HONDURAS: 2005-2006 INCSR PART II, MONEY

UNCLAS SECTION 01 OF 04 TEGUCIGALPA 002565

SIPDIS

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

E.O. 12958: N/A
TAGS: ECON KCRM KJUS PGOV PREL HO
SUBJECT: HONDURAS: 2005-2006 INCSR PART II, MONEY
LAUNDERING AND FINANCIAL CRIMES

REF: SECSTATE 210351


1. Per reftel, Post provides its submission for the 2005-2006
International Narcotics Control Strategy Report (INCSR) Part
II, Money Laundering And Financial Crimes.

Introduction and General Questions


2. Three years after passing a new law against money
laundering, the government of Honduras has made considerable
progress in implementing the law and establishing and
training the entities responsible for the investigation of
financial crimes. Department of Treasury officials and Post
continue to work to improve cooperation among these entities.
Sustained progress will depend upon increased commitment
from the government of Honduras to prosecute financial crimes
aggressively.


3. Honduras is not an important regional or offshore
financial center and is not considered to have a significant
black market for smuggled goods (though there have been
high-profile smuggling cases involving gasoline and other
consumer goods). Money laundering, however, does take place
in Honduras, primarily through the banking sector, but also
through currency exchange houses and front companies. The
vulnerabilities of Honduras to money laundering stem
primarily from significant trafficking of narcotics,
especially cocaine, through the region, though smuggling of
contraband may also generate funds that are laundered through
the banking system. Money laundering in Honduras derives
from both domestic and foreign criminal activity, and the
proceeds are controlled by local drug trafficking
organizations and organized crime syndicates. Honduras is
not experiencing an increase in financial crimes such as bank
fraud. It is not a matter of government policy to encourage,
facilitate, or engage in laundering the proceeds from illegal
drug transactions, from other serious crimes, or from
terrorist financing. However, corruption remains a serious
problem, particularly within the judiciary and law
enforcement sectors.

Laws and Regulations to Prevent Money Laundering/Terrorist
Financing


4. Money laundering has been a criminal offense in Honduras
since 1998, when the passage of Law. No. 27-98 criminalized
the laundering of narcotics-related proceeds and introduced
various record keeping and reporting requirements for
financial institutions. However, weaknesses in the law,
including a narrow definition of money laundering, made it
virtually impossible to successfully prosecute the crime.


5. In 2002, Honduras passed Decree No. 45-2002, which greatly
strengthened its legal framework and available investigative
and prosecutorial tools to fight money laundering. Under the
new legislation, the definition of money laundering was
expanded to include the transfer of assets that proceed
directly or indirectly from trafficking of drugs, arms, human
organs or people, auto theft, kidnapping, bank and other
forms of financial fraud, and terrorism, as well as any sale
or movement of assets that lacks economic justification. The
penalty for money laundering is a prison sentence of 15-20
years. The law also requires all persons entering or leaving
Honduras to declare, and if asked, present, money in cash and
convertible securities ("titulos valores de convertibilidad
inmediata") that they are carrying if the amount exceeds
$10,000 or its equivalent.


6. Decree No. 45-2002 also created a financial information
unit, the Unidad de Informacion Financiera (UIF),within the
Honduran National Banking and Insurance Commission. Banks and
other financial institutions are required to report to the
UIF any currency transactions over $10,000 in dollar
denominated accounts or the equivalent in local currency
accounts. The law requires the UIF and reporting institutions
to keep a registry of reported transactions for five years.
Banks are required to know the identity of all their clients
and depositors, regardless of the amount of a client's
deposits, and to keep adequate records of the information.
The law also includes banker negligence provisions that make
individual bankers subject to two- to five-year prison terms
if, by "carelessness, negligence, inexperience or
non-observance of the law, they permit money to be laundered
through their institutions." All of the above requirements
apply to all financial institutions that are regulated by the
National Banking and Insurance Commission, which include
state and private banks, savings and loan associations,
bonded warehouses, stock markets, currency exchange houses,
securities dealers, insurance companies, credit associations,
and casinos. The law does not, however, extend to the
activities of lawyers or accountants.


7. Decree No. 45-2002 requires that a public prosecutor be
assigned to the UIF. In practice, two prosecutors are
assigned to the UIF, each on a part-time basis, with
responsibility for specific cases divided among them
depending on their expertise. The prosecutors, under urgent
conditions and with special authorization, may subpoena data
and information directly from financial institutions. Public
prosecutors and police investigators are permitted to use
electronic surveillance techniques to investigate money
laundering.


