HONDURAS: 2004-2005 INCSR PART II, MONEY LAUNDERING

UNCLAS SECTION 01 OF 05 TEGUCIGALPA 002816

SIPDIS

STATE for INL and WHA/CEN
Justice for OIA and AFMLS
Treasury for FinCEN

E.O. 12958: N/A
TAGS: KCRM KTFN KJUS ECON PGOV PREL HO
SUBJECT: HONDURAS: 2004-2005 INCSR PART II, MONEY LAUNDERING
AND FINANCIAL CRIMES.

REF: State 254401


1. Post provides its submission for the 2004-2005
International Narcotics Control Strategy Report (INCSR) Part
II, Money Laundering And Financial Crimes.

Introduction and General Questions

Two years after passing a new law against money laundering,
the government of Honduras has made considerable progress in
implementing the law, establishing and training the entities
responsible for the investigation of financial crimes, and
improving cooperation among these entities. In 2004, these
efforts began to pay off, with 16 money laundering-related
arrests, seizure of over $6 million worth of cash and goods,
and the first five convictions for money laundering crimes
in the country's history. Sustained progress will depend
upon increased commitment from the government of Honduras to
prosecute financial crimes aggressively.

Honduras is not an important regional or offshore financial
center and is not considered to have a significant black
market for smuggled goods (though there have been recent
high-profile smuggling cases involving gasoline and other
consumer goods). Money laundering, however, does take place
in Honduras, primarily through the banking sector but also
through currency exchange houses and front companies as
well. The vulnerabilities of Honduras to money laundering
stem primarily from significant trafficking of narcotics,
especially cocaine, through the region, though smuggling of
contraband may also generate funds that are laundered
through the banking system. Money laundering in Honduras
derives from both domestic and foreign criminal activity,
and the proceeds are controlled by local drug trafficking
organizations and organized crime syndicates. Honduras is
not experiencing an increase in financial crimes such as
bank fraud. It is not a matter of government policy to
encourage, facilitate or engage in laundering the proceeds
from illegal drug transactions, from other serious crimes,
or from terrorist financing. However, corruption remains a
serious problem, particularly within the judiciary and law
enforcement sectors.

Laws and Regulations to Prevent Money Laundering/Terrorist
Financing

Money laundering has been a criminal offense in Honduras
since 1998, when the passage of Law. No. 27-98 criminalized
the laundering of narcotics-related proceeds and introduced
various record keeping and reporting requirements for
financial institutions. However, weaknesses in the law,
including a narrow definition of money laundering, made it
virtually impossible to successfully prosecute the crime.

In 2002, Honduras passed Decree No. 45-2002, which greatly
strengthened its legal framework and available investigative
and prosecutorial tools to fight money laundering. Under
the new legislation, the definition of money laundering was
expanded to include the transfer of assets that proceed
directly or indirectly from trafficking of drugs, arms,
human organs or people, auto theft, kidnapping, bank and
other forms of financial fraud, and terrorism, as well as
any sale or movement of assets that lacks economic
justification. The penalty for money laundering is a prison
sentence of 15-20 years. The law also requires all persons
entering or leaving Honduras to declare, and if asked,
present, money in cash and convertible securities ("titulos
valores de convertibilidad inmediata") that they are
carrying if the amount exceeds $10,000 or its equivalent.

Decree No. 45-2002 also created a financial information
unit, the Unidad de Informacion Financiera (UIF),within the
Honduran National Banking and Insurance Commission. Banks
and other financial institutions are required to report to
the UIF any currency transactions over $10,000 in dollar
denominated accounts or 200,000 lempiras (approximately
$10,770) in local currency accounts. The law requires the
UIF and reporting institutions to keep a registry of
reported transactions for five years. Banks are required to
know the identity of all their clients and depositors,
regardless of the amount of a client's deposits, and to keep
adequate records of the information. The law also includes
banker negligence provisions that make individual bankers
subject to two- to five-year prison terms if, by
"carelessness, negligence, inexperience or non-observance of
the law, they permit money to be laundered through their
institutions." All of the above requirements apply to all
financial institutions that are regulated by the National
Banking and Insurance Commission, which include state and
private banks, savings and loan associations, bonded
warehouses, stock markets, currency exchange houses,
securities dealers, insurance companies, credit associations
and casinos. The law does not, however, extend to the
activities of lawyers or accountants.

