UNCLAS SECTION 01 OF 06 SANTIAGO 000250

SIPDIS

DEPT THIS IS CORRECTED COPY FOR SANTIAGO 02906

E.O. 12958: N/A
TAGS: SNAR CI
SUBJECT: CHILE INSCR 2004 REPORT: CORRECTED COPY

REF: A. SANTIAGO 02906

B. SECSTATE 18769


1. The second section of the INSCR 2004 report was
inadvertently excluded in the first submission. Please find
this section at the end of the previously submitted INSCR
2004 report below.

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Section I: International Crime and Narcotics
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2. Summary. While not a center of illicit narcotics
production, Chile remains a transit country for cocaine and
heroin shipments destined for the U.S. and Europe. Chile also
has an internal cocaine and marijuana consumption problem,
with ecstasy continuing to grow in popularity. Chile is a
source of essential chemicals for use in coca processing in
Peru and Bolivia. Chile is a party to the 1988 UN Drug
Convention. End Summary.


3. Status of Country. Transshipment of cocaine from the
Andean region is a problem for Chile, as is the persistent
transit of heroin destined for the U.S. and Europe. Cocaine
hydrochloride consumption has increased, although cocaine
base abuse is more prevalent. Chilean authorities discovered
some cocaine and amphetamine labs two years ago, but Chile is
not a major source of refined cocaine. Marijuana also
continues to be widely used in Chile, a drug supplied
primarily by Paraguay and a handful of production farms in
Chile.


4. Country Actions Against Drugs in 2004
a. Policy Initiatives. The Chilean Congress continues to work
on a comprehensive revision of Chile's 1995 drug laws, a
project pending since 1999. In an effort to combat money
laundering, the Financial Intelligence Unit was created in
June of 2004. The National Drug Control Commission (CONACE)
develops and coordinates the National Drug Control Strategy.
The current plan covers the years 2003-2008. CONACE also
coordinates all demand reduction programs.

b. Accomplishments. In January, 2004, five representatives
from the Chilean Coalition on Drug Prevention (CHIPRED)
participated in a Voluntary Visitor program on managing drug
abuse prevention programs. Embassy Santiago, in conjunction
with CONACE, organized the launch of CHIPRED, a network of
Chilean NGOs working on drug issues, in August 2003. CHIPRED
allows better coordination of programs to prevent drug abuse
and reduce demand, and is a member of the Drug Prevention
Network of the Americas (DPNA).

In June 2004, the Financial Intelligence Unit (FIU) was
launched with a mandate to investigate money laundering
activity. While current laws do not provide adequate
authority for the FIU, amendments are expected to be approved
in 2005 to increase the investigative authority of the unit.

The DEA Santiago Country Office, together with the Policia de
Investigaciones de Chile ("PICH," roughly equivalent to the
FBI) and the Carabineros (national uniformed police),
initiated Operation Seis Fronteras VI on March 1, 2004.
This operation is a six-country initiative to combat the
diversion of legal chemicals in the production of cocaine.
As a follow-up, the DEA Santiago Country Office and the
Carabineros de Chile hosted Operation Seis Fronteras VI
After-Action Conference on June 9-10, 2004. DEA and police
representatives from Colombia, Venezuela, Ecuador, Brazil,
Peru, Bolivia, Argentina and Chile attended the conference,
which focused on analyzing the results of the three-month
Seis Fronteras VI operation.

Chile continues to implement its multi-year criminal justice
reform project. As of the January 2004, all of Chile's 12
regions have adopted the new adversarial judicial system,
leaving only the metropolitan area of Santiago operating
under the old system. The new system involves oral trials
rather than document-based legal proceedings and should
generally result in a faster resolution of cases. The
Santiago metropolitan region, which accounts for almost 40
percent of Chile's population, will present special
challenges. The transition in Santiago is scheduled to occur
in June 2005.
c. Law Enforcement Efforts. Chilean authorities are
successfully interdicting narcotics transiting through and
destined for Chile. As a result of increased U.S. support
for interdiction efforts in the Andean source nations,
narcotics traffickers are using Chile as a transshipment
point for cocaine and heroin with more frequency.
Traffickers assume Chile's clean reputation with authorities
in the U.S. and Europe means that vessels and aircraft
originating from Chile are less closely scrutinized.

