INCSR Part 2: Financial Crimes and Money Laundering

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000872 SIPDIS SENSITIVE SIPDIS JUSTICE FOR AFMLS, OIA, AND OPDAT TREASURY FOR FINCEN AND EB/ESC/TFS STATE FOR INL, EAP/RSP, EAP/CM STATE FOR MCC JIM HALLMARK E.O. 12958: N/A TAGS: EFIN KCRM KTFN PTER MG SUBJECT: INCSR Part 2: Financial Crimes and Money Laundering REF: State 157136 SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION. ¶1. (U) Mongolia is not an important regional financial center nor considered an offshore financial center, although there are no laws prohibiting the establishment of offshore entities in Mongolia. ¶2. (SBU) Mongolia's economy and banking system are relatively small, depriving the cover needed for large scale money-laundering activities. However, the dramatic rise in mineral prices, coupled with increases in foreign direct investment over the past few years mean more money is flowing into the country. Mongolian police fear that some of this money may be "dirty," but cannot cite known examples. The GOM states it is not aware of any information indicating the transfer by financial institutions of incomes derived from illegal trafficking of narcotics or generating of such income in the U.S. To date, there have been no cases of known or suspected terrorist individuals or groups attempting to engage in transactions with Mongolian banks. ¶3. (SBU) Although small quantities of smuggled consumer goods, mostly from China, are common, they are generally not believed to be funded by narcotics or other illicit activities. Some goods, such as raw cashmere, also are smuggled out to China. This small-scale smuggling trade to/from China is believed to operate on a cash basis. The smuggling of gold out of the country remains problematic, especially after the passage of a 68% windfall profits tax on gold and copper in May, but there are no known cases of such incidences funding other criminal activity. ¶4. (SBU) According to official figures, Mongolia received US $62.6 million in overseas cash remittances in 2003 (latest figure). A significant amount of remittances, particularly from South Korea, are remitted through informal or "grey market" channels. Some public estimates of overall remittances run as high as $250 million a year, although the accuracy of these guesses is unknown. Police believe these informal channels are used to avoid taxation rather than as part of terrorism, money-laundering or narcotic trafficking schemes. ¶5. (SBU) Though crimes related to banking activities such as bank ;fraud and counterfeiting are rare, banking officials suspect that such crimes are on the rise. Counterfeiting of local currency is most common; however, the modest North Korean presence in Mongolia also makes the country potentially vulnerable to counterfeit U.S. currency. In February, Mongolian authorities detained for examination over $1 million in U.S. and Japanese currency being carried into the country by a North Korean bank's couriers for deposit into a Mongolian bank. Authorities did not find any counterfeit currency, and released the money (note: additional details in classified reporting). There are no known cases of charities involved in money laundering. The Secret Service provided counterfeit training to Mongolian law enforcement and banking officials in April 2006. ¶6. (SBU) A Nonbank Financial Regulatory Commission (NBFRC),which began operations in January 2006, for the first time has begun to provide regulatory oversight for savings and loan and other non-banking financial institutions such as insurance brokers, Mongolia's stock market, etc. There is currently a major investigation into a savings and loan/credit union bankruptcy scandal which resulted in losses of 60 billion tugriks (over $50 million) for an estimated 9,000 depositors earlier this year. Police investigations into the scandal are ongoing and 22 civil lawsuits have been filed. While charges of fraud are possible, the failure of the institutions is blamed on malfeasance rather than money laundering or narcotics involvement. ¶7. (U) Mongolia has a law on free trade zones and has designated a special economic zone on the border with China at the town of Zamyn Uud. This zone has yet to be developed commercially and is inactive. ¶8. (U) Major changes in Mongolia's anti-money laundering situation occurred in the last few months, but are not yet complete. In July 2006, the Government of Mongolia (GOM) passed the "Law to Combat Money Laundering and Terrorist Financing," which brought several major changes. However, many issues have yet to be worked out ULAANBAATA 00000872 002 OF 003 through implementing regulations, and police are at a loss to explain how the new law will be enforced until it can be finalized in the criminal code. Amendments to the criminal code have been drafted, but are not yet enacted. ¶9. (U) The law states that money laundering offences apply to "all [related] serious crimes," except tax evasion. There is no specific threshold minimum monetary amount. The Central Bank, tax authorities and law enforcement agencies have the power to investigate, within their respective jurisdictions, transactions and books of banks and other financial institutions. According to Article 39 of the Criminal Code, officers of financial institutions are obligated to provide to law enforcement agencies information on crimes that have become known to them. ¶10. (SBU) Despite passage of the anti-money laundering and terrorist finance law, the GOM has yet to define terrorist financing in the criminal code, but the work is in draft and officials state it should be adopted by year's end. This lack of criminal definition of terrorist financing has left many police officials uncertain about their role or powers in conducting terrorist finance or money laundering investigations, or what penalties might be imposed. There is also uncertainty about the jurisdiction of the various agencies involved in uncovering, investigating and prosecuting violations of the new law. ¶11. (SBU) Mongolia created a Financial Investigation Unit (FIU) at the end of November 2006, as required