MORE COORDINATION AGAINST MONEY LAUNDERING BUT

C O N F I D E N T I A L SECTION 01 OF 02 ZAGREB 000243 SIPDIS SIPDIS E.O. 12958: DECL: 03/07/2017 TAGS: ECON EFIN KCOR KTFN HR SUBJECT: MORE COORDINATION AGAINST MONEY LAUNDERING BUT PROBLEMS REMAIN Classified By: Econ Officer Nicholas Berliner. Reasons 1.4 b and d. ¶1. (C) Summary: The recent establishment of an inter-ministerial working group on money laundering is a positive development in Croatia's weak institutional framework for tackling economic crime. The aim of the new working group, comprised of eleven different ministries, agencies and offices is to encourage information sharing and collaboration on money laundering and terrorist finance. Although a welcome development, lack of bureaucratic depth and Croatia's sclerotic legal system remain the greatest obstacles to more effective enforcement and prosecution of money laundering and other economic crime. End Summary. ¶2. (C) In a March 1 meeting with EconOff, Deputy Director of Croatia's Financial Intelligence Unit (FIU) Damir Bolta shared his views on Croatia's efforts to fight money laundering. Bolta, who is also part of the Croatian EU negotiating team for these issues, said Croatia had been criticized by Brussels on this front, resulting in the benchmarking of its negotiations on the Free Movement of Capital. As part of its effort to address these deficiencies, the GOC established an inter-ministerial working group (WG) on money laundering and terrorist finance. The WG includes representatives from the Ministry of Justice, State's Attorney's Office, Ministry of Interior, Ministry of Finance (FIU, Customs, Tax, Foreign Exchange and Financial Police),the Financial Services Regulator, the Croatian National Bank and the Intelligence Services. The Group's mandate, in addition to information sharing, includes making recommendations on legislative changes. ¶3. (C) A good part of the difficulty Croatia has in combating money laundering stems from its troubled and thoroughly Continental legal system. The FIU serves strictly as an analytical body, with no authority to initiate investigations of its own accord. Investigation is the domain of the police (Ministry of Interior),who have limited capacity to unravel complex financial transactions. The newly-reestablished Financial Police in the Ministry of Finance act only as the investigative arm of the tax authorities and do not have proper police powers. Cases that are brought go from the police to the state's attorney and then to an investigative judge before possibly coming to trial. 
¶4. (C) Croatia's framework for asset seizure and forfeiture is severely circumscribed by laws requiring that assets be directly linked to specific crimes. A recent amendment allowing seizure of assets related to organized crime took a small step in the direction of loosening this burden of proof, but in most cases authorities remain frustrated by the inability to connect assets to specific crimes (Note: Mission, through the ICITAP Program, is organizing training on asset seizure for prosecutors and police). Bolta noted ironically that defendants in some cases "explain" their wealth as the result of crimes committed abroad or beyond the statute of limitations, leaving the police with a dead end. ¶5. (C) The lack of provisions in Croatia's tax code enabling the state to "tax" illegal income precludes prosecuting money laundering and other economic crime under tax evasion statutes. Although U.S. and other experts have suggested that Croatia adopt such a law, the notion of taxing illegal income meets resistance among a large segment of the legal community here that feels that such a change would be tantamount to condoning illegal activity. ¶6. (C) Although the volume of electronic transactions continues to grow in Croatia, cash still plays a very large role in a country where some still hold to a historically-based mistrust of the banks. Bolta said he does not believe that Croatia has a problem with the cross-border transit of large amounts of un-declared cash, but that it remains the instrument of choice for domestic criminals. He noted a proposal to require transactions over a specific amount to be conducted only by bank transfers as one way of limiting the ability of criminals to use cash to mask their activities. However, given the cultural attachment to cash, he deemed this unlikely to gain traction. ¶7. (C) A final limiting factor for Croatia's efforts to combat money laundering is the fact that the state administration cannot attract and keep talented staff. Bolta noted that salaries in the FIU are among the lowest in the Ministry of Finance and lower than those of police officers. Although its staffing pattern calls for 22 positions, the FIU has never been given a budget for over 18. He said the Financial Police are also getting off to a slow start, with few positions filled one year after their re-establishment. The future of the FIU itself is the subject of a tug of war between the Ministry of Finance and the Ministry of Interior. ZAGREB 00000243 002 OF 002 The Ministry of Interior and the State's Attorney believe that bringing the FIU closer to the police would enhance its effectiveness since it could work directly on investigations. However, the FIU also needs to maintain good relations with the financial sector, which some fear could be hampered were the office to become part of the police. BRADTKE