2005-2006 INSCR REPORT FOR YEMEN: FINANCIAL CRIMES

UNCLAS SECTION 01 OF 02 SANAA 003577

SIPDIS

PLEASE PASS TO INL; JUSTICE FOR OIA AND AFMLS; TREASURY FOR
FINCEN; EB/ESC/TFS.

E.O. 12958: N/A
TAGS: EFIN ECON PTER KCRM KTFN YM TERFIN
SUBJECT: 2005-2006 INSCR REPORT FOR YEMEN: FINANCIAL CRIMES
AND MONEY LAUNDERING

REF: SECSTATE 210346


1. The following is the text of Embassy Sanaa's update to
Part II of the 2005-2006 INSCR report on financial crimes and
money laundering.

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The Yemeni financial system is not yet well developed; thus,
the extent of money laundering is not known. The prevalence
of alternative remittance systems, such as hawala, makes
financial institutions vulnerable to money laundering,
although they are technically subject to limited monitoring
by the Central Bank of Yemen (CBY),and renders commercial
banking largely irrelevant to most Yemenis. The banking
sector is relatively small with 17 commercial banks,
including four Islamic banks (one was recently taken over by
the CBY and may be liquidated). The CBY supervises the banks.
Local banks account for approximately 62 percent of the total
banking activities, while foreign banks cover the other 38
percent.

Yemen,s parliament passed a comprehensive anti-money
laundering legislation (Law 35) in April 2003. The
legislation criminalizes money laundering for a wide range of
crimes, including narcotics offenses, kidnapping,
embezzlement, bribery, fraud, tax evasion, illegal arms
trading, and monetary theft, and imposes penalties of three
to five years of imprisonment. Yemen currently has no
specific legislation relating to terrorist financing, but
Cabinet decision 247 issued in 2005 directs the CBY and the
Ministry of Legal Affairs to amend Law 35 to include
terrorist financing. The Ministry of Interior (MOI) also
has a unit to investigate terrorist financing. According to
the law, both the MOI and CBY report their findings to the
Attorney General for enforcement.

Law 35 requires banks, financial institutions, and precious
commodity dealers to verify the identity of persons and
entities that open accounts (or in the case of the dealers
for those who execute a commercial transaction),to keep
records of transactions for up to ten years, and to report
suspicious transactions. In addition, the law requires that
reports be submitted to an information-gathering unit within
the CBY. The unit acts as the Financial Intelligence Unit
(FIU),which in turn reports to the Anti-Money Laundering
Committee (AMLC).

The FIU is severely understaffed, with a total of three
employees at the main office. Eighteen field inspectors for
banking supervision, who also serve as investigators for the
FIU, work with laptop computers provided by the IMF over
eight years ago. The FIU has no database and is not
networked internally or to the rest of the CBY. The CBY
provides training to other members of the government to
assist in elements of anti-money laundering enforcement, but
lack of capacity severely hampers any attempts by the FIU to
control illicit activity. The supervision department of the
CBY has submitted requests for foreign assistance to the
Department of Treasury, the IMF, and others.

The AMLC is composed of representatives from the Ministries
of Finance, Foreign Affairs, Justice, Interior, and Industry
and Trade, the Central Accounting Office, the General Union
of Chambers of Commerce and Industry, the CBY, and the
Association of Banks. The AMLC is authorized to issue
regulations and guidelines and provide training workshops
related to combating money laundering efforts. It reports
its findings to the Prime Minister every three months. In
addition, Law 35 grants the AMLC the right to exchange
information with foreign entities. The head of the AMLC is
empowered by law to ask local judicial authorities to enforce
foreign court verdicts based on reciprocity. Also, the law
permits the extradition of non-Yemeni criminals in accordance
with international treaties or bilateral agreements. A
separate inter-ministerial Terrorist Finance Committee,
headed by the Ministry of Foreign Affairs, was created in
2000 and takes the lead in engaging the UN Security Council
and other international bodies.

