PART 2: U.S.-EU COUNTER-TERRORIST FINANCING WORKSHOP

UNCLAS SECTION 01 OF 04 PRAGUE 000339

SENSITIVE
SIPDIS

STATE FOR EEB/ESC, EUR/ERA, LA/EBA/BRIAN EVANS
TREASURY FOR GLOBAL AFFAIRS, TFFC, OFAC AND OSP
ICE FOR TF INVESTIGATIONS - JOINT VETTING UNIT/DAVID KANE

E.O.12958: N/A
TAGS: EFIN ETTC EAID KTFN KWBG KPAL KJUS KCRM KNNP PREL
PTER, UNSC, SNAR, EUN, EZ
SUBJECT: PART 2: U.S.-EU COUNTER-TERRORIST FINANCING WORKSHOP
(PRAGUE MAY 27-28): WIRE TRANSFERS AND NEW PAYMENT METHODS

Ref: PRAGUE 338

NOT FOR INTERNET DISTRIBUTION


1. (U) This message contains an Action Request. Please see
paragraph 7.


2. (SBU) SUMMARY. This is the second of two cables reporting on
U.S.-EU Terrorism Finance Workshop held in Prague on May 27-28. In
response to U.S. diplomatic efforts, the Czech Presidency of the
European Union (EU),in partnership with the upcoming Swedish
Presidency, hosted the eighth in a series of expert-level U.S.-EU
workshops on combating terrorism finance. About 120 participants
from EU member states and institutions, the U.S., and the UN
Monitoring Team attended the workshop, which focused on
opportunities for U.S.-EU cooperation in three new areas: wire
transfers, non-profit organizations and new payment methods. While
recognizing differences between the U.S. and EU legal framework and
practice, workshop participants focused on commonalities and agreed
to prepare a common outreach paper to be approved by the U.S. and EU
member states. The next workshop will take place under the Spanish
EU Presidency during the first half of 2010. This cable reports on
discussions relating to wire transfers, new payment methods and
ideas for U.S.-EU future cooperation (Part 1 (reftel) addresses
non-profit organizations). Europeans requested USG assistance in
bringing U.S. wire transfer companies into compliance with FATF SR
VII. END SUMMARY.

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I. Implementation of FATF SR VII: Wire Transfers
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3. (SBU) Workshop participants recognized that terrorists often
find ways to exploit new technology. U.S. presenters expressed
particular concern over e-payments/e-currency, online gaming and
pornography sites, stored-value cards, and mobile payments. In the
first session, the U.S., EU and European private sector
representatives exchanged experiences and discussed challenges
related to the implementation of Financial Action Task Force (FATF)
Special Recommendation VII (SR VII) on wire transfers. EU speakers
presented implementation of SR VII in the European legal framework,
the European common understanding on wire transfers, Germany's
implementation of SR VII at a national level, EU private sector
implementation, and practical examples of transfers non-compliant
with the regulations. U.S. Department of the Treasury, Director of
Strategic Policy Chip Poncy compared and contrasted the EU approach
to SR VII with the U.S. approach, including a discussion of the
comprehensive U.S. legal framework and challenges the U.S. faces.


4. (SBU) The U.S. and EU acknowledged that:

-- Implementation of SR VII is crucial in identifying and addressing
terrorist financing (TF) and other illicit financing risks for banks
and other financial institutions, law enforcement and national
security authorities, and sanctions enforcement authorities;

-- The private sector continues to be an essential partner in
combating financing of terrorism (CFT) and regulatory authorities
must work with private sector to ensure compliance, including
through enforcement actions where appropriate;

-- The private sector is concerned by reports questioning the
quality of the many government-issued lists of identifiers for use
in banks' costly compliance software -- their measures can only be
as good as the data they are checking against;

-- The private sector struggles with implementing so many government
watch lists without consolidated data (e.g., trade controls,
economic sanctions, technology controls, terrorism lists, suspect
government officials lists, money laundering lists, criminal
activity lists, etc.); and

-- Law enforcement and sanctions authorities must exploit data
reported from financial institutions to ensure maximum benefit in

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identifying and investigating TF and other forms of illicit finance.
Both U.S. and EU government authorities should provide greater
feedback to the financial community about the importance of SR VII
in combating TF and other illicit finance.


