PART 2: CORRECTED VERSION OF PRAGUE 339 - U.S.-EU

UNCLAS SECTION 01 OF 04 PRAGUE 000350

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: CORRECTED VERSION OF PRAGUE 339 - U.S.-EU
COUNTER-TERRORIST FINANCING WORKSHOP: WIRE TRANSFERS AND NEW PAYMENT
METHODS

Ref: A. PRAGUE 348

B. PRAGUE 339

NOT FOR INTERNET DISTRIBUTION


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


2. (SBU) SUMMARY. This cable contains significant revisions to
Prague 339 and should be regarded as replacing that cable. 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 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
(Ref A) 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
--------------


3. (SBU) 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 be able to
effectively exploit data reported from financial institutions to

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ensure maximum benefit in 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 forms of 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 / POST 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) 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. 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 financing 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

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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.

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

--------------
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:

-- Greater implementation of the Nine FATF Special Recommendations
should constitute the basis for future US-EU CFT dialogue;

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

-- All relevant government authorities and industries must be

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involved. Dialogue with the private sector is also an important
factor in successfully combating terrorist financing;

-- The U.S.-EU dialogue could continue to involve sessions with
private sector representatives as appropriate; and

-- The workshops should continue to be held at least once per year.


15. (SBU) Announcing that the EU would work with the US to
continue 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 Ref A.) 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 CFT 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 participantsagreed 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
--------------


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). 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.


18. (U) This cable has been cleared by the members of the U.S.
Delegation.

ThompsonJones