995, Luxembourg and the United States signed an asset sharing agreement, under which one million dollars of seized proceeds from the "Santa Cruz Londono" prosecutions in the United States were deposited in the "fonds de lutte;" these assets were shared in 1996. Luxembourg and the US also signed a major assets sharing agreement involving approximately $45 million in seized assets in Luxembourg related to the "Gacha" case; the Gacha funds are expected to be distributed in 1997. The customs mutual assistance agreement was signed by both countries in 1996. Luxembourg continues to participate in several international counternarcotics fora, including the Dublin Group and the FATF.

Pakistan. (Medium­High) Although Pakistan is not considered to be an international money laundering haven, drugs and drug money laundering are a significant concern. The drug trade has become a notable factor in Pakistan's economy, but all money laundering in Pakistan is not drug­related.

The "hawala" underground banking system remains a primary means of laundering drug money, despite Pakistani efforts to lure that money out of the black market through legislation and financial liberalization policies. Although USG agents believe that drug money finances construction and other industries in Pakistan, they also believe that Pakistani drug profits are also kept outside of Pakistan, in bank accounts throughout the Middle East and Asia. Pakistani heroin networks have also laundered their profits through banks in the United States.

The amendments to the Narcotics Ordinance promulgated in December strengthen some narcotics money laundering provisions such as the tracing, identification, and freezing of assets and participating in mutual legal assistance requests, and Pakistani officials are said to be considering a broadening of the scope its laws to include additional predicate offenses to money laundering. UNDCP, the Dublin Group and USG have advised the GOP that separate money laundering legislation is needed to cover other types of money laundering. The Ordinance included no legal requirement to show how or from where a person's income was derived.

Pakistan continues to export drug proceeds from wholesale sales and receive retail proceeds transmitted by Pakistani traffickers from markets in the UK, Germany and US. Money launderers use both the Hundi/Hawala underground systems as well as the licit financial system. Drug proceeds also flow back and forth across the Arabian Sea.

Paraguay (Medium High) is considered an important financial center in its own region. Money laundering in Paraguay is divided between contraband, tax evasion, capital flight, and narcotics­related origins. Banking sources claim that most is not/not linked to narcotics­related activities. There are estimates that most money laundering is linked to the US$ 4­14 billion (estimates range widely) re­export sector (largely contraband), followed by tax evasion and capital flight from Argentina and Brazil, with narcotics­related funds coming last. Money laundering occurs in both the banking and in non­bank financial systems.

Paraguay is considered an important tax haven (there is no personal income tax) and offshore banking center for Brazil. Offshore banking is permitted. regulations governing offshore banks are lax. Offshore banks are under the regulation of the authority where they are constituted.

There is no hard information on who controls the money laundering proceeds. There are indications that several senior government officials encourage, facilitate and engage in money laundering activities. The GOP condemns money laundering based on drug proceeds, and strongly supported the enactment of the OAS/CICAD compatible law criminalizing money laundering linked to narcotics trafficking and serious crimes. Since contraband trafficking, tax evasion and capital flight are not considered to be serious crimes, laundering of their proceeds do not fall under the new statute's prohibitions.

Although hard evidence is lacking, Paraguay's financial institutions probably engage in currency transactions involving international narcotics trafficking proceeds that include significant amounts of United States currency. For example, in 1994 Paraguay shipped usd 4.2 billion in excess U.S. currency to the United States, and the central bank recorded in excess of usd 35 billion in U.S. currency exchanges. It is unclear, however, whether these transactions derived from illegal drug sales in the United States or whether they significantly affected the United States.

Paraguay has adopted laws and regulations that ensure the availability of adequate records dealing with money laundering investigations to appropriate USG personnel and those of other governments.

Once President Wasmosy signs the money laundering law, which he is expected to do before the end of the year, money laundering will be a criminal offense in Paraguay. It also applies to money laundering related to criminal activity carrying a prison term of two years or more. Participation in contraband trafficking or fiscal evasion are only penalized by fines, and thus are not covered by the law.

The money laundering law requires that banks and financial institutions know and record the identity of customers engaging in significant, large currency transactions. These records are required to be kept for a period of five years. The money laundering law requires financial institutions to report suspicious transactions. These reports are to be made to a new secretariat for the prevention of money laundering. Bankers and others are protected under the money laundering law with respect to their cooperation with law enforcement entities.The money laundering law contains "due diligence" and "banker negligence" provisions.

The USG has yet to request cooperation from the GOP on financial crimes investigations under the financial information exchange agreement.

Paraguayan law enforcement officials have begun studying the problem of international transportation of illegal­source currency and monetary instruments. There are no controls on the amount of currency which can be brought into or out of the country.

With the exception of seizures made under the new money laundering law, Paraguay has not enacted laws for sharing seized narcotics assets with other governments. Under current law 1340, instruments of crime and intangible property derived from narcotrafficking, such as bank accounts, can be seized. Under the new money laundering law legitimate businesses can be seized if they are derived from illicit proceeds. They can be fined or subjected to administrative sanctions if merely used to launder money.

The legal and widespread use of shell corporations, bearer share corporations, and front men are legal loopholes used to help shield assets. Seized assets may only be forfeited once a suspect has been convicted. The law only provides for criminal forfeiture.

There have been no GOP enforcement efforts to trace funds and seize bank accounts, as until December money laundering was not a crime. Consequently there has been no banking community cooperation in such efforts, although the banking community cooperated in the drafting of the new law.

Peru. (Medium High) Despite a tough money laundering statute (passed in 1992), which mandates severe penalties, including life imprisonment, for knowingly laundering proceeds from narcotics trafficking or terrorist activities, there have been few successful prosecutions for money laundering in Peru. For most of 1996, legal difficulties hamstrung the government's ability to investigate and prosecute money laundering crimes. The government of Peru has created a special police financial crimes task force to combat money laundering and other financial crimes.

Peru's new banking law, passed in December 1996, contains tough provisions which, if enforced, should remedy some legal deficiencies in Peru's money laundering legislation.

The new provisions: (a) require Peruvian bankers to report suspicious transactions to law enforcement authorities; (b) protects bankers from civil and criminal liability if they pass money laundering information to law enforcement authorities; (c) requires bankers to record and report all cash transactions in excess of an amount set by the superintendency of banks; (d) mandate that banks keep records of all transactions for ten years; and (e) require that bank management institute internal policies to ensure that banks are not used to launder criminal proceeds.

The new banking law does not, however, explicitly set out penalties or fines if a bank does not provide account information in a timely manner once bank secrecy has been lifted. The superintendency of banks is currently preparing regulations to implement the new banking law.

Peru and the United States have entered into, but have not yet made use of, a financial information exchange agreement to facilitate exchange of money laundering information.

Peruvian law provides for the seizure of narcotics­generated proceeds, but constitutional principles do not permit asset forfeiture unless the owner is found guilty of narcotics crimes. Following the November 1996 arrest of a major Peruvian narcotics trafficker in Ecuador, Peruvian authorities moved to seize his assets, including bank accounts, boats, real estate and cars.

Spain (Medium­High) Spain is increasingly aware of its potential as a significant money laundering center. Spanish financial institutions are being used by traffickers to launder illicit proceeds. Banks and institutions of neighboring Gibraltar and Andorra are similarly used. However, Spanish financial institutions are increasingly sensitized to the modus operandi and signature of money laundering activities, which has led Spanish financial institutions to be more cooperative in combating money laundering activities.

Thirty­five to forty percent of money laundering in Spain is suspected of being related to narcotics proceeds. Sixty to sixty­five percent is related to white collar crime. Money laundering occurs primarily in the financial system. Authorities believe that Russian emigres may be laundering large amounts of money through real estate and business entities in Southern Spain. However, while there are no restrictions on buying property, it is difficult to sell property and take the money out of the country if the property was purchased with money brought into the country.

According to Spanish national law enforcement investigative reports, an undetermined, yet significant amount of illicit proceeds are estimated to arrive in the United States from Spanish financial institutions.

Money laundering became a criminal offense in 1995, punishable by imprisonment or by a fine. The money laundering statutes apply to three categories of money laundering: in connection with drugs, terrorism, and organized crime. Banks and other financial institutions are required to report the identity of customers engaging in significant, large currency transactions. Banks and other financial institutions are required to maintain sufficient records to reconstruct significant transactions through financial institutions. This enables banks to respond quickly to information requests from appropriate government authorities in narcotics­related inquiries. The bank of Spain is the central, long­term depository of financial records. Branch offices of all banks operating in Spain maintain short­term records as well as provide them to the central bank on a daily basis. Money change houses, gambling casinos, and insurance agencies also have to report suspicious transactions.

Bankers and others are protected by law with respect to their cooperation with law enforcement entities. Maximum confidentiality is maintained.

A special unit attached to the anti­drug prosecutor's office investigates money laundering crimes. The bank of Spain houses special units of the Spanish national police who investigate monetary crimes.

Spain is the originator and founder of the "Madrid group," a coalition of eight western European countries' national directors and heads of anti­drug agencies. The intended purpose of the group is to exchange information and intelligence reLating to all aspects of criminal narcotics activity.

Spain has been in full compliance with the 1988 Vienna convention and MLAT. Spain has cooperated fully with law enforcement agencies of the USG and other governments investigating financial crimes related to narcotics trafficking and money laundering.

Spain has addressed the problem of international transportation of illegal­source currency and monetary instruments. There are controls on the amount of currency which can be brought into or out of Spain, but the courts continue to apply lenient sentences when these controls are violated. Travellers have to declare more than 1,000,000 pesetas (8,000 dollars) coming into Spain and need band of Spain authorization to take out more than 5,000,000 pesetas (40,000 dollars).

Spain continues to enforce the "due diligence" and "banker negligence" laws in money laundering legislation approved in December 1993. The money laundering controls are also applied to non­ banking financial institutions, such as exchange houses. Exchange houses cannot exchange more than 1,000,000 pesetas (8,000 dollars) per person per day.

Some banking groups have objected to the government's policies and laws related to money laundering in relation to white collar crime, not drugs. There have been some declines in deposits attributable to changes in money laundering laws.

Spain adopted its asset seizure law in 1993, and amended it in 1995. In early 1997 the government introduced legislation to further refine and broaden this power by defining a fund to be managed by the plan nacional sobre drogas and to be used to finance on a fifty/fifty basis police/interdiction measures and prevention/treatment measures. The 1997 law also authorizes undercover operations in money laundering cases. There are no obstacles or disincentives to passing asset seizure laws.

The types of assets that May be seized include financial accounts and real estate and personal assets. Legitimate businesses can be seized. The government receives proceeds from asset seizures and forfeitures. There are no significant legal loopholes that allow traffickers to shield assets. The government can forfeit seized assets. Under a law introduced in early 1997, the government may use seized assets to finance on a 50/50 basis programs of treatment and prevention and law enforcement efforts such as interdiction.

Legislation allows for criminal forfeiture of assets seized in narcotics­related activities.

The Spanish national police narcotics division and the civil guard are entitled to investigate criminal offenses related to drug money laundering. Spanish national law enforcement agencies are empowered to both seize and enforce forfeiture proceedings. The government's 1997 proposals include establishing a national central office to coordinate the operations of the security forces and the customs service to improve channels of communication between the different law enforcement organizations involved in the fight against drug trafficking. The measures also include provision for establishing new units for drugs and organized crime, with specializations in drug trafficking, money laundering, and organized crime. The measures will also establish a program of local police to patrol neighborhoods either on foot or motor scooter, to pay particular attention to drug dealing on the local level.

The government believes that it has adequate powers to trace and seize assets. In 1996, authorities confiscated different types of currency amounting to about 300,000 dollars, vehicles, arms, electronic devices, appliances, mobile phones and pagers, and other personal effects.

The government cooperates with efforts by the U.S. or other countries to trace or seize assets. National laws do not yet permit sharing of forfeited assets with other countries. The response to Spanish government efforts to seize and/or forfeit assets has been favorable.

Spain has adopted laws and regulations which ensure the availability of records of narcotics investigations to appropriate USG personnel and those of other governments.

The banking community does cooperate with enforcement efforts to trace funds and/or seize bank accounts.

Taiwan. (Medium High) Money laundering is designated as a criminal offense under the money laundering prevention law (MLPL), enacted in October 1996. The MLPL forbids laundering of money obtained through criminal activity, including narcotics trafficking.

