COSTA RICA INCSR REPORT 2008-2009 PART II, MONEY LAUNDERING

UNCLAS SAN JOSE 000930 SIPDIS DEPT FOR INL AND WHA/CEN, SCT, AND EEB JUSTICE FOR OIA, AFMLS, OPDAT, NDDS TREASURY FOR FINCEN DEA FOR OILS AND OFFICE OF DIVERSION CONTROL E.O. 12958: N/A TAGS: SNAR KCRM KTFN CS SUBJECT: COSTA RICA INCSR REPORT 2008-2009 PART II, MONEY LAUNDERING AND FINANCIAL CRIMES REF: STATE 103810 ¶1. (U) The text of Costa Rica's 2008-2009 INCSR Part II is below. POC at Post is Robert Andrew. Costa Rica Although Costa Rica is not a major regional financial center, it remains vulnerable to money laundering and other financial crimes. Narcotics trafficking (mainly cocaine) continues to be a primary motive for money laundering, but fraud, trafficking in persons, arms trafficking, corruption, and the presence of Internet gaming companies all contribute to money laundering activity. While local criminals are active, the majority of criminal proceeds laundered derive primarily from foreign criminal activity. Reforms in 2002 to the Costa Rican counternarcotics law expanded the scope of anti-money laundering regulations, but also, unintentionally, created an opportunity to launder funds by eliminating the government's licensing and supervision of casinos, jewelers, realtors, attorneys, cash couriers, and other nonbank financial institutions. While these loopholes have not yet been closed, they should be addressed as part of a bill on terrorist financing and money laundering that is expected to pass in late 2008 or early 2009. Although terrorist financing is not yet a crime in Costa Rica, according to the Government of Costa Rica (GOCR) there is some evidence of FARC money laundering operations here. In a high-profile case in March 2008, a prominent couple from the Costa Rican academic community was caught with a safe containing $480,000 in FARC money. They were not arrested and have not been charged. The couple was also involved in a real estate transaction on behalf of a prominent FARC leader, which to date has not been investigated. Bank fraud, especially via the Internet, appears to be on the rise, though there has not been a rise in counterfeit currency. Gambling is legal in Costa Rica, and there is no requirement that the currency used in Internet gaming operations be transferred to Costa Rica. There are well over 250 sports-book companies registered to operate in Costa Rica. According to the GOCR, there is a black market for smuggled goods in �A; Costa Rica, but the size is not known. There is no particular evidence that it is being funded by narcotics or other illicit proceeds. Costa Rica is not considered an offshore financial center. While the formal banking industry in Costa Rica is tightly regulated, the offshore banking sector, which offers banking, corporate and trust formation services, remains a minor area of concern. Foreign- domiciled offshore banks can only conduct transactions under a service contract with a domestic bank, and they do not engage directly in financial operations in Costa Rica. They must also have a license to operate in their country of origin. Furthermore, they must comply with Article 146 of the Costa Rican Central Bank's Organic Law, which requires offshore banks to have assets of at least USD 3 million, a physical presence in Costa Rica, and be subject to supervision by the banking authorities of their registered country. Shell banks are not allowed in Costa Rica and regulated institutions are forbidden from having any direct or indirect relationships with institutions that may be described as shell banks or fictitious banks. Bearer shares are not permitted in Costa Rica. Currently, six offshore banks maintain correspondent operations in Costa Rica: three from The Bahamas and three from Panama. The GOCR has supervision agreements with its counterparts in both countries, permitting the review of correspondent banking operations. However, these counterpart regulatory authorities occasionally interpret the agreements in ways that limit review by Costa Rican officials. In 2005, the Attorney General ruled that the Superintendent General of Financial Entities (SUGEF) lacked authority to regulate offshore operations due to an apparent contradiction between the 1995 Organic Law of the Costa Rican Central Bank and Law 8204, the primary anti- laundering legislation (described below). However, there is a MOU between Costa Rica and Panama and the Bahamas to allow easy information exchanges. Draft legislation to correct the contradiction and reassert the SUGEF's regulatory power was submitted to the national assembly for consideration in 2008. Addition actions by SUGEF should decrease the number of offshore banks in the next year. The GOCR reports that Costa Rica is primarily used as a bridge to send funds to and from other jurisdictions using, in many cases, companies or established banks in offshore financial centers. Alternative remittance systems exist in Costa Rica, mainly as a result of Costa Rican immigration to the United States, or Nicaraguans to Costa Rica. However, there is no confirmation that these remittance systems are used for money laundering. There are 28 free