2005-2006 International Narcotics Control

UNCLAS VIENNA 003898

SIPDIS

STATE FOR INL AND EUR/AGS
STATE ALSO FOR EB/ESC/TFS
JUSTICE FOR OIA AND AFMLS
TREASURY FOR FINCEN
TREASURY FOR OCC/EILEEN SIEGEL
TREASURY FOR OASIA/ICB/VIMAL ATUKORALA

SIPDIS

E.O. 12958: N/A
TAGS: EFIN KCRM KTFN PTER KSEP SNAR AU
SUBJECT: 2005-2006 International Narcotics Control
Strategy Report (INSCR) Part II: Money Laundering and
Financial Crimes - Austria

REF: STATE 210351


1. Following is the 2005-2006 International Narcotics
Control Strategy Report (INSCR) Part II: Money
Laundering and Financial Crimes for Austria.

Austria
--------------

Austria is not an important financial center, offshore
tax haven, or banking center, but Austrian banking groups
control significant shares of the banking markets in
Central, Eastern and Southeastern Europe. Austria does
not have a reputation as a major money laundering
country. However, like any highly developed financial
marketplace, Austria's financial and non-financial
institutions are vulnerable to money laundering. The
Austrian Interior Ministry's crime statistics show mixed
developments regarding financial crime in Austria in
2004, with a significant increase in fraud, money
laundering and criminal organizations. Authorities
believe that the percentage of undetected organized crime
is enormous, with much of it coming from the former
Soviet Union, Poland, and the Balkans. Money which
organized crime launders primarily derives from fraud,
particularly with capital assets investments, but also
other serious crime, including narcotics-trafficking and
trafficking in persons. Contraband smuggling is
apparently not a source of significant money laundering.
Criminal proceeds laundered in Austria derive primarily
from foreign criminal activity. Foreign criminal groups
control the money laundering proceeds. There is a
significant black market for smuggled cigarettes in
Austria, but it does not seem to be funded by narcotic
proceeds. Free trade zones do not exist in Austria.
Money laundering occurs within the Austrian banking
system as well as in non-bank financial institutions and
businesses. Many of the former-Soviet crime groups are
trying to launder money in Austria by investing in real
estate, exploiting existing business contacts, and trying
to establish new contacts in political and business
circles. Criminal groups seem increasingly to use money
transmitters and informal money transfer systems to
launder money. The Internet and offshore companies also
play an important role in such crime.

Austria criminalized money laundering in 1993. The law
lists predicate crimes, including terrorist financing and
many other serious financial crimes, including smuggling.
Regulations are stricter for money laundering by criminal
organizations and terrorist "groupings," in which case
the law requires no proof that the money stems directly
or indirectly from predicate offenses.

Amendments to the Customs Procedures Act and the Tax
Crimes Act, effective May 1, 2004, address the problem of
cash couriers and international transportation of illegal-
source currency and monetary instruments. Austrian
customs authorities do not automatically screen all
persons entering Austria for cash or monetary
instruments. However, if asked, anyone carrying 15,000
euros ($18,000 at the current exchange rate) or more must
declare the funds and provide information on their source
and use. Spot checks for currency at border crossings
will continue. Customs has authority to seize suspect
cash at the border. In 2005, there was only one major
case reported of bulk cash smuggling and the use of cash
couriers to move the proceeds of crime and terrorist
funding. In implementing the new EU regulation on
controls of cash entering or leaving the Community, the
Government of Austria (GOA) in 2006 plans to amend the
Customs Procedures Act and the Tax Crimes Act to
introduce a declaration obligation for anyone carrying
cash of 10,000 euros ($12,000) or more.

Adoption of the Banking Act of 1994 creates customer
identification, record keeping, and staff training
obligations for the financial sector. Entities subject


to the Banking Act include banks, leasing and exchange
businesses, safe custody services, and portfolio
advisers. The Insurance Act of 1997 includes similar
regulations for insurance companies underwriting life
policies, the Securities Supervision Act of 1996 for
trade of securities, shares, money market instruments,
options and other instruments admitted to listing on an
Austrian stock exchange or on any regulated market in a
member state. The Banking Act requires identification of
all customers when entering an ongoing business
relationship, i.e., in all cases of opening a checking
account, a passbook savings account, a securities deposit
account, etc. In addition, the Banking Act requires
customer identification for all transactions of 15,000
euros ($18,000) or more for customers without a permanent
business relationship with the bank. The law requires
banks and other financial institutions to keep records on
customers and account owners. The law protects bankers
and all other reporting individuals (auctioneers, real
estate agents, lawyers, notaries; etc.) with respect to
their cooperation with law enforcement agencies. They
are also not liable for damage claims resulting from
delays in completing suspicious transactions. There is
no requirement for banks to report large currency
transactions, unless they are suspicious. The Austrian
Financial Intelligence Unit (AFIU) is, however, providing
information to banks to raise awareness of large cash
transactions.

