SERBIA: 2006-2007 INCSR SUBMISSION PART II -

UNCLAS BELGRADE 001899

SIPDIS

STATE FOR EB/ESC/TFS; INL; EUR/SCE/DSCHROEDER
TREASURY FOR FINCEN AND U/S TIMOTHY ADAMS
DOJ FOR OIA AND AFMLS AND CARL ALEXANDRE

SIPDIS

E.O. 12958: N/A
TAGS: EFIN KCRM KTFN PTER SNAR SR MW
SUBJECT: SERBIA: 2006-2007 INCSR SUBMISSION PART II -
FINANCIAL CRIMES AND MONEY LAUNDERING

REF: STATE 157000

INTRODUCTION
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1. As the result of a public referendum on May 21, 2006,
the State Union of Serbia and Montenegro (SAM) was
dissolved and Montenegro became an independent country. The
Government of the Republic of Serbia (GOS) became the
legacy member of the Council of Europe and the United
Nations. As a result, all treaties and agreements signed by
the State Union are now applicable to Serbia. Separate
reports will be submitted for the Republic of Serbia,
Kosovo and the Republic of Montenegro.


2. The Serbian parliament adopted a new constitution on
November 8, 2006, and passed a Constitution Law for its
implementation after a new Parliament is elected on January
21, 2007. It is unclear at this time whether the
implementation of the new constitution will impact existing
and pending legislation in regards to Serbia's anti-money
laundering/counter-terrorist financing (AML/CFT) regime.


3. At the crossroads of Europe and on the major trade
corridor known as the "Balkan route," Serbia still
confronts narcotics trafficking, smuggling of persons,
drugs, weapons and pirated goods, money laundering, and
other criminal activities. Serbia is not a regional
financial center, nor is it a money-laundering center.
Serbia is located in Southeastern Europe (the Balkans),
bordering Macedonia and Kosovo to the south, Romania and
Bulgaria to the east, and Croatia and Montenegro to the
west, and Hungary to the north. Major highways carry
European-bound traffic through Croatia and Hungary. Within
the Republic of Serbia is the nominally autonomous province
of Vojvodina. Kosovo, recognized by the UN as part of
Serbia, has been administered by the United Nations Mission
in Kosovo since 1999. (Since Serbia no longer exercises
effective control over Kosovo, this report does not address
Kosovo.) Serbia has a population of approximately 8
million.


4. A significant volume of money flows to Cyprus,
reportedly as the payment for goods and services. The
records maintained by various government entities vary
significantly on the volume and value of imports from this
small island nation. According to official statistics from
the National Bank of Serbia, over USD 1 billion in payments
in 2005, coded as being for goods and services, rank Cyprus
among the top five exporters of goods or services to
Serbia. The Serbian Statistical Office reflected imports
from Cyprus of roughly USD40 million in 2005. According to
GOS officials, much of the difference is due to payments
made to accounts in Cyprus for goods actually originating
from a third jurisdiction, e.g., Russian oil.


5. Serbia continues to be a significant black market for
smuggled goods. Illegal proceeds are generated from
predicate, or antecedent, crimes such as drug trafficking,
official corruption, tax evasion, organized crime and other
types of crimes. Proceeds from illegal activities are being
heavily invested in all forms of real estate. The
construction and renovation of commercial buildings such as
offices, apartments, high-end retail businesses as well as
personal residences is evident in the capital of Belgrade
as well as other major cities. Trade-based money
laundering, in the form of over- and under-invoicing, are
common methods used to launder money.


6. Serbia has 14 designated free trade zones, three of
which are in operation. The free zones were established to
provide customs duties benefits to companies operating out
of these zones and therefore attract investment. These
companies are subject to the same supervision as other
businesses in the country. There is no evidence of trade-
based money laundering schemes or terrorist financing in
these zones.


