COSTA RICA INCSR REPORT 2005 - 2006 PART II, MONEY

UNCLAS SECTION 01 OF 02 SAN JOSE 002881

SIPDIS

DEPARTMENT FOR INL, WHA/CEN, and EB/ESC/TFS
JUSTICE FOR OIA, AFMLS
TREASURY FOR FINCEN
DEA FOR OILS AND OFFICE OF DIVERSION CONTROL

E.O. 12958: N/A
TAGS: SNAR KTFN EFIN PTER KCRM CS
SUBJECT: COSTA RICA INCSR REPORT 2005 - 2006 PART II, MONEY
LAUNDERING AND FINANCIAL CRIMES

REF: SECSTATE 210351

Draft text of the 2005-2006 INCSR, Part II for Costa Rica
follows.
Costa Rica
Costa Rica is not a major financial center, but it remains
vulnerable to money laundering and other financial crimes,
due in part to narcotics trafficking, particularly of South-
American cocaine, in the region and the presence in Costa
Rica of Internet gaming companies. Reforms to the Costa
Rican counternarcotics law in 2002, which expand the scope
of anti-money laundering regulations, also create a loophole
by eliminating the government's licensing and supervision of
casinos, jewelers, realtors, attorneys, and other non-bank
financial institutions. No actions were taken to close this
loophole in 2005. Gambling is legal in Costa Rica, and
there is no requirement that the currency used in Internet
gaming operations be transferred to Costa Rica. Currently,
over 250 sports-book companies have registered to operate in
Costa Rica. Many of these registered firms have the same
owners and addresses.
In 2002, the Government of Costa Rica (GOCR) expanded the
scope of Law 7786 via Law 8204. This expansion criminalizes
the laundering of proceeds from all serious crimes. Serious
crimes are defined as carrying a sentence of four years or
more. Law 8204, which is a counter-narcotics law, also
obligates financial institutions and other businesses (such
as money exchangers) to identify their clients, report
currency transactions over $10,000, report suspicious
transactions, keep financial records for at least five
years, and identify the beneficial owners of accounts and
funds involved in transactions. While Law 8204, in theory,
covers the movement of all capital, current regulations
based on Law 8204, Chapter IV, Article 14, apply a
restrictive interpretation that covers only those entities
that are involved in the transfer of funds as a primary
business purpose.
The formal banking industry in Costa Rica is tightly
regulated. However, the offshore banking sector that offers
banking, corporate, and trust formation services remains
open and is an area of concern. Foreign-domiciled
"offshore" banks can only conduct transactions under a
service contract with a domestic bank, and they do not
engage directly in financial operations in Costa Rica.
Costa Rican authorities acknowledge that they are unable to
adequately assess risk. The Office of the Superintendent of
Financial Institutions (SUGEF) regulates Costa Rican
financial institutions.
Currently, six offshore banks maintain correspondent
operations in Costa Rica, three from the Bahamas and three
from Panama. The GOCR has supervision agreements with its
counterparts in Panama and the Bahamas, permitting the
review of correspondent banking operations. Unfortunately,
these counterpart regulatory authorities occasionally
interpret the agreements in ways that limit review by Costa
Rican officials. In September 2005, the GOCR's Attorney
("Procurador General") ruled that SUGEF has no authority to
regulate offshore operations. The ruling was an attempt to
clarify apparent contradictions between the 1995 Organic Law
of the Costa Rican Central Bank and Law 8204. Draft
legislation to correct the contradiction and reassert
SUGEF's regulatory power is under review in the Legislative
Assembly. However, important legal initiatives often
languish in the Legislative Assembly for years.
All persons carrying cash are required to declare any amount
over $10,000 to Costa Rican officials at ports of entry.
During 2005, officials seized over $850,000, much of it in
undeclared cash. In 2004, the GOCR seized $1.2 million.
Eighteen free trade zones operate within Costa Rica,
primarily producing electronic components, integrated
circuits, textiles, and medicines for re-export. The Zones
are under the supervision of "PROCOMER" an export-promotion
entity. Costa Rican authorities report no indications of
trade-based money laundering schemes in the zones. PROCOMER
strictly enforces control over the zones, but its measures
are aimed primarily at preventing tax evasion.
Costa Rica's Financial Intelligence Unit (FIU) became
operational in 1998 and was admitted into the Egmont Group
in 1999. The unit is analytical, screening cases for
referral to prosecutors. The FIU has access to the records
and databases of financial institutions and other government
entities but must obtain a court order if the information
collected is to be used as evidence in court. The unit has
no regulatory responsibilities. Despite its committed and
professional staff, the unit remains ill equipped and under-
funded to handle its current caseload (over 120 cases for
2005) and to provide the information needed by
investigators. Nevertheless, the unit developed evidence it
considers formidable in four high-profile cases of money
laundering during 2004. Three of those cases were
successfully prosecuted in 2005. Three additional money-
laundering cases began judicial proceedings in 2005 and the
FIU assisted international investigators to develop evidence
in four more cases.
Costa Rican authorities have received and circulated to all
financial institutions the lists of individuals and entities
designated by the U.S. or EU, or considered by the UN 1267
Sanction's Committee to be involved in the financing of
terrorism. However, these authorities cannot block, seize,
or freeze property without prior judicial approval. Thus,
Costa Rica lacks the ability to expeditiously freeze assets
connected to terrorism. No assets related to designated
individuals or entities were identified in Costa Rica in


2005. An interagency effort is underway to reduce the time
required to obtain such judicial approval.
The GOCR has ratified the major UN counterterrorism
conventions. Additionally, a government task force drafted
a comprehensive counterterrorism law with specific terrorist
financing provisions in 2002. The draft law would expand
existing conspiracy laws to include the financing of
terrorism. It would also enhance existing narcotics laws by
incorporating the prevention of terrorist financing into the
mandate of the Costa Rican Drug Institute. In 2004, the
Legislative Assembly considered a separate draft terrorism
law. In July of 2005, the Assembly's Narcotics Committee
approved a bill combining the two proposals, but no further
progress has been made.
Costa Rica is a party to the 1988 UN Drug Convention, the UN
International Convention for the Suppression of the
Financing of Terrorism, and the UN Convention against
Transnational Organized Crime. The GOCR has signed, but not
yet ratified, the UN Convention against Corruption. The
GOCR has also signed the OAS Inter-American Convention on
Mutual Assistance in Criminal Matters, and is a member of
the Caribbean Financial Action Task Force (CFATF) and the
aforementioned Egmont Group.