ARGENTINA FACES CHALLENGING AML/CFT REVIEW

S E C R E T BUENOS AIRES 001257 SIPDIS NOFORN E.O. 12958: DECL: 2019/12/01 TAGS: PTER SNAR ECON EFIN PGOV PREL KCOR AR SUBJECT: ARGENTINA FACES CHALLENGING AML/CFT REVIEW REF: BUENOS AIRES 313; BUENOS AIRES 1017; BUENOS AIRES 1212 CLASSIFIED BY: Martinez, Vilma, Ambassador, DOS, EXEC; REASON: 1.4(B),(D) -------------- Summary -------------- ¶1. (S/NF) The Financial Action Task Force (FATF) held a two week peer review of the Argentine anti-money laundering and counter terror finance (AML/CFT) regime. Although hoping to see some positive moves by Argentina, the FATF operational team leader is skeptical of the GoA's intentions to combat money laundering and terror finance. While most money laundering in Argentina conceals tax evasion and corruption, narcotics-derived funds are a growing problem. The Argentine statutory framework is relatively strong, but the bureaucracy working the issues is poorly led and starved of resources. Consequently, the FATF team leader views Argentine AML/CFT enforcement as largely ineffectual, with no meaningful prosecutions in recent memory. Some Embassy contacts argue that the current GoA leadership, including the President, stands to lose from honest and vigorous pursuit of money laundering. While the final FATF report is likely to embarrass the GoA, potentially provoking a harsh response, it is not likely to spur meaningful reform. Until now, terror financing and narcotics money have comprised just a small fraction of the illicit funds transiting Argentina. The near complete absence of enforcement coupled with a culture of impunity and corruption make Argentina ripe for exploitation by narco-traffickers and terrorist cells. For now, the most promising way to engage the GoA on the issue seems to be through the new Justice Minister, with whom we have developed a positive working relationship. We will encourage him to engage on this set of issues. End Summary. -------------- FATF Review -------------- ¶2. (C) The FATF peer review of Argentina's AML/CFT laws, regulations and enforcement, and general compliance with FATF best practices and recommendations began on November 16 and continued for two weeks. FATF had originally scheduled the review for last year but delayed it at Argentina's request. In the interim, the GoA implemented a tax amnesty law to encourage the repatriation of funds held overseas and in the process lost most of the AML/CFT focus and momentum it had built up after the last FATF review in October 2003. Econoff met with numerous AML/CFT contacts over several weeks before the review began to assess the strengths and weaknesses of Argentina's laws and enforcement efforts and to evaluate perceptions of how it will fare in the review. -------------- FATF Team Leader is a Skeptic -------------- ¶3. (C) Fabio Contini, the Italian national who heads the operational review team, has spent over a year in Argentina as the Economic and Financial AttachC) at the Italian Embassy and is married to an Argentine. He has a sober view of the GoA's AML/CFT efforts, which he deems little more than a fig-leaf. The measures taken, he said, are calculated for minimal compliance with international standards and evince little real enthusiasm for cleaning up the financial system. In addition, he said that Argentina should take control of the informal economy as a first step toward a serious AML/CFT effort. Contini summarized his views by noting that a substantial percentage of the Argentine economy is underground, with pure cash transactions comprising a disproportionate percentage of economic activity. Such an economic system, he observed, is inherently vulnerable to money laundering and other financial crimes. Contini said that Argentina will have to bring this black economy into the light of day before even the most robust AML/CFT regulations can be effective. ¶4. (C) While his views will be influential, Contini noted that he does not have the last word on Argentina's FATF peer assessment. Once his team makes its report, Argentina will have an opportunity to respond to the findings. A debate at next year's plenary will precede the issuance of the final report and any warnings. Contini said that FATF warned Argentina after the last review that a second warning could have a negative effect on Argentina's desire to rejoin the international financial system. -------------- Money Laundering in Argentina -------------- ¶5. (C) Embassy contacts agree that most money laundering in Argentina is the product of tax evasion and political corruption. For the most part, they insist that terror financing is seldom, if ever, transacted in Argentina. Most maintain, however, that narcotics trafficking is becoming a real problem and that, increasingly, the dirty money sloshing through the financial system originates in the drug trade. -------------- AML/CFT System -------------- ¶6. (C) Embassy contacts, including Contini, have noted numerous weaknesses in Argentina's AML/CFT