Decree No. 45-2002 requires that a public prosecutor be
assigned to the UIF. In practice, four prosecutors are
assigned to the UIF, each on a part-time basis, with
responsibility for specific cases divided among them
depending on their expertise. The prosecutors, under urgent
conditions and with special authorization, may subpoena data
and information directly from financial institutions. Public
prosecutors and police investigators are permitted to use
electronic surveillance techniques to investigate money
laundering.

Under the Criminal Procedure Code, reporting individuals
such as bank officials are protected by law with respect to
their cooperation with law enforcement authorities.
However, some have alleged that their personal security is
put at risk if the information they report leads to the
prosecution of money launderers. Officials of the Public
Ministry, the National Banking and Insurance Commission and
the private-sector banking association AHIBA are looking
into ways that testimony from bank officials could be
treated differently in order to protect the identity of the
bank officials.

Until this year, there had been some ambiguity in Honduran
law concerning the responsibility of banks to report
information to the regulating authorities and the duty of
banks to keep customer information confidential. A new law
passed in September 2004, the Financial System Law (Decree
No. 129-2004) clarifies this ambiguity, explicitly stating
that provision of information demanded by regulatory,
judicial, or other legal authorities shall not be regarded
as an improper divulgence of confidential information.

There have been no changes or additions to the Honduran laws
governing money laundering or terrorist financing during

2004. However, four financial sector strengthening laws
were passed in September, including the Financial System Law
mentioned above, and reforms of the National Banking and
Insurance Commission and the Central Bank. While these laws
do not touch specifically on money laundering or terrorist
financing, they improve the legal and operational capacity
of the Honduran authorities to regulate the banking sector,
and should therefore strengthen the authorities' ability to
detect and counteract money laundering or terrorist
financing. While some banks and political figures objected
to certain parts of these laws, on the whole the laws were
developed through close consultation with representatives of
the banking sector, which generally supports the changes for
their positive impact on greater regulatory clarity and
effectiveness.

Prosecutions in 2004

Prior to 2004, there had been no successful prosecutions of
money laundering crimes in Honduras. To date in 2004,
however, the authorities have arrested 16 persons for money
laundering crimes, issued six additional outstanding arrest
warrants, and secured five convictions.

In April 2004, two Guatemalan citizens were caught crossing
the border between Guatemala and Honduras carrying $247,000
in cash, suspected to be connected to narcotics trafficking
activities. The two men were brought to trial in June, and
one was convicted and sentenced to 16 years in prison, while
the other was found not guilty. This was the first
conviction of a money laundering offense since the 2002 law
had been passed.

In December 2002, the fishing vessel Capitan Ryan was seized
while departing a Honduran port and found to be carrying
$467,000 in cash, believed to be connected to drug
trafficking. The Hondurans on board the boat were arrested
and, in June 2004, four of them were convicted of money
laundering, while three others were found innocent and
released. All four who were convicted are currently serving
terms of 19 years in prison. The cash and other assets
(including the boat) seized at the time of the arrest were
ordered forfeited. Another person connected to the same
case was apprehended in Panama by Panamanian authorities;
his case is still being processed in the Panamanian judicial
system.

In early 2004, a Honduran named Angela Platero was arrested
and charged with running an illegal lottery scheme and
laundering the proceeds. Honduran authorities seized
approximately $1.6 million in cash and assets in connection
with this investigation. The case was due to go to court in
October 2004, however defense attorneys filed a motion
claiming that the seizure was unconstitutional, which has
been referred to an appellate court. A denial of the motion
is expected in early January 2005, in which case the case
will proceed to trial in February.

Measures to Prevent Terrorist Financing

The government of Honduras has been supportive of
counterterrorism efforts. Decree No. 45-2002 states that an
asset transfer related to terrorism is a crime; however,
terrorist financing has not been identified as a crime
itself. The law does not explicitly grant the government
the authority to freeze or seize terrorist assets; however,
on separate authority, the National Banking and Insurance
Commission has issued freeze orders promptly for the
organizations and individuals named by the UN 1267 Sanctions
Committee and those organizations and individuals on the
list of Specially Designated Global Terrorists designated by
the United States pursuant to Executive Order 13224 (on
terrorist financing). The Ministry of Foreign Affairs is
responsible for instructing the Commission to issue freeze
orders. The Commission directs Honduran financial
institutions to search for, hold, and report on terrorist-
linked accounts and transactions, which, if found, would be
frozen. The Commission has reported that, to date, no
accounts linked to the entities or individuals on the lists
have been found in the Honduran financial system.