Since October 2003, financial institutions have adopted
tighter identification procedures, requiring all
customers appearing in person to present an official
photo ID. These procedures also apply to trustees of
accounts, who are now required to disclose the identity
of the account beneficiary. However, the procedures
still allow customers to carry out non-face-to-face
transactions, including Internet banking, on the basis of
a secure electronic signature or a copy of a picture ID
and a legal business declaration submitted by registered
mail.

The Banking Act includes a due diligence obligation, and
the law holds individual bankers legally responsible if
their institutions launder money. In addition, banks
have signed a voluntary agreement to prohibit active
support of capital flight. On November 26, 2001, the
Federal Economic Chamber's Banking and Insurance
Department, in cooperation with all banking and insurance
associations, published an official "Declaration of the
Austrian Banking and Insurance Industries to Prevent
Financial Transactions in Connection with Terrorism."

The 2003 Amendments to the Austrian Gambling Act, the
Business Code, and the Austrian laws governing lawyers,
notaries, and accounting professionals, introduce money
laundering regulations regarding identification, record
keeping, and reporting of suspicious transactions for
dealers in high-value goods such as precious stones or
metals, or works of art; auctioneers; real estate agents;
casinos; lawyers; notaries; certified public accountants;
and auditors. Since April 1, 2002, the Austrian
Financial Market Authority (FMA),an autonomous
institution under public law with own legal personality,
supervises and examines banks, exchange houses,
stockbrokerages, insurance companies, securities
transactions and pension funds and regularly examines
their compliance with anti-money laundering/counter-
terrorist financing regulations. Divisions of the
Austrian Ministry of Finance supervise casinos and cash
couriers. For non-financial institutions no effective
compliance supervision is in place. The respective
chambers carry out perfunctory monitoring, if at all, of
lawyers and notaries, and the Austrian Ministry of
Economy and Labor is the competent authority for traders,
accountants and dealers.

Since 2002, the AFIU, the central repository of
suspicious transaction reports, has been a section of the


Austrian Interior Ministry's Bundeskriminalamt (Federal
Criminal Intelligence Service). The AFIU is an executive
body and avails itself of police forces for criminal
investigations. Aside from the AFIU, all police forces,
the Austrian Interior Ministry's Federal Agency for State
Protection and Counter Terrorism (BVT),tax authorities,
including customs, and investigating magistrates are
responsible for investigating financial crimes, money
laundering and terrorist financing. The AFIU has access
to bank records and databanks of government entities,
including the commercial register, the real estate
register, social security records, and the edict register
on insolvencies, auctions, invalidations and probate
proceedings. It also exchanges information with other
FIUs within the Egmont Group and will soon participate in
the new EU computer network for the exchange of
intelligence among FIUs, the FIU.NET. During the first
eleven months of 2005, the AFIU received 372 suspicious
transaction reports from banks and 22 from other
financial and non-financial institutions, and fielded 417
(412 in 2004) requests for information from Interpol,
Europol, the Egmont Group and other authorities.
Moreover, banks temporarily held up transactions of Euro
10.9 million ($13.1 million) under AFIU authority. This
represents a moderate increase from the 373 suspicious
transactions (349 of them from banks) reported in 2004,
which led to five convictions for money laundering. In
2003, 288 suspicious transactions reports resulted in
seven convictions for money laundering. Criminals are
often convicted for other crimes, however, with money
laundering serving as additional grounds for conviction.

Legislation implemented in 1996 allows for asset seizure
and the forfeiture of illegal proceeds. The banking
sector generally cooperates with law enforcement efforts
to trace funds and seize illicit assets. The distinction
between civil and criminal forfeiture in Austria is
different from that in the U.S. legal system. However,
Austria has regulations in the Code of Criminal Procedure
that are similar to civil forfeiture, such as forfeiture
in an independent procedure. In connection with money
laundering, organized crime and terrorist financing, all
assets (bank accounts, other financial assets, autos,
real estate and other property, including legitimate
businesses) are subject to seizure and forfeiture.
Courts may freeze assets in the early stages of an
investigation. Under this procedure and with
instructions from the AFIU, Austrian courts froze assets
worth 98.3 million euros ($118 million) in the first
eleven months of 2005. This is significantly more than
the 25.4 million euros ($30.5 million) in assets frozen
by the courts in 2004, and the 2.2 million euros ($2.6
million),which they froze in 2003.