8. Under the Criminal Procedure Code, reporting individuals
such as bank officials are protected by law with respect to
their cooperation with law enforcement authorities. However,
some have alleged that their personal security is put at risk
if the information they report leads to the prosecution of
money launderers. This has not been an issue throughout
2005, however, as only cases originating from the police and
prosecutors have been presented in court.


9. There had been some ambiguity in Honduran law concerning
the responsibility of banks to report information to the
regulating authorities and the duty of banks to keep customer
information confidential. A new law passed in September
2004, the Financial System Law (Decree No. 129-2004)
clarifies this ambiguity, explicitly stating that provision
of information demanded by regulatory, judicial, or other
legal authorities shall not be regarded as an improper
divulgence of confidential information.


10. In late December 2004, Decree 24-2004 created the
InterAgency Commission for the Prevention of Money Laundering
and Financing of Terrorism (CIPLAFT). The group was tasked
as the coordinating entity responsible for ensuring that all
anti-money laundering and anti-financing of terrorism systems
operate efficiently and consistently with all relevant laws,
regulations, resolutions, and directives. The group meets
every three months and includes representatives from UIF, the
prosecuting office, the police and other offices that touch
on the subject of money laundering and terrorism finance.
While the meetings represent a good opportunity to identify
and discuss general ideas and themes, more case specific,
working level meetings have been proposed in an attempt to
increase the efficiency of the process.

Prosecutions in 2005


11. Prior to 2004, there had been no successful prosecutions
of money laundering crimes in Honduras. In 2004, the
authorities arrested 16 persons for money laundering crimes,
issued six additional outstanding arrest warrants, and
secured five convictions. Six additional convictions were
made in 2005.

Measures to Prevent Terrorist Financing


12. The government of Honduras has been supportive of
counterterrorism efforts. Decree No. 45-2002 states that an
asset transfer related to terrorism is a crime; however,
terrorist financing has not been identified as a crime
itself. The law does not explicitly grant the government the
authority to freeze or seize terrorist assets; however, on
separate authority, the National Banking and Insurance
Commission has issued freeze orders promptly for the
organizations and individuals named by the UN 1267 Sanctions
Committee and those organizations and individuals on the list
of Specially Designated Global Terrorists designated by the
United States pursuant to Executive Order 13224 (on terrorist
financing). The Ministry of Foreign Affairs is responsible
for instructing the Commission to issue freeze orders. The
Commission directs Honduran financial institutions to search
for, hold, and report on terrorist-linked accounts and
transactions, which, if found, would be frozen. The
Commission has reported that, to date, no accounts linked to
the entities or individuals on the lists have been found in
the Honduran financial system.


13. While Honduras is a major recipient of flows of
remittances (estimated at $1.5 billion in 2005),there has
been no evidence linking these remittances to the financing
of terrorism. Remittances primarily flow from Hondurans
living in the United States to their relatives in Honduras.
Most remittances are sent through wire transfer or bank
services, with some cash probably being transported
physically from the United States to Honduras. There is no
significant indigenous alternative remittance system such as
hawala operating in Honduras, nor is there any evidence that
charitable or non-profit entities in Honduras have been used
as conduits for the financing of terrorism.

14. Honduras signed the 1999 International Convention for the
Suppression of the Financing of Terrorism on November 11,
2001, and ratified the convention on March 25, 2003.

Free Trade Zones


15. Under Honduran legislation, companies may register for
"free trade zone" status, and benefit from the associated tax
benefits, regardless of their location in the country.
Companies that wish to receive free trade zone status must
register with the Office of Productive Sectors in the
Ministry of Industry and Commerce. The majority of companies
with free trade zone status operate mostly in the textile and
apparel industry. There is no indication that free trade
zones are being used in trade-based money laundering schemes
or by the financiers of terrorism.

International Cooperation


16. Honduras cooperates with U.S. investigations and requests
for information pursuant to the 1988 UN Drug Convention.
Honduras has signed memoranda of understanding to exchange
information on money laundering investigations with Panama,
El Salvador, Guatemala, Mexico, Peru, Colombia, and the
Dominican Republic. Honduras strives to comply with the
Basel Committee's "Core Principles for Effective Banking
Supervision," and the new Financial System Law (Decree No.
129-2004) passed in September 2004 is designed to improve
compliance with these international standards. At the
regional level, Honduras is a member of the Central American
Council of Bank Superintendents, which meets periodically to
exchange information.