While Honduras is a major recipient of flows of remittances
(estimated at $1.1 billion in 2004),there has been no
evidence linking these remittances to the financing of
terrorism. Remittances primarily flow from Hondurans living
in the United States to their relatives in Honduras. Most
remittances are sent through wire transfer or bank services,
with some cash probably being transported physically from
the United States to Honduras. There is no significant
indigenous alternative remittance system such as hawala
operating in Honduras, nor is there any evidence that
charitable or non-profit entities in Honduras have been used
as conduits for the financing of terrorism.

Honduras signed the 1999 International Convention for the
Suppression of the Financing of Terrorism on November 11,
2001, and ratified the convention on March 25, 2003.

Free Trade Zones

Under Honduran legislation, companies may register for "free
trade zone" status, and benefit from the associated tax
benefits, regardless of their location in the country.
Companies that wish to receive free trade zone status must
register with the Office of Productive Sectors in the
Ministry of Industry and Commerce. As of December 2004,
there are 337 companies, both Honduran and foreign, with
free trade zone status operating in the country, mostly in
the textile and apparel industry. There is no indication
that free trade zones are being used in trade-based money
laundering schemes or by the financiers of terrorism.

International Cooperation

Honduras cooperates with U.S. investigations and requests
for information pursuant to the 1988 UN Drug Convention.
Honduras has signed memoranda of understanding to exchange
information on money laundering investigations with Panama,
El Salvador, Guatemala, Mexico, Peru, Colombia, and the
Dominican Republic. Honduras strives to comply with the
Basel Committee's "Core Principles for Effective Banking
Supervision," and the new Financial System Law (Decree No.
129-2004) passed in September 2004 is designed to improve
compliance with these international standards. At the
regional level, Honduras is a member of the Central American
Council of Bank Superintendents, which meets periodically to
exchange information.

Honduras is a party to the 1988 UN Drug Convention, the UN
Convention against Illicit Traffic in Narcotic Drugs and
Psychotropic Substances, the UN International Convention
against Transnational Organized Crime, and the UN
International Convention for the Suppression of the
Financing of Terrorism. Honduras signed the OAS Inter-
American Convention on Terrorism in June 2002, ratified the
agreement on September 22, 2004, and became a party to the
agreement when it deposited its instruments of ratification
on November 23, 2004. Honduras signed the UN Convention
Against Corruption on May 17, 2004. Honduras is a member of
the Organization of American States Inter-American Drug
Abuse Control Commission (OAS/CICAD) Group of Experts to
Control Money Laundering and the Caribbean Financial Action
Task Force (CFATF). Currently Spain and Panama are
sponsoring the Honduran UIF for membership in the Egmont
Group of Financial Intelligence Units; that membership is
expected to be voted upon in 2005.

No specific written agreement exists between the United
States and Honduras to establish a mechanism for exchanging
adequate records in connection with investigations and
proceedings relating to narcotics, terrorism, terrorist
financing, and other crime investigations. However,
Honduras has cooperated, when requested, with appropriate
law enforcement agencies of the U.S. government and other
governments investigating financial crimes.

Examples of cooperation between Honduran and U.S.
authorities include the prosecution of the Capitan Ryan case
described above, which was aided by support from the
Department of Treasury's anti-money laundering technical
assistance program, and by cooperation between the INL
offices at Embassy Panama and Embassy Tegucigalpa: Embassy
Panama provided funding travel so that Panamanian police and
prosecutors could share critical evidence with Honduran
authorities.

Another example of inter-governmental cooperation concerns
an ongoing investigation into the assets of drug trafficker
Juan Ramon Matta Ballesteros, currently serving a prison
term in the United States. In June 2004, a tip from the
Spanish authorities alerted the Honduran authorities that
$550,000 was being transferred to a Honduran bank account in
the name of Matta Ballesteros' wife. The Honduran
authorities seized this money, but lack direct evidence that
the money is connected to illegal activities, since a legal
case was never brought against Matta Ballesteros in
Honduras. Officials in the Honduran Public Ministry
requested information from the U.S. authorities by means of
an MLAT (Mutual Legal Assistance Treaty) to substantiate
their claim that the money was derived from illegal
activities. The Office of International Affairs in the U.S.
Attorney's Office in Washington agreed to give the Honduran
authorities access to the historical case files, and two
Honduran officials from the Public Ministry will travel to
Washington in January 2005 to examine the files, with INL
funds supporting the trip.

