GULF STRATEGY TO COMBAT TERRORIST FINANCING -

S E C R E T SECTION 01 OF 05 ABU DHABI 003565 SIPDIS NOFORN STATE FOR NEA/ARPI RSMYTH, EB/ESC/TFS FOR DNELSON, JUNDERRINER, S/CT TKUSHNER, IO/PSC JSCHWEITZER NSC FOR ZARATE, HEFFERNAN, HERRING, RUPERT OFAC FOR WERNER, LANGFORD MANAMA FOR BEAL TREASURY FOR GLASER, MURDEN E.O. 12958: DECL: 08/14/2015 TAGS: PTER KTFN EFIN ETTC TC SUBJECT: GULF STRATEGY TO COMBAT TERRORIST FINANCING - PREPARING FOR A JTFCC REF: A. 2005 ABU DHABI 720 ¶B. 2005 ABU DHABI 2684 ¶C. 2005 ABU DHABI 356 ¶D. 2005 ABU DHABI 2741 ¶E. 2005 DUBAI 836 ¶F. 2005 DUBAI 1700 Classified By: Ambassador Michele J. Sison for reasons 1.5 (b) and (d). ¶1. (S/NF) Summary. Embassy supports the priorities and initiatives for the UAE as outlined in the Gulf Strategy to Combat Terrorist Financing. Establishing a Joint Terrorist Finance Coordination Committee (JTFCC) will feed into the paper's priorities of enhancing charity regulation, monitoring and regulating the transit of cash couriers through the UAE, and stemming the flow of funding to extremists in Iraq. As we move forward with plans to propose a JTFCC to the UAEG, examining the current state of play in the UAE regarding terror finance will help the U.S. steer the mission of the JTFCC. In the aftermath of the September 11th attacks, in which the UAE banking system was used by the hijackers, the UAE became seized with the issue of terrorism financing and has enacted a stringent anti-money laundering (AML) and counter terror finance (CFT) laws. However, the UAE faces challenges in interagency cooperation and coordination that often affect its ability to investigate AML/CFT cases. Historically, cooperation between the U.S. and the UAE on terror financing has been good, but we hope that establishment of the JTFCC will deepen those ties and provide a mechanism through which the UAEG's own interagency communication is enhanced. Paragraphs 2-4 provide Embassy's suggestions on how to present the proposal so as to gain the most productive UAEG buy-in, and paragraphs 5-12 discuss the UAE's current AML/CFT issues so as to frame what the JTFCC will be faced with upon its inception. End Summary. Pitching the JTFCC -------------- ¶2. (S/NF) In order for the JTFCC to operate effectively, buy-in by senior UAE leaders will be essential, and they must communicate to JTFCC participants the importance of full participation. Embassy recommends that a senior USG official -- such as Deputy National Security Advisor for Combating Terrorism, Juan Zarate -- come to the UAE in early or mid September to present the proposal. Key players include Abu Dhabi Crown Prince Mohammed bin Zayed (MbZ),Dubai Crown Prince Mohammed bin Rashid (MbR),Central Bank Governor Sultan Nasser Al Suwaidi, Minister of Interior Sheikh Saif, Minister of Justice Mohammed Al Dhahiri, State Security Director Hazza bin Zayed, and the Director of Dubai's State Security Organization Mohammed Al Qemzi. Having a senior USG official make the formal pitch will convey to the Emiratis the importance we place on this initiative, and OFAC Director Bob Werner can use his September 23-26 visit to follow-up on and reinforce this message. ¶3. (S/NF) When Homeland Security Advisor Fran Townsend visited the UAE in February, she suggested to Central Bank Governor Al Suwaidi establishing a joint terrorism finance task force (Ref A). Governor Al Suwaidi was initially skeptical that a task force would improve what he characterized as already good cooperation between the UAEG and the USG and between different agencies within the UAEG. However, he stated that the UAEG would benefit from a task force if it enabled the UAEG to learn of U.S. terfin concerns earlier in designation process. Townsend and Al-Suwaidi agreed the USG would provide the UAEG with a written proposal. ¶4. (S/NF) Comment/Recommendation: Governor Al Suwaidi reacts defensively to any hint that the UAE is not doing enough in the fight against terror financing, and as a result, it is important that the U.S. frame the formal pitch of the JTFCC in a way that indicates the JTFCC will enhance an already strong bilateral relationship. We expect the UAE will react favorably to the training mechanism within the JTFCC, and officials will likely want to know if the committee will allow for increased information sharing on specific cases. Convincing MbZ and MbR of the value-added the JTFCC will bring to the U.S./UAE relationship is the most critical step. End Comment/Recommendation. Comprehensive Laws... -------------- ¶5. (U) The two laws that serve as the foundation for the UAE's AML/CFT efforts are the Anti-Money Laundering Law (Law No. 4/2002),and the Counterterrorism Law (Law No. 1/2004), and both authorize the freezing and confiscation of assets. Although the Anti-Money Laundering Law criminalizes money laundering, it is Administrative Regulation No. 24/2000 that provides the guidelines for how financial