7. Serbia introduced a VAT tax in 2005, and the full
impact of refund fraud associated with the administration
of the VAT is still not clear. Serbia's Tax Administration
lacks the audit and investigative capacity or resources to
adequately investigate the large number of suspicious
transactions that are forwarded by Serbia's Financial
Intelligence Unit (FIU). In addition, current tax law sets
a low threshold for auditing purposes and has increased the
burden on the Tax Administration. This creates a situation

where criminals can spend and invest criminal proceeds
freely with little fear of challenge by the tax authorities
or other law enforcement agencies.


8. The difficulty of convicting a suspect of money
laundering without a conviction for the original criminal
act and the unwillingness of the courts to accept
circumstantial evidence to support money laundering or tax
evasion charges is hampering law enforcement and
prosecutors in following the movement and investment of
illegal proceeds and effectively using the anti-money
laundering laws. The GOS has not identified any activities
relating to the financing of terrorism. Terrorist financing
was criminalized in September 2005, but the law that fully
addresses the UNSCR standards and that gives the FIU the
necessary power to require the reporting of terrorism
financing-related suspicious transactions is still pending.


9. Serbia's banking sector is over 80 percent foreign
owned. There are no offshore financial institutions, and
there is no evidence of any alternative remittance systems
operating in the country. There is no provision in the
banking law that allows the establishment of offshore
banks, shell companies or trusts. There is also no
evidence of financial institutions engaging in currency
transactions involving international narcotics trafficking
proceeds. Banking laws allow financial institutions to
disclose client and ownership information to law
enforcement authorities in the course of investigations.

LEGISLATIVE FRAMEWORK
--------------

10. In September 2005, Serbia codified an expanded
definition of money laundering in the Penal Code. This
gives police and prosecutors more flexibility to pursue
money laundering charges since the money laundering conduct
is broader under the new law and in conformity with
international standards. The penalty for money laundering
is up to 10 years imprisonment. This is significant in that
under Serbian law and procedure, it falls into the serious
crime category and permits the use of Mutual Legal
Assistance (MLAT) procedures to obtain information from
abroad. With the penalties previously applicable for money
laundering, it did not fall into the serious crime
category, and use of the MLAT or letters rogatory were not
an option in cases where a serious crime could not be
identified as the source of the suspected illegal proceeds.


11. On November 28, 2005, Serbia adopted a revised anti-
money laundering law (revised AML Law),replacing the July
2002 Law on the Prevention of Money Laundering. The revised
AML Law expands the number of entities required to collect
certain information on all cash transactions over EUR
15,000, or the dinar equivalent, and to file currency
transaction reports (CTRs) for all such transactions
exceeding this threshold to the FIU. Suspicious
transactions in any amount must be reported to the FIU. The
law expands those entities subject to reporting and record
keeping requirements, adding attorneys, auditors, tax
advisors and accountants to the banks, currency exchanges,
insurance companies, casinos, securities brokers, dealers
in high value goods and travel agents already required to
comply with the AML provisions; required records must be
maintained for five years. These entities are protected
with respect to their cooperation with law enforcement
entities. Other significant changes include the authority
of the FIU to freeze transactions for up to 72 hours and to
require covered entities and individuals to monitor
customers' accounts where money laundering is suspected.
The revised AML Law also eliminates a previous provision
limiting prosecution to crimes committed within Serbian
territory. Significant improvement has been noted in
financial institution compliance, i.e., gathering and
keeping records on customers and transactions. The flow of
information to the FIU has been steadily increasing, but
not all entities are yet subject to implementing bylaws.


12. The Law on Foreign Exchange Operations, adopted in
2006, criminalizes the use of false or inflated invoices or
documents to effect the transfer of funds out of the
country. This law was enacted in part to counter the
perceived problem of import-export fraud and money
laundering. According to the law, residents and
nonresidents are obliged to declare to Customs authorities
all foreign currency or dinars or securities in amounts
exceeding EUR 5,000 that will be transported across the

border.

