2005-2006 INTERNATIONAL NARCOTICS CONTROL

UNCLAS SECTION 01 OF 04 ROME 000187 SIPDIS DEPT PLEASE PASS TO INL JUSTICE FOR OIA AND AFMLS AND TREASURY FOR FINCEN E.O. 12958: N/A TAGS: EFIN KCRM KTFN PTER IT EUN UN SUBJECT: 2005-2006 INTERNATIONAL NARCOTICS CONTROL STRATEGY REPORT (INCSR) INSTRUCTIONS PART II, FINANCIAL CRIMES AND MONEY LAUNDERING REF: A. STATE 210351 ¶B. STATE 209558 ¶C. STATE 209560 ¶D. STATE 209561 ¶1. Italy is not an important regional or offshore financial center. However, money laundering is a concern both because of the prevalence of homegrown organized crime groups and the recent influx of criminal organizations from abroad, especially from Albania, Romania, and Russia. The heavy involvement in international narcotics-trafficking of domestic and Italian-based foreign organized crime groups complicates counter-narcotics. Italy is a consumer country and a major transit point for heroin coming from the Near East and Southwest Asia through the Balkans en route to Western/Central Europe and, to a lesser extent, the United States. Italian and ethnic Albanian criminal organizations work together to funnel drugs to and through Italy. Additional priority trafficking groups include other Balkan organized crime entities, as well as Nigerian, Dominican, Colombian, and other South American trafficking groups. In addition to the narcotics trade, money to be laundered comes from myriad criminal activities, such as alien smuggling, contraband cigarette smuggling, pirated goods, extortion, usury, and kidnapping. Financial crimes not directly linked to money laundering such as credit card and Internet fraud are increasing. ¶2. Money laundering occurs both in the regular banking sector and, more frequently, in the nonbank financial system, i.e., casinos, money transfer houses, and the gold market. Money launderers predominantly use nonbank financial institutions for the illicit export of currency--primarily U.S. dollars and euros--to be laundered in offshore companies. There is a substantial black market for smuggled goods in the country, but it is not funded significantly by narcotics proceeds. ¶3. Money laundering is defined as a criminal offense when it relates to a separate, intentional felony offense. All intentional criminal offenses are predicates to the crime of money laundering, regardless of the applicable sentence for the predicate offense. Italy has strict laws on the control of currency deposits in banks. Banks must identify their customers and record and report to the Italian exchange office (UIC)--Italy's financial intelligence unit (FIU)--any cash transaction that exceeds approximately $15,000. The Bank of Italy's mandatory guidelines require the reporting all suspicious cash transactions (STR - suspicious transaction report) and other activity--such as a third party payment on an international transaction--on a case-by-case basis. Italian law prohibits the use of cash or negotiable bearer instruments for transferring money in amounts in excess of approximately $15,000, except through authorized intermediaries/brokers. ¶4. Banks and other financial institutions are required to maintain for ten years records necessary to reconstruct significant transactions, including information about the point of origin of funds transfers and related messages sent to or from Italy. Banks operating in Italy must remit account data to a central archive controlled by the Bank of Italy. This archive was established for record keeping and financial oversight purposes, but has proved useful for tracking money laundering. A "banker negligence" law makes individual bankers responsible if their institutions launder money. The law protects bankers and others with respect to their cooperation with law enforcement entities. ¶5. Italy has addressed the problem of international transportation of illegal-source currency and monetary instruments by applying the $15,000-equivalent reporting requirement to cross-border transport of domestic and foreign currencies and negotiable bearer instruments. Reporting is mandatory for cross-border transactions involving negotiable bearer monetary instruments (e.g., checks),but not for wire transfers; nevertheless, financial institutions are required to maintain a uniform anti-money laundering database for wire transfers and to submit this data on a monthly basis to the UIC. The UIC analyzes the data and can request specific transaction details if warranted. In 2004, the UIC received 6,816 STRs related to money laundering and 288 related to terrorism finance. The UIC does little filtering of the STRs, but rather sends virtually all of them to the Anti-Mafia Investigative Unit (DIA) and the Guardia di Finanza (GdF). Law enforcement opened 328 investigations based on STRs, which resulted in 103 prosecutions. ¶6. Because of these banking controls, narcotics- traffickers are using different ways of laundering drug proceeds. To deter nontraditional money laundering, the Government of Italy (GOI) has enacted a decree to broaden the category of institutions and professionals required to abide by anti-money laundering regulations. The