IRAQ: INCSR Report Part II - Money Laundering and Financial

UNCLAS SECTION 01 OF 05 BAGHDAD 003354 SIPDIS DEPT FOR INL-I SENSITIVE TAGS: SNAR KCRM KJUS PGOV IZ SUBJECT: IRAQ: INCSR Report Part II - Money Laundering and Financial Crimes BAGHDAD 00003354 001.2 OF 005 ¶1. (SBU) Summary: Iraq's economy is primarily cash-based, and there is little data available on the extent of money laundering in the country. Smuggling is endemic, involving consumer goods, cigarettes, and petroleum products. Bulk cash smuggling, counterfeit currency, trafficking in persons, and intellectual property rights violations are also major problems. There is a large market in Iraq for stolen automobiles from Europe and the United States. Ransoms from kidnappings and extortion cost Iraqi citizens millions of dollars each year, and the funds are often used to finance terrorist networks. Trade-based money laundering, customs fraud, and value transfer are found in the underground economy. There are credible reports of counterfeiting. Hawala networks, both licensed and unlicensed, are widely used for legitimate and illegitimate purposes. Regulation and supervision of the formal and informal financial sectors is still quite limited and enforcement is subject to political constraints, resulting in weak internal private sector controls. Under its Stand-by Arrangement with the International Monetary Fund, the Central Bank of Iraq (CBI) has completed half of the necessary prudential regulations and is to finalize the remainder, including anti-money laundering regulations. End Summary. ¶2. (SBU) Oil production is the main source of revenue for the Iraqi government, but theft and diversion of oil products is only slowly being checked. In 2006, the World Bank and the Iraqi Ministry of Oil's Office of Inspector General estimated that the Iraqi government loses tens of millions of dollars each year to the smuggling, diversion, or misallocation of refined oil products. ¶3. (SBU) Fraudulent investment schemes are also on the rise in Iraq. For example, in 2008 there was an investment scam in the Basra area that netted the perpetrator tens of millions of dollars in a "Ponzi" scheme involving a fake investment company promising investors huge returns of between 200 to 300 percent every six months. When the scheme collapsed, the owner of the investment company fled Iraq with the remaining money. Corruption is a major challenge and is exacerbated by weak financial controls in the banking sector and weak links to the international law enforcement community. Transparency International's 2009 International Corruption Perception index ranked Iraq as 176 out of 180 countries surveyed, demonstrating only minimal change from the previous year. ¶4. (SBU) Nevertheless, Iraq is taking demonstrable steps to combat corruption, including acceding to the UN Convention Against Corruption, seeking candidacy status in the Extractive Industries Transparency Initiative and the World Bank's Stolen Asset Recovery Initiative, pursuing civil service and procurement reforms and legal assistance agreements with other countries. Iraq does not have a Mutual Legal Assistance Treaty with the United States and U.S. law enforcement agencies indicate that cooperation with Iraqi counterparts had been somewhat sporadic but is increasing. While Iraq's anti-corruption institutions are making strides to inspect, audit, and prosecute corruption cases in Iraq's ministries, weak procurement laws, widespread patronage, and other flaws in internal Qprocurement laws, widespread patronage, and other flaws in internal controls and regulations provide opening for fraud and embezzlement. The U.S. government, international financial institutions, and some Iraqi leaders are promoting new systems, laws, and enforcement mechanisms to address these gaps. Nevertheless, these need concerted will from a broad range of actors including civil society and senior leadership. ¶5. (SBU) The Coalition Provision Authority (CPA) Order No. 93, the "Anti-Money Laundering Act of 2004" (AMLA),continues in force and governs financial institutions in connection with: money laundering; financing of crime; financing terrorism; and imposes requirements to monitor financial transitions. The law also criminalizes money laundering, financing crime (including the financing of terrorism), and structuring cash transactions to avoid legal requirements. The AMLA covers: banks; investment funds; securities dealers; insurance entities; money transmitters; and foreign currency exchange dealers as well as persons who deal in financial instruments, precious metals or gems, and persons who undertake hawala transactions. Covered entities are also required to verify the identity of non-account holders performing a transaction or series of transactions