KAZAKHSTAN: 2008-2009 INCSR, PART II, FINANCIAL CRIMES

UNCLAS SECTION 01 OF 06 ASTANA 002447 STATE FOR INL/AAE, INL/C, SCA/CEN, EB/ESC/TFS; JUSTICE FOR AFMLS, OTA, AND OPDAT; TREASURY FOR OTA AND FINCEN SENSITIVE SIPDIS E.O. 12958: N/A TAGS: PGOV EFIN KCRM KCOR SNAR KZ SUBJECT: KAZAKHSTAN: 2008-2009 INCSR, PART II, FINANCIAL CRIMES AND MONEY LAUNDERING REF: STATE 138130 ASTANA 00002447 001.2 OF 006 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) In response to reftel, the text of Part II of the 2008-2009 International Narcotics Control Strategy Report (INCSR), Financial Crimes and Money Laundering for Kazakhstan follows. The INCSR currently covers only the first nine months of 2008. ¶3. (SBU) SUMMARY: Kazakhstan, with its developed and modern banking system, has become a financial center of Central Asia. Just as Kazakhstan's economic success and its geographic location provide an atmosphere for the development of trade and a banking system, it also presents challenges in the fight against organized crime, extremism, narco-business, and terrorist financing. In response, Kazakhstan is taking proactive measures against financial crimes, including drafting anti-money laundering legislation and establishing a Financial Intelligence Unit. Kazakhstan is now focused on enacting the long-delayed anti-money laundering legislation. In general, Kazakhstan remains a willing partner in the fight against narcotics and terrorism. END SUMMARY. GENERAL QUESTIONS REGIONAL FINANCIAL CENTER ¶4. (SBU) On June 5, 2006, the President signed the law establishing a Regional Financial Center in Almaty (RFCA). The RFCA is empowered to develop the Kazakhstani securities market, facilitate Kazakhstan's integration into international markets, attract investment, and introduce Kazakhstani securities into the global market. ¶5. (SBU) The RFCA is developing benefits for its members, including corporate income tax relief, free business registration, and visa support for non-residents of Kazakhstan. Members of RFCA must be officially registered companies holding a brokers' or dealers' license and having an office in Almaty. ¶6. (SBU) The Kazakhstan Stock Exchange (KASE) created a strategy for stock market development in July 2007 in cooperation with the Agency on Regulation and Supervision of Financial Market and Financial Organizations. According to this strategy, the RFCA and KASE would merge and provide RFCA privileges to all members of KASE; however, there is not yet a legal basis to create this union. ¶7. (SBU) RFCA's capitalization has grown by 60% over the last year, and as of January 1, 2008, is $68.6 billion. According to the official statistics of the Agency on Combating Financial Crime and Corruption (the financial police),there were no criminal cases of money laundering related to RFCA activities. ¶8. (SBU) During the first nine months of 2008, 285 criminal cases of fraudulent businesses were initiated, which is a 26% increase over the same period last year. Additionally, 115 cases of economic contraband (an 18.6% increase) and 743 cases of misappropriation of property and embezzlement (a 40% increase) were initiated. ¶9. (SBU) The Agency on Combating Economic Crimes and Corruption reported a 5.5% increase in cases this year for a total of 8,690. The number of serious and grave crimes increased to 1,547 cases. Serious crimes (with possible sentences of less than 12 years) increased to 1,547 cases and grave crimes (with possible sentences of more than 12 years) increased from 6 to 8 cases. ¶10. (SBU) Corruption cases increased by 12.8% (from 1,102 to 1,243). However, there was a 12.74% decrease, down to 411 cases, in the number of cases that appeared before the courts. This year there was also an increase in the rank of those tried. During the time period covered by this report, cases were initiated against 27 akims (i.e., mayors and governors),24 officers of the Ministry of Interior, 13 officials from the Committee on Judicial ASTANA 00002447 002.2 OF 006 Administration, 10 officials from the Ministry of Justice, 10 tax officials, and 10 judges. The Head of Committee of Control over State Purchases, the Head of Customs in Hargos (Chinese-Kazakhstani border),and the Deputy Head of the Almaty Tax Committee were involved in corruption schemes during 2008. The government estimates that $1.6 billion was lost to corruption (an increase from $400 million last year). Corrupt officials reimbursed the government $1.05 billion compared to $25 million last year. OFFSHORE FINANCIAL CENTERS ¶11. (SBU) Kazakhstan is not an offshore financial center. There are