trade zones (FTZs) within Costa Rica, used by approximately 250 companies. The Promotora del Comercio Exterior de Costa Rica (PROCOMER) manages the FTZ regime and has responsibility for registering all qualifying companies. PROCOMER's qualification process consists of conducting due diligence on a candidate company's finances and assessing the total cost of ownership. PROCOMER annually audits all of the firms within the FTZ regime and touts its system of tight controls. The four major types of firms operating under Costa Rica's FTZ regime are manufacturing, professional services, trading, and administrative organizations. PROCOMER reports that there has been no evidence of money laundering activity in the FTZs in 2008. In 2002, the GOCR enacted Law 8204. Law 8204 criminalizes the laundering of proceeds from all serious crimes (not only drug-related money laundering),which are defined as crimes carrying a sentence of four years or more. Law 8204 obligates financial institutions and other businesses to identify their clients, report currency transactions over U.S. $10,000 and suspicious transactions to the financial intelligence unit (FIU),known in Costa Rica as the Unidad de Analisis Financiero (UAF). Law 8204 also requires that financial records be retained for at least five years, and that the beneficial owners of accounts and funds involved in transactions be identified. While Law 8204, in theory, applies to the movement of all capital, current regulations are narrowly interpreted so that the law applies only to those entities that are involved in the transfer of funds as a primary business purpose, such as exchange houses and stock brokerages. Therefore, the law does not cover such entities as casinos, dealers in jewels and precious metals, insurance companies, intermediaries such as lawyers, accountants or broker/dealers, or Internet gambling operations, as their primary business is not the transfer of funds. However, as part of an anti-terrorism bill that is expected to pass before the end of 2008 or early 2009, there is a provision that should correct these loopholes. Additionally, in April of 2008, several government decrees established new rules to better identify casino ownership. Costa Rican financial institutions are regulated by the SUGEF, the Superintendent General of Securities (SUGEVAL),and the Superintendent of Pensiones (SUPEN). All three entities fall under the National Council of Supervision of the Financial System (CONASSIF). All financial entities subject to the jurisdiction of SUGEF, SUGEVAL and SUPEN are obligated to submit suspicious transaction reports (STRs),regardless of the amount involved or transaction reported. Law 8204 does not establish any protection for reporting individuals with respect to their cooperation with law enforcement entities. Nevertheless, this does not exempt them from reporting; if they do not file STRs, they may be subject to pecuniary sanctions established in Article 81 of Law 8204. The UAF, which is located within the Costa Rican Drug Institute (ICD),became operational in 1998. Article 123 of Law 8204 empowers the UAF to request, collect and analyze STRs and cash transaction reports (CTRs) submitted by obligated entities. The UAF, if warranted by its analysis, refers these reports to the Money Laundering, Financial, and Economic Crimes Unit of the Judicial Investigative Organization (OIJ),under the Public Ministry (Prosecutor's Office). Each superintendency holds the CTRs until they determine further analysis is required or until the UAF requests them. All requests and reports from the UAF must be signed by the Director of the ICD. The UAF has no regulatory responsibilities. The UAF has access to the records and databases of financial institutions and other government entities, but the OIJ must obtain a court order if the information collected is to be used as evidence in court. Additionally, there are formal mechanisms in place to share information domestically and with other countries' FIUs. In spite of its broad access to government information and high levels of cooperation with the financial sector, the UAF is somewhat ill-equipped and under-funded to provide information needed by investigators. However, in 2009 the UAF plans to hire four additional forensic auditors and one investigator, bringing total staffing to 27. In 2008, the UAF continued to increase the quality of its analysis and forwarded more thoroughly analyzed cases to prosecutors. The UAF received 500 STRs in 2008; 36 were forwarded to the OIJ for investigation. The GOCR body responsible for investigating financial crimes is the financial investigations unit (or Unidad de Investigacion Financiero- UIF) of the OIJ. The OIJ reports that currency smuggling has increased at their land borders; also, they suspect money laundering is occurring through the use of wire-transfer services. The OIJ is assisted by the UAF and has adequately trained staff. In 2008, there were two prosecutions for financial crimes. The UAF's primary mission is analysis; the UIF is investigative. All persons carrying, entering or exiting Costa Rica are required to declare any amount over