Since a significant percentage of the money laundering activity in Taiwan has been conducted through underground money Institutions, the money laundering controls stipulated by the MLPL apply to jewelry stores and insurance companies, as well as banks and other financial Institutions.

Under the MLPL, financial Institutions are required to record and report the identity of a customer engaging in a suspected money laundering transaction or a currency transaction exceeding a specified amount. Confidentiality of customer data ­­ required by other laws ­­ is waived for financial Institutions making reports under the MLPL. Additionally, the MLPL imposes "due diligence" or "banker negligence" responsibility on individual bankers if their Institutions launder money or fail to report suspicious transactions. While the MLPL does not set time requirements for financial Institutions to maintain records, enforcement regulations will require that records for transactions of a suspicious nature or exceeding a designated amount of money be kept for at least five years.

Taiwan's new anti­organized crime law, passed in December, 1996, contains provisions which would allow authorities to seize illegally­ acquired property and assets belonging to individuals and organizations engaged in criminal activities. Those assets and properties will either be returned to victims of the related crimes or, in cases where previous ownership cannot be clearly determined, be confiscated by the authorities. Authorities can also attach private, legally­acquired property of criminals in order to facilitate recovery, confiscation and collection of illegally­ acquired property. Since this legislation was recently passed, however, there remain a number of areas which must still be addressed regulatorily.

The United States has expressed its concern about a clause in the Taiwan law which permits a money launderer to avoid prosecution by declaring his/her crime.

Uruguay (Medium High) Uruguay is a significant financial center in the southern cone. Because it is, USG, GOU, and European law enforcement officials believe that narcotics traffickers launder money here, both in banks and exchange houses. The embassy is aware of several incidents in which Uruguayan banks were used to deposit illegal funds. However, the degree of laundering is not known and, beyond a few isolated but important cases, there is no solid evidence of widespread money laundering. It is also not clear what percentage of money laundering proceeds are owned by local organizations. There is some indication that terrorist groups (i.e. ETA, shining path/Sendero Luminoso, Tupac Amaru/MRTA) might be using Uruguay to launder money. Officially the GOU and all senior officials condemn money laundering.

The GOU has actively participated in international fora on money laundering.. The Uruguayan drug czar, serving as president of the OAS working group on strategies to fight narcotics trafficking in the 21st century, drafted the hemispheric antidrug strategy signed in Montevideo December 3 by all OAS member states. He is also vice­president of the UN commission on narcotic drugs (undcp). Uruguay takes its international role very seriously and not only intends to cooperate, but also to take the lead in the fight against the use and trafficking of illegal narcotics. The GOU has cooperated in good faith with the U.S. on all narcotics­related investigations.

The USG­GOU bilateral mlat became effective in may 1994. The GOU ratified the 1988 UN convention in September 1994 and deposited its instruments of ratification in March 1995. The GOU, along with all other OAS countries, signed the hemispheric antidrug strategy, which committed each signatory to sharing information and establishing strict controls to prevent money laundering. Although money laundering is still not a criminal offense, the proposed money­laundering bill pending in parliament would make it so. In accordance with existing law, banks and exchange houses are required to record large currency transactions over 10,000 usd and to make their records available quickly to the central bank on request. All financial institutions are required to monitor transactions. The law provides for legal penalties if violations occur, but to date there has been minimal enforcement. Uruguayan law requires that each financial institution keep records on all transactions exceeding 10,000 usd, and requires that those making such a transaction identify themselves. There are no controls on the amount of currency or gold entering or leaving the country. The GOU has not yet addressed the problem of international transportation of illegally­sourced currency and monetary instruments. Uruguay signed the ministerial communique on money laundering in buenos Aires in December 1995, agreeing to the establishment and implementation of regulations concerning the international transportation of money and instruments across national borders. The central bank can revoke the licenses of banks and exchange houses involved in money laundering. Banking officials are held liable if they commit acts which are considered criminal, or if they approve or overlook actions which entail violations of the law, including those which might involve money laundering. Nevertheless, money laundering as such is not a crime, and the GOU has not adopted specific "due diligence" or "banker negligence" laws which would make individual bankers responsible if their institutions launder money, whether or not connected with other criminal activity.

GOU laws have not yet changed with respect to money laundering. In spite of the reporting requirements mentioned in the previous paragraph, the GOU still does not have an established system for identifying, tracing, freezing, seizing, and forfeiting narcotics­related assets. Although the proposed money­laundering bill would address the legal "empowerment," the central bank would still lack the technical capacity to analyze transactions, since it still has no computerized data base. No known "legal loopholes" exist to allow launderers to shield assets. While the GOU can legally seize laundered drug money from banks or businesses, to our knowledge the GOU has never applied the asset seizure law in a case involving a money­laundering related crime. strict bank secrecy laws which protect assets can be lifted by judicial decree to permit access to asset information, but it is rarely done. The central bank has told USG representatives that they would support a judicial request for information related to investigations involving money laundering. However, in 1994­1995 a solid investigation involving money exchange houses and banks in Montevideo was derailed due to the extraordinary amount of information which Uruguayan courts demanded prior to approving any request for financial/banking records. Courts in such cases require a level of information normally unavailable to the investigator, thus preventing effective access to banking records. Uruguay currently lacks any laws for sharing seized narcotics assets with other countries, although existing laws contain a legal basis for establishing potential agreements on sharing.

In addition, Uruguay has expressed a willingness to negotiate such an agreement with other countries. Although the law allows for criminal forfeiture, the GOU has never used the law against convicted narcotics traffickers. The courts, sensitive to any violation of rights, must first give such authorization.

If there is reasonable cause to suspect criminal use of the banking system by someone, the courts by law may order access to all that person's accounts, and they may suspend or revoke the authority to operate of those financial institutions involved. The courts have intervened in the past in cases involving suspected narcotics traffickers who later were extradited to the U.S. Existing laws do not explicitly address the possibility of sharing forfeited assets with other countries, although such sharing is not ruled out. A recent drug case involving an airplane seized in brazil, claimed by brazilian authorities as well as its (former) Uruguayan owner, and still tied up in brazilian courts with no clear resolution in sight, highlighted the glaring lack of legislation regarding sharing forfeited assets.

United Arab Emirates (Medium High) An important financial center in the Middle East, the UAE's open and accessible banking system makes it a regional financial center with a high potential for the laundering of proceeds of various kinds of crime. There is also concern about gold transfers through the souks of Dubai.

The UAE government has been working on money laundering legislation for the past three years, but, currently, the UAE does not have laws to restrict or prevent money laundering, nor does it have disclosure laws, so no information is available on the sources of assets held by UAE banks. There are no restrictions on the import or export of either the UAE dirham or foreign currencies by foreigners or UAE nationals, with the exception of Israeli currency and the currencies of those countries subject to UN sanctions. Given the UAE's proximity to regional drug producing countries, it is likely that trafficking organizations use UAE banks to launder their narcotics proceeds.

Money laundering probably occurs in both the banking and non­bank financial institutions. Both the banking system and the non­bank financial system (primarily the "hawala" system used widely throughout South Asia) are open and flourishing. The large local gold market also is a probable money laundering venue. US dollars, like other foreign currencies, are freely exchanged.

Money laundering is not a criminal offense, and banks and other financial institutions are not required to know, record, and report the identity of customers engaged in significant, large currency transactions, or, to file suspicious transactions reports with the government.

MEDIUM PRIORITY GOVERNMENTS

Australia (Medium) Australia has money laundering and cash transactions reporting legislation designed to counter money laundering by organized crime. The GOA ratified the U.N. drug convention, participates in the U.N. drug control program, and is a leading member of the FATF. An official of Australia's National Crime Authority has served for several years as head of the FATF Asia Secretariat, the prime international entity dealing with money laundering in the Asia/Pacific region. The customs act of 1901 and the proceeds of crime act of 1987 allow for asset forfeiture and seizures in narcotics cases. The legislation is conviction­based. During 1996, Australia was the third FATF member country to be examined in the second round of mutual evaluations. The summary finding was that Australia had a balanced, comprehensive and in many ways exemplary system, due primarily to the effectiveness of its financial intelligence unit, the Australian Transactional Analysis Center (AUSTRAC).

The Bahamas (Medium) The Government of the Commonwealth of the Bahamas made progress during 1996, promulgating the regulations which bring its anti­money laundering laws into effect. The law and regulations should strengthen money laundering controls significantly. The final regulations were formally adopted November 7, effective December 16, 1996. These implementing regulations are seen as part of a very strong anti­money laundering regime in the Bahamas, without which the impact of the government's anti­money laundering law was limited.

The GCOB is actively participating in other anti­money laundering initiatives. The Central Bank of the Bahamas recently completed and submitted a questionnaire to the Caribbean Financial Action Task Force (CFATF) addressing Bahamian money laundering controls. The GCOB had delayed its submission of the questionnaire until final passage of the anti­money laundering legislation. The Central Bank has also established an anti­money laundering unit within the Bank that would monitor compliance of such controls in the Bahamas.

U.S. officials believe the recent passage of this anti­money laundering legislation signifies a dramatic shift in Bahamas political philosophy on money laundering. Just a few years ago, the GOB insisted there was "no evidence whatsoever of money laundering in the Bahamas", and believed that current legislation (at that time) was sufficient to deal with the problem. The emphasis then was to encourage and facilitate foreign investment through unfettered regulation of the financial services industry, believing that tighter money laundering controls would prohibit depositors from investing there. To general murmurs of assent, officials representing the GCOB and financial sector concede that strong anti­money laundering controls may indeed actually attract new business interests. The GOB now believes money laundering controls foster trust in that nation's financial services industry, thereby preventing dirty money from entering their financial system, thus preserving the integrity of their national economy.

The GCOB will enforce this legislation to the best of its ability, but it has only a limited capacity to conduct complex financial investigations. CFATF is in the process of scheduling an evaluation of money laundering controls in the Bahamas during 1997.

Belgium (Medium) Belgium has a significant financial sector which is heavily engaged in foreign exchange. Money laundering activities appear to be increasing, as indicated by the continuing increase in reporting of suspicious transactions.

Belgium implements the EU money laundering directive of 1991 through national legislation adopted January 11, 1993 and subsequent amendments. These measures complement the penal code (which sets penalties of up to five years for money laundering) with a series of preventative measures, administrative sanctions and reporting requirements.

The law of 1993 and its amendments cover infractions connected with drug trafficking and a range of other activities, including terrorism, organized crime, prostitution, and fraud. On June 28, 1996, the Council of Ministers adopted an action plan against organized crime which endorses an even broader definition of money laundering, to cover other institutions including notaries, financial advisors, accountants, real estate agents and casinos.

Financial institutions are required to keep records on the identity of their regular clients and occasional clients involved in transactions that are suspicious or that involve ECU 10,000 (about $13,000) or more. They must train their personnel in the detection and handling of suspicious transactions that could be linked to money laundering, and must report such transactions to the government in writing, generally in advance.

No civil, penal, or disciplinary actions can be taken against institutions or individuals for reporting such transactions in good faith. Infractions against the reporting and other requirements of the 1993 law are punishable by a fine of up to BF 50 million (about $1.7 million).

The 1993 law created an independent agency, the financial intelligence processing unit ­­cellule de traitement des informations financieres (CTIF) or cel voor financiele informatieverwerking (CFI)­­to receive, process and transmit information related to money laundering. The cell refers any cases of alleged money laundering to prosecutors. It also plays a key role in the international coordination of policies to control money laundering.

During its first 35 months of operation (December 1993 ­ October 1996), the CTIF/CFI referred 533 cases to the judicial system, representing transactions worth BF 67.7 billion ($2.3 billion). Of these, 63% involved manual foreign exchange transactions and 11% concerned international payments. The principal criminal activities behind these money laundering cases were drug trafficking (69%), other forms of organized crime (11%) and illegal traffic in goods and merchandise (8%). Two members of a known drug organization deposited US$9 million in a Swiss bank located in Antwerp. The money was initially routed through a trust company managed by a company in the British Virgin Islands. The money was used to purchase a US$10 million standard letter of credit at a discounted rate of US$8.6 million, which was resold in England for US$9,150,000.

The president of CTIF/CFI, who now chairs the Egmont legal working group, will become the president of FATF during its 1997­98 year. CTIF/CFI has played a key role in the effort to create financial intelligence units in key countries.

Belize. (Medium) Money laundering remains a potential threat in Belize due primarily to the absence of government oversight of the more than 1,000 international business companies for which the Central Bank keeps no independent records. The records of these IBC's are maintained primarily by Belize Bank, a subsidiary of BHI corporation. Although Belize Bank must regularly report the total amount of all IBC account holdings, patterns and changes of individuals on IBCs are not seen by Central Bank authorities unless requested.