no offshore companies or banks in the country. Existing legislation does not favor offshore banks or offshore financial centers, but Kazakhstan actively interacts with offshore zones. From January to June 2008, Kazakhstani investment in the Virgin Islands was $512.8 million, accounting for 8.3% of total outgoing foreign investments. According to media reports, these investments are the results of transfer pricing schemes used in the mineral sector of Kazakhstan. FREE TRADE ZONES ¶12. (SBU) Following the signing of the Free Trade Zone Agreement by CIS countries in Moscow in April 1994, Kazakhstan signed bilateral Free Trade Zone agreements with Azerbaijan, Belarus, Georgia, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan. The main function of the Free Trade Zones is to ease the flow of goods and services between CIS countries, to stabilize internal economies, and to allow for trade on mutually advantageous terms. ¶13. (SBU) In 2000, Belarus, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan signed an agreement to establish the Eurasian Economic Union (EvrazES). Uzbekistan joined EvrazES in 2006 and dropped out in 2008. Armenia, Moldova, and Ukraine have observer status. EvrazES was created to facilitate regional economic integration and establish a customs union. There is no evidence yet of this free trade agreement being used to further money laundering or terrorism-financing. ¶14. (SBU) In 2006, China opened the Maikapchagai-Zimunai cross-border shopping area on the border with the East Kazakhstan Oblast (EKO). The EKO Department for Entrepreneurship and Industry announced that that the shopping center was officially opened on March 28, 2006 under an agreement signed by the EKO and the Altay District of the Xinjiang Uygur Autonomous Region of China on January 26, 2006. Kazakhstani citizens can visit the shopping area for one day without a visa and may bring back goods with a total value of up $1,000 duty-free and weighing less than 50 kilos. Kazakhstani merchants may import goods valued at less than 50,000 tenge (approximately $400) to the marketplace duty-free or 80,000 tenge (approximately $650) at a reduced customs-rate. If the value of goods is more than 80,000 tenge, they are subject to all Chinese taxes and duties. ¶15. (SBU) In July 2007, according to a 2005 agreement, China started construction of the Khorgos International Trade Center on the Kazakhstani border. This center was established to promote trade, economic, and investment cooperation. Citizens of both countries have visa-free access to the center for up to 30 days. The simplified customs and border procedures are expected to improve the economies on both sides of the border. In May 2007, the Almaty Oblast Police Department signed a protocol with the Xinjiang Uygur Autonomous Region of China providing for cooperation to combat illegal migration, drug trafficking, and terrorism, as well as allowing for the exchange of information. LAW AND REGULATIONS TO PREVENT MONEY LAUNDERING AND FINANCING TERRORISM ¶16. (SBU) Kazakhstan previously ratified the 1988 UN Drug Convention, the UN Convention Against Transnational Crime, and the ASTANA 00002447 003.2 OF 006 UN International Convention for the Suppression of the Financing of Terrorism. Kazakhstan is also a signatory to the Central Asian Agreement on the Joint Fight Against Terrorism, Political and Religious Extremism, Transnational Organized Crime and Illicit Drug Trafficking, which was signed in April 2000 by Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. In 2008, Kazakhstan ratified the UN Conventions Against Corruption in May and the UN Convention Against Transnational Organized Crimes in July. ¶17. (SBU) The newly-created Committee on Financial Monitoring (Kazakhstan's financial intelligence unit (FIU)) is developing a draft to ratify the CIS agreement on anti-legalization of illegal incomes and terrorist financing signed in Dushanbe in October 2007. Kazakhstan continues its work to join the Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds from Crime signed in Strasbourg on November 8, 1990. Kazakhstan must first receive approval from all EU members to join the Convention. ¶18. (SBU) Money laundering is a crime in Kazakhstan under Article 193 of the Criminal Code. The definition of money laundering, however, is narrow and the sentencing structure is relatively light (a maximum of three years imprisonment, which can be increased to five years for multiple offenses). A further limit to the effectiveness of the law is that bank records may not be examined until after a criminal case has been