SERBIA: 2008-2009 INCSR II ON MONEY LAUNDERING

UNCLAS BELGRADE 001201

SIPDIS
FOR INL, SCT, EEB, EUR/SCE, EUR/PGI
DEPT OF JUSTICE FOR AFMLS, OIA, OPDAT
TREASURY FOR FINCEN

E.O. 12958: N/A
TAGS: KCRM EFIN KTFN SNAR SR
SUBJECT: SERBIA: 2008-2009 INCSR II ON MONEY LAUNDERING

REF: State 103813

SUMMARY
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1. Reftel requested post update for Serbia on efforts to combat
money laundering and terrorist financing. Serbia is upholding its
international commitments to eliminate money laundering and
terrorist financing. END SUMMARY.

BEGIN INCSR II TEXT

Serbia: Not a Financial Center
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2. Serbia is not a regional financial center. At the crossroads of
Europe and on the major trade corridor known as the "Balkan Route,"
Serbia confronts narcotics trafficking, smuggling of persons, drugs,
weapons and pirated goods, money laundering, and other criminal
activities. Serbia continues to be a significant black market for
smuggled goods. Illegal proceeds are generated from drug
trafficking, corruption, tax evasion and organized crime, as well as
other types of crimes. Proceeds from illegal activities are
invested in all forms of real estate. Trade-based money laundering
(TBML),in the form of over- and under-invoicing, is commonly used
to launder money. There are reports that the purchase of some
private and state-owned companies was linked to money laundering
activity.


3. A significant volume of money flows to Cyprus, reportedly as
payment for goods and services. The records maintained by various
government entities vary significantly on the volume and value of
imports from Cyprus. According to Government of the Republic of
Serbia (GOS) officials, much of the difference is due to payments
made to accounts in Cyprus for goods, such as Russian oil, that
actually originate in a third jurisdiction. Banks in Macedonia,
Hungary, Switzerland, Austria and China have emerged as destinations
for laundered funds.

Banking Sector Largely Foreign Owned
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4. Serbia's banking sector is more than 80 percent foreign-owned.
There is no provision in the banking law that allows the
establishment of offshore banks, shell companies or trusts. Serbia
has three designated operating free trade zones, established to
attract investment by providing tax-free areas to companies
operating within them. These companies are subject to the same
supervision as other businesses in the country. There is no
evidence of alternative remittance systems operating in the country.
Nor is there evidence of financial institutions engaging in
currency transactions involving international narcotics trafficking
proceeds.

Anti-Money Laundering Law
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5. Serbia's definition of money laundering in the Penal Code aims
to conform to international standards. This legislation also gives
police and prosecutors more flexibility to pursue money laundering
charges. The penalty for money laundering is a maximum of 10 years
imprisonment. Under this law and attendant procedure, money
laundering falls into the serious crime category and permits the use
of Mutual Legal Assistance (MLA) procedures to obtain information
from abroad.


6. Under Serbia's anti-money laundering law (AMLL),entities must
report suspicious transactions in any amount to the FIU. The law
defines those sectors subject to reporting and record keeping
requirements, including attorneys, auditors, tax advisors and
accountants, currency exchanges, insurance companies, casinos,
securities brokers, dealers in high value goods, real estate
agencies, and travel agents, among those required to comply with the
AMLL provisions. The AMLL requires entities to collect certain
information and file currency transaction reports (CTRs) with the
financial intelligence unit (FIU) on all cash transactions exceeding
15,000 euros (approximately U.S. $19,000),or the dinar equivalent.
These entities must also retain records for five years. Financial
institutions improved their compliance, i.e., gathering and keeping
records on customers and transactions. The AMLL requires obligated
entities and individuals to monitor customers' accounts when they
suspect money laundering, in addition to reporting to the FIU. Safe
harbor provisions protect the entities with respect to their
cooperation with law enforcement. The flow of information to the
FIU has steadily increased, but not all entities are subject to
implementing bylaws. The AMLL also eliminates a previous provision
limiting prosecution to crimes committed within Serbian territory.