In 2004, Chilean authorities seized 2697 kilograms of cocaine
hydrochloride, 8.8 kilograms of heroin, and over fifty-six
million Chilean pesos (approximately USD$90,000). Law
enforcement agencies also arrested 9400 persons for
drug-related offenses, an increase from 8343 in 2003.
Chilean authorities are also addressing the domestic
distribution sources of cocaine, marijuana, and ecstasy.
d. Corruption. Narcotics-related corruption among police
officers and other government officials is not a major
problem in Chile. The government actively discourages
illicit production and distribution of narcotic and
psychotropic drugs and the laundering of proceeds from
illegal drug transactions. No current Chilean senior
officials have been accused of engaging in such activities.
The high-profile scandals related to Pinochet's activities
provide an example of the gravity and attention that Chile
attaches to corrupt behavior by former or current government
officials. Transparency International's Annual Corruption
Perception Index ranked Chile 20th in 2004, one spot lower
than the U.S. but three positions down from last year.

e. Agreements and Treaties. Efforts are currently underway
to update the U.S.-Chile Extradition Treaty signed in 1900,
under which no Chilean citizen has ever been extradited to
the U.S. In late 2002, Chile expressed interest in updating
the current treaty, and exploratory meetings with discussions
of draft language are taking place. The U.S. and Chile do
not have a Mutual Legal Assistance Treaty (MLAT). The U.S.
is hoping that Chile will ratify the OAS MLAT to which the
U.S. is a party. Chile is party to the Inter-American
Convention Against Corruption.

The September 2002 letter of agreement between Chile and the
U.S. remains the most recent accord for cooperation and
mutual assistance in narcotics-related matters. U.S.
assistance programs are implemented under this agreement.
Although the GOC and the DEA signed an agreement in 1995 to
create a Special Investigative Unit (SIU) within the
Carabineros, no SIU currently operated in Chile. Due to the
very low level of corruption and the resulting
professionalism in the ranks of Chilean law enforcement,
there is currently no pressing need for an SIU. Chile has
bilateral narcotics cooperation agreements in force with
Argentina, Austria, Bolivia, Brazil, Colombia, Costa Rica,
Croatia, Cuba, Ecuador, El Salvador, Mexico, Panama,
Paraguay, Peru, Russia, Singapore, South Africa, Uruguay and
Venezuela.

f. Cultivation/Production. There is no known major
cultivation or production of drugs in Chile, and the
Department of State does not identify Chile as a "major"
drug-transit country. Very small amounts of marijuana are
cultivated in Chile to meet domestic demand.

g. Drug Flow/Transit. Increasing amounts of drugs are
transshipped from Andean source countries through Chile,
destined for the U.S. and Europe. Chile's extensive and
modern transportation system make it attractive to narcotics
traffickers. Maritime and land route trafficking has
increased; the most recent trend is to traffic drugs via
Chile's road system and out of the country via maritime
routes. The Santiago International Airport is also used to
transit particularly heroin to the U.S. and Europe. Most
narcotics arrive by land routes from Peru and Bolivia, but
some enter through Argentina. The efforts of Chilean
authorities are hampered by treaty provisions allowing cargo
originating in Bolivia and Peru to transit Chile without
inspection to the ports of Arica and Antofagasta.

No labs producing synthetic drugs have been found in Chile to
date. Ecstasy enters the country primarily in small amounts
via couriers traveling by air.

h. Demand Reduction Programs. The Chilean government has
expressed concern about domestic drug use. The most recent
study, completed in 2002 and released by CONACE in July 2003,
demonstrates that the existing treatment infrastructure in
Chile is insufficient. According to the survey, 5.7 percent
of Chileans had used drugs in 2002, a slight decrease from
6.3 percent recorded in 2000. Prevalence of marijuana
dropped from 5.8 percent in 2000 to 5.2 percent in 2002,
although current information indicates marijuana use is
significantly higher than the numbers suggest. The report
also states the use of cocaine base fell from 0.7 percent to
0.5 percent, but use of refined cocaine rose slightly from
1.5 percent to 1.6 percent. Current indications suggest an
increase in use of both types of cocaine. The 2002 survey
also found that 22.9 percent of respondents had used illegal
drugs at least once in their lives. CONACE continues to work
with NGOs, community organizations, and schools to develop
demand reduction programs. With the launch of CHIPRED last
year, the network of NGO prevention and treatment
organizations, CONACE is able to cooperate more effectively
with the NGO community.