The amended Extradition and Judicial Assistance Law
provides for expedited extradition, expanded judicial
assistance, and acceptance of foreign investigative
findings in the course of criminal investigations, as
well as enforcement of foreign court decisions. Austria
has strict banking secrecy regulations, though bank
secrecy will be lifted for cases of suspected money
laundering. Moreover, bank secrecy does not apply in
cases in which banks and other financial institutions are
required to report suspected money laundering. Such
cases are subject to instructions of the authorities
(i.e., AFIU) with regard to processing such transactions.

The 2002 Criminal Code Amendment, effective October 1,
2002, introduces the following new criminal offense
categories: terrorist "grouping," terrorist criminal
activities, and financing of terrorism. The Criminal
Code defines "financing of terrorism" as a separate
cQminal offense category, punishable in its own right.
Terrorism financing is also included in the list of
criminal offenses subject to domestic jurisdiction and
punishment, regardless of the laws where the act
occurred. Furthermore, the money laundering offense is
expanded to terrorist "groupings." The law also gives


the judicial system the authority to identify, freeze,
and seize terrorist financial assets. With regard to
terrorist financing, forfeiture regulations cover funds
collected or held available for terrorist financing, and
permit freezing and forfeiture of all assets that are in
Austria, regardless of the place of the crime and the
whereabouts of the criminal.

A new Law on Responsibility of Associations, effective
January 1, 2006, will introduce criminal responsibility
for all legal entities, general and limited commercial
partnerships, registered partnerships and European
Economic Interest Groupings. The law covers all crimes
listed in the Criminal Code, including corruption, money
laundering and terrorist financing.

Austrian authorities have circulated to all financial
institutions the names of individuals and entities
included on the UNSCR 1267 Sanctions Committee's
consolidated list and those whom the United States or the
EU have designated. According to the Ministry of Justice
and the AFIU, no accounts found in Austria ultimately
showed any links to terrorist financing. The AFIU
immediately shares all reports on suspected terrorism
financing with the BVT. During the first eleven months
of 2005, the AFIU and the BVT received 24 reports on
suspected terrorism financing transaction reports, of
which 15 were from banks, 7 from foreign and 2 from
domestic authorities. No assets were frozen. The
increase from the 14 suspicious transactions in 2004 is
due to improved control mechanisms in banks and better
international cooperation. None of the 2004 reports
resulted in a conviction, many cases being due to
mistaken identity. Authorities could not substantiate
suspicions against two domestic non-profit organizations.

Since January 1, 2004, money remittance businesses
require a banking license from the Financial Market
Authority (FMA) and are subject to supervision. Informal
remittance systems like hawala exist in Austria, but are
subject to administrative fines for carrying out banking
business without a license.

The GOA has undertaken some initial efforts that may help
thwart the misuse of charitable or non-profit entities as
conduits for terrorist financing. The law on
associations (Vereinsgesetz, published in Federal Law
Gazette No. I/66 of April 26, 2002) came into force on
July 1, 2002, and covers charities and all other non-
profit associations in Austria (including religious
associations, sports clubs, etc.). The law regulates the
establishment of associations, bylaws, organization,
management, association register, appointment of
auditors, and detailed accounting requirements, in
particular auditing in case the balance sheet exceeds 3
million euros ($3.6 million) or annual donations exceed 1
million euros ($1.2 million). The Ministry of Interior's
responsibility is limited to approving the establishment
of associations, regardless of the purpose of the
association, unless it violates legal regulations.

Except for the auditing of large associations, there is
no regular or routine checks made on associations
established in Austria, just random checks. Only in the
case of complaints will the Interior Ministry initiate
investigations and, in case of serious violations of
laws, it may officially prohibit the association from
operating. The GOA has implemented the FATF's Special
Recommendations on Terrorist Financing, except for
certain aspects of the recommendation regarding non-
profit organizations. Adoption of the new EU regulation
on wire transfers is imminent. The European Commission
hopes the regulation will enter into force on January 1,
2007, at which time it will be immediately and directly
applicable in Austria.