Asset Forfeiture and Seizure Legislation

Congress first enacted an asset seizure law in 1993 that
subsequent Honduran Supreme Court rulings substantially
weakened. Decree No. 45-2002 strengthened the asset seizure
provisions of the law, establishing an Office of Seized
Assets (OABI) under the Public Ministry. The law authorizes
the Office of Seized Assets to guard and administer "all
goods, products or instruments" of a crime, and states that
money seized (or money raised from the auctioning of seized
goods) should be transferred to the public entities that
participated in the investigation and prosecution of the
crime. Under the Criminal Procedure Code, when goods or
money are seized in any criminal investigation, a criminal
charge must be submitted against the suspect within sixty
days of the seizure. If one is not submitted, the suspect
has the right to demand the release of the seized assets.

Decree No. 45-2002 is not entirely clear on the issue of
whether a legitimate business can be seized if used to
launder money which derives from criminal activities. The
Chief Prosecutor for Organized Crime maintains that the
authorities do have this power, since once a "legitimate"
business is used to launder criminal assets, it ceases to be
"legitimate" and is subject to seizure proceedings.
However, this authority is not explicitly granted in the
law, and there has been no test case to date which would set
an interpretation. There are currently no new laws being
considered regarding seizure or forfeiture of assets of
criminal activity.

The total value of assets seized in 2004 was $6.1 million,
of which $4.1 million was in cash and $2.0 million was in
goods. This marks a significant increase over 2003 figures
of $2 million in cash and $584,000 in goods, for a total
value of seized assets of $2.6 million. Most of these
seized assets are alleged to have derived from crimes
related to drug trafficking; none of the seized assets are
suspected of being connected to terrorist activity. The law
allows for both civil and criminal forfeiture, and there are
no significant legal loopholes that allow criminals to
shield their assets.
However, OABI has not established firm control over the
asset seizure and forfeiture process. Implementation of the
existing law, and the process of equipping OABI to maintain
control over seized assets and effectively dispose of them,
has been slow and ineffective. The implementing regulations
governing OABI were not finalized and published until more
than a year after the passage of the law. Plans to build
separate offices and a warehouse for this entity are still
incomplete, resulting in seized assets currently being kept
in various locations under dispersed authority. Money
seized is also kept in various accounts without clear
records of control, or kept in cash as evidence. Due to the
absence of a clear chain of custody over seized cash, the
Public Ministry on one occasion in 2004 used seized cash to
pay certain employees' salaries, without the money's first
having passed through a proper legal process for
disposition.

Similarly, assets seized, such as vehicles, property, and
boats, are in many cases left unused, rather than being
distributed for use by government agencies. In one case in
2004, a house seized in connection with a drug-trafficking
investigation was nominally put under OABI's control, but
was in fact left unguarded, and as a result was looted and
severely damaged. Cases such as this one have led some
police agencies, which do not have the proper assets to
conduct their operations, to use these assets, again without
their first having passed through a legal process for their
disposition.

While these actions are contrary to proper procedures set
forth in the law, OABI lacks the necessary autonomy or power
to resist such actions, since OABI is itself under the
Public Ministry. Furthermore, there is currently no
external or independent audit of OABI's activities to
guarantee transparency and proper handling of seized assets.

There is no evidence that traffickers, organized crime
organizations, or terrorist organizations have taken
retaliatory actions related to money laundering/terrorist
financing investigations, government cooperation with the
USG, or seizure/freezing of assets.

Conclusion

In 2004, the government of Honduras took positive steps to
implement Decree No. 45-2002 by establishing and equipping
the various government entities responsible for combating
money laundering. However, there are only limited resources
available for training officials, most of whom lack
experience in dealing with money laundering issues. Further
progress in implementing the new money laundering
legislation will depend on the training and retention of
personnel familiar with money laundering and financial
crimes and improved ability and willingness of the Public
Ministry to aggressively investigate and prosecute financial
crimes. The government of Honduras should continue to
support the developing government entities responsible for
combating money laundering and other financial crimes, and
ensure that resources are available to strengthen its anti-
money laundering regime. The government should also
criminalize terrorist financing, and should ensure full
implementation and proper oversight of its asset forfeiture
program.

Palmer