regime. Most tellingly, there have been only two convictions since the criminalization of money laundering in 1989, and there have been no convictions under the currently applicable statute enacted in 2000. While the substantive law is generally considered adequate, there are numerous loopholes to close and important areas that require clarification. ¶7. (C) Local AML/CFT experts agree that, with the exceptions noted below, Argentina has a solid legal and regulatory foundation for combating money laundering and terror finance. The failures of the system arise when it comes to applying the law. Inspections are superficial and do not examine actual accounts and transactions. According to Pablo San Martin, the head of SMS Latinoamerica, a local accounting firm, inspectors are often content in their interviews with banking executives to accept the predictable anodyne responses to their inquiries without further follow-up. Several contacts point to the Financial Information Unit (UIF) as the weakest player on the financial crimes enforcement team, but the consensus is that a failure of political will cripples the whole AML/CFT project. -------------- Self-laundering -------------- ¶8. (C) Several experts have highlighted the money laundering loophole for criminals who do their own banking as a probable focus of the FATF review. Argentine law defines money laundering as an accessory offense so that, for example, a narcotics trafficker cannot be charged for merely laundering the profits from his drug deals. Only a third party who aids and abets in hiding the origins of the money is subject to prosecution. ¶9. (C) According to Raul Plee, the state's attorney who heads the unit charged with investigating financial crimes, this exemption for self-laundering explains the lack of convictions. Plee noted that a bill in draft form would allow him to pursue much of the currently protected laundering activity, and he believes that FATF will recommend enactment of the legislation. Plee observed that some of Argentina's most embarrassing prosecutorial failures, e.g., when a judge dismissed charges against Pablo Escobar's widow who bought two properties under an assumed name, originate in the self-laundering exemption. ¶10. (C) In contrast, other contacts believe that if the FATF review fixates on the self-laundering issue it will be a failure. Marcelo Casanovas, a compliance officer with the Bank of Buenos Aires Province and a board member of a leading anti-money laundering association, said that self-laundering is a problem, but to focus exclusively on that one shortcoming is to miss the whole forest for one tree. The real problems, he insisted, are systemic. Contini himself observed that the central failure is an absence of political will to pursue laundering as a serious crime. -------------- Repatriation of Funds -------------- ¶11. (C) One substantive legal issue that now seems unlikely to trouble FATF reviewers is the tax amnesty law (Ref A) designed to encourage repatriation of funds held outside Argentina. According to commonly cited estimates, Argentines hide about $150 billion in assets offshore. In an effort to lure back the billions held outside the formal financial system, the GoA passed legislation in December 2008 declaring an amnesty on repatriated funds that ran from March through August of 2009. Local experts and opposition political figures alleged that because it prohibited Argentine tax authorities from inquiring into the source of the repatriated funds, the law facilitated money laundering. FATF also expressed misgivings but was at least partially placated when then-Justice Minister Anibal Fernandez defended the law before the plenary in Paris. In May (after the amnesty had already been in effect for two months),the UIF issued rules requiring reports of suspicious transactions (STRs) arising from the capital regularization program. ¶12. (C) According to figures released by the GoA at the conclusion of the amnesty, Argentines declared only $4.7 billion. Of that, only 4.3 percent had been held abroad. The press reported that the program failed to achieve its goal of capital repatriation. According to Plee, requiring submission of STRs was a key factor in this failure and was at least one reason that very little money returned under this law. Plee and other contacts noted that the funds declared under the amnesty were not generally the product of criminal activity other than simple tax evasion. The Regional Advisor from the International Monetary Fund's Financial Integrity Group, Mariano Federici, observed that the repatriation was doomed from the outset because Argentines do not view the local economy as a stable place to invest, and they mistrust the government because of its history of economic mismanagement and capricious seizure of assets. ¶13. (C) Based on the requirement to file STRs and the insignificant scale of the funds repatriated, many contacts predicted that the tax amnesty issue will not draw much