institutions are to monitor for money laundering activity. Pursuant to the Financial Action Task Force (FATF) recommendations, banks and financial institutions (including the UAE's 106 money exchange houses) must maintain records of their customers (including copies of identification) and transactions, for as long as an account remains open and for five years after its closure, for the purpose of reconstructing transactions. Identity must be verified and transaction details (including name and address of originator and beneficiary) must be maintained for all exchange house transactions over $545 (one of the lowest thresholds in the world) and for all non-account holder bank transactions over $10,900. The regulation also outlines types of transactions that could constitute money laundering and requires financial institutions immediately report them to the Central Bank's Financial Intelligence Unit, the Anti-Money Laundering and Suspicious Cases Unit (AMLSCU). ¶6. (U) Law No. 1/2004 is a broad Counterterrorism Law that specifically criminalizes terror finance, and sets a maximum punishment of life in prison. The law authorizes the Central Bank Governor to freeze accounts for up to seven days if he suspects the funds will be used to fund or commit any of the crimes listed in the law, but it stipulates that the Central Bank provide evidence to the Attorney General for prosecution in order to maintain the freeze beyond seven days. The law gives the overall authority to seize or freeze assets to the Attorney General's office that has jurisdiction over the case (Note: Although the federal penal code is applied throughout the country, the UAE has three judicial systems -- federal, Emirate of Dubai, and Emirate of Ras al Khaimah -- and thus three separate Attorney General offices. End note.) It authorizes the Attorney General's office to order the investigation of activities the Attorney General has "sufficient evidence to believe" are related to the funding or committing of a terror activity stated in the law. ¶7. (C) In practice, the Central Bank holds freezes longer than seven days, even if no evidence has been provided to the Attorney General. The Central Bank Governor, Sultan Nasser Al Suwaidi, is proactive and would rather keep accounts frozen extra-judicially than to allow individuals access to suspect funds. However, Central Bank officials have expressed frustration when the USG has asked the Bank to freeze funds but has not provided evidence that could be used in a court of law. Central Bank officials have told us on multiple occasions they are concerned that courts could force them to release frozen assets based on a lack of evidence, which would seriously damage the credibility and effectiveness of the Central Bank. ...Weak Interagency Coordination -------------- ¶8. (C) Despite having a strong legal mechanism in place to combat terror financing, the loose federal structure of the UAE results in obstacles to interagency coordination. The UAE is made up of seven semi-autonomous Emirates and three separate judicial systems, and communication between (and among) federal and emirate-level agencies is overly formalized and often proprietary. The Central Bank, which has the capability to examine accounts, follow wire transfers, and ensure banks follow appropriate Know Your Customer procedures, does not have the law enforcement expertise to determine if there is underlying illegal activity. Although the UAE National Anti-Money Laundering Committee has representatives from the Ministries of Foreign Affairs, Interior, Justice, Finance, and Economy, the Central Bank, the Federal Customs Authority, and emirate-level customs authorities, Embassy and Consulate officers have observed that the Central Bank and law enforcement officials responsible for investigating suspicious activity do not communicate effectively. In the spring of 2004, the U.S. Department of Justice conducted an anti-money laundering conference that brought together officials from the AMLSCU, prosecutors and judges, and law enforcement officers to discuss investigative and prosecution techniques and how to improve coordination between the relevant elements, and the DOJ will conduct a similar regional training in Abu Dhabi September 17-19. Embassy officers have observed that, even with trainings aimed at enhancing cooperation and coordination, the underlying problem continues (and yet, Central Bank and Ministry of Interior officials continue to request more training, ref B). Recognizing that his financial investigators need experience in the banking sector, Minister of Interior Saif has told Ambassador that five Abu Dhabi police officers are working at the Central Bank to give them a better understanding of the banking world, which will aide them in conducting financial investigations. Actions Against Terror Finance -------------- ¶9. (SBU) As of the end of 2004, the UAE Central Bank