On August 1, 1996 two new pieces of legislation, the Offshore Banking Act and the Money Laundering Prevention Act, came into force. The Central Bank of Belize (CBB) has not licensed any offshore banks, although they have received numerous inquiries. As a relative newcomer to offshore banking, Belize is regarded as a minor player.

The money­laundering prevention act criminalizes money laundering related to numerous serious crimes, while imposing report and recordkeeping requirements on banks and financial institutions regarding large currency transactions and suspicious financial activities. The Act also allows for international cooperation as well as freezing and forfeiture of assets. The Act permits the Central Bank to examine individual accounts without obtaining a court order and also to review suspicious transactions. Although the Belize bar association reportedly lobbied for a weaker law, the final version retained many of the stricter elements of model legislation shared among Commonwealth nations.

In October 1996, Belize joined 19 other Caribbean and Central American countries signing a memorandum of understanding on the prevention and control of money laundering. By signing the MOU, Belize formalized its membership in the Caribbean Financial Action Task Force (CFATF).

The GOB this year began negotiations for a new extradition treaty with the USG which provides for the extradition of Belizean nationals. The draft treaty also includes a non­exhaustive list of extraditable offenses which includes important new offenses such as money laundering and terrorism. Four extradition requests are pending under the old extradition treaty signed with the UK, which remains in force in Belize. The GOB this year began negotiation on a mutual legal assistance treaty (MLAT) with the USG.

Bolivia (Medium) Bolivia is not an important financial center, offshore banking center or tax haven. However, Bolivia's commercial banks have a long tradition of strict bank secrecy which facilitates the laundering of illegally obtained earnings and the evasion of taxes. Contraband smuggling also has a long tradition and probably accounts for most of the money laundering in Bolivia. Money laundering is not currently a crime, and procedures for obtaining access to bank records for criminal investigations are cumbersome and inadequate for effective law enforcement. However, a recently­completed revision of Bolivia's criminal code effectively addresses most of the concerns raised by the USG during continuing discussions on the matter. The revisions have been presented to the cabinet for approval and need to be passed by the legislature before entering into force.

Bolivia's omnibus drug legislation, law 1008, mandates the forfeiture of assets derived from drug trafficking; however, the prevailing interpretation of the Bolivian constitution holds that an asset's owner must be convicted on trafficking charges and that all available appeals of a conviction must be exhausted before the asset can actually be forfeited. In practice, this has meant that seized assets are not available for forfeiture for five or more years after seizure, by which time the assets have lost considerable value, suffered damage, or disappeared altogether. In response, supreme decree 24196 of December 1995 was promulgated, allowing seized assets to be auctioned with the consent of the owner or where the cost of maintaining the asset would be excessively burdensome to the government. Since the decree's passage, four regional offices of the new seized asset directorate have opened, inventories of assets on hand were conducted, and several test sales were held. There have been some difficulties, however, with judges refusing to release the proceeds of sale to the seized asset directorate, as required by the decree.

Bulgaria (Medium) Bulgaria continues to experience a high level of money laundering especially connected to domestic banking and other financial fraud. Fourteen of the 23 banks that currently operate in Bulgaria are under receivership. Thirteen of these banks have been forced into bankruptcy due to mismanagement, and in some cases through the intentional depletion of the bank assets by the owners of newly acquired banks. One of the major schemes used by questionable bank owners involved making fraudulent loans to businesses they own or in which they have an interest. Funds representing the loans are wired abroad and the loans are never repaid. The loss of these funds undermine the Bulgarian economy since badly needed capital in the form of foreign investment credits and deposits of ordinary Bulgarian citizens are unavailable for investment in the Bulgarian economy.

Bulgaria's new money laundering law was promulgated on June 4, 1996. Implementing regulations have not yet been finalized, and potential effectiveness remains unclear. Banks, exchange houses, insurance companies, investment companies, privatization entities, state tendering agents, and gambling establishments have six months to institute internal procedures required by the law to identify possible money laundering.

The money laundering law mandates customer identification, collection and recordkeeping requirements for suspicious transactions, and the disclosure of information on suspicious transactions to a financial intelligence unit within the Ministry of Internal Affairs. The financial intelligence unit will become operational once implementing regulations are adopted. The law provides only for administrative fines for violations of its articles, since money laundering has yet to be criminalized in Bulgaria. Given the high level of inflation in Bulgaria, the amounts specified for administrative fines have become token in nature and ineffective for insuring compliance by financial institutions with anti­money laundering provisions in the law. Adoption of new amendments to the criminal code that include criminalization of money laundering remains uncertain due to political instability.

Burma (Medium) Money laundering in Burma is a growing problem and there is reason to believe that the laundering of drug profits is having a substantial impact on the Burmese economy. Political constraints on capital inflows magnify the importance of narcotics­derived funds in the economy. An underdeveloped banking system and lack of enforcement against money laundering has created a business and investment environment conducive to the use of drug­related proceeds in legitimate commerce.

Channel Islands and Isle of Man (Medium) The Channel islands of Jersey and Guernsey and the Isle of Man are major tax havens and offshore banking centers. The banking industry constitutes the islands' largest industry. Laundering of drug money and serious fraud are criminal offenses, and banks are required to report suspicious transactions to financial investigation units. There are also provisions for asset forfeiture. Still, the islands are considered attractive to money launderers with the sophistication to pass wire transfers through their banks to other European, North or South American destinations.

Cooperation with US officials is considered excellent. Jersey authorities announced on December 19, 1996, that the State of Jersey was being awarded US$1 million from the US Treasury asset forfeiture fund, a portion of the drug money obtained through legal proceedings in San Francisco. The case was initiated by US Customs in 1989, following disclosure by a Jersey­based trust company about the suspicious activities of two US clients.

Chile. (Medium) While Chile has a strong economy and banking system, as of yet it has not developed into an important financial center in its region. Given that no instances of money laundering have been proven, no estimates are available. Chile has not experienced an increase in financial crimes.

The new counter­narcotics/money laundering law went into effect in October 1995. The GOC counter­money laundering task force began operations shortly thereafter. Hence, few laundering activities or organizations have been identified as of yet. It is too soon to know if the 1995 law will ensure the availability of records to the USG or other governments. This law has yet to be tested in the court system.

The Chilean council for the defense of the state has reached a draft agreement to exchange financial crimes investigative data with FinCEN. This agreement will soon be formally considered by both the Department of State and the Chilean foreign ministry.

Laundering of drug proceeds is illegal. Banks and other financial institutions are not required to report suspicious financial activity. However, as of March 1, the government of Chile began requiring that exchange houses issue receipts that identify both the buyer and the seller for all foreign exchange transactions worth US$ 10,000 or more. Copies of all the receipts are sent to the internal tax service. Measures to open the veil of bank secrecy are under consideration, but not widely supported by the public or private sector. The 1995 law does allow banks to report suspicious activities, but it does not require them to do so. There is sporadic reporting only.

Because of the newness of the law, it is difficult to say if bankers and others are protected by law with respect to their cooperation with law enforcement entities. On one hand, the law attempts to protect sources of information, but on the other hand, it tries to protect law­abiding businesses and investors from scurrilous accusations.

Chile has cooperated in a limited manner with the USG in investigating financial crimes. Financial records are difficult to obtain without a court order. Banking groups' objection to the new money laundering law lies in their opposition to anything that reduces bank secrecy.

The new counter­narcotics law does not provide for the seizure and forfeiture of narcotics­related assets. This law provides for fines, imprisonment, revocation of professional licenses, and temporary closing of places of business, and nothing more.

Czech Republic (Medium) Czech police believe that drug organizations are continuing to strengthen their organization, develop their smuggling networks while targeting domestic markets, and launder drug profits. According to Czech officials, organized crime groups from the Newly Independent States (NIS) and the former Yugoslavia as well as Italian groups such as the Neapolitan Camorra and the Sicilian mafia are established in the Czech Republic and their members are using more violent methods. However, it is not clear how much of their money laundering operations take place in the Republic. In many ways, the situation is similar to that found in most of the Central European countries: there is money laundering; some legislation has been enacted; however the magnitude of the problem is unknown and the new statutes and regulations have not had enough time to show effect.

These organized crime groups and others use the Czech Republic as a conduit for smuggling drugs to Western Europe. For instance, Turks and local Czechs, Kosovo Albanians, Russians, and former Yugoslavs move large cargoes of heroin from the Golden Crescent­­Afghanistan, Pakistan, and Iran­­to European markets. More recently, South American cocaine traffickers have begun to target the Czech Republic as a staging ground to reach west European markets; law officials apprehended a series of small­time drug couriers traveling by air as well as parcels by mail.

Money laundering was criminalized in February 1996 and the law came into force in July with the promulgation of Ministry of Finance regulations requiring banks and other financial organizations to report unusual financial transactions and cash transactions over 500,000 Czech crowns (about $18,000) to a monitoring unit in the Ministry of finance. The Czech Republic has entered into an agreement with the European Union which necessitates that the Czechs meet the standards in the EU directive on money laundering; the new laws were designed in part to meet those standards. The FIU established contacts with counterpart organizations such as the U.S. FINCEN and the European Egmont group.

Efforts by the U.S. government, as well as by neighboring West European nations, have helped improve the Czech government's ability to combat to its drug problem. In 1996 DEA and U.S. Customs provided three narcotics enforcement seminars to their Czech and regional counterparts and the FBI organized a course on financial fraud and money laundering. Czech police have praised their cooperation with U.S. authorities and requested increasingly sophisticated training courses.

Ecuador (Medium) While Ecuador is not considered an important financial center in its own right, it is widely viewed as a significant center for money laundering activities, largely because of its proximity to Colombia and the close economic and social ties between the two countries. Ecuador has ratified, the 1988 UN Convention. The GOE cooperates with the USG on money laundering investigations and has received from the USG assets seized with its assistance from Ecuadorian narco­traffickers.

Several banks maintain offshore offices, but these have come under closer regulation under the 1994 banking reform legislation. It is believed that money laundering occurs in both the banking system and the non­banking financial system. Most narcotics­related money laundering stems from the sale of cocaine, although as heroin production increases in Colombia, the percentage of money laundering due to heroin sales profits will undoubtedly increase as well. In September, major drug trafficker Jorge Reyes Torres was sentenced to 16 years in prison, bringing to a close the career of one of Latin America's major drug traffickers.

The bulk of laundered money is believed to be owned by Colombians. Estimates of the annual value of money laundered in Ecuador range in the hundreds of millions of dollars. Ecuador has signed an agreement with the United States to share information on currency transactions over $10,000, but the agreement has not yet been tested. In late 1994, the superintendent of banks issued instructions to all banks to require them to keep internal records on the identity of persons engaging in these large transactions. The national drug council issued instructions to all Ecuadorian financial institutions in late 1995 requiring them to file regular reports to CONSEP on individuals engaging in large transactions. The intent was for the information to be stored in a computerized data bank, and then be readily available for sharing with the police and the USG under the terms of the bilateral agreement. However, lack of interagency agreement among superintendent of banks, the police and CONSEP has effectively nullified any progress in this area.

Money laundering is illegal under the 1990 narcotics law. However the law lacks specificity, saying only that it is illegal for anyone to try to hide the proceeds of narco­trafficking activity. There is no specific mention of the words "money laundering" or any comparable terminology. There is no requirement in Ecuadorian law for officials of financial institutions to exercise due diligence against money laundering activities. Another weakness in the law is that it makes it illegal to help another party to launder money, but does not criminalize laundering one's own money. We have urged the GOE to improve its law by adopting the OAS/CICAD model regulations.

The Ecuadorian association of private banks has drafted its own manual on banking procedures to prevent money laundering, and in fact seems interested in avoiding the damage to its reputation and financial condition caused by adverse court rulings here or in the US.

One difficulty arises with the reluctance of bankers to report suspicious transactions. There are different points of view as to the liability of bankers who report suspicious transactions, but bankers often cite the potential to be sued for moral defamation as one reason for not reporting suspicious transactions.

In addition, they are not legally required to do so. Exchange houses (casas de cambio) and other financial institutions are equally controlled under the banking regulations.

Ecuadorian law permits the GOE to temporarily seize practically all assets belonging to narcotics traffickers, as well as those assets legally held by other persons where the GOE can make a credible case that the assets actually belong to the trafficker. The banking community has cooperated in several such cases, beginning with the Reyes Torres arrest in 1992, and as recently as the Edgar Sisa case last year.