attention under the FATF review. -------------- Prosecutors and Judges -------------- ¶14. (C) Another weakness that experts highlighted was the lack of judicial and prosecutorial understanding of AML/CFT issues. According to Federici, the prosecutors and judges who should take the lead in AML/CFT cases lack the financial sophistication necessary to direct investigations and mount successful prosecutions. Federici also noted that judges appear uninterested in acquiring the skills necessary to manage money laundering cases. When the IMF staged a training seminar, over 70 prosecutors participated, but of the dozens invited, only one judge chose to attend. Because judges directly manage investigations under the Argentine legal system, no money laundering case can proceed without active judicial engagement. Federici observed that, in the short term, judicial indifference limits the opportunities for money laundering convictions. ¶15. (C) Casanovas agreed that the judicial system suffers deficiencies, but he maintained that prosecutors and investigators bear more of the blame than judges. Failure to develop solid evidence is the root of the problem, he said. He observed that judges want to pursue concrete cases with predictable outcomes, not squander their limited resources on prosecutions doomed to failure. -------------- FATF/GAFISUD Representative -------------- ¶16. (C) The FATF Representative's Office, headed by Alejandro Strega, who has a master's in law from the University of Illinois, is responsible for coordination of AML/CFT policy and for developing national strategy and legislation. Under the leadership of Strega's predecessor, Juan Felix Marteau, the office earned a reputation for foresight and action. Marteau drafted significant legislation and developed a national AML/CFT strategy that was endorsed by then- President Nestor Kirchner. In contrast, Strega's performance has been lackluster, and, with his weak background in AML/CFT and lack of resources, he has been largely ineffective. Strega is a congenial interlocutor, speaks English well, and is eager to engage with the Embassy, but he has little access to Minister of Justice Julio Alak, few staff, and almost no money. ¶17. (C) Marteau has insinuated that he lost the job to Strega as a reprisal for looking too closely into the casino business, where important Kirchneristas allegedly have interests. Federici conceded that casinos may be part of the story, but said the real explanation lies in a personality clash and bureaucratic feud with Alak's predecessor and current Chief of Cabinet, Anibal Fernandez. According to Federici, when Marteau drafted his national strategy, he consulted all high government officials with an interest in money laundering except for Fernandez, who was Minister of Interior at that time. As Justice Minister, Fernandez became Marteau's boss and quickly dismissed him and brought in Strega. Federici also noted that suspicions of connections to drug trafficking and money laundering have sometimes wafted around Fernandez (Ref B),and Marteau may have distrusted him based on those rumors. Strega is the son of a labor lawyer who is a close Fernandez confederate from his time as Mayor of Quilmes. His father, Enrique Strega, has been an attorney for the bank workers' union headed by Juan Jose Zanola, a Kirchner ally who was also close to former President Menem. Zanola is now under indictment in a politically radioactive case involving adulterated medicine, illegal campaign contributions, and a triple homicide. -------------- UIF: a Broken Institution -------------- ¶18. (S/NF) Numerous Embassy contacts and press reports have fingered the UIF as the main agent of Argentina's AML/CFT failures. The UIF is an inept and politically compromised institution, according to Federici. It is led by Rosa Falduto, who won her position based on the patronage of the judge who oversees the electoral process, Maria Romilda Servini de Cubria. She has since quarreled with Servini. Her other benefactor, Anibal Fernandez, has also reportedly been keeping his distance. Federici said that according to a highly placed contact in the UIF, Falduto holds on to her position because she is useful to President Cristina Fernandez de Kirchner and to her husband, the former President, Nestor Kirchner. Federici told Econoff that Falduto is personally holding back STRs on the Kirchner inner circle and has refused to respond to requests for STRs on the Kirchners themselves from Switzerland, Lichtenstein, and Luxembourg. In July, according to Federici and consistent with information from other sources, Falduto also personally leaked information that the UIF had requested from FinCEN on Francisco de Narvaez, a Kirchner rival. According to Federici, Falduto did this by design to harm the reputation of this important opposition figure. ¶19. (C) The defects of the UIF, however, transcend mere politicization. According to Federici and confirmed by several other sources, Falduto's organization