5. U.S. Policy Initiatives and Programs
a. U.S. Policy Initiatives. U.S. support to Chile in 2003
reinforced ongoing priorities in five areas: 1) Training for
prosecutors, police, judges, and public defenders in their
roles in the criminal justice system reform; 2) Demand
reduction; 3) Enhanced police investigation capabilities; 4)
Police intelligence capability; and 5) Money laundering.

b. Bilateral Cooperation. During 2004, the U.S. Government
pursued numerous initiatives based on the above priorities.
These include: 1) a two-part training series on the
nationwide drug intelligence computer network for
carabineros; 2) the first Intellectual Property Rights week
including a workshop for law enforcement and prosecutors,
public awareness campaign and youth concert; 3) the first
presentation on drug abuse prevention programs by students
from four communities as a result from the launch of PRIDE in
2003; 4) an INL-funded judicial reform intensive training
program for prosecutors and defenders, preceded by Digital
Video Conferences with the University of the Pacific; 5) an
INL-funded seminar for judges on DNA Forensic Technology; 6)
a workshop for Chilean authorities on how to investigate
Intellectual Property Rights crimes; 7) a DOJ-funded course
on cybercrime for prosecutors, law enforcement and government
officials from five countries; 8) a public affairs section
grant to Fundacion Paz Ciudadana to implement ADAM (Arrestee
Drug Abuse Monitoring); 9) five CHIPRED representatives
participated in a voluntary visitor program on managing drug
abuse prevention programs; 10) one IVP on the Financial
Intelligence Unit; 11) two U.S. speakers on drugs in the
workplace and drug courts; 12) INL-funded support of the
police to provide equipment for counter-narcotics operations;
13) two IVPs on drug prevention and drug prosecution; 14) a
series of radio programs on drug prevention recorded and
distributed to more than 80 radio stations; 15) continued
discussions towards updating the 1900 U.S./Chile extradition
treaty.

c. The Road Ahead. In 2005, the U.S. Government will
continue to support Chilean efforts to combat the
narcotics-related problems listed above. The U.S. plans to
continue to provide capacity-building assistance to the
on-going criminal justice system reform. Efforts to enhance
the counter-narcotics capabilities of both the Carabineros
and the Investigations Police pursuant to the Letter of
Agreement will also continue.

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Section II: Money Laundering and Terrorist Finance
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7. Chile has a large, well-developed banking and financial
sector, and it is a stated goal of the government to turn
Chile into a major regional center. The Chilean government
does not believe there is a significant money laundering
problem, but information is lacking as to the extent of money
laundering activity. Money laundering appears to be
primarily narcotics-related, and until 2003, money laundering
was only a crime when it involved the direct proceeds of drug
offenses. Chile is not considered to be an offshore
financial center, and offshore banking-type operations are
not permitted. Bank secrecy laws are strong in Chile, and
the privacy rights enshrined in the constitution have been
broadly interpreted and present challenges to Chilean efforts
to identify money laundering.


8. Money laundering in Chile is criminalized under Law
19.366 of January 1995 and Law 19.913 of December 2003.
Prior to the approval of Law 19.913, Chile's anti-money
laundering program was based solely on Law 19.366, which
criminalized only narcotics-related money laundering
activities. The law required only voluntary reporting of
suspicious or unusual financial transactions by banks and
offered no "safe harbor" provisions protecting banks from
civil liability; as a result, the reporting of such
transactions was extremely low. Law 19.366 gave only the
Council for the Defense of the State (Consejo de Defensa del
Estado, or CDE) authority to conduct narcotics-related money
laundering investigations. The Department for the Control of
Illicit Drugs (Departmento de Control de Trafico Ilicito de
Estupefacientes within the CDE functioned as Chile's
financial intelligence unit (FIU) until a new FIU with
broader powers was created under Law 19.913.