had frozen 17 accounts totaling $1,348,381 under UNSCR 1267, according to Central Bank documents provided to the Embassy. As a member of the Egmont Group and a participant in the Middle East North Africa/Financial Action Task Force (MENA/FATF),the AMLSCU's International Division is responsible for cooperating and coordinating with Financial Intelligence Units (FIUs) around the world and shares information on AML/CFT cases on the basis of reciprocity and international obligations. In addition to freezes under UNSCR 1267, the Central Bank has frozen 23 accounts based on information and requests from other countries, and it has referred 88 cases to counterparts in other countries for investigation and asset freezing (ref C). Additionally, the UAE cooperated closely with the U.S. on its investigation of Moussaoui and 9/11, and the Central Bank has allowed the FBI/Terrorist Financing Operations Section (TFOS) access to information and documents relating to the case. Although the process was difficult and time-consuming, the Central Bank provided U.S. officials with certified documents for use in federal court for the Moussaoui case. ¶10. (SBU) From December 2000 through the May 2005, 2,571 Suspicious Transaction Reports (STR) were submitted to the Central Bank's Anti-Money Laundering and Suspicious Cases Unit (AMLSCU),which serves as the UAE's Financial Intelligence Unit (FIU). The Central Bank Governor has told us that he stresses the importance of reporting "quality" suspicious transactions, not just "quantity" (however, in order to gain a perspective of the order of magnitude, the UAE Exchange conducts 20,000 transactions per day -- last year the exchange submitted 25 STRs). Out of the submitted STRs, the AMLSCU, the Central Bank, or law enforcement authorities reviewed and/or investigated 2,273 STRs, according to a document provided by the Central Bank. In 28 cases, freezing orders were issued and the case was reported to the public prosecutor in order to initiate legal action. As of May, 16 of those cases were in the process of prosecution (4 of these for customs violations),and 9 of them are in the "process of judgment," and have been for at least six months. We do not know if any of those 16 cases resulted in convictions. (Note: The AMLSCU's authority also covers anti-money laundering activity, and we do not have a breakdown of which cases are straight criminal cases, and which are related to terror finance. End note.) Risk Factors -------------- ¶11. (C) Despite the relatively well supervised financial system, risk factors remain in both the formal and informal financial sectors. We remain concerned that extremists could exploit the UAE's hawala system and charities to funnel money to terrorists, and we continue to impress upon Emirati customs officials the importance of monitoring large amounts of cash flowing into and out of the country. -- Hawala. In 2002, UAE began registering hawala dealers (hawaladars) through the Central Bank, but there is no enforcement or punishment for hawaladars that do not register. To date, over 160 hawalas have submitted registration applications, and so far, the Central Bank has not denied any hawaladar a license to operate. The Central Bank conducts a background check on hawaladar registrants, but AMLSCU official Ahmed Al Qamzi (protect) admitted the checks are sometimes perfunctory. He said that they look closely at the background of hawaladars from places like Somalia and other countries of concern (NFI),but that the Central Bank accepts the work permit issued by the Ministry of Labor as sufficient due diligence on most hawaladars. Central Bank officials acknowledge they do not know how many unregistered hawalas continue to operate. The Central Bank finds out about unregistered hawaladars in two ways: a) registered hawaladars report them to the Central Bank; b) by examining STRs from banks and exchange houses and noting individuals making transactions significantly above their means. (Note: Many hawaladars eventually use the formal financial system to settle their accounts with hawaladars in other countries. If, for example, a dry cleaner suddenly sends an amount of money significantly above his means, the bank or exchange house will submit an STR, in essence notifying the Central Bank that the person may be operating an unlicensed hawala. End note.) Central Bank officials tell us they have made it difficult for unregistered hawaladars to send money through the banks and exchange houses. When a known or suspected hawaladar goes to a bank or exchange house, he is required to show his license before he can transfer money. Registered hawaladars are required to submit records of every incoming and outgoing remittance to the Central Bank every quarter. Additionally, hawaladars are required to immediately report any suspicious transaction, but Central Bank officials tell us that none have done so yet. Central