passes on raw intelligence that is useless for building criminal cases. Contini said that information is routinely forwarded to prosecutors so long after the fact that it is legally and technically impossible to accumulate evidence on suspicious transactions. In the UIF's defense, however, San Martin noted that the AML/CFT regulators have insufficient resources. The UIF and the Argentine Central Bank pay poorly, he said, and cannot afford to hire sufficient investigative staff. San Martin agreed, however, that the UIF is likely to come in for pointed criticism in the FATF review. -------------- Political Will -------------- ¶20. (C) Several contacts, including Strega himself, have asserted that the Argentine AML/CFT regime was never designed to catch or punish money launderers and that the absence of convictions is by design. According to Federici, Plee's office does not get the political support that it needs to do its job and the Ministry of Justice under Fernandez made it plain that it did not want him to be too aggressive. When the MOJ switched Plee's assistant Federico di Pasquale from a long-term to a short-term job contract, it was seen as a message that the office was on a short leash. ¶21. (C) According to Roberto Bulit Goni, an attorney in a private practice dealing with money laundering issues, too many people stand to profit from lax enforcement of money laundering statutes. Casanovas and San Martin agree that the changes that there have been in the AML/CFT system are mainly cosmetic. The GoA has enacted the recommended laws and regulations, but the problem, they noted, is hostility to even token enforcement. Congress, which will pass to a divided opposition's control in December, has not played a consistent role in pressing for enforcement or investigations, but there is some prospect that the Congress and specific committees will give it increasing attention in 2010. ¶22. (C) The Embassy sources noted above maintain that the MOJ, under former Minister of Justice Anibal Fernandez (now Chief of Cabinet),systematically frustrated progress on AML/CFT issues. The current Minister of Justice, Julio Alak, has brought energy and a fresh perspective to the job and has shown considerable enthusiasm for collaborating with the United States on a wide range of law enforcement issues. While he has not yet focused on money laundering, the upcoming FATF report and the Argentine response and debate at next year's plenary give us an opportunity to engage him to focus more on AML/CFT issues. While a negative report will likely provoke a hostile response from some quarters of the GoA, it could well provide an opportunity and political cover for Alak to push for greater resources and for consequential changes in the law and enforcement. Alak appears to be serious about tackling Argentina's law enforcement problems (Ref C) and all Mission elements will continue to provide him with the information and, where possible, the resources to move forward with a positive agenda. -------------- FATF Outcome -------------- ¶23. (C) There are two views of the likely conclusions in the final FATF report. One view is that the FATF review will be so superficial that Argentina will pass with just a few areas for improvement noted. Casanovas and San Martin, for example, believe that the FATF review will be perfunctory. Reviewers will arrive with a checklist and conclude after talking to regulators that all the elements are in place. FATF will recommend some changes, but the review will be generally neutral. The other view is that the flaws are so glaring, i.e., no convictions and the problems within the UIF, that even a superficial review will come down hard on the GoA. Contini, as head of the operational team, seems inclined to issue a report highlighting a lack of political will to meaningfully combat money laundering and terror financing. -------------- Comment -------------- ¶24. (S/NF) Argentina will likely suffer some sharp criticism in the FATF review, blackening its eye when it is seeking to reenter the mainstream of the global financial system. The GOA would probably lash out publicly at a critical FATF review, with the government blaming the criticisms on external conspirators (including perhaps the USG). No matter the criticisms, and despite the apparent good faith of new players like Justice Minister Alak, it is probably unrealistic to expect that the GoA will funnel resources to prosecutors or make a concerted effort to pursue money launderers. The Kirchners and their circle simply have too much to gain themselves from continued lax enforcement. Although tax cheats and compromised politicians may still be the chief source of dirty money, continued GoA indifference to AML/CFT could offer an attractive local staging ground to narco-traffickers and international terrorists. If the GoA does not move to close loopholes and enhance enforcement, it may soon find its financial system contaminated by drug money and terror funds. MARTINEZ