There has been no retaliatory action taken by the traffickers themselves for these seizures. Once seized and inventoried by the police, the assets are turned over to CONSEP which can use the assets itself, or turn them over to another GOE agency. However, the assets are permanently forfeited to the Government only if there is a conviction. If the individual is acquitted, the assets must be returned in the same condition as when seized, except for normal wear and tear. Thus far, no assets have been permanently forfeited to the GOE. In 1994, the GOE and the USG signed an asset sharing agreement which allows each country to share with the other assets seized from narco­traffickers, in accordance with the contribution each country made to the seizure of those assets. During 1996, the US turned over to the GOE $51,345 in seized assets.

The asset seizure provisions are in need of reform, because in general CONSEP does not have the wherewithal to manage the larger assets. For example, a major dairy farm was seized, and CONSEP has to continue operating it. Also, the police who do the seizures, incur the danger, etc. receive no greater share of the houses, cars, etc. than do other Governmental entities such as the Ministry of education, CONSEP itself, etc.

Obviously, in a small, developing country such as Ecuador, neither the police or any other entity has sufficient resources to fully trace all assets, however they make the effort.

France (Medium) The government of France (GOF) amended its penal code in 1994 to make drug trafficking, previously a misdemeanor, punishable by life imprisonment and to subject directors of drug rings to the more severe jurisdiction of a special court for terrorism and spying. France's amended money laundering law, enacted May 13, 1996, will make it easier for the government of France (GOF) to convict on money laundering charges. The law extends the crime of money laundering beyond narcotics­trafficking offenses to include "all crimes and offenses." The 1996 law also includes new asset seizure provisions which reverse the burden of proof for government asset seizures by requiring persons in contact with drug traffickers to explain how their way of life is supported by their resources or face imprisonment. In addition, tighter controls on foreign exchange bureaus mandated by the 1996 law ­­ which require registration with the bank of France and record keeping of all transactions by exchange bureaus ­­ will further assist French customs officials, who now have authority to investigate compliance with these laws. The 1996 law also provides that TRACFIN, the French financial intelligence unit, will now receive suspicious transaction reports from these bureaux de change which are now obligated to report.

Gibraltar (Medium) Gibraltar passed the Criminal Justice Ordinance in 1995 to ensure that its offshore banks conform to the European Union's money laundering directive, and as of August 1996, no cases had been reported. However, Spanish authorities advise US officials that it is still easy to laundering money gained from drug and tobacco smuggling.

Greece (Medium) All forms of money laundering are illegal in Greece, which is not currently considered a major financial or money laundering center. On October 21, 1996, the Minister of National Economy and Finance signed the Presidential decree necessary to implement key provisions of the Greek bill on money laundering which was promulgated in 1995. One provision establishes a central authority meant to oversee the operations of the financial police. The law requires banks, securities dealers, lawyers, auditors, notaries, and insurance firms to report transactions.

Still one further step is necessary to bring the law into force. The State Council must approve the decree and forward it to the President. Greek officials caution that this final step in the approval process may be lengthy and arduous.

Despite the GOG's intention to levy taxes on government securities beginning in 1997, Greece remains vulnerable to money laundering because the GOG will continue to issue "bearer bonds." Sale of these Greek treasury obligations now totals US$22.5 billion yearly, or one­quarter of Greece's GNP.

Guatemala (Medium) The potential for money laundering in Guatemala is very high because of the weak monitoring and control of financial transactions, and the lack of laws specifically designed to combat money laundering. The amount of drug money being laundered through Guatemala is unknown, although financial institutions in Guatemala are vulnerable to the illicit introduction and movement of currency among Guatemala, the United States, and off­shore banks. During the last year, a major corruption ring centered on customs tax evasion and extortion was uncovered, giving the GOG further impetus to criminalize money laundering and develop the capability to investigate suspect financial transactions.

Hungary (Medium) Hungary is neither a major regional financial center nor a tax haven. Money laundering has been a crime since 1994 and banks are required to report significant cash transactions on a regular basis. With no effective internal banking controls, money laundering likely occurs on a limited basis, but narcotics traffickers are not particularly active. It is unlikely that Hungarian banks conduct transactions using narcodollars originating in the U.S. Hungary and the U.S. will exchange instruments of ratification for mutual legal assistance and extradition in 1997. Banks and other financial institutions are required to know, record, and report the identity of individuals and companies conducting large currency transactions. Banks and other financial institutions are required to maintain records of such transactions. Data is reported to the ministry of finance. Hungary cooperates with U.S. law enforcement agencies on the financial aspects of narcotics­related crime. Asset forfeiture laws exist but are not applied in practice.

Indonesia (Medium) Money laundering is a rapidly growing problem in Indonesia and has been the subject of increasing press attention. Indonesian banking laws are inadequate to the task of combatting this phenomenon. The extent to which money laundering in Indonesia entails laundering of illicit narcotics related money is unknown. However, during 1996, Indonesian authorities were alerted to several attempted large­scale transactions, some involving Dragon Bank, and reportedly are considering a requirement to report suspicious transactions. The Dragon Bank incident confirmed the need to provide banking institutions a "safe harbor" against prosecution when they cooperate with law enforcement.

Korea (Medium) Although there have been reports of Nigerians and Colombians entering the country carrying thousands of US dollars in bulk, these alleged incidents have not been linked to specific drug transactions. Korea is not considered a major drug money laundering country. Korea adopted new asset seizure and money laundering laws in 1995; coupled with previous action banning false name bank accounts, and providing prison terms for bankers and other money­lenders who conceal drug proceeds, Korea believes it has an adequate defense mechanism.

Lebanon (Medium) In May 1995 Lebanon acceded to the 1988 UN Convention but expressed reservations regarding provisions of the Convention which related to bank secrecy. There is a draft anti­drug code which is currently being studied by Parliament which would make money laundering a crime. The draft also creates tools by which the GOL enforcement agencies could address the particular problem of investments made by drug money. The Lebanese Banks' Association has an informal agreement between its members to discover and combat the laundering of funds. This informal agreement is to be supervised by the Central Bank of Lebanon.

Macau (Medium) The casinos are not regulated by Macau's Financial Systems Act, which compels all other kinds of financial institutions to report large or suspicious deposits and to cooperate with police. US officials continue to believe that Macau's traditional bank secrecy and long­time status as a safe­haven for criminals from Hong Kong make it conducive to money laundering, especially through casinos.

Malaysia (Medium) A narrow asset seizure law is available for use against money laundering, but Malaysia does not have a comprehensive anti­money laundering statute. The asset seizure law has had only limited success in confiscating drug­related proceeds. Most proceeds of crime in Malaysia are thought to be invested in real estate, stocks and bonds. Although Malaysian laws provide the police full access to bank records, senior government officials have publicly expressed concerns about possible money laundering activities in Malaysia's offshore financial center Labuan. Malaysia hosted and actively participated in the commonwealth law Ministers meeting in April. Following a discussion of money laundering issues, Malaysia endorsed the commonwealth secretariat's efforts to produce a model anti­money laundering law.

The Philippines (Medium) The Philippines is not an important financial center, tax haven, or offshore banking center. A bill criminalizing money laundering has been introduced in the Philippine Senate. Philippine bank secrecy laws make the amount and source of laundered money almost impossible to estimate.

However, there is no indication that the Philippines is a major money laundering center. During 1996, the Minister of Finance sought guidance from the US on improving defenses against money laundering, and two officials came to Washington for consultations with FinCEN.

Poland (Medium) Poland is not an important financial center. Money laundering is primarily related to tax evasion, other economic crimes, and criminal activity. We are not aware of significant links between money laundering and narcotics trafficking or production. Because the financial sector is underdeveloped, the dimensions and true importance of money laundering and other financial crimes are unknown.

Money­laundering is a criminal offense. The law does not apply solely to drug­related money laundering, but the law's application is limited in that only three other types of crimes can be the basis for a money­laundering charge. In addition, the proceeds from these crimes must be obtained from "organized crime activities" which is not defined. Therefore, money laundering crimes tend to be prosecuted as other crimes, such as tax evasion or the receipt of stolen property.

Money laundering occurs in both the banking system and in exchange houses. It also occurs in the turn­over of restaurants and other businesses. Money laundering proceeds are controlled by local criminal conspiracies. There is no evidence that Polish financial institutions engage in any transactions involving narcotics­derived U.S. currency or otherwise significantly affecting the United States.

Banks are required to know and record the identity of customers who engage in currency transactions over 20,000 PLN (approx US$ 8,000 equivalent). They are required to report only "suspicious" transactions. Banks are required to maintain these records for a period of five years. There is currently no centralized repository for gathering and analyzing the data from transaction reports. However, legislation is pending before the Sejm to establish a national financial intelligence unit which would function primarily as a central database for all transaction report data. The fate of this legislation will depend on election­year politics.

Banks report suspicious transactions to the local prosecutor. However, considerable discretion lies with the bank employee handling the transaction (sometimes simply a window cashier) as to whether the transaction is "suspicious" or not. Bankers are not protected by law with respect to their cooperation with law enforcement authorities.

Poland does not have specific laws dealing with the international transportation of illegal­source currency and monetary instruments. Such transactions are by nature limited by Polish foreign exchange control laws, which require that all foreign transfers of currency and monetary instruments be documented as to source and destination. However, Polish authorities admit that such "legal" documentation can be easily arranged for a price regardless of the reality of the transaction. The foreign transfer of Polish currency is prohibited. Travellers are required to report to customs officials when they import or export more than 2000 ECU (about $2,500) in currency.

Exchange houses are the primary non­banking financial institutions in Poland. (In practice other businesses ­ such as car dealerships ­ do change money.) Exchange houses are not subject to any reporting requirements. International transportation of foreign currency obtained from exchange houses is prohibited. Current reporting regulations do not apply to other frequently used laundering entities such as currency exchanges, automobile dealerships, and restaurants.

There have been no recent prosecutions of money laundering, despite occasional arrests and police investigations.

The current drafts in Parliament for revised legislation will loosen bank secrecy laws in order to bring Polish laws into closer conformity with Western European models and EU standards. Poland is required to have strong counternarcotics and banking legislation ratified before it can become a full member of the EU. In addition to the agreement with the European Union, Poland is a signatory to the Council of Europe Convention on the exchange of information in support of criminal procedures, a vehicle it has used to exchange information on money laundering.

There is no system in place specifically designed to identify, trace, seize, freeze, or forfeit assets resulting from criminal activity. Law enforcement agencies and regulators are limited to existing and inadequate financial crime laws in their efforts in this area.

Current bank secrecy laws in Poland are very restrictive, normally allowing law enforcement and/or financial regulatory agencies access to accounts only if a crime has already been established and an indictment rendered. Within this context, the banking community does cooperate with enforcement efforts to trace funds, but may interpret the laws strictly. When political pressure can be brought to bear or when there is an international investigation, banks have cooperated and released the information. Bank secrecy laws are to be amended to bring them into line with the needs of law enforcement and regulatory authorities in combatting financial crimes. The banking sector is neither opposing nor supporting the drafting of these amendments.

There are no current laws ensuring USG access to records. However, the U.S. and Polish law enforcement agencies have exchanged information and cooperate well on an operational level based on existing criminal investigative laws and procedures.

St. Vincent and the Grenadines (Medium) St. Vincent has a small, but growing, offshore financial services sector. The government passed a series of laws in 1996 to regulate the offshore sectors, including an International Banks Act, International Trusts Act, and International Business Companies Act. The government also created an offshore finance authority to regulate offshore activities. Despite this regulatory framework, money laundering has not yet been criminalized. However, a Proceeds of Crime Act currently before the Assembly would criminalize money laundering.

There have been indications that drug trafficking proceeds from both domestic and international narcotics trafficking have been laundered in St. Vincent. Authorities have cooperated, when requested, with US agencies on potential money laundering cases. In recognition of the money laundering challenge, the government invited a UK financial investigating officer to work with the St. Vincent police in 1995. His efforts resulted in the freezing of over 600,000 U.S. dollars in two drug cases.

South Africa (Medium) South Africa is the major financial center in the region and its relatively sophisticated banking and financial sector harbors great money laundering potential. Money laundering was criminalized during the November 1996 session of the South African Parliament. A comprehensive package of five crime bills targeted on organized crime were passed, including the Proceeds of Crime Act which criminalizes money laundering and provides procedures to confiscate the proceeds of any crime. A USG interagency team reviewed this bill in draft and determined that it follows, and in one case goes beyond, the forty FATF recommendations.