Law on Foreign Exchange
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7. The Law on Foreign Exchange Operations, adopted in 2006,
criminalizes the use of false or inflated invoices or documents to
conceal the illicit transfer of funds out of the country. Serbia
enacted this law in part to counter the perceived problem of
import-export fraud and TBML. The Foreign Currency Inspectorate,
part of the Ministry of Finance, is responsible for supervising
import/export companies for compliance. The law also requires
residents and nonresidents to declare to Customs authorities all
currency (foreign or dinars) and/or securities exceeding 5,000 euros
(approximately U.S. $6,500) transported across the border.

8. The National Bank of Serbia (NBS) has supervisory authority over
banks, currency exchanges, insurance and leasing companies. The NBS
has issued regulations requiring banks to have compliance and
know-your-customer (KYC) programs in place and to identify the
beneficial owners of new accounts. In June 2006, the NBS expanded
its customer identification and record keeping rules by adopting new
regulations mandating enhanced due diligence procedures for certain
high-risk customers and politically exposed persons. The NBS
developed similar regulations for insurance companies in 2006. The
Law on Banks includes a provision allowing the NBS to revoke a
bank's license for activities related to, among other things, money
laundering and terrorist financing, but the NBS has not yet used
this revocation authority. Although the legal framework is in place,
the NBS currently lacks the expertise needed for effective bank
supervision of money laundering, but is building these capacities
through training and staff development.


9. The Securities Commission (SC) supervises broker-dealers and
investment funds and monitors its obligors' compliance with the AML
Laws. The SC is developing regulations to implement this authority.
The Law on Investment Funds and the Law on Securities and Other
Financial Instruments Market provide the SC with the authority to
"examine" the source of investment capital during licensing
procedures.

Tax Administration
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10. Serbia's Tax Administration lacks the audit and investigative
capacity and resources to investigate adequately the large number of
suspicious transactions that are forwarded by Serbia's FIU. In
addition, current tax law sets a low threshold for auditing purposes
and has increased the burden on the Tax Administration. This has
created a situation where criminals can spend and invest illegal
proceeds freely with little fear of challenge by tax authorities or
other law enforcement agencies.

Financial Intelligence Unit in Place
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11. The Administration for the Prevention of Money Laundering
(APML) serves as Serbia's FIU, with the status of an administrative
body under the Ministry of Finance. APML has its own line-item
operating budget. The FIU has developed listings of suspicious
activity for banks, currency exchange offices, insurance companies,
securities brokers and leasing companies. APML also has the
authority to freeze transactions for 72 hours. The FIU signed
memoranda of understanding (MOU) on the exchange of information with
the NBS and Customs. The FIU authored Serbia's first National
Strategy on Combating Money Laundering and Terrorist Financing,
which the Government adopted in September 2008.

Recent Results
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12. From January 1, 2008, through November 05, 2008, the FIU
received 2,087 suspicious transaction reports (STRs). The majority
of the STRs received by the FIU were filed by commercial banks. In
2008, the FIU opened 31 cases. The public prosecutor's office
reports 66 persons suspected of money laundering, with 33 requests
for investigation and 27 issued and pending indictments.


13. In Serbia, it is difficult to convict a suspect of money
laundering without a conviction for the predicate crime. The most
common predicate crime is "abuse of office." To date, there have
been three convictions. In addition, courts are unwilling to accept
circumstantial evidence to support money laundering or tax evasion
charges. This hampers law enforcement and prosecutorial authorities
from effectively using the anti-money laundering laws. The
Suppression of Organized Crime Service (SOCS) of the Ministry of
Interior houses an Anti-Money Laundering Section to counter these
challenges and focus financial investigations. Prosecutors' offices
have assigned anti-money laundering liaison officers to ensure
information sharing with the FIU. In October 2008, Serbia passed
the Law on Asset Forfeiture which allows for asset sharing under
separate international agreements.

Interagency Working Group Established
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14. The GOS has established the Permanent Coordinating Group (PCG),
an interagency working group originally tasked with developing an
implementation plan for the recommendations from the Council of
Europe Select Committee of Experts on the Evaluation of Anti-Money
Laundering Measures' (MONEYVAL) first-round evaluation. Subgroups
have since worked to draft amendments to the AMLL that will bring
the country's laws into compliance with the European Union's Third
Directive on money laundering. The PCG and the working groups meet
intermittently as required for completing specific tasks. However,
the GOS still lacks consistent interagency coordination.


