2005-2006 INTERNATIONAL NARCOTICS CONTROL STRATEGY

UNCLAS SECTION 01 OF 02 QUITO 002854

SIPDIS


STATE FOR INL, INL/LP, WHA/AND
JUSTICE FOR OIA AND AFMLS
TREASURY FOR FINCEN AND EB/ESC/TFS

E.O. 12958: N/A
TAGS: SNAR PGOV EFIN KJUS KCRM KHLS KTFN EC
SUBJECT: 2005-2006 INTERNATIONAL NARCOTICS CONTROL STRATEGY
REPORT (INCSR) - ECUADOR - MONEY LAUNDERING SECTION

REF: STATE 210351

Ecuador's new comprehensive law against money laundering was
published in the Official Register on October 18, 2005. The new
law criminalizes the laundering of illicit funds from any source
and penalizes the undeclared entry of more than $10,000 in cash.
The law calls for the creation of a financial intelligence unit
(FIU) under the purview of the Superintendency of Banks.
Regulations for application of the law and establishment of the
FIU have not yet been developed.
With a dollar economy and a geographical situation between two
major drug producing countries, Ecuador is highly vulnerable to
money laundering but is not considered an important regional
financial center. Because there has been no effective control of
money laundering until now, there is no way to judge confidently
the magnitude of such activity in the country. In addition to
concerns about illicit transactions through financial
institutions, there are some indications that money laundering is
taking place through "normal" commercial activity. Recurrent
detections of large amounts of unexplained currency entering and
leaving Ecuador indicate that transit and laundering of illicit
cash are also significant activities. Though smuggled goods are
regularly brought into the country, there is no evidence that
they are significantly funded by drug proceeds.
A free trade zone law was passed in 1991 in order to promote
exports, foreign investment and employment. The law provides for
the import of raw materials and machinery free of duty and tax;
the export of finished and semi-processed goods free of duty and
tax; and tax exemptions for business activities in the government-
established zones. Free trade zones have been established in
Esmeraldas, Manabi and Pichincha provinces, and a new zone is
planned for the site of the new Quito airport. There is no known
evidence to indicate that the free trade zones are being used in
trade-based money laundering.
The Narcotics and Psychotropic Substance Act of 1990 (Law 108)
criminalized money laundering activities only in connection with
illicit drug trafficking. Regulations issued pursuant to Law
108, the 1994 Financial System Law, and a 1996 Banking
Superintendency Resolution require financial institutions to
report to the National Drug Council (CONSEP) any transaction in
cash or stocks over $5,000, as well as suspicious financial
transactions. Mutual societies are required to report
transactions of $5,000 and above. Financial cooperatives must
report transactions of $2,000 and higher. Electronic reporting of
this information was implemented in 1999. Banks operating in
Ecuador are required to maintain financial transaction records
for six years. There are no due diligence or banker negligence
laws that hold individual bankers responsible if their
institutions launder money. However, a bank's board of directors
can be held legally responsible if drug money laundering occurs
in their institution.
Some existing laws may conflict with the detection and
prosecution of money laundering. For example, the Bank Secrecy
Law severely limits the information that can be released by a
financial institution directly to the police as part of any
investigation, and the Banking Procedures Law reserves
information on private bank accounts to the Banking
Superintendency. In addition, the Criminal Defamation Law
sanctions banks and other financial institutions that provide
information about accounts to police or advise the police of
suspicious transactions if no criminal activity is proven.
As a result of this contradictory legal framework, cooperation
between other Government of Ecuador (GOE) agencies and the police
has fallen short of the level needed for effective enforcement of
money laundering statutes. Other problems conflicting with an
anti-money laundering regime include the absence of regulations
requiring financial institutions to exercise due diligence and
the weak regulation of currency exchange businesses (casas de
cambio).
As a result of these shortcomings, during the past five years
there have been no serious investigations of drug money
laundering in Ecuador. Without solid financial intelligence, it
is impossible to estimate accurately the extent and nature of a
money laundering problem in Ecuador. It is not known to what
extent money laundering may be related to narcotics proceeds, or
may be generated by other crimes such as contraband smuggling,
illegal migration, corruption, bank fraud, or terrorism.
The need to develop regulations and establish agencies to
implement the new money laundering law implies that it will be
several months, at least, before effective action can be taken to
remedy this situation.
Several Ecuadorian banks maintain offshore offices. The
Superintendency of Banks is responsible for oversight of both
offshore and onshore financial institutions. Regulations are
essentially the same for onshore and offshore banks, with the
exception that offshore deposits no longer qualify for the
government's deposit guarantee. Anonymous directors are not
permitted. Licensing requirements are the same for offshore and
onshore financial institutions. However, offshore banks are
required to contract external auditors pre-qualified by the
banking Superintendency. These private accounting firms perform
the standard audits on offshore banks that would generally be
undertaken by the Superintendency in Ecuador. Bearer shares are
not permitted for banks or companies in Ecuador.
The Ministry of Foreign Affairs, Superintendency of Banks and the
Association of Private Banks formed a working group in December
2004 to draft a law against terrorist financing. By year-end
2005, a draft law had been completed and sent to the Presidency
for review. Pending promulgation of a new law, terrorist
financing has not been criminalized in Ecuador. The Banking
Superintendency has cooperated with the USG in requesting
financial institutions to report transactions involving known
terrorists, as designated by the United States as Specially
Designated Global Terrorists pursuant to E.O. 13224 (on terrorist
financing) or by the UN 1267 Sanctions Committee. No terrorist
finance assets have been identified to date in Ecuador. The
Superintendency would have to obtain a court order to freeze or
seize such assets in the event they were identified in Ecuador.
Ecuador has ratified (26 June 2004) the UN International
Convention for the Suppression of the Financing of Terrorism.
No steps have been taken to prevent the use of gold and precious
metals to launder terrorist assets. Currently, there are no
measures in place to prevent the misuse of charitable or non-
profitable entities to finance terrorist activities.
Ecuador is a party to the 1988 UN Drug Convention and has
ratified (September 17, 2002) the UN Convention against
Transnational Organized Crime. Ecuador is a member of the OAS
Inter-American Drug Abuse Control Commission (OAS/CICAD) Experts
Group to Control Money Laundering. Ecuador is also a member of
the South American Financial Action Task Force (GAFISUD). Ecuador
and the United States have an Agreement for the Prevention and
Control of Narcotic Related Money Laundering that entered into
force in 1994 and an Agreement to Implement the United Nations
Convention Against Illicit Trafficking in Narcotic Drugs and
Psychotropic Substances of December 1988, as it relates to the
transfer of confiscated property, securities and
instrumentalities. There is also a Financial Information Exchange
Agreement (FIEA) between the Government of Ecuador (GOE) and the
U.S. to share information on currency transactions.
JEWELL