Vanuatu (Medium) The priority for Vanuatu has been raised to Medium in the wake of the Dragon Bank scandal. The case confirmed the concerns raised in the 1996 INCSR about the proliferation of offshore companies (between 600 and 1,000) and the belief that corporations, including some possibly controlled by traffickers, use bank charters and licenses from Vanuatu to establish bank accounts in countries other than Vanuatu. In this case, Vanuatu licensed Dragon Bank which really operated in Indonesia and the Philippines. There have also been allegations about persons connected with Vanuatu banking becoming involved in prime bank guarantee schemes. Despite these problems, Vanuatu has no foreign exchange controls, maintains strict bank secrecy, and continues its ready licensing of offshore companies which used their Vanuatu­approved incorporation papers to establish accounts at foreign banks.

Note: Reports were not available for three jurisdictions ranked Medium: Bahrain, Kuwait, and Madeira/Azores.

LOW MEDIUM PRIORITY COUNTRIES

Cambodia (Low Medium) Given its proximity to the poppy fields of the Golden Triangle and the opium/heroin trade believed to cross its borders, and the weakness of its institutions, Cambodia was raised in 1996 to Low­Medium priority to call its government's attention to its high vulnerability. Although the National Bank of Cambodia drafted anti­money laundering legislation in 1994, and there are reports that some provision for countering money laundering passed as part of a larger legislative package in December 1996, the law has yet to be approved by the King, and an English­language translation is not available.

Cambodia committed more than a year ago to ratifying the 1988 UN Convention, and taking other actions. Banking laws remain virtually non­existent in Cambodia. Many of the banks are reportedly only "fronts" for accepting cash but do not offer banking services such as checking accounts. Banks are not required to report suspicious transactions or otherwise provide information to investigators.

Cote D'Ivoire. (Low Medium) Cote D'Ivoire is an important financial center in West Africa. To the extent money laundering occurs, a significant portion is related to narcotics proceeds, and involves the banking system. Illicit activities are primarily related to heroin and cocaine, and money laundering proceeds are typically foreign owned, rather than owned by local trafficking organizations. The GOCI's financial institutions do not engage in currency transactions involving international narcotics trafficking proceeds that include significant amounts of US currency or currency derived from illegal drug sales in the US.

There is no formal mechanism for exchanging adequate records in connection with narcotics investigations and proceedings. Nonetheless, to the extent feasible, the GOCI has indicated willingness to respond favorably to any request. The GOCI has not adopted any laws or regulations that ensure the availability of adequate records of narcotics investigations to appropriate USG personnel and those of other governments. Cote D'Ivoire is a signatory to the 1988 Vienna convention and has adopted the formal articles of ratification. The GOCI has not entered into any bilateral agreements with any countries for the purpose of exchanging information on money laundering.

Money laundering from drug and non­drug crimes is a criminal offense. Banks are required to maintain records on large currency transactions; to report the data to the GOCI; and to maintain for an adequate time the records necessary to reconstruct significant transactions through financial institutions. Bankers are protected by law with respect to their cooperation with law enforcement entities. The GOCI has, to date, not been formally requested to cooperate with any law enforcement agency of the USG in investigating financial crimes related to narcotics. The GOCI has not addressed the problem of international transportation of illegal­source currency and monetary instruments. There are controls on the amount of currency which can be brought into and out of Cote D'Ivoire. Individual bankers are not accountable for the activities of their institutions. Money laundering controls are not applied to non­banking institutions.

Cuba. (Low­Medium) There is little evidence to refute the GOC claim that no money laundering occurs in Cuba. The Cuban peso is not accepted in international markets and Cuba is not considered an important financial center in the Caribbean region. All Cuban banks and the economy are controlled by the government. Cuba has no agreement with the U.S. regarding money laundering. The GOC has not published details of whether anti­narcotics cooperation agreements with other nations include provisions reLating to money laundering.

Money laundering is not a specific criminal offense in Cuba, although the Cuban criminal code states that anyone who "helps or assists" drug offenders is subject to the same sentence as the offender. Cuban banks record large currency transactions, but report such transactions only after specific requests by law enforcement authorities. Cuban banks do not automatically report suspicious transactions absent a specific request. Cuban banks maintain banking records for different periods of time depending on the type (but not the amount) of transaction. In an August press report, the government­controlled media asserted that existing "mechanisms" made it possible to investigate in detail the origin of money entering Cuba for the purpose of foreign investment, and said it would be very difficult for Cuban institutions to be used for narcotics money laundering. The exact "mechanisms," including bank regulations, used by the GOC to detect possible money laundering are not known.

Cuban customs regulations require declaration of the amount of currency being brought into or out of the country. Cuban government exchange houses do not permit transactions in excess of US$300. There were no reported cases of arrests or prosecutions for money laundering­type offenses in 1996. The Cuban government seizes and retains property suspected of being connected with narcotics trafficking. According to an August 1996 report in the government­controlled media, Cuban authorities had so far in 1996 seized US$82,613, 380 pounds sterling, 20,963 Spanish pesetas, five firearms, five speedboats, 11 outboard motors, four cellular telephones and two navigation instruments.

Denmark. (Low) There are no known cases of drug related money laundering in Denmark.

Egypt (Low­Medium) The Anti­Narcotics General Administration (ANGA) has provided the Egyptian people's assembly with programs for cracking down on money laundering and asset forfeiture. These proposals have been under study by the Assembly's sub­committees for some time without sign of progress. ANGA has no authority to push this through the Assembly. The Administrative Control Authority has requested anti­money laundering training during 1997.

The Ministry of Justice continues to endeavor to change banking laws in Egypt with an eye toward controlling money laundering (us$10,000 currency transfer limits, reduction of bank secrecy laws, and control of casino gaming operations.) However, implementation remains elusive.

Egypt is not considered an important financial center, a significant money laundering center, nor an important tax haven or offshore banking center. No laws exist regarding money laundering. The GOE has not addressed the problem of the international transportation of illegal­source currency and monetary instruments.

There are no controls on the amount of currency which can be brought into or out of Egypt. Individual bankers are not held responsible if their institutions launder money.

Jamaica (Low­Medium) Jamaica is not considered an important regional financial center; it does not provide tax havens nor offshore banking. The financial sector has experienced severe shocks in recent years, with two banks closed at government behest. The actions of the officials of the two closed banks are under investigation. The sources of any money laundered in Jamaica are unclear.

A significant amount of U.S. and other currency derived from illegal drug sales in the United States enters Jamaica. Such money laundering as occurs in the financial system is likely to involve both the banking system and the non­bank financial system (largely exchange houses or cambios), but its impact on the system is not known. The degree of control of money laundering proceeds by local trafficking organizations is unknown.

Money laundering was criminalized by Jamaica in December 1996. The law contains a number of provisions which meet international requirements but is disappointing in that it only applies to drug­related money laundering and the full force of the act cannot be engaged unless there is a conviction for drug trafficking. Money laundering controls apply to non­banking financial institutions, including exchange houses, insurance companies, and security dealers (cambios). Financial institutions are specifically required by the act to know, record, and report the identity of customers engaging in currency transactions larger than the threshold of US$10,000, but are not required to report large currency transactions unless they are regarded as suspicious. Even smaller transactions must be reported if regarded as suspicious. No specification is given in the act as to the length of time financial institutions must maintain records in narcotics­related cases. All reporting is made to a central database under the control of the director of public prosecutions.

The importation or export of currency in amounts exceeding US$ 10,000 or its equivalent must be reported to the government.

No arrests have yet occurred under the recently­passed money laundering legislation. Banks, lawyers (especially the criminal bar), human rights organizations, and opposition political groups have all objected to the money laundering legislation. While generally supportive of the law, banks believed the initial draft gave them insufficient guidance and placed them at too much legal risk for failure to report. The criminal bar believed the law destroyed the right to counsel. Human rights organizations believed thelaw exposed poorer members of society to undue harassment. Opposition political groups believed the law gave the government another for harassment, intimidation and oppression.

Jamaica has established systems for tracing, freezing, seizing and forfeiting narcotics­related assets, but has not forfeited any assets since the law's passage in 1994. Jamaica has enacted laws allowing for assets to seized upon application by a foreign government. Property that can be forfeited under the act includes 'money and all other property, real or personal, including things in action and other intangible or incorporeal property.

The pertinent legislation contains no apparent bar to the seizure of legitimate businesses used to launder drug money. An assets forfeiture/money laundering office was established as part of the Jamaica constabulary force in may 1996. The office was recently expanded, to facilitate operations under the 1994 assets forfeiture act.

However, assets may not be frozen (placed under restraint) unless drug trafficking charges have been lodged. Under the Jamaican constitution, a trafficker must be convicted, and conviction upheld on appeal, before assets can be forfeited. Appeals can take years to complete. No assets were forfeited to the government in 1996.

Montserrat (Low­Medium) (See Caribbean Dependent Territories)

Morocco (Low­Medium) The proceeds from narcotics exports from Morocco are easily repatriated. The government of Morocco makes no serious effort to trace drug or contraband money. There are in fact no laws against money laundering that would allow them to prosecute offenders effectively. Much of the revenue is invested in real estate, especially in Northern Morocco, where drug money is an important source of income and has supported a construction boom. However, as increasing numbers of office and apartment buildings sit unoccupied, drug traffickers are reportedly casting about for new investment opportunities.

Portugal. (Low­Medium) There is no evidence to suggest that Portugal is a major source of money laundering. The concern with Portugal is really a concern about offshore banking activity in Madeira and the Azores. There are no reporting requirements for the offshore banks in those jurisdictions.

St. Kitts and Nevis (Low­Medium) St. Kitts and Nevis have been actively developing the offshore financial services sector, raising the risk of money laundering activities. Authorities in Nevis have been particularly aggressive in seeking to attract offshore banks. The high degree of drug trafficking activity through and around St. Kitts and Nevis and the presence of suspected traffickers in St. Kitts have put this mini­state at greater risk for money laundering. Some money laundering appears to be occurring through the purchase and development of real estate and business property. The overall volume of money laundering appears to be limited, but the government will need to strengthen laws and regulatory mechanisms to monitor the sector. The conclusion of Mutual Legal Assistance Treaties with the U.S. and other countries would also enhance the governments ability to work with international law enforcement agencies to combat money launderers.

Slovakia (Low­Medium) Slovakia does not appear to have a serious drug­related money laundering problem, although money laundering from other sources has been detected. The government has deemed the problem significant enough to enact and implement anti­money laundering legislation. The law, enacted in late 1994, criminalizes money laundering of proceeds from all serious crimes. Separate legislation requires banks to report suspicious transactions, as do all other persons except lawyers.

A requirement that financial institutions report suspect transactions to the Ministry of Interior financial police went into effect in January, 1997. The law has a safe harbor provision that protects financial institutions from liability when they cooperate with authorities.

Trinidad and Tobago (Low Medium) Trinidad and Tobago is not an important financial center for the region. Money laundering connected to drug trafficking is believed to be substantial but little data is available. TT is not a tax haven or offshore banking center. It is suspected that money laundering takes place through banks, credit unions, stock brokerages, insurance companies and retail establishments. No cases have established the extent of money laundering.

Money laundering for any illicit purpose, including drug­related money laundering, is a criminal offense. Banks report transactions involving over approximately US$ 8,000 in cash. Banking records must be maintained for 14 years, although banks often maintain records for longer periods. The law requires banks to report suspicious transactions. Reports are made on a case­by­case basis, and in response to police inquiries. Bankers and others reporting a suspicious transaction are protected by law from prosecution. Disclosure of money laundering is not considered a breach of the banker­client relationship.

Travellers entering and departing TT must declare currency of US$ 5,000 or more to customs. Cash above US$ 10,000 in value may be seized by customs, with judicial approval, pending determination of its legitimate source. Money laundering guidelines, set by the central bank, apply only to banks. However, employees of credit unions or exchange houses are subject to money laundering penalties.

There were no arrests or prosecutions for money laundering in 1996. The law provides for confiscation of payments, rewards or proceeds of drug trafficking, or of trafficking­connected property transferred or gifts made in the prior six years. The 1994 amendments also allow external confiscation and forfeiture orders, payment of interest on sums unpaid, seizure of cash and forfeiture of abandoned properties. Legitimate businesses can be seized if used to launder money. The GOTT general treasury receives proceeds from seizures and forfeitures. There is no provision for sharing assets with other governments.