17. Honduras is a party to the 1988 UN Drug Convention, the
UN Convention against Illicit Traffic in Narcotic Drugs and
Psychotropic Substances, the UN International Convention
against Transnational Organized Crime, and the UN
International Convention for the Suppression of the Financing
of Terrorism. Honduras signed the OAS Inter-American
Convention on Terrorism in June 2002, ratified the agreement
on September 22, 2004, and became a party to the agreement
when it deposited its instruments of ratification on November
23, 2004. Honduras signed the UN Convention Against
Corruption on May 17, 2004. Honduras is a member of the
Organization of American States Inter-American Drug Abuse
Control Commission (OAS/CICAD) Group of Experts to Control
Money Laundering and the Caribbean Financial Action Task
Force (CFATF). In mid-2005, the Honduran UIF was admitted as
a member in the Egmont Group, signifying that the Honduran
Unit meets the international standards of Financial
Information Units. The membership will allow Honduras to
share information with FIUs of other member countries in an
effort to increase international cooperation and enhance
effectiveness.


18. No specific written agreement exists between the United
States and Honduras to establish a mechanism for exchanging
adequate records in connection with investigations and
proceedings relating to narcotics, terrorism, terrorist
financing, and other crime investigations. However, Honduras
has cooperated, when requested, with appropriate law
enforcement agencies of the U.S. government and other
governments investigating financial crimes.

Asset Forfeiture and Seizure Legislation


19. Congress first enacted an asset seizure law in 1993 that
subsequent Honduran Supreme Court rulings substantially
weakened. Decree No. 45-2002 strengthened the asset seizure
provisions of the law, establishing an Office of Seized
Assets (OABI) under the Public Ministry. The law authorizes
the Office of Seized Assets to guard and administer "all
goods, products or instruments" of a crime, and states that
money seized (or money raised from the auctioning of seized
goods) should be transferred to the public entities that
participated in the investigation and prosecution of the
crime. Under the Criminal Procedure Code, when goods or
money are seized in any criminal investigation, a criminal
charge must be submitted against the suspect within sixty
days of the seizure. If one is not submitted, the suspect
has the right to demand the release of the seized assets.


20. Decree No. 45-2002 is not entirely clear on the issue of
whether a legitimate business can be seized if used to
launder money which derives from criminal activities. The
Chief Prosecutor for Organized Crime maintains that the
authorities do have this power, since once a "legitimate"
business is used to launder criminal assets, it ceases to be
"legitimate" and is subject to seizure proceedings. However,
this authority is not explicitly granted in the law, and
there has been no test case to date which would set an
interpretation. There are currently no new laws being
considered regarding seizure or forfeiture of assets of
criminal activity.


21. The total value of assets seized since the 2002 law came
into effect is estimated at $6.4 million and around $4.6
million in seized assets (cars, houses, boats, etc.) as of
December 2005. The lack of clear records, and differences in
accounting between OABI, the police and the investigators
office, make prior year comparisons difficult. Most of these
seized assets are alleged to have derived from crimes related
to drug trafficking; none of the seized assets are suspected
of being connected to terrorist activity. The law allows for
both civil and criminal forfeiture, and there are no
significant legal loopholes that allow criminals to shield
their assets.


22. However, OABI has not established firm control over the
asset seizure and forfeiture process. Implementation of the
existing law, and the process of equipping OABI to maintain
control over seized assets and effectively dispose of them,
has been slow and ineffective. The two implementing
regulations governing OABI were not finalized and published
until more than a year after the passage of the law, and the
key regulation that governs the distribution of assets is
still pending action by the Attorney General. Plans to build
separate offices and a warehouse for this entity are still
incomplete, resulting in seized assets currently being kept
in various locations under dispersed authority. Money seized
is kept in various accounts without clear records of control,
or kept in cash as evidence. Due to the absence of an
approved implementing regulation on distribution of assets,
the Public Ministry has on several occasions used seized cash
to pay certain employees' salaries, without the money's first
having passed through a proper legal process for disposition.
Similarly, assets seized, such as vehicles, property, and
boats, are in many cases left unused, rather than being
distributed for use by government agencies. Outside of the
police investigative unit, for example, at least fifty cars
seized by OABI are left to rust while twenty officers take
turns using the unit's one active car to pursue
investigations.


23. There is no evidence that traffickers, organized crime
organizations, or terrorist organizations have taken
retaliatory actions related to money laundering/terrorist
financing investigations, government cooperation with the
USG, or seizure/freezing of assets.

Conclusion


24. In 2005, the government of Honduras continued their
positive steps to implement Decree No. 45-2002. However, the
different units involved in the fight against money
laundering continue to suffer from lack of resources and
limited interagency communication. Further progress in
implementing the new money laundering legislation will depend
on the training and retention of personnel familiar with
money laundering and financial crimes and improved ability to
target and pursue more cases that have a higher probability
of success. Key to enabling these agencies is to free more
resources from OABI. The government of Honduras should
continue to support the developing government entities
responsible for combating money laundering and other
financial crimes, and ensure that resources are available to
strengthen its anti-money laundering regime.
Ford