WORKING WITH ITALY TO BETTER COMBAT FINANCIAL CRIME

UNCLAS SECTION 01 OF 02 ROME 000703 SIPDIS SENSITIVE SIPDIS STATE FOR LONNI REASOR TREASURY FOR BEN DAVIS E.O. 12958: N/A TAGS: EFIN ETTC KTFN PREL PTER PGOV IT SUBJECT: WORKING WITH ITALY TO BETTER COMBAT FINANCIAL CRIME REF: A. ROME 384 ¶B. 06 ROME 3172 SUMMARY & BACKGROUND -------------- ¶1. (SBU) Italy has made significant strides over the past several decades in investigating and combating financial crimes, such as terrorism finance and money laundering. The government's highly public fights against the Sicilian Cosa Nostra mafia and the "Tangentopoli" ("Bribery-gate") scandal in Milan in the 1980s and 90s also raised public awareness of the economic and political consequences of financial crime. However, challenges still remain. The large size Italy's underground economy creates ample space for money launderers and terrorist financiers to operate. Resources within the Italian law enforcement and intelligence communities are tight, due to national budget constraints. And Italian law enforcement agencies do not regularly share information with each other. Post has been engaged with our GOI counterparts in improving law enforcement tactics and the prosecution of financial crimes, and will continue to meet with GOI officials to encourage greater cooperation. End summary and background. CHALLENGES -------------- ¶2. (U) The size and scope of Italy's underground economy is a significant challenge for Italian law enforcement in preventing and combating financial crimes. Economic analysts estimate the size of Italy's underground economy to range up to 27 percent of GDP. Much of the underground economy consists of routine tax evasion by small- and medium-sized entrepeneurs. However, money launderers and terrorism financiers almost certainly use the underground economy to operate through holding companies, real estate investments, and illegal money transfer operators (e.g., hawalas). Recent reporting in Italy's leading daily, "Corriere della Sera," highlighted the role of illegal money transfer operators in Italy's underground economy. It focused on an investigation by the Guardia di Finanza, made public March 6, which described illegal money transfer operations in Italy, with over 400 money transfer agencies and 280,000 "irregular transactions." According to the report, a total of 80 million euro worth of unreported financial transactions were carried out just by these transfer agencies. ¶3. (SBU) A second challenge to combating financial crime is the lack of an aggressive legal regime to prosecute financial crime. For example, Italian law currently requires that any amount over 12,500 euro (approx. 16,000 USD) brought into Italy must be declared (ref A). As a penalty for not declaring cash, a fine of 40 percent of the undeclared amount over 12,500 euro is imposed. There is no threat of jail time for cash smuggling, as in the U.S., which could be used as leverage to encourage the cash smuggler to work as an informant to investigate the source of the cash. (Comment: Even if there existed the possibility for jail time, Italy's legal system differs significantly from the U.S. in the use of informants. The use of informants in Italy is tightly regulated under the "Pentiti" law, most recently amended in ¶2001. Italian investigators do not have the same discretion of U.S. law enforcement in using informants. End comment.) Additionally, even when strong penalties may exist against a given financial crime, court cases in Italy last 7-8 years on average. ¶4. (SBU) A third challenge is the lack of awareness about financial crimes and due diligence (a.k.a. "Know Your Customer," or KYC) among small- and medium-enterprises. Econoffs met in early February with consultants at PricewaterhouseCoopers Advisory SrL in Milan to discuss anti-money laundering and terrorism finance compliance at Italian banks and firms. They reported that, while large Italian banks and firms have in place effective controls to ensure due diligence, small- and medium-sized banks, firms, and insurance companies in Italy often lack adequate compliance measures. Additionally, they often claim to be unaware of Italian law on compliance -- or, if they know the law, decide that the cost of complying is too high. ROME 00000703 002 OF 002 ¶5. (SBU) A fourth challenge is a lack of information sharing between law enforcement agencies. This problem is particularly acute between the "big three" national security forces -- the Polizia di Stato, Carabinieri, and the Guardia di Finanza. Information sharing is also a challenge for various Italian government agencies that make up the Financial Security Committee (FSC). (Note: The FSC is an interagency body that coordinates Italy's efforts to prevent and combat terrorism financing and financial crime.) This is sometimes due to bureaucratic inefficiencies; sometimes to bureaucratic rivalries. U.S. law enforcement officials also note a lack of interagency task forces in Italy to combat and investigate financial crimes. ¶6. (SBU) A final challenge facing Italian law enforcement is national budget constraints. Given Italy's anemic economic growth rate since 2000, government revenue has suffered and funds available for law enforcement and intelligence are tight. In the absence of an asset forfeiture law to help fund operations and investigations, Italian law enforcement is heavily dependent on government spending. WHAT WE ARE DOING & STEPS FORWARD -------------- ¶7. (SBU) Post is currently organizing a Voluntary Visit (VOLVIS) program to the U.S. for five mid-level GOI contacts (from four ministries) who specialize in anti-money laundering and terrorism finance to learn more about U.S. law enforcement efforts and interagency cooperation. Other USG agencies, such as the FBI and Secret Service, organize regular capacity-building training exercises and seminars for their Italian law enforcement counterparts. We will continue to discuss with our law enforcement counterparts ways the U.S. could better assist Italy in moving forward with tougher penalties and more rigorous prosecutions of financial crimes. Additionally, we will hold regular meetings with our Italian colleagues to discuss new and innovative ways for law enforcement officials to cooperate and share information. SPOGLI