LOW PRIORITY

Afghanistan (Low) Given its present state of war and political turmoil, Afghanistan is not a money laundering center, although a significant amount of drug activity has taken place in recent years in order to finance war efforts. Afghan nationals, however, are increasingly taking part in drug and money laundering activity outside of Afghanistan, including Pakistan, Europe and the United States. DEA investigations have indicated that Afghans are laundering money in New York and New Jersey through the "hawala" alternative remittance system. Typically, cash­intensive businesses, such as restaurants and grocery stores are used to cover illicit money movement. Law enforcement officials in Asia have noticed an increase in Afghans acting as cross­border money couriers.

Andorra (Low) Although not a major financial center nor a money laundering haven, Andorra has enacted strong laws. Any act designed to conceal the origin of money or other assets derived from drug trafficking, prostitution, or terrorism, by a person who is aware or should have been aware of that origin, and any subsequent lawful use of such money or assets by such person, is punishable by imprisonment and fine. Although not a member of the European Union, Andorra has very close ties to Spain and France, and conceivably could become an alternative

Anguilla (Low) (See Caribbean Dependent Territories)

Azerbaijan (Low) Although Azerbaijans's main narcotics problem is the transit of drugs through the country, the potential inherent in this surge in trafficking and the high vulnerability of its largely unregulated banking system are our reasons for advancing Azerbaijan up from the No Priority category. Government officials point out that the shutdown of the "Balkan route" due to conflict in the former Yugoslavia have increased Azerbaijan's attractiveness as a transit route. Narcotics from Afghanistan and South Asia enter from Iran and across the Caspian sea from Central Asia, and continue on to markets in Russia and Europe. The collapse of the Soviet Union left Azerbaijan with a nearly 700 km frontier with Iran, but with inadequate police forces or know­how to patrol it. Iranian and other traffickers have begun to exploit this situation. Cross­Caspian ferries are also used to ship narcotics. Consumption is growing, with 5,952 persons registered in hospitals for drug abuse. However, government officials estimate that the actual level of drug use in many times higher. Illegal poppy and cannabis cultivation occurs, mostly in the south of the country. Corruption permeates the economy, government structures, and law enforcement, severely impeding counternarcotics efforts. Government authorities fear that many among the many unemployed and displaced persons from the conflict concerning Nagorno­Karabakh are being drawn into drug trafficking as a source of income. The government also claims that ethnic Armenians in the Armenian­occupied areas of Azerbaijan engage in drug cultivation and transport.

UNDCP representatives have goaded Azerbaijani officials to realize that Azerbaijan faces a rising drug problem and needs a coordinated national counternarcotics policy. An August visit by UNDCP head Giacomelli played an important role in crystallizing the government's awareness of the emerging narcotics problem. In August the president decreed the creation of a government commission chaired by Deputy Prime Minister Rustamov to draw up a national plan for "combating the spread of narcotic and psychotropic substance," including counternarcotics legislation. The decree also instructs the foreign ministry to conclude counternarcotics agreements with neighboring countries and other states. The UNDCP approved US$500,000 for a technical assistance program. Laws exist that criminalize drug use and trafficking. Current legislation does not cover money laundering and is inadequate to tackle police and judicial corruption.

Barbador (Low) The Barbadian offshore financial services industry continues to expand, driven largely by Canadian­ based companies. Strong offshore bank laws and enforcement, backed by existing currency controls, provide a defense against the threat of laundering. Banks are expected to report large and unusual transactions voluntarily.

The government keeps the financial sector under surveillance, and limits "tax haven" privileges. Financial services companies have been denied permission to operate because a background check revealed a history of money laundering.

Government officials are determined to maintain a financial industry free of taint, and have spoken out frequently about the importance of preventing inroads by money launderers. To this end, the government is preparing new anti­money laundering legislation, which it expects to present to parliament in the spring of 1997. The government is also completing its mutual evaluation questionnaire in preparation for a March 1997 CFATF mutual evaluation. Barbados has organized a CFATF­recommended national committee on money laundering, which has been active over the past year.

Benin (Low) Benin's proximity to Nigeria and its relatively open economy inevitably make it attractive to those wishing to dispose of ill­gotten gains from narcotrafficking. There were no significant developments with regard to money laundering in Benin in 1996. The anti­narcotics bill awaiting action in the national assembly contains a provision outlawing money laundering, but the current legal framework is not adequate. The anti­narcotics bill also contains a provision permitting seizure and forfeiture of assets derived from the drug trade and money laundering. Current law does not permit asset seizure and forfeiture.

In discussions with embassy officials and in public comments, Beninese authorities say that they suspect money laundering is taking place in Benin. With economic liberalization, there are numerous import companies that may be being used as front companies for laundering drug money. In particular, there is a large market for used vehicles at Cotonou's port, many of which are destined for Nigeria. Nigerians are also heavily involved in this area of the economy.

Benin's financial system does not normally engage in currency transactions involving international narcotics trafficking proceeds that include significant amounts of U.S. currency. Money laundering is not a criminal offense. There is no legal requirement that banks report suspicious transactions.

British Virgin Islands (Low) (See Caribbean Dependent Territories)

Dominica (Low) Money laundering is believed to be minimal, due in part to the undeveloped financial sector. Some domestic­based trafficker groups launder proceeds through non­financial sectors of the economy. The Government has ratified the UN convention and criminalized money laundering. There are controls on the export of money and a requirement for banks to report unusual foreign exchange transactions. As in other Eastern Caribbean countries, the government is looking to expand its offshore financial services sector, and has just passed offshore banking legislation. As the sector expands, the government will need to strengthen its regulatory capability to prevent abuse.

El Salvador (Low) The government of El Salvador is aware of the dangers of drug trafficking and money laundering, but has yet to implement an effective anti­narcotics policy. The tremendous growth of the country's financial sector, its stable currency, and the lack of specific legislation against money laundering make El Salvador a fertile field for such activity.

The recent passage of a landmark reform of the Salvadoran criminal procedures code, and the expected passage of related legal and judicial reforms, should provide a needed basis for the application of existing anti­narcotics legislation, and for the development of effective legislation against money laundering. The Central American money laundering agreement of July 1996, as well as U.S. training initiatives, have heightened attention to this issue.

Estonia (Low) Estonia's location astride routes linking the Nordic countries to central Europe, and Russia to western Europe, makes it an attractive transit area for illicit drugs. According to Estonian authorities one route is for drugs to transit Estonia from European countries (primarily Poland, Germany, Holland) en route to Western Russia (the St. Petersburg region). Another route is via Spain, where Estonian traffickers have reportedly established connections. Drugs originating from North Africa and South America transit Spain bound for the Nordic countries through Estonia. In 1996 Sweden and Finland investigated several cases where seized drug shipments followed this route.

Estonian authorities express serious concern about financial crimes, especially money laundering, as Estonia's role as a regional financial center grows. An intergovernmental working group supported by EU and UNDCP has been formed to deal with financial crimes. The working group includes representatives from the central bank, ministries of justice and finance and also the economic police. In Estonia money from narcotics is regarded as a far less important source for laundering than earnings from tax evasion and smuggling. Law enforcement officials acknowledge that they are ill­prepared to deal with sophisticated financial crimes, the main reason being a lack of legislation which this intergovernmental working group is intended to remedy.

Illegal proceeds from foreign sources are deposited directly into Estonian banks and eventually transferred abroad. Estonian banks are routinely used as a conduit for funds flowing to and from Russia and Western countries. These funds are transferred from one bank to another through a variety of businesses, shell companies and offshore centers. Local organized crime groups involved in the illegal fuel trade and other smuggling activities launder their proceeds through commercial accounts. Shell corporations are also used to transfer funds to Estonian accounts opened with false identification. Although Estonian laws provide for regulation of traditional financial institutions such as banks, some untraditional financial institutions remain unregulated and offer ready means to launder money outside the banking system.

The Estonian parliament has yet to criminalize money laundering. While banks must identify customers and maintain records, banks are not required to report suspicious transactions or large currency transactions.

Estonia is a signatory of the Riga Declaration of November 143, 1996, which commits the three Baltic states to criminalize money laundering and take other steps to strengthen international cooperation.

Finland (Low) Finland enacted legislation criminalizing money laundering in 1994. There was one arrest, investigation and prosecution of a small group of individuals for narcotics related money laundering in cy 1996. The case involved a sum of money totaling circa usd 500,000.

The French West Indies (Low) Martinique, Guadeloupe and French Guiana are departments of France, subject to French law. Money launderers are active in the islands, especially on the French side of St. Martin and on St. Barthelemy, which are part of the Department of Guadeloupe. The free port status, offshore banking, heavy flow of tourists and easy access to the less­controlled Dutch half of St. Martin make that island the most susceptible to money laundering. To combat the drug threat in St. Martin and St. Barthelemy, DEA and the U.S. Customs Service are fostering close liaison with all French law enforcement agencies. The past two years, the gendarmerie and French customs together played a major role in drug law enforcement throughout the Caribbean. Enhanced drug control measures enacted by the GOF in 1996, including new money laundering, asset seizure, and banking reporting laws, provide French law enforcement agencies with the tools to further expand drug law enforcement in the region in 1997 and beyond.

Ghana (Low) Money laundering occurs in relation to proceeds from diamonds, gold and narcotics. The non­bank financial systems (foreign exchange bureaux) are suspected conduits for illicit proceeds. Money laundering is a criminal offense. The special fraud office also handles cases of money laundering which are not drug related. Banks and other financial institutions in Ghana are not required to report the identity of customers engaging in significant, large currency transactions. However, the attorney general is given special powers for the purpose of any investigation into narcotic offenses, and can authorize police to inspect and take copies of any document held by a bank or financial institution. The attorney general has further powers to require any person to furnish him in writing a sworn statement identifying his properties both inside and outside Ghana, his sources of income, earnings or assets.

Bankers and others are protected by the same law with respect to their cooperation with the law enforcement entities.

Any amount of currency can be brought into the country provided it is declared to customs when entering the country and also when leaving the country. There have not been any arrests and/or prosecutions for money laundering in the year under review.

Once there is proof that a narcotic offense has been committed, any equipment or property used for the commission of the offense shall be forfeited notwithstanding that no person has been convicted of the offense. Ghana has not enacted laws for sharing narcotic assets with other governments. It is proposed under current amendments to the law that proceeds from narcotic related seizures be given to the board instead of the present system whereby such seizures form part of the consolidated fund of the state. The law allows for criminal forfeiture.

The banking community would not easily give information on bank accounts of drug dealers but it is hoped that when a drug dealer's bank accounts would be liable to seizure, the banking community would cooperate.

Guyana (Low) Guyana is not an important regional financial center, nor is it considered an important tax haven. Offshore banking is not permitted. There are indications that financial crimes, such as bank fraud, may be increasing. there are also indications that contraband smuggling generates funds which are laundered, mostly through currency exchanges (know locally as cambios). The government of Guyana is investigating the illegal export of large quantities of gold, which is suspected to have been purchased with narcotrafficking funds. Neither the country nor any senior official facilitates or engages in money laundering activities as a matter of government policy. The currency exchanges, or cambios, engage in transactions which include significant amounts of U.S. currency. It is suspected Guyana may be utilized as a conduit for such transactions between Colombia and the United States. A tax information exchange act is in place between Guyana and the United States.

Haiti (Low Priority) There has been modest growth in the banking industry since Aristide's return, amidst speculation some part of that growth may be related to money laundering. There is doubt, however, that large­scale money laundering occurs in Haiti because of the country's weak economic and political sectors. Part of the growth may be explained by the large (estimated at US$ 114 million for FY 1996) foreign remittances Haitians living abroad send to relatives. Money laundering concerns focus largely on currency exchange houses which are essentially unregulated. Haiti does not have money laundering laws in place. Scotia Bank is the only bank with a system in place for identifying the source of large deposits by its clients. The internal checks were put in place by Scotia Bank due to its concern over the possibility of the bank unknowingly accepting money laundering proceeds and transferring those proceeds abroad. There is no government requirement that such information be provided to the GOH. The GOH has not yet formulated a national policy vis­a­vis money laundering, other than to develop legislation for parliamentary review, which has not yet been adopted. Asset seizure and forfeiture laws allow for GOH confiscation of narcotics­trafficking vessels and aircraft; however, Haiti has not taken advantage of such legal measures. GOH law requires a criminal conviction in any narcotics case before assets may be disposed of by the GOH.

