(S/NF) ITALY: RESPONSE TO INFORMATION REQUEST

S E C R E T ROME 002275

SIPDIS

NOFORN
SIPDIS

ISN, EEB, NEA, TREASURY

E.O. 12958: DECL: 10/30/2117
TAGS: KNNP PREL PARM EFIN ETTC
SUBJECT: (S/NF) ITALY: RESPONSE TO INFORMATION REQUEST
REGARDING TOOLS FOR POSSIBLE USE AGAINST IRANIAN FINANCIAL
INSTITUTIONS

REF: A. SECSTATE 149523

B. ROME 600

C. ROME 628

D. ROME 1281

E. SECSTATE 132904

F. ROME 2095

G. SECSTATE 149648

Classified By: Econ Counselor William R. Meara for Reasons
1.4 (b) and (d)


1. (S/NF) Summary: The Bank of Italy regulates banking
activity in Italy and sends inspectors to banks as needed.
Due to Italy's long-history of combating Mafia-related money
laundering activities, Italy maintains a flexible and
well-developed bank monitoring system. In extreme cases, the
BOI can place a bank under "Special Administration" and take
over banking activity. The Bank Sepah case (Refs B, C and D)
is such an example. Our working-level contacts are helpful;
they stress to us that actions taken against the Iranian
financial system are more likely to have GOI support if they
are carried out in a transparent, step-by-step approach, and
are based on UNSCR 1747 or other international mechanisms.
End summary.


2. (S/NF) The following are Embassy Rome's answers to the ref
A request for information on Bank regulation:


A. Which governmental agencies regulates banks? What actions
can the government
take against banks, especially in regard to penalizing
activities such as
proliferation or terrorism financing and money laundering?

The Bank of Italy (BOI) regulates all banks in Italy. The
governor of the BOI is appointed by the President of the
Republic and must report to Parliament once every year. The
BOI can place a bank under "Provisional Administration" for
60 days for investigation. To continue its oversight,
inspectors from the BOI must determine that extraordinary
irregularities or losses have occurred. Once such a finding
is made, the BOI can then place the bank under "Special
Administration."

"Special Administration" does not require the bank to be shut
down. The BOI has final authority to enforce Italian banking
law when a bank is in special administration status. In
June, 2007 the Bank of Italy placed Bank Sepah under "Special
Administration" (refs B, C, and D). The Bank of Italy has
the power to seize assets, but this action must be taken in
coordination with the Ministry of Finance and the Financial
Security Committee.

The Bank of Italy also maintains the Italian Foreign-Exchange
Office (Ufficio Italiano dei Cambi, or UIC). All financial
institutions (including, but not limited to: banks, exchange
houses, debt collection agencies, and art galleries) must
report all foreign-exchange transactions over 12,500 Euros to
the UIC. The UIC may provisionally suspend for 48 hours
transactions suspected of involving money laundering or
terrorist financing. The courts must then act to freeze or
seize the assets.


B. Can host government revoke the operating licenses for
foreign
financial institutions? Which government agency cando so,
and
on what grounds? What is the legal standard for revoking a
license?

Yes. The Bank of Italy has the power to revoke operating
licenses for both foreign and national banks in Italy. This
step usually occurs after the BOI has placed an organization
under "Special Administration." If the BOI investigates a
bank and finds extraordinary irregularities and losses, BOI
officials then must ask the Ministry of Finance to issue a
decree to close the bank. Historically, the Bank of Italy
has used this measure in cases where the Mafia controlled a
bank.


C. Does the host government have any way to mandate that
banks


close correspondent accounts with Iranian banks, on
proliferation
or other grounds?

Yes. If the Bank of Italy has evidence of illegal activity,
they can order correspondent accounts closed. In September,
ECONCOUNS raised the issue of Bank Markazi's correspondent
account at UBAE Arab Italian Bank in Rome with officials the
Ministry of Finance (Ref E). Finance officials promised to
send inspectors to the bank and if necessary, place the bank
under Special Administration (Ref F). In a follow-up
conversation on October 26, Roberto Ciciani, head of the
Financial Crimes Prevention Unit at the Ministry of Finance
told Econoff that they are closely monitoring the activity of
the UBAE Arab Italian Bank. To date, he said, they have
found no illegal activity involving the account in question.


D. Other than revoking operating licenses, are there other
host government
legal mechanisms which could be used to cut off Iran-related
financial
transactions? For example, can the host government monitor
or prevent
Iranian banks from engaging directly or indirectly in
transactions
denominated in the host nation currency?

Yes. As discussed above, the special administrative
procedure can be used to restrict banking activities. For
instance, while under special administration, BOI officials
are allowing Bank Sepah employees to be paid, but monitor all
other financial activities.


E. Are there ways other than legal authorities in which the
host government
can induce or encourage financialinstitutions to cut off
Iran-related
financial ties? Can the regulating authority issue a
financial
advisory regarding the proliferation, terrorism finance, or
money-laundering activities of Iran's state-owned banks?

After September 11, the Government of Italy created the
Financial Security Committee (FSC) to coordinate efforts to
track and combat terrorist financing. The FSC is chaired by
the Secretary General of the Finance Ministry and has
representatives from the BOI; from Ministries of Finance,
Foreign Affairs, Interior, Justice; and law enforcement and
intelligence agencies. The FSC issues advisories for both
1267 and 1737 designated entities. The FSC has also issued
advisories as a result of FATF recommendations.


F. Is there any other information we should be aware of to
shape this effort?

At the working-level, we enjoy a cooperative relationship on
issues related to UNSCR 1747 concerns. BOI officials have
hinted to us that violations of UNSCR 1747 could be
characterized as an "extraordinary irregularity," and might
be used in the future to justify additional actions. At the
October FATF plenary meetings in Paris, Italian Ministry of
Finance officials proposed compromise language and assisted
in negotiating the consensus that enabled FATF to issue the
strong public statement of concern (Ref G). Ciciani, who
attended the Paris meetings, told Econoff that the Italian
Government supported FATF actions against Iran because FATF
followed a transparent, step-by-step approach that provided
specific guidelines on activities that will be restricted.
Ciciani encouraged the US to continue this approach.

SPOGLI