2006-2007 INCSR REPORT, FINANCIAL CRIMES AND

UNCLAS KATHMANDU 002998

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN KCRM KTFN NP
SUBJECT: 2006-2007 INCSR REPORT, FINANCIAL CRIMES AND
MONEY LAUNDERING

REF(S): A)STATE 157084

B)KATHMANDU 1042


1. (SBU) This is Post?s 2006-2007 International
Narcotics Control Strategy Report II, Financial Crimes
and Money Laundering, per ref A.

Begin Text:

Nepal is not a regional financial center. There are
no indications that Nepal is used as an international
money laundering center. The Government of Nepal
(GON) has not yet criminalized money laundering, and
legislation on money laundering, mutual legal
assistance and witness protection, developed as part
of the GON?s Master Plan for Drug Abuse Control,
remained stalled in 2006. The Parliament was
reinstated in April and is entitled to pass new laws
(ref B). Draft anti-money laundering legislation has
been prepared but has not yet been tabled in the
reinstated Parliament. The Foreign Exchange Act of
1962 and the Bank and Financial Institutions Act of
2006, together, authorize prosecutions for illegal
transfer of money. There were no prosecutions or
arrests for illegally transferring money so far in

2006.

Banks are required to record the identity of customers
engaging in significant transactions. In particular,
the Nepal?s central bank, Nepal Rastra Bank (NRB),
must approve all transactions that involve payments in
foreign currency. Any Nepali citizen who wishes to
open a foreign currency account must obtain a license
to do so from the NRB, and Nepali citizens wishing to
conduct foreign exchange transactions of any kind must
obtain approval from the NRB by clearly outlining the
purpose for the transaction. The NRB normally
approves small transactions (in USD thousands) for
travel, education and medical treatment. Travelers
can take out USD 2000 a year from any commercial bank
by showing travel documents such as a passport, visa,
and air ticket, without NRB approval. Individuals
with an NRB approval letter can conduct a foreign
exchange transaction at any bank. In addition to NRB
approval, students must obtain a recommendation letter
from the Ministry of Education; the transactions
approved can only be for the amount listed on the
total expenses line of the student?s visa paperwork.
The NRB approves foreign exchanges for medical
treatment based on the recommendation of the Nepal
Medical Council, and there is no limit on the amount.
Business travelers are entitled to foreign exchange
approval from the NRB to cover their food, lodging,
and transportation expenses. For business
transactions, however, individuals must open a letter
of credit from a commercial bank documenting all the
transaction details. The commercial bank then
forwards the letter of credit to the NRB for approval.
There is no maximum or minimum limit on the amount for
transactions in legal products and services.

Nepal has enacted bank secrecy laws that prevent the
disclosure of client and ownership information to
individuals and law enforcement authorities; however,
the present law does not prevent the disclosure of
client and ownership information to the NRB, courts,
auditors or the Commission for Investigation of Abuse
of Authority (CIAA). Banks have provided records
regarding bank accounts of individuals and
institutions to assist in GON investigations into
corruption by senior officials. There are currently
no free trade zones in Nepal. However, different
industry sector associations have been urging the GON
to set up an export processing zone near the Inland
Container Depot (ICD) in Birgunj, which borders India.

The NRB has the authority to freeze accounts and seize
assets related to criminal investigations. However,
the GON?s ability to identify and trace assets is
hindered by the lack of a computerized information
sharing system. For example, many bank branch offices
do not have computers. The Nepal Police also have the
authority to seize any goods or property related to
criminal investigations. The Department of Revenue

Investigation (DRI),under the Ministry of Finance,
functions as Nepal?s financial intelligence unit
(FIU). DRI is responsible for the control and
investigation of any kind of revenue loss to the GON.
It has the authority to make raids, seize assets, and
arrest and prosecute individuals or institutions for
causing any kind of revenue loss to the government,
such as cash smuggling, underpaying customs duty, or
tax evasion. The DRI can also investigate and
prosecute foreign exchange violations. Nepal Police,
Immigration, and Customs forward all cash smuggling
cases to the DRI for prosecution. The DRI makes the
case and takes it to the district court. However, the
DRI is not adequately staffed. Increased cooperation
among the NRB, Nepal Police, and the DRI would enhance
Nepal?s money laundering and terrorist financing
investigative and enforcement capabilities.

The estimated 1.2 million Nepalese who work overseas
send back at least $1 billion (about 13 percent of
GDP) a year and are the largest users of informal
means of transferring money to Nepal. Expatriates
frequently send money back using the hundi system of
informal money transfers (called hawala in other
countries) or physically carry money back with them
undeclared to Nepal. A large number of Nepalese who
work in India are able to bring Indian rupees back
over the border because the Indian and Nepalese
governments do not aggressively look for cash on
people or in vehicles as they cross. Indian currency
is widely accepted in Nepal. Nepalese workers in the
Gulf and Southeast Asia also send a significant amount
of money back through informal channels even though
financial regulations are more stringent. In Nepal,
the hundi system is linked to issues of capital
flight, tax avoidance, and corruption. The NRB has
instituted an International Monetary Exchanges
licensing policy within the past year, which requires
financial organizations wanting to distribute foreign
remittances to obtain an operating license.
Additionally, many of Nepal?s commercial banks have
opened offices in countries with large numbers of
Nepali expatriate workers to facilitate remittances
through the banking system. According to NRB
officials, the combination of these factors has
resulted in a decrease in the use of the hundi system
in Nepal.

The Bank and Financial Institutions Act 2006 and Nepal
Rastra Bank Act 2002, working in tandem, criminalize
terrorist financing. In addition, using the
regulatory power vested in it under various acts and
regulations, the NRB directs all the banks and
financial institutions of Nepal to comply with anti-
terrorist financing requests made by USG. The Bank
and Financial Institutions Act 2006 regulates the
actions of financial institutions in Nepal and
provides the NRB with the authority to seize any
assets or freeze accounts deemed to have been used in
terrorist activities. No assets belonging to
individuals or entities on the UNSCR 1267 Sanctions
Committee?s consolidated list have been identified in
Nepal. Additionally, Nepal?s State Offense Act of
1989 authorizes security forces to arrest and
prosecute any Nepalese or foreign citizen involved in
any criminal activities against the State or
associated with foreign terrorist activity. The GON
made no arrests for terrorist financing in 2006.

The GON is a party to the 1988 UN Drug Convention, the
1961 UN Single Convention on Narcotic Drugs, as
amended by the 1972 Protocol, and the 1990 South Asian
Association for Regional Cooperation (SAARC)
Convention on Narcotics, Drugs, and Psychotropic
Substances. It has signed, but not yet ratified, the
UN Convention against Transnational Organized Crime
and the UN Convention Against Corruption. Nepal is
not a signatory to the UN International Convention
Against Illicit Traffic in Narcotic Drugs and
Psychotropic Substances.

End Text.

MORIARTY