Austria has not enacted legislation that provides for
sharing forfeited narcotics-related assets with other


governments. However, the mutual legal assistance
treaties (MLATs) can be used as an alternative vehicle to
achieve equitable distribution of forfeited assets. The
U.S. Department of Justice and the Austrian Ministry of
Justice continue to actively negotiate an agreement to
share forfeited assets. It is anticipated that this
agreement will be ratified in 2006. The agreement is now
being vetted through the Austrian Foreign and Financial
Ministries for approval. Ratification of bilateral
protocols to update the bilateral MLAT, which has been in
force since August 1, 1998, and the bilateral extradition
treaty, which has been in force since January 1, 2000,
and bring them in line with the twin U.S.-EU agreements
on extradition and mutual legal assistance, is under way.

The GOA has been cooperative with U.S. law enforcement
investigations. The FMA and the New York State Banking
Department are exchanging views about the legal scope of
information exchange, including possibilities for on-site
examinations in the host country. Information exchange
with member states is based on EU law (Article 30,
Directive 2000/12/ EC, implemented in articles 77 and 77a
of the Austrian Banking Act). In addition, Austria may
define this information exchange more precisely in
bilateral agreements with other EU/EAA members or third
countries, provided certain legal requirements relating
to professional secrecy are met. Until now, Austria has
concluded such bilateral agreements with nine other EU
members (France, Germany, Italy, Netherlands, United
Kingdom, the Czech Republic, Hungary, Slovakia, and
Slovenia) and two third countries (Croatia and Bulgaria).

The International Monetary Fund's spring 2004 Financial
System Stability Assessment (FSAP) states that Austria
has made significant progress in the past few years in
bringing its anti-money laundering and counterterrorism
financing regime into compliance with international
standards. The FSAP notes that the overall legal and
institutional framework currently in place is
comprehensive and that Austria has achieved a good level
of compliance with the FATF Recommendations. The FMA has
created an internal Task Force on Money Laundering, and
in following up on suggestions for further improvements,
started to publish on its homepage circulars with
additional guidance for banks and other financial
institutions on fighting money laundering and terrorist
financing.

Austria is a party to the 1988 UN Drug Convention and the
Council of Europe Convention on Laundering, Search,
Seizure, and Confiscation of the Proceeds from Crime.
Austria ratified the UN Convention against Transnational
Organized Crime on September 23, 2004, and the UN
International Convention for the Suppression of the
Financing of Terrorism on April 15, 2002. Parliamentary
procedures to ratify the UN Convention against Corruption
are under way, so that the ratification instrument is
likely to be deposited before the end of 2005. Austria
has endorsed fully the Basel Committee's "Core Principles
for Effective Banking Supervision." Austria is a member
of the FATF. The AFIU is a member of the Egmont Group.

Austria has several important money laundering cases
pending, all of which have international dimensions. Two
of these cases involve U.S. citizens: Claude Duboc, a
ongoing case that dates back to 1988 and involves $ 216
million in Austria, and Frank Louis Palumbo, which dates
back to 2000 and involves $ 43 million in Austria. In
another case, a Palestinian woman, Halimeh Almughrabi, is
trying to withdraw funds from a frozen account, which
allegedly belonged to Sabri Al Banna, a.k.a. Abu Nidal,
the deceased Palestinian terrorist. Almughrabi, who
lives in Libya, is a signatory to the account, which
contains 6.8 million euros ($ 8.2 million). Austrian
authorities have refused to grant her a visa to come to
Austria.

The Government of Austria has implemented a viable anti-



money laundering and anti-terrorist financing regime.
Austria is very cooperative with U.S. authorities in
money laundering cases. However, there is room for
improvement. There is a need for identification
procedures for customers in "non-face to face" banking
transactions. The criminal code should be amended to
penalize negligence in reporting money laundering and
terrorist financing transactions. The AFIU and law
enforcement should be provided with sufficient resources
to adequately perform their functions. AFIU and other
government personnel should be protected against damage
claims because of delays in completing suspicious
transactions. Additionally, Austria should adequately
regulate its charitable and non-profit entities to reduce
their vulnerability to misuse by criminal and terrorist
organizations and their supporters.

In 2006, the GOA will start working on domestic
implementation of the EU's third money laundering
directive (Directive 2005/60/EC on The Prevention of the
Use of the Financial System for the Purpose of Money
Laundering and Terrorist Financing),which involves a
number of legal changes, including of the Banking Act,
Insurance Act, Gambling Act, Business Code, and several
other laws. During Austria's EU Presidency in the first
half of 2006, the GOA in various EU committees and bodies
will also work to implement guidelines for the third
money laundering directive, proceed with implementing the
FATF's special recommendation seven on wire-transfers,
stage a workshop on a code of conduct for non-profit
organizations and together with the USG, one on terrorist
financing.

MCCAW