(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