ENFORCEMENT AND SUPERVISION CAPACITIES
--------------

13. The National Bank of Serbia (NBS) has supervisory
authority over banks, currency exchanges, insurance and
leasing companies. The NBS has issued regulations requiring
banks to have compliance and know-your-customer (KYC)
programs in place and to identify the beneficial owners of
new accounts. Similar regulations are in process for
insurance companies. The Law on Banks includes a provision
allowing the NBS to revoke a bank's license for activities
related to, among other things, money laundering and
terrorist financing. To date, the NBS has not used this
revocation authority. The legal framework is in place, but
the NBS currently lacks the expertise needed for effective
bank supervision. It is building these capacities through
training and staff development.


14. The Securities Commission (SC) supervises broker-
dealers and investment funds. The Law on Investment Funds
and the Law on Securities and Other Financial Instruments
Market provide the SC with the authority to "examine" the
source of investment capital during licensing procedures.
The SC is also charged with monitoring its obligors'
compliance with the AML Laws. Regulations to implement this
authority are in process.


15. The 2001 AML law created Serbia's FIU, the
Administration for the Prevention of Money Laundering
(APML). The revised AML Law elevates the status of the FIU
to that of an administrative body under the Ministry of
Finance from its previous status as a "sector" in that
Ministry. This provides more autonomy for the agency to
carry out its mandate, as well as additional resources. One
important change is that the APML now has its own line item
operating budget. The APML currently has 24 employees. In
accordance with the revised AML Law, the APML developed
listings of suspicious activity red flags for banks,
currency exchange offices, insurance companies, securities
brokers and leasing companies. The APML has signed
memoranda of understanding (MOU) on the exchange of
information with the NBS and Customs and is negotiating one
with the Tax Administration.


16. The FIU received 279 suspicious transaction reports
(STRs) in 2005 and 361 through September 1, 2006. Virtually
all of the STRs received by the FIU have been filed by
commercial banks. Currency exchange offices have filed only
seven STRs since 2003, and none in either 2005 or 2006.
Since its inception in 2003, the APML has opened 240 cases,
74 based on the STRs it received and 166 based on CTRs (see
para 9),or referrals from other entities; 103 cases were
referred to either law enforcement or the prosecutor's
office for further investigation. Since 2004, authorities
filed 41 criminal charges against 48 persons for money
laundering violations. The most common predicate crime is
"abuse of office". Of this number, 18 are currently under
investigation, six were dismissed or terminated; 14 were
indicted; and two court decisions have been reached so far
Q one person was acquitted and the other was convicted in
the first instance, with an appeal in process. The case on
appeal involves just over $52,000.


17. A new Anti-Money Laundering Section was established
within the Suppression of Organized Crime Service (SOCS) of
the Ministry of Interior to better focus financial
investigations.

COUNTERING TERRORISM FINANCING
--------------

18. In August 2005, the GOS established the Permanent
Coordinating Group (PCG),an interagency working group
originally tasked with developing an implementation plan
for the recommendations from MONEYVAL's first-round
evaluation in October 2003. A subgroup was tasked with
drafting a new law to address the procedures needed to
comply with UN Security Council resolutions regarding the
freezing, seizing and confiscation of suspected terrorist
assets, and to require reporting to the FIU of transactions
suspected to be terrorist financing. Rather than having
standing meetings, the PCG appears to meet only
intermittently as required for specific tasks. The
government still needs better interagency coordination to
improve information sharing, record keeping and statistics,
and thereby introduce a more effective regime and permit a

meaningful assessment of its AML/CFT efforts at all levels
of government.


19. In September 2005 Serbia criminalized the financing of
terrorism through the adoption of the new Penal Code. Under
Serbian law, assets derived from criminal activity or
suspected of involvement in the financing of terrorism can
be confiscated upon conviction for an offense. The APML is
the authority charged with enforcing the UNSCR 1267
provisions regarding suspected terrorist lists. A draft
law on terrorist financing, now pending Parliamentary
approval, will apply the provisions of the AML laws to
terrorist financing and will put in place a freezing
mechanism based on UNSCR provisions. Although the APML
routinely provides the UN list of suspected terrorist
organizations to the banking community, checks for suspect
accounts have revealed no evidence of terrorist financing
within the banking system and no evidence of the usage of
alternative remittance systems. The Department for the
Suppression of Organized Crime Service (SOCS),the Special
Anti-Terrorist Unit (SAJ) and Gendarmarie, in the Ministry
of Interior, are the law enforcement bodies responsible for
planning and conducting the most complex anti-terrorism
operations. SOCS cooperates and shares information with its
counterpart agencies in all of the countries bordering
Serbia. Serbia has criminalized the financing of
terrorism, but the freezing, seizing and confiscation of
assets of terrorists in accordance with UN Security Council
resolutions still lacks a legal basis, pending enactment of
the Anti-terrorism Finance law.