Honduras (Low) Conditions exist for major money laundering activities due to the lack of legal control. While the actual extent of laundering is unknown, anecdotal evidence suggests it is a growing problem. It is almost certain that some laundering occurs through the cash purchase of land and other investments as well as vehicles and expensive consumer products. The expected passage of comprehensive money laundering legislation in 1997 will significantly aid law enforcement efforts. Honduras enacted a weak asset seizure law in 1993. Stronger asset forfeiture legislation is currently pending before congress and is expected to be passed in 1997.

Iran (Low) Iran is not considered an efficient base for money laundering operations.

Iraq (Low) While the state­owned Rafidain Bank has not resumed its once­powerful position in the Middle East, there are concerns about Iraqis engaging in illegal financial schemes.

A collaboration between Austria and Interpol resulted in the arrest of eleven illegal immigrants from Iraq, Iran, Syria and Turkey and recovery of large sums of US currency as well as narcotics and ammunition. There was speculation that the illegal immigrants were being used to transport narcotics and/or arms.

Ireland (Low) Ireland is not at this time a major international financial center, off­shore banking center or tax haven. However, the government is aggressively promoting its fast­growing off­ shore investment center, created in 1988, which now employs over 3,200 people in more than 400 companies. Government officials believe that the major local drug traffickers account for most of the money laundering in Ireland, and that it is generally not international in scope. New money laundering legislation gives authorities greater powers to monitor financial transactions and imposes stricter reporting requirements and criminal penalties on financial institutions and other professionals. A new criminal assets bureau has significantly increased seizures of money laundering proceeds and illegitimate assets, which are subject to forfeiture. New legislation provides that persons importing currency valued at more than 8,000 dollars make a customs declaration upon entry into Ireland. With the exception of cooperation under the new customs mutual assistance agreement, all law enforcement cooperation with USG officials is on an informal basis. No negotiations are underway to establish an official mechanism for exchanging records in connection with narcotics investigations and proceedings. Ireland cooperates fully under European Union regimes for exchange of information relating to narcotics trafficking.

Kenya (Low) Nairobi is East Africa's banking and financial hub. Although there is no shortage of banking and other financial fraud, Kenya is not believed to be a significant money laundering center for narcotics proceeds. The law is strict: laundering the proceeds of narcotics transactions is an offense under the 1994 narcotics act, punishable by up to 14 years in prison. The 1994 act also provides police with broad powers to compel production of evidence, which explicitly override bank secrecy and other legal limitations on information disclosure. Police sources say they enjoy good cooperation from the banking community.

The 1994 narcotics act provides for forfeiture of all property owned by a convicted person, as well as instruments of the violation, including equipment and conveyances, and any land upon which narcotics are grown. The act also provides for tracing and preserving assets in respect of any person who has or is suspected of having committed a drug­related offense, upon the GOK's or a foreign government's request. In practice, the forfeiture provisions have been used sparingly since taking effect in August 1994. In 1996, forfeited property consisted of one commercial truck, one passenger automobile, and one wooden dhow, having a total estimated value of US$150,000. Forfeited assets are auctioned and the proceeds remitted to the national treasury. A portion of the proceeds are supposed to be earmarked for drug rehabilitation programs.

Kyrgyzstan (Low) Kyrgyzstan does not produce significant quantities of narcotics, but the country is becoming a major transit point for Afghan opium to Russia and Western Europe. Efforts to control this trade have been hampered because of the lack of resources of the Kyrgyz law enforcement agencies. Kyrgyzstan has signed the three UN drug Conventions, to include the 1988 UN drug Convention, and has nascent relationships with the US DEA and FBI.

Since the break­up the former Soviet Union, Kyrgyzstan has not had a working legal framework to cover many aspects of money laundering arrest, seizure and prosecution. Counter­narcotics legislation is ready, however, and could be passed in 1997.

Laos (Low) is not considered a major financial center and its commercial banking system is still in the early stages of development, with the assistance of international financial institution consultants. The senior Lao leadership has expressed concern about the potential for money laundering operations, however, in the many foreign (overwhelmingly Thai) banks which have established branches in Laos. The Lao are already discussing possible legislation to counter such activities with the resident UNDCP office which has provided previous support for legislative development. The Lao have continued to participate in regional money laundering conferences. The Lao kip is not a free currency. The GOL has very strict laws on its export.

Lao customs legislation, enacted in 1994, specifically authorizes asset seizure. The law states that the means of conveyance of contraband can be seized along with the contraband. There have been several instances of such seizures in drug­related cases during 1996. A UNDCP legal advisor, who spent one year in Vientiane assisting in development of draft narcotics legislation, stated that under current laws and judicial procedure, provisions are adequate to deal with narcotics violations and that the courts can order the seizure of assets. The legal advisor opined, however, that additional legislation would be required should the current one­party system of national political administration be modified in the direction of greater individual rights, including the rights of those accused of crimes. The previously referenced draft legislation also includes a section of asset forfeiture.

Latvia (Low) Money laundering in Latvia is associated with organized crime and involves both foreign and domestic proceeds. The illegal sale of Russian raw materials provides the bulk of foreign proceeds laundered in Latvia, and currency movements parallel those experienced in Estonia.

The Central Bank has been improving its supervisory procedures as well as its banking regulations to address weaknesses in the system that allow opportunities for money laundering. However, Latvia has not yet adopted money laundering legislation.

Working closely with UNDCP, the USG has devoted significant effort to promoting the adoption of money laundering legislation in Latvia. Two seminars on the subject were conducted in Riga. At the November seminar which was also supported by the EU Commission, the three Baltic prime ministers signed the Riga declaration against money laundering. The USG will continue to work with UNDCP to design an assistance program to enable the Latvian government to implement legislation and build necessary institutions.

Lithuania (Low) Although Lithuania signed the 1961 and 1971 UN drug conventions in early 1994, the 1988 narcotics convention has not yet been ratified because the parliament has not passed legislation which would allow law enforcement officials to conduct effective investigations of suspected money­laundering operations.

As regulation of Lithuania's private banking sector is still in its formative stage, most of Lithuania's financial sector woes are the result of widespread laundering of illegal money. Lithuania is working with eu officials on a draft money­laundering law. The project is part of the EU­Phare program's "combatting drugs in Central and Eastern Europe" initiative and is the first of its kind in the Baltics.

Malta (Low) Based on all information available to U.S. government authorities, Malta does not have a money laundering problem and it is not considered a major money laundering country. However, while Malta has a law dealing with money laundering there is some question about how effectively it can deal with extradition cases. The 1931 extradition treaty has no provisions concerning money laundering or conspiracy, and the language used in such cases, "obtaining money or property under false pretensions," has proved inadequate. A review of the extradition provisions between the U.S. and Malta would be necessary to adequately cover extraditable cases of money laundering.

Further, many provisions of Malta's tax code are designed to attract outside investors and depositors, especially from countries with which Malta has a double­taxation treaty. This situation is seen by some as a possible incentive for money laundering. In part because of such concerns, the U.S. notified Malta in November 1995 that it was unilaterally cancelling the existing double­taxation treaty between the two countries, effective January 1, 1997.

Asset forfeiture is included in the penalties/punishments prescribed by the laws regulating dangerous drugs in Malta. In addition to rather stiff penalties for conspiracy, importation, trafficking, cultivation possession with intent to supply and drug dealing, the courts can also order the forfeiture of any part or all of the assets of the accused if these are related to the crime of which the accused is found guilty.

Monaco (Low) The principality is not a major financial center, and does have money laundering controls, which affect casinos as well as financial institutions. A few isolated incidents suggest that Monaco is vulnerable but vigilant.

Mozambique (Low) In recent years Mozambique has emerged as a significant and growing transshipment point for narcotics (primarily Mandrax and hashish but also cocaine) destined for the south African and European markets. The country's drug trade appears to be tied in part to regional arms trafficking and stolen vehicle syndicates and is facilitated by Mozambique's extensive transportation links to neighboring countries. There has also been increasing concern that money laundering and related financial crimes could become significant problems in Mozambique, as a result of these criminal activities.

Nepal (Low) The USG is not aware that Nepal has any money laundering or asset­seizing forfeiture legislation as called for by the 1988 UN Convention. Nepal has not yet acceded to the 1971 Convention on Psychotropic Substances, but the GON has accorded high priority to ratification.

New Zealand (Low) There is no evidence of significant money laundering activities in New Zealand.

Norway (Low) Norway is not a major world financial hub, tax haven, or offshore banking center. Money laundering is a criminal offense in Norway and is adequately investigated by a special police unit on economic crime (ECOKRIM). A draft law requiring that large money transactions be reported to ECOKRIM has recently been introduced and is expected to be passed by parliament by December 1997. Laws on asset forfeiture and seizure are adequate and aggressively enforced, and drug­related money laundering is unusual.

Romania (Low) There is concern about whether Romania could become a money laundering country. The economy is still in transition and as a result there is potential for investment in most sectors, creating the possibility that money could be laundered.

Seychelles (Low) In response to international concerns, the Seychelles government decided in 1996 not to implement previously approved measures that would have offered large­scale investors a no­questions­asked opportunity to deposit proceeds from any source, as well as protection against international requests for extradition and asset seizures. There is currently no evidence substantial money laundering occurs in the Seychelles, but the United States and others continue to monitor the situation.

Sri Lanka (Low) There is no conclusive evidence that money laundering is occurring on a large scale. The increasing amount of heroin transiting and being sold within the country, however, would indicate that drug­related money movement takes place, specifically between India and Sri Lanka. The Cabinet has approved new legislation for consideration by Parliament in 1977 which includes anti­money laundering provisions and drug­related asset forfeiture. Sri Lanka implemented strict bank secrecy laws earlier in the decade, and even offered numbered bank accounts to attract hard currency. However, transactions related to drug trafficking are excluded from the secrecy protection. Common means of money movement include invoice manipulation and underground banking, particularly between India and Sri Lanka. These underground or "hawala" channels are used extensively by businessmen as well as drug traffickers throughout India, Pakistan and the rest of South Asia. Sri Lanka's liberalized foreign exchange and investment policies would seem to make "hawala" schemes attractive only to individuals seeking to launder or hide the origin of money, and not to persons conducting legitimate business transactions.

St. Lucia (Low) Under the Proceeds of Crime Bill, money laundering is illegal and there are controls on foreign exchange. Officials are adamant about protecting their banking system by ensuring adherence to offshore banking laws. In 1995, an anti­money laundering coordination group was formed under the Attorney­General. The government of St. Lucia is considering steps to develop an offshore banking industry.

Suriname (Low) Primarily Dutch­owned banks in Suriname are sensitive to money laundering methodology and money laundering by outside organizations. Local traffickers are utilizing restaurants and supermarkets to launder some of their proceeds. Quasi­banking organizations, which pay exhorbitant interest to depositors, may also be involved in laundering activities. Local cocaine traffickers may have purchased professional soccer teams in Suriname to help launder local currency.

The SG has limited means to monitor possible money laundering violations. The central bank has some regulations against laundering, but proposed legislation has not moved forward.

Sweden (Low) Money laundering is a crime under Swedish law, which requires banks and other financial institutions to identify new customers and register large currency transactions (over usd 15,700) with the Swedish central bank and report any suspicious individuals/transactions to the police. From January 1997 this will also include money exchange businesses. Swedish law also provides for the seizure of assets derived from drug­related activity. In 1993, the Swedish police have established a "national financial intelligence service" unit with a staff of ten to enforce these laws. The government is preparing additional legislation in 1997 to tighten up existing money laundering control.

Syria (Low) At the present time, Syria has no specific laws against money laundering but the Syrian government hopes to have such legislation drafted in 1997. Despite the absence of specific legislation against money laundering, Syria's government­controlled banking system is not propitious to money laundering activities. Opportunities could exist outside the banking system, but Syrian law 24 prohibits the handling or possession of, and financial transaction in, any foreign currency. Until mid­1996, the source of all foreign currency had to be declared when deposited in a Syrian bank account. To date, the Syrian government continues to regulate tightly the amounts of money that can be withdrawn from banks, and the amount of currency that can be taken out of the country ($2,000 per person). These tight restrictions and the absence of private banks inhibit money laundering, which, although technically possible, is much easier to carry out in neighboring Lebanon.