initiated. The draft Anti-Money Laundering and Countering Financing of Terrorism legislation (AML/CFT) would require banks and other financial organizations to report suspicious transactions to the Committee on Financial Monitoring for analysis. ¶19. (SBU) During the first nine months of 2008, 51 cases of money laundering were in process. Twenty-one of these cases were initiated in 2008 versus the 54 cases initiated in 2007. Of the 2008 caseload, 22 cases were forwarded to the courts (a decrease from 41 cases last year) and there were 23 convictions in 2008, compared with eight in 2007. The "Mama Rosa" case, which involved prostitution, a corrupt police official, and money laundering, was widely reported in the media. Mama Rosa (Ms. Kodonidi) was sentenced to six years in prison for laundering money earned by prostitutes and for creating an organized crime group. In addition to the prison term, the court ordered $3 million to be confiscated. Kodonidi appealed and a local panel of judges overturned the confiscation of the property. Due to the obvious lack of basis for the decision, prosecutors filed an appeal of the decision and the original court's decision was upheld. ¶20. (SBU) Kazakhstan is in the final stages of adopting an AML/CFT law and establishing an FIU. In his initiative against corruption, President Nazarbayev made the adoption of AML/CFT legislation a high priority. Initially, the Procurator General's Office took the lead on drafting the legislation; the Ministry of Finance later took over this role. The law is currently in the lower chamber of Parliament and is expected to move to the Senate (upper chamber) in December ¶2008. If the law is passed in early 2009, it will go into effect later that year. ¶21. (SBU) The Committee on Financial Monitoring (FIU) was established within the Ministry of Finance. The Chairman of the Committee was appointed on October 1, 2008. Because the FIU is not yet fully staffed, it could lose some of the $1.7 million included in its 2008 budget. The Committee is initially expected to be staffed by 90 people - 60 in Astana and 30 in Almaty. The staffing pattern will grow and change with the development of the Committee. ¶22. (SBU) In 2006, Parliament postponed consideration of the draft legislation until the completion of the property legalization amnesty. Under the terms of the amnesty legislation, citizens seeking to legalize property were required to pay a fee in the amount of 10% of the property's value. This rule did not apply to residential homeowners, whose property was legalized at no cost. The legalization process was concluded on August 1, 2007. ASTANA 00002447 004.2 OF 006 ¶23. (SBU) According to Ministry of Finance estimates, $590 million in taxes owed was not received during the first half of 2008. Of that amount, $390 million is believed to have been laundered. According to media reports, the majority of the losses are due to the April 2007 law on gambling, which allows gambling only in the cities of Shuchinsk and Kapshagai and is believed to have forced casinos in other cities underground. Under the law, all casinos are regulated by the Committee on Industry and Tourism. Some video gambling establishments have argued that they are exempt from the law, which allows gambling with no monetary prizes. The establishments normally provide telephone cards as prizes and an individual outside of the establishment exchanges the cards for cash. The situation is further complicated by the President's February 2008 moratorium on the inspection of small and medium businesses. FINANCIAL SECTOR ¶24. (SBU) A Presidential Decree of February 25, 2005 re-organized the Agency on Combating Economic Crimes and Corruption into a separate governmental agency reporting directly to the President. Currently, the Agency on Combating Economic Crimes and Corruption, the Prosecutor General's Office, and the Agency for the Regulation and Inspection of the Financial Market and Financial Organizations are authorized to supervise all aspects of financial institutions. In the future, the supervision and examination of financial institutions for compliance with AML/CFT laws and regulations will be the responsibility of the Committee on Financial Monitoring. ¶25. (SBU) According to the 2005 Law on Currency Regulation and Currency Control, banks and other financial institutions are required to verify and record the identity of customers engaged in currency transactions. Banks should refuse to conduct a transaction if legally-required documents are not provided. If violations occur, the National Bank can suspend an