9. Law 19.913 went into effect on December 18, 2003. Under
Law 19.913, predicate offenses for money laundering are
expanded to include (in addition to narcotics trafficking)
terrorism in any form (including the financing of terrorist
acts or groups), illegal arms trafficking, fraud, corruption,
child prostitution and pornography, and adult prostitution.
The law also creates the new financial intelligence unit, the
Unidad de Analisis Financiero (UAF), within the Ministry of
Finance, which has replaced the CDE as Chile's FIU. Law
19.913 requires mandatory reporting of suspicious
transactions by banks and financial institutions, brokerage
firms, financial leasing companies, general funds managing
companies and investment funds managing companies, the
Foreign Investment Committee, money exchange firms and other
entities authorized to receive foreign currencies, credit
cards issuers and operators, securities and money transfer
and transportation companies, stock exchanges, stock exchange
brokers, securities agents, insurance companies, mutual funds
managing companies, forwards and options markets operators,
tax free zones' legal representatives, casinos, gambling
houses and horse tracks, customs general agents, auction
houses, realtors and companies engaged in the land
development business, and notaries and registrars. The law
also requires that obligated entities maintain registries of
cash transactions that exceed 450 unidades de fomento
(approximately $12,000) and imposes record keeping
requirements (five years). All cash transaction reports
contained in the internal registries must be sent to the UAF
at least once per year, or more frequently at the request of
the UAF. The movement of funds exceeding 450 unidades de
fomento into or out of Chile must be reported to the customs
agency, which then files a report with the UAF.


10. Shortly after the passage of Law 19.913 in September
2003, portions of the new law -- specifically those that
dealt with the UAF's ability to gather information, impose
sanctions, and lift bank secrecy provisions -- were deemed
unconstitutional by Chile's constitutional tribunal. The
tribunal held that some of the powers granted to the UAF in
the law violated privacy rights guaranteed by the
constitution. The tribunal's decisions eliminate the ability
of the UAF to request background information from government
databases or from obligated entities on the reports they
submit, impose sanctions on entities for failure to file or
maintain reports, or lift bank secrecy protections. The law
went into effect in December 2003 without the above-mentioned
powers. A new bill has been drafted to give the UAF the
ability to fine or sanction obligated entities for
noncompliance with the reporting requirements. The UAF was
initially granted this power in the original version of Law
19.913, but the constitutional tribunal objected to this
section on grounds of due process. The new bill, if passed,
will address the due process issues by allowing the
individual or entity 15 days to contest the sanction, and
also create a stage for sanctions by the regulatory agencies
prior to sanctions administered by the UAF. The bill will
establish processes through which the UAF can request
information from other government entities.


11. The Unidad de Analisis Financiero began operating in
April 2004. The UAF began receiving suspicious transaction
reports (STRs) from obligated entities in May 2004 and had
received 25 STRs as of October 2004. Suspicious transaction
reports from financial institutions are received
electronically, via a system known as SINACOFI (Sistema
Nacional de Comunicaciones Financieras) that is used by banks
to send information amongst themselves and the
Superintendence of Banks in an encrypted format. The UAF has
not yet developed a suspicious transaction disclosure form
for entities other than banks and financial institutions, and
therefore has not received STRs from non-financial
institutions. Non-bank financial institutions currently do
not fall under the supervision of any regulatory body. It is
estimated that the UAF will receive roughly 50-80 suspicious
transaction reports per year. Cash transaction reports
(CTRs) are only reported upon request, and as of October
2004, the UAF had only requested CTRs from currency exchange
houses. Reports on the transportation of currency and
monetary instruments into or out of Chile must be to the
customs agency, which sends the reports to the UAF on a daily
basis. If an obligated entity or individual fails to file a
report, the UAF currently lacks the ability to sanction that
entity or individual for failure to report.


12. After receiving a suspicious transaction report, the UAF
may request account information on the subject of the STR
from the institution that filed the report. The UAF may also
request CTRs from obligated entities at any time, but is
required by law to request at least once per year all CTRs
filed from each institution. If the draft law is passed, the
UAF will be able to request information from any entity that
its obligated to file suspicious transaction reports, even if
that entity did not file the STR that is being investigated.
The draft law will also permit the UAF to request information
from any entity that is not obliged to report suspicious
transactions if that information is necessary to complete the
analysis of an STR, and will allow the UAF access to any
government databases necessary for carrying out its duties.
In order to perform these functions detailed in the draft
law, the UAF will need the authorization of the Santiago
Appeal Court. However, in the case of access to government
databases, the UAF only needs court authorization for
protected information, such as that which is related to
taxes. The UAF's ability to access this information depends
on the passage of the draft law.


