SERBIA: 2007-2008 INCSR II ON MONEY LAUNDERING

UNCLAS BELGRADE 001709

SIPDIS

SIPDIS
FOR INL, SCT, EEB, EUR/SCE, EUR/PGI
DEPT OF JUSTICE FOR AFMLS, OIA, OPDAT
TREASURY FOR FINCEN

E.O. 12958: N/A
TAGS: KCRM EFIN KTFN SNAR SR
SUBJECT: SERBIA: 2007-2008 INCSR II ON MONEY LAUNDERING

REF: State 138130

SUMMARY
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1. Reftel requested post update for Serbia on efforts to combat
money laundering and terrorist financing. Serbia is upholding all
international commitments to eliminate money laundering and
terrorist financing. END SUMMARY.

SERBIA: Not a Financial Center
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2. Serbia is not a regional financial center. At the crossroads of
Europe and on the major trade corridor known as the "Balkan route,"
Serbia confronts narcotics trafficking, smuggling of persons, drugs,
weapons and pirated goods, money laundering, and other criminal
activities. Serbia continues to be a significant black market for
smuggled goods. Illegal proceeds are generated from drug
trafficking, corruption, tax evasion and organized crime, as well as
other types of crimes. Proceeds from illegal activities are invested
in all forms of real estate. Trade-based money laundering, in the
form of over- and under-invoicing, is commonly used to launder
money.

3. A significant volume of money flows to Cyprus, reportedly as the
payment for goods and services. The records maintained by various
government entities vary significantly on the volume and value of
imports from Cyprus According to Government of the Republic of
Serbia (GOS) officials, much of the difference is due to payments
made to accounts in Cyprus for goods, such as Russian oil, that
actually originate in a third jurisdiction.

Banking Sector Largely Foreign Owned
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4. Serbia's banking sector is more than 80 percent foreign-owned.
There is no provision in the banking law that allows the
establishment of offshore banks, shell companies or trusts.
Reportedly, there is no official evidence of any alternative
remittance systems operating in the country; however, there is
anecdotal evidence. Nor, reportedly, is there evidence of financial
institutions engaging in currency transactions involving
international narcotics trafficking proceeds. Serbia has 14
designated free trade zones, three of which are in operation. The
free trade zones were established to attract investment by providing
tax-free areas to companies operating within them. These companies
are subject to the same supervision as other businesses in the
country.

Anti-Money Laundering Law
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5. In September 2005, Serbia codified an expanded definition of
money laundering in the Penal Code. This legislation gives police
and prosecutors more flexibility to pursue money laundering charges,
as the law broadens the scope of money laundering and aims to
conform to international standards. The penalty for money laundering
is a maximum of 10 years imprisonment. Under this law and attendant
procedure, money laundering falls into the serious crime category
and permits the use of Mutual Legal Assistance (MLA) procedures to
obtain information from abroad.


6. On November 28, 2005, Serbia adopted a revised anti-money
laundering law (AMLL),replacing the July 2002 Law on the Prevention
of Money Laundering. The revised AMLL expands the number of entities
required to collect certain information on all cash transactions
over EUR 15,000 (approx. $21,750),or the dinar equivalent, and to
file currency transaction reports (CTRs) for all such transactions
exceeding this threshold with the financial intelligence unit (FIU).
Suspicious transactions in any amount must be reported to the FIU.
The law also expands those sectors subject to reporting and record
keeping requirements. Banks, attorneys, auditors, tax advisors and
accountants, currency exchanges, insurance companies, casinos,
securities brokers, dealers in high value goods, real estate
agencies and travel agents are required to comply with the AMLL
provisions. Required records must be maintained for five years.
These entities are protected with respect to their cooperation with
law enforcement entities. The AMLL requires obligated entities and
individuals to monitor customers' accounts when they have a
suspicion of money laundering, in addition to reporting to the FIU.
The AMLL also eliminates a previous provision limiting prosecution
to crimes committed within Serbian territory. Significant
improvement has been noted in financial institution compliance,
i.e., gathering and keeping records on customers and transactions.
The flow of information to the FIU has been steadily increasing, but
not all entities are yet subject to implementing bylaws.

