CHILE: 2005 INCSR PART II: MONEY LAUNDERING

UNCLAS SANTIAGO 002521

SIPDIS

SIPDIS

DEPT FOR INL, EB/ESC/TFS; JUSTICE FOR OIA AND AFMLS;
TREASURY FOR FINCEN

E.O. 12958: N/A
TAGS: SNAR KTFR PTER CI
SUBJECT: CHILE: 2005 INCSR PART II: MONEY LAUNDERING

REF: STATE 210351


1. Please find below the 2005-2006 International Narcotics
Control Strategy Report (INCSR) Part II: Financial Crimes and
Money Laundering for Chile.


2. SUMMARY. Chile's large, well-developed banking and
financial sector stands out as the strongest in the region.
With rapidly increasing trade and currency flows, the
government is actively seeking to turn Chile into a global
financial center. However, the Chilean government continues
to believe money laundering is not a significant threat.
Stringent bank secrecy laws emphasizing privacy rights have
been broadly interpreted and hamper Chilean efforts to
identify money laundering. Chile's Financial Intelligence
Unit, operating under a narrow and limited interpretation of
law, has become a hindrance in efforts to combat money
laundering and terrorist finance. No regulatory framework to
oversee the non-banking sector exists. There is strong
evidence that Chile's favorable reputation and incomplete
regulatory oversight is attracting an increasing number of
money launderers, particularly in the northern free trade
zone and in the money exchange house sector.


3. Money laundering appears to be primarily
narcotics-related. Until December 2003, money laundering was
only a crime when direct proceeds of drug offenses were
involved. Criminal proceeds laundered through Chile
generally appear to be derived from foreign criminal
activity. A significant amount of the funds derived from
illegal activity are laundered through the United States.
Chile is not considered to be an offshore financial center,
and offshore banking-type operations are not permitted. END
SUMMARY.


4. 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 ("Unidad de Analisis Financiero"
or UAF) until a new UAF with broader powers was created under
Law 19.913.


5. Law 19.913 went into effect on December 18, 2003. Under
this law, predicate offenses for money laundering are
expanded to include 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 created
the new financial intelligence unit, the Unidad de Analisis
Financiero (UAF),within the Ministry of Finance, which
replaced the CDE as Chile's UAF.


6. Law 19.913 requires mandatory reporting of suspicious
transactions by banks, non-banks and any entity handling
financial transactions. 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 are
sent to the UAF at least once per year, or more frequently at
the request of the UAF. However, the law does not impart any
consequences on an entity for non- or partial compliance.
The law also does not specify under what parameters
information should be reported; each financial entity
independently decides what constitutes irregularities in
financial transactions. This means that in effect there is
still only voluntary, not compulsory, reporting of suspicious
or unusual financial transactions. The law also dictates
that the movement of funds exceeding 450 unidades de fomento
into or out of Chile must be reported to Customs, which then
files a report with the UAF. However, Customs and other law
enforcement agencies are not permitted to seize or otherwise
stop the movement of funds, and the entry or exit of these
funds are not subject to taxation.


7. Notably, the December version of Law 19.913 was a
significant modification of the orginal Law 19.913 drafted
and passed by Chile's congress in September 2003. The
earlier version allowed the UAF to gather information, impose
sanctions, and lift bank secrecy protections under limited
circumstances. These provisions were deemed unconstitutional
by Chile's constitutional tribunal, which held that these
powers granted to the UAF violated privacy rights guaranteed
by the constitution. The tribunal's decision therefore
eliminated the ability of the UAF to request background
information from government databases or from obligated
entities on the reports they submitted. Gone also were the
UAF's power to impose sanctions on entities for failure to
file or maintain reports or to lift bank secrecy protections
easily. A new bill has been drafted to restore some of these
powers to the UAF, but it has been stalled in Congress for
over eighteen months.


8. The Unidad de Analisis Financiero began operating in
April 2004, and began receiving suspicious transaction
reports (STRs) from obligated entities the following month.
In 2005, the UAF received approximately 10 STRs from the
banking sector per month. 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 does not
receive regular STRs from non-financial institutions. Cash
transaction reports (CTRs) are only reported upon request.
Customs sends reports on the transportation of currency and
monetary instruments into or out of Chile to the UAF on a
daily basis.


