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
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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
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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
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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