whose value is equal to or greater than five million Iraqi dinars (approximately $4,250). Beneficial owners must be identified upon account opening and for transactions exceeding ten BAGHDAD 00003354 002.2 OF 005 million Iraqi dinars (approximately $8,500). Records must be maintained by financial institutions for a period of at least five years. Covered entities must report suspicious transactions and wait for guidance before proceeding with the transaction; the relevant funds are frozen until guidance is received. ¶6. (SBU) Reports of suspicious transactions are to be completed for any transaction over four million Iraqi dinars (approximately $3,400) that are believed to involve funds that are derived from illegal activities or money laundering, intended for the financing of crime (including terrorism),or over which a criminal organization has disposal power, or a transaction conducted to evade any law or which has no apparent business or other lawful purpose. Nevertheless, the Government of Iraq is currently drafting a new anti-money laundering law to replace Order No. 94. ¶7. (SU) The "tipping off" of customers by bank employees where a transaction has generated a report of suspicious transaction is prohibited. Bank employees are protected from liability for cooperating with the government. Willful violations of the reporting requirement may result in fines or imprisonment CPA Order No. 94, the "Banking Law of 2004," gives the CBI the authority to conduct due diligence on proposed bank management. Order No. 94 establishes requirements for bank capital, confidentiality of records, audit and reporting requirements for banks, and prudential standards. ¶8. (SBU) The CBI is responsible for the supervision of financial institutions. The CBI was mandated by the AMLA to issue regulations and require financial institutions to provide employee training, appoint compliance officers, develop internal procedures and controls to deter money laundering, and establish an independent audit function. The CBI has branches in Irbil, Sulaymaniyah, Mosul, and Basra. ¶9. (SBU) The CBI headquarters in Baghdad also houses Iraq's financial intelligence unit, the Money Laundering Reporting Office (MLRO). The MLRO is responsible for the collection and analysis of suspicious transactions and forwards the results of their analysis to law enforcement authorities. The MLRO's primary Iraqi law enforcement contact is with the Ministry of Interior's Financial Crimes Unit. The CBI branches are responsible for the licensing and examining of public and private banks, and the licensing of money exchangers and money transmitters. ¶10. (SBU) The CBI is required to conduct examinations of public banks every six months and private banks every three months. Order No. 94 gives the CBI administrative enforcement authority including the removal of institution management and revocation of bank licenses. The banks provide traditional banking services such as deposit taking, foreign exchange, transfers, and lending to the community. There is no time limit for funds to be held in the CBI for accrual of interest. Outside of this relationship, there is poor communication between the CBI and Iraq's public and private banks, particularly with respect to money laundering, terrorist financing, and other potential risks. The formal financial sector continues to develop. Thirty seven private banks and six state-owned banks operate in Iraq. The state-owned banks still control a majority of Qoperate in Iraq. The state-owned banks still control a majority of the banking sector. ¶11. (SBU) The CBI is still experiencing challenges with communications between its various offices. Efforts are underway to modernize the banking technology utilized by the CBI, but the effort has borne little fruit to date. In particular there is a lack of an adequate electronic payment and wire transfer systems. Electronic payment systems are being introduced in Iraq, including payment of pensions by a "Smart Card" (embedded microchip) and electronic transfers by private banks, but these programs are at an early stage. There is little institutional knowledge in the CBI, law enforcement agencies, or the judiciary regarding implementing Iraq's anti-money laundering/countering the financing of terrorism (AML/CTF) legislation and combating systemic money laundering and terrorist finance threats. In addition, the economy is still largely cash-based. There is widespread societal distrust of banks by the Iraqi people based on their experiences during the Saddam Hussein regime. ¶12. (SBU) Bulk cash smuggling is a significant problem in Iraq. The CBI is considering issuance of regulations to require currency BAGHDAD 00003354 003.2 OF 005 transaction reports be filed for the cross-border transfer of currency in