5. (SBU) Following the presentations, multiple EU member state and
institutional delegations raised concerns that most of the
non-compliant wire transfers in their jurisdictions originate in the
U.S. via U.S. wire transfer companies or banks. The EU may not be
able to force compliance with this law because the source of the
problem originates under the U.S. jurisdiction. EU banks may be
reluctant to draw regulators' attention to the noncompliance of
their U.S. partners for fear of losing key relationships, especially
in today's challenging financial sector climate. The U.S.
delegation explained that this was probably due to a difference in
legal threshold for mandatory identity disclosure. The U.S.
delegation also pointed out that in regards to Western Union and
other money service businesses (MSBs),the industry practice was to
include identification information on all transfers over $1,000 (the
FATF standard),even though the U.S. legal requirement was $3,000.
Belgium's representative to the EU's "Three Level Three (3L3)
Committees" (e.g., CEBS (Committee of European Banking Supervisors),
CESR (Committee of European Securities Regulators),and CEIOPS
(Committee of European Insurance and Occupational Pensions
Supervisors)) Anti-Money Laundering Task Force (AMLTF) noted that it
was important for financial institutions to maintain a dialogue with
regulators and to notify them of countries which repeatedly fail to
comply with SR VII. A representative from Italy asked whether the
U.S. and EU should sign a Memorandum of Understanding to address the
gap between our SR VII approaches.


6. (SBU) The U.S. and EU agreed to engage regulators to explore
ways to address noncompliance on SR VII through a collaborative
approach with respective regulatory counterparts. The U.S. also
promised to share with EU FATF representatives information about
possible upcoming opportunities to submit comments on potential
changes to the U.S. rules relevant to SR VII via our open Notice of
Public Rule-Making (NPRM) procedures.


7. (SBU) ACTION REQUEST / COMMENT: Given the importance of this
issue to several EU capitals, posts would benefit from coordinated
U.S. interagency and regulatory guidance on how the U.S. and EU
could address the SR VII discrepancy issue. The EU appears willing
to work with the U.S. in good faith to achieve full compliance with
SR VII. If the USG plans to meet the FATF standard by revising a
threshold of $1000 for wire transfer company reporting requirements,
this could help the EU in turn implement full compliance with the
international standard. END ACTION REQUEST / COMMENT.

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II. New Payment Methods
--------------


8. (SBU) Participants recognized that the payment market is fast
developing. New payment methods are continuously emerging to
benefit consumers, but these also pose new threats of misuse by
terrorists and criminals. Participants agreed that risk assessment
and deployment of countermeasures should strike the right balance
between allowing the market to develop and minimizing the
possibility of money laundering and terrorist financings abuses.


9. (SBU) Lars Rutberg of the Swedish Bankers' Association (SBA)
described new market trends and the new regulatory framework in the
EU, including:

-- the new EU Payments Services Directive (PSD),to be implemented
by the EU Member States by November 1, 2009, which applies not only
to banks but to many other types of payment/financial institutions
in the EU area such as money remitting businesses.

-- the new EU "E-Money" Directive, adopted by the European
Parliament on April 24, 2009, now awaiting adoption by the European
Council in September of 2009.


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-- Regulation 2560 on cross border payments, adopted by the European
Council on April 24, 2009, which extends new regulatory coverage on
payments to direct debits.


10. (SBU) Rutberg reported that there has been a significant
improvement in wire transfer compliance in Sweden. Upon immediate
implementation of the FATF SR VII measures in Sweden concerning
originator information on wire transfers, the Swedish Bankers'
Association noted that approximately 30 percent of the transfers
were non-compliant. The majority of the non-compliant transfers
involved transfers from or through American banks. [See above.]
The rate of noncompliance has since decreased: currently 2 or 3 of
every 1,000 transfers are non-compliant with the EU law. The major
technical problems continue to be the wrong format in which wire
information is entered (i.e. not entered in SWIFT format, entered
into incorrect boxes, and etc.).


11. (SBU) Rutberg focused on the role of the Euro Payments Council
(EPC),established in 2002 to facilitate the migration from a
national to a Single European Payment Area (SEPA). The formation of
the EPC was strongly supported by the European Central Bank (ECB)
and the European Commission. There are currently two rule books
under SEPA: SEPA Credit Transfer, which came into force on 1/28/09;
and SEPA Direct Debit, which will take effect in November 2009.
Other new regulatory "frameworks" being developed by the ECB
include: SEPA Online Payments, the E-Mandate (internet currency),
mobile phone payments, and E-Invoice.