list now includes accountants, debt collectors, exchange houses, insurance companies, casinos, real estate agents, brokerage firms, gold and valuables dealers and importers, auction houses, art galleries, antiques dealers, labor advisors, lawyers, and notaries. Not all implementing regulations for the decree have been issued, so while Italy now has comprehensive internal auditing and training requirements for its (broadly-defined) financial sector, implementation of these measures by nonbank financial institutions lags behind that of banks, as evidenced by the relatively low number of suspicious transaction reports (STRs) filed by nonbank financial institutions. According to UIC data, banking institutions submit 88 per cent of all STRs. Other financial intermediaries such as exchange houses submit 5.5 per cent, insurance companies 3.1 per cent, the postal sector 2.6 per cent, and all other sectors less than one per cent. ¶7. he UIC, which is an arm of the Bank of Italy (BoI), receives and analyzes STRs filed by covered institutions, and then forwards them to either the Anti- Mafia Directorate, the National Anti-Mafia Directorate (local public prosecutors) or the Guardia di Finanza (GdF) (financial police) for further investigation. The UIC compiles a register of financial and non- financial intermediaries that carry on activities that could be exposed to money laundering. The UIC also performs supervisory and regulatory functions such as issuing decrees, regulations, and circulars. It does not require a court order to compel supervised institutions to provide details on regulated transactions. ¶8. A special currency unit of the GdF is the Italian law enforcement agency with primary jurisdiction for conducting financial investigations in Italy. STRs led the GdF to identify $14,400,000 in laundered money in ¶2003. Both the UIC and the special currency unit have access to the Bank of Italy's central archive. Investigators from other divisions in the GdF and other Italian law enforcement agencies must obtain a court order prior to being granted access to the archive. ¶9. Italy has established reliable systems for identifying, tracing, freezing, seizing, and forfeiting assets from narcotics-trafficking and other serious crimes, including terrorism. These assets include currency accounts, real estate, vehicles, vessels, drugs, legitimate businesses used to launder drug money, and other instruments of crime. Under anti- Mafia legislation, seized financial and non-financial assets of organized crime groups can be forfeited. The law allows for forfeiture in both civil and criminal cases. Through October, Italian law enforcement seized more than 160 million in forfeited assets due to money laundering in 2004. Italy does not have any significant legal loopholes that allow traffickers and other criminals to shield assets. However, the burden of proof is on the Italian government to make a case in court that assets are related to narcotics-trafficking or other serious crimes. Law enforcement officials have adequate powers and resources to trace and seize assets; however, their efforts can be affected by which local magistrate is working a particular case. Funds from asset forfeitures are entered into the general State accounts. Italy shares assets with member states of the Council of Europe. Italy is involved in multilateral negotiations with the European Union (EU) to enhance asset tracing and seizure. ¶10. In October 2001, Italy passed a decree (subsequently converted into legislation) that created the Inter-Ministerial Financial Security Committee (FSC),which is charged with coordinating GOI efforts to track and interdict terrorist financing. The FSC members include includes the Ministries of Finance, Foreign Affairs, Home Affairs, Justice, the BoI, UIC, CONSOB (securities market regulator),GdF, the Carabinieri, the National Anti-Mafia Directorate (DNA) as well as the Anti-Mafia Investigative Directorate (DIA). The Committee has far-reaching powers that include waiving provisions of the Official Secrecy Act to obtain information from all government ministries and the as-yet-unused authority to order a freeze of terrorist-related assets. ¶11. A second October 2001 decree (also converted into legislation) made financing of terrorist activity a criminal offense, with prison terms of between seven and 15 years. The legislation also requires financial institutions to report suspicious activity related to terrorist financing. Both measures facilitate the freezing of terrorist assets. Per FSC data as of December 2004, 57 accounts have been frozen belonging to 55 persons, totaling $528,000 under UN Resolutions relating to terrorist financing. The GOI cooperates fully with efforts by the United States to trace and seize assets. Italy is second only to the United States in the number of individual terrorists and terrorist organizations it has submitted to the United Nations (UN) 1267 Sanctions Committee for designation. The UIC transmits to financial institutions the EU, UN, and U.S. Government (USG) lists of terrorist groups and individuals. The UIC may