13. The CDE continues to analyze and investigate any cases
opened prior to the establishment of the UAF. Until June
2005, all cases that are deemed by the UAF to require further
investigation will be sent to the Consejo de Defensa del
Estado (CDE). The UAF has not yet sent any cases to the CDE
for further investigation. After June 2005, the Public
Ministry (the public prosecutor's office) will be responsible
for receiving and investigating all cases from the UAF Under
the new law, the Public Ministry has the ability to request
that a judge issue an order to freeze assets under
investigation and can also, with the authorization of a
judge, lift bank secrecy provisions to gain account
information if the account is directly related to an ongoing
case. The Pubic Ministry has up to two years to complete an
investigation and prosecution.


14. Given the above legislative restrictions, no money
laundering cases were prosecuted in 2004. At the same time,
the Chilean investigative police (PICH) are actively
cooperative in pursuing money laundering investigations.


15. Terrorist financing in Chile is criminailized under Law
18.314 and Law 19.906. Law 19.906 went into effect in
November 2003 and modifies Law 18.314 in order to sanction
more efficiently terrorist financing in conformity with the
UN International Convention for the Suppression of the
Financing of Terrorism. Under Law 19.906, the financing of a
terrorist act and the provision (directly or indirectly) of
funds to a terrorist organization are punishable. The
Government of Chile (GOC) circulates the UNSCR 1267
consolidated list to banks and financial institutions. No
terrorist assets belonging to individuals or groups named on
the list have been identified to date in Chile. If assets
were found, the legal process that would be followed to
freeze and seize them is still unclear; Law 19.913 contains
provisions that allow for prosecutors to request that assets
be frozen based on a suspected connection to criminal
activity. Government officials have stated that Chilean law
is currently sufficient to effectively freeze and seize
terrorist assets; however, the new provisions freezing assets
are based on provisions in the drug law, which at times have
been interpreted narrowly by the courts. Until a case
emerges, it will be difficult to judge how smoothly the new
system will operate. The Ministry of National Property
currently oversees forfeited assets and proceeds from the
sale of such assets are passed directly to the national
regional development fund to pay for drug abuse prevention
and rehabilitation programs. Under the present law,
forfeiture is possible for real estate, vehicles, ships,
airplanes, other property, money securities and stocks, and
instruments used or intended for use in the commission of the
underlying crime, all proceeds of such criminal activity, and
businesses involved in the criminal activity or purchased
with illicit funds.


16. Chile is a party to the 1988 UN Drug Convention, and has
signed, but not yet ratified, the UN Convention against
Transnational Organized Crime. In November 2001, the GOC
became a party of the UN International Convention for the
Suppression of the Financing of Terrorism. On December 11,
2003, the GOC signed the UN Convention Against Corruption.
Chile is a member of the OAS Inter-American Drug Abuse
Control Commission (OAS/CICAD) Experts Group to Control Money
Laundering. Chile is a member of the South American
Financial Action Task Force on Money Laundering (GAFISUD) and
has pledged to come into compliance with the organization's
recommendations. The CDE became a member of the Egmont Group
of financial intelligence units in 1997, and the UAF was
vetted by the Egmont Group in October 2004 to replace the
CDE.


17. In the establishment of the UAF, the Government of Chile
has created an FIU that essentially surmounts the
deficiencies of the CDE and meets the Egmont Group's
definition of a financial intelligence unit. However, there
remain several weaknesses that may hinder the operation of
the UAF, such as its inability to sanction obligated entities
or individuals for failure to file reports and its lack of
access to information from other government agencies. The
GOC should recognized that the establishment of an effective
financial intelligence unit that meets the Egmont Group's
standards is imperative in the fight against money laundering
and terrorist financing. If the abilities of the UAF remain
limited by the current version of the new law, the steps that
have been taken in Chile over the past years to create a
regime capable of investigating, punishing, and deterring
financial crimes may be severely limited, if not negated.
The GOC should take all necessary steps to ensure that its
FIU becomes a viable entity capable of combating money
laundering and terrorist financing to the best of its
abilities.

KELLY