amounts exceeding 15 million Iraqi dinars (approximately $12,750). Neither Iraqis nor foreigners are permitted to carry more than $10,000 in U.S. currency when exiting Iraq, but these measures are rarely enforced. Overseas currency speculation regarding the new Iraqi dinar is widespread often involving fraudulent schemes. It is illegal under Iraqi law to export dinars. ¶13. (SBU) Another vulnerability to Iraq's AML/CTF regime is that money exchangers and money transmitters, including hawaladars, are largely unregulated. Because of the efficiency and easy access of the money exchange business and money transmitters, most people in Iraq use these businesses to conduct international business. Some conventional banks can take weeks or months to conduct simple funds transfers while similar international transactions can be done rapidly and efficiently through the informal money exchange and transfer services. Although money exchangers and transmitters are required to be licensed by the CBI, the level of supervision and enforcement is minimal. As of late 2009, there were credible media reports of fraud and theaft involving money changers in some Iraqi provinces. ¶14. (SBU) Money exchangers are not subject to the same level of supervision as banks nor are they required to report suspicious transactions to the CBI. The level of training on AML/CTF given by the CBI to managers and operators of money exchanges and money transmitter businesses is inadequate. The MLRO, in its present form, is unable to provide adequate training and guidance on AML/CTF issues to the banking institutions it oversees, let alone the money transmitter or money exchange businesses in Iraq. Because the MLRO is part of the CBI, it also suffers from the same shortcomings as the CBI regarding communication with the CBI branches outside of Baghdad and the private banks. Furthermore, the MLRO has no criminal investigative authority. A recent Iraqi academic study reported money-laundering activities in the province of Dohuk and warning of vulnerabilities in the Kurdish Regional Government (KRG) financial system. ¶15. (SBU) The MLRO, which was formed in mid-2006, is weak and requires significant funding, support and training in order to adequately monitor the formal and informal financial systems in Iraq. The MLRO is understaffed with approximately 30 personnel, who have rudimentary accounting capabilities and computer skills. Additionally, the MLRO's computer equipment and software are outdated and access to the internet is inadequate. The MLRO receives little support from the Iraqi law enforcement agencies. Although, the MLRO is empowered to exchange information with other Iraqi and foreign government agencies, those contacts are limited. All financial institutions in Iraq are required to report suspicious financial transactions, including potential money laundering and terrorist financing, but only a few reports have been submitted since the MLRO's establishment. Institutional links between KRG financial authorities and Baghdad needs strengthening, as well as cooperation between all institutions involved in tracking and enforcing financial crimes. Qenforcing financial crimes. ¶16. (SBU) The predicate offenses for the crime of money laundering extend beyond "all serious offenses" to include "some form of unlawful activity." The penalties for violating the AMLA depend on the specific nature of the underlying criminal activity. For example, "money laundering" is punishable by a fine of up to 40 million dinars (approximately $34,000) or twice the value of the property involved in the transaction, (whichever is greater) or imprisonment of up to four years or both. Other offenses for which there are specific penalties include the financing of crime with a fine of up to 20 million dinars (approximately $17,500) or two years imprisonment or both and structuring transactions to avoid reporting requirements of up to 10 million dinars (approximately $8,500) or one year imprisonment or both. No Iraqi government arrests or prosecutions for crimes covered under the AMLA have been reported. The current law is ineffective and is not consistent with the provisions of the Iraqi legal system. Penalties for violations of the law are weak. The GOI is in the process of drafting a new AMLA law. ¶17. (SBU) The AMLA includes provisions for the forfeiture of any property. Such property includes, but is not limited to, funds involved in a covered offense, or property traceable to the BAGHDAD 00003354 004 OF 005 property, or any property gained as a result of such an offense, without prejudging the rights of bona fide third parties. The courts can order confiscation of property, but they can only do so if the property is directly related to the crime, including drug proceeds. According