9. 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 can 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 bill is passed,
the UAF would then be able to request information from any
entity that is obligated to file suspicious transaction
reports. The draft law would also permit the UAF to request
information from any entity if that information is necessary
to complete the analysis of an STR. The draft law would also
allow the UAF access to government databases. These functions
would require authorization from the Santiago Appeals Court,
although the draft bill stipulates that access to government
databases would only require court authorization for
protected information, such as tax information.


10. Banks are supervised formally by the Superintendent of
Banks and informally by the Association of Banks and
Financial Institutions. Banks are obligated to abide by
"know your customer" standards and other money laundering
controls for checking accounts. However, savings accounts
are not subject to the same compliance standards; only a
limited number of banks rigorously apply money laundering
controls to non-current accounts. A significant gap in
Chile's efforts to combat money laundering is that non-bank
financial institutions, such as money exchange houses,
currently do not fall under the supervision of any regulatory
body.


11. Chile's gaming industry consists of the Superintendent
of Casinos, which is a supervisory body without law
enforcement or regulatory authority, and seven casinos
located throughout the country. However, Chile is engaged in
sorting through international and domestic bids for 17
additional casinos legislated by the Chilean congress. There
is currently no legal framework for regulating the money
moving through the gaming industry.


12. One free trade zone exists in the northern region of
Chile at Arica. The borders within the free trade zone are
pourous and largely unregulated. Strong indications suggest
money laundering schemes are rampant in the free trade zone,
and Chilean resources to combat this issue are extremely
limited.


13. The CDE continues to analyze and investigate any cases
opened prior to the establishment of the UAF. Following
completion of a judicial reform in June 2005, all cases
deemed by the UAF to require further investigation are sent
to the Public Prosecutor's Office (Ministerio Publico or MP).
In effect, the UAF operates as a warehouse of information
which is internally analyzed, investigated and judged without
external input. To date, only two reports have been
submitted to the MP, both of which contained inadequate
information for future investigation. The Public
Prosecutor's Office 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. The Pubic Ministry
has up to two years to complete an investigation and
prosecution.


14. Given the above legislative restrictions and the narrow
interpretation of the law under which the UAF currently
operates, it is no surprise that no money laundering cases
have been prosecuted since the inception of the UAF. At the
same time, the Chilean investigative police (PICH) and the
Public Prosecutor's Office continue to cooperate with U.S.
and regional law enforcement in 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 modified 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
Superintendent of Banks circulates UNSCR 1267 consolidated
list to banks and financial institutions.


16. 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 to freeze and seize them
remains unclear. Law 19.913 contains provisions that would
allow 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 freeze and seize terrorist assets; however, the
provisions for freezing assets are based on the drug law,
which at times has itself been interpreted narrowly by the
courts. While assets have been frozen during two drug
investigations, it is unclear the new system would operate
for a terrorism financing case. 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 property and financial
assets. Civil forfeiture is not allowed by current law.


17. 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
is currently considered in 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.


18. In the establishment of the UAF, Chile created an entity
that meets the Egmont Group's definition of a Financial
Intelligence Unit. However, the UAF is hindered by its
inability to sanction obligated entities for non-compliance;
its lack of access to information from other government
agencies; and, by a very narrow interpretation of how the UAF
operates and coordinates with law enforcement and other
government agencies. This interpretation directly impacts
the effectiveness and accountability of the UAF.


19. The continuation of these limitations will be a step
backward, reversing the steps Chile has taken over the past
years to create a regime capable of investigating, punishing,
and deterring financial crimes. With signs of growing money
laundering and with it also terrorist financing, Chile lacks
the legal ability to obtain necessary information and
coordinate efforts to address these issues. To compete in
the global financial sector, the current operating procedures
of the UAF, in terms of both legislation and interpretation
of current law, need to evolve in order for Chile to be able
effectively to combat money laundering and terrorist finance.

KELLY