CAMBODIAN MONEY LAUNDERING VULNERABILITIES

UNCLAS SECTION 01 OF 02 PHNOM PENH 000489

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/MLS, EAP/RSP--STUART ALLEN,
EB/ESC/TFS--KATHERINE LEAHY AND LEANNE CANNON, S/CT--PATTY
HILL AND ANNE GALER, INL/AAE--CHARLES BOULDIN
TREASURY FOR FINCEN

E.O. 12958: N/A
TAGS: EFIN SNAR KCRM CB
SUBJECT: CAMBODIAN MONEY LAUNDERING VULNERABILITIES
HIGHLIGHTED BY EXTERNAL AUDIT



1. (SBU) SUMMARY. An external assessment team recently
rated Cambodia as falling far short of international
financial regulatory standards and described government
officials as being in a "state of denial" about the potential
for money laundering. Poor coordination among Cambodian
government agencies and donors, distrust of the police, and
lack of political will all hamper efforts to prevent money
laundering. Casinos, banks, and real estate transactions are
not effectively policed, although many international banks
effectively implement stringent company policies on financial
regulation. Cambodia is the only ASEAN country without an
anti-money laundering law, and prospects for passage of a law
in the near term are uncertain. SUMMARY.


2. (SBU) The Asia-Pacific Group (APG),a regional financial
standards body similar to the G8's Financial Action Task
Force, and the World Bank (WB) recently completed a joint
assessment of Cambodia's financial regulatory system. While
results will not be announced publicly until after the
plenary session this summer, two team members, Lindsey Chan
of the APG and Andrew Clayton of the Hong Kong Police, gave
Poleconoff an informal readout of the assessment.
Separately, National Bank of Cambodia Deputy Governor Neav
Chanthana also provided her impression of the process and
results.

"A State of Denial" about Potential for Financial Crimes
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3. (SBU) Overall Cambodia falls far short of APG standards.
Out of 40 areas assessed, Cambodia was largely compliant in
2, partially compliant in 6, and non-compliant in 30,
according to Neav Chanthana. (Note: Two areas were deemed
to be inapplicable. End Note.) While Chan and Clayton felt
certain that this could not have come as a shock to the
Cambodian government, Neav Chantana expressed surprise that
the country did so poorly in the assessment and that only
effectively implemented legislation--not draft or unenforced
laws--could have a positive impact on the assessment.


4. (SBU) Clayton and Chan expressed overall frustration with
Cambodia's weak attempts to police its financial sector,
saying that the Cambodian government was in a "state of
denial" about the potential for money laundering in Cambodia
and that the National Bank didn't sufficiently understand or
take ownership of the problem. They noted that a sound
anti-money laundering regime requires excellent
intra-governmental cooperation, but ministries who are
supposedly cooperating in the Financial Intelligence Unit do
not appear to be working well together. Moreover, neither
the National Bank of Cambodia nor individual private banks
trust the police. Government officials conveniently blame
their lack of action on the lack of an anti-money laundering
bill, but in fact they could be doing much more to
effectively regulate the financial sector in the absence of
such a law. For example, an existing law requires that banks
perform "know your customer" checks and record transactions
over a threshold to be defined by the Ministry of Economics
and Finance (MoEF). However, the MoEF has never defined this
threshold and as a result no transactions have to be
reported.

Potential Money Laundering Avenues Unchecked
--------------


5. (SBU) The government is largely ineffective at policing
potential avenues for money laundering, Chan and Clayton
stated. The MoEF's casino management section told the APG/WB
team that they can not effectively police Cambodia's casinos
because nearly all are located along Cambodia's borders and
they do not have funding to travel. Many of the
international banks appear to be doing a relatively good job
of policing themselves, but most limit their interaction with
law enforcement; choosing, for example, to close an account
and refuse to make a suspicious transaction rather than
alerting the police to the attempted activity. In contrast
to lax enforcement in other areas, Chan and Clayton noted
relatively good monitoring of international NGOs, which can
potentially serve as instruments of money laundering.


6. (SBU) Real estate transactions are essentially unregulated
and represent an accessible route for would-be money
launderers, according to the APG/WB assessment. Despite a
new real estate licensing law, few realtors are licensed.
There is no objective assessment of property values and 60%

PHNOM PENH 00000489 002 OF 002


of all real estate transactions are done in cash, even those
involving hundreds of thousands of dollars or more, making it
easy for someone to claim to have bought a property for USD
100,000 and sold it for USD 1 million. Moreover, many
landowners choose not to register their land in Cambodia, as
unregistered land is common and registration requires the
payment of a 4% registration tax.


7. (SBU) Chan and Clayton also noted that lack of donor
coordination and follow up hampers the effectiveness of
foreign assistance designed to build Cambodia's capacity to
prevent and detect money laundering. Different donors have
drawn on different legal traditions in assisting with the
drafting of financial and criminal laws, leading to laws that
sometimes conflict or fail to fully address the issue.
Moreover, donors are quick to send Cambodian government
officials to conferences and training sessions about
financial regulations--the head of the Banking Supervision
Department of the National Bank travels one week a month,
they noted--but there is little on the ground follow up or
pressure from donors on participants to apply what they have
learned.

Prospects for an Anti-Money Laundering Bill Unclear
-------------- --------------


8. (SBU) Cambodia is the only country in ASEAN without a
money laundering bill; prospects for passage of a
long-delayed draft bill are unclear. Clayton and Chan
believe that if the legislation is not passed by May 15--the
deadline for any change in Cambodia's financial regulation to
be reflected in the APG assessment--it is unlikely that there
will be significant pressure to pass the legislation until
the next APG assessment several years from now. In contrast,
National Bank Deputy Governor Neav Chantana professed
optimism. She reported that the National Bank Governor had
met with the relevant National Assembly committee last week
to explain the importance of passing the bill promptly, and
Neav Chantana predicted that the bill would soon be submitted
to the plenary session and passed. (Note: Cambodia's
narcotics law already outlaws money laundering related to
drug trafficking. The draft anti-money laundering law merely
defines money laundering rather than criminalizing it.
Cambodian government officials told the APG/WB team that
outlawing other types of money laundering would have to be
done via changes to the criminal code. End Note.)

Comment
--------------


9. (SBU) The APG/WB assessment tracks with what banking
sector contacts routinely tell us: while many in the
financial sector are honest, Cambodia's financial regulatory
system is full of holes that could easily be exploited.
Reputable international banks--which are bound by strict
rules from their parent companies and, in some cases,
financial disclosure statements required by stock exchanges
where they are listed--are probably the least vulnerable of
the actors in Cambodia's financial services sector. However,
areas like casinos and real estate, which are not scrutinized
by a well-respected parent company, are likely routes for
would-be money launderers. It is unfortunate that the
assessment team did not investigate or meet with officials
from the Khmer/Canadian-owned Canadia Bank, one of Cambodia's
largest banks and widely alleged to have lax financial
monitoring systems. END COMMENT.
MUSSOMELI