Law on Foreign Exchange
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7. The Law on Foreign Exchange Operations, adopted in 2006,
criminalizes the use of false or inflated invoices or documents to
affect the transfer of funds out of the country. This law was
enacted in part to counter the perceived problem of import-export
fraud and money laundering. According to the law, residents and
nonresidents are obliged to declare to Customs authorities all
currency (foreign or dinars),or securities in amounts exceeding EUR
5,000 ($7,250) being transported across the border. The Foreign
Currency Inspectorate, part of the Ministry of Finance, is
responsible for supervising import/export companies for compliance.


8. The National Bank of Serbia (NBS) has supervisory authority over
banks, currency exchanges, insurance and leasing companies. The NBS
has issued regulations requiring banks to have compliance and
know-your-customer (KYC) programs in place and to identify the
beneficial owners of new accounts. In June 2006, the NBS expanded
its customer identification and record keeping rules by adopting new
regulations mandating enhanced due diligence procedures for certain
high risk customers and politically exposed persons. Similar
regulations are being developed for insurance companies. The Law on
Banks includes a provision allowing the NBS to revoke a bank's
license for activities related to, among other things, money
laundering and terrorist financing. To date, the NBS has not used
this revocation authority. The legal framework is in place, but the
NBS is still building the capacities needed for effective bank
supervision through training and staff development.


9. The Securities Commission (SC) supervises broker-dealers and
investment funds. The Law on Investment Funds and the Law on
Securities and Other Financial Instruments Market provide the SC
with the authority to "examine" the source of investment capital
during licensing procedures. The SC is also charged with monitoring
its obligors' compliance with the AML Laws. Regulations to implement
this authority are being developed.

Financial Intelligence Unit in Place
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10. The Administration for the Prevention of Money Laundering
serves as Serbia's FIU. The revised AMLL elevates the status of the
FIU to that of an administrative body under the Ministry of Finance.
This provides more autonomy for the agency to carry out its mandate,
as well as additional resources. One important change is that the
FIU now has its own line item operating budget. The FIU currently
has 24 employees. In accordance with the revised AMLL, the FIU
developed listings of suspicious activity red flags for banks,
currency exchange offices, insurance companies, securities brokers
and leasing companies. Other significant changes include the
authority of the FIU to freeze transactions for a maximum of 72
hours. The FIU has signed memoranda of understanding (MOU) on the
exchange of information with the NBS and Customs and is negotiating
one with the Tax Administration.


11. For year-to-date, through November 19, 2007, the FIU received
1,572 suspicious transaction reports (STRs). Virtually all of the
STRs received by the FIU have been filed by commercial banks.
Currency exchange offices have filed only seven STRs, all prior to

2004. In 2007, the FIU has opened 46 cases; 119 cases were referred
to law enforcement, investigative agencies or the prosecutor's
office for further investigation. A total of six criminal charges
have been submitted for money laundering violations this year. The
most common predicate crime is "abuse of office". One final sentence
has been issued in 2007.

VAT
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12. Serbia introduced a value-added tax (VAT) in 2005, and the full
impact of refund fraud associated with the administration of the VAT
is still not clear. Serbia's Tax Administration lacks the audit and
investigative capacity or resources to adequately investigate the
large number of suspicious transactions that are forwarded by
Serbia's FIU. In addition, current tax law sets a low threshold for
auditing purposes and has increased the burden on the Tax
Administration. This creates a situation where criminals can spend
and invest criminal proceeds freely with little fear of challenge by
the tax authorities or other law enforcement agencies.


13. The difficulty of convicting a suspect of money laundering
without a conviction for the predicate crime and the unwillingness
of the courts to accept circumstantial evidence to support money
laundering or tax evasion charges is hampering law enforcement and
prosecutors in following the movement and investment of illegal
proceeds and effectively using the anti-money laundering laws. The
Suppression of Organized Crime Service (SOCS) of the Interior
Ministry houses an Anti-Money Laundering Section to better focus
financial investigations.
Interagency Working Group Established
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14. In August 2005, the GOS established the Permanent Coordinating
Group (PCG),an interagency working group originally tasked with
developing an implementation plan for the recommendations from
MONEYVAL's first-round evaluation in October 2003. Subgroups have
been tasked with drafting amendments to the AMLL that will bring the
country's laws into compliance with the EU Third Directive on Money
Laundering and with estimating the budget necessary to effectively
implement the new law when it is enacted. The PCG and the working
groups meet intermittently as required for completing specific
tasks. The government still needs better, more consistent
interagency coordination to improve information sharing, record
keeping and statistics.


