2006-2007 INTERNATIONAL NARCOTICS CONTROL STRATEGY

UNCLAS SECTION 01 OF 04 ROME 003172 SIPDIS SIPDIS DEPT PLEASE PASS TO INL JUSTICE FOR OIA AND AFMLS TREASURY FOR FINCEN E.O. 12958: N/A TAGS: EFIN KCRM KTFN PTER IT SUBJECT: 2006-2007 INTERNATIONAL NARCOTICS CONTROL STRATEGY REPORT (INCSR) INSTRUCTIONS PART II, FINANCIAL CRIMES AND MONEY LAUNDERING REF: A. ROME 3060 ¶B. STATE 157084 ¶1. This message responds to ref B request for information on financial crimes and money laundering in Italy. Together with ref A, these reports transmit Mission Italy's submission to the 2006-07 International Narcotics Control Strategy Report (INCSR). ¶2. Italy is not an offshore financial center. Italy is part of the euro area and is fully integrated in the EU single market for financial services. However, money laundering is still 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 important trafficking groups include other Balkan organized crime entities, as well as Nigerian, Dominican, Colombian, and 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. ¶3. Money laundering occurs both in the regular banking sector and 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 Italy, but it is not funded significantly by narcotics proceeds. According to late 2004 Embassy reporting, Italy,s underground economy in 2002 was an estimated 27 percent of Italian GDP -- or approximately 200 billion euro. For the most part, Italy's underground economy does not include illicit activities per se, but does reflect substantial activity that is not subject to taxation. Its sheer volume, however, provides a ready environment for money laundering. ¶4. Italy has a comprehensive Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) system set up initially in 1991 and, later, updated a number of times. The AML/CFT law enforcement system is based on long-standing enforcement machinery designed to cut down on the economic power of mafia-type criminal organizations. Money laundering is defined as a criminal offense when laundering 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. Law enforcement efforts against money laundering have been quite successful. Almost 600 cases of money laundering lead to conviction every year -- one of the highest rate of successful prosecutions in Europe. Italy has strict laws on the control of currency deposits in banks. Banks must identify their customers and record any transaction that exceeds approximately $15,000 (12,500 euro). Bank of Italy (BoI) mandatory guidelines require the reporting of all suspicious cash transactions (STRs) and other activity -- such as a third party payment on an international transaction. 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. ¶5. 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 record account data on their own standardized customer database established within the framework of the anti-money laundering ROME 00003172 002 OF 004 regulation. A &banker negligence8 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. ¶6. 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). Financial institutions are required to maintain a uniform anti-money laundering database for all transactions (including wire transfers) over $15,000 and to submit this data monthly to the Ufficio Italiano dei Cambi (Italian Exchange Office, UIC),although edited to remove any reference to customers and aggregated for classes of transactions. The UIC analyzes the data and can request specific transaction details if warranted. In 2005, the UIC received 8,576 STRs related to money laundering and 482 related to terrorism finance. The UIC does filter the STRs, although the Italian law requires that the Anti-Mafia Investigative Unit (DIA) and the Guardia di Finanza (GdF) be informed about all cases, including those that the UIC does not pursue further. Law enforcement opened 328 investigations based on STRs, which resulted in 103 prosecutions. ¶7. 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 (included since 1991),casinos, real estate agents, brokerage firms, gold and valuables dealers and importers, auction houses, art galleries, antiques dealers, labor advisors, lawyers, and notaries. The required implementing regulations for the decree, as far as non-financial businesses and professions are concerned, were issued in February 2006 and came into force in April 2006 (per Ministerial Decree no. 141, 142, and 143 of 3.02.2006). However, while Italy now has comprehensive internal auditing and training requirements for its (broadly-defined) financial sector, it is not clear whether 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. As of 2005, according to UIC data, banking institutions submitted about 80 per cent of all STRs. Other financial intermediaries, such as money remittance operators, submit 13.5 percent; insurance companies, about two percent; the postal sector, nearly 4.5 percent; and all other sectors, less than one percent. Nonetheless, such distribution of STRs across the financial spectrum closely resembles what can be observed in most jurisdictions. ¶8. The UIC, which is an arm of the BoI, receives and analyzes STRs filed by covered institutions, and then forwards them to either the DIA or the GdF for further investigation. The UIC compiles a register of financial and non-financial intermediaries which 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. ¶9. A special currency branch 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. The UIC has access to the banks, customer database. Investigators from the GdF and other Italian law enforcement agencies must obtain a court order prior to being granted access to the archive. ¶10. Italy has established reliable systems for identifying, tracing, freezing, seizing, and forfeiting assets from narcotics-trafficking and other serious crimes, including ROME 00003172 003 OF 004 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 2004, Italian law enforcement seized more than 160 million euro in forfeited assets due to money laundering. 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 Member State negotiations within the European Union (EU) to enhance asset tracing and seizure. ¶11. In October 2001, Italy issued a decree (subsequently converted into law) that created the Financial Security Committee (FSC),charged with coordinating GOI efforts to track and interdict terrorist financing. FSC members 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 DIA. The Committee has far-reaching powers that include waiving provisions of the Official Secrecy Act to obtain information from all government ministries. ¶12. A second October 2001 decree (also converted into law) made financing of terrorist activity a criminal offense, with prison terms of between seven and fifteen 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 in the EU only to the United Kingdom in the number of individual terrorists and terrorist organizations the country has submitted to the United Nations (UN) 1267 Sanctions Committee for designation. The UIC disseminates 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 of money laundering or terrorist financing. The courts must then act to freeze or seize the assets. Under Italian law, financial and economic assets linked to terrorists can be directly frozen by the financial intermediary holding them, should the owner be listed under EU regulation. Moreover, assets can be seized through a criminal sequestration order. Courts may issue such orders as part of criminal investigation of crimes linked to international terrorism or applying administrative seizing measures originally conceived to fight the mafia. 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. Law no. 15 of 29.01.2006 gave the government authority to implement the Third EU Money Laundering directive and to issue provisions to make more effective the freezing of non-financial assets belonging to listed terrorist groups and individuals. ¶13. In Italy, the term &alternative remittance system8 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 ¬-for-profit organizations of social utility8 (ONLUS). Such an organization can be an association, a foundation, or a fundraising committee. To be classified as an ONLUS, the ROME 00003172 004 OF 004 organization must register with the Finance Ministry and prepare an annual report. There are currently 19,000 registered ONLUS. ¶14. The ONLUS Agency was established in 2000 and can issue guidelines and 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 there is a low risk of terrorism financing in the Italian non-profit sector. ¶15. 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 (MLAT) Treaties. 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. In May 2006, however, the U.S. and Italy signed new bilateral instruments on extradition and mutual legal assistance as part of the process of implementing the U.S./EU Agreements on Extradition and Mutual Legal Assistance, signed in June 2003. Similar bilateral instruments have now been negotiated and signed with all 25 EU member states, but must be still be ratified by the U.S. Senate. Once ratified, the new U.S./Italy bilateral instrument on mutual legal assistance will provide for asset forfeiture and sharing. ¶16. 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 ratified the UN Convention against Transnational Organized Crime with Law no. 146 of 16.03.2006. ¶17. 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. ¶18. The GOI is firmly committed to the fight against money laundering and terrorist financing, both domestically and internationally. However, given the newness of reporting requirements for nonbank financial institutions, the GOI should closely monitor activities in this area to determine if additional training and supervision are warranted. The GOI should also continue its active participation in multilateral fora dedicated to the global fight against money laundering and terrorist financing. SPOGLI