institution's license. In September 2008, the Agency on Regulation and Supervision of Financial Market and Financial Organizations (AFN) issued three written warnings for violations of banking legislation. As of October 1, 2008, seven banks were in the process of compulsory liquidation for violation of banking legislation. In total there are 36 active banks in Kazakhstan with total assets of $105.04 billion. The Agency on Combating Financial Crime and Corruption reports that during the first nine months of 2008 there were 123 cases against banks (a 22% increase from last year). Of those cases, 64 were for the illegal receipt of credit and its improper use (56 cases last year),51 cases of illegal use of funds (28 cases last year),five cases of illegal bank activity (two cases last year),and three cases of knowingly submitting false information about banking operations (15 cases last year). ¶26. (SBU) The 2005 law also requires that the passport information of a non-resident be filed in accordance with National Bank rules if a non-resident enters into a contract for an amount exceeding $10,000. ¶27. (SBU) The AFN, according to a 2005 regulation, requires the maintenance of adequate records to reconstruct significant transactions at financial institutions. Commercial banks, for example, are required to keep records for five years on the opening of currency accounts and investment activities, deals made through export and import operations, and payments made to foreign and international banks and organizations. ¶28. (SBU) Statutory requirements for limiting and monitoring the international transportation of currency and monetary instruments, as well as all cross-border currency reporting requirements, are governed by the April 2001 Rules on Currency Transactions and the May 2004 Rules on Declaring Foreign and National Currency by Individuals Entering and Leaving the Republic of Kazakhstan. A Kazakhstani resident is required to fill out a declaration form if he or she is leaving the country with more than $3,000 equivalent in foreign currency and must provide supporting documents verifying the source of funds if taking more than $10,000 out of the country. Non-residents are also allowed a maximum of $3,000 without submitting a declaration form. The amount of national currency that may be taken out of the country by residents or non-residents is ASTANA 00002447 005.2 OF 006 unlimited and there are no reporting requirements. There are no limitations or reporting requirements on the amount of national or foreign currency being transported into the country by either residents or non-residents. ¶29. (SBU) The AFN requires all banks to develop risk management and internal control systems in their compliance departments. The AFN is also drafting decree that will apply to banking and insurance organizations, professional participants of the stock market, pension funds, and joint-stock investment funds, setting stricter rules for doing business in 45 off-shore zones. ¶30. (SBU) Kazakhstan provides for the protection of individuals who are participating in the criminal process, such as witnesses, suspects, accused individuals, and members of their families and close relatives, during the investigation of the criminal case. Special departments in law enforcement agencies are responsible for the safety of witnesses and victims. TERRORIST FINANCING ¶31. (SBU) Kazakhstan plays an active role in the region in combating terrorism. Kazakhstan is implementing United Nations Security Council Resolution 1373 and all related resolutions on combating terrorism. According to the Committee of National Security (KNB),the activities of 14 terrorist organizations, including Al Qaeda and the Taliban, are prohibited in Kazakhstan. The Central Asian branch of the Zhamaat Mojakhed organization is also prohibited in Kazakhstan and was included in the consolidated list of terrorist organizations by the UN Security Council. ¶32. (SBU) Financing of extremism and terrorist activity is criminalized by Article 233-3 of the Criminal Code. The penalty for terrorism financing is up to five years of imprisonment for the first offense and eight years for repeat offenses. The Antiterrorism Center of the KNB is responsible for combating all forms of terrorism. ¶33. (SBU) During 2007-2008, the KNB, in cooperation with Kyrgyzstan, Uzbekistan, and Tajikistan, arrested the leader and financial director of the Khizb-ut-Tahir organization in Kazakhstan. Regional leaders of the organization in Astana, Almaty, Pavlodar, Karaganda, Kentau, and Ekibastuz called on members to voluntarily