INTERNATIONAL COOPERATION
--------------

20. Because of its successor status after the dissolution
of the state union with Montenegro, the GOS is a party to
the 1988 UN Convention against Illicit Traffic in Narcotic
Drugs and Psychotropic Substances and the UN Convention
against Transnational Organized Crime. On October 9, 2003,
the former state union ratified the Council of Europe's
Convention on Laundering, Search, Seizure, and Confiscation
of the Proceeds from Crime. The GOS is a party to 11 of the
12 UN Conventions or Protocols dealing with terrorism,
including the UN International Convention for the
Suppression of the Financing of Terrorism, although
domestic implementation procedures do not provide the
framework for full application. As mentioned above, Serbia
has criminalized the financing of terrorism, but the
freezing, seizing and confiscation of assets of terrorists
in accordance with UN Security Council resolutions still
lacks a legal basis, pending the enactment of the draft
Anti-terrorism Finance law. The GOS also has ratified the
UN Convention against Corruption. As a member of the
Council of Europe, the GOS is a full and active member of
the Council's MONEYVAL Committee. In July 2003, the APML
became a member of the Egmont Group and actively
participates in information exchanges with counterpart
FIUs.


21. Serbia has no laws governing its cooperation with
other governments related to narcotics, terrorism, or
terrorist financing. Cooperation is instead based on
participation in Interpol, bilateral cooperation
agreements, and agreements concerning international legal
assistance. There are no laws at all governing the sharing
of confiscated assets with other countries, nor is any
legislation under consideration; the GOS may at this time
enter into bilateral agreements for this purpose.


22. Serbia does not have a mutual legal assistance
arrangement with the United States, but information
exchange via a letter rogatory is standard. The GOS has
bilateral agreements on mutual legal assistance with 31
countries. These agreements authorize extradition of
suspected terrorists. The 1902 extradition treaty between
the Kingdom of Serbia and the United States remains in
force. The GOS generally cooperates with its counterparts
and neighbors, and it has responded to U.S. Department of
Treasury FINCEN requests for information in a timely
manner. In April 2003, the former SAM joined eight other
participants in the South Eastern Europe Cooperation
Process, in adopting a joint "Belgrade Declaration" to call
for the continuation of regional cooperation and the
intensification of the fight against terrorism and
organized crime. The Serbian FIU has signed information
sharing memorandums of understanding (MOUs) with Macedonia,
Romania, Belgium, Slovenia, Montenegro, Albania, Georgia,

Ukraine, Bulgaria, Croatia, and Bosnia and Hercegovina.

Pending Agenda
--------------

23. Among the pending legal infrastructure necessary for
Serbia to be fully compliant with international standards
are:

-- legislation providing for the liability of legal persons
for money laundering and terrorist financing;
-- regulations to apply all requirements of the Revised AML
Law to covered non-bank financial institutions;
-- legislation to establish a robust asset seizure and
forfeiture regime;
--a pending law to put in place the procedures needed to
comply with UN Security Council resolutions regarding the
freezing, seizing and confiscation of suspected terrorist
assets and to require suspicions of terrorist financing to
be reported to the FIU.


24. On an operational level, necessary improvements
include: Rather than address only specific tasks, the PCG
should meet on a regular basis to discuss issues and
projects to enhance the GOS' AML/CTF regime. The PCG should
work to improve interagency coordination to improve
information sharing, record keeping and statistics. And the
GOS should ensure that sufficient resources are available
for its law enforcement agencies to work effectively and
efficiently.

POLT