Ukraine (Low) Money laundering appears to be a relatively minor, but growing, problem in Ukraine. Some unsubstantiated reports attribute the spate of swanky new nightclubs and restaurants in Kiev and other major Ukrainian cities to laundered profits. Ukraine is not a financial center, and the Ukrainian financial sector is highly underdeveloped. MVD sources tell they uncovered no money laundering cases involving narcotics in 1996, although they admit they have very little expertise in the area.

Uzbekistan (Low) Uzbekistan continues to be an important transshipment route for opium products and hashish en route from South Asia to Europe. The Uzbek government is working to develop the legal and legislative framework needed to combat narcotics, but the work has been slow and has so far not been sufficient. Considerable law enforcement attention has been devoted to counternarcotics, but the undermanned, resource­poor law enforcement organs have made barely a dent in narcotics trafficking. Uzbekistan has stepped up its efforts to cooperate with its neighbors, with the UNDCP, and with the United States and other western countries in counternarcotics efforts.

Illicit cultivation, production, distribution, sale, and transport are properly criminalized. However, money laundering legislation is non­existent, as are extradition and mutual legal assistance treaties, and asset seizure regulations are vague. Moreover, there are concerns that Uzbekistan's narcotics laws­­like many of its other laws­­fall short of international standards on such issues as due process.

Vietnam (Low) There is no indication that extensive money laundering is being done through Vietnam's banking system. Vietnam's legal and banking structures are not well­regulated, however, and could possibly be manipulated by drug traffickers or money launderers. A new banking law is expected to be submitted to the national assembly early in 1997, but it is not known whether money laundering will be among its provisions. The new comprehensive narcotics control law now in preparation is expected to include provisions on money laundering. The state bank is concerned about the danger of money laundering, and some state bank personnel have received training in this area. The state bank has tried to upgrade its surveillance of unusual bank transactions. Vietnam does not control extensive private currency exchange activities, which can easily be utilized by drug traffickers. U.S. currency circulates in Vietnam and is used for border transactions of all types. There is no official SRV policy which condones the laundering of funds acquired in the trafficking of narcotics. As of the end of 1996, the SRV did not have a bilateral antinarcotics agreement with the United States. The SRV has begun cooperating with the United States on counterfeit and other criminal cases and this cooperation possibly could be extended to money laundering cases.

Western Samoa (Low) Reports about money laundering activities in Western Samoa's offshore zone have risen over the past few years. With some of the strictest bank secrecy and most flexible offshore corporation laws, Western Samoa appears to be creating an environment attractive to money launderers and fraudsters. Corporate registration documents may be recorded in any language and records may be maintained anywhere in the world. Meetings of shareholders and directors are not required. Western Samoa has no tax treaties or agreements to exchange information with other countries. Corporate documents filed with the registrar can only be viewed with written permission from the international company and severe criminal penalties can be applied to anyone who reveals information about an international company or an international trust.

Yugoslavia (Low) Serbia/Montenegro is not an important regional financial center. Montenegro declared itself an international offshore include offshore banking. (add)

Zambia (Low) The Bank of Zambia (BOZ) and the GOZ are concerned that money laundering is rampant in the banking industry. Proposals to tighten banking standards await legislative action in 1997. The GOZ has increasingly used its legal authority to confiscate property of suspected drug traffickers and money launderers. The courts have not, however, always sustained these confiscations.

A number of banks are considered money laundering facilities ­ some ministers and other government officials hold significant financial positions in a few of those banks. No legal proceedings have yet been directed against the allegedly corrupt financial institutions or the ministers linked to those banks or foreign exchange houses.

Zimbabwe (Low) Recent liberalization of Zimbabwe's economy may have signaled an invitation to illicit cash. Modern financial regulations and laws addressing money laundering have not yet filled the gap left by the lifting of the rigid currency transaction restrictions of zimbabwe's state­ guided economy of the 1980's. Local banking sources have not yet noted an alarming amount of suspicious activity, but it is probably just a matter of time before the waters are seriously tested.

Reports on these Low Priority countries were not available:

Bermuda, Cook Islands, and Sierra Leone.

NO PRIORITY COUNTRIES

Armenia (No Priority) The spokesperson of the central bank of Armenia claimed in a December interview that money laundering does not constitute a serious problem in Armenia. Other sources of information on money laundering are not available. There has been an increase in narcotics trafficking through Armenia.

Bangladesh (No Priority) Drug money laundering is not a problem in Bangladesh, despite the indication that Bangladesh is used as a transit point for drugs coming from both the Golden Triangle and the Golden Crescent. Bangladesh law provides for court­ordered examination of financial records and confiscation of assets, but these endeavors are generally ineffective when attempted due to the extreme burden of proof placed on law enforcement, whose officials are usually deterred from pursuing those avenues of investigation.

Belarus (No Priority) Belarus is not considered a major regional or international finance center. Belarusian authorities are aware of money laundering activities from foreign and domestic sources of crime. The illegal sale of Russian raw materials accounts for the bulk of foreign proceeds laundered in Belarus. Domestic laundered funds are generated by the sale of contraband alcohol and tobacco, arms, narcotics, and, to a lesser extent, from capital flight, tax evasion and fraud, and embezzlement of state assets. Belarusian officials say money laundering operations are readily conducted through commercial ventures, banks and other financial institutions. Belarusian banks are commonly used to launder funds from foreign sources, especially from Russia, the Baltic States, and other CIS nations. These transactions are conducted in cash, or through the use of wire transfers, bank drafts or travelers checks. False invoicing schemes are also used. There are no estimates of the volume of illicit proceeds transactions. The Belarus parliament has not criminalized money laundering but draft legislation is said to be in the formative stages. There are currency control requirements, mandating banks to report transactions of more than US$10,000 equivalent.

Botswana (No Priority) Botswana is not, nor is it likely to become, a significant center for the production of narcotics or precursor chemicals, or for narcotics trafficking, or for money laundering operations. Under Botswana's stringent laws, the courts are authorized to identify, freeze, and forfeit drug­ related assets, while the Bank of Botswana has the power to provide information regarding large currency transactions to law enforcement agencies.

Croatia (No Priority) Croatia is not a major financial center. What evidence there is of money laundering indicates that in general it is not related to narcotics activity. Croatia is not a tax haven. Legislation designed to control money laundering is currently before parliament.

Ethiopia (No Priority) There is no evidence that Ethiopian banks or businesses are used for money laundering purposes.

Grenada (No Priority) In an effort to diversify its national revenue base, Grenada took steps in 1996 to develop what had been an almost non­existent offshore financial services sector. The Government recently approved legislation that will make possible the establishment of a range of offshore financial services including international banks, trust and trust management companies, and captive insurance companies. The government has also licensed an offshore gaming industry. Grenadian officials have made clear their desire to develop these sectors carefully by strengthening the regulatory framework and cooperating closely with international law enforcement organizations to vet potential operators before issuing licenses. There has been little evidence of significant money laundering in Grenada, but the expansion of offshore sectors will create new vulnerabilities.

Iceland (No Priority) Money laundering per se is not a crime in Iceland. To be a crime, laundered money must derive from some related activity that violates Icelandic law. Recent and current cases of money laundering in violation of Icelandic laws do not involve drugs. There were no reports of assets seized in 1996. (Note: convention and FATF)

Jordan (No Priority) Lack of a money laundering law may prove to be an attraction for drug traffickers in the region whose countries have adopted money laundering laws. Jordan has seen an increase in the movement of Turkish heroin and Captagon pills through Jordan. Money laundering is not a crime in Jordan. The prospect of a money laundering law is not envisioned for the near future. Currently, there are no laws for financial institutions which require them to advise law enforcement of large currency deposits or other suspicious transactions. Jordan's economy relies heavily on deposits from Palestinian expatriates. Jordan is not considered a regional financial center.

Kazakstan (No Priority) In 1996, the Kazakstani parliament passed a law banning anonymous bank accounts, a significant step against money laundering. No statistics are available on money laundering. The GOK has requested U.S. assistance in this area as a follow­on to recent FBI training on white collar and organized crime.

Liberia (No Priority) Liberia is a nation caught in the throes of a protracted civil war; troubled by a failing economy, diminishing social services, an impaired and tarnished civil administration and a nearly bankrupt government.

Moldova (No Priority) We have no information to suggest that Moldova is used for money laundering related to narcotics but organized crime activity generates illegal proceeds.

The embryonic state of the banking industry prompts criminals to launder money through various businesses or to send proceeds to bank accounts abroad. However, the availability of nominee accounts could attract money laundering activity to Moldovan banks in the future. The adoption of anti­money laundering legislation remains uncertain.

Nicaragua (No Priority) The GON's money laundering bill languished in committee in the national assembly during 1996, and never came to a vote.

Nauru (No Priority) Reports of capital flight and alleged money laundering through Nauru's offshore financial center have increased in the past year, prompting renewed concern over the island's involvement in illicit financial activity. Like other offshore banking centers, Nauru is a tax haven for individuals and corporations and has strict bank secrecy laws. In 1994 (last report) Nauru had more than $680 million invested offshore, making it one of the wealthiest nations per capita. When Nauru depletes its supplies of phosphate, around the turn of the century, Nauru will become highly dependent on its financial services industry for foreign exchange.

North Korea (Low) While North Korea's tightly controlled economy repels criminals from laundering money through its financial system for personal gain, several North Korean diplomats recently have been involved in schemes to smuggle counterfeit US currency.

Oman (No Priority) There is no indication that money laundering is a current or potential problem for Oman's small banking industry.

Qatar (No Priority) The Central bank has enforced a strict know­your­customer and recordkeeping requirement, and Qatar does not have a money laundering problem.

Slovenia (No Priority) Despite of its small size, the Republic of Slovenia is increasingly facing drug­related problems from the production, consumption and international drug trafficking. Slovenia is a signatory party to the 1988 UN Convention. Accordingly, Slovenia had developed and initiated a number of policies to deal with the emerging drug problems including: adopting special precursor laws, cooperating with other un members especially neighboring countries, and playing a special role in INTERPOL.

Due to its geographic location, Slovenia is actively included in the "Balkan route" for heroin smuggling and views itself as one of the crossings for international drug trade into western Europe. The largest inflow of drugs comes from the bordering countries of Hungary, Croatia and Austria, as well as through its sole seaport city of Koper. Slovenia is also used as a transit country for the smuggling of cocaine from South America for final distribution in Western Europe. Slovenia believes that South American countries are extensively using the north Adriatic ports of Rijeka in Croatia, Koper in Slovenia and Trieste in Italy as intermediate points for the final destination of cocaine which is largely Western Europe. Although the extent and nature of these Adriatic drug shipments are not well known, Slovenia, with the cooperation of Croatia and Italy, is investigating and closely monitoring these areas for drug trafficking.

The concern is that drug money and other illicit proceeds may well follow this trafficking route.

Swaziland (No Priority). Money laundering does not appear to be a concern at this time.

Tajikistan (No Priority) Tajikistan's economy and banking structures are not conducive to money­laundering.

Turkmenistan (No Priority) The drug industry is increasing its efforts to use Turkmenistan as a conduit to smuggle illicit drugs to the west, and precursor and essential chemicals to producers in Southwest Asia. Other efforts are being made to open new markets and cultivate opium. The growing number of casinos and foreign­run luxury hotels also raises questions about Turkmenistan's vulnerability to money­laundering activities associated with the narcotics trade, although no official cases have been reported. Turkmen authorities remain concerned that crime groups may be laundering funds through casinos and hotels. For example, the two foreign­owned luxury hotels in Ashgabat are owned by the family of an individual with a prior conviction for heroin trafficking in the United States.

Turks & Caicos (No Priority) (See Caribbean Dependent Territories)

Yemen (No Priority) There is no indication that money laundering is a current or potential problem.

Other No Priority countries and territories include:

Albania, Algeria, Angola, Burkina Faso, Burundi, Central African Republic, Cameroon, Cape Verde, Chad, Comoros, Congo, Djibouti, Equatorial Guinea, Eritrea, Solomon Islands, Fiji, Gabon, Gambia, Guinea, Guinea­Bissau, Kiribati, Lesotho, Libya, Madagascar, Malawi, Maldives, Mali, Marshall Islands, Mauritania, Mauritius, Micronesia, Mongolia, Northern Marianas, Namibia, Nauru, Niger, Oman, Papau New Guinea, Qatar, Rwanda, Saudia Arabia, Somalia, Sudan, Tanzania, Togo, Tunisia, Tuvalu, Uganda, US Virgin Islands, Western Sahara, Yemen, Zaire, and Zanzibar.

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