leave the organization. CASH SMUGGLING ¶34. (SBU) Article 209 of the Criminal Code stipulates that the trafficking of contraband (including currency) through the borders of Kazakhstan with falsified documentation may result in the confiscation of the property, financial penalties, and/or imprisonment of up to three years. The severity of the punishment is based on several factors, including whether the action is a repeat offense or if it is connected to the activities of an organized crime group. ASSET FORFEITURE AND SEIZURE LEGISLATION ¶35. (SBU) Criminal and civil forfeitures are defined by the Criminal and Civil Codes. Article 31 of the Law on Combating Narcotics, Psychotropic Substances, and Precursors stipulates that narcotics or psychotropic substances and precursors, as well as the means of producing illegal narcotic substances, including property and finances, are subject to seizure by the government. INTERNATIONAL COOPERATION ¶36. (SBU) Kazakhstan is an active member of the Eurasian Group (EAG) on money laundering established in October 2004. Russia, Belarus, Uzbekistan, Kyrgyzstan, Tajikistan, and China are also members. In October 2007, Kazakhstan hosted an EAG working group meeting on typologies of money laundering and held consultations with the private sector on anti-money laundering efforts. ¶37. (SBU) The United States continues to assist Kazakhstan's anti-money laundering and crime efforts through the Embassy's Office of International Narcotics and Law Enforcement (INL). ASTANA 00002447 006.2 OF 006 ¶38. (SBU) In March 2005, INL funded a computer laboratory at the Financial Police Academy in Astana. The Academy specializes in training financial police and customs officers in the skills required to recognize and investigate money laundering as well as combating corruption and other economic crimes. The computer laboratory is an important resource for future INL training programs as well as for the Academy itself. Enhancement of the Financial Police Academy provides a long-term impact on Kazakhstan's ability to effectively police its financial system and to control money laundering related to terrorism, narcotics trafficking, tax evasion, and corrupt activities by government officials. ¶39. (SBU) In May and September 2005, INL, in cooperation with the Prosecutor General's Office (PGO),held a series of four seminars at PGO offices in both Almaty and Astana on the draft AML/CFT legislation and the establishment of an FIU. The goal of these seminars was to help Kazakhstan develop the regulatory structure needed to enforce the provisions of the legislation, to prepare Kazakhstan to enter various organizations related to the Financial Action Task Force on Money Laundering (FATF),to train commercial banks to meet AML/CFT requirements, and to help Kazakhstan establish an effective FIU. The lead training agency was the U.S. Department of Treasury's Office of Technical Assistance (OTA). ¶40. (SBU) In November 2007, under the auspices of INL, personnel from OTA trained financial police officers and representatives of the PGO in financial crime detection techniques. This course was in addition to four earlier courses in investigative techniques. This training program will enhance the ability of law enforcement officers in combating financial crimes. ¶41. (SBU) INL provided equipment and trained the Statistics Division of the PGO, which targets drug trafficking organizations operating in Kazakhstan. Equipment was provided as part of a larger project aimed at improving the collection of criminal statistics in Kazakhstan, especially those related to Kazakhstan's efforts to combat narcotics trafficking and anti-money laundering activities. ¶42. (SBU) In November 2008, INL provided for the participation of two experts from the newly-created FIU in a training program on the analysis of financial techniques arranged by OTA in Bishkek, Kyrgyzstan. The Kazakhstani experts learned basic techniques to analyze suspicious transaction reports and made contact with members of the FIUs of Kyrgyzstan and Russia. INL will continue to work with the FIU and is in close contact with its director regarding training opportunities, technical assistance, and study tours in the United States. ¶43. (SBU) Kazakhstan is a willing partner in the fight against terrorism and it is making major strides to identify potential money laundering activities connected to international terrorism and narcotics trafficking. When adopted and implemented, the draft AML/CFT legislation and its FIU will help Kazakhstan become an active member in the Egmont Group. HOAGLAND