12. (SBU) David Kane, U.S. DHS/ICE, described the threat posed by
the lack of regulation over stored value cards (SVCs). While most
money laundering and banking experts view SVCs as cash equivalents,
SVCs are not subject to currency and monetary instrument reporting
requirements (CMIR) in the U.S. upon importation/exportation that
apply to cash, money orders and certain checks, creating a loophole
for potential abuses. For example, if criminal and terrorist
organizations utilize SVCs to move large amounts of their illicit
funds to/from the U.S., they could do so anonymously by using ATM
machines for deposits and withdrawals, which would be very difficult
for law enforcement to spot or track. To prevent this, the SVCs
should be made subject to the same regulatory regime upon
exportation from, or importation into the U.S. (CMIR reporting) as
cash and its equivalents.


13. (SBU) Rutberg echoed Kane's concerns and said that the SBA was
closely monitoring these SVC service providers in Sweden, and has
already shutdown numerous shady SVC providers. Concluding the
discussion, Veronica Fucile of the Bank of Italy applauded FATF's
reconsideration of how to better regulate and handle alternate
payment methods, which the Italian banking community views as ripe
for abuse by terrorist organizations.

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III. Ideas for U.S.-EU Future Cooperation
--------------


14. (SBU) In the closing session, Tomas Rumpl, Czech Presidency
chair of the EU Council Working Party on Terrorism (COTER),proposed
the following five guidelines for future U.S.-EU terrorist finance
workshop cooperation on behalf of the EU:

-- The Nine FATF Special Recommendations should constitute the basis
for future dialogue;

-- Countering terrorist financing must be dynamic, continuously
engaging new and cross-pillar strategies;

-- All relevant public authorities and industries must be involved.
Dialogue with the private sector is a key factor in successful
combating terrorist financing;

-- The U.S.-EU dialogue should continue in the format of the
workshops to which private sector representatives should be invited
as appropriate; and


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-- The workshops should be held once per year.


15. (SBU) Announcing that the EU would continue to work on
refining these guidelines, Rumpl emphasized that the EU is open in
principle to discussing any terrorism finance-related topic in
future workshops. (Comment: The U.S. delegation offered informal
feedback on this proposal on the margins of the event, but we must
follow up. The Czech proposal may be aimed at solidifying an EU
consensus to allow a broader discussion with the U.S. on sensitive
TF issues. See also comment regarding workshop next steps in
reftel.) On behalf of the U.S. delegation, Poncy welcomed future
dialogue, but noted the challenge of translating workshop
discussions into action.


16. (SBU) In closing remarks, a European Commission representative
reiterated a desire to better coordinate U.S. and EU CTF efforts in
third countries, particularly to avoid duplication of efforts in
providing technical assistance programs. A German representative
repeated a request made at the previous workshop to explore a
similar venue for U.S.-EU experts to discuss challenges related to
country-specific sanctions regimes. The U.S. delegation welcomed
this idea and agreed to participate if the EU wished to pursue.
[Note: The latter does not reflect a coordinated Government of
Germany position or proposal. German economic and finance
ministries would actually likely oppose such an initiative if
pursued formally. Nonetheless, the Czech Presidency raised this
proposal at the TF Troika the following day. Troika participants
agreed that country-based sanctions should be addressed in an
alternative venue, perhaps during the presidency which is not
hosting the annual TF workshop.] Finally, workshop participants
agreed to prepare a common outreach paper to be approved by the U.S.
and EU member states.

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Participants
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17. (U) U.S. participants included representatives from the State
Department's Bureau of Economic, Energy and Business
Affairs/Terrorist Financing and Economic Sanctions Policy, the
State's Office of European Union and Regional Affairs; the U.S.
Mission to the EU; U.S. Embassy Prague; U.S. Embassy Stockholm; the
Treasury Department's Office of Global Affairs/Terrorist Financing
and Financial Crimes Office (TFFC),Office of Strategic Policy
(OSP),and the Department of Homeland Security's Terrorist Financing
Investigations - Joint Vetting Unit, Immigration and Customs
Enforcement (ICE). TFFC and OSP made formal presentations in this
workshop. The approximately 100 European workshop participants
included representatives from the EU member states, the EU
Commission, the EU Council, EUROPOL, Switzerland, and the UN
Monitoring Team.

ThompsonJones