provisionally suspend for 48 hours transactions deemed suspect. The courts must then act to freeze or seize the assets. Under Italian law, financial and economic assets linked to terrorists can only be seized through a criminal sequestration order. Courts may issue such orders as part of criminal investigation of crimes linked to international terrorism. The sequestration order may be issued with respect to any asset, resource, or item of property, provided that these are goods or resources linked to the criminal activities under investigation. A provision of the Italian implementing legislation of the 3rd EU Money Laundering directive would give the government authority to issue a decree law to allow the freezing, seizing, and forfeiture of non-financial assets belonging to terrorist groups and individuals. The legislation must be passed by the Parliament before it dissolves for the March 2005 national elections or the law must be resubmitted by the new government. ¶12. In Italy, the term "alternative remittance system" refers to nonbank regulated institutions such as money transfer businesses. Informal remittance systems do exist, primarily to serve Italy's significant immigrant communities, and in some cases are used by Italy-based drug trafficking organizations to transfer narcotics proceeds. Italy does not regulate charities per se. Primarily for tax purposes, Italy in 1997 created a category of "not-for-profit organizations of social utility" (ONLUS). Such an organization can be an association, a foundation or a fundraising committee. To be classified as an ONLUS, the organization must register with the Economics Ministry and prepare an annual report. There are currently 19,000 registered ONLUS. ¶13. The ONLUS Agency was established in 2000 and has the power to issue guidelines and to draft legislation for the non-profit sector, to maintain data and statistics, alert other authorities in case of violations of existing obligations, and confirm the de- listing from the ONLUS registry. The ONLUS Agency cooperates with the Finance Ministry in reviewing the conditions for being an ONLUS. The ONLUS Agency has recently launched a $240,000 project for the creation of a centralized database, gathering mandatory information related to all Italian ONLUS'. The ONLUS Agency has reviewed 1,500 agencies and recommended the dissolution of several ONLUS which were not in compliance with Italian Law. Italian authorities believe that based on the analysis of the UIC and the investigations of the GdF, there is a low risk of terrorism financing in the Italian non-profit sector. ¶14. Italian cooperation with the United States on money laundering has been exemplary. The United States and Italy have signed a customs assistance agreement as well as extradition and Mutual Legal Assistance treaties (MLAT). Both in response to requests under the MLAT and on an informal basis, Italy provides the United States records related to narcotics-trafficking, terrorism and terrorist financing investigations and proceedings. Italy also cooperates closely with U.S. law enforcement agencies and other governments investigating illicit financing related to these and other serious crimes. An effort to provide a mechanism under the MLAT for asset forfeiture and the sharing of forfeited assets has not yet come to fruition. Assets can only be shared bilaterally if agreement is reached on a case-specific basis. ¶15. Italy is a party to the 1988 UN Drug Convention; the UN International Convention for the Suppression of the Financing of Terrorism; and the Council of Europe Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds from Crime. Italy has signed, but not yet ratified, the UN Convention against Transnational Organized Crime. ¶16. Italy is a member of the FATF and held the FATF presidency in 1997-98. As a member of the Egmont Group, Italy's UIC shares information with other countries' FIUs. The UIC has been authorized to conclude information-sharing agreements concerning suspicious financial transactions with other countries. To date, Italy has signed memoranda of understanding with France, Spain, the Czech Republic, Croatia, Slovenia, Belgium, Panama, Latvia, the Russian Federation, Canada, and Australia. Italy also is negotiating agreements with Japan, Argentina, Malta, Thailand, Singapore, Hong Kong, Malaysia, and Switzerland, and has a number of bilateral agreements with foreign governments in the areas of investigative cooperation on narcotics-trafficking and organized crime. There is no known instance of refusal to cooperate with foreign governments. ¶17. The GOI is firmly committed to the fight against money laundering and terrorist financing, both domestically and internationally. However, given the relatively low number of STRs being filed by nonbank financial institutions, the GOI should increase its training efforts and supervision in this sector, to decrease its vulnerability to abuse by criminal or terrorist groups. The GOI should also continue its active participation in multilateral fora dedicated to the global fight against money laundering and terrorist financing. Spogli