BULGARIA TO CLOSE MONEY-LAUNDERING LOOP-HOLE, BUT

C O N F I D E N T I A L SECTION 01 OF 02 SOFIA 000683

SIPDIS

E.O. 12958: DECL: 10/27/2018
TAGS: ECON PGOV PREL PTER BU
SUBJECT: BULGARIA TO CLOSE MONEY-LAUNDERING LOOP-HOLE, BUT
EVEN GREATER TRANSPARENCY CHALLENGES AHEAD

REF: SOFIA 0122

Classified By: Ambassador Nancy McEldowney for reasons 1.4 (b) and (d).


1. (C) Summary: In response to intense lobbying by the
Embassy (and later joined by the European Commission and
several Bulgarian NGOs) the Bulgarians will close a
long-standing loop-hole in financial reporting that was
exploited to great effect by money launderers. The
loop-hole allowed large sums of cash to go unreported -- and
therefore uninvestigated -- in Bulgaria's largely cash-based
economy. The Central Bank, backed by the banker's lobby and
other politically-connected businesses and individuals, for
years refused to close this gaping hole in Bulgarian
anti-money laundering (AML) legislation. The country's
politicians -- and their bankers -- finally gave in after the
European Commission cited the loop-hole in its July
Monitoring Report. This is the third success for the
Embassy's self-styled rule of law taskforce in a year, after
tax breaks for casinos were abandoned in December 2007 and
the notorious duty free shops were closed in July 2008. We
will now step up efforts on our next agenda item -- further
shoring up Bulgaria's anti-money laundering infrastructure by
restoring on-site inspection powers to the Financial
Intelligence Directorate. End Summary.

THE SAGA OF CASH TRANSACTIONS
--------------


2. (C) For years money launderers have had it easy in
Bulgaria. The country's anti-money laundering legislation
required financial institutions to report cash transactions
over 30,000 leva (19,000 USD) to the Financial Intelligence
Directorate (FID). But in an intentional effort to create a
loop-hole for those wishing to move large sums of cash
through the Bulgarian banking system without detection, the
form used to report these high value cash transactions did
not include the actual amount of the transaction. In 2007,
there were over 300,000 such transactions reported. But
because the value of these transactions was not recorded, the
FID was unable to distinguish between transactions of 30,000
or 3 million leva. The FID director, Vasil Kirov, identified
this loop-hole as a key impediment to determining whether
cash transactions merit further investigation.


3. (C) As part of its rule of law pressure campaign,
Embassy leadership and action officers raised the cash
transaction issue with the Bulgarian Government at all levels
for more than a year. We reached out to other Embassies,
civil society experts, the Banker's Association, and private
individuals, urging them to join forces to close the
loop-hole. When the idea met strong Bulgarian government
resistance, we made in-roads with the drafters of the EU
monitoring reports in Brussels. They included it in their
July Monitoring Report on Bulgaria, using our points nearly
word for word.


4. (C) Eager to answer the criticism of the EU's stinging
report and desperate to regain the EU's confidence in the
government's ability to manage EU funds, in August Bulgaria
issued an 80-point action plan keyed to concerns in the EU's
July Report. Included was a promise to close the cash
transactions reporting loop-hole by mid-October. Even after
inclusion in the action plan, our contacts tell us the
Central Bank put up stiff resistance to closing the
loop-hole. After realizing it was fighting a losing battle,
it acquiesced. On October 21, the Central Bank Governor and
Head of the State Agency for National Security signed a joint
instruction introducing a new form for recording of cash
transactions over 30,000 leva. The new form includes the
amount of the transaction. The joint instruction will be
implemented beginning January 1, 2009. There are certain
strings attached -- the forms must be destroyed after five
years (the Central Bank had argued for six months) and the
FID must explain to a Parliamentary oversight committee how
it uses the information it gathers from these forms each year
-- but otherwise the new form is a true improvement in
Bulgaria's anti-money laundering regime.

THE WORK AHEAD
--------------


5. (C) With the money laundering loop-hole soon to close,
we will turn our attention to other gaps in Bulgaria's
anti-money laundering regime. We will focus first on
lobbying the government to restore on-site inspection powers
the FID lost when it became part of the newly-created State
Agency for National Security in early 2008. By stripping the

SOFIA 00000683 002 OF 002


FID of these powers, the Central Bank is now the only entity
able to overcome banking secrecy rules to perform unannounced
on-site AML-related bank inspections. But there is evidence
that the Central Bank is not interested in conducting such
investigations, and, as a result, no AML investigations are
being conducted in Bulgaria at present. We will include this
serious hole in Bulgaria's AML regime in our next INCSR-II
report. We'll also urge the European Commission to include
it in its next report on Bulgaria, due February 2008.


6. (C) We will also focus on other weak links in
Bulgarian's AML regime. We will urge Bulgaria to adopt a
cross-border currency declaration requirement and include
withdrawals in the list of cash transactions which must be
reported to the FID if they are over 30,000 leva (according
to the head of the FID, currently only deposits are required
to be reported). We will also advocate for a doubling of
FID inspectors (to 24 from the current 12) and urge a
reporting requirement showing that Bulgarian AML inspectors
are performing a minimum number of inspections per month.
We'll lobby for an increase in sanctions against banks -- and
there are many -- that do not file suspicious transaction
reports.

COMMENT
--------------


7. (C) If the multi-year, multi-party effort it took to
close the cash transactions reporting loophole is any
indication, we are in for a tough fight as we move forward on
our next rule of law/AML agenda items. One disturbing aspect
of the battle is the aggressiveness with which the Central
Bank and banking lobby fight needed improvements in
Bulgaria's AML regime. Even more disturbing is the blatant
passivity of the Bulgarian Government in the face of obvious
need for additional reform. From the outside, this
seemingly coordinated passive/aggressive approach lends the
impression that the Government is still intent on protecting
well-connected individuals who benefit from Bulgaria's AML
loop holes and weak rule of law regime. Our efforts on tax
breaks for casinos, duty free shops and now cash transactions
prove that coordinated Embassy, civil society and European
Commission action can affect genuine change on individual
issues. But true progress will come only when Bulgarians
spear-head it themselves. We'll keep helping those
Bulgarians who want precisely that.


McEldowney