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

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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