to the Iraqi Penal Code, a person must pay the government back for any property stolen from the government. In other cases of theft, restitution is made to the victim(s). ¶18. (SBU) Any property forfeited to the state becomes state property and goes into the general treasury. Should the government confiscate perishables, it can sell them while the case is ongoing and if the defendant is acquitted, the government returns the money it acquired from the sale of the goods to the defendant. While the case is ongoing, the government appoints a judicial guardian to supervise and maintain the property pending the outcome of the case. The AMLA also blocks any funds or assets, other than real property (which is covered by separate regulation) belonging to members of the former Iraqi regime and authorizes the Minister of Finance to confiscate such assets following a judicial or administrative order. The lack of automation or infrastructure in the banking sector hinders the government's ability to identify and freeze assets linked to illicit activities. ¶19. (SBU) Iraq has four free trade zones: the Basra/Khor al-Zubair seaport; Ninewa/Falafel area; Sulaymaniyah; and al-Qaim, located in western Al Anbar province. Under the Free Trade Zone (FZ) Authority Law, goods imported or exported from the FZ are generally exempt from all taxes and duties, unless the goods are to be imported for use in Iraq. Additionally, capital, profits, and investment income from projects in the FZ are exempt from taxes and fees throughout the life of the project, including the foundation and construction phases. Value transfer via trade goods is a significant problem in Iraq and the surrounding region ¶20. (SBU) The CBI distributes the UN 1267 Sanction Committee's consolidated list of suspected terrorist organizations to the various banks under its supervision as mandated by the AMLA. However, no asset seizures or any other information pertaining to the names on this list has been reported. Currently there is no legislation in Iraq that allows the GOI to freeze and confiscate terrorist assets without delay under civil proceedings. This represents a significant shortfall in the GOI's AML/CTF regime and in the international standards set by the Financial Action Task Force (FATF). ¶21. (SBU) Iraq became a member of the Middle East and North Africa Financial Action Task Force (MENAFATF) in September 2005. The Iraq MLRO attended the May 2009 MENA FATF meeting in Bahrain. Iraq also has not yet undergone a mutual evaluation of its compliance with the FATF standards. Iraq is a party to the 1988 UN Drug Convention, the UN Convention against Corruption, and the UN Convention against Transnational Organized Crime. It is not a party to the UN Convention for the Suppression of the Financing of Terrorism. ¶22. (SBU) A USG interagency group lead by the State Department conducted a Financial System Assessment Team (FSAT) study of Iraq in September 2009. A report of the findings is forthcoming and will QSeptember 2009. A report of the findings is forthcoming and will present recommendations for improvements. The Government of Iraq has the foundation needed to support the fight against terrorist financing and money laundering, but needs to implement existing legislation, bolster the relevant agencies in Iraq's AML/CTF regime, and issue or establish the proper regulations and legislation related to combating systemic money laundering and terrorist financing threats in Iraq. ¶23. (SBU) The CBI should be particularly cautious about granting licenses to banks from jurisdictions of concern; the MLRO needs proper training, equipment, and direction; the Iraqi financial sector needs to adopt and use AML/CTF standards and best practices; the GOI should pass legislation that allows Iraq to freeze and confiscate criminal and terrorist assets; Iraq needs to participate fully in the MENAFATF by attending its plenary meetings, taking advantage of its training opportunities and implementing the FATF's international standards; Iraqi law enforcement and the judiciary at national and regional levels need to enhance their ability to soundly interpret, apply, and enforce the legal principles of the AMLA and therefore better conduct investigations and to cooperate with one another; Iraqi law enforcement, border authorities, and BAGHDAD 00003354 005.2 OF 005 customs service should continue to strengthen border enforcement and identify and pursue smuggling, trade-based money laundering, and terrorist financing networks; and, the GOI should make a concerted effort to combat the corruption that hinders development and impedes an effective anti-money laundering and counterterrorist financing regime. Iraq should become a party to the UN Convention for the Suppression of the Financing of Terrorism.