15. Under the law, the GOS can, upon conviction for an offense,
confiscate assets derived from criminal activity or suspected of
involvement in terrorist financing. The FIU enforces the United
Nations Security Council Resolution (UNSCR) 1267 provisions
regarding suspected terrorist lists. Although the FIU routinely
provides the UN list of suspected terrorist organizations to the
banking community, examinations for suspect accounts have revealed
no evidence of terrorist financing within the banking system. The
SOCS, the Special Anti-Terrorist Unit (SAJ),and Gendarmerie in the
Ministry of Interior are the law enforcement bodies responsible for
planning and conducting the most complex antiterrorism operations.
SOCS cooperates and shares information with its counterpart agencies
in countries bordering Serbia. Although Serbia has criminalized the
financing of terrorism - penalties include the freezing, seizing and
confiscation of assets of terrorists in accordance with UN Security
Council resolutions - it still lacks a legal basis, pending
enactment of draft anti-terrorism finance legislation. This draft
law on terrorist financing, now pending Parliamentary approval, will
apply all provisions of the AMLL to terrorist financing; require
reporting to the FIU of transactions suspected to be terrorist
financing; and will create mechanisms for freezing, seizing and
confiscating suspected terrorist assets based on UNSCR provisions.

Cooperation with Others
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16. Serbia has no laws governing its cooperation with other
governments related to narcotics, terrorism, or terrorist financing.
Bases for cooperation include participation in Interpol, bilateral
or regional cooperation agreements, and agreements concerning
international legal assistance. There are no laws governing the
sharing of confiscated assets with other countries.

17. Serbia does not have a mutual legal assistance arrangement with
the United States, but information exchange via a letter rogatory is
standard. The 1902 extradition treaty between the Republic of
Serbia and the United States remains in force. The treaty allows
the Serbian government to extradite non-Serbs to the United States.
The GOS has bilateral agreements on mutual legal assistance with 31
countries. As a member of MONEYVAL, Serbia will undergo a mutual
evaluation in 2009. The FIU is a member of the Egmont Group and
participates in information exchanges with counterpart FIUs
including FinCEN. APML has also signed information sharing
memoranda of understanding (MOUs) with eleven counterpart FIUs.

18. Serbia is a party to the 1988 UN Drug Convention, the UN
Convention against Corruption, and the UN Convention Against
Transnational Organized Crime. The GOS also is a party to all 12 UN
Conventions and protocols dealing with terrorism, including the UN
International Convention for the Suppression of the Financing of
Terrorism. Domestic implementation procedures, however, do not
provide the framework for full application of Convention
provisions.

Next Steps
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19. Serbia should continue to work toward eliminating the abuses of
office and the culture of corruption that enables money laundering
and financial crimes. The GOS should take action to realize and
implement the pending legislative initiatives necessary for Serbia
to comply fully with international standards. These include the
laws providing for the liability of legal persons and regulations
applying all requirements of the AMLL to cover nonbank financial
institutions. The GOS should enforce anti-money laundering
regulations pertaining to money service businesses and obligated
nonfinancial business and professions. Serbia should complete its
supervisory scheme and enact binding regulations for the securities
sectors. Serbia also needs to enact and implement legislation
needed to comply with UN Security Council resolutions regarding the
freezing, seizing and confiscation of suspected terrorist assets and
to require suspicions of terrorist financing to be reported to the
FIU. The National Bank and other supervisory bodies need to enhance
their knowledge and resources. On an operational level, law
enforcement needs audit and investigative capacity to investigate
the STRs that the FIU disseminates. Prosecutors and judges also need
a better understanding of money laundering and terrorist financing
to ensure successful prosecutions. Rather than address specific
tasks as an ad hoc group, the PCG should meet on a regular basis to
discuss issues and projects and work to improve interagency
coordination in such areas as information sharing, record keeping,
and statistics.

END INCSR II TEXT

Comment
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20. Serbia is upholding its international commitments to eliminate
money laundering and terrorist financing. Serbia continues to
strengthen its anti-money laundering and terrorist financing law
enforcement with the help of the U.S Department of Justice, which
provides training in organized crime investigation, prosecution, and
adjudication. Although key legislation is still needed, Serbia has
made progress, as evidenced by the adoption of the Law on Asset
Forfeiture. END COMMENT.

MUNTER