Bank officials tell us they will eventually raise the reporting requirements for registered hawaladars and begin to more actively seek out unregistered hawaladars. But for now, the bank does not want to be too aggressive and risk driving hawaladars further underground. According to one of the hawaladar examiners, the Central Bank wants hawaladars to trust that their transaction information will be held in confidence and not disclosed to countries like Bahrain, Saudi Arabia, and India, where hawala is illegal. -- Charities. The UAE Ministry of Labor and Social Affairs is responsible for licensing and monitoring UAE charities; however, less than half of UAE charities are federally licensed. The rest are licensed by local emirates and operate largely independent to federal guidelines. UAE law stipulates that all international charitable donations be channeled through one of three government approved charities: the UAE Red Crescent Authority, the Sheikh Zayed Charitable and Humanitarian Foundation, or the Mohammed bin Rashid Charitable and Humanitarian Foundation; however there is no mechanism in place to ensure that charities abide by this requirement, and we have been told that it is not universally abided by. Federally licensed charities are required to submit records of donor, amount, and beneficiary for all charitable donations to the Ministry of Labor and Social Affairs. However, the staff reviewing charities is administrative in nature, and does not have the capability to examine yearly reports with an eye toward detecting diversionary activity. (For a thorough discussion of UAE charity regulation, see ref D). -- Cash Couriers. Legislation specifically requires cash in excess of $10,800 be declared when it is brought into the UAE, and the Central Bank is in the process of revising the law to also require declaring exported cash. We note, however, that the requirement to report cash only creates a record of its movement and UAE authorities may not use the information to begin an investigation. According to documents from the Central Bank, customs officials only submitted 111 STRs to the AMLSCU between December 2000 and January 2005. The UAE is seeing large sums of cash coming from India and Pakistan, and the Central Bank has highlighted the problem of cash couriers as an area of concern. In one instance, Dubai Police arrested an Indian man who had taken multiple trips to and from India and smuggled the proceeds of illegal activity, and the case is pending prosecution. Overall, customs officials appear to not aggressively enforce the cash reporting requirement and tell us they do not view it as a tool for combating money laundering. If they discover someone carrying undeclared cash, customs officials have them declare the money, but they tell us they do not necessarily consider it a criminal case. As a senior customs official told an Embassy officer, "But he might be a business man using the money for legitimate purposes." DHS/ICE recently held a training session on detecting bulk-cash smuggling for Dubai Customs officials. ¶12. (C) In September 2004, the Dubai International Financial Center (DIFC) opened as a "financial free zone." The DIFC is owned by the Government of Dubai and reports to the office of Crown Prince Mohammed bin Rashid (MbR). It has a legally independent regulatory body, the Dubai Financial Services Authority (DFSA),which also reports to MbR's office. UAE law governing free zones exempts the DIFC from federal civil and commercial laws, but it remains subject to criminal laws -- including the Anti-Money Laundering and Counterterrorism laws. Federal Law No. 8/2004, the Financial Free Zone law, gives Central Bank examiners the authority to "conduct inspections of a Financial Free Zone to ascertain its compliance with this law" and submit their findings to the UAE Cabinet; however the DFSA has established its own set of AML/CFT regulations (above and beyond those of the UAE Central Bank) (ref E). Financial institutions within DIFC are required to submit suspicious transaction reports to the AMLSCU and the DFSA (ref F),with any investigations to be carried out by the AMLSCU. The AMSCLU maintains that Law No. 8/2004 gives it the authority to randomly inspect the books of DIFC international member institutions, but DFSA regulators -- expatriates hired from UK, Australia, and other western regulatory agencies -- are keen to preserve the DIFC as an independent entity run according to western standards and are thus reluctant to grant the Central Bank this authority. While they do not dispute the fact that the Central Bank has the legal authority to inspect DFSA and its records, they are reluctant to grant it the authority to examine the books of individual institutions within DIFC absent a formal investigation request. As a result, a long-awaited MOU between DIFC/UAEG spelling out precise authorities has not/not been finalized. SISON