15. Under Serbian law, assets derived from criminal activity or
suspected of involvement in the financing of terrorism can be
confiscated upon conviction for an offense. The FIU is charged with
enforcing the UNSCR 1267 provisions regarding suspected terrorist
lists. A draft law on terrorist financing, now pending Parliamentary
approval, will apply all provisions of the AMLL to terrorist
financing, require reporting to the FIU of transactions suspected to
be terrorist financing and will create mechanisms for freezing,
seizing and confiscation of suspected terrorist assets based on
UNSCR provisions. Although the FIU routinely provides the UN list of
suspected terrorist organizations to the banking community,
examinations for suspect accounts have revealed no evidence of
terrorist financing within the banking system or any official
evidence of alternative remittance systems. The SOCS, the Special
Anti-Terrorist Unit (SAJ),and Gendarmarie, in the Interior
Ministry, are the law enforcement bodies responsible for planning
and conducting the most complex antiterrorism operations. SOCS
cooperates and shares information with its counterpart agencies in
all of the countries bordering Serbia. Although Serbia has
criminalized the financing of terrorism, the freezing, seizing and
confiscation of assets of terrorists in accordance with UN Security
Council resolutions still lacks a legal basis, pending enactment of
the draft legislation.

Cooperation with Others
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16. Serbia has no laws governing its cooperation with other
governments related to narcotics, terrorism, or terrorist financing.
Bases for cooperation include participation in Interpol, bilateral
cooperation agreements, and agreements concerning international
legal assistance. There are no laws at all governing the sharing of
confiscated assets with other countries.


17. Serbia does not have a mutual legal assistance arrangement with
the United States, but information exchange via a letter rogatory is
standard. The 1902 extradition treaty between the Republic of Serbia
and the United States remains in force. The GOS has bilateral
agreements on mutual legal assistance with 31 countries. As a member
of the Council of Europe, the GOS is an active member of the
Council's MONEYVAL. In July 2003, the FIU became a member of the
Egmont Group and actively participates in information exchanges with
counterpart FIUs including FinCEN. The Serbian FIU has also signed
information sharing memoranda of understanding (MOUs) with
Macedonia, Romania, Belgium, Slovenia, Montenegro, Albania, Georgia,
Ukraine, Bulgaria, Croatia, and Bosnia and Herzegovina. Serbia is a
party to the 1988 UN Drug Convention and the UN Convention against
Transnational Organized Crime. The GOS also is a party to all 12 UN
Conventions and Protocols dealing with terrorism, including the UN
International Convention for the Suppression of the Financing of
Terrorism, although domestic implementation procedures do not
provide the framework for full application. In December 2005, the
GOS ratified the UN Convention against Corruption.

Next Steps
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18. Serbia should continue to work toward eliminating the abuses of
office and culture of corruption that enables money laundering and
financial crimes. Among the pending legislative initiatives to make
Serbia fully compliant with international standards are laws
providing for the liability of legal persons for money laundering
and terrorist financing; regulations to apply all requirements of
the AMLL to covered non-bank financial institutions; legislation to
establish a robust asset seizure and forfeiture regime; and
legislation providing for the sharing of seized assets. Serbia also
needs to enact and implement proposed legislation needed to comply
with UN Security Council resolutions regarding the freezing, seizing
and confiscation of suspected terrorist assets and require
suspicions of terrorist financing to be reported to the FIU.


19. The National Bank and other supervisory bodies need training
and additional staff. The GOS should enforce regulations pertaining
to money service businesses and obligated non-financial businesses
and professions. The supervisory scheme should be completed, and
implementing regulations should be binding, for the insurance and
securities sectors. On an operational level, law enforcement needs
audit and investigative capacity in order to investigate the STRs
that the FIU disseminates. Training is also required for prosecutors
and judges. Rather than address specific tasks as an ad hoc group,
the PCG should meet on a regular basis to discuss issues and
projects, and work to improve interagency coordination in such areas
as information sharing, record keeping and statistics.

Comment
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20. Serbia is upholding all international commitments to eliminate
money laundering and terrorist financing. Serbia continues to
strengthen its anti-money laundering and terrorist financing law
enforcement with the help of U.S Department of Justice and
Treasury's Embassy-based personnel from whom Serbian authorities
have received training in organized crime investigation,
prosecution, and adjudication. End Comment.

MUNTER