U.S. $10,000 to Costa Rican officials at ports of entry. Declaration forms are required. Cash smuggling reports are entered into a database maintained by ICD and is shared with appropriate government agencies, including the UAF. Articles 33 and 34 of Law 8204 cover asset forfeiture and stipulate that all movable or immovable property used in the commission of crimes covered by this act shall be subject to preventative seizure. When asset seizure or freeze takes place, the property is placed in a legal deposit under the control of ICD. The banking industry closely cooperates with law enforcement efforts to trace funds and seize or freeze bank accounts. During 2008, officials seized over USD 2 million in narcotics-related assets, much of it in undeclared cash. Seized assets are processed by the ICD and if judicially forfeited, are divided among drug treatment agencies (60 percent),law enforcement agencies (30 percent),and the ICD (10 percent) or as determined by ICD's council. Although the GOCR has ratified the major UN counterterrorism conventions, terrorist financing is not yet a crime in Costa Rica. In 2002, a government task force drafted a comprehensive counterterrorism law with specific terrorist financing provisions. The draft law, when passed, would expand existing laws to include the financing of terrorism and enhance existing narcotics laws by incorporating the prevention of terrorist financing. In 2008, Costa Rica received a third extension to pass this law on terrorist financing to avoid being expelled from the Egmont Group of financial intelligence units. The GOCR expects the legislation to be passed in late 2008 or early 2009, before the extended deadline of March 2009. In addition to the pending law on terrorism, the GOCR's legislature is working to pass an organized crime bill which would close additional money-laundering loopholes. Costa Rican authorities receive and circulate to all financial institutions the names of suspected terrorists and terrorist organizations listed on the UN 1267 Sanctions Committee consolidated list and the list of Specially esignated Global Terrorists designated by the Unted States pursuant to E.O. 13224. However, thee authorities cannot block, seize, or freeze property without prior judicial approval. Thus, Costa Rica lacks the ability to expeditiously freeze assets connected to terrorism. However, no assets related to designated individuals or entities were identified in Costa Rica in 2008. Costa Rica fully cooperates with appropriate USG law enforcement agencies and other governments investigating financial crimes related to narcotics and other crimes. Articles 30 and 31 of Law 8204 grant authority to the UAF to cooperate with other countries in investigations, proceedings, and operations concerning financial and other crimes covered under that law. Costa Rica is a party to the 1988 UN Drug Convention, the UN International Convention for the Suppression of the Financing of Terrorism, and the UN Convention against Transnational Organized Crime. On March 21, 2007, the GOCR ratified the UN Convention against Corruption. The GOCR has also signed, but not yet ratified, the Organization of American States (OAS) Inter-American Convention on Mutual Assistance in Criminal Matters, and has ratified the Inter- American Convention against Terrorism. Costa Rica is a member of the Caribbean Financial Action Task Force (CFATF). As noted above, SUGEF has signed MOUs with Panama and the Bahamas to help regulate the six offshore banks that have representation here. The most recent mutual evaluation of Costa Rica was conducted by the CFATF in July 2006. The GOCR is a member of the Money Laundering Experts Working Group of the OAS Inter-American Drug Abuse Control Commission (OAS/CICAD). The UAF is a member of the Egmont Group. Even though the Government of Costa Rica convicted a handful of individuals for money laundering over the last several years, further efforts are required to bring Costa Rica into compliance with international anti-money laundering and counter-terrorist financing standards. In 2009, Post plans to introduce the GOCR to various training opportunities offered by organizations such as the Department of Justice, ICE (of DHS),the Florida International Bankers' Association, and the Federal Reserve Bank of Atlanta. In addition, Post plans to link relevant agencies in the GOCR to peer agencies in other Latin American countries, most notably Colombia and Mexico. The GOCR needs to criminalize terrorist financing prior to the Egmont Group March 2009 deadline for expulsion. The GOCR also needs to pass legislation that reconciles contradictions regarding the supervision of its offshore banking sector, and should extend its anti-money laundering legislation and regulations to cover the Internet gaming sector, dealers in jewelry and precious metals, attorneys, casinos, as well as any business activity that might entail the use of cash and other nonbank financial institutions. Finally, Costa Rica should continue to ensure that its financial intelligence unit and other GOCR authorities are adequately equipped to combat financial crime. CIANCHETTE