Prior to passage of the anti-money laundering law, the CBY
issued Circular 22008 in April 2002, instructing banks and
financial institutions that they must verify the legality of
all proceeds deposited in or passing through the Yemeni
banking system. The circular stipulates that financial
institutions must positively identify the place of residence
of all persons and businesses that establish relationships
with them. The circular also requires that banks verify the
identity of persons or entities that wish to transfer more
than $10,000, when they have no accounts at the banks in
question. The law also prohibits the transfer of more than
$10,000 cash in or out of the country without permission from
the CBY, although this is rarely enforced. The same
provision applies to beneficiaries of such transfers. Banks
must also take every precaution when transactions appear
suspicious, and report such activities to the CBY. The
circular was distributed to the banks along with a copy of
the Basel Committee,s "Customer Due Diligence for Banks,"
concerning "know your customer" procedures and "Core
Principles for Effective Banking Supervision". The CBY issued
Circular No. 4 on December 9, 2003, ordering banks to set up
intelligence gathering units specializing in investigating
and monitoring suspicious funds and transactions in their
regulatory structures. In 2005, however, no reports were
filed with the FIU by commercial banks and there were no
prosecutions.

In response to the UNSCR 1267 Sanctions Committee,s
consolidated list and the list of Specially Designated Global
Terrorists designated by the United States pursuant to E.O.
13224, and Yemen,s Council of Ministers, directives, CBY
issues regular circulars to all banks operating in Yemen,
directing them to freeze accounts of designated persons,
companies, and organizations, and to report any finding to
CBY. No accounts were frozen and no assets were seized in

2005. Since the February 2004 addition of Sheikh Abdul Majid
Zindani to the UNSCR 1267 Sanctions Committee,s consolidated
list, the Yemeni government has made no known attempt to
enforce the sanctions and freeze his assets. In such cases,
information sharing is limited by a lack of political will,
as well as a lack of enforcement capacity.

A law was passed in 2001 governing charitable organizations.
This law entrusts the Ministry of Labor and Social Affairs
with overseeing their activities. The law also imposes
penalties of fines and/or imprisonment on any society or its
members convicted of carrying out activities or spending
funds for other than the stated purpose for which the society
in question was established. In 2005, 21 charities were
questioned as part of continuous supervision in coordination
with the Ministry of Labor and Social Affairs, but there were
no prosecutions. Cabinet decision 378 gave the FIU authority
to investigate gold shops, insurance companies, and real
estate brokers in order to enhance procedures to combat
terrorist financing. The FIU also has legal authority to
investigate transactions in the Aden Free Zone, but has never
had cause to test these powers in what is a relatively small
area of activity.

Yemen is one of the original signatories of the memorandum of
understanding governing the establishment of the Middle East
and North Africa Financial Action Task Force (MENAFATF). The
MENAFATF is a FATF-styled regional body that promotes best
practices to combat money laundering and terrorist financing
in the region. It was inaugurated in November 2004 in Bahrain
by 14 Arab countries. Yemen is a party to the 1988 UN Drug
Convention and the UN Convention Against Corruption, and has
signed, but not yet ratified, the UN Convention against
Transnational Organized Crime and the UN International
Convention for the Suppression of the Financing of Terrorism.
Yemen is a party to the Arab Convention for the Suppression
of Terrorism.

The Government of Yemen is making progress in enforcing its
domestic anti-money laundering program. The passage of the
2003 anti-money laundering legislation represents a
significant first step in meeting international standards.
However, development of the FIU and international cooperation
with criminal investigations are still in the initial stages.
The CBY is still organizing its enforcement mechanism and is
in dire need of technical and financial assistance. Its
effectiveness will demonstrate the authorities, commitment
to ending money laundering. Yemen should also consider
expanding oversight of alternative remittance systems such as
hawala and trade-based money laundering. As a next step,
Yemen should follow through on plans to enact specific
legislation with respect to terrorist financing and
forfeiture of the assets of those suspected of terrorism. It
should ratify the UN Convention against Transnational
Organized Crime and the UN International Convention for the
Suppression of the Financing of Terrorism.
Krajeski