under the new law. Currently, the FIU has two investigators, with plans to introduce two more. The first stage will create a four person group, with plans for later expansion. FIU members are predominately law, finance, and information technology experts. The FIU is funded by and housed in Mongol Bank (the central bank),but will remain an independent entity. It monitors the activities of all banks and ensures they operate legally. FIU is responsible for detecting criminal activities within the banking sector, but investigative responsibilities are left to the Financial Crimes Unit of the Mongolian National Police, who are charged with investigating all financial crimes including money laundering and terrorist financing. At present, the FIU lacks the capacity or know-how to tackle some of the more complex financial crimes. Mongolia recognizes that FIU is still in its infancy and will take some time to develop fully. The Asian Development Bank recently began anti-money laundering training, and is working with the administration of Mongol Bank. Mongolian officials have requested anti-money laundering training from American experts. ¶12. (U) The AML introduces suspicious transaction reporting (STR) requirements. Every cash transaction of 20 million tugriks (USD $17,250) or more must be reported, as must any other suspicious activity. The AML also provides that legal entities conducting the activities of banks, non bank financial institutions, commercial insurance companies, activities described by Article 15.3.1 of the Law on Special Licensing of Commercial Activities, savings and loan cooperatives, and their subsidiaries or branches have an obligation to inform relevant agencies about applicable transactions. Transaction records must be kept for five years. ¶13. (U) The Law on Foreign Currency Regulation (Article 17 and others) has provisions that regulate the flow of foreign currency through the Mongolian border. Under the AML, Customs authorities are required to monitor cash flowing in and out of Mongolia and cooperate with all FIU inquiries. Amounts over 5 million tugriks (US $4300) must be declared to authorities. Border checkpoints maintain name lists of those who carry large amounts of cash into Mongolia, and require these people to report on how much cash they take back out of the country. Cash couriers are subject to the same policies. ¶14. (SBU) The smuggling of bulk shipments of cash (U.S. dollar, Chinese Yuan and/or Mongolian tugriks) in and out of Mongolia is relatively common, especially along its southern, porous, boarder with China where merchants engage in "suitcase trading." Quite a few cases have emerged involving Chinese traders smuggling large amounts of money into the country to buy iron, steel, animal parts and more. In such cases, Mongolian police try to work with Chinese counterparts. With the introduction of the new anti-laundering law, police can now investigate money-laundering or organized crime angles pertaining to such shipments. Police pay attention to international trafficking of foreign currency or other payment ULAANBAATA 00000872 003 OF 003 documents that have illegal origins, but there have been no investigations to date. ¶15. (SBU) Mongolia has been slow to establish interagency coordination mechanisms to help monitor international financial transactions. Moreover, growing corruption, a weak legal system, an inability to effectively patrol its borders to detect smuggling, and lack of capacity to conduct transnational criminal investigations all hamper Mongolia's ability to fight all forms of transnational crime. Police and investigators admit that they do sufficiently share information or cooperate with other units. ¶16. (SBU) The Foreign Currency Department of the Central Bank regularly distributes the lists of members of al-Qaida, the Taliban and other associated persons, supplied by the USG, to banks and financial institutions along with recommended measures. ¶17. (U) There is a system to track, identify, investigate, seize, confiscate or impose fines regarding assets created through grave crimes such as international trafficking, narcotics-related crimes or funding of terrorism. These proceedings would be carried out according to rules provided by the Criminal Code and the Criminal Procedure Code. Mongolia has the right to seize money that is involved in a narcotics case. Assets confiscated or fines collected are transferred to the general GOM budget. The FIU can freeze assets for three days and hand them over to the police for further investigation. Police have all investigatory responsibilities. Tracing and seizing assets is the duty of the police and courts. ¶18. (SBU) The U.S. has not yet requested any laundering information. In recent years, Mongolia has increased its participation in forums that focus on transnational criminal activities and, in 2004, became a member of the Asia Pacific Group (APG) on Money Laundering. APG began to conduct an initial peer review of Mongolia's anti-money laundering regime in late 2006. ¶19. (SBU) The President of Mongolia directed the introduction of legal regulations combating terrorism by issuing Decree #60 in 2001 on, "Supporting Establishment of an International Coalition Against Terrorism." Accordingly, the GOM adopted Resolution #226 in 2001, entitled "Supporting Activities of the International Coalition Against Terrorism." The resolution requires relevant agencies to exchange information and cooperate with their counterparts in coalition countries regarding terrorists, drug-trafficking and money laundering actions. ¶20. (SBU) Mongolia is a party to the 1988 UN Drug Convention. Mongolia became a party to the UN International Convention for the Suppression of the Financing of Terrorism on February 25, 2004. The GOM ratified the UN Convention Against Corruption in October 2005. An anti-corruption law was passed in July 2006. It did not define any new crimes, but created an independent anti-corruption agency with investigatory powers, and introduced a requirement for asset and income disclosure from all public officials. The new agency is not yet in operation. Minton